Federal Register, Volume 71 Issue 160 (Friday, August 18, 2006)

[Federal Register Volume 71, Number 160 (Friday, August 18, 2006)]
[Rules and Regulations]
[Pages 47870-48351]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-6692]

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Part II

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Parts 409, 410, 412, et al.

Revision to Hospital Inpatient Prospective Payment Systems--2007 FY
Occupational Mix Adjustment to Wage Index; Implementation; Final Rule

Federal Register / Vol. 71, No. 160 / Friday, August 18, 2006 / Rules
and Regulations

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 409, 410, 412, 413, 414, 424, 485, 489, and 505

[CMS-1488-F; CMS-1287-F; CMS-1320-F; and CMS-1325-IFC4]
RINs 0938-AO12; 0938-AO03; 0938-AN93; and 0938-AN58

Medicare Program; Changes to the Hospital Inpatient Prospective
Payment Systems and Fiscal Year 2007 Rates; Fiscal Year 2007
Occupational Mix Adjustment to Wage Index; Health Care Infrastructure
Improvement Program; Selection Criteria of Loan Program for Qualifying
Hospitals Engaged in Cancer-Related Health Care and Forgiveness of
Indebtedness; and Exclusion of Vendor Purchases Made Under the
Competitive Acquisition Program (CAP) for Outpatient Drugs and
Biologicals Under Part B for the Purpose of Calculating the Average
Sales Price (ASP)

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

ACTION: Final rules and interim final rule with comment period.

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SUMMARY: We are revising the Medicare hospital inpatient prospective
payment systems (IPPS) for operating and capital-related costs to
implement changes arising from our continuing experience with these
systems, and to implement a number of changes made by the Deficit
Reduction Act of 2005 (Pub. L. 109-171). In addition, in the Addendum
to this final rule, we describe the changes to the amounts and factors
used to determine the rates for Medicare hospital inpatient services
for operating costs and capital-related costs. We also are setting
forth rate-of-increase limits as well as policy changes for hospitals
and hospital units excluded from the IPPS that are paid in full or in
part on a reasonable cost basis subject to these limits. These changes
are applicable to discharges occurring on or after October 1, 2006.
In this final rule, we discuss public comments we received on our
proposals to refine the diagnosis-related group (DRG) system under the
IPPS to better recognize severity of illness among patients--to use a
hospital-specific relative value (HSRV) cost center weighting
methodology to adjust DRG relative weights; and to implement
consolidated severity-adjusted DRGs or alternative severity adjustment
methods.
Among the other policy changes that we are making are those changes
related to: limited revisions of the reclassification of cases to DRGs;
the long-term care (LTC)-DRGs and relative weights; the wage data,
including the occupational mix data, used to compute the wage index;
applications for new technologies and medical services add-on payments;
payments to hospitals for the direct and indirect costs of graduate
medical education; submission of hospital quality data; payments to
sole community hospitals and Medicare-dependent, small rural hospitals;
and provisions governing emergency services under the Emergency Medical
Treatment and Labor Act of 1986 (EMTALA).
We are responding to requested public comments on a number of other
issues that include performance-based hospital payments for services
and health information technology, as well as how to improve health
data transparency for consumers.
In addition, we are responding to public comments received on a
proposed rule issued in the Federal Register on May 17, 2006 that
proposed to revise the methodology for calculating the occupational mix
adjustment to the wage index for the FY 2007 hospital inpatient
prospective payment system by applying an adjustment to 100 percent of
the wage index using new 2006 occupational mix survey data collected
from hospitals.
We are finalizing two policy documents published in the Federal
Register relating to the implementation of the Health Care
Infrastructure Improvement Program, a hospital loan program for cancer
research, established under the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003.
This final rule also revises the definition of the term ``unit'' to
specify the exclusion of units of drugs sold to approved Medicare
Competitive Acquisition Program (CAP) vendors for use under the CAP
from average sales price (ASP) calculations for a period of up to 3
years, at which time we will reevaluate our policy.

DATES: Effective Dates: The provisions of these final rules are
effective on October 1, 2006, with the exception of the provisions in
Sec. 412.8, Sec. 414.802, and the procedures for withdrawing or
terminating reclassifications established in section III.H.4. of the
preamble. The provisions of Sec. 412.8, Sec. 414.802, and the
procedures for withdrawing or terminating reclassifications established
in section II.H.4. of the preamble are effective August 18, 2006. This
rule is a major rule as defined in 5 U.S.C. 804(2). Pursuant to 5
U.S.C. 801(a)(1)(A), we are submitting a report to the Congress on this
rule on August 1, 2006.
Comment Date: We will consider comments on the exclusion of CAP
drugs from the ASP calculation (Sec. 414.802) as discussed in section
XII. of the preamble of this final rule, if we receive them at one of
the addresses provided below, no later than 5 p.m. on October 2, 2006.

ADDRESSES: In commenting, on section XII. of this rule, please refer to
file code CMS-1325-IFC4.
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 regulation to http://www.cms.hhs.gov/eRulemaking. Click
on the link ``Submit electronic comments on CMS regulations with an
open comment period.'' (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-1325-IFC4, P.O. Box 8011, Baltimore, MD 21244-1850.
Please allow sufficient time for mailed comments to be received
before the close of the comment period.
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-1325-IFC4, 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 HHH Building is not readily
available to

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persons without Federal Government identification, commenters are
encouraged to leave their comments in the CMS drop slots located in the
main lobby of the building. A stamp-in clock is available for persons
wishing to retain a proof of filing by stamping in and retaining an
extra copy of the comments being filed.)
Comments mailed to the addresses indicated as appropriate for hand
or courier delivery may be delayed and received after the comment
period.
For information on viewing public comments, see the beginning of
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:
Marc Hartstein, (410) 786-4548, Operating Prospective Payment,
Diagnosis-Related Groups (DRGs), Wage Index, Occupational Mix
Adjustment, New Medical Services and Technology Add-On Payments,
Hospital Geographic Reclassifications, Sole Community Hospital,
Disproportionate Share Hospital, and Medicare-Dependent, Small Rural
Hospital Issues.
Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded
Hospitals, Graduate Medical Education, Critical Access Hospitals, Long-
Term Care (LTC)-DRGs, and Terms of Hospital Loans under Health Care
Infrastructure Improvement Program Issues.
Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital
Demonstration Issues.
Sheila Blackstock, (410) 786-3502, Quality Data for Annual Payment
Update Issues.
Thomas Valuck, (410) 786-7479, Hospital Value-Based Purchasing Issues.
Frederick Grabau, (410) 786-0206, Services in Foreign Hospitals Issues.
Brian Reitz, (410) 786-5001, Obsolete Paper Claims Forms Issues.
Melinda Jones, (410) 786-7069, Loan Forgiveness Criteria for Health
Care Infrastructure Improvement Program.
Corinne Axelrod, (410) 786-5620, Competitive Acquisition Program (CAP)
for Part B Drugs Issues.
Angela Mason, (410) 786-7452, Payment for Covered Outpatient Drugs and
Biologicals Issues.
Submitting Comments: We welcome comments from the public on all
issues set forth in this rule to assist us in fully considering issues
and developing policies. You can assist us by referencing the file code
CMS-1325-IFC4 and the specific ``issue identifier'' that precedes the
section on which you choose to comment.
Inspection of Public Comments: All comments received before the
close of the comment period are available for viewing by the public,
including any personally identifiable or confidential business
information that is included in a comment. We post all comments
received before the close of the comment period on a public Web site as
soon as possible after they are received: http://www.cms.hhs.gov/eRulemaking. Clink on the link ``Electronic Comments on CMS
Regulations'' on that Web site to view public comments.
Comments received timely will also be available for public
inspection as they are received, generally beginning approximately 3
weeks after publication of a document, at the headquarters of the
Centers for Medicare & Medicaid Services, 7500 Security Boulevard,
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30
a.m. to 4 p.m. To schedule an appointment to view public comments,
phone 1-800-743-3951.

Electronic Access

This Federal Register document is also available from the Federal
Register online database through GPO Access, a service of the U.S.
Government Printing Office. Free public access is available on a Wide
Area Information Server (WAIS) through the Internet and via
asynchronous dial-in. Internet users can access the database by using
the World Wide Web; the Superintendent of Documents' home page address
is http://www.gpoaccess.gov/, by using local WAIS client software, or
by telnet to swais.access.gpo.gov, then login as guest (no password
required). Dial-in users should use communications software and modem
to call (202) 512-1661; type swais, then login as guest (no password
required).

Acronyms

AHA American Hospital Association
AHIMA American Health Information Management Association
AHRO Agency for Health Care Research and Quality
AMI Acute myocardial infarction
AOA American Osteopathic Association
APR DRG All Patient Refined Diagnosis-Related Group System
ASC Ambulatory surgical center
ASP Average sales price
AWP Average wholesale price
BBA Balanced Budget Act of 1997, Pub. L. 105-33
BBRA Medicare, Medicaid, and SCHIP [State Children's Health Insurance
Program] Balanced Budget Refinement Act of 1999, Pub. L. 106-113
BIPA Medicare, Medicaid, and SCHIP [State Children's Health Insurance
Program] Benefits Improvement and Protection Act of 2000, Pub. L. 106-
554
BLS Bureau of Labor Statistics
AH Critical access hospital
AP Competitive Acquisition Program
CART CMS Abstraction & Reporting Tool
CBSAs Core-based statistical areas
CC Complication or comorbidity
CDAC Clinical Data Abstraction Center
CIPI Capital input price index
CPI Consumer price index
CMI Case-mix index
CMS Centers for Medicare & Medicaid Services
CMSA Consolidated Metropolitan Statistical Area
COBRA Consolidated Omnibus Reconciliation Act of 1985, Pub. L. 99-272
CPI Consumer price index
CRNA Certified registered nurse anesthetist
CY Calendar year
DRA Deficit Reduction Act of 2005, Pub. L. 109-171
DRG Diagnosis-related group
DSH Disproportionate share hospital
ECI Employment cost index
EMR Electronic medical record
EMTALA Emergency Medical Treatment and Labor Act of 1986, Pub. L. 99-
272
FDA Food and Drug Administration
FFY Federal fiscal year
FIPS Federal information processing standards
FQHC Federally qualified health center
FTE Full-time equivalent
FY Fiscal year
GAAP Generally Accepted Accounting Principles
GAF Geographic Adjustment Factor
GME Graduate medical education
HCAHPS Hospital Consumer Assessment of Healthcare Providers and Systems
HCFA Health Care Financing Administration
HCRIS Hospital Cost Report Information System
HHA Home health agency
HHS Department of Health and Human Services
HIC Health insurance card
HIPAA Health Insurance Portability and Accountability Act of 1996, Pub.
L. 104-191
HIPC Health Information Policy Council
HIS Health information system
HIT Health information technology
HMO Health maintenance organization
HSA Health savings account
HSCRC Maryland Health Services Cost Review Commission

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HSRV Hospital-specific relative value
HSRVcc Hospital-specific relative value cost center
HQA Hospital Quality Alliance
HQI Hospital Quality Initiative
HwH Hospital-within-a-hospital
ICD-9-CM International Classification of Diseases, Ninth Revision,
Clinical Modification
ICD-10-PCS International Classification of Diseases, Tenth Edition,
Procedure Coding System
ICU Intensive care unit
IHS Indian Health Service
IME Indirect medical education
IOM Institute of Medicine
IPF Inpatient psychiatric facility
IPPS Acute care hospital inpatient prospective payment system
IRF Inpatient rehabilitation facility
IRP Initial residency period
JCAHO Joint Commission on Accreditation of Healthcare Organizations
LAMCs Large area metropolitan counties
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MCE Medicare Code Editor
MCO Managed care organization
MCV Major cardiovascular condition
MDC Major diagnostic category
MDH Medicare-dependent, small rural hospital
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare Provider Analysis and Review File
MEI Medicare Economic Index
MGCRB Medicare Geographic Classification Review Board
MMA Medicare Prescription Drug, Improvement, and Modernization Act of
2003, Pub. L. 108-173
MRHFP Medicare Rural Hospital Flexibility Program
MSA Metropolitan Statistical Area
NAICS North American Industrial Classification System
NCD National coverage determination
NCHS National Center for Health Statistics
NCQA National Committee for Quality Assurance
NCVHS National Committee on Vital and Health Statistics
NECMA New England County Metropolitan Areas
NICU Neonatal intensive care unit
NQF National Quality Forum
NTIS National Technical Information Service
NVHRI National Voluntary Hospital Reporting Initiative
OES Occupational employment statistics
OIG Office of the Inspector General
OMB Executive Office of Management and Budget
O.R. Operating room
OSCAR Online Survey Certification and Reporting (System)
PRM Provider Reimbursement Manual
PPI Producer price index
PMSAs Primary metropolitan statistical areas
PPS Prospective payment system
PRA Per resident amount
ProPAC Prospective Payment Assessment Commission
PRRB Provider Reimbursement Review Board
PS&R Provider Statistical and Reimbursement (System)
QIG Quality Improvement Group, CMS
QIO Quality Improvement Organization
RHC Rural health clinic
RHQDAPU Reporting hospital quality data for annual payment update
RNHCI Religious Nonmedical Health Care Institution
RRC Rural referral center
RUCAs Rural-urban commuting area codes
RY Rate year
SAF Standard Analytic File
SCH Sole community hospital
SFY State fiscal year
SIC Standard Industrial Classification
SNF Skilled nursing facility
SOCs Standard occupational classifications
SOM State Operations Manual
SSA Social Security Administration
SSI Supplemental Security Income
TAG Technical Advisory Group
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248
UHDDS Uniform hospital discharge data set

Table of Contents

I. Background
A. Summary
1. Acute Care Hospital Inpatient Prospective Payment System
(IPPS)
2. Hospitals and Hospital Units Excluded from the IPPS
a. Inpatient Rehabilitation Facilities (IRFs)
b. Long-Term Care Hospitals (LTCHs)
c. Inpatient Psychiatric Facilities (IPFs)
3. Critical Access Hospitals (CAHs)
4. Payments for Graduate Medical Education (GME)
B. Provisions of the Deficit Reduction Act of 2005 (DRA)
C. Summary of the Provisions of the FY 2007 IPPS and FY 2007
Occupational Mix Adjustment to the Wage Index Proposed Rules
1. DRG Reclassifications and Recalibrations of Relative Weights
2. Changes to the Hospital Wage Index
3. Other Decisions and Changes to the IPPS for Operating Costs,
GME Costs, and Promoting Hospitals' Effective Use of Health
Information Technology
4. Changes to the PPS for Capital-Related Costs
5. Changes for Hospitals and Hospital Units Excluded from the
IPPS
6. Payments for Services Furnished Outside the United States
7. Payment for Blood Clotting Factor Administered to Inpatients
with Hemophilia
8. Limitation on Payments to Skilled Nursing Facilities for Bad
Debt
9. Determining Prospective Payment Operating and Capital Rates
and Rate-of-Increase Limits
10. Impact Analysis
11. Recommendation of Update Factors for Operating Cost Rates of
Payment for Inpatient Hospital Services
12. Discussion of Medicare Payment Advisory Commission
Recommendations
13. Appendix C and Appendix D
D. Public Comments Received in Response to the FY 2007 IPPS and
FY 2007 Occupational Mix Adjustment to the Wage Index Proposed Rules
E. Interim Final Rule on Selection Criteria of Loan Program for
Qualifying Hospitals Engaged in Cancer-Related Health Care
F. Proposed Rule on Forgiveness of Indebtedness under the Health
Care Infrastructure Improvement Program
G. Interim Final Rule on the Exclusion of Vendor Purchases Made
Under the Competitive Acquisition Program for Part B Outpatient
Drugs and Biologicals for the Purpose of Calculating the Average
Sales Price
II. Changes to DRG Classifications and Relative Weights
A. Background
B. DRG Reclassifications
1. General
2. Yearly Review for Making DRG Changes
C. Revisions to the DRG System Used Under the IPPS
1. MedPAC Recommendations
2. Refinement of the Relative Weight Calculation
3. Refinement of DRGs Based on Severity of Illness
a. Comparison of the CMS DRG System and the APR DRG System
b. CS DRGs for Use in the IPPS
c. Changes to CMI from a New DRG System
4. Effect of CS DRGs on the Outlier Threshold
5. Impact of Refinement of DRG System on Payments
6. Conclusions
7. Severity Refinement to CMS DRGs
a. MDC 1 (Diseases and Disorders of the Nervous System)
b. MDC 4 (Diseases and Disorders of the Respiratory System):
Respiratory System Diagnosis with Ventilator Support
c. MDC 6 (Diseases and Disorders of the Digestive System)
d. MDC 11 (Diseases and Disorders of the Kidney and Urinary
Tract): Major Bladder Procedures
e. MDC 16 (Diseases and Disorders of the Blood and Blood Forming
Organs and Immunological Disorders): Major Hematological and
Immunological Diagnoses
f. MDC 18 (Infectious and Parasitic Diseases (Systemic or
Unspecified Sites)): O.R. Procedure for Patients with Infectious and
Parasitic Diseases

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g. Severe Sepsis
D. Changes to Specific DRG Classifications
1. Pre-MDCs
a. Heart Transplant or Implant of Heart Assist System: Addition
of Procedure to DRG 103
b. Pancreas Transplants
2. MDC 1 (Diseases and Disorders of the Nervous System)
a. Implantation of Intracranial Neurostimulator System for Deep
Brain Stimulation (DBS)
b. Carotid Artery Stents
3. MDC 5 (Diseases and Disorders of the Circulatory System)
a. Insertion of Epicardial Leads for Defibrillator Devices
b. Application of Major Cardiovascular Diagnoses (MCVs) List to
Defibrillator DRGs
4. MDC 8 (Diseases and Disorders of the Musculoskeletal System
and Connective Tissue)
a. Hip and Knee Replacements
b. Spinal Fusion
c. CHARITE^TM Spinal Disc Replacement Device
5. MDC 18 (Infectious and Parasitic Diseases (Systemic or
Unspecified Sites)): Severe Sepsis
6. Medicare Code Editor (MCE) Changes
a. Edit: Newborn Diagnoses
b. Edit: Diagnoses for Pediatric--Age 0-17 Years Old
c. Edit: Maternity Diagnoses--Age 12 through 55
d. Edit: Diagnoses Allowed for Females Only
e. Edit: Diagnoses Allowed for Males Only
f. Edit: Procedures Allowed for Females Only
g. Edit: Manifestations Not Allowed as Principal Diagnosis
h. Edit: Nonspecific Principal Diagnosis
i. Edit: Unacceptable Principal Diagnosis
j. Edit: Nonspecific O.R. Procedures
k. Edit: Noncovered Procedures
l. Edit: Bilateral Procedure
7. Surgical Hierarchies
8. Refinement of Complications and Comorbidities (CC) List
a. Background
b. Comprehensive Review of the CC List
c. CC Exclusions List for FY 2007
9. Review of Procedure Codes in DRGs 468, 476, and 477
a. Moving Procedure Codes from DRG 468 or DRG 477 to MDCs
b. Reassignment of Procedures among DRGs 468, 476, and 477
c. Adding Diagnosis or Procedure Codes to MDCs
10. Changes to the ICD-9-CM Coding System
11. Other Issues
a. Chronic Kidney Disease
b. Bronchial Valve
c. Female Reproductive System Reconstruction Procedures
d. Devices That are Replaced Without Cost or Where Credit for a
Replaced Device is Furnished to the Hospital
E. Recalibration of DRG Weights
F. LTC-DRG Reclassifications and Relative Weights for LTCHs for
FY 2007
1. Background
2. Changes in the LTC-DRG Classifications
a. Background
b. Patient Classifications into DRGs
3. Development of the FY 2007 LTC-DRG Relative Weights
a. General Overview of Development of the LTC-DRG Relative
Weights
b. Data
c. Hospital-Specific Relative Value Methodology
d. Low-Volume LTC-DRGs
4. Steps for Determining the FY 2007 LTC-DRG Relative Weights
5. Summary of Public Comments and Departmental Responses
G. Add-On Payments for New Services and Technologies
1. Background
2. Public Input Before Publication of a Notice of Proposed
Rulemaking on Add-On Payments
3. FY 2007 Status of Technologies Approved for FY 2006 Add-On
Payments
a. Kinetra[supreg] Implantable Neurostimulator (Kinetra[supreg])
for Deep Brain Stimulation
b. Endovascular Graft Repair of the Thoracic Aorta
c. Restore[supreg] Rechargeable Implantable Neurostimulator
4. FY 2007 Applications for New Technology Add-On Payments
a. C-Port[supreg] Distal Anastomosis System
b. NovoSeven[supreg] for Intracerebral Hemorrhage
c. X STOP Interspinous Process Decompression System
5. Interim and Final Cost Threshold Tables Due to Changes to
Wage Index and Budget Neutrality Factors
III. Changes to the Hospital Wage Index
A. Background
B. Core-Based Statistical Areas for the Hospital Wage Index
C. Occupational Mix Adjustment to the FY 2007 Wage Index
1. Development of Data for the FY 2007 Occupational Mix
Adjustment
2. Timeline for the Collection, Review, and Correction of the
Occupational Mix Data
3. Calculation of the Occupational Mix Adjustment
D. Worksheet S-3 Wage Data for the FY 2007 Wage Index Update
E. Verification of Worksheet S-3 Wage Data
F. Computation of the FY 2007 Unadjusted Wage Index
G. Implementation of the FY 2007 Occupational Mix Adjustment to
the Wage Index
H. Revisions to the Wage Index Based on Hospital Redesignations
1. General
2. Effects of Reclassification/Redesignation
3. FY 2007 MGCRB Reclassifications
4. Procedures for Hospitals Applying for Reclassification
Effective in FY 2008 and Reinstating Reclassifications in FY 2008
5. FY 2007 Redesignations Under Section 1886(d)(8)(B) of the Act
6. Reclassifications Under Section 508 of Pub. L. 108-173
7. Wage Indices for Reclassified Hospitals and Reclassification
Budget Neutrality Factor
I. FY 2007 Wage Index Adjustment Based on Commuting Patterns of
Hospital Employees
J. Process for Requests for Wage Index Data Corrections
K. Labor-Related Share for the Wage Index for FY 2007
L. Proxy for the Hospital Market Basket
IV. Other Decisions and Changes to the IPPS for Operating Costs and
GME Costs
A. Reporting of Hospital Quality Data for Annual Hospital
Payment Update
1. Background
2. New Procedures for Hospital Reporting of Quality Data
a. Two Percentage Point Reduction
b. New Procedures
c. Expanded Quality Measures
d. HCAHPS[supreg] Survey
e. Data Submission
f. RHQDAPU Program Withdrawal and Chart Validation Requirements
g. Data Validation and Attestation
h. Public Display and Reconsideration Procedures
i. Conclusion
3. Electronic Medical Records
B. Value-Based Purchasing
1. Introduction
2. Premier Hospital Quality Incentive Demonstration
3. RHQDAPU Program
a. Section 501(b) of Pub. L. 108-173 (MMA)
b. Section 5001(a) of Pub. L. 109-171 (DRA)
4. Plan for Implementing Hospital Value-Based Purchasing
Beginning with FY 2009
a. Measure Development and Refinement
b. Data Infrastructure
c. Incentive Methodology
d. Public Reporting
5. Considerations Related to Certain Conditions, Including
Hospital-Acquired Infections
6. Promoting Effective Use of Health Information Technology
C. Sole Community Hospitals (SCHs) and Medicare-Dependent, Small
Rural Hospitals (MDHs)
1. Background
2. Volume Decrease Adjustment for SCHs and MDHs
a. HAS/Monitrend Data
b. HAS/Monitrend Data Book Replacement Alternative
3. Mandatory Reporting Requirements for Any Changes in the
Circumstances Under Which a Hospital Was Designated as an SCH or MDH
4. Payment Changes for MDHs under the DRA of 2005
a. Background
b. Regulation Changes
5. Technical Change
D. Rural Referral Centers
1. Case-Mix Index
2. Discharges
E. Indirect Medical Education (IME) Adjustment
1. Background
2. IME Adjustment Factor for FY 2007
3. Technical Change to Revise Cross-Reference
F. Payment Adjustment for Disproportionate Share Hospitals
(DSHs)

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1. Background
2. Technical Corrections
3. Reinstatement of Inadvertently Deleted Provisions on DSH
Payment Adjustment Factors
4. Enhanced DSH Adjustment for MDHs
G. Geographic Reclassifications
1. Background
2. Reclassifications under Section 508 of Pub. L. 108-173
3. Multicampus Hospitals
4. Urban Group Hospital Reclassifications
5. Effect of Change of Ownership on Urban County Group
Reclassifications
6. Requested Reclassification for Hospitals Located in a Single
Hospital MSA Surrounded by Rural Counties
7. Special Adjustment for the Hospital Group Reclassification
Denied on the Basis of Incomplete CSA Listing
H. Payment for Direct Graduate Medical Education
1. Background
2. Determination of Weighted Average Per Resident Amounts (PRAs)
for Merged Teaching Hospitals
3. Determination of Per Resident Amounts (PRAs) for New Teaching
Hospitals
4. Requirements for Counting and Appropriate Documentation of
FTE Residents: Clarification
5. Resident Time Spent in Nonpatient Care Activities as Part of
Approved Residency Programs
6. Medicare GME Affiliated Groups: Technical Changes to
Regulations
I. Payment for the Costs of Nursing and Allied Health Education
Activities: Clarification
J. Hospital Emergency Services under EMTALA
1. Background
2. Role of the EMTALA Technical Advisory Group (TAG)
3. Definition of ``Labor''
4. Application of EMTALA Requirements to Hospitals Without
Dedicated Emergency Departments
5. Clarification of Reference to ``Referral Centers''
K. Other Technical Changes
1. Cross-Reference Correction in Regulations on Limitations on
Beneficiary Charges
2. Cross-Reference Corrections in Regulations on Payment Denials
Based on Admissions and Quality Reviews
3. Cross-Reference Correction in Regulations on Outlier Payments
4. Removing References to Two Paper Claims Forms
L. Rural Community Hospital Demonstration Program
M. Health Care Information Transparency Initiative
V. Changes to the PPS for Capital-Related Costs
A. Background
B. Treatment of Certain Urban Hospitals Reclassified as Rural
Hospitals Under Sec. 412.103
C. Other Technical Corrections Relating to the Capital PPS
Geographic Adjustment Factors
VI. Changes for Hospitals and Hospital Units Excluded from the IPPS
A. Payments to Excluded Hospitals and Hospital Units
1. Payments to Existing Excluded and New Hospitals and Hospital
Units
2. Separate PPS for IRFs
3. Separate PPS for LTCHs
4. Separate PPS for IPFs
5. Grandfathering of Hospitals-Within-Hospitals (HwHs) and
Satellite Facilities
6. Changes to the Methodology for Determining LTCH Cost-to-
Charge Ratios (CCRs) and the Reconciliation of High-Cost and Short-
Stay Outlier Payments under the LTCH PPS
a. Background
b. High-Cost Outliers
c. Short-Stay Outliers
d. CCR Ceiling
e. Statewide Average CCRs
f. Data Used to Determine a CCR
g. Reconciliation of Outlier Payments Upon Cost report
Settlement
7. Technical Corrections Relating to LTCHs
8. Cross-Reference Correction in Authority Citations for 42 CFR
412 and 413
9. Report of Adjustment (Exceptions) Payments
B. Critical Access Hospitals (CAHs)
1. Background
2. Sunset of Designation of CAHs as Necessary Providers:
Technical Correction
VII. Payment for Services Furnished Outside the United States
A. Background
B. Proposed Clarification of Regulations
VIII. Payment for Blood Clotting Factor Administered to Inpatients
with Hemophilia
IX. Limitation on Payments to Skilled Nursing Facilities for Bad
Debt
A. Background
B. Changes Made by Section 5004 of Pub. L. 109-171
C. Proposed Regulation Changes
X. MedPAC Recommendations
XI. Health Care Infrastructure Improvement Program: Selection
Criteria for Loan Program for Qualifying Hospitals Engaged in
Cancer-Related Health Care and Forgiveness of Indebtedness
A. Background
B. Issuance of an Interim Final Rule with Comment Period and a
Proposed Regulation
C. Provisions of the Interim Final Rule With Comment Period
1. Loan Qualifying Criteria
2. Selection Criteria
3. Terms of the Loan
4. Public Comments Received on the Interim Final Rule With
Comment Period
5. Provisions of this Final Rule
D. Proposed Rule on Forgiveness of Indebtedness
1. Conditions for Loan Forgiveness
2. Plan Criteria for Meeting the Conditions for Loan Forgiveness
3. Public Comments Received on the Proposed Rule and Our
Responses
4. Provisions of the Final Rule
E. Statutory Requirements for Issuance of Regulations
XII. Exclusion of Vendor Purchases Made Under the Competitive
Acquisition Program (CAP) for Outpatient Drugs and Biologicals Under
Part B for the Purpose of Calculating the Average Sales Price (ASP)
A. Background
1. Average Sales Price (ASP)
2. Competitive Acquisition Program (CAP)
3. Regulatory History
B. Regulation Change
XIII. Other Required Information
A. Requests for Data from the Public
B. Collection of Information Requirements
C. Waiver of Proposed Rulemaking and Delay in the Effective Date
D. Response to Comments

Regulation Text

Addendum--Schedule of Tentative Standardized Amounts, Tentative
Update Factors and Rate-of-Increase Percentages Effective With Cost
Reporting Periods Beginning On or After October 1, 2006
I. Summary and Background
II. Changes to Prospective Payment Rates for Hospital Inpatient
Operating Costs
A. Calculation of the Tentative Adjusted Standardized Amount
1. Standardization of Base-Year Costs or Target Amounts
2. Computing the Tentative Average Standardized Amount
3. Updating the Tentative Average Standardized Amount
4. Other Adjustments to the Average Standardized Amount
a. Recalibration of DRG Weights and Updated Wage Index--Budget
Neutrality Adjustment
b. Reclassified Hospitals--Tentative Budget Neutrality
Adjustment
c. Outliers
d. Tentative Rural Community Hospital Demonstration Program
Adjustment (Section 410A of Pub. L. 108-173)
5. Tentative FY 2007 Standardized Amount
B. Tentative Adjustments for Area Wage Levels and Cost-of-Living
1. Tentative Adjustment for Area Wage Levels
2. Final Adjustment for Cost-of-Living in Alaska and Hawaii
C. DRG Relative Weights
D. Calculation of the Prospective Payment Rates
1. Federal Rate
2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs)
a. Calculation of Hospital-Specific Rate
b. Updating the FY 1982, FY 1987, FY 1996, and FY 2002 Hospital-
Specific Rates for FY 2007
3. General Formula for Calculation of Prospective Payment Rates
for Hospitals Located in Puerto Rico Beginning On or After October
1, 2006, and Before October 1, 2007
a. Puerto Rico Rate
b. National Rate
III. Changes to Payment Rates for Acute Care Hospital Inpatient
Capital-Related Costs for FY 2007
A. Determination of Federal Hospital Inpatient Capital-Related
Prospective Payment Rate Update
1. Projected Capital Standard Federal Rate Update

[[Page 47875]]

a. Description of the Update Framework
b. Comparison of CMS and MedPAC Update Recommendation
2. Outlier Payment Adjustment Factor
3. Budget Neutrality Adjustment Factor for Changes in DRG
Classifications and Weights and the GAF
4. Exceptions Payment Adjustment Factor
5. Capital Standard Federal Rate for FY 2007
6. Special Capital Rate for Puerto Rico Hospitals
B. Calculation of the Inpatient Capital-Related Prospective
Payments for FY 2007
C. Capital Input Price Index
1. Background
2. Forecast of the CIPI for FY 2007
IV. Payment Rates for Excluded Hospitals and Hospital Units: Rate-
of-Increase Percentages
A. Payments to Existing Excluded Hospitals and Units
B. New Excluded Hospitals and Units
V. Payment for Blood Clotting Factor Administered to Inpatients with
Hemophilia

Tables

The following tables are included as part of this final rule:
Table 1A--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor (69.7 Percent Labor Share/30.3 Percent Nonlabor Share If
Wage Index Is Greater Than 1) (Tentative)
Table 1B--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If Wage
Index Is Less Than or Equal to 1) (Tentative)
Table 1C--Adjusted Operating Standardized Amounts for Puerto Rico,
Labor/Nonlabor (Tentative)
Table 1D--Capital Standard Federal Payment Rate (Tentative)
Table 4J--Out-Migration Wage Adjustment--FY 2007 (Tentative)
Table 5--List of Diagnosis-Related Groups (DRGs), Relative Weighting
Factors, and Geometric and Arithmetic Mean Length of Stay (LOS)
(Tentative)
Table 6A--New Diagnosis Codes
Table 6B--New Procedure Codes
Table 6C--Invalid Diagnosis Codes
Table 6D--Invalid Procedure Codes
Table 6E--Revised Diagnosis Code Titles
Table 6F--Revised Procedure Code Titles
Table 6G--Additions to the CC Exclusions List
Table 6H--Deletions from the CC Exclusions List
Table 7A--Medicare Prospective Payment System Selected Percentile
Lengths of Stay: FY 2005 MedPAR Update March 2006 GROUPER V23.0
Table 7B--Medicare Prospective Payment System Selected Percentile
Lengths of Stay: FY 2005 MedPAR Update March 2006 GROUPER V24.0
Table 8A--Statewide Average Operating Cost-to-Charge Ratios--July
2006
Table 8B--Statewide Average Capital Cost-to-Charge Ratios--July 2006
Table 8C-- Statewide Average Total Cost-to-Charge Ratios for LTCHs--
July 2006
Table 9A--Hospital Reclassifications and Redesignations by
Individual Hospital and CBSA for FY 2007 (Tentative)
Table 9B--Hospital Reclassifications and Redesignation by Individual
Hospital Under Section 508 of Pub. L. 108-173 for FY 2007
(Tentative)
Table 9C--Hospitals Redesignated as Rural under Section
1886(d)(8)(E) of the Act for FY 2007 (Tentative)
Table 10--Geometric Mean Plus the Lesser of .75 of the National
Adjusted Operating Standardized Payment Amount (Increased to Reflect
the Difference Between Costs and Charges) or .75 of One Standard
Deviation of Mean Charges by Diagnosis-Related Group (DRG)--July
2006 (Tentative)
Table 11--FY 2007 LTC-DRGs, Relative Weights, Geometric Average
Length of Stay, and \5/6\ths of the Geometric Average Length of Stay
Appendix A--Regulatory Impact Analysis
I. Overall Impact
II. Objectives
III. Limitations on Our Analysis
IV. Hospitals Included In and Excluded From the IPPS
V. Effects on Excluded Hospitals and Hospital Units
VI. Quantitative Effects of the Policy Changes Under the IPPS for
Operating Costs
A. Basis and Methodology of Estimates
B. Analysis of Table I
C. Effects on the Hospitals that Failed the Quality Data
Submission Process (Column 2)
D. Effects of the DRA Provision Related to MDHs (Column 3)
E. Effects of the Changes to the DRG Reclassifications and
Relative Cost-Based Weights (Column 4)
F. Effects of Wage Index Changes (Column 5)
G. Combined Effects of DRG and Wage Index Changes, Including
Budget Neutrality Adjustment (Column 6)
H. Effects of the 3-Year Provision Allowing Urban Hospitals that
Were Converted to Rural as a Result of the FY 2005 Labor Market Area
Changes to Maintain the Wage Index of the Urban Labor Market Area in
Which They Were Formerly Located (Column 7)
I. Effects of MGCRB Reclassifications (Column 8)
J. Effects of the Wage Index Adjustment for Out-Migration
(Column 9)
K. Effects of All Changes (Column 10)
L. Effects of Policy on Payment Adjustments for Low-Volume
Hospitals
M. Impact Analysis of Table II
VII. Effects of Other Policy Changes
A. Effects of LTC-DRG Reclassifications and Relative Weights for
LTCHs
B. Effects of New Technology Add-On Payments
C. Effects of Requirements for Hospital Reporting of Quality
Data for Annual Hospital Payment Update
D. Effects of Other Policy Changes Affecting Sole Community
Hospitals (SCHs) and Medicare-Dependent, Small Rural Hospitals
(MDHs)
E. Effects of Policy on Payment for Direct Costs of Graduate
Medical Education
1. Determination of Weighted Average GME PRAs for Merged
Teaching Hospitals
2. Determination of PRAs for New Teaching Hospitals
3. Requirements for Counting and Appropriate Documentation of
FTE Residents
4. Resident Time Spent in Nonpatient Care Activities as Part of
an Approved Residency Program
F. Effects of Policy Changes Relating to Emergency Services
under EMTALA
G. Effects of Policy on Rural Community Hospital Demonstration
Program
H. Effects of Policy on Hospitals-within-Hospitals and Satellite
Facilities
I. Effects of Policy Changes to the Methodology for Determining
LTCH CCRs and the Reconciliation of LTCH PPS Outlier Payments
J. Effects of Policy on Payment for Services Furnished Outside
the United States
K. Effects of Final Policy on Limitation on Payments to SNFs
L. Effects of Policy on CAP for Outpatient Drugs and Biologicals
under Part B for the Purpose of Calculating the ASP
VIII. Impact of Changes in the Capital PPS
A. General Considerations
B. Results
IX. Impact of Changes Relating to the Loan Program for Capital Cost
under the Health Care Infrastructure Improvement Program
A. Effects on Hospitals
B. Effects on the Medicare and Medicaid Programs
X. Alternatives Considered
XI. Overall Conclusion
XII. Accounting Statement
XIII. Executive Order 12866
Appendix B--Recommendation of Update Factors for Operating Cost
Rates of Payment for Inpatient Hospital Services
I. Background
II. Secretary's Final Recommendation for Updating the Prospective
Payment System Standardized Amounts
III. Secretary's Final Recommendation for Updating the Rate-of-
Increase Limits for Excluded Hospitals and Hospital Units
IV. Secretary's Recommendation for Updating the Capital Prospective
Payment Amounts

I. Background

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)
Section 1886(d) of the Social Security Act (the Act) sets forth a
system of payment for the operating costs of acute care hospital
inpatient stays under Medicare Part A (Hospital Insurance) based on
prospectively set rates. Section 1886(g) of the Act requires the
Secretary to pay for the capital-related costs of hospital inpatient
stays under a prospective payment system (PPS). Under these PPSs,
Medicare payment for hospital inpatient operating and capital-related
costs is made at

[[Page 47876]]

predetermined, specific rates for each hospital discharge. Discharges
are classified according to a list of diagnosis-related groups (DRGs).
The base payment rate is comprised of a standardized amount that is
divided into a labor-related share and a nonlabor-related share. The
labor-related share is adjusted by the wage index applicable to the
area where the hospital is located; and if the hospital is located in
Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of-
living adjustment factor. This base payment rate is multiplied by the
DRG relative weight.
If the hospital treats a high percentage of low-income patients, it
receives a percentage add-on payment applied to the DRG-adjusted base
payment rate. This add-on payment, known as the disproportionate share
hospital (DSH) adjustment, provides for a percentage increase in
Medicare payments to hospitals that qualify under either of two
statutory formulas designed to identify hospitals that serve a
disproportionate share of low-income patients. For qualifying
hospitals, the amount of this adjustment may vary based on the outcome
of the statutory calculations.
If the hospital is an approved teaching hospital, it receives a
percentage add-on payment for each case paid under the IPPS, known as
the indirect medical education (IME) adjustment. This percentage
varies, depending on the ratio of residents to beds.
Additional payments may be made for cases that involve new
technologies or medical services that have been approved for special
add-on payments. To qualify, a new technology or medical service must
demonstrate that it is a substantial clinical improvement over
technologies or services otherwise available, and that, absent an add-
on payment, it would be inadequately paid under the regular DRG
payment.
The costs incurred by the hospital for a case are evaluated to
determine whether the hospital is eligible for an additional payment as
an outlier case. This additional payment is designed to protect the
hospital from large financial losses due to unusually expensive cases.
Any outlier payment due is added to the DRG-adjusted base payment rate,
plus any DSH, IME, and new technology or medical service add-on
adjustments.
Although payments to most hospitals under the IPPS are made on the
basis of the standardized amounts, some categories of hospitals are
paid the higher of a hospital-specific rate based on their costs in a
base year (the higher of FY 1982, FY 1987, FY 1996, or FY 2002) or the
IPPS rate based on the standardized amount. For example, sole community
hospitals (SCHs) are the sole source of care in their areas, and
Medicare-dependent, small rural hospitals (MDHs) are a major source of
care for Medicare beneficiaries in their areas. Both of these
categories of hospitals are afforded special payment protection in
order to maintain access to services for beneficiaries. (Through FY
2007, an MDH receives the IPPS rate plus 50 percent of the difference
between the IPPS rate and its hospital-specific rate if the hospital-
specific rate is higher than the IPPS rate. In addition, an MDH may not
use FY 1996 as its base year for the hospital-specific rate. As
discussed below, for discharges occurring on or after October 1, 2007,
but before October 1, 2011, an MDH will receive the IPPS rate plus 75
percent of the difference between the IPPS rate and its hospital-
specific rate, if the hospital-specific rate is higher than the IPPS
rate.)
Section 1886(g) of the Act requires the Secretary to pay for the
capital-related costs of inpatient hospital services ``in accordance
with a prospective payment system established by the Secretary.'' The
basic methodology for determining capital prospective payments is set
forth in our regulations at 42 CFR 412.308 and 412.312. Under the
capital PPS, payments are adjusted by the same DRG for the case as they
are under the operating IPPS. Capital PPS payments are also adjusted
for IME and DSH, similar to the adjustments made under the operating
IPPS. In addition, hospitals may receive outlier payments for those
cases that have unusually high costs.
The existing regulations governing payments to hospitals under the
IPPS are located in 42 CFR Part 412, Subparts A through M.
2. Hospitals and Hospital Units Excluded From the IPPS
Under section 1886(d)(1)(B) of the Act, as amended, certain
specialty hospitals and hospital units are excluded from the IPPS.
These hospitals and units are: inpatient rehabilitation hospitals and
units (commonly referred to as inpatient rehabilitation facilities
(IRFs); long-term care hospitals (LTCHs); inpatient psychiatric
hospitals and units (commonly referred to as inpatient psychiatric
facilities (IPFs); children's hospitals; and cancer hospitals.
Religious nonmedical health care institutions (RNHCIs) are also
excluded from the IPPS. Various sections of the Balanced Budget Act of
1997 (Pub. L. 105-33), the Medicare, Medicaid and SCHIP [State
Children's Health Insurance Program] Balanced Budget Refinement Act of
1999 (Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 (Pub. L. 106-554) provide for
the implementation of PPSs for IRFs, LTCHs, and IPFs, as discussed
below. Children's hospitals, cancer hospitals, and RNHCIs continue to
be paid solely under a reasonable cost-based system.
The existing regulations governing payments to excluded hospitals
and hospital units are located in 42 CFR Parts 412 and 413.
a. Inpatient Rehabilitation Facilities (IRFs)
Under section 1886(j) of the Act, IRFs have been transitioned from
payment based on a blend of reasonable cost reimbursement and the
adjusted IRF Federal prospective payment rate for cost reporting
periods beginning on or after January 1, 2002, through September 30,
2002, to payment at 100 percent of the Federal rate effective for cost
reporting periods beginning on or after October 1, 2002. IRFs subject
to the blend were also permitted to elect payment based on 100 percent
of the Federal rate. The existing regulations governing payments under
the IRF PPS are located in 42 CFR Part 412, Subpart P.
b. Long-Term Care Hospitals (LTCHs)
Under the authority of sections 123(a) and (c) of Pub. L. 106-113
and section 307(b)(1) of Pub. L. 106-554, LTCHs that do not meet the
definition of ``new'' under Sec. 412.23(e)(4) are being transitioned
from being paid for inpatient hospital services based on a blend of
reasonable cost-based reimbursement under section 1886(b) of the Act to
100 percent of the Federal rate during a 5-year period with cost
reporting periods beginning on or after October 1, 2002. Those LTCHs
that do not meet the definition of ``new'' may elect to be paid based
on 100 percent of the Federal prospective payment rate instead of a
blended payment in any year during the 5-year transition. For cost
reporting periods beginning on or after October 1, 2006, LTCHs will be
paid 100 percent of the Federal rate. The existing regulations
governing payment under the LTCH PPS are located in 42 CFR Part 412,
Subpart O.
c. Inpatient Psychiatric Facilities (IPFs)
Under the authority of sections 124(a) and (c) of Pub. L. 106-113,
IPFs are paid under the IPF PPS. Under the IPF PPS, some IPFs are
transitioning from being paid for inpatient hospital services based on
a blend of reasonable cost-based payment to a Federal per diem

[[Page 47877]]

payment rate, effective for cost reporting periods beginning on or
after January 1, 2005 (November 15, 2004 IPF PPS final rule (69 FR
66922) and May 9, 2006 IPF PPS final rule (71 FR 27040)). For cost
reporting periods beginning on or after January 1, 2008, all IPFs will
be paid 100 percent of the Federal per diem payment amount. The
existing regulations governing payment under the IPF PPS are located in
42 CFR 412, Subpart N.
3. Critical Access Hospitals (CAHs)
Under sections 1814, 1820, and 1834(g) of the Act, payments are
made to critical access hospitals (CAHs) (that is, rural hospitals or
facilities that meet certain statutory requirements) for inpatient and
outpatient services based on 101 percent of reasonable cost. Reasonable
cost is determined under the provisions of section 1861(v)(1)(A) of the
Act and existing regulations under 42 CFR Parts 413 and 415.
4. Payments for Graduate Medical Education (GME)
Under section 1886(a)(4) of the Act, costs of approved educational
activities are excluded from the operating costs of inpatient hospital
services. Hospitals with approved graduate medical education (GME)
programs are paid for the direct costs of GME in accordance with
section 1886(h) of the Act; the amount of payment for direct GME costs
for a cost reporting period is based on the hospital's number of
residents in that period and the hospital's costs per resident in a
base year. The existing regulations governing payments to the various
types of hospitals are located in 42 CFR Part 413.

B. Provisions of the Deficit Reduction Act of 2005 (DRA)

On February 8, 2006, the Deficit Reduction Act of 2005 (DRA), Pub.
L. 109-171, was enacted. Pub. L. 109-171 made a number of changes to
the Act relating to prospective payments to hospitals and other
providers for inpatient services. This final rule implements amendments
made by the following sections of Pub. L. 109-171:
Section 5001(a), which, effective for FY 2007 and
subsequent years, allows for expansion of the requirements for hospital
quality data reporting.
Section 5003, which makes several changes to the MDH
program. It extends special payment provisions, requires MDHs to use FY
2002 as their base year for determining whether use of their hospital-
specific rate enhances payment (but permits them to continue to use
either their 1982 or 1987 hospital-specific rate if using either of
those rates results in higher payments), and removes the application of
the 12-percent cap on the DSH payment adjustment factor for MDHs.
Section 5004, which reduces certain allowable SNF bad debt
payments by 30 percent. Payments for the bad debts of full-benefit,
dual eligible individuals are not reduced.
In this final rule, we also discuss the provisions of section
5001(b) of Pub. L. 109-171, which require us to develop a plan to
implement, beginning with FY 2009, a value-based purchasing plan for
section 1886(d) hospitals and summarize the public comments received in
response to our invitation for public comments. This discussion also
includes the provisions of section 5001(c) of Pub. L. 109-171, which
requires a quality adjustment in DRG payments for certain hospital-
acquired conditions, effective for FY 2008.

C. Summary of the Provisions of the FY 2007 IPPS and FY 2007
Occupational Mix Adjustment to the Wage Index Proposed Rules

In the FY 2007 IPPS proposed rule, we set forth proposed changes to
the Medicare IPPS for operating costs and for capital-related costs in
FY 2007. We also set forth proposed changes relating to payments for
GME costs, payments to certain hospitals and units that continue to be
excluded from the IPPS and paid on a reasonable cost basis, and
payments for SCHs and MDHs. The changes were proposed to be effective
for discharges occurring on or after October 1, 2006, unless otherwise
noted.
After publication of the FY 2007 IPPS proposed rule, the United
States Court of Appeals for the Second Circuit issued a decision in the
Bellevue case that caused us to modify our proposals on the
implementation of the occupational mix adjustment. As a result, we
published a second proposed rule in the May 17, 2006 Federal Register
that superseded the occupational mix proposals that had been made in
the FY 2007 IPPS proposed rule (published April 25, 2006). The
following is a summary of the major changes that we proposed to make
and the issues that we addressed in the FY 2007 IPPS and FY 2007
Occupational Mix Adjustment to the Wage Index proposed rules:
1. DRG Reclassifications and Recalibrations of Relative Weights
As required by section 1886(d)(4)(C) of the Act, we proposed
limited annual revisions to the DRG classifications structure. In this
section, we responded to several recommendations made by MedPAC
intended to improve the DRG system. We also proposed to use, for FY
2007, hospital-specific relative values (HSRVs) for 10 cost centers to
compute DRG relative weights. In addition, we proposed to use
consolidated severity-adjusted DRGs or alternative severity adjustment
methods in FY 2008 (if not earlier).
We presented our reevaluation of certain FY 2006 applicants for
add-on payments for high-cost new medical services and technologies,
and our analysis of FY 2007 applicants (including public input, as
directed by Pub. L. 108-173, obtained in a town hall meeting).
We proposed the annual update of the long-term care diagnosis-
related group (LTC-DRG) classifications and relative weights for use
under the LTCH PPS for FY 2007.
2. Changes to the Hospital Wage Index
We proposed revisions to the wage index and the annual update of
the wage data. Specific issues addressed include the following:
The FY 2007 wage index update, using wage data from cost
reporting periods that began during FY 2003.
The FY 2007 occupational mix adjustment to the wage index
(discussed inthe May 17, 2006 proposed rule).
The revisions to the wage index based on hospital
redesignations and reclassifications.
The adjustment to the wage index for FY 2007 based on
commuting patterns of hospital employees who reside in a county and
work in a different area with a higher wage index.
The timetable for reviewing and verifying the wage data
that will be in effect for the proposed FY 2007 wage index.
The special timetable that will apply in FY 2007 in order
to allow us to make presumptive reclassification withdrawal or
termination decisions on behalf of affected hospitals which will then
become final unless reversed or modified by the affected hospitals in
accordance with CMS procedural rules.
The labor-related share for the FY 2007 wage index,
including the labor-related share for Puerto Rico.
3. Other Decisions and Changes to the IPPS for Operating Costs, GME
Costs, and Promoting Hospitals' Effective Use of Health Information
Technology
In the proposed rule, we discussed a number of provisions of the
regulations in 42 CFR Parts 412 and 413 and related proposed changes,
including the following:
The reporting of hospital quality data as a condition for
receiving the full annual payment update increase.
Changes in payments to SCHs and MDHs.

[[Page 47878]]

Updated national and regional case-mix values and
discharges for purposes of determining rural referral center status.
The statutorily-required IME adjustment factor for FY
2007.
Changes relating to hospitals' geographic classifications,
including reclassifications under section 508 of Pub. L. 108-173,
multicampus hospitals, urban group hospital reclassification and the
effect of change in ownership on urban county group reclassifications.
Changes and clarifications relating to GME that address
determining the per resident amounts (PRAs) for merged hospitals and
new teaching hospitals, counting and appropriate documentation of FTE
residents, and counting of resident time spent in nonpatient care
activities as part of approved residency programs.
Changes relating to payment for costs of nursing and
allied health education programs.
Changes relating to requirements for emergency services
for hospitals under EMTALA.
Discussion of the third year of implementation of the
Rural Community Hospital Demonstration Program.
We also invited comments on promoting hospitals' effective use of
health information technology.
4. Changes to the PPS for Capital-Related Costs
In the proposed rule, we discussed the payment policy requirements
for capital-related costs and capital payments to hospitals and
proposed several technical corrections to the regulations.
5. Changes for Hospitals and Hospital Units Excluded From the IPPS
In the proposed rule, we discussed payments made to excluded
hospitals and hospital units, proposed policy changes regarding
decreases in square footage or decreases in the number of beds of the
``grandfathering'' HwHs and satellite facilities, and proposed changes
to the methodology for determining LTCH CCRs and the reconciliation of
high-cost and short-stay outlier payments under the LTCH PPS. In
addition, we proposed a technical change relating to the designation of
CAHs as necessary providers.
6. Payments for Services Furnished Outside the United States
In the proposed rule, we set forth proposed changes to clarify what
is considered ``outside the United States'' for Medicare payment
purposes.
7. Payment for Blood Clotting Factor Administered to Inpatients With
Hemophilia
In the proposed rule, we discussed the proposed changes in payment
for blood clotting factor administered to Medicare beneficiaries with
hemophilia for FY 2007.
8. Limitation on Payments to Skilled Nursing Facilities for Bad
Debt
In the proposed rule, we proposed to implement section 5004 of Pub.
L. 109-171 relating to reduction in payments to SNFs for bad debt.
9. Determining Prospective Payment Operating and Capital Rates and
Rate-of-Increase Limits
In the Addendum to the proposed rule, we set forth proposed changes
to the amounts and factors for determining the FY 2007 prospective
payment rates for operating costs and capital-related costs. We also
proposed to establish the threshold amounts for outlier cases. In
addition, we addressed the proposed update factors for determining the
rate-of-increase limits for cost reporting periods beginning in FY 2007
for hospitals and hospital units excluded from the PPS.
10. Impact Analysis
In Appendix A of the proposed rule, we set forth an analysis of the
impact that the proposed changes would have on affected hospitals.
11. Recommendation of Update Factors for Operating Cost Rates of
Payment for Inpatient Hospital Services
In Appendix B of the proposed rule, as required by sections
1886(e)(4) and (e)(5) of the Act, we provided our recommendations of
the appropriate percentage changes for FY 2007 for the following:
A single average standardized amount for all areas for
hospital inpatient services paid under the IPPS for operating costs
(and hospital-specific rates applicable to SCHs and MDHs).
Target rate-of-increase limits to the allowable operating
costs of hospital inpatient services furnished by hospitals and
hospital units excluded from the IPPS.
12. Discussion of Medicare Payment Advisory Commission Recommendations
Under section 1805(b) of the Act, MedPAC is required to submit a
report to the Congress, no later than March 1 of each year, in which
MedPAC reviews and makes recommendations on Medicare payment policies.
MedPAC's March 2006 recommendation concerning hospital inpatient
payment policies addressed the update factor for inpatient hospital
operating costs and capital-related costs under the IPPS and for
hospitals and distinct part hospital units excluded from the IPPS. This
recommendation was addressed in Appendix B of the proposed rule. For
further information relating specifically to the MedPAC reports or to
obtain a copy of the reports, contact MedPAC at (202) 220-3700 or visit
MedPAC's Web site at: www.medpac.gov.
13. Appendix C and Appendix D
In Appendix C of the proposed rule, we listed the combinations of
the consolidated severity-adjusted DRGs that we proposed to implement
on FY 2008 (if not earlier), as discussed in section II.C. of the
preamble of the proposed rule. In Appendix D of the proposed rule, we
provided a crosswalk of the proposed consolidated severity-adjusted DRG
system to the respective All Patient Related Diagnosis-Related Group
(APR DRG) system.

D. Public Comments Received in Response to the FY 2007 IPPS and FY 2007
Occupational Mix Adjustment to the Wage Index Proposed Rules

We received over 2,300 timely items of correspondence containing
multiple comments on the FY 2007 IPPS proposed rule. We also received
over 100 timely items of correspondence on the FY 2007 Occupational Mix
Adjustment to the Wage Index proposed rule. Summaries of the public
comments and our responses to those comments are set forth under the
appropriate heading.

E. Interim Final Rule on Selection Criteria of Loan Program for
Qualifying Hospitals Engaged in Cancer-Related Health Care

On September 30, 2005, we published in the Federal Register (70 FR
57368) an interim final rule with comment period (CMS-1287-IFC) that
set forth the criteria for implementing a loan program for qualifying
hospitals engaged in research in the causes, prevention, and treatment
of cancer, as specified in section 1016 of the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 (Pub. L. 108-173).
Specifically, this interim final rule established a loan application
process by which qualifying hospitals, including specified entities,
may apply for a loan for the capital costs of health care
infrastructure improvement projects. The interim final rule was
effective on November 29, 2005.
We received seven timely items of correspondence on the interim
final

[[Page 47879]]

rule. In section XI. of the preamble to this final rule, we are
finalizing this interim final rule with comment period. In that
section, we discuss the provisions of the program, the public comments
received, our responses to those comments, and the final policy.

F. Proposed Rule on Forgiveness of Indebtedness under the Health Care
Infrastructure Improvement Program

On September 30, 2005, we published in the Federal Register (70 FR
57376) a proposed rule (CMS-1320-P) to establish the loan forgiveness
criteria for qualifying hospitals who receive loans under the Health
Care Infrastructure Improvement Program that was established under
section 1016 of Pub. L. 108-173.
We received one timely item of correspondence on this proposed
rule. We address the provisions of the proposed rule, a summary of the
public comments received and our responses, and the provisions of the
final rule in section XI. of the preamble of this final rule.

G. Interim Final Rule on the Exclusion of Vendor Purchases Made Under
the Competitive Acquisition Program for Part B Outpatient Drugs and
Biologicals for the Purpose of Calculating the Average Sales Price

In November 21, 2005 Federal Register (70 FR 70748), we published
an interim final rule with comment period (CMS-1325-IFC3) to clarify
and solicit comments on the relationship between drugs supplied under
the CAP for Part B Drugs and Biologicals and the calculation of the
ASP.
We did not receive any timely items of correspondence on this
interim final rule with comment period. We summarize the provisions of
the July 6, 2005 and the November 21, 2005 interim final rules and the
current interim final provisions in section XII. of the preamble of
this final rule.

II. Changes to DRG Classifications and Relative Weights

A. Background

Section 1886(d) of the Act specifies that the Secretary shall
establish a classification system (referred to as DRGs) for inpatient
discharges and adjust payments under the IPPS based on appropriate
weighting factors assigned to each DRG. Therefore, under the IPPS, we
pay for inpatient hospital services on a rate per discharge basis that
varies according to the DRG to which a beneficiary's stay is assigned.
The formula used to calculate payment for a specific case multiplies an
individual hospital's payment rate per case by the weight of the DRG to
which the case is assigned. Each DRG weight represents the average
resources required to care for cases in that particular DRG, relative
to the average resources used to treat cases in all DRGs.
Congress recognized that it would be necessary to recalculate the
DRG relative weights periodically to account for changes in resource
consumption. Accordingly, section 1886(d)(4)(C) of the Act requires
that the Secretary adjust the DRG classifications and relative weights
at least annually. These adjustments are made to reflect changes in
treatment patterns, technology, and any other factors that may change
the relative use of hospital resources.

B. DRG Reclassifications

1. General
As discussed in section II.D. of the preamble to the FY 2007 IPPS
proposed rule (71 FR 24030), for FY 2007, we are making only limited
changes to the current DRG classifications that will be applicable to
discharges occurring on or after October 1, 2006. We are limiting our
changes because, as discussed in detail in section II.C. of the
preamble to the proposed rule and to this final rule, we are focusing
our efforts on addressing the recommendations made last year by MedPAC
to refine the entire CMS DRG system by taking into account severity of
illness and applying hospital-specific relative value (HSRV) weights to
DRGs.
Currently, cases are classified into CMS DRGs for payment under the
IPPS based on the principal diagnosis, up to eight additional
diagnoses, and up to six procedures performed during the stay. In a
small number of DRGs, classification is also based on the age, sex, and
discharge status of the patient. The diagnosis and procedure
information is reported by the hospital using codes from the
International Classification of Diseases, Ninth Revision, Clinical
Modification (ICD-9-CM).
The process of forming the DRGs was begun by dividing all possible
principal diagnoses into mutually exclusive principal diagnosis areas,
referred to as Major Diagnostic Categories (MDCs). The MDCs were formed
by physician panels as the first step toward ensuring that the DRGs
would be clinically coherent. The diagnoses in each MDC correspond to a
single organ system or etiology and, in general, are associated with a
particular medical specialty. Thus, in order to maintain the
requirement of clinical coherence, no final DRG could contain patients
in different MDCs. Most MDCs are based on a particular organ system of
the body. For example, MDC 6 is Diseases and Disorders of the Digestive
System. This approach is used because clinical care is generally
organized in accordance with the organ system affected. However, some
MDCs are not constructed on this basis because they involve multiple
organ systems (for example, MDC 22 (Burns)). For FY 2006, cases are
assigned to one of 526 DRGs in 25 MDCs. The table below lists the 25
MDCs.

Major Diagnostic Categories (MDCs)
------------------------------------------------------------------------

------------------------------------------------------------------------
1....................... Diseases and Disorders of the Nervous System.
2....................... Diseases and Disorders of the Eye.
3....................... Diseases and Disorders of the Ear, Nose,
Mouth, and Throat.
4....................... Diseases and Disorders of the Respiratory
System.
5....................... Diseases and Disorders of the Circulatory
System.
6....................... Diseases and Disorders of the Digestive
System.
7....................... Diseases and Disorders of the Hepatobiliary
System and Pancreas.
8....................... Diseases and Disorders of the Musculoskeletal
System and Connective Tissue.
9....................... Diseases and Disorders of the Skin,
Subcutaneous Tissue and Breast.
10...................... Endocrine, Nutritional and Metabolic Diseases
and Disorders.
11...................... Diseases and Disorders of the Kidney and
Urinary Tract.
12...................... Diseases and Disorders of the Male
Reproductive System.
13...................... Diseases and Disorders of the Female
Reproductive System.
14...................... Pregnancy, Childbirth, and the Puerperium.
15...................... Newborns and Other Neonates with Conditions
Originating in the Perinatal Period.
16...................... Diseases and Disorders of the Blood and Blood
Forming Organs and Immunological Disorders.

[[Page 47880]]

17...................... Myeloproliferative Diseases and Disorders and
Poorly Differentiated Neoplasms.
18...................... Infectious and Parasitic Diseases (Systemic or
Unspecified Sites).
19...................... Mental Diseases and Disorders.
20...................... Alcohol/Drug Use and Alcohol/Drug Induced
Organic Mental Disorders.
21...................... Injuries, Poisonings, and Toxic Effects of
Drugs.
22...................... Burns.
23...................... Factors Influencing Health Status and Other
Contacts with Health Services.
24...................... Multiple Significant Trauma.
25...................... Human Immunodeficiency Virus Infections.
------------------------------------------------------------------------

In general, cases are assigned to an MDC based on the patient's
principal diagnosis before assignment to a DRG. However, for FY 2006,
there are nine DRGs to which cases are directly assigned on the basis
of ICD-9-CM procedure codes. These DRGs are for heart transplant or
implant of heart assist systems, liver and/or intestinal transplants,
bone marrow transplants, lung transplants, simultaneous pancreas/kidney
transplants, pancreas transplants, and for tracheostomies. Cases are
assigned to these DRGs before they are classified to an MDC. The table
below lists the nine current pre-MDCs.

Pre-Major Diagnostic Categories (Pre-MDCs)
------------------------------------------------------------------------

------------------------------------------------------------------------
DRG 103..................... Heart Transplant or Implant of Heart
Assist System.
DRG 480..................... Liver Transplant and/or Intestinal
Transplant.
DRG 481..................... Bone Marrow Transplant.
DRG 482..................... Tracheostomy for Face, Mouth, and Neck
Diagnoses.
DRG 495..................... Lung Transplant.
DRG 512..................... Simultaneous Pancreas/Kidney Transplant.
DRG 513..................... Pancreas Transplant.
DRG 541..................... ECMO or Tracheostomy with Mechanical
Ventilation 96+ Hours or Principal
Diagnosis Except for Face, Mouth, and
Neck Diagnosis with Major O.R.
DRG 542..................... Tracheostomy with Mechanical Ventilation
96+ Hours or Principal Diagnosis Except
for Face, Mouth, and Neck Diagnosis
without Major O.R.
------------------------------------------------------------------------

Once the MDCs were defined, each MDC was evaluated to identify
those additional patient characteristics that would have a consistent
effect on the consumption of hospital resources. Because the presence
of a surgical procedure that required the use of the operating room
would have a significant effect on the type of hospital resources used
by a patient, most MDCs were initially divided into surgical DRGs and
medical DRGs. Surgical DRGs are based on a hierarchy that orders
operating room (O.R.) procedures or groups of O.R. procedures by
resource intensity. Medical DRGs generally are differentiated on the
basis of diagnosis and age (0 to 17 years of age or greater than 17
years of age). Some surgical and medical DRGs are further
differentiated based on the presence or absence of a complication or a
comorbidity (CC).
Generally, nonsurgical procedures and minor surgical procedures
that are not usually performed in an operating room are not treated as
O.R. procedures. However, there are a few non-O.R. procedures that do
affect DRG assignment for certain principal diagnoses. An example is
extracorporeal shock wave lithotripsy for patients with a principal
diagnosis of urinary stones.
Once the medical and surgical classes for an MDC were formed, each
class of diagnoses was evaluated to determine if complications,
comorbidities, or the patient's age would consistently affect the
consumption of hospital resources. Physician panels classified each
diagnosis code based on whether the diagnosis, when present as a
secondary condition, would be considered a substantial CC. A
substantial CC was defined as a condition which, because of its
presence with a specific principal diagnosis, would cause an increase
in the length of stay by at least one day in at least 75 percent of the
patients. Each medical and surgical class within an MDC was tested to
determine if the presence of any substantial CC would consistently
affect the consumption of hospital resources.
A patient's diagnosis, procedure, discharge status, and demographic
information is fed into the Medicare claims processing systems and
subjected to a series of automated screens called the Medicare Code
Editor (MCE). The MCE screens are designed to identify cases that
require further review before classification into a DRG.
After patient information is screened through the MCE and any
further development of the claim is conducted, the cases are classified
into the appropriate DRG by the Medicare GROUPER software program. The
GROUPER program was developed as a means of classifying each case into
a DRG on the basis of the diagnosis and procedure codes and, for a
limited number of DRGs, demographic information (that is, sex, age, and
discharge status).
After cases are screened through the MCE and assigned to a DRG by
the GROUPER, the PRICER software calculates a base DRG payment. The
PRICER calculates the payment for each case covered by the IPPS based
on the DRG relative weight and additional factors associated with each
hospital, such as IME and DSH adjustments. These additional factors
increase the payment amount to hospitals above the base DRG payment.
The records for all Medicare hospital inpatient discharges are
maintained in the Medicare Provider Analysis and Review (MedPAR) file.
The data in this file are used to evaluate possible DRG classification
changes and to recalibrate the DRG weights. However, in the July 30,
1999 IPPS final rule (64 FR 41500), we discussed a process for
considering non-MedPAR data in the recalibration process. In order for
us to consider using particular non-MedPAR data, we must have
sufficient time to evaluate and test the data. The time necessary to do
so depends upon the nature and quality of the non-MedPAR data
submitted. Generally, however, a significant sample of the non-MedPAR

[[Page 47881]]

data should be submitted by mid-October for consideration in
conjunction with the next year's proposed rule. This allows us time to
test the data and make a preliminary assessment as to the feasibility
of using the data. Subsequently, a complete database should be
submitted by early December for consideration in conjunction with the
next year's proposed rule.
In the FY 2007 IPPS proposed rule, we proposed limited changes to
the DRG classification system for FY 2007 for the FY 2007 GROUPER,
Version 24.0 and to the methodology used to recalibrate the DRG
weights. The changes we proposed, the public comments we received
concerning the proposed changes, the final DRG changes, and the
methodology used to calculate the DRG weights are set forth below. The
changes we are implementing in this final rule will be reflected in the
FY 2007 GROUPER, Version 24.0, and are effective for discharges
occurring on or after October 1, 2006. Unless otherwise noted in this
final rule, our DRG analysis is based on data from the March 2006
update of the FY 2005 MedPAR file, which contains hospital bills
received through March 31, 2006, for discharges occurring in FY 2005.
2. Yearly Review for Making DRG Changes
Many of the changes to the DRG classifications are the result of
specific issues brought to our attention by interested parties. We
encourage individuals with concerns about DRG classifications to bring
those concerns to our attention in a timely manner so they can be
carefully considered for possible inclusion in the annual proposed rule
Therefore, similar to the timetable for interested parties to submit
non-MedPAR data for consideration in the DRG recalibration process,
concerns about DRG classification issues should be brought to our
attention no later than early December in order to be considered and
possibly included in the next annual proposed rule updating the IPPS.
The actual process of forming the DRGs was, and continues to be,
highly iterative, involving a combination of statistical results from
test data combined with clinical judgment. For purposes of this final
rule, in deciding whether to create a separate DRG, we consider whether
the resource consumption and clinical characteristics of the patients
with a given set of conditions are significantly different than the
remaining patients in the existing DRG. We evaluate patient care costs
using average charges and lengths of stay as proxies for costs and rely
on the judgment of our medical officers to decide whether patients are
clinically distinct or similar to other patients in the DRG. In
evaluating resource costs, we consider both the absolute and percentage
differences in average charges between the cases we are selecting for
review and the remainder of cases in the DRG. We also consider
variation in charges within these groups; that is, whether observed
average differences are consistent across patients or attributable to
cases that are extreme in terms of charges or length of stay, or both.
Further, we also consider the number of patients who will have a given
set of characteristics and generally prefer not to create a new DRG
unless it will include a substantial number of cases.

C. Revisions to the DRG System Used Under the IPPS

1. MedPAC Recommendations
In the FY 2006 IPPS final rule, we discussed a number of
recommendations made by MedPAC regarding revisions to the DRG system
used under the IPPS (70 FR 47473 through 47482).
In Recommendation 1-3 in the 2005 Report to Congress on Physician-
Owned Specialty Hospitals, MedPAC recommended that CMS refine the
current DRGs to more fully capture differences in severity of illness
among patients, including:
Base the DRG relative weights on the estimated cost of
providing care.
Base the weights on the national average of the hospital-
specific relative values (HSRVs) for each DRG (using hospital-specific
costs to derive the HSRVs).
Adjust the DRG relative weights to account for differences
in the prevalence of high-cost outlier cases.
Implement the case-mix measurement and outlier policies
over a transitional period.
As we noted in the FY 2006 IPPS final rule, we had insufficient
time to complete a thorough evaluation of these recommendations for
full implementation in FY 2006. However, we did adopt severity-weighted
cardiac DRGs in FY 2006 to address public comments on this issue and
the specific concerns of MedPAC regarding cardiac surgery DRGs. We also
indicated that we planned to further consider all of MedPAC's
recommendations and thoroughly analyze options and their impacts on the
various types of hospitals in the FY 2007 IPPS proposed rule. Following
the publication of the FY 2006 IPPS final rule, we contracted with 3M
Health Information Systems to assist us in performing this analysis.
Beginning with MedPAC's relative weight recommendations, we
analyzed MedPAC's recommendations to move to a cost-based HSRV
weighting methodology. In performing this portion of the analysis, we
studied hospital cost report data, departmental cost-to-charge ratios
(CCRs), MedPAR claims data, and HSRV weighting methodology. Our
intention in undertaking this portion of the analysis was to find an
administratively feasible approach to improving the accuracy of the DRG
weights. As we described in the proposed rule, we believe some changes
can be made to MedPAC's methodology for determining the relative
weights that will make it more feasible to replicate on an annual basis
but will result in similar impacts.
In conjunction with analyzing MedPAC's relative weight
recommendations, we looked at refining the current DRG system to better
recognize severity of illness. Starting with the APR DRG GROUPER used
by MedPAC in its analysis, we studied Medicare claims data. Based on
this analysis, we developed a CS DRG GROUPER that we believe could be a
better alternative for recognizing severity of illness among the
Medicare population. We note that MedPAC's recommendations with regard
to revising the DRGs to better recognize severity of illness may have
implications for the outlier threshold, the measurement of real case-
mix versus apparent case-mix, and the IME and the DSH adjustments. We
discuss these implications in more detail in the following sections.
As we present below, we believe that the recommendations made by
MedPAC, or some variants of them, have significant promise to improve
the accuracy of the payment rates in the IPPS. We agree with MedPAC
about exploring possible refinements to our payment methodology even in
the absence of concerns about the proliferation of specialty hospitals.
In the FY 2006 final rule, we indicated that until we had completed
further analysis of the options and their effects, we could not predict
the extent to which changing to APR DRGs would provide payment equity
between specialty and general hospitals. In fact, we cautioned that any
system that groups cases will always present some opportunities for
providers to specialize in cases they believe to have higher margins.
We believe that improving payment accuracy should reduce these
opportunities and potentially reduce the

[[Page 47882]]

incentives that Medicare payments may provide for the further
development of specialty hospitals.
We considered MedPAC's recommendation to adjust the relative
weights to account for differences in the prevalence of outlier cases.
However, we placed most of our attention and resources on the
recommendations related to refinement of the current DRGs to more fully
capture differences in severity of illness among patients, as we do not
have the statutory authority to make the specific changes to our
outlier policy that MedPAC recommended. While we have not made MedPAC's
recommendation regarding outliers a central focus of our analysis, we
do intend to examine this issue in more detail in the future. In
sections II.C.2. through C.6. of the FY 2007 proposed rule, we
discussed a number of issues related to the MedPAC recommendations. We
also presented our analysis and specific proposals for FY 2007 and FY
2008 including their estimated impacts. In this final rule, we present
the public comments received on the proposed rule, our responses to
those comments, our final decisions for FY 2007 and our intended
actions for FY 2008.
2. Refinement of the Relative Weight Calculation
MedPAC made two recommendations with respect to the DRG relative
weight calculation. First, MedPAC recommended that CMS base the DRG
relative weights on the estimated cost of providing care. Second,
MedPAC recommended that CMS base the weights on the national average of
hospitals' relative values in each DRG. Because both of these
recommendations address the relative weight calculation, we are
addressing them together. The work we have done to address these
recommendations was discussed in detail in the proposed rule (71 FR
24006-24011).
MedPAC recommended that CMS replace its charge-based relative
weight methodology with cost-based weights, as it believed that the
charge-based relative weight methodology that CMS has utilized since
1985 has introduced bias into the weights due to differential markups
for ancillary services among the DRGs. In analyzing claims data, it is
evident to us that some hospital types (for example, teaching
hospitals) are systematically more expensive overall than the average
hospital and certain case types are more commonly treated at these more
expensive facilities. Higher average charges for cases that are treated
at more expensive hospitals may result in higher weights for these
types of cases. MedPAC suggested a hospital-specific relative value
(HSRV) methodology which MedPAC believed would reduce the effect of
cost differences among hospitals that may be present in the national
relative weights due to differences in case-mix adjusted costs.
Under the HSRV methodology recommended by MedPAC, charges are
standardized for each provider by converting its charges for each case
to hospital-specific relative charge values and then adjusting those
values for the hospital's case-mix. The first step in this process
involves dividing the charge for each case at the hospital by the
average charge for all cases at the hospital in which the case was
treated. The hospital-specific relative charge value, by definition,
averages 1.0 for each hospital. The resulting ratio is then multiplied
by the hospital's case-mix index (CMI). In this way, each hospital's
relative charge value is adjusted by its case-mix to an average that
reflects the complexity of the cases it treats relative to the
complexity of the cases treated by all other hospitals. We discuss this
issue in further detail below.
Our analysis of departmental-level CCRs from the Medicare cost
report data has shown that charges for routine days, intensive care
days, and various ancillary services are not marked up by a consistent
amount. For example, the markup amounts for cardiology services are
higher than average. Because charges are the current basis for the DRG
relative weights, the practice of differential markups can lead to bias
in the DRG weights because various DRGs use, on average, more or less
of particular ancillary services. MedPAC believes that the bias in the
national DRG relative weights that may arise as a result of
differential markups across various cost centers can be removed by
moving from charge-based to cost-based weights. Based on the analysis
we have conducted, we agree that it is appropriate to adjust the DRG
relative weights to account for the differences in charge markups
across cost centers.
In the proposed rule, we indicated several concerns about the
methodology used by MedPAC. MedPAC's methodology to reduce hospital
charges to cost is administratively burdensome, not only to develop,
but also to maintain. First, MedPAC developed CCRs for individual
hospitals at the most detailed department level. Specifically, in
calculating costs as the basis for the relative weights, MedPAC applied
hospital-specific CCRs from each provider's cost report to the line
item charges on the claims that the hospital submitted during the same
time period. This methodology required matching cost report data to
claims data, and because cost report data take longer to compile and
file, the method necessitates using older claims data to set relative
weights. The most recent complete set of Medicare cost reports
available to us is from FY 2003. Thus, if we were to model the exact
approach used by MedPAC and use claims data for a matching year, we
would be using claims data from FY 2003 instead of using FY 2005 claims
data, as we would if we were to continue with our current methodology.
In addition, MedPAC's hospital-specific approach required detailed cost
center distinctions for each hospital that are difficult to define,
map, and apply. This approach also required the use of the Standard
Analytic File (SAF) because MedPAR data that we currently use to set
DRG weights did not have the necessary level of detail. Using the SAF
increases processing time and adds further complexity to the process of
setting the relative weights.
Second, because MedPAC applied these CCRs at the individual claim
level, missing or invalid data resulted in MedPAC deleting a large
number of claims (approximately 10 percent) from the relative weight
calculation. Lastly, MedPAC acknowledged that its method was too
difficult to replicate on an annual basis and suggested that the
weights be recalculated once every 5 years with other adjustments based
on charges during the intervening years.
As we explained in the FY 2007 IPPS proposed rule, we developed an
alternative to MedPAC's approach that we believe achieves similar
results in a more administratively feasible manner. This method
involves developing hospital-specific charge relative weights at the
cost center level and then scaling the weights to costs using the
national cost center charge ratios developed from the cost report data.
After studying Medicare cost report data, we established 10 cost center
categories based upon broad hospital accounting definitions. In our
cost center categories, there are 8 ancillary cost groups in addition
to routine day costs and intensive care day costs, and each category
represents at least 5 percent of the charges in the claims data. The
specific cost report lines that contribute to each category and the
corresponding charge lines from the MedPAR claims data are itemized in
Table A below.
In the proposed rule, we stated that this alternative approach,
which we labeled as the HSRV cost center (HSRVcc) methodology, has
several advantages. First, the use of national average rather than
hospital-specific CCRs avoids the complexity

[[Page 47883]]

encountered with cost center CCRs at the hospital level and allows us
to retain more data for use in the relative weight calculation. In
addition, the methodology eliminates the need to match claims to the
time period of the CCRs, resulting in the ability to use more timely
claims data. Furthermore, the alternative approach makes it more
feasible to update the relative weights annually using a single
methodology. We do not have to replicate the methodology once every 5
years and make adjustments based on changes in charges in the
intervening years. The HSRVcc methodology is described in detail in the
proposed rule (71 FR 24008 through 24011).
Comment: Several commenters supported CMS' effort to restructure
the DRG relative weights based on cost. They stated that using charges
as a proxy for hospital costs in determining resource utilization under
the current system is inappropriate and encouraged CMS to implement a
cost-based system consistent with the agency's original intent without
delay.
Response: We appreciate the commenters' support of our proposal to
implement a cost-based weighting methodology. We believe that adopting
cost-based weights will result in significant improvements to
Medicare's IPPS payments. MedPAC concluded after an extensive analysis
of Medicare hospital inpatient claims and cost data that the IPPS
payment rates are badly distorted, resulting in Medicare paying too
much for some types of patients and too little for others. As indicated
below, we are making some modifications to our proposals in response to
the public comments. However, we are adopting a system of cost-based
weights for FY 2007 to address the concerns raised by MedPAC. As a
result, all hospitals, including specialty hospitals, will be paid more
appropriately. In addition, based on our analysis, we concur with
MedPAC that the current DRG system needs to be changed to better
account for severity of illness among patients. This issue is discussed
in more detail in the next section of this final rule.
Comment: A majority of commenters supported CMS' efforts to improve
the accuracy of the DRG weights, and better reflect variations in
patients' severity of illness. However, many commenters viewed the
HSRVcc proposal as flawed from both a methodological and policy
perspective, and believed the proposal to implement cost-based weights
should be delayed for at least a year. They believed that CMS needs to
further consider a number of issues raised in the public comments
before such sweeping changes are implemented. In addition, the
commenters indicated that CMS needs to provide hospitals with more
lead-time before implementing changes so they can budget accurately.
They urged CMS to use the current standardized charge-based approach in
FY 2007 until these issues can be addressed. At a minimum, they
believed CMS should address what were characterized as methodological
flaws and publish revised relative weights along with hospital impacts
for public comment prior to implementation.
Response: We appreciate the commenters' concerns with regard to a
rapid and full implementation of the changes we proposed to the
relative weight methodology. However, based on our analysis and study
of the MedPAC recommendations that we presented in our proposed rule,
it has come to our attention that differential markups between routine
and ancillary cost centers have introduced significant bias into the
relative weights. In order to reduce the bias in weights and make more
appropriate payments under the IPPS, we believe it is necessary to
initiate the transition to a cost-based relative weight methodology in
FY 2007. However, we have considered the commenters' requests to
further review the HSRV methodology. Therefore, in this final rule, we
are not adopting our proposal to standardize charges using the HSRV
methodology. However, we are adopting our proposal to reduce charges to
estimated costs prior to setting DRG weights. We will undertake further
analysis of the HSRV methodology during the next year. Based on this
analysis, we will consider proposing further changes to adopt the HSRV
methodology for FY 2008.
Comment: Many commenters disagreed with CMS' assertion that the
more administratively feasible HSRVcc approach achieves similar results
to the MedPAC methodology. While they supported CMS' efforts to ensure
the DRG weights are updated annually to reflect the most recent trends
in inpatient care, they expressed concern with the specifics of the
HSRVcc methodology.
First, they noted that CMS stated in the proposed rule that organ
acquisition costs were eliminated from hospital charges before the
HSRVcc weights were calculated. However, it had come to their attention
that organ acquisition charges were actually included in the
calculation of DRG weights under the proposed methodology. They stated
that organ acquisition is reimbursed by Medicare on a cost basis and
should not be included in the weight calculation. Furthermore, the
commenters asserted that the inclusion of organ acquisition charges
improperly overstated the transplant DRG HSRVcc weights. Commenters
recommended that CMS remove the organ acquisition charges from the
computation of the DRG weights if the HSRVcc methodology is to be
adopted.
Second, commenters believe CMS made questionable methodological
decisions when calculating the national CCRs. Under the proposed
methodology, CMS calculated hospital-weighted rather than charge-
weighted CCRs for each of the 10 cost centers used to scale the charge-
based weights. Because the averages are unweighted, the commenters
stated that the CCRs do not account for the differential contribution
of each hospital to total charges. The commenters asserted that,
mathematically, the only correct way to get from total hospital charges
to total hospital costs is to use a charge-weighted average of hospital
CCRs. Failure to use charge-weighted averages overestimates routine and
ICU costs and underestimates ancillary costs, which ultimately
exaggerates the shift in payments, according to the commenters.
Therefore, commenters believed CMS should recalculate the mean national
CCRs using a charge-weighted method.
Third, commenters believed CMS applied questionable trimming
criteria in computing the cost center CCRs. They stated that trimming
the cost center CCRs at 1.96 standard deviations (rather than 3
standard deviations) from the geometric mean inappropriately excluded
over 200 large hospitals that account for 25 percent of routine
accommodation charges. They noted that the CCRs for these hospitals
appear to be predominantly correct. In addition, the commenters noted
that CMS applied the CCRs to the charge data for hospitals that were
excluded from the national average CCR calculation. Thus, the
commenters argued there is a significant mismatch between the hospital
data that was included in the CCR and HSRVcc calculations. These
commenters recommended that CMS exclude hospital data from the CCRs if
it is more than 3 standard deviations (rather than 1.96) from the mean
CCR. Many commenters characterized these methodological decisions as
errors and indicated that their combined impact is significant. If CMS
is to use the HSRVcc methodology, the commenters indicated that these
issues should be addressed.
A few commenters stated that we made incorrect assumptions that may
have resulted in new distortions to the relative weights. Specifically,
the commenters stated that we were incorrect in applying the same CCR

[[Page 47884]]

across all hospitals for a given cost center and applying the same
percent mix of services by cost center to all DRGs. The commenters
recommended that we first convert charges to costs for each hospital
and DRG, and then compute hospital-specific relative values. They
stated that the reversal of the calculations in the HSRVcc methodology
accommodates cost center mix and charge markup differences across
hospitals and across DRGs.
Many commenters argued that the hospital-specific relative value
methodology is unnecessary and compresses the DRG weights. Commenters
cited past research indicating that HSRV has a disproportionate impact
on certain types of hospitals and types of care, and reduces the range
of DRG weights between the lowest and highest weight DRGs.\1\
Commenters noted that the HSRV methodology ``produces more compressed
DRG weights'' than the existing standardization methodology and that
``the greater compression of the HSRV weights is counter balanced by
the fact that more high-weighted cases qualify as [high cost] outlier
cases.'' A few commenters expressed concern that adopting MedPAC's
recommendation to exclude high-cost outliers in addition to statistical
outliers from the computation of the DRG weights so that the weights
reflect the average cost only of inlier cases would compound the DRG
weight compression caused by the HSRV methodology because high-cost
outlier cases occur most frequently in high-weighted DRGs. The
commenters indicated that the finding raises the concern of patient
access to care for services in higher cost DRGs.
---------------------------------------------------------------------------

\1\ Carter, Grace ``How recalibration method, pricing, and
coding affect DRG weights,'' Health Care Financing Review, Winter
1992.
---------------------------------------------------------------------------

Commenters also believed that the HSRV methodology fails to take
into account legitimate variation in costs that occur between
hospitals. Therefore, any hospital-level variation in cost that is not
explained by the IPPS case mix index is simply ignored, according to
the commenters. To the extent that certain services are provided most
frequently in hospitals with higher than average cost, the commenters
believed that the HSRV methodology will result in inappropriately lower
DRG weights for these services.
Therefore, commenters strongly recommended that the HSRV
methodology be eliminated in favor of the cost-based weighting
methodology adopted under the OPPS. They stated that the main
difference between these two approaches is the treatment of cost
variation that is not otherwise explained with IPPS payment factors. In
the standardization approach employed by OPPS, any variation in
hospital costs that is not explained by CMS payment factors affects the
calibration of DRG weights. They stated that the HSRV approach proposed
by CMS, by contrast, ignores any hospital level variation in charges
that is not explained by the case mix index. Many commenters added that
CMS could propose to remove other sources of cost variation beyond its
current practice of standardizing for wage index, DSH, and IME. They
believed a factor-specific approach to standardization would lead to
more precise and valid adjustments than those recognized under the HSRV
methodology, which eliminates all sources of charge variation
irrespective of whether there are legitimate differences among
hospitals in costs that are not taken into account in the payment
system.
Response: In preparing the FY 2007 relative weights, the costs of
organ acquisition were inadvertently included in the relative weight
for the calculation of ``other services.'' The costs of organ
acquisition are paid by Medicare on a cost basis and should not be
included in setting the IPPS relative weights. These costs have been
excluded from the IPPS relative weights calculated for this final rule.
In response to the concerns expressed regarding the CCR
calculation, we proposed to establish the geometric mean CCRs using a
hospital-weighted methodology because we believed that it served as an
acceptable measure of central tendency. In addition, we proposed to
trim the CCRs on the basis of 1.96 standard deviations since we were
using national averages and thought a more stringent statistical trim
would be appropriate. In response to comments, however, we have
reconsidered our approach and have implemented the 3 standard deviation
statistical trim supported by commenters. Further, we are also adopting
the charge-weighted method of calculating CCRs, as we now believe it
may be more appropriate to apply CCRs based on aggregate costs and
charges among hospitals to the charges that are aggregated by DRG and
used to set the relative weights.
Although commenters asserted that the HSRV methodology exacerbates
the effect of charge compression on the relative weights, we have not
had sufficient time between the close of the comment period and the
publication of this final rule to analyze this assertion. Therefore, in
response to comments (and as stated above), we are postponing the
implementation of the HSRV methodology until we can study this comment
further. Instead, as suggested by many commenters, we are using an
approach to calculating the IPPS relative weights that is more similar
to the approach used in the OPPS. That is, rather than using a
hospital-specific relative weighting methodology, we are standardizing
charges to remove relevant payment factor adjustments and then
adjusting those charges to costs using national cost center CCRs. As we
stated in the proposed rule, it is not administratively feasible to
adjust charges to cost using hospital-specific cost to charge ratios.
Therefore, while we are standardizing charges for the IPPS cost-based
weights using a similar process to the OPPS, we are still utilizing
national average CCRs to determine cost. Specifically, we are
standardizing the charges for each DRG by cost center to remove
differences in wage index, indirect medical education and
disproportionate share adjustments and are then reducing the
standardized charges to cost using the national average CCRs. The
relative weights we are adopting in this final rule are calculated
based on the average total cost for a DRG in relation to the national
average total cost.
Comment: Many commenters expressed concern that CMS collapsed the
full set of at least 37 cost centers into only 10. They believed this
approach eliminates detail that is available on the cost report. The
commenters requested that CMS elaborate on the process it went through
to derive the 10 cost centers used to calculate the HSRVcc weights.
Some commenters stated CMS should use all 37 cost centers that are used
in calculating the OPPS relative weights for the IPPS. Other commenters
suggested that CMS expand the number of cost centers used in the
calculation. MedPAC found that the CCRs within the proposed 10 cost
centers varied significantly in some areas and recommended that CMS
expand the number to 13 by distinguishing anesthesia and labor and
delivery from the operating room cost center and distinguishing
inhalation therapy from the therapy services cost center. Several
commenters supported MedPAC's recommendation. Further, MedPAC
recommended that the CCRs be based on Medicare-specific costs and
charges rather than on the costs and charges for the entire facility.
Some commenters advocated that a separate cost center be added for
implantable devices. They believed this additional cost center would
better identify the mark-up for high cost technological devices than

[[Page 47885]]

using the average for all supplies and equipment.
Several commenters encouraged CMS to specifically incorporate
nursing costs into the weighting methodology. They stated that nursing
care represents approximately 30 percent of all hospital expenditures
and nearly half of all direct care costs and have been essentially
ignored in the payment formula. Specifically, these commenters urged
CMS to create a unique Nursing Cost Center that identifies the
inpatient direct and indirect costs for registered nurses, licensed
practical nurses, and unlicensed assistive personnel. They defined
direct nursing costs as those associated with licensed and assistive
nursing personnel assigned to care for an individual patient. Indirect
nursing costs are all other salary and benefits related to licensed and
assistive nursing personnel not directly assigned to care for
individual patients. They suggested that the routine and intensive care
cost centers in the proposed HSRVcc methodology be replaced with a
nursing cost center and a separate facility cost center to identify the
non-nursing cost component of care. They urged CMS to set aside funds
to study and implement the above recommendation using methodologically
sound research and demonstration projects.
Response: As we stated in the proposed rule, we established 10 cost
center categories based upon broad hospital accounting definitions.
These 10 cost center categories consist of 8 ancillary cost groups, a
routine days cost group, and an intensive care days cost group. These
cost centers were selected because each category represents at least 5
percent of the charges in the claims data.
We thoroughly reviewed the comments advocating that we expand the
number of cost centers used in the calculation. We currently use the
MedPAR data set for charge detail. The MedPAR file does not provide
enough granularity in the charge detail to support 37 different cost
centers. In addition, in the proposed methodology, we eliminated claims
for providers that did not have costs greater than zero for at least 8
of the 10 cost centers. At least 96 percent of the providers in the
MedPAR file had charges for at least 8 of the 10 cost centers. We
believe that if we were to expand to the full set of 37 cost centers
outlined in the cost report, we would eliminate a greater number of
claims in the calculation of the DRG relative weights.
While we do not believe expanding to 37 cost centers is feasible,
we agree with MedPAC that we may have consolidated a few revenue
centers that have significantly different CCRs. Upon further
examination of the data, in this final rule, we are expanding the
number of cost centers from 10 to 13 by creating separate cost centers
for anesthesia, labor and delivery, and inhalation therapy. We also
agree with MedPAC that it would be more appropriate to set the CCRs
based on Medicare-specific charges and costs rather than on the costs
and charges for the entire facility. Therefore, in this final rule, we
are modifying our CCR calculations to incorporate Medicare-specific
charge data from Worksheet D Part 4 in addition to the cost and charge
data from Worksheet C Part I that we used in the proposed rule.
Other commenters suggested that we also create separate cost
centers for implantable devices and nursing. As noted in the comments,
the MedPAR file does not contain the necessary detail to identify a
separate cost center for implantable devices or nursing. In addition,
we did not have enough time to evaluate whether it would be reasonable
to utilize a nursing cost center in the methodology in the future.
However, we anticipate undertaking further analysis of the relative
weight methodology over the next year in conjunction with the research
we are doing on charge compression to determine if additional cost
centers are necessary.
Comment: Commenters, referring to Table A, ``Charge Line Items from
MedPAR Included in Cost Center Charge Group,'' noted that MedPAR charge
descriptions do not match the Form CMS-2552-96 Cost Center
description(s) for several cost centers. For example:
(a) MedPAR lists (18) Lithotripsy Charges where the cost reporting
form lists Radioisotopes;
(b) MedPAR lists (6) Other Services where the cost reporting form
lists Whole Blood and Packed Red Blood Cells;
(c) MedPAR lists (19) Cardiology Charges as including line 54 of
the cost report, which is Electroencephalography;
(d) MedPAR lists (16) Blood Administration Charges where the cost
reporting form lists ASC (Non-Distinct Part);
(e) MedPAR lists (24) Outpatient Services Charges where the cost
reporting form lists Emergency;
(f) MedPAR lists (25) Emergency Room Charges where the cost
reporting form lists Ambulance Services;
(g) MedPAR lists (26) Ambulance Charges where the cost reporting
form lists Renal Dialysis;
(h) MedPAR lists (29) ESRD Revenue Setting Charges where the cost
reporting form lists Clinic;
(i) MedPAR lists (30) Clinic Visit Charges where the cost reporting
form lists Other Outpatient Services, Other Ancillary, Home Program
Dialysis and Ambulance Services;
(j) Ambulance Services appear to be included twice, once in (30)
Clinic Visit Charges and once in (25) Emergency Room Charges;
(k) Lithotripsy is included in Radiology Services;
(l) Line 62 ``Observation Beds'' is not reflected separately in
Table A; and
(m) Line 68 ``Other reimbursement'' of the cost report is not
listed in Table A.
In addition, commenters were unclear as to whether CMS accounted
for subscripted lines in the cost report when calculating CCRs. The
commenters noted that subscripted lines did not appear in Table A.
Commenters believed this inconsistency in reporting may lead to
distorted DRG weights. Therefore, commenters recommended that CMS
examine this issue thoroughly before implementing cost-based weights.
Several commenters requested that CMS publish a crosswalk of the
revenue codes that are used for each MedPAR charge data group and
require intermediaries to review cost report data to ensure that
providers have reported data consistent with the mapping to the MedPAR
data.
Response: We wish to clarify to the commenters that the charge
description titles shown in the MedPAR charge description column in
Table A were not meant to also be interpreted as the title for each of
the cost report line items. That is, we were simply using Table A to
illustrate the MedPAR charge groups and the cost report line numbers
that were used to create the 10 proposed cost centers. To alleviate
this confusion, we are revising Table A to show both the MedPAR charge
titles and the titles of the cost report line items. In response to
comments (j) and (l), we note that the cost report line item number 65
for ambulance was inadvertently listed twice in the proposed rule; line
item 62, observation beds, was used in establishing the CCR for the
other services category. Line 65 for ambulance was only used once in
the actual other services CCR calculation. Line item 62 should have
appeared in the ``other services'' cost center grouping printed in
Table A in the proposed rule. We have corrected this error in the final
version of Table A. In addition, in regards to comment (k) above, we
have moved the lithotripsy charges from MedPAR to the ``other
services'' cost center grouping and we have also

[[Page 47886]]

revised the CCR for ``other services'' to include the cost report line
item 43 for radioisotopes, which was formerly included in the radiology
CCR.
In response to the commenters' question regarding the inclusion of
subscripted lines, when we calculated the CCRs for the proposed rule
and subsequently for this final rule, we relied on a HCRIS data set
that contains rolled-up cost report fields such that line items which
are subscripted contain the total value for the line item and any
subscripted lines below. Therefore, most subscripted lines were
included in the proposed rule CCRs and continue to be included in the
final rule CCR calculations. However, some subscripted line items are
not rolled up and continue to have their own field on the HCRIS data
set that we used to calculate the CCRs. Therefore, we are now including
the cost report line item 6201 for observation beds, the cost report
line item 6350 for Rural Health clinics and the cost report line item
6360 for Federally Qualified Health clinics in the other services CCR.
Cost report line items 6350 and 6360 are only reported by provider-
based Rural Health clinics and Federally Qualified Health clinics and
are necessary in order to identify all incurred costs applicable to
furnishing an observation bed prior to a decision to admit a patient to
the hospital. Further, we are now including the cost report line item
68 for other reimbursement in the other services CCR, and we are
including professional services charges from MedPAR in the other
services charge grouping. In response to the commenters' requests that
we show the revenue codes that comprise the MedPAR charges, we have
also inserted an additional column in Table A that lists the revenue
codes MedPAR groups into each charge field that we are using in the
final 13 cost centers. The final version of Table A appears below:
BILLING CODE 4120-01-P

[[Page 47887]]

[GRAPHIC] [TIFF OMITTED] TR18AU06.000

[[Page 47888]]

[GRAPHIC] [TIFF OMITTED] TR18AU06.001

[[Page 47889]]

[GRAPHIC] [TIFF OMITTED] TR18AU06.002

[[Page 47890]]

[GRAPHIC] [TIFF OMITTED] TR18AU06.003

[[Page 47891]]

[GRAPHIC] [TIFF OMITTED] TR18AU06.004

[[Page 47892]]

[GRAPHIC] [TIFF OMITTED] TR18AU06.005

Comment: Many commenters warned that the redistribution of payments
from the surgical to the medical DRGs under the proposed methodology
may create unintended consequences. Several of these commenters stated
that this redistribution poses a threat to patients' access to the
latest medical advances and highest quality care. They feared that
hospitals will invest less in new medical technologies because Medicare
would not pay sufficiently for the DRGs that use them. Another
commenter stated that the increased reimbursement for psychiatric DRGs
may create an incentive for IPFs to decertify and become inpatient
units.
Response: We appreciate the commenters' concern that payment
redistribution may create the potential for unintended consequences.
However, we wish to emphasize that the redistribution of payments among
DRGs is necessary to improve payment accuracy and eliminate the
distortions in the current IPPS payment rates. Under the methodology in
this final rule, we will increase payment for relatively underpaid
cases and reduce payment for relatively overpaid cases.
We are adopting a methodology that will realign payments with costs
to pay more appropriately for services rendered by hospitals.
Therefore, we do not believe altering the DRG relative weighting
methodology will affect patients' access to quality medical care.
Patients should have continued and uninterrupted access to new,
innovative technologies.
We have analyzed the impact of the increased reimbursement for
psychiatric DRGs in response to the commenter's concern that increased
reimbursement may provide incentives for IPFs to decertify their units
and be paid under the IPPS. Because of the differences in payment
between the IPPS and the IPF PPS, we do not believe that the DRG
relative weights we are adopting in this final rule will provide
increased incentive for IPFs to decertify units. Whereas under the IPF
PPS, hospitals receive a daily base rate and adjustments to account for
certain patient and facility characteristics, hospitals paid under the
IPPS are paid a specified amount based on the DRG for the same cases,
regardless of the length of the hospital stay. Our analysis suggests
that even though the average payment per day (total payment divided by
average length of stay) for the psychiatric DRGs in the IPPS proposed
rule may be higher than under the IPF PPS, the total average payment
per episode of care remains lower (product of the average IPF payment
per day and the average length of stay). Thus, because payments per
episode of care remain lower under the IPPS than under the IPF PPS, we
are not concerned that IPFs will decertify to get paid using the IPPS.
In addition, as indicated above, we are making some modifications to
our methodology in response to the public comments. Based on these
changes, the increase in the relative weights for the psychiatric DRGs
presented in this final rule will not be as significant as those
contained in the proposed rule.
Comment: Commenters expressed concern that because hospitals often
allocate charges on the cost reports differently than charges on the
claims, the cost-center level CCRs are calculated based on a different
set of charges than the charges on the claims to which the CCRs are
later applied. Commenters expressed concern that Medicare cost report
data are not detailed enough or consistently reported accurately to
determine costs accurately at a DRG level since such data lack specific
cost data on individual items and services. They reiterated that the
Medicare cost reports, which serve as the primary source of data under
the proposed system, were not designed to be used in a prospective
payment system and have not been used to establish hospital rates for
inpatient services for some time. They noted several limitations in
using the cost reports to derive estimated costs utilized in the DRG
relative weight calculations that should be carefully examined and
addressed before moving forward with the proposed system of hospital-
specific cost weights.
First, the commenters believed that CMS should address cost report
accuracy. The commenters stated that because the cost reports have only
been used for payment in limited circumstances (DSH, IME, outlier
policy), hospitals have had little incentive to report accurately and
completely for the services provided to Medicare beneficiaries. In
addition, they claimed the cost reports do not contain the level of
detail necessary to accurately determine costs at the DRG level.
Instead, the cost report provides payments, costs, and some
reimbursement totals by department or cost center. The commenters also
advised that CMS perform additional auditing of the cost reports to
ensure accuracy. The commenters were concerned that if CMS implements a
cost-based weighting methodology, the DRG weights will be based on
largely un-audited cost reports since approximately 15 percent of
hospital cost reports are audited each year. They noted that MedPAC
estimated that a full-scale audit could require 1,000 to 2,000 hours
from a fiscal intermediary,

[[Page 47893]]

as well as additional time and resources from the hospital. In
addition, a few commenters stated that CMS should only use final
settled cost report data, not as-submitted data, in calculating DRG
weights.
Second, some commenters contended that CMS should evaluate the
overall timeliness of cost report data. They stated that cost report
data used to recalibrate the DRG weights are outdated and significantly
older than the charge-based data currently used to determine DRG
weights under the IPPS. Under the proposed methodology, CMS used
hospital claims data from FY 2005 and hospital cost reports from FY
2003. The commenters were concerned that because a lag between the cost
report year and the payment year exists, the proposed methodology would
rely on older data that does not reflect the costs of many newer
technologies. The commenters supported an approach that uses more
recent claims and cost report data and also urge CMS to explore options
for using alternative data sources that include current information on
the costs of inpatient care.
Third, the commenters stated that CMS should examine the
comparability of cost reports due to variability in how hospitals
allocate costs. Commenters explained that a cost allocation methodology
must be used to estimate the cost of individual items and services from
the aggregate costs reported for each cost-center on the cost-report.
They stated that the proposed methodology assumes that all hospitals
consistently allocate costs to the same cost centers. However,
hospitals may have inconsistent cost accounting practices or use
different cost allocation methods (for example, utilization or square-
footage) according to the commenters. The commenters suggested these
factors and the compression of charges both within and across cost-
centers, limits the usefulness of cost report data to accurately
estimate costs. According to the commenters, each hospital uses its own
method to allocate costs among cost centers, often resulting in cost
assignments that do not reflect the departments to which charges are
assigned in the MedPAR data. For example, some commenters indicated
that they included cardiac catheterization in lines other than 53 and
54 that group to the cardiac cost center. In addition, several
commenters noted that hospitals report medical supply costs
inconsistently. While some report them in the supply cost center,
others report the medical supply cost in the cost center for the
procedure in which the device was used (that is, medical supplies
specific to the Emergency Room are included in line 61 of the cost
report). The commenters suggested that more specific cost report
instructions may be necessary to ensure that hospitals report the
information correctly and consistently. Some commenters believed that
cost report data were not intended or designed to be used to develop
accurate payment rates and suggested developing a proxy to more
accurately allocate costs at the DRG level, such as collecting data
from hospitals that utilize ``sophisticated cost accounting tools that
provide more accurate allocation of costs.''
Some commenters also recommended that CMS convene an expert panel
to explore ways to address the current limitations of the cost report.
They stated that this effort should identify methods to better use or
improve hospital cost reports for use in setting the inpatient and
outpatient relative weights. The expert panel should aim to identify
changes to the cost report that reduce the net information burden on
hospitals, while improving overall payment accuracy. The panel should
report its recommendations by April 2007 to enable CMS enough time to
consider the recommendations in setting the relative weights for FY
2008. Other commenters advocated that CMS initiate a national project
to correct any misalignments between cost and charges in cost reports
and on the MedPAR claims. Other commenters suggested that CMS postpone
the adoption of the proposed HSRVcc methodology until such time that
providers improve the accuracy of the source data used in the
determination of the DRG weights.
Response: With respect to the commenters' recommendation regarding
the reporting of costs and charges for services, CMS requires hospitals
to report their costs and charges through the cost report with
sufficient specificity to support CMS' use of cost report data for
monitoring and payment. Within generally accepted principles of cost
accounting, CMS allows providers flexibility to accommodate the unique
attributes of each institution's accounting systems. For example,
providers must match the generally intended meaning of the line-item
cost centers, both standard and non-standard, to the unique
configuration of department and service categories used by each
hospital's accounting system. Also, while the cost report provides a
recommended basis of allocation for the general service cost centers, a
provider is permitted, within specified guidelines, to use an
alternative basis for a general service cost if it can support to its
intermediary that the alternative is more accurate than the recommended
basis. This approach creates internal consistency between a hospital's
accounting system and the cost report but cannot guarantee the precise
comparability of costs and charges for individual cost centers across
institutions.
However, we believe that achieving greater uniformity by, for
example, specifying the exact components of individual cost centers,
would be very burdensome for hospitals and auditors. Hospitals would
need to tailor their internal accounting systems to reflect a national
definition of a cost center. It is not clear that the marginal
improvement in precision created here is worth the additional
administrative burden. The current hospital practice of matching costs
to the generally intended meaning of a cost center ensures that most
services in the cost center will be comparable across providers, even
if the precise composition of a cost center among hospitals differs.
Further, every hospital provides a different mix of services. Even if
CMS specified the components of each cost center, costs and charges on
the cost report would continue to reflect each hospital's mix of
services. At the same time, internal consistency is very important to
the IPPS. Costs are estimated on claims by matching CCRs for a given
hospital to their own claims data through a cost center-to-revenue code
crosswalk.
Despite the concerns raised in the comments, we believe that costs
and charges are reported through the cost report with sufficient
specificity to support CMS' use of cost report data to develop cost-
based weights. The information we obtained from the cost report on the
differing level of charge markups occurring between routine and
ancillary hospital departments supports MedPAC's conclusions that the
most profitable DRGs that are leading to the development of specialty
hospitals are those that require a lot of ancillary services with high
markups and low CCRs. To the extent that charge markups vary
significantly between the various routine and ancillary hospital
departments, we believe that there is a need to adjust charges to cost
prior to setting the relative weights. We will continue to rely on the
cost report to establish the CCRs that we are finalizing to use to
adjust the DRG charges to costs.
However, we continue to be interested in receiving suggestions on
ways that hospitals can uniformly and consistently report charges and
costs related to all cost centers that also acknowledge the ubiquitous
tradeoff between greater precision in developing CCRs and
administrative burden

[[Page 47894]]

coupled with reduced flexibility in hospital accounting practices.
Another issue to consider is the potential changes to the relative
weights from undertaking efforts of this magnitude that will be costly
for both CMS, its fiscal intermediaries and costly and burdensome to
hospitals. Although we are not modifying the cost report or our cost
report instructions at this time, we would be open to making
improvements in the future.
Comment: Several commenters applauded CMS' efforts to find ``an
administratively feasible approach to improving the accuracy of the DRG
weights.'' However, they expressed serious concerns about whether the
proposed approach achieves that goal. Many commenters asserted that CMS
proposes to move to a new cost-based methodology without offering any
evidence that the proposed method actually improves payment accuracy.
A few commenters submitted analyses that suggest that the impact of
the proposed HSRVcc methodology is substantially different than the
MedPAC recommendations, and may even decrease payment accuracy relative
to the charge-based weights. A few commenters specifically noted that
cardiac procedures are more adversely impacted by the HSRVcc
methodology. The proposed methodology reduces relative weights for the
three major implantable cardioverter defibrillator (ICD) DRGs (515,
535, and 536) by 25 percent or more. While these proposed reductions
imply that the weights based on the existing charge-based methodology
overstate the costs of ICD procedures and therefore overpay them, the
commenters presented analyses suggesting that these cases are actually
underpaid. One such analysis by MedPAC, in its report on physician-
owned specialty hospitals, found ICD procedures to have ``lower
marginal'' profitability or ``possibly a loss'' for hospitals, based on
calculation of payment-to-cost ratios and surveys of specialty
hospitals. They also indicated that CMS, in approving cardiac
resynchronization therapy defibrillators (CRT-D) for new technology
add-on payments, found the device to be inadequately paid and granted
the add-on payments to defray the costs of the therapy. Given that
payment rates under the charge-based weights appear to be inadequate in
many of the cardiovascular DRGs, the commenters believed the severe
reductions resulting from the proposed HSRVcc methodology appear to be
unjustified and provide ample reason to believe that the proposed
methodology does not accomplish the goal of improving payment accuracy.
These commenters emphasized that while measuring improved payment
accuracy is difficult, the large degree to which the weights fluctuate
given the methodological changes alone indicates the need for further
analysis and study. The commenters believed CMS should publish reliable
indicators that demonstrate how the goal of payment accuracy is
achieved. One commenter requested that CMS produce and publish
estimates of payment-to-cost ratios and the relative profitability by
DRG to determine the effectiveness of different weight-setting and
patient classification methodologies in improving overall payment
accuracy. The commenter emphasized that such estimates must be adjusted
to account for the cost of providing services that include high-
technology devices that are understated in the cost reports. Another
commenter recommended that CMS construct a process to test the
sensitivity of weights to various methodological assumptions and
publicly share the results, including: a comparison of the CMS weights
to MedPAC's HSRV cost approach; a comparison of CMS weights to an
approach using standardized costs (as opposed to HSRV); comparison of
CMS weights to weights calculated by estimating costs at the claim
level using the 10 cost center approach; evaluation of other
alternative methodologies for estimating costs; and an evaluation of
the stability of weights over time.
Response: We appreciate the commenters concerns regarding the
HSRVcc relative weight setting methodology we proposed and the large
change in the relative weights that result from the application of this
methodology. As we stated in the FY 2006 IPPS final rule, given the
potential for significant redistribution in payments, the MedPAC
recommendations should be studied extensively before any broad
fundamental changes are made to the current system. In the proposed
rule, we provided the results of such an extensive analysis and
concluded that changes can be made to the relative weight methodology
and the DRG system to improve payment accuracy. Although we agree that
adopting a methodology that results in large changes in payment should
not be adopted without careful study, we do not believe that the mere
presence of such significant impacts invalidates the methodology. On
the contrary, we believe large payment impacts may suggest there is a
significant degree of distortion present in the current payment system.
In our view, we believe that the changes to the IPPS should be
evaluated based on whether they represent an improvement to the current
system. MedPAC has studied the IPPS extensively and found that
improvement can be found in payment accuracy from adopting its
recommendations that are similar to those we proposed.\2\
---------------------------------------------------------------------------

\2\ Medicare Payment Advisory Commission: Report to Congress on
Physician-Owned Specialty Hospitals, March 2005, p. 37-38.
---------------------------------------------------------------------------

While we acknowledge the need for further study and evaluation of
the HSRVcc methodology, we continue to believe that the differential
markups among departmental CCRs have introduced distortion into the
charge-based relative weights. We note that MedPAC found that ``the
current payment system encourages community hospitals to allocate
capital to profitable services such as cardiology and stimulates the
formation of specialty hospitals that often focus on providing
profitable services and tend to care for low-severity patients.'' \3\
The information we obtained from the cost reports on the differing
level of charge markups occurring between routine and ancillary
hospital departments supports MedPAC's conclusions that the most
profitable DRGs that are leading to the development of cardiac
specialty hospitals are those that require a lot of ancillary services
with high markups and low CCRs. We note that the proposed rule showed
that these hospitals are almost exclusively affected by changes to the
relative weight methodology providing further evidence of bias and
distortion in the relative weights by setting them using hospital
charges. To the extent that charge markups vary significantly between
the various routine and ancillary hospital departments, we believe that
there is a need to adjust charges to cost prior to setting the relative
weights. Although it suggested refinements to CMS' proposal (all of
which we have adopted in this final rule), we note that MedPAC found
that the CMS proposals made great strides toward achieving the goal of
improvements in payment accuracy.\4\ Therefore, as discussed in section
II. C., we are using the national average CCRs to adjust the cost
center charges for each DRG to cost prior to setting the relative
weights. While we acknowledge that no payment methodology can be
perfect because DRG-specific costs cannot be determined, we believe the
cost-based methodology we are finalizing in this rule represents a
significant

[[Page 47895]]

improvement over the current charge-based methodology for all of the
reasons we specified above. Under the cost-based methodology in this
final rule, we will increase payment for relatively underpaid cases and
reduce payment for relatively overpaid cases. We believe this reform is
badly needed to reduce the bias in the weights and make more
appropriate payments for both medical and surgical DRGs.
---------------------------------------------------------------------------

\3\ Hackbarth, Glenn, MedPAC Comments on the IPS Rule, June 12,
2006, page 2.
\4\ Hackbarth, Glenn, MedPAC Comments on the IPPS Rule, June 12,
2006, page 2.
---------------------------------------------------------------------------

In order to mitigate the impact of the changes in the relative
weights, we are implementing the new cost-based weight methodology in a
3-year transition, where the weights in the first year will be set
based on 33 percent of the cost-based weight and 67 percent of the
charge based weight. We will continue to study the HSRVcc methodology,
the potential effects of charge compression and ways in which we can
better account for severity of illness within the DRG system in the
coming year.
With respect to the changes in the new patient classification
system, the proposed rule noted that we modeled the CS DRGs and
observed a 12-percent increase in the explanatory power (or R-quare
statistic) of the DRG system to explain hospital charges. That is, we
found more uniformity among hospital total charges within the CS DRGs
than we did with Medicare's current DRG system (71 FR 24027). Thus, we
believe that there is clear evidence that improvements can be made to
the current DRG system that will reduce heterogeneity among patients
within a given DRG. While this statistic indicates that the current CMS
DRG system can be refined to improve payment accuracy, we agree that it
does not necessarily mean we should adopt the system we proposed. For a
variety of reasons explained further below, we believe that a number of
factors must be considered in deciding how to revise the DRG system to
better recognize severity of illness.
Comment: One commenter asserted that CMS published incorrect and
deficient information about the HSRVcc methodology, its impact on
hospitals, and the underlying data utilized in developing the proposed
rule. Specifically, the commenter believed the HSRVcc methodology was
flawed and therefore stated that the published impacts were inaccurate.
The commenter believed that we failed to comply with the Federal Data
Quality Act, and OMB, HHS, and CMS Guidelines which address the quality
of the data used for policy development, in particular, meeting
standards of utility, objectivity, integrity, and transparency and
reproducibility. Because the commenter believed that we have violated
these data quality standards, the public was deprived of the
opportunity to submit meaningful comments, as required by the
Administrative Procedure Act (APA). The commenter urged CMS to take the
appropriate steps that would result in the withdrawal of the FY 2007
IPPS proposed rule and the publication of a new proposed rule.
Response: We disagree with the commenter's claims that the data
utilized in the development of the FY 2007 IPPS proposed rule were
materially flawed, did not comply with the Federal Data Quality Act,
and did not meet established OMB, Department and CMS guidelines for
data quality. The data sources used in estimating the payment impacts
from policy changes proposed in the FY 2007 IPPS proposed rule were the
HCRIS files that contain Medicare cost report data, the MedPAR files
that contain Medicare claims data, the OSCAR database, and the PSF
(which is maintained by the fiscal intermediaries and used in paying
Medicare claims). These are the best and most reliable data sources
available to CMS for modeling the impacts of policy changes. We note
that these same databases are used in modeling payment impacts under
the LTCH PPS, the OPPS, the IRF PPS, and the IPF PPS, as well as other
payment systems. We also note that the comment period to the FY 2007
IPPS proposed rule provided commenters with an opportunity to bring to
our attention specific examples of incorrect or inaccurate data. In
addition to our posting the impact files from the FY 2007 IPPS proposed
rule on the CMS Web site, as always, commenters had access to the same
CMS data files that we utilized through communication with our Office
of Information Services (OIS).
The fact that the data we used in the development of the FY 2007
IPPS proposed rule were available and transparent to the public was
attested by the detailed data analyses included with a significant
number of the public comments we received on the FY 2007 IPPS proposed
rule. Therefore, for the reasons stated above, we disagree with the
commenter's assertion that the data used by CMS in the FY 2007 IPPS
proposed rule does not meet the transparency and reproducibility
standards. As is the case with any change in policy, we do not base
policy decisions on mere assumptions, but rather we analyze the
relevant data and any comments submitted in response to a proposed
rule.
Comment: One commenter stated that it was unclear whether the
weights published for CS DRGs included using the transfer-adjusted
charges prior to calculating weights.
Response: We used the hospital's charge on the claim in the HSRVcc
methodology. We presume the commenter is asking whether we adjusted the
number of cases in setting the relative weights to reflect early
transfer to either a post-acute or other acute care setting. We did use
transfer-adjusted case counts when we applied the HSRVcc methodology
for the relative weights that were shown in Table 5 of the IPPS
proposed rule (71 FR 24272) and the ``Consolidated severity adjusted
DRG HSRVcc relative weights'' provided on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp #TopOfPage. The case
mix index that we use to iterate the proposed FY 2007 HSRVcc weights
did not reflect a transfer-adjusted case count. That is, we used the
sum of all the case weights divided by the total number of cases
unadjusted for transfers to post-acute or other acute care settings.
Comment: Many commenters stated that once a cost-based system is
implemented, CMS should provide at least a three-year transition. They
stated that a three-year transition is consistent with MedPAC's
recommendation to implement the changes to the weights and DRG system
over a transitional period. Commenters recommended that payments be
made based on a blend of charge and cost-based weights culminating with
full cost-based weights at the completion of the transition period.
Response: We have in the past provided for transition periods when
adopting changes that have significant payment implications. Given the
significant payment impacts upon some hospitals because of these
changes to the DRG weighting methodology, we considered options to
transition to cost-based weights. We believe the potential payment
effects from the changes to the DRG relative weights can be mitigated
by adopting a 3-year transition of the relative weights. During the
first year of the transition, the relative weights will be based on a
blend of 33 percent of the cost-based weights and 67 percent of the
charge weights. In the second year of the transition, the relative
weights will be based on a blend of 33 percent of the charge weights
and 67 percent of the cost-based weights. In the third year of the
transition, the relative weights will be based on 100 percent of the
cost-based weights.
Comment: One commenter asserted that the proposed changes to
improve

[[Page 47896]]

payment accuracy and to provide payment equity between specialty and
general hospitals do not address many of the differences between
specialty and full-service hospitals. The commenter stated that
hospitals should be reimbursed for the additional services that are
required to operate a full-service hospital which are often unnecessary
in a specialty hospital setting. The commenter acknowledged that CMS
already provides some support to hospitals that serve a high percentage
of Medicaid patients through disproportionate share payments. However,
the commenter suggested that CMS also make add-on payments to the base
DRG payment for expenses such as: operation of a full-service, 24-hour
emergency department; operation of a trauma service, a burn unit, or
other high cost medically necessary services; sponsoring ground and
helicopter ambulance services; operation of 24-hour diagnostic
services; provision of round the clock nursing services; and provision
of other support services such as clinical pharmacists, nutritionists,
case managers, and medical social workers. The commenter believed these
add-on payments will encourage hospitals to maintain these services
rather than promote specialty hospitals that may be able to operate at
a lesser cost without some or all of these services.
Response: Medicare does pay for all of these services through
either the IPPS or OPPS payment. We disagree that add-on payments are
necessary for services that are commonly provided at many hospitals.
The costs of these services will be incorporated in the IPPS or OPPS
relative weights. Rather, we continue to believe that Medicare's IPPS
payment system needs to be changed to make more equitable payment
across all hospitals and decrease the incentive to profit from patient
and DRG selection.
Comment: A few commenters stated that although the DRG payment
changes proposed by CMS seek to address the proliferation of physician-
owned, limited service hospitals in response to recommendations by
MedPAC, they do not believe that these payment changes alone will
remove the inappropriate incentives created by physician self-referral
to limited-service hospitals. They stated that physicians will still
have the ability and incentive to refer financially attractive patients
to facilities they own, avoid serving low-income patients, and
encourage utilization of profitable services. The commenters urged CMS
to examine the investment structures of physician-owned, limited
service hospitals and to continue the moratorium on issuing new
provider numbers to physician-owned, limited service hospitals until
the agency's strategic plan has been developed and the Congress has had
the opportunity to consider the agency's final report on the topic.
Response: We are in the process of completing the Final Report to
Congress and the Strategic and Implementing Plan on Specialty
Hospitals, as required by section 5006 of the DRA. Section 5006 of the
DRA requires us to consider, among other things, issues of bona fide
investment and proportionality of investment with respect to physician
investment in specialty (that is, cardiac, orthopedic or surgical)
hospitals. Section 5006 of the DRA also provides that the suspension on
enrollment of new specialty hospitals that we administratively
instituted on June 9, 2005, shall expire upon the date we issue the
final report, or, if the report is issued after August 8, 2006, it
shall expire on October 8, 2006. We note that Congress has provided for
a date certain for the end of the suspension on enrollment of new
specialty hospitals. Furthermore, we have not identified a need at this
time to continue the suspension beyond that date.
Comment: Many commenters stated that CMS's proposed HSRVcc
methodology presented in the FY 2007 IPPS proposed rule failed to
address issues of ``charge compression.'' The commenters explained that
``charge compression'' describes the common billing practice of
hospitals applying higher percentage markups on lower cost items and
lower percentage markups on higher cost items. The commenters noted
that MedPAC explained that hospitals may reduce the mark-ups for
higher-cost items to avoid ``sticker shock.'' \5\ As discussed below,
many commenters believed that, to the extent ``charge compression''
exists, the proposed HSRVcc methodology would lead to systematic
differences between estimates of costs and Medicare's payments.
Therefore, the commenters believed that the proposal failed to
accomplish CMS's stated goal of setting the DRG weights based on
accurate cost determinations. If the proposed methodology is
implemented, several commenters believed hospitals that perform a large
volume of procedures requiring relatively costly supplies/procedures
would be severely and unfairly penalized through inappropriately
reduced Medicare DRG payments. The treatments they provide would be
less likely to be provided, and consequently, Medicare beneficiaries'
access to care may be diminished. Therefore, the commenters stated that
if CMS adopts a cost-based DRG weighting methodology, a more accurate
measure of determining hospitals' actual costs must be developed.
---------------------------------------------------------------------------

\5\ Medicare Payment Advisory Commission, ``Meeting Brief: Study
of Hospital Charge-Setting Practices, '' September 9-10, 2004.
---------------------------------------------------------------------------

Many commenters believed that ``charge compression'' is a concern
because the proposed HSRVcc methodology uses a single CCR for a variety
of items and services in a department. Specifically, under the proposed
HSRVcc methodology, we proposed to aggregate hospital-level
departmental charges into 10 cost centers for each DRG, and then apply
national average cost-center level CCRs to determine estimated costs.
The commenters asserted that because most hospitals do not apply the
same uniform percentage mark-up when setting the charges of each item
in the department, the proposed HSRVcc methodology underestimates the
cost of relatively more expensive items (particularly devices and
implants) and overestimates the cost of relatively less expensive
items. The commenters believed that the use of a single CCR for a
variety of different items results in a systematic distortion of the
estimated costs, and consequently the DRG relative weights that are
used in determining the IPPS payment rates. Specifically, many
commenters stated that the HSRVcc methodology has a disproportionate
adverse impact on DRGs that include implantable technologies and
devices, and in some cases would result in Medicare reimbursement that
is less than the actual cost of the device.
Some commenters discussed cost data research that has been
performed since the implementation of the OPPS to determine the causes
and effects of ``charge compression.'' The commenters asserted that
OPPS payment rates are also affected by charge compression.
Specifically, one commenter recently commissioned research to
investigate whether Medicare claims data provided statistical evidence
of ``charge compression.'' (This research was summarized in an
executive summary by Christopher Hogan of Direct Research, LLC.
entitled ``A Proposed Solution for Charge Compression.'') Many other
commenters cited this recent research in their own comments, and
recommended that the results of this research be used to develop an
adjustment under the proposed HSRVcc methodology to account for
``charge compression.'' This analysis utilized the detailed coding of
charges for supplies by revenue center on the Medicare claims data in
the Standard Analytical Files (SAF) to divide the single cost-

[[Page 47897]]

center CCR for ``supplies and equipment'' used under the proposed
HSRVcc methodology into separate cost-center CCRs for 5 supplies
subcategories (general supplies; implantables; sterile supplies;
pacemakers and defibrillators; and all other supplies) based on a
``strong statistical association between mix of charges for supplies
(by revenue center) in a hospital and the [overall] supplies CCR in a
hospital.'' Using these data from all hospitals, a regression analysis
yielded a single ``set of CCR adjustments reflecting national average
CCRs for [each of] the [five supplies] sub-categories.'' This national-
average set of adjustments is applied to each hospital (and combined
with each hospital's actual supplies CCR) to determine an adjusted
estimate of cost on each hospital's claim in the MedPAR file. The
results of this research showed that this variation in CCRs across the
supplies subcategories would result in weights for some DRGs being
significantly different than under the HSRVcc methodology. In
particular, the methodology advocated by Hogan would increase the
relative weights ``for DRGs with substantial charges in the implantable
devices and pacemaker/defibrillator revenue centers.''
The commenters pointed out that the results of this research are
consistent with previous analyses demonstrating ``charge compression''
in hospitals' billing patterns. The commenters also noted that this
research was conducted exclusively on Medicare claims data, without
supplementation with any external data. The commenters believed that
this research demonstrates that an adjustment for ``charge
compression'' is possible. They further asserted that the research
provides a solid analytical basis for a specific adjustment. The
commenters advocated that we use the coefficients from this regression
analysis to develop a ``data-driven'' adjustment to the CCRs for the
supplies and equipment to address the distortion caused by ``charge
compression.''
Another commenter supported the idea of a ``charge compression''
adjustment but suggested that CMS should ensure appropriate stakeholder
involvement before applying such a policy. Other commenters also
advocated for the use of data from the SAF to analyze the relationship
between costs and charges for non-implantable supplies and equipment to
determine whether an adjustment to the medical-surgical supplies cost
center on the MedPAR files to account for ``charge compression'' is
also warranted.
As a result of the concerns discussed above, many commenters stated
that any change toward a cost-based DRG weighting methodology under the
IPPS must address the distortion caused by ``charge compression'' and
must ensure that the methodology utilizes accurate cost determinations.
Consequently, some commenters requested a delay in the implementation
of the cost-based DRG weighting methodology until an adjustment for
``charge compression'' can be incorporated. In addition, some
commenters stated that such an adjustment should also be used to
address ``charge compression'' under the OPPS. Several commenters
recommended that, in addition to including an adjustment for ``charge
compression,'' the methodology for determining the cost-based DRG
relative weights be developed without employing the HSRV methodology.
However, a few other commenters endorsed the proposed HSRVcc
methodology, stating that the ``HSRVcc methodology more closely
represents the cost of providing services than the current charge-based
system.''
Several commenters referenced various research studies on this
issue undertaken over the past 5 to 6 years. These commenters asserted
that the research supports the existence of ``charge compression'' and
its systemic distortion in payment rates. The commenters also stated
that ``although evidence of the effect of charge compression is not
new,'' research that could support an adjustment to offset charge
compression was not available. However, according to the commenters,
``research just completed now presents a solution.''
Response: We appreciate the commenters' concerns regarding charge
compression and its impact on the relative weight calculations under
the proposed HSRVcc methodology. We are interested in further studying
the analytic technique suggested in the comments of using a regression
analysis to identify adjustments that could be made to the CCRs to
account for charge compression. We note that the Hogan study's
regression model was only applied to expensive medical supplies and
devices and was not applied uniformly to develop potential adjustments
that could be made to costs and charges across all revenue and cost
centers that could potentially be subject to charge compression. If
such a model were to be applied, we believe further analysis would have
to be undertaken to determine whether it should apply to all costs and
revenue centers. At this time, we intend to research whether a rigorous
model should allow an adjustment for ``charge compression'' to the
extent it exists. Accordingly, we have engaged a contractor to
undertake a study on charge compression and review the statistical
models provided to us by the commenters. To the extent that we find
``charge compression'' exists, we will further study potential models
that could adjust for it so we can develop more accurate systems of
cost-based weights to better reflect the relative costs of the
different types of services provided under the IPPS. As suggested in
the comments, we plan to fully involve appropriate stakeholders in
future analysis of this issue to the extent feasible. Before
implementing such an adjustment, we would fully describe our analysis
and a potential proposed adjustment as part of the IPPS proposed rule
for FY 2008.
Further, we intend to use the charge compression study that we will
conduct over the next year as an opportunity to better understand the
costs of medical devices. The United States faces a dilemna in health
care. Although the rate-of-increase in health care spending slowed last
year, costs are still growing at an unsustainable rate. One reason
health care costs are rising so quickly is that most consumers of
health care are frequently not aware of the actual cost of their care
due to lack of transparency. We believe that cost, quality, and patient
satisfaction information should be available across the spectrum of
care.
Transparency of device pricing is a key aspect of consumer
understanding of the cost of health care. We believe that the enhanced
understanding of device pricing that will be brought about as part of
our charge compression study will help accelerate the public release,
in a consumer friendly fashion, of pricing information of medical
devices. The public release of device pricing will help augment our
overall efforts to empower consumers with better information on the
health care they require.
In addition, we note that in order to mitigate the impact of
adopting a revised methodology for calculating DRG weights, we are
standardizing charges for MedPAR claims using the same methodology we
have used in past years, rather than using the HSRV methodology.
However, as discussed in detail in section II.E. of this preamble to
the final rule, we are adopting our proposal to adjust charges to
account for costs prior to establishing DRG weights. However, we
anticipate undertaking further analysis of the hospital-specific
methodology over the next year in conjunction with the research we are
doing on charge compression. If our analysis suggests that an
adjustment for charge compression should be applied and/or that the
hospital-specific methodology will result in relative

[[Page 47898]]

weights that more closely approximate the relative costs of care, we
will propose further changes for FY 2008. In the interim, we are
further mitigating the potential payment effects from the changes to
the DRG relative weights by adopting a 3-year transition of the
relative weights. During the first year of the transition, the relative
weights will be based on a blend of 33 percent of the cost-based
weights and 67 percent of the charge weights. In the second year of the
transition, the relative weights will be based on a blend of 33 percent
of the charge weights and 67 percent of the cost-based weights. In the
third year of the transition, the relative weights will be based on 100
percent of the cost-based weights.
3. Refinement of DRGs Based on Severity of Illness
For purposes of the following discussions, the term ``CMS DRGs''
means the DRG system we currently use under the IPPS; the term ``APR
DRGs'' means the severity DRG system designed by 3M Health Information
Systems that currently is used by the State of Maryland; and the term
``consolidated severity-adjusted DRGs (CS DRGs)'' means the DRG system
based on a consolidated version of the APR DRGs (as described in detail
below). We discussed the CS DRGs in the FY 2007 IPPS proposed rule and
solicited public comments on whether there are alternative DRG systems
that could result in better recognition of severity than the CS DRGs we
were proposing. As we made clear in the proposed rule, there are still
further changes that are important to make to the CS DRG system before
it is ready for adoption. In the remainder of this final rule, ``CS
DRGs'' refers to the DRG system we analyzed and proposed for adoption
in FY 2008. However, as we indicate below, we received a number of
public comments about the proposed CS DRGs, potential alternatives, and
a number of other issues related to our proposal. Below we summarize
those comments, respond to the comments, and present our plans for
adopting a severity-adjusted DRG system for FY 2008.
In the FY 2006 IPPS final rule (70 FR 47474), we stated that we
would consider making changes to the CMS DRGs to better reflect
severity of illness among patients. We indicated that we would conduct
a comprehensive review of the CC list as well as consider the
possibility of using the APR DRGs for FY 2007. We did not adopt APR
DRGs for FY 2006 because such an adoption would represent a significant
undertaking that could have a substantial effect on all hospitals.
There was insufficient time between the release of the MedPAC report in
March 2005 and the publication of the FY 2006 IPPS final rule for us to
analyze fully a change of this magnitude. Instead, we adopted a more
limited policy by implementing severity-adjusted cardiac DRGs.
After publication of the FY 2006 IPPS final rule, CMS contracted
with 3M Health Information Systems to further analyze the MedPAC
recommendations in support of our consideration of possible changes to
the IPPS for FY 2007. Under one task of this contract, 3M Health
Information Systems analyzed the feasibility of using a revised DRG
system under the IPPS that is modeled on the APR DRGs Version 23 to
better recognize severity of illness. The APR DRGs have been used
successfully as the basis of Belgium's hospital prospective global
budgeting system since 2002. The State of Maryland began using APR DRGs
as the basis of its all-payer hospital payment system in July 2005.
More than a third of the hospitals in the United States are already
using APR DRG software to analyze comparative hospital performance.
Many major health information system vendors have integrated this
system into their products. Several State agencies utilize the APR DRGs
for the public dissemination of comparative hospital performance
reports. APR DRGs have been widely applied in policy and health
services research. In addition to being used in research by MedPAC, the
APR DRGs also contain a separate measure of risk of mortality that is
used in the Quality Indicators of the Agency for Healthcare Research
and Quality, the Premier Hospital Quality Incentive Demonstration
discussed in section IV.B. of this preamble, and the Joint Commission
on Accreditation of Healthcare Organizations (JCAHO) hospital
accreditation survey process (Shared Visions-New Pathways).
Below we present a comparison of the CMS DRG system and the APR DRG
system.
a. Comparison of the CMS DRG System and the APR DRG System
The CMS DRG and APR DRG systems have a similar basic structure.
There are 25 MDCs in both systems. The DRG assignments for both systems
are based on the reporting of ICD-9-CM diagnosis and procedure codes.
Both DRG systems are composed of a base DRG that describes the reason
for hospital admission and a subdivision of the base DRG based on other
patient attributes that affect the care of the patient. For surgical
patients, the base DRG is defined based on the type of procedure
performed. For medical patients, the base DRG is defined based on the
principal diagnosis. In Version 23.0 of the CMS DRG system, there are
367 base DRGs and 526 total DRGs. In Version 23 of the APR DRG system,
there are 314 base DRGs and 1,258 total APR DRGs. Some of the base DRGs
in the two systems are virtually identical. For example, there is no
significant difference between the base DRG under both systems for
medical treatment of congestive heart failure. For other base DRGs,
there are substantial differences. For example, in the CMS DRG system,
there are two base DRGs for appendectomy (simple and complex); in the
APR DRG system, there is only one base DRG for appendectomy (the
relative complexity of the patient is addressed in the subsequent
subdivision of the base DRG into severity of illness subclasses).
The focus of the CMS DRGs is on complexity. Complexity is defined
as the relative volume and types of diagnostic, therapeutic, and bed
services required for the treatment of a particular illness. Thus, the
focus of payment in the CMS DRG system reflects the relative resource
use needed by the patient in one DRG group compared to another.
Resource use is generally correlated with severity of illness but
intensive resource use does not necessarily indicate a high level of
severity in every case. It is possible that some patients will be
resource-intensive and require high-cost services even though they are
less severely ill than other patients. The CMS DRG system subdivides
the base DRGs using age and the presence of a secondary diagnosis that
represents a CC. The age subdivisions primarily relate to pediatric
patients (those who are less than 18 years of age). Patients are
assigned to the CC subgroup if they have at least one secondary
diagnosis that is considered a CC. The diagnoses that are designated as
CCs are the same across all base DRGs. The subdivisions of the base CMS
DRGs are not uniform: Some base DRGs have no subdivision; some base
DRGs have a two-way subdivision based on the presence of a CC; and
other base DRGs have a three-way subdivision based on a pediatric
subdivision followed by a CC subdivision of the adult patients. In
addition, some base DRGs in MDC 5 (Diseases and Disorders of the
Circulatory System) have a subdivision based on the presence of a major
cardiovascular condition or complex diagnosis.
The APR DRG system subdivides the base DRGs by adding four severity
of

[[Page 47899]]

illness subclasses to each DRG. Under the APR DRG system, severity of
illness is defined as the extent of physiologic decompensation or organ
system loss of function. The underlying clinical principle of APR DRGs
is that the severity of illness of a patient is highly dependent on the
patient's underlying problem and that patients with high severity of
illness are usually characterized by multiple serious diseases or
illnesses. The assessment of the severity of illness of a patient is
specific to the base APR DRG to which a patient is assigned. In other
words, the determination of the severity of illness is disease-
specific. High severity of illness is primarily determined by the
interaction of multiple diseases. Patients with multiple comorbid
conditions involving multiple organ systems are assigned to the higher
severity of illness subclasses. The four severity of illness subclasses
under the APR DRG system are numbered sequentially from 1 to 4,
indicating minor (1), moderate (2), major (3), and extreme (4) severity
of illness.
The APR DRG system does not subdivide base DRGs based on the age of
the patient. Instead, patient age is used in the determination of the
severity of illness subclass. In the CMS DRG system, the CC list is
generally the same across all base DRGs. However, there are CC list
exclusions for secondary diagnoses that are related to the principal
diagnosis. In the APR DRG system, the significance of a secondary
diagnosis is dependent on the base DRG. For example, an infection is
considered more significant for an immune-suppressed patient than for a
patient with a broken arm. The logic of the CC subdivision in the CMS
DRG system is a simple binary split for the presence or absence of a
CC. In the APR DRG system, the determination of the severity subclass
is based on an 18-step process that takes into account secondary
diagnoses, principal diagnosis, age, and procedures. The 18 steps are
divided into three phases. There are six steps in Phase I, three steps
in Phase II, and nine steps in Phase III.
The diagram below illustrates the three-phase process for
determining patient severity of illness subclass.
BILLING CODE 4120-01-P

[[Page 47900]]

[GRAPHIC] [TIFF OMITTED] TR18AU06.006

Under the CMS DRG system, a patient is assigned to the DRG with CC
if there is at least one secondary diagnosis present that is a CC.
There is no recognition of the impact of multiple CCs. Under the APR
DRG system, high severity of illness is primarily determined by the
interaction of multiple diseases. Under the CMS DRG

[[Page 47901]]

system, patients are assigned to an MDC based on their principal
diagnosis. While the principal diagnosis is generally used to assign
the patient to an MDC in the APR DRG system, there is a rerouting step
that assigns some patients to another MDC. For example, lower leg
amputations can be performed for circulatory, endocrine, or
musculoskeletal principal diagnoses. Instead of having three separate
amputation base DRGs in different MDCs as is done in the CMS DRG
system, the APR DRG system reroutes all of these amputation patients
into a single base APR DRG in the musculoskeletal MDC. The CMS DRG
system uses death as a variable in the DRG definitions but the APR DRG
system does not. Both DRG systems are based on the information
contained in the Medicare Uniform Bill. The APR DRG system requires the
same information used by the current CMS DRG system. No changes to the
claims form or the data reported would be necessary if CMS were to
adopt APR DRGs or a variant of them.
The CMS DRG structure makes some DRG modifications difficult to
accommodate. For example, high severity diseases that occur in low
volume are difficult to accommodate because the only choice is to form
a separate base DRG with relatively few patients. Such an approach
could lead to a proliferation of low-volume DRGs. Alternatively, these
cases may be included in DRGs with other patients that are dissimilar
clinically or in costs. Requests for new base DRGs formed on the use of
a specific technology may also be difficult to accommodate. Base DRGs
formed based on the use of a specific technology would result in the
payment weight for the DRG being dominated by the price set by the
manufacturer for the technology.
The structure of the APR DRGs provides a means of addressing high
severity cases that occur in low volume through assignment of the case
to a severity of illness subclass. However, the APR DRG structure does
not currently accommodate distinctions based on complexity.
Technologies that represent increased complexity, but not necessarily
greater severity of illness, are not explicitly recognized in the APR
DRG system. For example, in the CMS DRGs, there are separate DRGs for
coronary angioplasty with or without insertion of stents. The APR DRGs
do not make such a differentiation. The insertion of the stent makes
the patient's case more complex but does not mean the patient is more
severely ill. However, the inability to insert a stent may be
indicative of a patient's more advanced coronary artery disease.
Although such conflicts are relatively few in number, they do represent
an underlying difference between the two systems. If Medicare were to
adopt a severity DRG system based on the APR DRG logic but assign cases
based on complexity as well as severity as we do under the current
Medicare DRG system, such a distinction would represent a departure
from the exclusive focus on severity of illness that currently forms
the basis of assigning cases in the APR DRG system.
Section 1886(d)(4) of the Act specifies that the Secretary must
adjust the classifications and weighting factors at least annually to
reflect changes in treatment patterns, technology, and other factors
that may change the relative use of hospital resources. Therefore, we
believe a method of recognizing technologies that represent increased
complexity, but not necessarily greater severity of illness, should be
included in the system. We plan to develop criteria for determining
when it is appropriate to recognize increased complexity in the
structure of the DRG system and how these criteria interact with the
existing statutory provisions for new technology add-on payments. In
the FY 2007 IPPS proposed rule, we invited public comments on this
particular issue.
Another difference between the CMS DRG system and the APR DRG
system is the assignment of diagnosis codes in category 996
(Complications peculiar to certain specified procedures). The CMS DRG
system treats virtually all of these codes as CCs. With the exceptions
of complications of organ transplant and limb reattachments, these
complication codes do not contribute to the severity of illness
subclass in the APR DRG system. While these codes could be added to the
severity logic, the appropriateness of recognizing codes such as code
998.4 (Foreign body accidentally left during a procedure) as a factor
in payment calculation could create the appearance of incentives for
less than optimal quality. Although there is no direct recognition of
the codes under the 996 category, the precise complication, in general,
can be coded separately and could contribute to the severity of illness
subclass assignment.
Comment: Some commenters strongly supported including the
complication codes (996.00-999.9) when assigning a patient to a
severity-adjusted DRG because the codes represent pre-existing or
predictably higher risks upon admission for difficult patients who are
typically referred to regional centers. The commenters stated that
failure to do so will create new incentives for adverse admission
selection and underpay hospitals that treat difficult patients. The
commenters stated that the 996 codes include some complications that
should never be paid (for example, wrong site surgery and instruments
left in the patient). However, the commenters indicated that these
kinds of complications likely constitute less than one-half of one
percent of all complications and revising the DRG system so that all
996 codes are not paid will provide incentives to hospitals to avoid
admitting patients that are at high risk because of a pre-existing
condition or other circumstance. Another commenter stated that all
infections should be removed as complicating conditions under the DRG
system.
Response: The discussion in this section of the proposed rule noted
that 996 codes are used in assigning a patient to a CMS DRG but not to
an APR DRG. Although the discussion in this section of the proposed
rule did indicate that using these codes to assign a patient to a DRG
may raise questions about incentives for less than optimal quality, the
discussion was only intended to note the differences that currently
exist between the CMS and the APR DRGs. The commenters raised issues
that require further study. We will consider quality of care issues and
payment incentives as we consider how to implement section 5001(c) of
Pub. L. 109-171 with respect to hospital acquired conditions, including
infections. There is a more detailed discussion of this provision of
the law in a later section of this final rule.
Table B below summarizes the differences between the two DRG
systems:

Table B.--Comparison of the CMS DRG System and the APR DRG System
----------------------------------------------------------------------------------------------------------------
Element CMS DRG System APR DRG System
----------------------------------------------------------------------------------------------------------------
Number of base DRGs...................... 367......................... 314
Total number of DRGs..................... 526......................... 1,258
Number of CC (severity) subclasses....... 2........................... 4

[[Page 47902]]

Multiple CCs recognized.................. No.......................... Yes.
CC assignment specific to base DRG....... No.......................... Yes.
Logic of CC subdivision.................. Presence or absence......... 18-step process.
Logic of MDC assignment.................. Principal diagnosis......... Principal diagnosis with rerouting.
Death used in DRG definitions............ Yes......................... No.
Data requirements........................ Hospital claims............. Hospital claims.
----------------------------------------------------------------------------------------------------------------

To illustrate the differences between the two DRG systems, we
compare in Table C below four cases that have been assigned to CMS DRGs
and APR DRGs. In all four cases, the patient is a 67-year-old who is
admitted for diverticulitis of the colon and who has a multiple
segmental resection of the large intestine performed. ICD-9-CM
diagnosis code 562.11 (Diverticulitis of colon (without mention of
hemorrhage)) and ICD-9-CM procedure code 45.71 (Multiple segmental
resection of large intestine) would be reported to capture this case.
In both DRG systems, the patient would be assigned to the base DRG for
major small and large bowel procedures. These four cases would fall
into two different CMS DRGs and four different APR DRGs. We include
Medicare average charges in the table to illustrate the differences in
hospital resource use.
Case 1: The patient receives only a secondary diagnosis of an ulcer
of anus and rectum (ICD-9-CM diagnosis code 569.41). Under the CMS DRG
system, the patient is assigned to base DRG 149 (Major Small and Large
Bowel Procedures Without CC). Under the APR DRG system, the patient is
assigned to base DRG 221 (Major Small and Large Bowel Procedures) with
a severity of illness subclass of 1 (minor).
Case 2: The patient receives a secondary diagnosis of an ulcer of
anus and rectum and an additional secondary diagnosis of unspecified
intestinal obstruction (ICD-9-CM diagnosis code 560.9). Under the CMS
DRG system, the patient is assigned to DRG 148 (Major Small and Large
Bowel Procedures With CC). Under the APR DRG system, the patient is
assigned to base DRG 221 and the severity of illness subclass increases
to 2 (moderate).
Case 3: The patient receives multiple secondary diagnoses of an
ulcer of anus and rectum, unspecified intestinal obstruction, acute
myocarditis (ICD-9-CM diagnosis code 422.99), and atrioventricular
block, complete (ICD-9-CM diagnosis code 426.0). Under the CMS DRG
system, the patient is assigned to DRG 148. Under the APR DRG system,
the patient is assigned to base DRG 221 and the severity of illness
subclass increases to 3 (major).
Case 4: The patient receives multiple secondary diagnoses of an
ulcer of anus and rectum, unspecified intestinal obstruction, acute
myocarditis, atrioventricular block, complete, and the additional
diagnosis of acute renal failure, unspecified (ICD-9-CM diagnosis code
584.9). Under the CMS DRG system, the patient is assigned to DRG 148.
Under the APR DRG system, the patient is assigned to base DRG 221 and
the severity of illness subclass increases to 4 (extreme).

Table C.--Example of Sample Cases Assigned Under the CMS DRG System and Under the APR DRG System
----------------------------------------------------------------------------------------------------------------
CMS DRG System APR DRG System
Principal diagnosis code: 562.11 --------------------------------------------------------------------------
Procedure code: 45.71 Average Average
DRG assigned charge DRG assigned charge
----------------------------------------------------------------------------------------------------------------
Case 1--Secondary Diagnosis: 569.41.. 149 without CC......... $25,147 221 with severity of $25,988
illness subclass 1.
Case 2--Secondary Diagnoses: 569.41, 148 with CC............ 59,519 221 with severity of 38,209
560.9. illness subclass 2.
Case 3--Secondary Diagnoses: 569.41, 148 with CC............ 59,519 221 with severity of 66,597
560.9, 422.99, 426.0. illness subclass 3.
Case 4--Secondary Diagnoses: 569.41, 148 with CC............ 59,519 221 with severity of 130,750
560.9, 422.99, 426.0, 584.9. illness subclass 4.
----------------------------------------------------------------------------------------------------------------

The largest significant difference in average charges is seen in
case 4 where the average charge under the APR DRG assigned to the
patient ($130,750) is more than double the average charge under the CMS
DRG assigned to the patient ($59,519).
b. CS DRGs for Use in the IPPS
APR DRGs were developed to encompass all-payer patient populations.
As a result, we found that, for the Medicare population, some of the
APR DRGs have very low volume. MedPAC noted that the larger number of
DRGs under a severity-weighted system might mean that CMS would be
faced with establishing weights in many categories that have few cases
and, thus, potentially creating unstable estimates. While volume is an
important consideration in evaluating any potential consolidation of
APR DRGs for use under the IPPS, we believe that hospital resource use
and clinical interpretability also need to be taken into consideration.
For example, any consolidation of severity of illness subclasses within
a base DRG should be restricted to contiguous severity of illness
subclasses. Thus, it would not be reasonable clinically to combine
severity of illness subclasses 1 and 4 solely because both consist of
low-volume cases. We analyzed consolidating APR DRGs by either
combining the base DRGs or the severity of illness subclasses within a
base DRG. For consolidation across base APR DRGs, we considered patient
volume, similarity of hospital charges across all four severity of
illness subclasses and

[[Page 47903]]

clinical similarity of the base APR DRGs. For consolidations of
severity of illness subclasses within a base DRG, we considered patient
volume and the similarity of hospital charges between severity of
illness subclasses. In considering how to consolidate severity of
illness subclasses, we believed it was important to use uniform
criteria across all DRGs to avoid creating confusing and difficult to
interpret results. That is, we were concerned about inconsistencies in
the number of severity levels across different DRGs.
The objective to simultaneously take into consideration patient
volume and average charges often produced conflict. Table D below
contains the overall patient volume and average charge by APR DRG
severity of illness subclass. While severity of illness subclass 4
(extreme) has the lowest patient volume of 5.80 percent, we found that
the dramatically different average charges between severity of illness
subclass 3 (major) and subclass 4 (extreme) patients of approximately
$32,426 and $81,952, respectively, would make it difficult to
consolidate severity of illness subclass 3 and 4 patients. Conversely,
we found that, while the average charge difference between severity of
illness subclass 1 (minor) and 2 (moderate) patients was much smaller,
of approximately $17,649 and $20,021, respectively, the majority of
patient volume (68.08 percent) is in these two subclasses. Thus, low
patient volume and small average charge differences rarely coincided.

Table D.--Overall Average Charges and Patient Volume by APR DRG Severity of Illness Subclass
--------------------------------------------------------------------------------------------------------------------------------------------------------
APR DRG APR DRG APR DRG APR DRG
Severity of Severity of Severity of Severity of
All cases illness illness illness illness
Subclass 1 Subclass 2 Subclass 3 Subclass 4
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of Cases.................................................... 11,142,651 21.47% 46.61% 26.12% 5.80%
Average Charges.................................................... $26,342 $17,649 $20,021 $32,426 $81,952
--------------------------------------------------------------------------------------------------------------------------------------------------------

There were also few opportunities to consolidate base DRGs. For
base DRGs in which there was a clinical basis for considering a
consolidation, there were usually significant differences in average
charges for one or more of the severity of illness subclasses. APR DRGs
already represented a considerable consolidation of base DRGs (314)
compared to CMS DRGs (367). Thus, we expected that further base DRG
consolidation would be difficult.
We reviewed the patient volume and average charges across APR DRGs
and found that medical cases assigned severity of illness subclass 4
within an MDC have similar average charges. We observed the same
pattern in average charges across severity of illness subclass 4
surgical patients within an MDC. The data suggest that, in cases with a
severity of illness of subclass 4, the severity of the cases had more
impact on hospital resource use than the reason for admission (that is,
the base APR DRG within an MDC). Thus, we believe that, within each
MDC, the severity of illness subclass 4 medical and surgical patients,
respectively, could be consolidated into a single group.
In some MDCs, it was not possible to consolidate into a single
medical and a single surgical severity of illness subclass 4 group. In
these MDCs, more than one group was necessary. For instance, Table E
below contains the patient volume and average charges for severity of
illness subclass 4 cases in MDC 11 (Diseases and Disorders of the
Kidney and Urinary Tract). Taking into consideration volume and average
charges, except for APR DRG 440 (Kidney Transplant), surgical cases
assigned severity of illness subclass 4 in MDC 11 could be consolidated
into a single group having 5,492 patients and an average charge of
$107,258. However, we decided not to include kidney transplant patients
in this severity of illness subclass 4 due to their very high average
charges (approximately $203,732 or more than $100,000 greater than
other patients in MDC 11 having a severity of illness subclass 4).
Average charges within the consolidated severity of illness subclass 4
surgical DRG in MDC 11 show some variation but are much higher than the
corresponding average charges for the severity of illness subgroup 3
patients of $48,863. Thus, our analysis suggests that the data support
maintaining three severity of illness levels for each base DRG in MDC
11; a separate severity of illness subclass 4 for all patients other
than those having kidney transplant; and a separate DRG for kidney
transplants.

Table E.--Summary Statistics for Surgical Cases With Severity of Illness
Subclass 4 in MDC 11
------------------------------------------------------------------------
Average Average
APR DRG Number of length of total
cases stay charges
------------------------------------------------------------------------
440 (Kidney Transplant).......... 378 18.0 $203,732
441 (Major Bladder Procedures)... 528 21.5 128,729
442 (Kidney & Urinary Tract 833 16.6 101,501
Procedure for Malignancy).......
443 (Kidney & Urinary Tract 966 18.4 103,905
Procedure for Non-Malignancy)...
444 (Renal Dialysis Access Device 935 18.3 104,249
Procedure Only--Severity of
Illness Subclass 4).............
445 (Other Bladder Procedures)... 186 15.2 80,197
446 (Urethral & Transurethral 492 13.4 73,110
Procedure--Severity of Illness
Subclass 4).....................
447 (Other Kidney, Urinary Tract 1,552 19.3 121,011
& Related Procedures)...........
------------------------------------------------------------------------

The consolidation of severity of illness subclass 4 APR DRG into
fewer groups was done for all MDCs except MDC 15 (Newborn and Other
Neonates With Conditions Originating in the Perinatal Period), MDC 19
(Mental Diseases and Disorders), and MDC 20 (Alcohol/Drug Use and
Alcohol/Drug Induced Organic Mental Disorders). In the 22 MDCs in which
the severity of illness subclass 4 consolidation was applied, the
number of separate severity

[[Page 47904]]

of illness subclass 4 groups was reduced from 262 to 69.
For MDC 14 (Pregnancy, Childbirth, and Puerperium), the base APR
DRGs were consolidated from 12 to 6. Severity of illness subclass 1
through 3 were retained, and severity of illness subclass 4 was
consolidated into a single APR DRG, except for cesarean section and
vaginal deliveries, which were maintained as separate APR DRGs. This
consolidation reduced the total number of obstetric APR DRGs from 48 to
22.
The Medicare patient volume in MDC 15 was very low, allowing for a
more aggressive consolidation. For MDC 15, we consolidated 28 base APR
DRGs into 7 base CS DRGs. For each of the 7 consolidated base MDC 15
DRGs, we combined severity of illness subclasses 1 and 2 into one DRG
and severity of illness subclass 3 and 4 into another DRG. This
consolidation reduced the total number of MDC 15 DRGs from 112 in the
APR DRG system to 14 CS DRGs.
In MDC 19, we consolidated 12 base DRGs into 4 base DRGs. We
retained the 4 severity of illness subclasses in MDC 19 for each of the
4 base DRGs. In MDC 20, the base APR DRG for patients who left against
medical advice has severity of illness subclass 1 and 2 consolidated
and severity of illness subclass 3 and 4 consolidated. The remaining 4
base DRGs were consolidated into 1 base DRG with 4 severity of illness
subclasses.
We did not consolidate any of the pre-MDC subclass 4 APR DRGs such
as Heart Transplant. As explained earlier, pre-MDC DRGs are DRGs to
which cases are directly assigned on the basis of ICD-9-CM procedure
codes. These DRGs are for liver and/or intestinal transplants, heart
and/or lung transplants, bone marrow transplants, pancreas transplants,
and tracheotomies. For the pre-MDC DRGs, except for Bone Marrow
Transplant, we consolidated severity of illness subclasses 1 and 2 into
one DRG. In addition, the three base APR DRGs for Human
Immunodeficiency Virus (HIV) with multiple or major HIV-related
conditions had severity of illness subclasses 1 and 2 consolidated.
In total, we reduced 1,258 APR DRGs to 861 CS DRGs. In Appendix C
of this proposed rule, we present the 861 unique combinations of CS
DRGs.
Table F below includes a description of the consolidations that we
did within each individual MDC and includes information about the total
number of DRGs that were eliminated from the APR DRGs to develop the CS
DRGs.
BILLING CODE 4120-01-P

[[Page 47905]]

[GRAPHIC] [TIFF OMITTED] TR18AU06.007

Appendix D of the FY 2007 IPPS proposed rule (71 FR 24433) showed
the crosswalk of each CS DRG to its respective APR DRG. We numbered the
DRGs sequentially and incorporated the severity of illness subclass
into the DRG

[[Page 47906]]

description. However, within the range of sequential numbers used for
an MDC, we retained some unused numbers to allow for future DRG
expansion. By using a three-digit number for the CS DRGs, we also avoid
the need for reprogramming of computer systems that would be necessary
to accommodate a change from the current three-digit DRG number to
separate fields for the base CS DRG number and the severity of illness
subclass.
Severity DRGs represent a significant change from our current DRG
system. In addition to changing the way claims are grouped, severity
DRGs introduce other issues requiring additional analysis, including
possible increases in reported case-mix and changes to the outlier
threshold. Our analysis of these issues is outlined further in the next
section.
Comment: A number of commenters suggested further refinements that
need to be made to the CS DRGs to account for complexity as well as
severity. Commenters recommended that CMS create a ``task force'' to
analyze situations in which the complexity of the patients is not
always appropriately recognized by the proposed CS DRGs. One commenter
stated that the severity system is flawed because it does not capture
resource utilization or the utility of technologies that would be more
appropriate for beneficiaries.
The commenters also provided examples of base DRG assignments under
the current CMS DRGs that are different than those under the CS DRG.
For instance, one commenter indicated that high dose interleukin-2 (HD
IL2) is used to treat otherwise terminal cancer patients with
metastatic renal cell cancer and melanoma. HD IL2 can evoke an immune
response that eradicates the tumor and provides a potential opportunity
for recovery. In the FY 2004 IPPS final rule, CMS created a new
procedure code for HD IL2 therapy and assigned these patients to DRG
492. The commenter reported improved access to HD IL2 therapy as a
result of these changes. However, the commenter was concerned that
these patients could potentially be assigned to a number of different
DRGs under the CS DRGs with a weighted average reduction in the
relative weight of 58 percent. The commenter suggested revising the CS
DRG to take into account the complexity associated with providing HD
IL2 therapy. Other commenters noted:
Some patients in need of ventricular assist devices (VAD)
are currently paid in the same group as heart transplant patients using
the CMS DRGs. Other heart assist devices are assigned to DRG 525 (Other
Heart Assist Implant). These patients will be paid in the same group as
implantable cardiac defibrillator patients under the CS DRGs. The
commenters noted that it is possible that payment for these kinds of
cases could decline by more than 70 percent under the proposed rule.
The commenter believed that the assignment under the CS DRGs will not
recognize higher resources associated with treating VAD patients
relative to those in need of implantable cardiac defibrillators.
Bare metal and drug-eluting coronary stents would be
assigned to the same CS DRG eliminating the distinction currently made
for these two different kinds of stents in the CMS DRGs. The commenters
noted that CMS created separate DRGs for drug eluting and bare metal
stents to recognize the higher costs of drug eluting stents.
Defibrillator device replacement cases are currently
assigned to DRG 551 (Permanent Cardiac Pacemaker Implant With Major
Cardiovascular Diagnoses or AICD Lead or Generator). The commenters
were concerned that these cases would be assigned to the DRGs for
Permanent Cardiac Pacemaker Implant With & W/O AMI, Heart Failure or
Shock and the cases would revert back to classification based on
presence or absence of heart failure, AMI, or shock, rather than an
MCV.
Patients receiving tPA thrombolytic therapy for stroke are
currently assigned to DRG 559 (Acute Ischemic Stroke With Use of a
Thrombolytic Agent). CMS revised the DRGs in FY 2006 to provide a
separate DRG for stroke patients being treated with a reperfusion
agent. According to the commenter, these patients will be paid in the
same group with all stroke cases under CS DRGs undoing the change that
CMS made in FY 2006 according to the commenter.
In FY 2006, CMS created separate DRGs for the revision of
hip or knee replacement (DRG 545, Revision of Hip or Knee Replacement)
to distinguish the higher resources associated with revisions from
original replacements. Under CS DRGs, these cases would be assigned to
the same group as the original replacement (bilateral or single) of the
specific joint. The commenters were concerned that CMS' proposal to
adopt cCS DRGs will undo a proposal that it adopted just 1 year ago.
Combined anterior/posterior spinal fusion cases are
currently assigned to DRG 496 (Combined Anterior/Posterior Spinal
Fusion). This procedure requires two separate incisions and turning the
patient over during surgery. The commenter expressed concern that under
the CS DRG system, these cases would be paid in the same group as all
spinal fusions and the new DRGs would not recognize higher costs
associated with treating these patients.
The APR DRG and CS DRG systems do not have DRGs for lung
transplants alone or combined kidney/pancreas transplants. The
commenter suggested that there should be separate DRGs for these
transplants in addition to liver/intestinal transplants. The commenter
indicated that lung transplants alone have lower costs and should not
be in the same DRG as combined transplants.
Response: In the vast majority of clinical situations, severity of
illness and treatment complexity are directly related and are therefore
addressed in the CS DRGs. As discussed in the proposed rule, there are
a number of clinical situations, primarily related to the use of
specific technologies, in which low severity patients receive care with
high treatment complexity and cost. We acknowledge that further
refinements are needed to the proposed CS DRG system before it will be
ready for adoption. In the FY 2007 IPPS proposed rule, we noted a
number of concerns we had with adopting the CS DRGs in FY 2007 (71 FR
24027). Among them was our concern that we might need additional time
to refine the CS DRGs to better account for complexity as well as
severity. The commenters have brought some important issues to our
attention that we believe should be carefully considered before we
adopt the CS DRGs. We will consider these issues if we were to make
further modifications to the CS DRGs and propose adopting them for FY
2008. However, as we indicate elsewhere in this final rule, we have
engaged a contractor to assist us with completing an evaluation of
alternative DRG systems that may better recognize severity than the
current CMS DRGs and meet other criteria that would make them suitable
to adopt for purposes of payment under the IPPS. We expect to complete
this evaluation of alternative DRG systems quickly this fall as part of
moving forward on adopting a revised DRG system that better recognizes
severity in the IPPS rulemaking for FY 2008. It is possible that some
of the alternatives that we evaluate for better recognizing severity in
the DRGs will be based on the current CMS DRGs. If we were to develop a
clinical severity concept that uses the current CMS DRGs as the
starting point, it is possible that the issues raised by the commenters
will no longer be a concern. If, however, we were to propose adopting
the CS DRGs for FY 2008, we would consider the issues raised by the
commenters as we make further refinements to this DRG

[[Page 47907]]

system so it accounts for complexity as well as severity as a proxy for
relative resource use.
Comment: One commenter suggested a way of accounting for
therapeutic complexity when assigning a patient under the CS DRGs. The
commenter indicated that the patient should be assigned to a severity
of illness subclass based on whether they received a separately
identifiable technology that provides a clinical benefit and results in
significantly higher case costs independent of severity level relative
to the base DRG. The commenter also recommended that complexity levels
be superimposed on the proposed severity of illness levels, such that
either severity or complexity, or a combination of the two, would
increase the classification of a case. The classifications would be
defined as severity of illness or complexity (1-4).
Response: We will further consider how to incorporate complexity
into the assignment of a patient to a severity of illness subclass
under either the CS DRGs if we propose to adopt them in FY 2008 or the
alternative DRG system that we will consider once we complete our
evaluation of potential DRG systems. It may be possible to assign a
case to a severity of illness subclass under either the CS DRGs, the
alternative system we plan to evaluate or even underrefined CMS DRGs by
using the procedures or services that are provided to the patient as a
measure of resource use (that is, complexity). We agree that the use of
a separately identifiable procedure or technology may be useful in
determining the assignment of a patient to a specific subclass of a
base DRG much like what occurs today under the CMS DRGs when assigning
patients with placement of a bare metal or drug-eluting stent to
separate DRGs.
Comment: Some commenters were concerned that CMS did not propose to
adopt the already widely used APR DRGs endorsed by MedPAC, but rather
proposed to adopt CMS'-developed CS DRGs. Some commenters stated that
the CMS analysis that resulted in the CS DRGs is skewed because
Medicare uses a truncated list of diagnosis and procedure codes. The
commenter noted that CMS does not use comparable data to what 3M uses
for the complete APR DRGs. Another commenter stated that the APR DRGs
are the most advanced DRG classification system available yielding the
most clinically homogenous groupings and the greatest predictive power.
This commenter believed that it provides a sound basis for developing
CS DRGs.
Response: MedPAC did not endorse using the APR DRGs.\6\ However,
MedPAC's analysis that led to their recommendation to refine the
current DRGs to more fully account for difference in severity of
illness among patients was based on the APR DRGs. Even though MedPAC's
analysis was based on the APR DRGs, it recognized that CMS would have
to consider a number of different factors when making decisions in the
design of a DRG system. For instance, MedPAC noted that the large
number of DRGs might mean that CMS would be faced with establishing
weights in many categories that have few cases and thus potentially
creating unstable estimates. To avoid creating refined DRGs with
unstable relative weights, MedPAC recommended that the Secretary should
be selective in adopting fine clinical distinctions similar to those
reflected in the APR DRGs. Refining the DRGs will require carefully
weighing the benefits of more accurate and economic distinctions
against the potential for instability in relative weights based on a
small number of cases.\7\ We do not believe that MedPAC expected that
we would adopt the APR DRGs without any changes.
---------------------------------------------------------------------------

\6\ Medicare Payment Advisory Commission. March, 2005. Report to
the Congress, Physician-Owned Specialty Hospitals, page 76.
\7\ Ibid, page 41.
---------------------------------------------------------------------------

Comment: Some commenters stated concerns with merging of dissimilar
patient groups in the CS DRG system. Combining clinically dissimilar
groups across the severity dimension has the potential to render the
groups far less clinically meaningful. It is anticipated that such
groups would have to be restructured frequently as treatment patterns
change for primarily very ill patients. Some commenters stated that it
seems that more categories may have been consolidated than necessary,
giving up clinical and statistical homogeneity unnecessarily. It was
noted that this is especially important if the CS DRGs are envisioned
as part of the basis for evolving efforts towards value-based
purchasing where such measures as post-admission complications and
readmissions need to be evaluated on a risk-adjusted basis. An
alternative approach was suggested to keep the patient groups separate
from a classification perspective, but merge from a payment analysis
perspective.
Response: As discussed above, the CS DRGs are based on the APR DRG
system. The APR DRG system is comprised of 314 base DRGs, which are
divided into four severity of illness subclasses. We believe that the
APR DRG greatly improve recognition of resource use and clinical
similarity of patients. However, in our analysis of the APR DRG system,
we observed that cases assigned severity of illness subclass 4 within
an MDC have similar average charges. Furthermore, our clinical
consultants frequently considered the severity of illness subclass 4
patients across DRGs within an MDC to have a closer clinical
resemblance than to lower severity patients in their respective DRGs
because, in severely ill patients, comorbidities have a greater impact
on severity than the reason for admisssion. Treatment patterns will
evolve for these multiple comorbidities leading to severity level 4
(sepsis, shock, acute renal failure, among others). However, to the
extent that these multiple comorbidities will change (for example,
better treatment of septic shock so that this occurs less frequently)
they should do so equally across all patients within an MDC. With
respect to the comment about maintaining more DRG groups for purposes
other than payment under the IPPS, we proposed to adopt the CS DRGs
only for Medicare inpatient hospital payment. We chose to consolidate
the APR DRGs to increase administrative simplicity, minimize the impact
on existing claim processing systems, and avoid having multiple DRGs
with low case volumes and similar weights. The commenter's suggestion
would essentially result in many more DRGs having exactly the same
weight. Therefore, we do not see a need to adopt the commenter's
suggestion. However, a hospital or any other entity can use an
alternative patient classification system for the other purposes
suggested in the comment.
Comment: Some commenters stated that the CS DRGs are problematic
because they were not designed to accommodate non-Medicare populations.
The commenters indicated that many hospitals use DRGs for quality and
other outcome measurements and that the proposed CS DRGs may not be
clinically appropriate for these purposes.
In addition, another commenter stated that private health insurance
company contracts use the CMS DRG relative weights as the payment basis
for inpatient services delivered to members under private health
insurance plans. The commenter stated that because these contracts are
typically negotiated based on a fairly static assumption of CMS DRGs
(including classification and weights), the proposed redistribution
will disrupt virtually every contract because of the varying services

[[Page 47908]]

consumed by members covered under private health insurance. The
commenter urged CMS to provide a greater lead time in implementing
changes to the DRG system and relative weight methodology to allow
health insurers more time to model the impact of the methodological
changes to their hospital contracts.
Response: We acknowledge that Medicare DRGs are sometimes used by
non-Medicare payers for their own purposes. However, CMS' primary focus
of updates to the Medicare DRG classification system is on changes
relating to payment for services furnished to Medicare beneficiaries,
not the obstetric, pediatric, or neonatal population. Cases involving
these patients are found far less frequently among Medicare
beneficiaries than in the general population. In fact, we applied
consolidations to the APR DRGs to develop the CS DRGs to recognize that
the APR DRGs were developed to accommodate all patient populations and
there would be many DRGs with few Medicare cases or insufficient
differences in the relative weights to warrant us maintaining a
separate DRG. We encourage other payers that use Medicare's DRG system
for payment to make appropriate modifications for patient populations
that are found infrequently among Medicare beneficiaries such as
neonates and children. Again, as we stated above, a hospital or any
other entity can use an alternative patient classification system for
purposes other than Medicare payment.
In response to the commenter's concern with regard to the impact on
private health insurance plans, we are improving our relative weight
methodology to make Medicare payments more accurate. We utilize
Medicare specific data to calculate the relative weights designed to
pay Medicare costs. We have a fiduciary responsibility to administer
the trust fund in order to provide quality care for our beneficiaries
and that, not private payer contracts, is our foremost concern.
However, as we noted earlier in this section, we are postponing the
implementation of the HSRV methodology while we study its impact on
charge compression. Instead, we are using a more similar approach to
calculating the IPPS relative weights that is used in the OPPS. That
is, rather than using a hospital-specific relative weighting
methodology, we are standardizing charges to remove relevant payment
factor adjustments and then adjusting those charges to costs using
national cost center CCRs.
In addition, we are adopting a 3-year transition of the relative
weights. We believe this transition may also mitigate any potential
impacts to private payer contracts from the changes to the DRG relative
weights. During the first year of the transition, the relative weights
will be based on a blend of 33 percent of the cost-based weights and 67
percent of the charge weights. In the second year of the transition,
the relative weights will be based on a blend of 33 percent of the
charge weights and 67 percent of the cost-based weights. In the third
year of the transition, the relative weights will be based on 100
percent of the cost-based weights.
Comment: One commenter suggested that CMS seek further refinements
to the DRGs for mental services. The commenter suggested that these
DRGs have been underpaid for many years.
Response: We will consider whether the psychiatric DRGs need
further refinements as we proceed to refine the DRG system to better
recognize severity for FY 2008. We note that the application of cost-
based weights will increase Medicare's payments for the psychiatric
DRGs in FY 2007.
Comment: Some commenters inquired how other prospective payment
systems such as the IPF PPS and LTCH PPS that rely upon the IPPS DRG
classifications would be affected by the changes to adopt CS DRGs.
Response: We did not propose any changes to the DRG classifications
systems used under the IPF PPS or the LTCH PPS in the IPPS proposed
rule. However, we acknowledge that these PPSs use the IPPS DRG
classifications to make payment determinations. Furthermore, we note
that the refinements we are adopting to the current CMS DRG system to
better recognize severity (which are discussed in detail in section
II.C.7. of this final rule) will be applicable under the IPF PPS and
LTCH PPS, just as past annual updates to the IPPS DRG classifications).
We will need to consider whether corresponding changes need to be made
to these other payment systems once final decisions are made about how
DRG classification will occur under the IPPS in the future. Payment
rate and policy changes to the IPF PPS and LTCH PPS went into effect
for RY 2007 on July 1, 2006. These PPSs are using the Version 23 IPPS
GROUPER for the first 3 months of RY 2007 (July 2006 through September
2006). Consistent with the IPPS, the IPF PPS will use Version 24 of the
IPPS GROUPER, effective October 1, 2006. No further changes will be
made to the IPF PPS until next July. Under the LTCH PPS, changes to the
LTC-DRGs were proposed for FY 2007, based on the proposed Version 24
IPPS GROUPER (71 FR 24049 through 24068), and changes to the LTC-DRGs
that will be effective October 1, 2006, based on the finalized Version
24 IPPS GROUPER (presented in this final rule) are discussed in section
II.F. of the preamble of this final rule. Any changes to the DRG
classification systems for these prospective payment systems would be
undertaken through notice and comment rulemaking in their respective
proposed rules.
Comment: One commenter stated that it was not clear how the
judgment was made for the MDC 11 severity subclass 4 example shown that
these average charge values were sufficiently similar to consolidate.
The commenter suggested that CMS provide further information about the
criteria and considerations it used to judge categories as low volume
and potentially unstable and to judge the mean charges (or costs) as
sufficiently similar to warrant consolidation. One commenter expressed
concern about the consolidations related to obstetrics and psychiatric
care services.
Response: As discussed above, the CS DRGs are based on APR DRGs
that are divided into severity subclasses 2 through 4 subclasses which
greatly increase the resource and clinical similarity of the patients.
Furthermore, as discussed above, our clinical consultants frequently
considered the level 4 severity patients across DRGs within an MDC to
have a closer clinical resemblance than to lower severity patients in
their respective DRGs. In consolidating the severity level 4 patients
in an MDC, volume was a primary consideration along with the extent of
clinical difference. For example, in MDC 11 severity level 4, kidney
transplants were kept in a separate group and not consolidated with the
other MDC 11 surgical DRGs because of the clinical distinctiveness of
patients having a major organ transplant.
Comment: One commenter expressed concern that patients may need to
suffer adverse consequences in order for the case to be assigned to a
higher severity level. The commenter believed that the severity
grouping should reflect complexity and patient benefit as well and
should allow for an increased severity/complexity level even without
adverse patient consequences.
Response: The current DRG system assigns a CC status to most
patients with a complication or adverse event that occurs after
admission. Although in the CS DRGs post admission complications can
result in an increase in a patient's

[[Page 47909]]

severity level, patients are primarily assigned to the higher severity
levels (levels 3 and 4) based on the presence of multiple serious
comorbidities in multiple organ systems rather than a single adverse
event. Thus, unlike the current DRGs in which a single post admission
complication can place the patient in a higher paying DRG, the CS DRGs
in general require multiple significant problems to be present in order
for a higher severity level to be assigned. In general, these patients
will be more costly to treat. The system does not reward ``adverse''
consequences as suggested by the commenter but instead recognizes
severity of illness will also be associated, at least in part, with
resource use.
Patients are increasingly admitted to the hospital at high severity
of illness. Adverse consequences can and do occur within the hospital.
However, some of those consequences are unavoidable (particularly for
patients who are admitted at a high severity of illness). Section
5001(c) of Pub. L. 109-171 requires that, beginning in FY 2009, we
select diagnosis codes associated with at least two conditions that
result in assignment of a higher weighted DRG and that reasonably could
be prevented through the application of evidence-based guidelines.
Beginning with discharges in FY 2009, section 5001(c) requires that we
not assign cases to higher weighted DRGs based on the presence of these
preventable conditions. Section 5001(c) also mandates that, for
discharges on or after October 1, 2007, we require a hospital to
include the secondary diagnosis of a patient at admission as part of
the information required to be reported by a hospital for payment
purposes. We believe that the concerns of the commenter will be
addressed when we implement section 5001(c) of Pub. L. 109-171.
Comment: A number of comments supported CMS' goal of improving
payment accuracy. However, the commenters stated that the need for and
best approach to changing the patient classification system has not
been objectively demonstrated. One commenter provided a sophisticated
statistical analysis that it asserted confirms MedPAC's conclusion that
changes are needed to improve payment accuracy. However, this commenter
suggested the greatest improvement in cost-margin consistency resulted
from switching the basis for the DRG weights from charges to cost and
neither the HSRVcc methodology nor the CS DRGs improved payment
accuracy. Other commenters indicated that more careful analysis is
needed, along with greater access to the details of the CS DRG
methodology. The commenters identified the following concerns:
Validation. The commenters indicated that it is unclear
whether there is a need for a new patient classification system. The
commenters stated that the implication of moving from a resource-based
system to a severity-based payment system must be more fully explored
and understood. They indicated that CMS provided no analysis that shows
that the proposed changes result in an improved hospital payment system
compared to the existing DRG system or APR DRGs.
Budget neutrality adjustment. The commenter indicated that
the proposed rule did not address an adjustment for improved
documentation and coding or even a methodology for determining one. The
commenter suggested that CMS not apply an adjustment for more
comprehensive documentation and coding that increases perceived but not
real case mix until there is evidence that one is needed. The commenter
requested that CMS monitor actual changes in coding and documentation
practices associated with implementation of inpatient payment reforms
to determine if any base payment adjustments are needed rather than
adjust payments in anticipation of such changes.
Availability of the GROUPER. Many commenters stated that
the proprietary nature and lack of transparency of the proposed CS DRG
GROUPER are concerns. The current DRG GROUPER logic has been in the
public domain since the inception of IPPS. Without the new GROUPER
logic, the commenters believed that it is virtually impossible for
anyone to thoroughly analyze the system and comment. The commenters
urged that CMS make any new classification system widely available to
the public on the same terms as the current DRG system. Some commenters
stated that CMS should provide the GROUPER for the CS DRGs and open a
new public comment period. Several commenters were concerned about the
cost of the GROUPER if the CS DRGs were implemented.
Too few diagnoses and procedures considered. The
commenters are concerned that the current CMS GROUPER does not use all
diagnosis and procedures that affect a patient's severity of illness
and/or the resources utilized. The commenters believed that the number
of secondary diagnoses may be an important factor in determining
differences in patient characteristics.
Response: With respect to the comment about the need for a new
patient classification system, the proposed rule noted that we modeled
the CS DRGs and observed a 12-percent increase in the explanatory power
(or R-square statistic) of the DRG system to explain hospital charges.
That is, we found more uniformity among hospital total charges within
the CS DRGs than we did with Medicare's current DRG system (71 FR
24027). Thus, we believe that there is clear evidence that improvements
can be made to the current DRG system that will reduce heterogeneity
among patients within a given DRG. While this statistic indicates that
the current CMS DRG system can be refined to improve payment accuracy,
we agree that it does not necessarily mean we should adopt the system
we proposed. As suggested by the commenters, there are a number of
other evaluation criteria that we need to consider before deciding
whether to adopt the CS DRGs or a potential alternative. We describe
these criteria in more detail below. With respect to the comments about
a budget neutrality adjustment to account for potential improvements in
documentation and coding, we discuss the comments and our responses on
this issue more fully in the next section of this final rule. The
comment about the availability of the GROUPER is related to a number of
detailed comments we received about the potential for Medicare to adopt
a proprietary DRG system. We have provided a more detailed description
of these comments and our responses below. With respect to the comment
about fully utilizing all of the diagnosis and procedure codes
submitted on the claim, we note that CMS does not process codes
submitted electronically on the 837i electronic format beyond the first
9 diagnosis codes and the first 6 procedure codes. While HIPAA requires
CMS to accept up to 25 ICD-9-CM diagnosis and procedure codes on the
HIPAA 837i electronic format, it does not require that CMS process that
many diagnosis and procedure codes. As suggested by the commenters,
there may be value in retaining additional data on patient conditions
that would result from expanding Medicare's data system so it can
accommodate additional diagnosis and procedure codes. We will consider
this issue while we contemplate refinements to our DRG system to better
recognize patient severity. However, extensive lead time is required to
allow for modifications to our internal and contractors' electronic
systems in order to process and store this additional information. We
are unable to move forward with this recommendation without carefully
evaluating implementation issues. One

[[Page 47910]]

issue that we expect to consider in deciding whether to adopt such a
major systems change is how frequently information beyond the ninth
diagnosis code and sixth procedure code affects DRG assignment. Given
the cost of an infrastructure change to accommodate this request, we
want to be certain that there are sufficient benefits to justify the
costs. Again, we will continue to carefully evaluate this request to
expand the process capacity of our systems.
Comment: Some commenters stated that the CS DRG grouping
methodology based on average charges is inconsistent with the proposed
changes to adopt cost relative weights. The commenters recommended
using the HSRVcc methodology to determine cost-based weights for
consolidating the APR DRGs into CS DRGs.
Response: As explained above, we are not adopting the HSRVcc
methodology for FY 2007 because of our concerns about the interaction
of charge compression with the hospital-specific portion of the cost
weight methodology. Instead, we are setting relative weights based on
the estimated cost of the DRGs where cost is determined by applying the
national average CCRs to the standardized charges for each DRG in each
of the 13 cost centers. In general, when we consider whether to further
distinguish types of cases within a DRG in order to create a new DRG or
to reassign these cases to a different DRG, we are comparing cases that
are clinically similar. Therefore, it is possible or even likely that
these cases will be using the same mix of routine and ancillary
services and the results of the analysis will be similar whether the
cases are compared based on average costs or charges. That is, the
cases will be using services that have comparable charge markups over
costs and the analysis will produce the same conclusion whether the
comparison between cases is based on costs or charges. The major
differences between cost and charge weights will occur when comparing
across clinically dissimilar services that use a different mix of
routine and ancillary services with variable markups. For this reason,
we believe that we can continue to do our initial evaluation of
potential DRG changes using average charges. Given the complexity
associated with developing cost-based weights, we believe our
preliminary analysis for evaluating whether to make a DRG change should
use charges as a proxy for costs. However, we will consider the
commenters' suggestion and, to the extent feasible, consider whether it
is possible to evaluate potential DRG changes using costs as well as
charges.
Comment: Numerous comments expressed concerns about the use of a
proprietary DRG classification system. The commenters indicated that
the current DRG GROUPER logic has been in the public domain since the
inception of the IPPS. Many commenters noted that the source code,
logic and documentation for the current DRG system can be purchased
through the National Technical Information Service. The commenters
stressed the importance of maintaining transparency within the DRG
system (that is, any new DRG system should be available to the public
on the same terms as the current one). The commenters stated that any
methodology used for the Medicare GROUPER must not be based on a
proprietary system. One commenter questioned how future DRG refinements
would be made if the underlying system is owned by 3M.
A number of commenters were concerned that it was not possible to
thoroughly analyze the proposed CS DRGs and provide comments without
the GROUPER logic. Other commenters stated that limited information on
the proposed CS DRGs hampered their ability to conduct modeling of the
new system. Some commenters raised serious concerns allowing CMS to
assign the CS DRG without hospitals having the ability to group the
case themselves. According to the commenters, without the CS DRG
information, revenue and patient receivables cannot be recorded
accurately. The commenters stated that hospitals must have the ability
to accurately estimate payments in evaluating strategic initiatives,
business plans, budgets, marketing, staffing, and other critical
decisions. Commenters noted that CMS provided a link to a web tool on
the 3M Web site that allowed hospitals to conduct their own analyses of
the impact of moving to CS DRGs. However, these commenters stated that
the reality was that if a hospital does not have its own APR DRG
GROUPER software, it can only obtain CS DRG information one case at a
time by entering specific diagnostic and procedure codes.
Several commenters stated that if CS DRGs are adopted and the
GROUPER remains proprietary, they would be limited in their ability to
educate and assist hospitals in use of the new system. One commenter
indicated that the current 3M product is proprietary and not available
in the public domain for hospitals or their software vendors who
develop and support their patient account billing and case management
software. The commenter also stated that it does not have any access to
the underlying codes, conditions and edits utilized by 3M with its
product and as a result could not accurately comment on the interaction
between severity and complexity associated with individual claims in
contrast to resource consumption. The commenter stated that, although
hospitals are not required to have a GROUPER, hospitals that hold
compliance as a top priority rely on a grouper/encoder to ensure that
claims meet all edits prior to submission.
Several commenters stated that a single company's monopoly over the
DRG system would be costly to hospitals. The commenters indicated that
it would be more difficult to obtain the system to integrate it into
hospitals' existing systems. The commenters reported that Maryland
hospitals report a GROUPER price of $20,000 per hospital with the
ultimate price varying based on criteria such as whether it is used on
a mainframe or personal computer. Another commenter expressed concerns
that only 3M would be providing access to the GROUPER. The commenter
stated that with over 4,000 hospitals requiring a new severity-adjusted
DRG GROUPER, it is not feasible or reasonable to expect that one vendor
could service all the hospitals nationally in the few months between
the posting of the final IPPS rule and an October 1, 2006
implementation. The commenter stated that having 3M maintain control of
the GROUPER software limits access by other software vendors to begin
reprogramming of the many computer systems that would need to be loaded
with the CS DRGs that is currently incompatible with the CMS DRGs. The
commenter stated that there will need to be sufficient time between
making the GROUPER available and implementation so that hospitals can
test their systems, and study the impact on their facilities.
Another commenter stated that it offered software that hospitals
and health plans utilize in managing the billing, coding, and payment
for inpatient hospital services under the DRGs. The development of
software related to Medicare's DRG system by private companies is
possible only because the current DRG methodology is available in the
public domain. The commenter also noted that the public can obtain full
access to the details underlying the CMS DRG system by purchasing
information and software from the National Technical Information
Service for a nominal charge in a timely manner well in advance of the
implementation of changes. The commenter noted the information was
available to all of the public simultaneously and no company

[[Page 47911]]

currently has a competitive advantage in producing DRG products. The
commenter added that CMS currently engages in an open and comprehensive
discussion about the structure of the DRG methodology through a variety
of mechanisms including notices published in the Federal Register. CMS
releases sufficient detail about its methodology in electronic formats
to enable providers, health plans, and vendors to develop and validate
their own computer programs. The commenter expressed concern that
unfettered access to the underpinnings of the DRG system would not
continue to be available under the CMS proposal to adopt CS DRGs. The
commenter suggested the following criteria that a new DRG system should
meet in order to be adopted by Medicare:
Software distribution comparable to what is currently made
available, which includes:
GROUPER source code which produces all pertinent return
information;
All underlying tables that drive the GROUPER with
documentation;
A complete set of test cases to validate the functioning
of the software;
Complete system and user documentation;
Contact people who can and will respond to questions in a
timely fashion;
The right to redistribute the methodology to business
partners and consultants;
The right to translate source code to other technology
environments and to integrate it into other systems;
Pre-releases of software and documentation well in advance
of planned implementations; and
An open inclusive process for considering future
enhancements.
The commenter indicated that the agency must also ensure that
whatever refinement methodology is adopted is open to public discussion
and scrutiny, now and on an ongoing basis. The commenter stated that
transparency is critical to advancing affordability in our health care
system.
Response: With respect to making information available for the
public to analyze the proposed DRGs, we were cognizant of this issue
and attempted to provide as much information as possible that would
allow the public an opportunity to comment meaningfully on the proposed
CS DRGs. We provided the following data files on the CMS Web site at no
cost to the public to assist with understanding our proposed rule:
Provider Specific File.
Impact file for IPPS FY 2007 Proposed Rule.
CCRs and Weighting Factors.
DRG Relative Weights.
CS DRG HSRVcc relative weights.
CAH List for FY 2007 Proposed Rule.
In addition to this information, we made available for purchase
both the FY 2004 and FY 2005 MedPAR data that were used in simulating
the policies in the IPPS proposed rule. We also discussed the proposed
rule in at least two national teleconferences that were open to the
public. One of these calls was a Special Hospital Open Door call that
was scheduled for 1 and 1\/2\ hours and was completely devoted to
explaining the IPPS proposed rule and answering questions from the
public. There were over 1,100 calls into this national teleconference.
Finally, we were able to provide access to a Web tool on 3M's Web site
that would allow an end user to build case examples using the proposed
CS DRGs. While the commenters are correct that these case examples
could only be analyzed one at a time, the tool did provide a detailed
explanation of how the severity of illness was assigned and the
demographic and diagnostic information that went into that
determination. Further, other information about the CS DRGs and APR
DRGs were available at that Web site, including access to the APR DRG
definitions manual.
We acknowledge the many comments suggesting that the logic of
Medicare's DRG system should continue to remain in the public domain as
it has since the inception of PPS. We also acknowledge the commenters'
concern about the impact of moving to a proprietary system and the
potential for limiting public access to the underlying GROUPER logic
relative to the current CMS DRGs. We note that the issues associated
with using a proprietary DRG system were well illustrated in a public
comment that we received from the Maryland Health Services Cost Review
Commission (HSCRC). Maryland adopted the APR DRGs in June 2004. The
commenter noted that ``despite the advance notice, a number of
hospitals had not acquired the APR DRG GROUPER until near the time for
full implementation to begin. In addition to acquiring the GROUPER,
hospitals had to deal with issues of integrating the GROUPER with other
hospital systems, which was at times difficult with proprietary
systems.'' The commenter further noted that Maryland has 47 acute care
hospitals and ``moving the nation's entire hospital industry to a new
system in a short period is likely to be much more difficult.'' The
commenter indicated that ``CMS has the opportunity to avoid some of the
transition issues the HSCRC faced by placing the CS DRG logic in the
public domain or by requiring open licensing of the GROUPER at
reasonable rates.'' The commenter noted that consultants and vendors to
hospitals have struggled to obtain access to the GROUPER as they
advised their clients.
The public comments and Maryland's experience with APR DRGs have
led to many commenters recommending that Medicare should adopt a new
DRG system that is in the public domain. As we evaluate alternative
severity classification systems, we will use public access to the
system as an important element in evaluating whether each system can be
adopted by Medicare. We will continue to strive to promote transparency
in our decision making as well as in future payment and classification
systems, as we have done in the past.
Comment: A number of commenters suggested that a more
straightforward approach to achieving the same or similar objective
would be for CMS to refine the current DRG classification system by
retaining the current base DRGs (eliminating the current paired DRGs
with and without CC) and adding 3-4 levels of severity, rather than
using APR DRGs. This option would preserve the many policy decisions
that CMS has made over the last 20 years that are already incorporated
into the DRG system and yet adjust hospital payments to reflect the
cost of care based on patient needs and conditions. Other commenters
suggested designating certain DRGs as device-dependent to ensure that
device costs are appropriately reflected in the claims file data. Some
commenters suggested that CMS retain the current DRG system but revise
the CC list as an alternative approach to better recognizing severity
of illness in the DRG system.
Several commenters stated that CMS did not conduct an objective
study of the CS DRGs although alternatives for the APR DRG system are
readily available. These commenters asked whether CMS considered
adopting an alternative DRG system that could also better recognize
severity.
Two commenters proposed alternative severity of illness systems to
the APR DRG system. One commenter suggested that we use the Refined DRG
(RDRG) severity of illness system which is supported by Health Systems
Consultants, Inc, that contains 1,274 groups with 350 base DRGs. The
commenter explained that each of the medical base DRGs is divided into
three severity classes and each of the surgical base DRGs is divided
into four severity

[[Page 47912]]

classes. In addition, there are neonate groups based on birth weight,
seven DRGs that do not have severity classes and an early death group
in each MDC created to remove low outliers according to the commenter.
The commenter noted that the research for the RDRG system was
undertaken between 1986 and 1989 under a Health Care Financing
Administration (now CMS) cooperative agreement. The commenter indicated
that the RDRG system has been updated annually using the current CMS
complications and comorbidities list since 1989. Solucient, LLC has
also used the previous HCFA DRG severity work to develop a risk
adjusted DRG system which they refer to as Refined Diagnosis Related
Group (R-DRG). Solucient also reports that they have updated their
system annually with ICD-9-CM code changes. Another commenter noted
that HSS/Ingenix has developed an all-payer severity-adjusted DRG
system (APS-DRGs) which contains 1,130 case-mix cells with 376
consolidated DRGs plus 2 error categories. The commenter indicated
that, outside of MDC 15, all consolidated DRGs are divided uniformly
into three severity levels. The commenter also indicated that the
number of severity levels within MDC 15 depends upon the consolidated
DRG in the APS-DRG system.
One commenter stated that based on their analysis none of the off-
the-shelf Version 23 DRG systems is the best alternative. Rather, it
was recommended that a hybrid system be created which would combine the
best features of each system. The commenter stated that the proposed CS
DRG system or the current CMS DRG system would be the preferred systems
to modify. One commenter stated that the use of objective, physiologic
data on admission to enhance claims data significantly improves the
accuracy of any severity stratification. The commenter suggested that
CMS conduct one or more demonstration projects studying claims data
enhanced with objective, time-stamped electronically captured
laboratory results as an alternative approach for severity adjustment
for payment and quality assessment purposes.
Response: The approach suggested in the comments to incorporating
severity measures into the current CMS DRG system may be a viable
option that we will evaluate in the coming year. With respect to the
comment that we undertake demonstration projects to study alternative
ways of better recognizing severity in the DRG system, we are concerned
that such an endeavor could not be completed in time for FY 2008
implementation. We believe it is very important to make improvements to
the DRG system to better recognize severity rapidly and there are a
number of different ways that improvements in payment accuracy can be
achieved without undertaking a lengthy demonstration project. As
suggested by the commenters, much research has already been completed
on alternative DRG systems. We believe it is likely that at least one
of these systems (or potentially a system that we develop ourselves
based on our own prior research) will be suitable to achieve our goal
of improvements in payment accuracy by FY2008. We are currently in the
process of engaging a research contractor to evaluate the 3M Severity
of Illness DRG products along with the other DRG severity systems that
have come to our attention during the comment process.
As indicated above, we will use public access to the system as an
important element in evaluating whether each system can be adopted by
Medicare. With respect to the CS DRGs and potentially the other systems
described in the public comments, there may be licensing issues. We
proposed to use the CS DRGs beginning in FY 2008. While they were
developed under a contract with the Federal government, the CS DRGs are
essentially a variant of the APR DRGs that are copyrighted by 3M. The
APS-DRGs are a proprietary product owned by HSS/Ingenix, a division of
United Health Care. However, HSS/Ingenix has indicated that, should we
decide to adopt their product, it would make its DRG system available
to the public under the same terms as the current CMS DRGs (that is,
the source code, logic and documentation can be purchased through the
National Technical Information Service). The RDRG system is supported
by Health Systems Consultants.
There are other issues of note with respect to the DRG systems
mentioned in the comments and Medicare's efforts to adopt a DRG system
that better recognizes severity. In the late 1980's, CMS (then HCFA)
funded a Yale University contract for the development of refined
severity DRGs. The severity DRGs developed under this contract formed
the basis for most of the severity DRG systems available today,
including the Ingenix APS-DRGs, the 3M APR DRGs, the Health Systems
Consultants RDRGs and the Australian government's AR-DRGs. In the mid-
1990's, CMS (then HCFA) also adapted the Yale system and developed a
potential severity DRG system, which was described in the Health Care
Financing Review.\8\ Although the APR DRGs have departed from the Yale
approach to a greater extent than have the other systems, both the 3M
product and the APS-DRGs were derived from the 1989 Yale severity
system that is in the public domain. Given that the Yale system is in
the public domain and CMS considered adopting a severity DRG system
based on it in the mid 1990's, we will also consider updating our prior
work part of our initiative to identify and implement a severity DRG
system for use by Medicare in FY 2008. Consistent with the sentiment
expressed in the public comments, this option would have the advantage
of using the current DRGs as a starting point and retaining the benefit
of the many DRG decisions we have made in recent years. The DRG system
we considered in the mid-1990's used a base DRG with 3 levels of
severity depending upon whether the patient had no CC, a CC, or a major
CC. During this past winter, CMS began a comprehensive review of over
13,000 diagnosis codes to determine whether they should be classified
as CCs when present as a secondary diagnosis. Under this option, we
could continue this review of the CC list, classifying them into one of
the three categories described above in conjunction with updating the
severity DRG system that we considered in mid-1990's.
---------------------------------------------------------------------------

\8\ Edwards, Nancy et al., ``Refinement of Medicare Diagnosis
Related Groups to Incorporate a Measure of Severity,''Health Care
Financing Review, Winter 1994, pages 45-64.
---------------------------------------------------------------------------

c. Changes to CMI From a New DRG System
After the 1983 implementation of the IPPS DRG classification
system, CMS observed unanticipated growth in inpatient hospital case-
mix (the average relative weight of all inpatient hospital cases) that
is used as proxy measurement for severity of illness.
There are three factors that determine changes in a hospital's CMI:
(1) Admitting and treating a more resource intensive patient-mix
(due, for example, to technical changes that allow treatment of
previously untreatable conditions and/or an aging population);
(2) Providing services (such as higher cost surgical treatments,
medical devices, and imaging services) on an inpatient basis that
previously were more commonly furnished in an outpatient setting; and
(3) Changes in documentation (more complete medical records) and
coding practice (more accurate and complete coding of the information
contained in the medical record).

[[Page 47913]]

Changes in CMI as a result of improved documentation and coding do
not represent real increases in underlying resource demands. For the
implementation of the IPPS in 1983, improved documentation and coding
were found to be the primary cause in the underprojection of CMI
increases, accounting for as much as 2 percent in the annual rate of
CMI growth observed post-PPS.\9\
---------------------------------------------------------------------------

\9\ Carter, Grace M. and Ginsburg, Paul: The Medicare Case Mix
Index Increase, Medical Practice Changes, Aging and DRG Creep, Rand,
1985.
---------------------------------------------------------------------------

We believe that adoption of CS DRGs would create a risk of
increased aggregate levels of payment as a result of increased
documentation and coding. MedPAC notes that ``refinements in DRG
definitions have sometimes led to substantial unwarranted increases in
payments to hospitals, reflecting more complete reporting of patients'
diagnoses and procedures.'' MedPAC further notes that ``refinements to
the DRG definitions and weights would substantially strengthen
providers' incentives to accurately report patients' comorbidities and
complications.'' To address this issue, MedPAC recommended that the
Secretary ``project the likely effect of reporting improvements on
total payments and make an offsetting adjustment to the national
average base payment amounts.'' \10\
---------------------------------------------------------------------------

\10\ Medicare Payment Advisory Commission: Report to Congress on
Physician-Owned Specialty Hospitals, March 2005, p. 42.
---------------------------------------------------------------------------

The Secretary has broad discretion under section 1886(d)(3)(A)(vi)
of the Act to adjust the standardized amount so as to eliminate the
effect of changes in coding or classification of discharges that do not
reflect real changes in case-mix. While we modeled the changes to the
DRG system and relative weights for the proposed rule to ensure budget
neutrality, we are concerned that the large increase in the number of
DRGs will provide opportunities for hospitals to do more accurate
documentation and coding of information contained in the medical
record. Coding that has no effect on payment under the current DRG
system may result in a case being assigned to a higher paid DRG under a
system that better recognizes severity. Thus, more accurate and
complete documentation and coding may occur under a DRG system that
better recognizes severity because it will result in higher payments
than the current CMS DRGs. In the FY2007 IPPS proposed rule, we
solicited comments on this issue.
Comment: One commenter suggested that CMS should delay
implementation of the proposed changes to the DRG system until it
conducts nationwide coding and documentation education, particularly to
physicians. The commenter also suggested that CMS should find a method
to provide physicians who practice in hospitals with web-based
documentation training and incentives document correctly.
Response: The proposed CS DRG system is based on the reporting of
current ICD-9-CM diagnosis and procedure codes. The proposed changes do
not require any changes for hospitals or physicians in how they code or
document information in the medical record. For this reason, we do not
believe there is a need for any changes to education and training that
occurs with respect to documentation and coding.
Comment: Several commenters expressed concern that the proposed
rule did not provide any type of analysis to justify or support the
need for an adjustment to the IPPS rates for anticipated changes in
case mix from a new DRG system. These commenters noted that CMS did not
provide a specific adjustment amount in the proposed rule. The
commenters stated their view that it is the responsibility of CMS to
provide adequate notice and the opportunity for meaningful public
comments in response to such a specific proposal before any adjustment
can be applied. One commenter recognized that CMS is authorized to make
adjustments for changes in coding that are likely to occur. However,
absent strong evidence, they urged CMS to avoid making negative
adjustments to the standardized amount for anticipated increases in
case mix. Another commenter provided two suggestions to CMS. The first
suggestion was for CMS to share its thought process on how the
standardized amount would be adjusted and allow the public an
opportunity to provide comments on this basic set of criteria. The
second suggestion was that CMS should make a commitment to adjust
future base payment levels if it is determined that the initial
adjustment projections are inaccurate. Another commenter stated that
any adjustment to the standardized amount in an attempt to account for
increased documentation and coding is unnecessary and unwarranted. The
commenter asserted that it is virtually impossible to objectively
distinguish real changes in case mix from those that occur due to
improved coding and documentation. This commenter stated claims are
coded using the official coding guidelines that are the same regardless
of the DRG system being used. Another commenter requested that CMS not
overestimate the growth in CMI as a result of improved coding. This
commenter asserted there are many needs for accurate data collection in
a hospital setting and coders do not stop reviewing a medical record
after locating the first CC that assigns the patient to a higher
weighted DRG. The commenter maintained that several hospitals ask
coders to assign codes to many of the non-invasive procedures that do
not affect DRG assignment. This same commenter also stated they believe
the increase in CMI will not be as significant as CMS anticipates.
One commenter representing the State of Maryland shared the state's
experience with case mix index changes after adoption of the APR DRG
system. The commenter stated correct coding resulting in maximum
reimbursement under the CMS DRGs could understate a hospital's case mix
under the APR DRGs. Facilities that have tried to improve their coding
productivity by seeking to maximize reimbursement under Medicare may
not obtain an accurate representation of its patient's severity of
illness under APR DRGs. According to the commenter, hospitals have a
financial incentive to improve their clinical documentation and to code
more completely when APR DRGs (or CS DRGs which are based on APR DRGs)
are used for reimbursement.
The commenter also indicated that case mix growth exceeded four
percent for the State's hospitals on average, as they began to prepare
for the full transition to APR DRGs. Case mix growth in this current
fiscal year is about the same. As such, the State has established a
policy for FY 2006, limiting the amount of case mix growth experienced
for each hospital until the coding patterns become stable. In addition,
an appeals process for hospitals with services that generate rising
case mix growth due to complexity has also been established.
Response: We appreciate the commenters' concerns and feedback
regarding potential adjustments to the national standardized amount to
account for improvements in documentation and coding that may cause the
case-mix index to increase absent real case-mix growth. The commenters
are correct that we did not propose a specific adjustment for improved
documentation and coding. As stated in the proposed rule, we were
soliciting comments on the possibility of changes in the case mix index
as a result of the increase in the number of DRGs within the proposed
CS DRGs. We will continue to analyze this issue as we evaluate
alternative DRG systems that may better recognize severity of illness
for implementation in FY 2008. We

[[Page 47914]]

acknowledge the commenters' request to provide an opportunity for
public comment before CMS adopts a specific adjustment to the
standardized amounts for improved documentation and coding. As stated
earlier, we intend to propose further changes to better recognize
severity in the DRG system for FY 2008. If we decide to make an
adjustment to the standardized amount to account for improvements in
documentation and coding, we will provide the specific level adjustment
and the data and analysis underlying it in a proposed rule that will
allow for an opportunity for public comment.
We disagree with the commenters that suggested there is no need for
an adjustment to the IPPS standardized amounts to account for
improvements in documentation that increase case mix and, therefore,
payments. As presented above and in the proposed rule, Medicare's
experience since the original inception of the IPPS and long-standing
research provide substantiation that improvements in documentation and
coding that increase case-mix and payment will occur when the
opportunity arises through the expansion of the DRG system. Further,
the comment representing the State of Maryland made clear that when CS
DRGs ``are used for reimbursement, hospitals have the financial
incentive to improve their clinical documentation and to code
administrative records more completely.'' \11\ MedPAC also noted that
``adopting our recommended refinements to the DRG definitions and
weights would substantially strengthen providers' incentives to
accurately report patients' comorbidities and complications.'' \12\
---------------------------------------------------------------------------

\11\ Redmon, Patrick, D., Comment Letter to CMS on the FY 2007
IPPS Proposed Rule, June 12, 2006.
\12\ MedPAC, p. 42.
---------------------------------------------------------------------------

Comment: One commenter stated that, in its experience, a change to
the severity of illness grouping logic will result in an increase to
the rate of change in case-mix. Because any effect will not be revenue
neutral, the commenter questioned if and how CMS intends to address the
change in case-mix, for example, regulating the change or setting a cap
for hospitals. The commenter indicated that case-mix could rapidly
decline as well as rapidly increase at the hospital-specific level and
asked if CMS had a mechanism to address that issue, as well. The
commenter also recommended that hospitals with improved case mix due to
improved coding accuracy and internal documentation should be entitled
to the full CMI benefit.
Response: We appreciate the commenter's concern and agree that the
severity of illness grouping logic will affect case-mix. Also, we have
known since the development of a PPS for capital payments that changes
in case-mix affect capital payments to certain hospitals as much, or
more than, operating payments. However, we do not know, at this point,
the extent and direction of the impact to case-mix that the severity of
illness grouping logic would have, or how rapidly the changes to case-
mix would occur. When a decision is made regarding implementing the
severity logic, we will be carefully scrutinizing the data and a myriad
of variables to ascertain its effect and whether or not adjustments or
interventions are necessary.
4. Effect of CS DRGs on the Outlier Threshold
In its March 2005 Report to Congress on Physician-Owned Specialty
Hospitals, MedPAC recommended that Congress amend the law to give the
Secretary authority to adjust the DRG relative weights to account for
the differences in the prevalence of high-cost outlier cases. MedPAC
recommended DRG-specific outlier thresholds that would be financed by
each DRG rather than through an across-the-board adjustment to the
standardized amounts. Furthermore, in comments that MedPAC submitted
during the comment period for the FY 2006 IPPS proposed rule, MedPAC
stated its belief that the current policy makes DRGs with a high
prevalence of outliers profitable for two reasons: 1) These DRGs
receive more in outlier payments than the 5.1 percent that is removed
from the national standardized amount; and 2) the relative weight
calculation results in these DRGs being overvalued because of the high
standardized charges of outlier cases. MedPAC also noted that, under
its recommendations, outlier thresholds in each DRG would reduce the
distortion in the relative weights that comes from including the
outlier cases in the calculation of the weight and would correct the
differences in profitability that stem from using a uniform outlier
offset for all cases. MedPAC added that its recommendation would help
make relative profitability more uniform across all DRGs.
In the FY 2006 IPPS final rule (70 FR 47481), we responded to
MedPAC's recommendation on outliers by noting that a change in policy
to replace the 5.1 percent offset to the standardized amount would
require a change in law. However, because the Secretary has broad
discretion to consider all factors that change the relative use of
hospital resources in the calculation of the DRG relative weights, we
stated we would consider changes that would reduce or eliminate the
effect of high-cost outliers on the DRG relative weights. At this time,
we have not completed a detailed analysis of MedPAC's outlier
recommendation because we do not have the authority to adopt such a
change under current law. Instead, we have focused our resources on
analyzing MedPAC's recommendations with respect to adopting severity
DRGs and calculating cost-based HSRV weights that can be adopted
without a change in law. While we intend to study MedPAC's
recommendation in more detail at a future date, we note that changes to
the DRG system that better recognize severity would have important
implications for the outlier threshold. In the proposed rule, we
analyzed how the outlier threshold would be affected by adopting the CS
DRGs.
Using FY 2004 Medicare charge data, 3M Health Information Systems
simulated the effect of adopting CS DRGs in conjunction with HSRVcc
weights (described) on the FY 2006 outlier threshold using the same
estimation parameters used by CMS in the FY 2006 final rule (that is,
the charge inflation factor of 14.94 percent) (70 FR 47494). Under
these assumptions, 3M Health Information Systems estimated that the
outlier threshold would be reduced from $23,600 under the current
system to $18,758 under the CS DRGs with HSRVcc weights. By increasing
the number of DRGs to better recognize severity, the DRG system itself
would provide better recognition for cases that are currently paid as
outliers. That is, many cases that are high-cost outlier cases under
the current DRG system would be paid using a severity of illness
subclass 3 or 4 under the CS DRGs and could potentially be paid as
nonoutlier cases.
Comment: Some commenters noted that there was only a limited
discussion of the CS DRGs' effect on the outlier threshold and no
information about application of the postacute care transfer payment
policy. Some commenters inquired how policy areas such as outliers and
new technology will be affected by the proposed DRG changes.
Response: We will consider further the application of the postacute
care transfer payment policy as we make changes to the DRG system. With
respect to outliers, we discussed this issue in the proposed rule. We
noted that better recognition of severity in the

[[Page 47915]]

DRG system will result in some cases that are currently paid as
outliers becoming nonoutliers. Under current law, we are required to
establish an estimated outlier threshold so that between 5 and 6
percent of estimated IPPS payments are made as outlier payments. Our
longstanding policy has been to set the outlier threshold so that
estimated outlier payments equal 5.1 percent of estimated IPPS
payments. If we were to continue this longstanding policy, we would
expect DRG refinements that better recognize severity to lead to a
reduction in the outlier threshold. In the proposed rule, using the
same data and assumptions used for the FY 2006 final rule, we estimated
that adoption of the CS DRGs would reduce the outlier threshold from
$23,600 to $18,758.
Comment: One commenter recommended that CMS continue to provide the
additional payment for blood clotting factor administered to
hemophiliac inpatients in the future even if severity-adjusted DRGs are
implemented.
Response: Section 1886(a)(4) of the Act excludes the costs of
administering blood clotting factors to inpatients with hemophilia from
the definition of ``operating costs of inpatient hospital services.''
Therefore, under the statute, payment for blood clotting factor
provided to hemophiliac inpatients is not included in Medicare's IPPS
payment and is paid separately. For this reason, we will continue to
apply Medicare's policy of paying separately for blood clotting factor
provided to hemophiliac inpatients.
5. Impact of Refinement of DRG System on Payments
In the FY 2007 IPPS proposed rule (71 FR 24020), using the FY 2004
MedPAR claims data, we simulated the payment impacts of moving to the
CS DRG GROUPER and the alternative HSRVcc method for developing HSRV
weights. These payment simulations did not make any adjustments for
changes in coding or case-mix. For purposes of this analysis, estimated
payments were held budget neutral to estimated FY 2006 payments because
we have a statutory requirement to make any changes to the weights or
GROUPER budget neutral. Based on the results of this impact analysis,
in the FY 2007 IPPS proposed rule, we proposed to adopt both the HSRVcc
weighting methodology for FY 2007 and the CS DRGs for FY 2008. Later in
the proposed rule (71 FR 24028) and in the Appendix A--Regulatory
Impact Analysis (71 FR 24404), we modeled the effect of only adopting
HSRVcc relative weights using the FY 2005 MedPAR claims data applying
the traditional statutory budget neutrality requirements.
For reasons described in more detail above, we are adopting cost-
based weights in this final rule. However, we are not adopting our
proposal to standardize charges on MedPAR claims using HSRVs until we
further research issues related to charge compression. Further, as
described in more detail above, we are modifying our proposed plan to
adopt the CS DRG system for FY 2008. Rather, we will evaluate the CS
DRGs along with the other DRG severity systems that have come to our
attention during the comment process and consider updating the work we
did to develop a severity DRG system in the mid-1990's before adopting
a system that better recognizes severity for FY 2008.
In the proposed rule, we presented the impact of the proposed
changes on specific high volume DRGs. For comparison purposes, in the
following table we are showing the percent changes in weight for these
DRGs presented in the proposed rule and the percent changes in weights
for these DRGs under the policies we are finalizing in this rule:

------------------------------------------------------------------------
Final rule
Proposed Final rule (w/o (with
DRG Title rule transition) transition)
(percent) (percent) (percent)
------------------------------------------------------------------------
14. INTRACRANIAL 3.8 1.8 0.6
HEMORRHAGE OR
CEREBRAL INFARCTION.
75. MAJOR CHEST 1.4 0.0 0.0
PROCEDURES.
76. OTHER RESP SYSTEM -3.4 -1.7 -0.6
O.R. PROCEDURES W
CC.
79. RESPIRATORY 7.6 2.0 0.7
INFECTIONS &
INFLAMMATIONS AGE
>17 W CC.
87. PULMONARY EDEMA & 10.9 0.0 0.0
RESPIRATORY FAILURE.
88. CHRONIC OBSTRUCTIVE 8.3 1.8 0.6
PULMONARY DISEASE.
89. SIMPLE PNEUMONIA & 9.7 2.1 0.7
PLEURISY AGE >17 W
CC.
104 CARDIAC VALVE & OTH -11.0 -3.1 -1.0
MAJOR
CARDIOTHORACIC PROC
W CARD CATH.
105 CARDIAC VALVE & OTH -7.2 -2.3 -0.8
MAJOR
CARDIOTHORACIC PROC
W/O CARD CATH.
110 MAJOR CARDIOVASCULAR -5.4 -3.3 -1.1
PROCEDURES W CC.
113 AMPUTATION FOR CIRC 5.0 3.4 1.1
SYSTEM DISORDERS
EXCEPT UPPER LIMB &
TOE.
121 CIRCULATORY 4.7 0.7 0.2
DISORDERS W AMI &
MAJOR COMP,
DISCHARGED ALIVE.
124 CIRCULATORY -19.7 -9.3 -3.1
DISORDERS EXCEPT
AMI, W CARD CATH &
COMPLEX DIAG.
125 CIRCULATORY -28.9 -14.6 -4.9
DISORDERS EXCEPT
AMI, W CARD CATH W/
O COMPLEX DIAG.
127 HEART FAILURE & 2.8 3.7 1.2
SHOCK.
138 CARDIAC ARRHYTHMIA & 2.7 2.5 0.8
CONDUCTION
DISORDERS W CC.
143 CHEST PAIN.......... -10.5 -6.2 -2.1
144 OTHER CIRCULATORY 4.2 2.2 0.7
SYSTEM DIAGNOSES W
CC.
174 G.I. HEMORRHAGE W CC 11.2 2.9 1.0
182 ESOPHAGITIS, 5.6 -1.1 -0.4
GASTROENT & MISC
DIGEST DISORDERS
AGE >17 W CC.
188 OTHER DIGESTIVE 5.7 1.0 0.3
SYSTEM DIAGNOSES
AGE >17 W CC.
210 HIP & FEMUR 3.8 2.2 0.7
PROCEDURES EXCEPT
MAJOR JOINT AGE >17
W CC.
277 CELLULITIS AGE >17 W 15.2 9.1 3.0
CC.
296 NUTRITIONAL & MISC 10.6 5.3 1.8
METABOLIC DISORDERS
AGE >17 W CC.
316 RENAL FAILURE....... 8.3 3.7 1.2
320 KIDNEY & URINARY 10.9 5.3 1.8
TRACT INFECTIONS
AGE >17 W CC.
493 LAPAROSCOPIC -4.0 -4.6 -1.5
CHOLECYSTECTOMY W/O
C.D.E. W CC.
497 SPINAL FUSION EXCEPT -13.4 0.5 0.2
CERVICAL W CC.
515 CARDIAC -20.6 0.3 0.1
DEFIBRILLATOR
IMPLANT W/O CARDIAC
CATH.
541 ECMO OR TRACH W MV 3.6 -2.9 -1.0
96+HRS OR PDX EXC
FACE, MOUTH & NECK
W MAJ O.R..
542 TRACH W MV 96+HRS OR 8.4 -0.8 -0.3
PDX EXC FACE, MOUTH
& NECK W/O MAJ O.R..
544 MAJOR JOINT -3.7 2.6 0.9
REPLACEMENT OR
REATTACHMENT OF
LOWER EXTREMITY.
545 REVISION OF HIP OR -5.8 1.8 0.6
KNEE REPLACEMENT.

[[Page 47916]]

547 CORONARY BYPASS W -8.9 -5.5 -1.8
CARDIAC CATH W
MAJOR CV DX.
548 CORONARY BYPASS W -11.9 -6.2 -2.1
CARDIAC CATH W/O
MAJOR CV DX.
550 CORONARY BYPASS W/O -5.8 -3.8 -1.3
CARDIAC CATH W/O
MAJOR CV DX.
551 PERMANENT CARDIAC -13.0 1.3 0.4
PACEMAKER IMPL W
MAJ CV DX OR AICD
LEAD OR GNRTR.
552 OTHER PERMANENT -15.0 1.0 0.3
CARDIAC PACEMAKER
IMPLANT W/O MAJOR
CV DX.
553 OTHER VASCULAR -5.8 -0.5 -0.2
PROCEDURES W CC W
MAJOR CV DX.
554 OTHER VASCULAR -6.5 -1.4 -0.5
PROCEDURES W CC W/O
MAJOR CV DX.
556 PERCUTANEOUS -34.9 -16.2 -5.4
CARDIOVASC PROC W
NON-DRUG-ELUTING
STENT W/O MAJ CV DX.
557 PERCUTANEOUS -25.5 -10.4 -3.5
CARDIOVASCULAR PROC
W DRUG-ELUTING
STENT W MAJOR CV DX.
558 PERCUTANEOUS -34.5 -13.8 -4.6
CARDIOVASCULAR PROC
W DRUG-ELUTING
STENT W/O MAJ CV DX.
------------------------------------------------------------------------

We received a number of comments, which we discuss below,
expressing concern over the magnitude of the changes we proposed to the
relative weight methodology and the effects on the DRG weights. As
shown in this table above, the impact of the transitional cost based
weights computed without using the HSRVcc method of standardization is
significantly less than the impacts projected in the proposed rule. As
a further demonstration of the manner in which our final policy
mitigates the impacts of the proposed rule, we are presenting the
following two tables showing the number of DRGs experiencing percent
gains and losses in their relative weights in the proposed and final
rules. We also are showing the number of providers experiencing percent
gains and losses in case mix due to the proposed and final changes. As
shown in the tables, the more extreme percent changes are greatly
reduced with our final policies.

Comparison of the Number of DRGs Experiencing Percent Gains/Losses in
Relative Weights in the Proposed Rule Relative to the Final Rule
Transition
------------------------------------------------------------------------
Final rule (with
Percent change in DRG weight Proposed rule transition)
------------------------------------------------------------------------
More than -10%.................. 32 0
Between -5 and -10%............. 42 1
Between -1 and -5%.............. 49 78
Between -1 and +1%.............. 42 308
Between 1% and 5%............... 111 130
Between 5% and 10%.............. 97 12
More than +10%.................. 153 7
------------------------------------------------------------------------

Comparison of the Number of Hospitals Experiencing Percent Gains/Losses
in Case-Mix Index in the Proposed Rule Relative to the Final Rule
Transition
------------------------------------------------------------------------
Final rule (with
Percent change in case-mix index Proposed rule transition)
------------------------------------------------------------------------
More than -10%.................. 40 0
Between -5 and -10%............. 103 0
Between -1 and -5%.............. 597 30
Between -1 and +1%.............. 416 2,067
Between 1% and 5%............... 1493 1,450
Between 5% and 10%.............. 794 28
More than +10%.................. 79 20
------------------------------------------------------------------------

For additional comparison purposes between the proposed and final
rule relative weights and DRG changes, the following table shows the
estimated payment impacts on case mix change by hospital group that we
projected for the proposed rule and also shows the estimated payment
impacts that we are finalizing in this rule.

----------------------------------------------------------------------------------------------------------------
Severity DRG
Proposed rule Severity changes & cost
Column 1 changes in weights (with
DRGs transition)
----------------------------------------------------------------------------------------------------------------
All hospitals................................................... 0.0 0.0 0.0
By Geographic Location:
Urban hospitals............................................... -0.3 0.0 0.0

[[Page 47917]]

Large urban areas (populations over 1 million)................ 0.1 0.0 0.1
Other urban areas (populations of 1 million or fewer)......... -0.9 0.0 -0.2
Rural hospitals............................................... 2.7 -0.1 0.2
Bed Size (Urban):
0-99 beds..................................................... 0.5 0.3 0.1
100-199 beds.................................................. 1.8 0.0 0.3
200-299 beds.................................................. 0.0 -0.1 -0.1
300-499 beds.................................................. -1.1 0.0 0.1
500 or more beds.............................................. -1.5 0.0 -0.2
Bed Size (Rural):
0-49 beds..................................................... 5.5 -0.1 0.3
50-99 beds.................................................... 4.3 -0.2 0.3
100-149 beds.................................................. 2.8 -0.2 0.2
150-199 beds.................................................. 1.0 0.1 0.1
200 or more beds.............................................. -0.2 -0.2 -0.2
Urban by Region:
New England................................................... 0.3 0.3 0.1
Middle Atlantic............................................... 0.1 0.0 0.2
South Atlantic................................................ -0.7 -0.1 -0.2
East North Central............................................ -0.4 0.0 0.0
East South Central............................................ -0.8 -0.2 -0.3
West North Central............................................ -1.4 0.1 -0.2
West South Central............................................ -0.7 0.0 -0.1
Mountain...................................................... -1.4 0.2 -0.1
Pacific....................................................... 0.6 -0.1 0.2
Puerto Rico................................................... 3.3 -0.4 0.1
Rural by Region:
New England................................................... 1.8 0.1 0.5
Middle Atlantic............................................... 2.8 0.0 0.4
South Atlantic................................................ 3.4 -0.3 0.2
East North Central............................................ 1.9 -0.1 0.1
East South Central............................................ 2.9 0.0 0.0
West North Central............................................ 1.7 -0.1 0.1
West South Central............................................ 3.5 -0.2 0.1
Mountain...................................................... 2.4 -0.1 0.2
Pacific....................................................... 3.5 -0.4 0.3
By Payment Classification:
Urban hospitals............................................... -0.3 0.0 0.0
Large urban areas (populations over 1 million)................ 0.1 0.0 0.1
Other urban areas (populations of 1 million or fewer)......... -0.9 0.0 -0.2
Rural areas................................................... 2.6 -0.1 0.2
Teaching Status:
Non-teaching.................................................. 1.1 0.0 0.2
Fewer than 100 Residents...................................... -0.8 -0.1 -0.1
100 or more Residents......................................... -0.8 0.0 -0.2
Urban DSH:
Non-DSH....................................................... -1.1 0.1 0.0
100 or more beds.............................................. -0.2 -0.1 0.0
Less than 100 beds............................................ 3.5 0.1 0.4
Rural DSH:
SCH........................................................... 4.2 --0.2 0.2
RRC........................................................... 1.3 -0.1 0.0
Other Rural:..................................................
100 or more beds.............................................. 4.2 0.1 0.3
Less than 100 beds............................................ 5.5 -0.1 0.2
Urban teaching and DSH:
Both teaching and DSH......................................... -0.6 0.0 -0.1
Teaching and no DSH........................................... -1.7 0.1 -0.1
No teaching and DSH........................................... 1.1 0.0 0.2
No teaching and no DSH........................................ -1.0 0.1 0.0
Rural Hospital Types:
RRC........................................................... 4.8 0.1 0.3
SCH........................................................... 0.9 0.0 0.0
MDH........................................................... 3.9 -0.3 0.2
SCH and RRC................................................... 5.1 -0.1 0.4
MDH and RRC................................................... 1.0 -0.3 0.0
Type of Ownership:
Voluntary..................................................... -0.3 0.0 0.0
Proprietary................................................... 0.2 0.0 0.1
Government.................................................... 1.3 0.0 0.0

[[Page 47918]]

Medicare Utilization as a Percent of Inpatient Days:
0-25.......................................................... 2.7 0.2 0.3
25-50......................................................... -0.5 0.0 0.0
50-65......................................................... 0.3 -0.1 0.0
Over 65....................................................... 0.3 0.0 -0.1
Hospitals Reclassified by the Medicare Geographic Classification
Review Board:
FY 2005 Reclassifications:....................................
Urban Hospitals Reclassified by the Medicare Geographic -0.5 0.1 0.0
Classification Review Board: First Half FY 2007
Reclassifications............................................
Urban Nonreclassified, First Half FY 2007..................... -0.3 0.0 0.0
All Urban Hospitals Reclassified Second Half FY 2007.......... -0.3 0.0 0.0
Urban Nonreclassified Hospitals Second Half FY 2007........... -0.3 0.0 0.0
All Rural Hospitals Reclassified Second Half FY 2007.......... 1.6 -0.1 0.1
Rural Nonreclassified Hospitals Second Half FY 2007........... 4.5 -0.1 0.3
All Section 401 Reclassified Hospitals........................ 2.9 -0.1 0.2
Other Reclassified Hospitals (Section 1886(d)(8)(B)).......... 4.6 -0.2 0.4
Section 508 Hospitals......................................... -0.5 -0.1 0.0
Cardic Specialty Hospitals...................................... -11.2 0.0 -2.3
----------------------------------------------------------------------------------------------------------------

We are discussing specific comments and responses relevant to our
impact analysis below. The changes that we are adopting in this final
rule are illustrated in our regulatory impact analysis.
Comment: Some commenters expressed concern that the proposed rule
discusses the impact of moving to CS DRGs using FY 2004 inpatient
claims rather than FY 2005 claims to estimate impact. Some commenters
stated that using 2 separate years of claims data to show the impact of
major changes made it impossible to assess the overall impact of the
changes with any reasonable level of confidence.
Response: Because of the long lead time to develop the methodology
and our proposed rule, we used the FY 2004 MedPAR data to calculate
HSRVcc weights and model the CS DRGs for purposes of the analysis shown
on pages 24007-24011, 24020-24026 of the FY 2007 IPPS proposed rule (71
FR24007-24011, 24020-24026). At the time we were developing provisions
of the proposed rule, FY 2005 MedPAR data were unavailable to us. Given
the public interest in prompt publication of the rule, we decided not
to replicate all of the analysis that we provided in section II.C. of
the proposed rule based on the FY 2004 data once the new FY 2005 data
became available to us. We believed delaying publication of the
proposed rule to revise our analysis so all of the payment impacts were
shown based on FY 2005 data was not in the public interest. Once we
developed the methodology and the analysis for the proposed rule, we
calculated the relative weights using the HSRVcc methodology that we
were proposing to adopt for FY 2007 using the FY 2005 MedPAR. We
modeled the HSRVcc relative weights using the FY 2005 MedPAR because we
would be using these data to calculate actual relative weights that
would be used to determine FY 2007 hospital payments. We believed it
was important to model our FY 2007 proposal as closely to how payments
would be determined to provide the most meaningful opportunity for
public comment. For purposes of providing the payment impacts shown on
pages 24028-24030 and the Appendix A--Regulatory Impact Analysis (71
FR24404) and the methodological description shown on pages 24044-24049
of the proposed rule, we used FY 2005 MedPAR data. We disagree with the
commenters that providing separate analyses using 2 years of data makes
it more difficult to understand and assess the payment impacts. Rather,
we believe that providing these analyses makes it easier to understand
how relative weights will change solely as a result of updating the
data.
Comment: MedPAC was pleased that CMS proposed three of MedPAC's
four recommended changes to the IPPS system. However, the MedPAC
expressed concern the proposal not to implement the severity changes
until FY 2008. They stated that it is important to correct for
differences in patients' severity concurrently with the corrections for
charging distortions. MedPAC believed that all of the proposed policy
changes to the IPPS should happen concurrently. MedPAC stated that
failure to adopt all of the changes would leave some payment
distortions in place, thereby continuing to favor some kinds of
patients over others. According to MedPAC, adopting all of the policies
would create the most accurate payments and prevent hospitals from
facing unjustified shifts in their payments that may occur under
partial adoption of the payment reforms. MedPAC stated that concerns
about giving hospitals time to adapt to the changes may be better
managed by implementing all changes in FY 2007 and then giving
hospitals a transition period. Another commenter asked that CMS
implement both of these proposed changes in FY 2007 for the following
reasons:
MedPAC's analysis revealed significant inaccuracy in the
current payment system and recommended implementation of both the new
severity-refined DRGs and a revised method for the weights at the same
time.
It is inequitable to remove the subsidy provided by the
overpayments for cardiac and orthopedic surgery prior to correcting the
underpayments for the most severely ill patients.
It is not reasonable to ask that some hospitals experience
financial losses from implementing the new weights this year if
implementing severity would offset some or all of these losses. To
stagger implementation will cause providers to experience unnecessary
payment fluctuation between FY 2007 and FY 2008.
The commenter further added that a delay is not beneficial to
taxpayers as hospitals will have more time to up-code and increase
their Medicare payments. Many commenters agreed with MedPAC that the
cost weights and severity-adjusted DRGs should be implemented
simultaneously. However, these commenters suggested implementation no
sooner than FY 2008 to limit sharp fluctuations in payments

[[Page 47919]]

to hospitals from year to year. Many commenters opposed a two-step
implementation, whereby CMS would implement cost-based weights in one
year and a new DRG system to better account for patient severity in a
subsequent year. They noted that each of these two major reforms
significantly redistributes payments, often in off-setting directions.
They stated that large swings in payments between the two reforms would
create unnecessary volatility and have a profound impact on hospitals'
ability to plan effectively, especially for necessary major medical
equipment purchases and other capital expenditures. Therefore, they
recommended that CMS implement both cost-based weights and severity-
adjusted DRGs concurrently. While some commenters urged CMS to
implement both payment reforms concurrently in FY 2007, other
commenters advised delaying until at least FY 2008 to allow enough time
to improve the proposed methodologies and underlying cost data to
ensure accuracy of payments. Some commenters stated that the cost-based
weights methodology should be implemented after the severity adjusted
DRG methodology.
Response: Although we are not adopting the CS DRGs this year, we
agree that it is important to smooth the transition for our current DRG
system to a more accurate payment system. As indicated above, we have
decided to adopt traditional cost-based weights for FY 2007 without the
HSRV part of the methodology and we are making refinements that will
create 20 new CMS DRGs, modify 32 others across 13 different clinical
areas involving 1,666,476 cases that would improve the CMS DRG system's
recognition of severity of illness for FY 2007. We believe it is
appropriate to take steps toward transitioning the IPPS to a severity
based DRG system for FY 2007 by applying some of the severity logic
from our proposal to the CMS DRGs where appropriate. By revising the
CMS DRGs, we are offering hospitals an interim step toward severity
DRGs. Hospitals would be able to take advantage of the improved
recognition of severity within the context of the more familiar CMS
DRGs. This interim step affords us the opportunity to adopt some of the
more basic components of a severity DRG system, such as specific splits
in DRGs that lead to groups with greater resource utilization.
Comment: Some commenters were concerned that CMS has not taken into
account all of MedPAC's recommendations for reforming the IPPS.
Response: We believe the commenters were expressing concern that we
did not analyze MedPAC's recommendation to adjust the relative weights
to account for differences in the prevalence of outlier cases. As
explained above, we placed most of our attention and resources on the
recommendations related to refinement of the current DRGs to more fully
account for differences in severity of illness among patients as we do
not have the statutory authority to make the specific changes to our
outlier policy that MedPAC recommended. While we have not made MedPAC's
recommendation regarding outliers a central focus of our analysis, we
do intend to examine this issue in more detail over the next year.
Comment: One commenter stated that the annual impact of the changes
to the proposed CS DRG system will reduce payments for its institution
by an additional $2.7 million per year. The commenter suggested that
community, not for profit hospitals be exempt from these proposed
changes as this is not the group of hospitals that were the intended
target of these changes. One commenter stated that the efforts to
address issues identified in the MedPAC report should begin and end
with the specialty hospital subset and should not occur in conjunction
with payment systems at large for all other hospital facilities.
A few commenters urged CMS to further analyze and evaluate the
impact of the proposed HSRVcc methodology on access to Centers of
Excellence. They noted that the proposed changes are particularly
significant for large volume hospitals and may have a negative impact
on the Centers of Excellence. Any negative impact to these Centers
could impede beneficiary access to high quality services. Several
commenters stated that although CMS' intent may have been to eliminate
reimbursement incentives for specialty hospitals to select the most
profitable cases, the proposed methodology appears to negatively affect
all hospitals serving the most prevalent diagnoses (cardiology,
orthopedic joint replacement, and neurosurgery) within the Medicare
population. The commenters stated that efforts to address issues
identified in the MedPAC report should be limited to specialty
hospitals. The payment systems at large that affect all other hospital
facilities should not be changed. These commenters suggested that CMS
address the reimbursement incentives of specialty hospitals by
implementing a separate payment system for specialty hospitals, rather
than implement a proposed policy that could negatively impact all
hospitals. Several commenters suggested implementing the proposal only
for specialty hospitals while deferring the proposed payment reforms
for full-service hospitals to afford more time to study the
implications of the HSRVcc as a method of general applicability.
Another commenter stated that care for Medicare beneficiaries in rural
areas will be adversely affected by the proposed adoption of HSRVcc
weights because of the dramatic impact on specialized services provided
by rural referral centers that are not available at other smaller
hospitals in rural communities. The commenter suggested that the future
viability of these specialized services may be at risk. Therefore, the
commenter recommended that CMS recognize the unique impact of the
proposed changes on rural referral centers by excluding these hospitals
from the change.
Response: Payments under a prospective payment system are
predicated on averages. Therefore, we do not believe it would be
appropriate to exclude certain hospital groups from implementation of
the changes we are adopting to use cost-based weights or better
recognize severity in the DRG system. While these changes are expected
to reduce incentives for hospitals to ``cherry pick'' or treat only the
most profitable patients, the objective of these proposed revisions is
to improve the accuracy of payments, leading to better incentives for
hospital quality and efficiency and ensure that payment rates relate
more closely to patient resource needs. Even though few hospitals will
have a large increase or decrease in overall Medicare payments, there
may be a significant increase or decrease in payment for individual
cases within a hospital. Under certain circumstances, the current DRG
system benefits hospitals that focus on treating less severely ill
patients. Adjusting payment for the severity of the patient will remove
the incentives to systematically choose one patient over another.
Currently, the DRGs overpay for some types of cases and underpay for
others because the relative weight system is based on charges and the
DRG system does not sufficiently distinguish more or less resource
intensive patients based on severity of illness. The changes we are
making to account for costs in the DRG relative weights and improve
recognition of severity within the DRG system will significantly
increase payment accuracy at both the patient and hospital level.
For these reasons, we believe these changes should apply to all
hospitals paid using the IPPS, regardless of

[[Page 47920]]

whether a hospital is a specialty hospital or a rural referral center.
We have made significant changes to our proposal and the impacts shown
in this final rule may be very different for an individual hospital
than those we showed in the proposed rule. The impact on any specific
hospital will depend on the types of cases it treats.
Comment: Several commenters stated that in order to analyze and
comment, a crosswalk between the current DRGs and the severity DRGs
should be made available.
Response: As indicated earlier, we provided a number of resources
during the comment period to assist commenters in analyzing our
proposal. We provided a number of data files listed earlier on the CMS
Web site at no cost to the public. In addition to this information, we
made available for purchase both the FY 2004 and FY 2005 MedPAR data
that were used in simulating the policies in the FY 2007 IPPS proposed
rule. We also provided access to a Web tool on 3M's Web site that would
allow an end user to build case examples using the proposed CS DRGs.
Comment: One commenter stated that the best estimates on a hospital
specific basis, of the incremental effects on payment of CMS' changes
to the DRG system should be published in the FY 2007 IPPS final rule.
The commenter also suggested that CMS release impact files by hospitals
far in advance of any implementation.
Response: Information to determine hospital-specific impacts is
available on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage Page. Click on: ``Acute
Inpatient--Files for Download http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp.'' For the proposed rule impact file, click
on ``Impact file for IPPS FY 2007 Proposed Rule http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/itemdetail.asp?filterType=none&filterByDID=-99&sortByDID=2 sortByDID=2&sortOrder=ascending&
itemID=CMS061736.'' Similar information for the final rule will also be
available on the CMS Web site shortly after the publication of this
final rule. We note that some level of familiarity with data concepts
and Medicare payment variables will be necessary for hospitals to use
these files and simulate a payment analysis for their own facility.
Using the latest data available at the time this final rule was
prepared, we estimated impacts by category of hospital, and the tables
displaying these impacts are published in the impact section of this
final rule. Space limitations preclude us from being able to provide
hospital-level impacts. In addition, to the extent that adjustments for
providers such as the IME adjustment, DSH adjustment, and/or operating
and capital CCRs may be updated for FY 2007 subsequent to the
publication of this final rule, the actual impacts on individual
providers may differ slightly from those we estimated. We believe that
by providing the payment variables and other information electronically
on the CMS Web site, hospitals have the flexibility to simulate and
develop their own impact analyses that may be better suited to their
needs than any analysis CMS would do at the hospital level.
Comment: Some commenters stated that CMS needs to extend the
comment period to allow hospitals additional time to evaluate the
effects of these proposed changes.
Response: One of the reasons that we proposed adopting the CS DRGs
for FY 2008 was to give hospitals more than the 60-day public comment
period and the additional 60-day delay between the publication of the
final rule and implementation on October 1, 2006, to fully understand
and plan for the change to the CS DRG system. As indicated earlier, we
are not adopting CS DRGs for FY 2007. Therefore, we do not see a need
to extend the 60-day public comment period. Although we are not
extending the 60-day public comment period, we will involve hospitals
and other stakeholders in our plans for moving to a severity DRG system
for FY 2008. We are interested in public input on the types of criteria
that we should consider and how to evaluate improved payment accuracy
as we consider changes to the DRG system to better recognize severity
of illness.
Comment: Some commenters encouraged CMS to review the cost/benefit
of implementing the cost-based weight methodology and a severity-
adjusted DRG system in conjunction with changes to the CMS UB04 claim
form and the adoption of ICD-10-CM. The commenters suggested that
implementing these changes simultaneously could help alleviate the
additional cost of multiple system upgrades both for the hospital and
the fiscal intermediaries. Some commenters stated that CMS should
conduct a single independent study to determine the impact that
implementation of this methodology will have on coding and billing
productivity or hospital cash flow. Some commenters stated that
implementing the significant DRG changes proposed by CMS is only a
temporary solution until a more refined DRG system can be adopted with
more specific clinical classification systems such as ICD-10-CM and
ICD-10-PCS that will be capable of fully recognizing a patient's
severity of illness and the services provided to treat that condition.
Response: We believe that it is important to improve the payment
accuracy in the hospital IPPS by implementing these changes when
appropriate. The IPPS payment reforms that we have proposed do not
require information system changes for hospitals similar to those that
will be required for adoption of ICD-10 or a new HIPAA compliant
transaction system. The relative weights are merely one component in a
payment formula for calculating Medicare's IPPS payment rate. Although
there will be increases and decreases in the relative weights that are
used in the payment formula for different DRGs, this payment change
does not require hospitals to make any computer system changes.
Similarly, the changes to adopt a severity DRG system will also not
necessarily require hospitals to make any upgrades to their computer
systems. The proposed DRG system or any alternative that we consider
would use the same ICD-9-CM diagnosis and procedures codes as the
current CMS DRGs. Although it seems likely that hospitals will want to
acquire the DRG system that Medicare will use, we do not expect that
substituting one DRG GROUPER for another should be burdensome and
require upgrades to hospital information systems. With regard to the
comment that a more refined DRG system can only be adopted with more
specific classification systems such as ICD-10-CM and ICD-10-PCS, the
Secretary is evaluating whether we should adopt ICD-10.
Comment: One commenter supported the decision to use the CS DRGs,
noting that use of a 3-digit DRG number would avoid the undue health
programming costs that move limited financial resources away from
initiatives focused on improving quality care and access to health
care. However, the commenter also indicated that the number of digits
in the DRG number should not be a factor in choosing the best severity
classification system.
Response: We appreciate the commenter's support for our proposal as
well as the comment that the DRG classification system used by Medicare
should not be dependent upon the number of digits in the DRG number. We
will consider any information system infrastructure issues as we
evaluate alternative DRG systems.
Comment: Several commenters stated that the reasons CMS gave in the
proposed rule for not implementing CS DRGs for FY 2007 are valid. The
commenters stated that they are all the

[[Page 47921]]

more valid because hospitals now would have less time to prepare if CMS
were to implement its proposed severity adjusted DRGs this October 1.
Response: We agree. The proposed change to adopt CS DRGs represents
a major change to how hospitals are paid for Medicare inpatient
services. We will not be implementing the CS DRGs for FY 2007. However,
we do plan to evaluate potential alternative DRG systems that better
recognize severity than the current CMS DRGs for FY 2008.
Comment: One commenter suggested that the CS DRG system's reliance
on 3M's proprietary APR DRG grouping logic and software may not be in
compliance with Pub. L. 104-113, the National Technology Transfer and
Advancement Act of 1995. The commenter recommended that we participate
in the formation of expert committees with a proven consensus standards
body to develop a standardized DRG classification and severity-
adjustment system for the IPPS.
Response: We appreciate the commenter's support for the use of a
consensus standards body to develop a severity-adjusted DRG system. The
National Technology Transfer and Advancement Act of 1995 directs
Federal agencies to use voluntary consensus standards in lieu of
government-unique standards, except where inconsistent with law or
otherwise impractical. As we move toward implementing a severity-
adjusted DRG system, we will carefully consider whether it would be
appropriate to involve a voluntary consensus standards body in the
process.
Comment: Some commenters stated a transition (blended) period with
stop loss protections should be provided over a period of one to three
years. Other commenters suggested a longer transition period given the
magnitude of payment distribution across DRGs and hospitals. The
commenters believe that the transition approach would be consistent
with many other major changes that have been implemented gradually over
the years, including the capital prospective payment system. The
commenters suggested that a minimum of 1 year should be allowed for the
development of software systems to handle these changes.
Response: We agree that these changes should be implemented over a
transitional period. As we indicated earlier, we are revising the
current DRG system to better recognize severity (which is discussed in
detail in section II.C.7. of the preamble of this final rule) and are
also adopting cost-based weights for FY 2007. We are providing for a
transition period of 3 years with the relative weights becoming an
increasing blend of costs weights as the transition proceeds. We also
believe that the 20 new DRGs we are adopting for 2007 will improve the
transition from our current system to a more sophisticated severity DRG
system in FY 2008.
Comment: One commenter noted that MedPAC recommended excluding
statistical and high cost outliers from the computation of the DRG
weights in order that the weights reflect the average cost of the
inlier case only. MedPAC further recommended shifting the financing of
the outlier pool from all cases to cases in the DRGs with the highest
prevalence of outliers. The commenter noted that outlier cases occur
most frequently in high-weighted DRGs. Therefore, MedPAC's proposal of
accounting for the high prevalence of outliers in the DRGs would
compound the weight compression caused by the HSRV methodology. The
commenter believed that each proposal by MedPAC (to exclude statistical
and high cost outliers from the computation of the DRGs) would
exacerbate payment inaccuracies, and the two proposals combined would
be deleterious. The commenter stated that it would further analyze
MedPAC's proposal to test their theory empirically.
Another commenter was also concerned about MedPAC's recommendation
to adjust the DRGs to account for the prevalence of high-cost cases.
The commenter explained that reducing the relative weights to finance
the outlier pool will adversely affect payment for hospitals
specializing in the most complex patients. Hospitals may be discouraged
from developing the capacity to treat high cost outliers and responding
to the needs of their community according to the commenter. Meanwhile,
the commenter suggested that hospitals that have the capacity to treat
the highest cost and most complex cases may abandon such an
infrastructure because it will be too costly to maintain.
One commenter supported MedPAC's proposal and believed that
implementing MedPAC's proposal would support the goal of achieving
payment accuracy. The commenter explained that the current system
provides double reward for DRGs with a high prevalence of outliers. The
commenter recommended that CMS seek legislative authority to implement
MedPAC's proposal of DRG specific outlier thresholds.
Another commenter was supportive of MedPAC's recommendation and
noted that MedPAC stated in a letter to CMS that ``failure to adopt any
of (MedPAC's) recommendations would leave some payment distortions in
place, thereby continuing to favor some patients over others.''
Therefore, the commenter recommended that CMS implement all of MedPAC's
recommendations simultaneously when Congress has granted CMS authority
to adopt MedPAC's outlier recommendation.
One commenter was concerned that CMS provided only ``minimal''
analysis of the effect of the DRG refinements on the outlier threshold.
Noting that the 5.1 percent set aside for outlier payments could be
significantly reduced with the adoption of severity DRG refinements,
the commenter believed that implementation of severity DRGs is
premature until the Secretary determines whether statutory changes are
needed to determine the percentage of total IPPS payments that should
be made as outliers.
One commenter recommended that, even though CMS does not have the
authority to change the outlier policy, it should review creating DRG-
specific or day outliers under a severity DRG system. Another commenter
recommended that CMS reduce payments for outliers and eventually
eliminate them upon implementing severity DRGs.
Response: We thank the commenters for taking the time to comment on
MedPAC's recommendation. As noted above, we do not have the statutory
authority to implement MedPAC's recommendation, and, therefore, we
placed most of our attention and resources on the recommendations
related to refinement of the current DRGs to more fully capture
differences in severity of illness among patients. However, we intend
to examine MedPAC's recommendation regarding outliers in more detail in
the future and will consider the comments we received on the FY 2007
IPPS proposed rule.
6. Conclusions
As we describe in more detail below, we believe that adopting cost-
based weights and making improvements to the DRG system to better
recognize severity has the potential to result in significant
improvements to Medicare's IPPS payments. This final rule implements a
cost weight methodology effective for FY 2007. Further, we are creating
20 new CMS DRGs and modifying 32 others across 13 different clinical
areas involving 1,666,476 cases that would improve the CMS DRG system's
recognition of severity of illness for FY 2007. Further, as suggested
by MedPAC and others, we are adopting these changes over a

[[Page 47922]]

transition period while we plan further improvements to the IPPS for FY
2008.
In developing our proposed and final policies, we considered a
range of alternatives outlined below, and we solicited comments on both
the proposal and the alternatives. We asked commenters to consider both
the CS DRGs and alternative severity adjustment methods for accounting
for severity more comprehensively in the DRG payment system. For
example, under one alternative in the proposed rule, we would implement
the CS DRGs in FY 2007 along with the HSRVcc weighting methodology. In
this event, as discussed above, to maintain budget neutrality, we would
also implement in FY 2007 an adjustment to the standardized amounts to
eliminate the effect of changes in coding or classification of
discharges that do not reflect real changes in case-mix. Although we
did receive comments in support of this idea, many commenters requested
that we not adopt the CS DRGs and the HSRVcc weights for FY 2007. Many
of these commenters suggested delaying implementation of both proposals
until at least FY 2008. Under another alternative, we would have
adopted and implemented CS DRGs in FY 2008. Although we did receive
comments in support of this idea, we also received many comments
raising important concerns about licensing and proprietary issues
potentially associated with use of the CS DRGs. The commenters asked us
not to adopt the CS DRGs unless we could make them available on the
same terms as the current CMS DRGs. Yet other commenters objected to
our proposed implementation of the CS DRGs unless we evaluated
alternatives and better justified why there is a need to adopt a
revised DRG system. Under yet another alternative, we would consider
partially implementing the CS DRGs in FY 2007 and complete
implementation in FY 2008. However, we noted that there were practical
difficulties associated with partial implementation of CS DRGs because
cases in a single DRG under the current CMS DRG system may group to
multiple DRGs and MDCs under the CS DRG system. Conversely, cases that
group to multiple MDCs and DRGs under the current system may group to a
single MDC and DRG under the current CS DRG system. We did not receive
any comments supporting the idea of partial adoption of the CS DRGs.
In the FY 2007 IPPS proposed rule, we discussed in some detail an
alternative to partially adopting CS DRGs that would apply a clinical
severity concept to an expanded set of DRGs in FY 2007. For example, we
have received correspondence that raised the concern that hospitals may
have incentives under the current DRG system to avoid severely ill,
resource-intensive back and spine surgical cases (as discussed in
section II.D.3.b. of the proposed rule; the correspondence specifically
requested that we apply a clinical severity concept to DRG 546). In the
proposed rule, we noted that other surgical DRGs may not accurately
recognize case severity. Because of the frequency of DRG use and the
potential for risk selection, we pointed out that certain DRGs may be
particularly important in creating a financial incentive for hospitals
to select a less severely ill patient whose case would be assigned to
the same DRG as a more severely ill patient.
Therefore, while we proposed to adopt the CS DRGs in FY 2008, we
were considering whether to make more limited changes to the current
DRG system to better recognize severity of illness in FY 2007. In the
FY 2006 IPPS final rule (70 FR 47474 through 47478), we took steps to
better recognize severity of illness among cardiovascular patients. For
all DRGs except cardiac DRGs, we currently distinguish between more and
less complex cases based on the presence or absence of a CC. However,
the diagnoses that we designate as CCs are the same across all base
DRGs. Because the CC list is not dependent on the patient's underlying
condition, CCs may not accurately recognize severity in a given case.
The changes we made in FY 2006 to the cardiac DRGs significantly
improved recognition of severity between patients by distinguishing
between more and less severe cases based on the presence or absence of
a MCV. In the proposed rule, we indicated that we were considering
whether a similar approach applied to other DRGs would improve payment.
Much like the approach we took last year to identify MCV conditions
that represented higher severity in cardiovascular patients, in the
proposed rule, we indicated that we planned to examine which conditions
identified more severely ill cases in selected MDCs and DRGs. We
solicited comments as to whether it would be appropriate to adopt these
types of limited changes in FY 2007 as an intermediate step to adopting
CS DRGs in FY 2008. There were a number of comments that suggested we
should make improvements to our current DRG system rather than adopting
the CS DRGs. A number of comments expressed support for using the
current DRG system as the starting point for revising the DRG system to
better recognize severity to avoid losing the many positive changes
that have been made over the years to the CMS DRGs. We also encouraged
commenters to send us suggestions regarding potential changes that
could be made to the current DRG system to better recognize severity of
illness. As indicated below, some commenters did provide us with
specific suggestions for how we could revise the current DRGs.
In the FY 2007 IPPS proposed rule, we also discussed an additional
alternative under which we would implement the CS DRGs in FY 2007 and
the HSRVcc methodology in FY 2008. We did receive one comment
supporting this idea. However, as we have discussed elsewhere, we
believe that we should not adopt CS DRGs in FY 2007, but rather
evaluate severity DRG systems for adoption in FY 2008.
With respect to the relative weight calculations, we believe that
adopting HSRVcc weights has the potential to significantly improve
payment equity between DRGs. As MedPAC notes, a ``survey of hospitals'
charging practices suggests that hospitals use diverse strategies for
setting service charges and raising them over time.'' MedPAC found that
data from the Medicare cost reports indicate that hospital markups for
ancillary services (for example, operating room, radiology, and
laboratory) are generally higher than for routine services (for
example, intensive care unit and room and board).\13\ Thus, MedPAC has
concluded that the relative weights for DRGs that use more ancillary
services may be too high compared to other DRGs where the routine costs
account for a higher proportion of hospital costs. Although we agree
with MedPAC's conclusion, the public comments raised important issues
about the effect of charge compression on the relative weights using
the HSRVcc methodology. These commenters argued that the HSRV
calculation exacerbates the effect of charge compression or the
practice of hospitals applying higher percentage markups on lower cost
items and lower percentage markups on higher cost items. As we
indicated above, we have engaged a contractor to assist us with
studying whether charge compression is an actual phenomenon and how it
affects the HSRV methodology. As part of this analysis, we will study
an adjustment for charge compression suggested in the public comments
and will consider adopting HSRV weights in the future. Nevertheless, in
the interim, we believe it is important to adopt a methodology for
calculation of DRG

[[Page 47923]]

relative weights that takes costs into account. We have revised the
CCRs that we used to develop cost-based weights based on the public
comments. Although they do not show the same differentials indicated in
the proposed rule, they continue to support MedPAC's conclusion that a
system based on charges pays too much for some types of cases and pays
too little for others. As indicated above, we summarized hospital-level
cost and charge information to 2 routine and 11 ancillary departmental
cost centers and found that national average routine cost center CCRs
ranged from 50 percent (intensive care unit days) to 56 percent
(routine days), while ancillary cost center CCRs ranged from 16 percent
(anesthesiology) to 46 percent (labor and delivery room).
---------------------------------------------------------------------------

\13\ Ibid, p. 26.
---------------------------------------------------------------------------

MedPAC also found that relative profitability ratios were higher
among cardiovascular surgical DRGs than the medical DRGs.\14\ We
believe the relative profitability of the surgical cardiovascular DRGs
has been an important factor in the development of specialty heart
hospitals. Our payment impact analysis indicates that this issue will
be addressed by adopting cost-based weights. Moving from the current
system of charge-based weights to cost-based weights increases payment
in the medical DRGs relative to the surgical DRGs. We expected this
result, given that routine costs will generally account for a higher
proportion of total costs in the medical DRGs than in the surgical
DRGs. In the proposed rule, we estimated that all of our combined
changes would, on average, increase the medical DRG weights by
approximately 7.3 percent while reducing the surgical DRG weights by
approximately 6.9 percent. Implementing the cost-based weights without
utilizing the HSRV standardization method under the 3-year transition
period where the weights for FY 2007 will be based on 33 percent of the
cost-based weight and 67 percent of the charge weight will lessen the
effects of redistribution between medical and surgical DRGs. In this
final rule, we estimate that the increase in the average medical DRG
weight will be 0.9 percent and that the decrease in the average
surgical DRG weight will be 1.2 percent. The pattern of increasing
medical weights and decreasing surgical weights still holds true.
However, by adopting the cost based weights in a transition period, we
are mitigating the larger swings in payments that our proposed policies
adopted in full would have caused.
---------------------------------------------------------------------------

\14\ Ibid, p. 29.
---------------------------------------------------------------------------

Although adopting HSRVcc weights would result in the most
significant improvement in hospital payment-to-cost ratios among the
changes to the IPPS recommended by MedPAC,\15\ we have concerns about
implementing this methodology until we can further study whether the
relative weights might be affected by charge compression. For this
reason, we are adopting cost-based weights without HSRV for FY 2007.
However, we will consider applying the HSRV methodology in subsequent
years if our analysis of charge compression suggests the issue is not a
concern or, if appropriate, we can apply an adjustment that would
account for its effects.
---------------------------------------------------------------------------

\15\ Ibid, p. 37.
---------------------------------------------------------------------------

Based on our analysis, we concur with MedPAC that the CS DRGs would
account more completely for differences in severity of illness and
associated costs among hospitals. MedPAC observed some modest
improvements in hospitals' payment-to-cost ratios from adopting APR
DRGs.\16\ We modeled the CS DRGs discussed above and observed a 12-
percent increase in the explanatory power (or R-square statistic) of
the DRG system to explain total hospital charges. That is, we found
more uniformity among hospital total charges within the CS DRG system
than we did with Medicare's current DRG system. While we believe the CS
DRG system that we described above has the potential to improve the
IPPS, we have the following concerns about adopting it for FY 2007:
---------------------------------------------------------------------------

\16\ Ibid, p.37.
---------------------------------------------------------------------------

Further adjustments are needed to the proposed DRG system.
In the proposed rule, we indicated that further adjustments need to be
made to the proposed CS DRGs to account for situations where less
severely ill patients may be more resource-intensive because they need
expensive medical technology. The CS DRGs assign a patient to a DRG
based on severity of illness but do not recognize increased complexity
due to the types of services/technology provided. In addition, the CS
DRGs do not incorporate many of the changes to the base DRG assignments
that have been made over the years to the CMS DRGs. There was
significant interest in the public comments in either revising the CS
DRGs to reflect these changes or use the CMS DRGs at the starting point
to better recognize severity. The public comments provided a number of
examples where we need to consider whether further changes are needed
to the CS DRGs before they are ready for implementation.
Use of a proprietary DRG system. The commenters raised
valid points about adopting a proprietary DRG system, including
concerns about the availability, price and transparency of logic of the
APR DRGs that are currently in use in Maryland. The CS DRGs are a
variant of the APR DRG system. As we evaluate alternative severity
classification systems, we will use public access to the system as an
important element in evaluating whether each system can be adopted for
Medicare. We will continue to strive to promote transparency in our
decisionmaking as well as in future payment and classification systems
as we have done in the past.
No alternatives have been evaluated. We have not evaluated
alternative DRG systems that could also better recognize severity. We
have received comments suggesting that alternative DRG systems can
better recognize severity than the CS DRGs. It appears that all of the
DRG systems that were raised in the public comments as potential
alternatives to the CS DRGs are proprietary systems. However, it is
possible that we could use one of these systems if it were made
available in the public domain on the same terms as the current CMS
DRGs. Further, as discussed above, CMS (then HCFA) did work on
developing a severity DRG system in the mid-1990's. It is possible that
we could update this work and adopt a system that better recognizes
severity based on the current CMS DRGs for FY 2008 that does not raise
the licensing issues that are involved with using prioprietary systems.
Therefore, for the reasons indicated above, we are not adopting the
CS DRGs for FY 2007. However, we are creating 20 new CMS DRGs and
modifying 32 others across 13 different clinical areas involving
1,666,476 cases that would improve the CMS DRG system's recognition of
severity of illness for FY 2007. Furthermore, as discussed earlier, we
have engaged a contractor to assist us with evaluating alternative DRG
systems that were raised as potential alternatives to the 3M Severity
of Illness DRG products in the public comments. Finally, we will
consider the review that we have undertaken of the 13,000 codes on the
CC list as part of making further refinements to the current CMS DRGs
to better recognize severity of illness based on the work that CMS
(then HCFA) did in the mid-1990's to adopt severity DRGs. Again, we
expect to complete this work in time for proposing changes to the DRG
system to better recognize severity of illness by FY 2008.

[[Page 47924]]

7. Severity Refinements to CMS DRGs
In response to the FY 2007 IPPS proposed rule, we received a number
of public comments that supported the refinement of the current CMS
DRGs so that they better capture severity. Several commenters supported
the expanded use of a clinical severity concept similar to the approach
used in FY 2006 to refine the cardiac DRGs. One commenter urged CMS to
expand the set of DRGs to which this clinical severity concept would
apply, including the DRGs that capture the implanting of
defibrillators. Another commenter expressed support for additional
modifications to the current DRGs to better capture severity and
complexity of patients. Another commenter recommended that CMS start
with the current DRG system and provide overlays for severity,
complexity and patient benefit. One commenter suggested that CMS
develop severity levels within all of the existing DRGs (or pairs of
DRGs, in the cases where CC or MCV splits now exist), or identify
specific DRGs that may be most appropriate for severity adjustments.
Several commenters recommended specific adjustments to better capture
severity for septicemia, headache, and mechanical ventilation patients.
(The DRG recommendations are discussed below under the specific DRG
topic.)
We recognize the importance of having a classification system that
recognizes cases that utilize greater resources and have higher levels
of severity of illness. While we discussed moving to a new DRG system
such as the CS DRGs for FY 2007, we stated that we were also interested
in improving the current DRGs so that they better capture patients with
greater severity of illness as early as FY 2007. We solicited comments
in the proposed rule on whether it would be appropriate in FY 2007 to
apply a clinical severity concept to an expanded set of DRGs, similar
to the approach we used in FY 2006 to refine cardiac DRGs based on the
presence or absence of an MCV.
We believe it is appropriate to move in a direction toward a DRG
system that better recognizes severity. Our strategy involves following
recommendations received as part of public comments and implementing
some of the severity logic in the proposed CS DRGs in the CMS DRGs
where appropriate. By doing so, we would be taking an interim step
toward better recognizing severity in the DRG system. Hospitals would
be able to take advantage of a portion of improved severity logic in
the proposed CS DRGs within the context of the more familiar CMS DRGs.
This interim step would also afford hospitals a more detailed
understanding of some of the basic types of DRG logic used in the
proposed CS DRG system. Obviously, we were not able to adopt some of
the more sophisticated logic involved in the 18 steps included in the
proposed CS DRG system. However, we were able to adopt some of the more
basic components such as specific splits in DRGs that lead to groups
with greater resource utilization.
We began our process of adopting some of the severity logic within
the proposed CS DRGs by first comparing the current CMS DRGs to the
base DRGs in the proposed CS DRGs to identify areas where improvements
could be made to better account for severity of illness and resource
utilization. We used two general approaches to evaluate potential DRG
changes. First, we analyzed where the assignment of a case to a DRG
differed under the CMS DRGs and the proposed base CS DRGs. Second, we
analyzed whether there was a list of ``major conditions'' that could be
used to revise any DRGs to better recognize severity, similar to the
changes to the cardiovascular DRGs involving MCVs we established in
last year's final rule. We used the diagnoses listed as ``major'' or
``extreme'' under the proposed CS DRGs for this review. The changes
described below will result in better recognition of severity in the
current DRG system and, like the changes we made last year to reform
the cardiovascular DRGs based on MCVs, represent an excellent next step
in refining the Medicare inpatient hospital payment system so our
payments are better targeted to specific patients based on their costs
of care.
We began our review by focusing on the cardiac and orthopedic DRGs
because of our concerns that cardiac, orthopedic, and surgical
hospitals have taken advantage of opportunities in the DRG system to
specialize in the least complex and most profitable inpatient cases.
However, with respect to orthopedic and surgical specialty hospitals,
we considered that they have very small inpatient volume and the issues
that are leading to their creation are generally unrelated to profit
opportunities in the IPPS. Although we did review the orthopedic DRGs,
we generally did not find opportunities within the current DRG system
to make further refinements for severity of illness. We were also
unable to find a strong basis to subdivide further most of the
cardiovascular DRGs. In last year's IPPS rule, we already made
significant changes to the DRG system to better account for severity of
illness in the DRGs frequently performed by cardiac hospitals. As
mentioned earlier, this DRG change involved splitting some cardiac DRGs
based on the presence or absence of an MCV. We then conducted a
comparison of the base DRGs in the CMS DRG system and proposed CS DRGs.
We analyzed data to identify specific CMS DRGs with wide ranges in
charges that had been subdivided or in other ways modified under the
proposed CS DRGs. As stated earlier, this process did not allow CMS to
use the more sophisticated logic involved in the proposed CS DRGs to
differentiate groups with greater severity. However, we were able to
identify a group of DRGs that could be created to better align our
payments based on severity of illness. We used our own analysis along
with specific recommendations received during the comment period to
develop further severity refinements to the current DRGs.
We identified 20 new CMS DRGs involving 13 different clinical areas
that would improve the CMS DRG system's recognition of severity of
illness. Twelve of the new DRGs are medical and 8 are surgical. The 20
new DRGs are constructed through a combination of approaches used in
the proposed CS DRGs to refine the base DRGs such as:
Subdividing existing DRGs through the use of diagnosis
codes.
Subdividing DRGs based on specific surgical procedures.
Selecting cases with specific diagnosis and/or procedure
codes and assigning them to a new DRG which better accounts for their
resource use and severity.
We also modified 32 DRGs to better capture differences in severity.
The new and revised DRGs were selected from 40 current DRGs which
contain 1,666,476 cases and represent a number of body systems. In
creating these 20 new DRGs, we are deleting 8 existing DRGs and
modifying 32 existing DRGs. The specific DRG changes are described
below:
a. MDC 1 (Diseases and Disorders of the Nervous System)
(1) Nervous System Infection Except Viral Meningitis
Under our current DRG system, all nervous system infections except
viral meningitis are assigned to CMS DRG 20 (Nervous System Infection
Except Viral Meningitis). By combining all nervous system infections
except viral meningitis into one DRG, we are grouping together patients
with wide ranges of severity. Under our proposed CS DRGs, there are
separate DRGs that distinguish bacterial infection and tuberculosis
from other infections of the

[[Page 47925]]

nervous system. The CS DRGs divided these cases in order to better
recognize severity. The codes which describe bacterial infection and
tuberculosis are listed below.
We then divided the cases within CMS DRG 20 based on the presence
or absence of bacterial infections and tuberculosis of the nervous
system. Our medical advisors support dividing these cases in this
manner to better recognize severity of illness. The data indicated that
these are two distinctly different groups with significant differences
in severity. The bacterial and tuberculosis infection group had average
charges of $47,034 compared to the $36,507 average charges for cases
with other types of infection of the nervous system. Clearly these
charge data support the fact that the bacterial and tuberculous
infection group has a significantly greater degree of severity. The
chart below illustrates these data:

----------------------------------------------------------------------------------------------------------------
Number of Average length Average
DRG cases of stay charges
----------------------------------------------------------------------------------------------------------------
CMS DRG 20...................................................... 6,130 9.88 $42,191.76
DRG 20 with Bacterial & TB Infections of Nervous System......... 3,310 10.1 47,034.42
DRG 20 w/o Bacterial & TB Infections of Nervous System.......... 2,820 9.54 36,507.64
----------------------------------------------------------------------------------------------------------------

The data support the creation of two separate DRGs for these two
groups of patients. Therefore, we are deleting DRG 20 and creating the
following two new DRGs:
DRG 560 (Bacterial & Tuberculosis Infections of Nervous
System).
DRG 561 (Non-Bacterial Infections of Nervous System Except
Viral Meningitis).
The ICD-9-CM diagnosis codes assigned to each new DRG are as
follows.
The new DRG 560 will have principal diagnosis codes listed in the
following table.

------------------------------------------------------------------------
Diagnosis code DRG 560 diagnosis code titles
------------------------------------------------------------------------
003.21................ Salmonella meningitis.
013.00................ Tuberculous meningitis, unspecified examination.
013.01................ Tuberculous meningitis, bacteriological or
histological examination not done.
013.02................ Tuberculous meningitis, bacteriological or
histological examination results unknown (at
present).
013.03................ Tuberculous meningitis, tubercle bacilli found
(in sputum) by microscopy.
013.04................ Tuberculous meningitis, tubercle bacilli not
found (in sputum) by microscopy, but found by
bacterial culture.
013.05................ Tuberculous meningitis, tubercle bacilli not
found by bacteriological examination, but
tuberculosis confirmed histologically.
013.06................ Tuberculous meningitis, tubercle bacilli not
found by bacteriological or histological
examination, but tuberculosis confirmed by
other methods (inoculation of animals).
013.10................ Tuberculoma of meninges, unspecified
examination.
013.11................ Tuberculoma of meninges, bacteriological or
histological examination not done.
013.12................ Tuberculoma of meninges, bacteriological or
histological examination results unknown (at
present).
013.13................ Tuberculoma of meninges, tubercle bacilli found
(in sputum) by microscopy.
013.14................ Tuberculoma of meninges, tubercle bacilli not
found (in sputum) by microscopy, but found by
bacterial culture.
013.15................ Tuberculoma of meninges, tubercle bacilli not
found by bacteriological examination, but
tuberculosis confirmed histologically.
013.16................ Tuberculoma of meninges, tubercle bacilli not
found by bacteriological or histological
examination, but tuberculosis confirmed by
other methods (inoculation of animals).
013.20................ Tuberculoma of brain, unspecified examination.
013.21................ Tuberculoma of brain, bacteriological or
histological examination not done.
013.22................ Tuberculoma of brain, bacteriological or
histological examination results unknown (at
present).
013.23................ Tuberculoma of brain, tubercle bacilli found (in
sputum) by microscopy.
013.24................ Tuberculoma of brain, tubercle bacilli not found
(in sputum) by microscopy, but found by
bacterial culture.
013.25................ Tuberculoma of brain, tubercle bacilli not found
by bacteriological examination, but
tuberculosis confirmed histologically.
013.26................ Tuberculoma of brain, tubercle bacilli not found
by bacteriological or histological examination,
but tuberculosis confirmed by other methods
(inoculation of animals).
013.30................ Tuberculous abscess of brain, unspecified
examination.
013.31................ Tuberculous abscess of brain, bacteriological or
histological examination not done.
013.32................ Tuberculous abscess of brain, bacteriological or
histological examination results unknown (at
present).
013.33................ Tuberculous abscess of brain, tubercle bacilli
found (in sputum) by microscopy.
013.34................ Tuberculous abscess of brain, tubercle bacilli
not found (in sputum) by microscopy, but found
by bacterial culture.
013.35................ Tuberculous abscess of brain, tubercle bacilli
not found by bacteriological examination, but
tuberculosis confirmed histologically.
013.36................ Tuberculous abscess of brain, tubercle bacilli
not found by bacteriological or histological
examination, but tuberculosis confirmed by
other methods (inoculation of animals).
013.40................ Tuberculoma of spinal cord, unspecified
examination.
013.41................ Tuberculoma of spinal cord, bacteriological or
histological examination not done.
013.42................ Tuberculoma of spinal cord, bacteriological or
histological examination results unknown (at
present).
013.43................ Tuberculoma of spinal cord, tubercle bacilli
found (in sputum) by microscopy.
013.44................ Tuberculoma of spinal cord, tubercle bacilli not
found (in sputum) by microscopy, but found by
bacterial culture.
013.45................ Tuberculoma of spinal cord, tubercle bacilli not
found by bacteriological examination, but
tuberculosis confirmed histologically.
013.46................ Tuberculoma of spinal cord, tubercle bacilli not
found by bacteriological or histological
examination, but tuberculosis confirmed by
other methods (inoculation of animals).
013.50................ Tuberculous abscess of spinal cord, unspecified
examination.
013.51................ Tuberculous abscess of spinal cord,
bacteriological or histological examination not
done.
013.52................ Tuberculous abscess of spinal cord,
bacteriological or histological examination
results unknown (at present).
013.53................ Tuberculous abscess of spinal cord, tubercle
bacilli found (in sputum) by microscopy.
013.54................ Tuberculous abscess of spinal cord, tubercle
bacilli not found (in sputum) by microscopy,
but found by bacterial culture.

[[Page 47926]]

013.55................ Tuberculous abscess of spinal cord, tubercle
bacilli not found by bacteriological
examination, but tuberculosis confirmed
histologically.
013.56................ Tuberculous abscess of spinal cord, tubercle
bacilli not found by bacteriological or
histological examination, but tuberculosis
confirmed by other methods (inoculation of
animals).
013.60................ Tuberculous encephalitis or myelitis,
unspecified examination.
013.61................ Tuberculous encephalitis or myelitis,
bacteriological or histological examination not
done.
013.62................ Tuberculous encephalitis or myelitis,
bacteriological or histological examination
results unknown (at present).
013.63................ Tuberculous encephalitis or myelitis, tubercle
bacilli found (in sputum) by microscopy.
013.64................ Tuberculous encephalitis or myelitis, tubercle
bacilli not found (in sputum) by microscopy,
but found by bacterial culture.
013.65................ Tuberculous encephalitis or myelitis, tubercle
bacilli not found by bacteriological
examination, but tuberculosis confirmed
histologically.
013.66................ Tuberculous encephalitis or myelitis, tubercle
bacilli not found by bacteriological or
histological examination, but tuberculosis
confirmed by other methods (inoculation of
animals).
013.80................ Other specified tuberculosis of central nervous
system, unspecified examination.
013.81................ Other specified tuberculosis of central nervous
system, bacteriological or histological
examination not done.
013.82................ Other specified tuberculosis of central nervous
system, bacteriological or histological
examination results unknown (at present).
013.83................ Other specified tuberculosis of central nervous
system, tubercle bacilli found (in sputum) by
microscopy.
013.84................ Other specified tuberculosis of central nervous
system, tubercle bacilli not found (in sputum)
by microscopy, but found by bacterial culture.
013.85................ Other specified tuberculosis of central nervous
system, tubercle bacilli not found by
bacteriological examination, but tuberculosis
confirmed histologically.
013.86................ Other specified tuberculosis of central nervous
system, tubercle bacilli not found by
bacteriological or histological examination,
but tuberculosis confirmed by other methods
(inoculation of animals).
013.90................ Unspecified tuberculosis of central nervous
system, unspecified examination.
013.91................ Unspecified tuberculosis of central nervous
system, bacteriological or histological
examination not done.
013.92................ Unspecified tuberculosis of central nervous
system, bacteriological or histological
examination results unknown (at present).
013.93................ Unspecified tuberculosis of central nervous
system, tubercle bacilli found (in sputum) by
microscopy.
013.94................ Unspecified tuberculosis of central nervous
system, tubercle bacilli not found (in sputum)
by microscopy, but found by bacterial culture.
013.95................ Unspecified tuberculosis of central nervous
system, tubercle bacilli not found by
bacteriological examination, but tuberculosis
confirmed histologically.
013.96................ Unspecified tuberculosis of central nervous
system, tubercle bacilli not found by
bacteriological or histological examination,
but tuberculosis confirmed by other methods
(inoculation of animals).
036.0................. Meningococcal meningitis.
036.1................. Meningococcal encephalitis.
098.82................ Gonococcal meningitis.
320.0................. Hemophilus meningitis.
320.1................. Pneumococcal meningitis.
320.2................. Streptococcal meningitis.
320.3................. Staphylococcal meningitis.
320.7................. Meningitis in other bacterial diseases
classified elsewhere.
320.81................ Anaerobic meningitis.
320.82................ Meningitis due to gram-negative bacteria, not
elsewhere classified.
320.89................ Meningitis due to other specified bacteria.
320.9................. Meningitis due to unspecified bacterium.
324.0................. Intracranial abscess.
324.1................. Intraspinal abscess.
324.9................. Intracranial and intraspinal abscess of
unspecified site.
357.0................. Acute infective polyneuritis.
------------------------------------------------------------------------

The new DRG 561 will have principal diagnosis codes listed in the
following table.

------------------------------------------------------------------------
Diagnosis code DRG 561 diagnosis code titles
------------------------------------------------------------------------
006.5................. Amebic brain abscess.
045.00................ Acute paralytic poliomyelitis specified as
bulbar, unspecified type of poliovirus.
045.01................ Acute paralytic poliomyelitis specified as
bulbar, poliovirus type i.
045.02................ Acute paralytic poliomyelitis specified as
bulbar, poliovirus type ii.
045.03................ Acute paralytic poliomyelitis specified as
bulbar, poliovirus type iii.
045.10................ Acute poliomyelitis with other paralysis,
unspecified type of poliovirus.
045.11................ Acute poliomyelitis with other paralysis,
poliovirus type i.
045.12................ Acute poliomyelitis with other paralysis,
poliovirus type ii.
045.13................ Acute poliomyelitis with other paralysis,
poliovirus type iii.
045.90................ Unspecified acute poliomyelitis, unspecified
type poliovirus.
045.91................ Unspecified acute poliomyelitis, poliovirus type
i.
045.92................ Unspecified acute poliomyelitis, poliovirus type
ii.
045.93................ Unspecified acute poliomyelitis, poliovirus type
iii.
049.8................. Other specified non-arthropod-borne viral
diseases of central nervous system.

[[Page 47927]]

049.9................. Unspecified non-arthropod-borne viral diseases
of central nervous system.
052.0................. Postvaricella encephalitis.
052.2................. Postvaricella myelitis.
053.14................ Herpes zoster myelitis.
054.3................. Herpetic meningoencephalitis.
054.74................ Herpes simplex myelitis.
055.0................. Postmeasles encephalitis.
056.01................ Encephalomyelitis due to rubella.
056.09................ Rubella with other neurological complications.
062.0................. Japanese encephalitis.
062.1................. Western equine encephalitis.
062.2................. Eastern equine encephalitis.
062.3................. St. Louis encephalitis.
062.4................. Australian encephalitis.
062.5................. California virus encephalitis.
062.8................. Other specified mosquito-borne viral
encephalitis.
062.9................. Mosquito-borne viral encephalitis, unspecified.
063.0................. Russian spring-summer (taiga) encephalitis.
063.1................. Louping ill.
063.2................. Central European encephalitis.
063.8................. Other specified tick-borne viral encephalitis.
063.9................. Tick-borne viral encephalitis, unspecified.
064................... Viral encephalitis transmitted by other and
unspecified arthropods.
066.2................. Venezuelan equine fever.
071................... Rabies.
072.2................. Mumps encephalitis.
090.40................ Juvenile neurosyphilis, unspecified.
090.41................ Congenital syphilitic encephalitis.
090.42................ Congenital syphilitic meningitis.
090.49................ Other juvenile neurosyphilis.
091.81................ Acute syphilitic meningitis (secondary).
094.2................. Syphilitic meningitis.
094.3................. Asymptomatic neurosyphilis.
094.81................ Syphilitic encephalitis.
100.81................ Leptospiral meningitis (aseptic).
100.89................ Other specified leptospiral infections.
112.83................ Candidal meningitis.
114.2................. Coccidioidal meningitis.
115.01................ Histoplasma capsulatum meningitis.
115.11................ Histoplasma duboisii meningitis.
115.91................ Histoplasmosis meningitis, unspecified.
130.0................. Meningoencephalitis due to toxoplasmosis.
321.0................. Cryptococcal meningitis.
321.1................. Meningitis in other fungal diseases.
321.2................. Meningitis due to viruses not elsewhere
classified.
321.3................. Meningitis due to trypanosomiasis.
321.4................. Meningitis in sarcoidosis.
321.8................. Meningitis due to other nonbacterial organisms
classified elsewhere.
322.0................. Nonpyogenic meningitis.
322.1................. Eosinophilic meningitis.
322.2................. Chronic meningitis.
322.9................. Meningitis, unspecified.
323.01................ Encephalitis and encephalomyelitis in viral
diseases classified elsewhere.
323.02................ Myelitis in viral diseases classified elsewhere.
323.1................. Encephalitis, myelitis, and encephalomyelitis in
rickettsial diseases classified elsewhere.
323.2................. Encephalitis, myelitis, and encephalomyelitis in
protozoal diseases classified elsewhere.
323.41................ Other encephalitis and encephalomyelitis due to
infection classified elsewhere.
323.42................ Other myelitis due to infection classified
elsewhere.
323.51................ Encephalitis and encephalomyelitis following
immunization procedures.
323.52................ Myelitis following immunization procedures.
323.61................ Infectious acute disseminated encephalomyelitis
(ADEM).
323.62................ Other postinfectious encephalitis and
encephalomyelitis.
323.63................ Postinfectious myelitis.
323.81................ Other causes of encephalitis and
encephalomyelitis.
323.82................ Other causes of myelitis.
323.9................. Unspecified causes of encephalitis, myelitis,
and encephalomyelitis.
341.20................ Acute (transverse) myelitis NOS.
341.21................ Acute (transverse) myelitis in conditions
classified elsewhere.
341.22................ Idiopathic transverse myelitis.
------------------------------------------------------------------------

[[Page 47928]]

(2) Seizure and Headache
Comment: One commenter stated that the current DRGs do not
adequately capture the severity of patients with more severe types of
headaches. The commenter further noted that seizures and headaches
represent distinctly different levels of severity, yet they are grouped
together in the CMS DRGs:
CMS DRG 24 (Seizure & Headache Age >17 with CC).
CMS DRG 25 (Seizure & Headache Age >17 without CC).
CMS DRG 26 (Seizure & Headache Age 0-17).
The commenter stated that more severely ill patients, such as those
with intense migraine headaches, should be differentiated from other
patients in the DRG. The commenter suggested splitting these DRGs into
two or more new DRGs to better capture severity. Alternatively, the
commenter suggested that CMS examine how the APR DRG system handles
these types of cases.
Response: Under both the APR DRGs and our proposed CS DRGs, seizure
and headache cases are assigned to separate DRGs while these cases are
grouped together in the CMS DRGs. Both severity DRG systems recognize
different levels of severity for these two groups of patients. Our
medical advisors found that seizure and headache patients are
clinically different, with seizure patients having a higher level of
severity. We also analyzed data for patients with seizures versus those
who are admitted with headaches and found that seizure cases have
higher average charges than headaches. We did not have enough cases to
analyze potential DRG changes for DRG 26. As the chart below shows,
seizure patients age greater than 17 have average charges of $17,125
with CC and $10,540 without CC. Headache patients greater than 17 years
of age have average charges of $11,618. The data did not support
creating a split for headache patients greater than 17 years with and
without CC. The difference in average charges for these groups was only
$2,596 ($12,591 with CC as compared to $9,995 for those without a CC).

DRGs 24, 25, and 26
----------------------------------------------------------------------------------------------------------------
Number of Average length Average
DRG cases of stay charges
----------------------------------------------------------------------------------------------------------------
24.............................................................. 60,186 4.67 $16,403.55
25.............................................................. 25,816 3.13 10,419.00
26.............................................................. 21 4.05 17,396.43
----------------------------------------------------------------------------------------------------------------

Seizures Age >17 With and Without CC
----------------------------------------------------------------------------------------------------------------
Number of Average length Average
DRG cases of stay charges
----------------------------------------------------------------------------------------------------------------
With CC......................................................... 50,605 4.8 $17,125.19
Without CC...................................................... 20,065 3.1 10,540.27
----------------------------------------------------------------------------------------------------------------

Headaches > 17
------------------------------------------------------------------------
Average length Average
DRG of stay charges
------------------------------------------------------------------------
15,332.................................. 3.4 $11,618.15
------------------------------------------------------------------------

Headaches >17 With and Without CC
----------------------------------------------------------------------------------------------------------------
Number of Average length Average
DRG cases of stay charges
----------------------------------------------------------------------------------------------------------------
With CC......................................................... 9,581 3.7 $12,591,92
Without CC...................................................... 5,751 2.9 9,995.85
----------------------------------------------------------------------------------------------------------------

The data also support creating separate DRGs for seizure and
headache patients greater than 17 years of age. The data further
support an additional split for seizure patients based on the presence
of a complication or comorbidity (CC). Seizure cases with a CC have
$6,585 greater average charges compared to cases without a CC. The data
are less compelling for creating a split based on the presence of a CC
for headache cases, since the difference in average charges is only
$2,596.
The clinical data and our medical advisors support the creation of
separate DRGs for these two groups of patients. Therefore, we are
deleting the following DRGs:
DRG 24 (Seizure & Headache Age >17 with CC).
DRG 25 (Seizure & Headache Age >17 without CC).
We are creating the following three new DRGs:
DRG 562 (Seizure Age >17 with CC).
DRG 563 (Seizure Age >17 without CC).
DRG 564 (Headaches Age >17).
The ICD-9-CM codes and DRG logic for cases assigned to these new
DRGs will be as follows.
New DRG 562 will have the following principal diagnosis codes and
age greater than 17 years with a CC.

[[Page 47929]]

------------------------------------------------------------------------
Diagnosis code Diagnosis code title
------------------------------------------------------------------------
345.00................ Generalized nonconvulsive epilepsy, without
mention of intractable epilepsy.
345.01................ Generalized nonconvulsive epilepsy, with
intractable epilepsy.
345.10................ Generalized convulsive epilepsy, without mention
of intractable epilepsy.
345.11................ Generalized convulsive epilepsy, with
intractable epilepsy.
345.2................. Petit mal status, epileptic.
345.3................. Grand mal status, epileptic.
345.40................ Localization-related (focal) (partial) epilepsy
and epileptic syndromes with complex partial
seizures, without mention of intractable
epilepsy.
345.41................ Localization-related (focal) (partial) epilepsy
and epileptic syndromes with complex partial
seizures, with intractable epilepsy.
345.50................ Localization-related (focal) (partial) epilepsy
and epileptic syndromes with simple partial
seizures, without mention of intractable
epilepsy.
345.51................ Localization-related (focal) (partial) epilepsy
and epileptic syndromes with simple partial
seizures, with intractable epilepsy.
345.60................ Infantile spasms, without mention of intractable
epilepsy.
345.61................ Infantile spasms, with intractable epilepsy.
345.70................ Epilepsia partialis continua, without mention of
intractable epilepsy.
345.71................ Epilepsia partialis continua, with intractable
epilepsy.
345.80................ Other forms of epilepsy and recurrent seizures,
without mention of intractable epilepsy.
345.81................ Other forms of epilepsy and recurrent seizures,
with intractable epilepsy.
345.90................ Epilepsy, unspecified, without mention of
intractable epilepsy.
345.91................ Epilepsy, unspecified, with intractable
epilepsy.
780.31................ Febrile convulsions (simple), unspecified.
780.32................ Complex febrile convulsions.
780.39................ Other convulsions.
------------------------------------------------------------------------

New DRG 563 will have the principal diagnosis codes listed above
for DRG 562, age greater than 17 years, but no complication/
comorbidity.
New DRG 564 will have the principal diagnosis codes listed as
follows and an age greater than 17 years.

------------------------------------------------------------------------
Diagnosis code Diagnosis code title
------------------------------------------------------------------------
307.81................ Tension headache.
310.2................. Postconcussion syndrome.
346.00................ Classical migraine without mention of
intractable migraine.
346.01................ Classical migraine with intractable migraine, so
stated.
346.10................ Common migraine without mention of intractable
migraine.
346.11................ Common migraine with intractable migraine, so
stated.
346.20................ Variants of migraine without mention of
intractable migraine.
346.21................ Variants of migraine with intractable migraine,
so stated.
346.80................ Other forms of migraine without mention of
intractable migraine.
346.81................ Other forms of migraine with intractable
migraine, so stated.
346.90................ Migraine, unspecified without mention of
intractable migraine.
346.91................ Migraine, unspecified with intractable migraine,
so stated.
348.2................. Benign intracranial hypertension.
349.0................. Reaction to spinal or lumbar puncture.
437.4................. Cerebral arteritis.
784.0................. Headache.
------------------------------------------------------------------------

b. MDC 4 (Diseases and Disorders of the Respiratory System):
Respiratory System Diagnosis With Ventilator Support
Medical patients who are treated with mechanical ventilation for
respiratory failure are currently assigned to DRG 475 (Respiratory
System Diagnosis with Ventilator Support). This DRG includes patients
who are on a mechanical ventilator for only a few hours as well as
patients who are on mechanical ventilation for several days. The
proposed CS DRGs divide these patients into two groups, those on
ventilator support for 96 or more hours and those on ventilator support
for less than 96 hours. The CS DRGs recognize the difference in
severity between these two groups of patients. Our medical advisors
agree that medical patients who are treated with mechanical ventilation
for respiratory failure for 96 or more hours in most cases are more
severely ill than patients who are treated with mechanical ventilation
for fewer than 96 hours. A review of these cases illustrates a
significant difference in average charges for patients on ventilator
support for 96 or more hours which supports the greater severity of
these patients. The chart below shows that patients on ventilator
support for 96 or more hours have average charges of $83,058 compared
to $38,300 for patients on ventilator support for less than 96 hours, a
difference of $44,758 in charges. The following chart summarizes these
data.

[[Page 47930]]

DRG 475 Respiratory System Diagnosis With Ventilator Support
------------------------------------------------------------------------
Average
DRG Number of length of Average
cases stay charges
------------------------------------------------------------------------
DRG 475......................... 114,199 10.64 $55,873.15
DRG 475 with Ventilator Support 44,836 15.30 83,058.24
96+ Hours......................
DRG 475 with Ventilator Support 69,363 7.64 38,300.81
<96 Hours......................
------------------------------------------------------------------------

The proposed CS DRGs do a much better job of identifying patients
on ventilator support who have higher levels of severity and utilize
significantly more resources. Therefore, we will adopt the approach
used under the CS DRG system and split these patients based on whether
or not the patients are on mechanical ventilation for 96 hours. We are
deleting DRG 475 and creating the following two new DRGs:
DRG 565 (Respiratory System Diagnosis with Ventilator
Support 96+ Hours).
DRG 566 (Respiratory System Diagnosis with Ventilator
Support < 96 Hours).
The DRG logic for these two new DRGs is as follows.
New DRG 565 will have a respiratory system diagnosis and procedure
code 96.72 (Continuous mechanical ventilation for 96 consecutive hours
or more).
New DRG 566 will have a respiratory system diagnosis and the
following procedure codes:
96.70 (Continuous mechanical ventilation of unspecified duration).
96.71 (Continuous mechanical ventilation for less than 96
consecutive hours).
c. MDC 6 (Diseases and Disorders of the Digestive System)
(1) Major Esophageal Disorders and Major Gastrointestinal and
Peritoneal Infections
The proposed CS DRGs assign major esophageal disorders to a single
DRG because these disorders have been shown to have a higher level of
severity than do other types of esophageal disorders. Under the current
CMS DRGs these disorders are dispersed throughout 8 separate DRGs. The
conditions included in the list of major esophageal disorders are
described in the table below. The proposed CS DRGs also assign specific
gastrointestinal and peritoneal infections that represent a high level
of severity into a single DRG. These conditions are assigned to the
same group of eight CMS DRGs mentioned above within CMS' current DRGS.
The conditions considered gastrointestinal and peritoneal infections
are described in the table below.
Our data show that the two groups of cases assigned to major
esophageal disorders and to the gastrointestinal and peritoneal
infections represent significantly greater severity levels and have
higher average charges than do other cases in the eight CMS DRGs. The
eight current CMS DRGs to which these two groups of higher severity
cases as assigned are as follows:
CMS DRG 174 (G.I. Hemorrhage with CC).
CMS DRG 175 (G.I. Hemorrhage without CC).
CMS DRG 182 (Esophagitis, Gastroenteritis & Miscellaneous
Digestive Disorders Age >17 with CC).
CMS DRG 183 (Esophagitis, Gastroenteritis & Miscellaneous
Digestive Disorders Age >17 without CC).
CMS DRG 184 (Esophagitis, Gastroenteritis & Miscellaneous
Digestive Disorders Age 0-17).
CMS DRG 188 (Digestive System Diagnoses Age >17 with CC).
CMS DRG 189 (Digestive System Diagnoses Age >17 without
CC).
CMS DRG 190 (Digestive System Diagnoses Age 0-17).

DRGs 174, 175, 182, 183, 184, 188, 189, and 190
------------------------------------------------------------------------
Average
DRG Number of length of Average
cases stay charges
------------------------------------------------------------------------
DRG 174....................... 249,359 4.69 $16,987.26
DRG 174 w/o Major Esophageal 241,508 4.69 16,934.86
Disorders or Gastrointestinal
and Peritoneal Infections....
DRG 175....................... 28,485 2.86 9,573.73
DRG 175 w/o Major Esophageal 27,816 2.87 9,934.86
Disorders or Gastrointestinal
and Peritoneal Infections....
DRG 182....................... 282,619 4.48 14,269.01
DRG 182 w/o Major Esophageal 243,563 4.07 13,124.03
Disorders or Gastrointestinal
and Peritoneal Infections....
DRG 183....................... 77,582 2.89 9,933.62
DRG 183 w/o Major Esophageal 74,899 2.84 9,845.81
Disorders or Gastrointestinal
and Peritoneal Infections....
DRG 184....................... 66 4.38 12,116.67
DRG 184 w/o Major Esophageal 60 3.88 10,053.38
Disorders or Gastrointestinal
and Peritoneal Infections....
DRG 188....................... 88,970 5.45 18,278.19
DRG 189 w/o Major Esophageal 87,210 5.43 18,194.27
Disorders or Gastrointestinal
and Peritoneal Infections....
DRG 189....................... 12,454 3.06 9,963.90
DRG 190 w/o Major Esophageal 12,123 3.02 9,855.31
Disorders or Gastrointestinal
and Peritoneal Infections....
DRG 190....................... 58 5.02 14,156.52
DRG 190 w/o Major Esophageal 45 5.13 14,829.47
Disorders or Gastrointestinal
and Peritoneal Infections....
------------------------------------------------------------------------

[[Page 47931]]

Major Esophageal Disorders
------------------------------------------------------------------------
Average
Number of cases length of Average
stay charges
------------------------------------------------------------------------
10,633..................................... 4.7 $18,410.30
------------------------------------------------------------------------

Major Gastrointestinal and Peritoneal Infections
------------------------------------------------------------------------
Average
Number of cases length of Average
stay charges
------------------------------------------------------------------------
41,736..................................... 6.9 $20,861.06
------------------------------------------------------------------------

As can be seen from the tables above, cases assigned to these eight
DRGs without a major esophageal disorder or a major gastrointestinal
disorder and peritoneal infection have average charges ranging from
$9,845 to $18,194. The average charges for major esophageal disorders
are $18,410, while average charges for major gastrointestinal disorders
and peritoneal infections are $20,861. Removing these higher severity
cases from the eight DRGs does not have a significant impact on the DRG
weights for the remaining cases. Most of the higher severity cases are
being removed from DRG 182. There were 282,619 cases in this DRG. By
removing the two new groups of cases, the DRG has 243,563 cases
remaining. The average charge for DRG 182 with the remaining cases
decreases from $14,269 to $13,124. Therefore, the impact on the
remaining cases is not that significant. However, reassigning cases
with major esophageal and gastrointestinal disorders and peritoneal
infections to two new DRGs has the effect of creating two groups which
have higher levels of severity and use significantly greater resources.
Our medical advisors agree that these two groups represent higher
levels of severity and that it is appropriate to move these two groups
of cases out of their existing assignments and into the following two
new DRGs:
DRG 571 (Major Esophageal Disorders)
DRG 572 (Major Gastrointestinal Disorders and Peritoneal
Infections)
We are creating new DRG 571 with the following ICD-9-CM diagnosis
codes (removing them from DRGs 174, 175, 182, 183, 184, 188, 189, and
190):

------------------------------------------------------------------------
Diagnosis code Major esophageal disorders diagnosis code titles
------------------------------------------------------------------------
017.80................ Tuberculosis of esophagus, unspecified
examination.
017.81................ Tuberculosis of esophagus, bacteriological or
histological examination not done.
017.82................ Tuberculosis of esophagus, bacteriological or
histological examination results unknown (at
present).
017.83................ Tuberculosis of esophagus, tubercle bacilli
found (in sputum) by microscopy.
017.84................ Tuberculosis of esophagus, tubercle bacilli not
found (in sputum) by microscopy, but found by
bacterial culture.
017.85................ Tuberculosis of esophagus, tubercle bacilli not
found by bacteriological examination, but
tuberculosis confirmed histologically.
017.86................ Tuberculosis of esophagus, tubercle bacilli not
found by bacteriological or histological
examination, but tuberculosis confirmed by
other methods (inoculation of animals).
112.84................ Candidal esophagitis.
456.0................. Esophageal varices with bleeding.
456.1................. Esophageal varices without mention of bleeding.
456.20................ Esophageal varices in diseases classified
elsewhere, with bleeding.
530.4................. Perforation of esophagus.
530.7................. Gastroesophageal laceration-hemorrhage syndrome.
530.82................ Esophageal hemorrhage.
530.84................ Tracheoesophageal fistula.
750.3................. Congenital tracheoesophageal fistula, esophageal
atresia and stenosis.
750.4................. Other specified congenital anomalies of
esophagus.
862.22................ Injury to esophagus without mention of open
wound into cavity.
947.2................. Burn of esophagus.
------------------------------------------------------------------------

We are creating new DRG 572 with the following ICD-9-CM diagnosis
codes (removing them from DRGs 182, 183, 184, 188, 189, and 190):

------------------------------------------------------------------------
Diagnosis code Major esophageal disorders diagnosis code titles
------------------------------------------------------------------------
001.0................ Cholera due to vibrio cholerae.
001.1................. Cholera due to vibrio cholerae el tor.
001.9................. Cholera, unspecified.
003.0................. Salmonella gastroenteritis.
004.0................. Shigella dysenteriae.
004.1................. Shigella flexneri.
004.2................. Shigella boydii.
004.3................. Shigella sonnei.
004.8................. Other specified shigella infections.
004.9................. Shigellosis, unspecified.
005.0................. Staphylococcal food poisoning.
005.2................. Food poisoning due to clostridium perfringens
(c. welchii).
005.3................. Food poisoning due to other clostridia.
005.4................. Food poisoning due to vibrio parahaemolyticus.
005.81................ Food poisoning due to vibrio vulnificus.
005.89................ Other bacterial food poisoning.
006.0................. Acute amebic dysentery without mention of
abscess.
006.1................. Chronic intestinal amebiasis without mention of
abscess.
006.2................. Amebic nondysenteric colitis.
007.0................. Balantidiasis.
007.1................. Giardiasis.

[[Page 47932]]

007.2................. Coccidiosis.
007.3................. Intestinal trichomoniasis.
007.4................. Cryptosporidiosis.
007.5................. Cyclosporiasis.
007.8................. Other specified protozoal intestinal diseases.
007.9................. Unspecified protozoal intestinal disease.
008.00................ Intestinal infection due to e. coli,
unspecified.
008.01................ Intestinal infection due to enteropathogenic e.
coli.
008.02................ Intestinal infection due to enterotoxigenic e.
coli.
008.03................ Intestinal infection due to enteroinvasive e.
coli.
008.04................ Intestinal infection due to enterohemorrhagic e.
coli.
008.09................ Intestinal infection due to other intestinal e.
coli infections.
008.1................. Intestinal infection due to arizona group of
paracolon bacilli.
008.2................. Intestinal infection due to aerobacter
aerogenes.
008.3................. Intestinal infection due to proteus (mirabilis)
(morganii).
008.41................ Intestinal infection due to staphylococcus.
008.42................ Intestinal infection due to pseudomonas.
008.43................ Intestinal infection due to campylobacter.
008.44................ Intestinal infection due to yersinia
enterocolitica.
008.45................ Intestinal infection due to clostridium
difficile.
008.46................ Intestinal infection due to other anaerobes.
008.47................ Intestinal infection due to other gram-negative
bacteria.
008.49................ Intestinal infection due to other organisms.
008.5................. Bacterial enteritis, unspecified.
4.00.................. Tuberculous peritonitis, unspecified
examination.
014.01................ Tuberculous peritonitis, bacteriological or
histological examination not done.
014.02................ Tuberculous peritonitis, bacteriological or
histological examination results unknown (at
present).
014.03................ Tuberculous peritonitis, tubercle bacilli found
(in sputum) by microscopy.
014.04................ Tuberculous peritonitis, tubercle bacilli not
found (in sputum) by microscopy, but found by
bacterial culture.
014.05................ Tuberculous peritonitis, tubercle bacilli not
found by bacteriological examination, but
tuberculosis confirmed histologically.
014.06................ Tuberculous peritonitis, tubercle bacilli not
found by bacteriological or histological
examination, but tuberculosis confirmed by
other methods (inoculation of animals).
014.80................ Other tuberculosis of intestines and mesenteric
glands, unspecified examination.
014.81................ Other tuberculosis of intestines and mesenteric
glands, bacteriological or histological
examination not done.
014.82................ Other tuberculosis of intestines and mesenteric
glands, bacteriological or histological
examination results unknown (at present).
014.83................ Other tuberculosis of intestines and mesenteric
glands, tubercle bacilli found (in sputum) by
microscopy.
014.84................ Other tuberculosis of intestines and mesenteric
glands, tubercle bacilli not found (in sputum)
by microscopy, but found by bacterial culture.
014.85................ Other tuberculosis of intestines and mesenteric
glands, tubercle bacilli not found by
bacteriological examination, but tuberculosis
confirmed histologically.
014.86................ Other tuberculosis of intestines and mesenteric
glands, tubercle bacilli not found by
bacteriological or histological examination,
but tuberculosis confirmed by other methods
(inoculation of animals).
021.1................. Enteric tularemia.
022.2................. Gastrointestinal anthrax.
032.83................ Diphtheritic peritonitis.
039.2................. Abdominal actinomycotic infection.
095.2................. Syphilitic peritonitis.
098.86................ Gonococcal peritonitis.
123.1................. Cysticercosis.
123.5................. Sparganosis (larval diphyllobothriasis).
123.6................. Hymenolepiasis.
123.8................. Other specified cestode infection.
123.9................. Cestode infection, unspecified.
126.0................. Ancylostomiasis due to ancylostoma duodenale.
126.1................. Necatoriasis due to necator americanus.
126.2................. Ancylostomiasis due to ancylostoma braziliense.
126.3................. Ancylostomiasis due to ancylostoma ceylanicum.
126.8................. Other specified ancylostoma.
126.9................. Ancylostomiasis and necatoriasis, unspecified.
540.0................. Acute appendicitis with generalized peritonitis.
540.1................. Acute appendicitis with peritoneal abscess.
567.0................. Peritonitis in infectious diseases classified
elsewhere.
567.1................. Pneumococcal peritonitis.
567.21................ Peritonitis (acute) generalized.
567.22................ Peritoneal abscess.
567.23................ Spontaneous bacterial peritonitis.
567.29................ Other suppurative peritonitis.
567.31................ Psoas muscle abscess.
567.38................ Other retroperitoneal abscess.
7.39.................. Other retroperitoneal infections.
567.89................ Other specified peritonitis.
567.9................. Unspecified peritonitis.
569.5................. Abscess of intestine.
------------------------------------------------------------------------

[[Page 47933]]

(2) Principal or Secondary Diagnosis of Major Gastrointestinal
Diagnosis
We examined the diagnosis codes assigned to MDC 6 for severity
using the proposed CS DRGs and created a list of diagnosis codes that
are identified as major or extreme in the APR DRGs or the consolidated
severity DRGs. We refer to this set of higher severity diagnosis codes
as Major Gastrointestinal Diagnoses. The list of higher severity
diagnosis codes considered to be a Major Gastrointestinal Diagnosis is
provided in the table below showing new DRG 569.
We then examined DRGs 148 and 149 (Major Small & Large Bowel
Procedures with and without CC, respectively) and DRGs 154 through 156
(Stomach, Esophageal & Duodenal Procedures Age >17 with and without CC
and Age 0-17, respectively) when these Major Gastrointestinal Diagnoses
were present as either a principal or secondary diagnosis. In general,
these Major Gastrointestinal Diagnoses represent or are associated with
the reason for performing the surgical procedure in DRGs 148 and 149
and DRGs 154 through 156 and are the most serious diagnoses that
necessitate surgery. As the following tables illustrate, the presence
of these Major Gastrointestinal Diagnoses identifies patients with a
higher level of severity. The presence of these Major Gastrointestinal
Diagnoses leads to significantly higher average charges for these two
groups of surgical patients, particularly for cases currently assigned
to DRGs 148 and 154 which are the surgical procedures that include the
presence of a CC. The surgical patients with Major Gastrointestinal
Diagnoses would not only be considered to have a greater level of
severity and be more expensive, they would also be assigned to the
surgical DRG that includes a CC. The tables below show that patients in
DRG 148 with a Major Gastrointestinal Diagnosis have average charges of
$70,001.16 compared to average charges of $43,809.03 when a Major
Gastrointestinal Diagnosis is not present. The difference in charges
for cases in DRG 149 was not as great. The difference in average
charges was $29,103.84 for DRG 149 when a Major Gastrointestinal
Diagnosis was present and $23,077.84 when it was not. The number of
cases with a Major Gastrointestinal Diagnosis was significantly larger
for DRG 148 (58,153 cases compared to only 1,822 in DRG 149). Similar
findings occur for DRGs 154, 155, and 156. Cases with a Major
Gastrointestinal Diagnosis occur with significantly greater numbers in
DRG 154 (9,924 compared to only 357 in DRG 155 and none in DRG 156).
The average charges for cases with a Major Gastrointestinal Diagnosis
were $84,270.92 for DRG 154, and only $29,193.81 for DRG 155.

DRGs 148, 149, 154, 155, and 156
------------------------------------------------------------------------
Average
DRG Number of length of Average
cases stay charges
------------------------------------------------------------------------
DRG 148....................... 126,156 11.92 $55,882.59
DRG 148 with PDX/SDX of Major 58,153 14.24 70,001.16
GI Diagnoses.................
DRG 148 w/o PDX/SDX Major GI 68,003 9.94 43,809.03
Diagnoses....................
DRG 149....................... 18,471 5.66 23,672.25
DRG 149 with PDX/SDX of Major 1,822 7.66 29,103.84
GI Diagnoses.................
DRG 149 w/o PDX/SDX Major GI 16,649 5.44 23,077.84
Diagnoses....................
DRG 154....................... 25,617 12.95 66,257.17
DRG 154 with PDX/SDX of Major 9,924 15.59 84,270.92
GI Diagnoses.................
DRG 154 w/o PDX/SDX Major GI 15,693 11.28 54,865.56
Diagnoses....................
DRG 155....................... 5,679 3.96 21,543.88
DRG 155 with PDX/SDX of Major 357 7.10 29,193.81
GI Diagnoses.................
DRG 155 w/o PDX/SDX Major GI 5,322 3.75 21,030.50
Diagnoses....................
DRG 156....................... 4 9.25 48,015.50
DRG 156 with PDX/SDX of Major 0 0 0
GI Diagnoses.................
DRG 156 w/o PDX/SDX Major GI 4 9.25 48,015.50
Diagnoses....................
------------------------------------------------------------------------

Our medical advisors agree that these gastrointestinal surgical
patients with a Major Gastrointestinal Diagnosis are more severely ill
and represent patients with a higher level of severity. They support
subdividing cases in DRG 148 and 154 based on the presence of a Major
Gastrointestinal Diagnosis to better capture patients with higher level
of severity. A summary of these changes is provided below.
We are deleting DRG 148 and creating the following two new DRGs:
DRG 569 (Major Small & Large Bowel Procedures with CC with
Major Gastrointestinal Diagnosis)
DRG 570 (Major Small & Large Bowel Procedures with CC
without Major Gastrointestinal Diagnosis)
The DRG logic for new DRGs 569 and 570 is as follows.
New DRG 569 will have a principal diagnosis from MDC 6 and one of
the following codes as either the principal or secondary diagnosis.
This DRG will also have an operating room procedure from current DRG
148 and a Complication/Comorbidity (as defined in CMS DRG GROUPER
Version 24.0).

------------------------------------------------------------------------
Principal or secondary diagnosis--major
Diagnosis code gastrointestinal diagnosis diagnosis code title
------------------------------------------------------------------------
008.41................ Intestinal infection due to staphylococcus.
008.42................ Intestinal infection due to pseudomonas.
008.43................ Intestinal infection due to campylobacter.
008.45................ Intestinal infection due to clostridium
difficile.
008.46................ Intestinal infection due to other anaerobes.
008.49................ Intestinal infection due to other organisms.
014.04................ Tuberculous peritonitis, tubercle bacilli not
found (in sputum) by microscopy, but found by
bacterial culture.
098.86................ Gonococcal peritonitis.

[[Page 47934]]

456.0................. Esophageal varices with bleeding.
456.20................ Esophageal varices in diseases classified
elsewhere, with bleeding.
530.21................ Ulcer of esophagus with bleeding.
530.4................. Perforation of esophagus.
530.7................. Gastroesophageal laceration-hemorrhage syndrome.
530.84................ Tracheoesophageal fistula.
531.00................ Acute gastric ulcer with hemorrhage, without
mention of obstruction.
531.21................ Acute gastric ulcer with hemorrhage and
perforation, with obstruction.
531.40................ Chronic or unspecified gastric ulcer with
hemorrhage, without mention of obstruction.
531.41................ Chronic or unspecified gastric ulcer with
hemorrhage, with obstruction.
531.50................ Chronic or unspecified gastric ulcer with
perforation, without mention of obstruction.
531.60................ Chronic or unspecified gastric ulcer with
hemorrhage and perforation, without mention of
obstruction.
531.91................ Gastric ulcer, unspecified as acute or chronic,
without mention of hemorrhage or perforation,
with obstruction.
532.00................ Acute duodenal ulcer with hemorrhage, without
mention of obstruction.
532.10................ Acute duodenal ulcer with perforation, without
mention of obstruction.
532.11................ Acute duodenal ulcer with perforation, with
obstruction.
532.20................ Acute duodenal ulcer with hemorrhage and
perforation, without mention of obstruction.
532.31................ Acute duodenal ulcer without mention of
hemorrhage or perforation, with obstruction.
532.40................ Chronic or unspecified duodenal ulcer with
hemorrhage, without mention of obstruction.
532.41................ Chronic or unspecified duodenal ulcer with
hemorrhage, with obstruction.
532.50................ Chronic or unspecified duodenal ulcer with
perforation, without mention of obstruction.
532.60................ Chronic or unspecified duodenal ulcer with
hemorrhage and perforation, without mention of
obstruction.
533.00................ Acute peptic ulcer of unspecified site with
hemorrhage, without mention of obstruction.
533.10................ Acute peptic ulcer of unspecified site with
perforation, without mention of obstruction.
533.21................ Acute peptic ulcer of unspecified site with
hemorrhage and perforation, with obstruction.
533.40................ Chronic or unspecified peptic ulcer of
unspecified site with hemorrhage, without
mention of obstruction.
533.41................ Chronic or unspecified peptic ulcer of
unspecified site with hemorrhage, with
obstruction.
533.50................ Chronic or unspecified peptic ulcer of
unspecified site with perforation, without
mention of obstruction.
533.51................ Chronic or unspecified peptic ulcer of
unspecified site with perforation, with
obstruction.
533.60................ Chronic or unspecified peptic ulcer of
unspecified site with hemorrhage and
perforation, without mention of obstruction.
533.91................ Peptic ulcer of unspecified site, unspecified as
acute or chronic, without mention of hemorrhage
or perforation, with obstruction.
534.00................ Acute gastrojejunal ulcer with hemorrhage,
without mention of obstruction.
534.40................ Chronic or unspecified gastrojejunal ulcer with
hemorrhage, without mention of obstruction.
534.41................ Chronic or unspecified gastrojejunal ulcer, with
hemorrhage, with obstruction.
534.50................ Chronic or unspecified gastrojejunal ulcer with
perforation, without mention of obstruction.
534.51................ Chronic or unspecified gastrojejunal ulcer with
perforation, with obstruction.
534.91................ Gastrojejunal ulcer, unspecified as acute or
chronic, without mention of hemorrhage or
perforation, with obstruction.
535.01................ Acute gastritis with hemorrhage.
535.11................ Atrophic gastritis with hemorrhage.
535.21................ Gastric mucosal hypertrophy with hemorrhage.
535.31................ Alcoholic gastritis with hemorrhage.
535.41................ Other specified gastritis with hemorrhage.
535.51................ Unspecified gastritis and gastroduodenitis with
hemorrhage.
535.61................ Duodenitis with hemorrhage.
537.3................. Other obstruction of duodenum.
537.83................ Angiodysplasia of stomach and duodenum with
hemorrhage.
540.0................. Acute appendicitis with generalized peritonitis.
540.1................. Acute appendicitis with peritoneal abscess.
550.00................ Unilateral or unspecified inguinal hernia, with
gangrene.
550.01................ Recurrent unilateral or unspecified inguinal
hernia, with gangrene.
550.02................ Bilateral inguinal hernia, with gangrene.
551.00................ Unilateral or unspecified femoral hernia with
gangrene.
551.1................. Umbilical hernia with gangrene.
551.20................ Unspecified ventral hernia with gangrene.
551.21................ Incisional ventral hernia, with gangrene.
551.29................ Other ventral hernia with gangrene.
551.3................. Diaphragmatic hernia with gangrene.
551.8................. Hernia of other specified sites, with gangrene.
551.9................. Hernia of unspecified site, with gangrene.
557.0................. Acute vascular insufficiency of intestine.
557.1................. Chronic vascular insufficiency of intestine.
557.9................. Unspecified vascular insufficiency of intestine.
560.0................. Intussusception.
560.2................. Volvulus.
560.31................ Gallstone ileus.
560.81................ Intestinal or peritoneal adhesions with
obstruction (postoperative) (postinfection).
560.89................ Other specified intestinal obstruction.
560.9................. Unspecified intestinal obstruction.
562.02................ Diverticulosis of small intestine with
hemorrhage.
562.03................ Diverticulitis of small intestine with
hemorrhage.
562.12................ Diverticulosis of colon with hemorrhage.
562.13................ Diverticulitis of colon with hemorrhage.
564.7................. Megacolon, other than hirschsprung's.

[[Page 47935]]

567.0................. Peritonitis in infectious diseases classified
elsewhere.
567.1................. Pneumococcal peritonitis.
567.21................ Peritonitis (acute) generalized.
567.22................ Peritoneal abscess.
567.23................ Spontaneous bacterial peritonitis.
567.29................ Other suppurative peritonitis.
567.31................ Psoas muscle abscess.
567.38................ Other retroperitoneal abscess.
567.39................ Other retroperitoneal infections.
567.81................ Choleperitonitis.
567.9................. Unspecified peritonitis.
568.81................ Hemoperitoneum (nontraumatic).
569.5................. Abscess of intestine.
569.83................ Perforation of intestine.
569.85................ Angiodysplasia of intestine with hemorrhage.
578.0................. Hematemesis.
750.3................. Congenital tracheoesophageal fistula, esophageal
atresia and stenosis.
863.30................ Injury to small intestine, unspecified site,
with open wound into cavity.
863.31................ Injury to duodenum with open wound into cavity.
863.39................ Other injury to small intestine with open wound
into cavity.
863.50................ Injury to colon, unspecified site, with open
wound into cavity.
863.51................ Injury to ascending (right) colon with open
wound into cavity.
863.52................ Injury to transverse colon with open wound into
cavity.
863.53................ Injury to descending (left) colon with open
wound into cavity.
863.54................ Injury to sigmoid colon with open wound into
cavity.
863.55................ Injury to rectum with open wound into cavity.
863.59................ Other injury to colon and rectum with open wound
into cavity.
863.90................ Injury to gastrointestinal tract, unspecified
site, with open wound into cavity.
863.95................ Injury to appendix with open wound into cavity.
863.99................ Injury to other and unspecified gastrointestinal
sites with open wound into cavity.
868.13................ Injury to peritoneum with open wound into
cavity.
947.3................. Burn of gastrointestinal tract.
------------------------------------------------------------------------

New DRG 570 will have an operating room procedure code from current
CMS DRG 148 and a principal diagnosis from MDC 6, except for a
principal or secondary diagnosis listed above in the Major
Gastrointestinal Diagnosis list and will have a Complication/
Comorbidity.
We also are deleting DRG 154 and creating two new DRGs as follows:
DRG 567 (Stomach, Esophageal & Duodenal Procedures Age >17
with Complication/Comorbidity with Major Gastrointestinal Diagnosis)
DRG 568 (Stomach, Esophageal & Duodenal Procedures Age >17
with Complication/Comorbidity without Major Gastrointestinal Diagnosis)
New DRG 567 will have a principal diagnosis from MDC 6 with either
a principal or secondary diagnosis of a Major Gastrointestinal
Diagnosis (see list of Major Gastrointestinal Diagnoses listed above).
New DRG 567 will also have an operating room procedure from current CMS
DRG 154 and a CC. New DRG 568 will have a principal diagnosis from MDC
6, except it will not have a principal or secondary diagnosis from the
list of Major Gastrointestinal Diagnoses. It will also have an
operating room procedure from current CMS DRG 154 and a CC.
d. MDC 11 (Diseases and Disorders of the Kidney and Urinary Tract):
Major Bladder Procedures
Under our proposed CS DRGs, cases with a major bladder procedure
were found to have a higher level of severity than were cases with
other types of bladder procedures. Therfore, cases with a major bladder
procedure are assigned to a single DRG in the CS DRGs. The procedures
classified as a major bladder procedure are as follows:

Major Bladder Procedures
------------------------------------------------------------------------
Procedure code Description
------------------------------------------------------------------------
57.6.................. Partial cystectomy.
57.71................. Radical cystectomy.
57.79................. Other total cystectomy.
57.83................. Repair of fistula involving bladder and
intestine.
57.84................. Repair of other fistula of bladder.
57.85................. Cystourethroplasty and plastic repair of bladder
neck.
57.86................. Repair of bladder exstrophy.
57.87................. Reconstruction of urinary bladder.
57.88................. Other anastomosis of bladder.
57.89................. Other repair of bladder.
------------------------------------------------------------------------

[[Page 47936]]

The CMS DRGs assign these cases to one of the five following DRGs:
DRG 303 (Kidney, Ureter & Major Bladder Procedures for
Neoplasm).
DRG 304 (Kidney, Ureter & Major Bladder Procedures for
Non-Neoplasm with CC)
DRG 305 (Kidney, Ureter & Major Bladder Procedures for
Non-Neoplasm without CC)
DRG 308 (Minor Bladder Procedures with CC)
DRG 309 (Minor Bladder Procedures without CC)
Our medical advisors support creating a new DRG for major bladder
procedures because they represent cases with higher levels of severity,
are clinically different, and use greater resources. We examined data
on cases containing a major bladder procedure and determined they
represent cases with a higher level of severity and utilize
significantly more resources than other cases within the DRGs where
they are currently assigned. Cases with a major bladder procedure had
average charges of $53,434 compared to $14,976 to $38,119 for other
cases within the five DRGs where the patient did not have a major
bladder procedure. The tables below illustrate these data.

------------------------------------------------------------------------
Average
DRGs Number of length of Average
cases stay charges
------------------------------------------------------------------------
DRG 303....................... 23,328 7.28 $37,510.79
DRG 303 Without Major Bladder 18,909 6.33 32,867.55
Procedures...................
DRG 304....................... 13,257 8.35 38,800.38
DRG 304 Without Major Bladder 12,835 8.19 38,119.74
Procedures...................
DRG 305....................... 2,827 3.10 19,528.35
DRG 305 Without Major Bladder 2,776 3.02 19,295.59
Procedures...................
DRG 308....................... 6,358 6.15 27,982.54
DRG 308 Without Major Bladder 5,180 5.30 24,017.30
Procedures...................
DRG 309....................... 3,104 1.98 15,446.61
DRG 309 Without Major Bladder 2,820 1.72 14,976.79
Procedures...................
------------------------------------------------------------------------

Major Bladder Procedures
------------------------------------------------------------------------
Average length Average
Number of cases of stay charges
------------------------------------------------------------------------
6,354................................... 10.8 $53,434.93
------------------------------------------------------------------------

Therefore, we are moving these procedures out of their current DRGs
(DRG 303, 304, 305, 308, and 309) and into new DRG 573 (Major Bladder
Procedures). A summary of these changes is as follows:
We are renaming the following three DRGs:
DRG 303--`` Kidney and Ureter Procedures for Neoplasm''
DRG 304--`` Kidney and Ureter Procedures for Non-Neoplasm
With CC''
DRG 305--`` Kidney and Ureter Procedures for Non-Neoplasm
Without CC''
We are removing the following procedure codes from DRG 303-305,
308, and 309 and assigning them to new DRG 573. New DRG 573 will
contain the following procedure codes.

e. MDC 16 (Diseases and Disorders of the Blood and Blood Forming Organs
and Immunological Disorders): Major Hematological and Immunological
Diagnoses
Under our proposed CS DRGs, major hematological and immunological
diagnoses were found to identify cases with a higher level of severity.
They are assigned to a single DRG under the CS DRGs. The diagnoses
considered to be major hematological and immunological diagnoses
include the following conditions:

[[Page 47937]]

283.10................ Non-autoimmune hemolytic anemia, unspecified.
283.19................ Other non-autoimmune hemolytic anemias.
283.2................. Hemoglobinuria due to hemolysis from external
causes.
283.9................. Acquired hemolytic anemia, unspecified.
284.8................. Other specified aplastic anemias.
284.9................. Aplastic anemia, unspecified.
288.1................. Functional disorders of polymorphonuclear
neutrophils.
288.2................. Genetic anomalies of leukocytes.
996.85................ Complications of transplanted bone marrow.
------------------------------------------------------------------------

These conditions are currently assigned to the following four CMS
DRGs:
DRG 395 (Red Blood Cell Disorders Age >17)
DRG 396 (Red Blood Cell Disorders Age 0-17)
DRG 398 (Reticuloendothelial & Immunity Disorders with CC)
DRG 399 (Reticuloendothelial & Immunity Disorders without
CC)
Our medical advisors agree that major hematological and
immunological disorders are found in patients with significantly
greater levels of severity and are different from other conditions in
the four DRGs where they are assigned. Our data analysis shows that
major hematological and immunological diseases identify patients with
significantly greater levels of severity. They are more resource
intensive than other conditions assigned to these four DRGs. Cases with
major hematological and immunological conditions had average charges of
$21,276 compared to $11,066 to $18,791 for the other conditions where
these cases are currently assigned. Most of the nonhematological and
immunological cases (96,557) are assigned to DRG 395 and have an
average charge of $12,977.

DRGs 395, 396, 398, and 399
------------------------------------------------------------------------
Average
DRG Number of length of Average
cases stay charges
------------------------------------------------------------------------
DRG 395.......................... 109,874 4.28 $14,078.78
DRG 395 Without Major 96,557 4.10 12,977.20
Hematological Diagnosis
excluding Sickle Cell Crisis &
Coagulation Disorders...........
DRG 396.......................... 19 2.95 10,406.05
DRG 396 Without Major 17 3.06 11,066.94
Hematological Diagnosis
excluding Sickle Cell Crisis &
Coagulation Disorders...........
DRG 398.......................... 17,608 5.71 19,902.21
DRG 398 Without Major 6,381 3.28 18,791.32
Hematological Diagnosis
excluding Sickle Cell Crisis &
Coagulation Disorders...........
DRG 399.......................... 1,552 3.38 11,277.35
DRG 399 Without Major 1,011 3.28 11,207.22
Hematological Diagnosis
excluding Sickle Cell Crisis &
Coagulation Disorders...........
------------------------------------------------------------------------

Major Hematological Diagnosis excluding Sickle Cell Crisis & Coagulation
Disorders
------------------------------------------------------------------------
Average length Average
Number of cases of stay charges
------------------------------------------------------------------------
25,087.................................. 5.6 $21,276.25
------------------------------------------------------------------------

We are creating a new CMS DRG 574 (Major Hematologic/Immunologic
Diagnoses Except Sickle Cell Crisis and Coagulation Disorders). We are
removing the codes mentioned in the table above from DRGs 395, 396,
398, and 399 and assigning them to new DRG 574. We also are assigning
the new diagnosis codes indicated by an asterisk (*) to new DRG 574.
These new codes also capture major hematological and immunological
conditions and were created to provide more detail than the current
codes in this section of ICD-9-CM. The DRG assignments for these new
codes are also shown in Table 6A of the Addendum to this final rule.

------------------------------------------------------------------------
Major hematological and immunological code
Diagnosis code titles
------------------------------------------------------------------------
279.11................ Digeorge's syndrome.
279.12................ Wiskott-aldrich syndrome.
279.13................ Nezelof's syndrome.
279.19................ Other deficiency of cell-mediated immunity.
279.2................. Combined immunity deficiency.
283.0................. Autoimmune hemolytic anemias.
283.10................ Non-autoimmune hemolytic anemia, unspecified.
283.19................ Other non-autoimmune hemolytic anemias.
283.2................. Hemoglobinuria due to hemolysis from external
causes.
283.9................. Acquired hemolytic anemia, unspecified.
284.01 *.............. Constitutional red blood cell aplasia.
284.09 *.............. Other constitutional aplastic anemia.
284.8................. Other specified aplastic anemias.
284.9................. Aplastic anemia, unspecified.
288.00 *.............. Neutropenia, unspecified.

[[Page 47938]]

288.01 *.............. Congenital neutropenia.
288.02 *.............. Cyclic neutropenia.
288.03 *.............. Drug induced neutropenia.
288.04 *.............. Neutropenia due to infection.
288.09 *.............. Other neutropenia.
288.1................. Functional disorders of polymorphonuclear
neutrophils.
288.2................. Genetic anomalies of leukocytes.
996.85................ Complications of transplanted bone marrow.
------------------------------------------------------------------------

f. MDC 18 (Infections and Parasitic Diseases (Systemic or Unspecified
Sites)): O.R. Procedure for Patients With Infectious and Parasitic
Diseases
Under the APR DRG system, cases in DRG 415 (O.R. Procedure for
Infectious and Parasitic Diseases) are subdivided based on the presence
or absence of one of the following principal diagnosis codes, which we
are referring to as Postoperative or Post-Traumatic Infection:
958.3, Posttraumatic wound infection, not elsewhere
classified
998.51, Infected postoperative seroma
998.59, Other postoperative infection
999.3, Infection complicating medical care, not elsewhere
classified
The APR DRG system found cases with one of the above infection
codes to represent a higher level of severity. Our medical advisors
examined cases in the current CMS DRG system in DRG 415 and found that
the presence of one of these infection codes as a principal diagnosis
led to significantly higher levels of severity. Charge data also
support this conclusion. The following table illustrates our findings.

----------------------------------------------------------------------------------------------------------------
Average
DRG Redefinition of DRG 415 Number of length of Average
cases stay charges
----------------------------------------------------------------------------------------------------------------
415.................... O.R. Procedure for Infectious & Parasitic 52,458 14.03 $63,211.99
Diseases.
A...................... O.R. Procedure with Principal Diagnosis 33,077 15.90 74,964.28
Except Postoperative or Post-Traumatic
Infection.
B...................... O.R. Procedure with Principal Diagnosis of 19,381 10.8 43,154.68
Postoperative or Post-Traumatic Infection.
----------------------------------------------------------------------------------------------------------------

As can be seen from the above table, cases in DRG 415 with a
principal diagnosis except for postoperative or post-traumatic
infection have average charges of $74,964.28. Cases with a principal
diagnosis of postoperative or post[pi]traumatic infection have average
charges of $43,154.68, or $31,809.60 less. Therefore, cases without one
of the four infection codes, 958.3, 998.51, 998.59, and 999.3, have
significantly higher severity levels than do cases that contain one of
the four infection codes.
Accordingly, we are deleting DRG 415 and divide the cases into two
new DRGs as follows:
DRG 578, Infectious and Parasitic Diseases with O.R.
Procedure
DRG 579, Postoperative or Post-traumatic Infection with
O.R. Procedure
Cases will be assigned to new DRG 578 if they were previously in
DRG 415, but do not contain one of the following principal diagnosis
codes:
958.3, Posttraumatic wound infection, not elsewhere
classified
998.51, Infected postoperative seroma
998.59, Other postoperative infection
999.3, Infection complicating medical care, not elsewhere
classified
Cases will be assigned to DRG 579 if they were previously assigned
to DRG 415 and contain one of the four principal diagnosis codes listed
above.
g. Severe Sepsis
Comment: As an alternative to the proposed CS DRGs, commenters
recommended a new DRG to identify patients with severe sepsis
associated with respiratory failure requiring mechanical ventilation.
One commenter suggested using an approach to better recognize severity
of illness that is similar to the change CMS implemented in the FYa2006
final rule for major cardiovascular conditions (MCVs). This approach
involved examining the MCVs which could be present as either a
principal or secondary diagnosis leading to greater severity of illness
and resource consumption. Another option suggested by two commenters
involved modifying DRGa416 (Septicemia Age >17) so that it would be
split based on mechanical ventilation greater than 96 hours (code
96.72). The commenter stated that patients on mechanical ventilation
for greater than 96 hours have a greater severity of illness than do
those who are not on mechanical ventilation for 96 or more hours.
Another commenter recommended considering mechanical ventilation as a
pre-MDC DRG on the basis of the mechanical ventilation greater than 96
hours procedure code (96.72) to better recognize patients with a
greater severity level. This commenter also provided an option to add
systemic infections (038.x) as an acceptable principal diagnosis for
DRG 475 when reported in conjunction with mechanical ventilation or
tracheostomy. One commenter maintained that the clinical reason to
address a new DRG for severe sepsis is related to proper recognition
and treatment for this group of patients with a greater degree of
severity. This commenter stated clinicians are getting better at
understanding the importance of early recognition and treatment. As
sepsis presents with organ dysfunction, treatments must be prompt or
mortality rapidly increases according to the commenter.
Response: We analyzed data for patients in DRG 416 and 417 who are
on mechanical ventilation for 96 or more hours. The following table
shows our findings.

[[Page 47939]]

------------------------------------------------------------------------
Average
DRGs Number of length of Average
cases stay charges
------------------------------------------------------------------------
DRG 416....................... 272,603 7.45 $28,344.81
DRG 416 With Mechanical 10.369 15.55 94,994.49
Ventilation 96 Hours (96.72).
DRG 416 Without Mechanical 262,234 7.13 25,709.42
Ventilation 96 + Hours.......
DRG 417....................... 31 6.35 27,131.58
DRG 417 With Mechanical 0 0 0
Ventilation 96 + Hours.......
DRG 417 Without Mechanical 31 6.35 27,131.58
Ventilation 96 + Hours.......
------------------------------------------------------------------------

The data clearly show that DRG 416 septicemia patients who are on
mechanical ventilation for 96 or more hours have a significantly
greater severity of illness level and use greater resources than do
other patients in DRG 416. Those patients on mechanical ventilation for
96 or more hours had average charges of $94,994 compared to $25,709 for
other patients in DRG 416. We found no cases in DRG 417 with patients
who reported mechanical ventilation for 96 or more hours. Therefore, we
agree with the commenters that patients in DRG 416 who are on long term
mechanical ventilation of 96 or more hours have greater severity of
illness and use significantly greater resources. These patients should
be assigned to a separate DRG to better reflect their higher severity
level. Because we have no data on patients in DRG 417, we are not
modifying that DRG at this time. Because the data on DRG 416 are
compelling, we are deleting DRG 416 and splitting these cases into two
new DRGs based on whether or not the patient is on mechanical
ventilation for 96 or more hours. These two new DRGs are as follows:
DRG 575 (Septicemia with Mechanical Ventilation 96 + Hours
Age >17)
DRG 576 (Septicemia without Mechanical Ventilation 96 +
Hours Age >17)
Cases will be assigned to DRG 575 when they have a principal
diagnosis from current DRG 416 and code 96.72 (Continuous mechanical
ventilation for 96 consecutive hours or more). Cases will be assigned
to DRG 576 when they have a principal diagnosis from current DRG 416
and do not have code 96.72.
We note that this DRG split is similar to the change we are making
in MDC 4, for DRG 475 which was discussed earlier. The creation of
these two new DRGs is distinct from the request to create a separate
DRG for severe sepsis, which is discussed in section II.D.7. of this
final rule.

D. Changes to Specific DRG Classifications

1. Pre-MDCs
a. Heart Transplant or Implant of Heart Assist System: Addition of
Procedure to DRG 103
Based on public comments, we are assigning an additional procedure
code to DRG 103 (Heart Transplant or Implant of Heart Assist System)
under the pre-MDCs. In the FY 2006 IPPS final rule (70 FR 47297), we
addressed suggestions concerning the placement of codes for external
heart assist systems in DRG 103. Although we found that charges
associated with code 37.65 (Implant of external heart assist system)
were more than $100,000 lower than the average charges for all cases in
DRG 103, we found that there was a subgroup of patients who were
comparable in resource use and length of stay to other cases included
in DRG 103. Those patients received both the external heart assist
device (code 37.65) and later had the device removed (code 37.64,
Removal of heart assist system) after a lengthy period of rest and
recovery of their native hearts. We note that commenters provided
external data indicating that survival rates are improving for patients
receiving more advanced versions of these devices. In addition,
commenters provided information indicating that longer periods of
support with the external heart assist device are improving patients'
survival chances and opportunity to be discharged with their native
heart. These data show a 50-percent survival rate with an average total
length of stay of 43 days for all AMI heart recovery patients. On
average, a surviving patient will receive 31 days of average support
time followed by an additional 38 days in the hospital after the device
is removed. Based on information considered from a later year than our
MedPAR data, it is clear that patients weaned from the external heart
assist system have longer lengths of stay and are very different from
the average patients having this procedure that were in our FY 2004
data.
Given the newness of this procedure and the latest generation of
this device, the Medicare charge data included a limited number of
patients having the device implanted and removed. However, the Medicare
charge data did support that patients receiving both an implant and
removal of an external heart assist system in a single hospital stay
had an average length of stay exceeding 50 days and average charges of
$378,000 that are more comparable to patients in DRG 103 than DRG 525
(Other Heart Assist System Implant). Accordingly, in FY 2006, we
revised DRG 103 so that both implantation and removal of an external
heart assist device in the same hospitalization would group to DRG 103.
However, we did not consider those cases where an external heart
assist system is switched during a hospitalization, and replaced with
another external heart assist system, that is subsequently removed. The
ICD-9-CM coding structure specifies that the replacement of the system
be coded to 37.63 (Repair of heart assist system), and not to 37.65.
These cases are assigned to DRG 525 not DRG 103 even though the cases
are comparable in resources expended, length of stay, etc., to other
patients where the device is implanted and explanted during the same
hospital stay.
Based on public comments, we believe that DRG 103 should be revised
to take this situation into account. Therefore, we are reconfiguring
DRG 103 in the following manner: Those patients who have both the
replacement of an external heart assist system (code 37.63) and the
explantation of that system (code 37.64) prior to the hospital
discharge will be assigned to DRG 103.
By making this change, Medicare will be making higher payments for
patients who receive both a replacement and an explant of an external
heart assist system during a single hospital stay. Our intent in making
this change is to recognize the higher costs of patients who have a
longer length of stay and are discharged alive with their native heart.
Cases in which a heart transplant also occurs during the same
hospitalization

[[Page 47940]]

episode will continue to be assigned to DRG 103.
b. Pancreas Transplants
On July 1, 1999, we issued coverage policy that specified that
pancreas transplants were only covered when performed simultaneously
with or after a Medicare covered kidney transplant. A noncoverage
policy for pancreas transplant remained in effect for patients who had
not experienced end stage renal failure secondary to diabetes. On July
29, 2005, we opened a national coverage determination (NCD) to
determine whether pancreas transplant alone, that is, without a kidney
transplant, is a reasonable and necessary service for Medicare
beneficiaries. On April 26, 2006, we published the NCD for pancreas
transplants on our Web site at: http://www.cms.hhs.gov/mcd/viewncd.asp?ncd_ id=260.3&-- version=3& basket=ncd%3A260%2E3% 3A3%3
APancreas+Transplants. The NCD specifies the limited circumstances
where the evidence is adequate to conclude that pancreas transplant
alone is reasonable and necessary for Medicare beneficiaries.
Medicare coverage of pancreas transplants alone is limited to
transplants in those facilities that are Medicare-approved for kidney
transplantation. A listing of approved transplant centers can be found
at: http://www.cms.hhs.gov/ESRDGeneralInformation/02_Data.asp#TopOfPage. The CMS NCD includes several criteria for the coverage
of pancreas transplants alone, including having a diagnosis of Type I
diabetes. (We refer readers to section 260.3 of the Medicare National
Coverage Manual for the entire language of the NCD.)
Because we had issued a proposed NCD and a final NCD was not
expected to be completed until late April 2006 (after completion of the
proposed rule), we used the FY 2007 IPPS proposed rule to indicate the
coding changes that we would make to DRG 513 (Pancreas Transplant) in
FY 2007 if Medicare's final decision memorandum would have continued
the program's national noncoverage of pancreas transplants (71 FR
24030). In addition, we also indicated the conforming changes that we
would make to the MCE ``NonCovered Procedure'' edit if Medicare
coverage was established for pancreas transplants alone. That
discussion was included in section II.D.6. of the preamble of the
proposed rule (71 FR 24039), which described proposed changes to the
MCE.
Because the April 2006 Medicare final decision memorandum stated
that the performance of pancreas transplants alone is reasonable and
necessary for Medicare beneficiaries in limited circumstances, the
logic for the determination of patient case assignment to DRG 513 in
the FY 2006 GROUPER program needs to be modified to remove the
requirement that patients also have kidney disease. Therefore, because
the NCD was finalized, we are modifying DRG 513 to consist of the
following logic: List A (the diabetes codes) of the required principal
or secondary diagnosis codes remains the same, as does the required
operating room procedures (codes 52.80 (Pancreatic transplant NOS), and
52.82, (Homotransplant of pancreas)). List B is removed from the logic;
the following codes will no longer be required as a principal or
secondary diagnosis:
403.01, Hypertensive kidney disease, malignant, with
chronic kidney disease
403.11, Hypertensive kidney disease, benign, with chronic
kidney disease
403.91, Hypertensive kidney disease, unspecified, with
chronic kidney disease
404.02, Hypertensive heart and kidney disease, malignant,
with chronic kidney disease
404.03, Hypertensive heart and kidney disease, malignant,
with heart failure and chronic kidney disease
404.12, Hypertensive heart and kidney disease, benign,
with chronic kidney disease
404.13, Hypertensive heart and kidney disease, benign,
with heart failure and chronic kidney disease
404.92, Hypertensive heart and kidney disease,
unspecified, with chronic kidney disease
404.93, Hypertensive heart and kidney disease,
unspecified, with heart failure and chronic kidney disease
585.1, Chronic kidney disease, Stage I
585.2, Chronic kidney disease, Stage II (mild)
585.3, Chronic kidney disease, Stage III (moderate)
585.4, Chronic kidney disease, Stage IV (severe)
585.5, Chronic kidney disease, Stage V
585.6, End stage renal disease
585.9, Chronic kidney disease, unspecified
V42.0, Organ or tissue replaced by transplant, kidney
V43.89, Organ or tissue replaced by other means, other
organ or tissue, other
We note that DRG 513 remains in the pre-MDC hierarchy.
Comment: Five commenters supported the proposed coding changes to
DRG 513 and the MCE.
Response: We appreciate the support of the commenters. Accordingly,
as the NCD for pancreas transplants alone was approved, in this final
rule, we are adopting the changes as described above to DRG 513 and the
MCE logic.
2. MDC 1 (Diseases and Disorders of the Nervous System)
a. Implantation of Intracranial Neurostimulator System for Deep Brain
Stimulation (DBS)
Deep-brain stimulation (DBS) is designed to deliver electrical
stimulation to the subthalamic nucleus or internal globus pallidus to
ameliorate symptoms caused by abnormal neurotransmitter levels that
lead to abnormal cell-to-cell electrical impulses in Parkinson's
disease and essential tremor. DBS implants for essential tremor are
unilateral, with neurostimulation leads on one side of the brain. DBS
implants for Parkinson's disease are bilateral, requiring implantation
of neurostimulation leads in both the left and right sides of the
brain.
The implantation of a full DBS system requires two types of
procedures. First, surgeons implant leads containing electrodes into
the targeted sections of the brain where neurostimulation therapy is to
be delivered. Second, a neurostimulator pulse generator is implanted in
the pectoral region and extensions from the neurostimulator pulse
generator are then tunneled under the skin along the neck and connected
with the proximal ends of the leads implanted in the brain. Hospitals
stage the two procedures required for a full-system DBS implant.
In FY 2005, to better account for these two types of procedures, we
revised procedure code 02.93 (Implantation or replacement of
intracranial neurostimulator lead(s)) for the lead placement and
created three new procedures codes for the pulse generator: 86.94
(Insertion or replacement of single array neurostimulator pulse
generator); 86.95 (Insertion or replacement of dual array
neurostimulator pulse generator); and 86.96 (Insertion or replacement
of other neurostimulator pulse generator). We published the new
procedure codes and revised procedure code titles in Tables 6B and 6F
of the FY 2005 IPPS final rule (69 FR 49627 and 49641).
In FY 2006, we made further refinements to the pulse generator
codes to identify rechargeable pulse generators. We published the new
procedure codes and revised procedure code titles in Tables 6B and 6F
of the FY 2006 IPPS final rule (70 FR 47637

[[Page 47941]]

and 47639). The current list of pulse generators codes are:
86.94 (Insertion or replacement of single array
neurostimulator pulse generator, not specified as rechargeable);
86.95 (Insertion or replacement of dual array
neurostimulator pulse generator, not specified as rechargeable);
86.96 (Insertion or replacement of other neurostimulator
pulse generator);
86.97 (Insertion or replacement of single array
neurostimulator rechargeable generator); and
86.98 (Insertion or replacement of dual array
neurostimulator rechargeable generator).
Kinetra[supreg] is an implantable dual array neurostimulator pulse
generator that is approved for a new technology add-on payment through
FYA2006. For more information about the new technology add-on payment,
please refer to section II.G.3.a. of this preamble.
Medtronic, the manufacturer of Kinetra[supreg], argues that the new
technology add-on payment provision is designed to recognize the higher
costs of new medical innovations for the initial period the technology
is available on the market, and until the associated costs and charges
related to the technology are available in the MedPAR database and can
be used to recalibrate the DRG weights. Medtronic also argues that,
once a technology is no longer eligible for new technology add-on
payments, the new technology add-on payment provision is designed to
support the reclassification of the technology to other clinically
coherent DRGs with comparable resource costs.
With the conclusion of the new technology add-on payment, Medtronic
is concerned that Kinetra[supreg] will be inadequately paid in DRG 1
(Craniotomy Age >17 With CC) or DRG 2 (Craniotomy Age >17 Without CC)
under MDC 1. Medtronic recommended that CMS reassign the full-system
Kinetra[supreg] implants to DRG 543 (Craniotomy with Implant of Chemo
Agent or Acute Complex CNS Principal Diagnosis) under MDC 1. To
accommodate this recommendation, procedure codes 02.93 and 86.95 would
have to be reassigned to DRG 543 and the title for DRG 543 would have
to be revised to ``Craniotomy with Implantation of Major Device or
Acute Complex CNS Principal Diagnosis.'' Medtronic argued that DRG 543
would be a ``clinically-consistent DRG that more appropriately reflects
the resource utilization associated with full-system [deep brain
stimulation] procedures.'' Medtronic also emphasized that its proposal
would only apply to full-system Kinetra[supreg] implants when both the
leads and generators are implanted during a single inpatient stay and
procedure codes 02.93 and 86.95 both appear on the claim. Medtronic
believes the current DRG assignment is appropriate for partial system
implants.
Medtronic provided an analysis of FY 2004 MedPAR data. Procedure
code 86.95 was not created until FY 2005 so Medtronic used procedure
codes 02.93 and 86.09 (Other incision of skin and subcutaneous tissue)
to identify the full system. It identified 193 cases assigned to DRG 1
with average charges of approximately $69,155, and 532 cases assigned
to DRG 2 with average charges of approximately $56,113.
In the FY 2007 IPPS proposed rule we indicated that we have
reviewed the latest data for the full-system DBS implants assigned to
DRG 1 or DRG 2 in the FY 2005 MedPAR file. We identified cases with
procedure codes 02.93 and 86.95 for full-system dual array cases. We
also identified cases with reported codes 02.93 and 86.96 for those
full-system cases where the type of pulse generator was not specified.
The following table displays our results:

------------------------------------------------------------------------
Average
DRG Number of length of Average
cases stay charges
------------------------------------------------------------------------
DRG 1--All Cases.............. 23,037 9.61 $55,494
DRG 1--Cases with 02.93 and 51 5.18 73,020
86.95 (Kinetra[supreg])......
DRG 1--Cases with 02.93 and 101 4.86 53,356
86.96 (Unspecified)..........
DRG 2--All Cases.............. 9,707 4.41 32,791
DRG 2--Cases with 02.93 and 146 2.40 59,414
86.95 (Kinetra[supreg])......
DRG 2--Cases with 02.93 and 249 2.12 47,047
86.96 (Unspecified)..........
DRG 543--All cases............ 5,192 11.71 71,138
------------------------------------------------------------------------

These data showed that approximately one-quarter of the full-system
dual array neurostimulator pulse generator cases are assigned to DRG 1
and approximately three-quarters of these cases are assigned to DRG 2.
In both DRGs, the average length of stay was shorter for the full-
system array neurostimulator pulse generator cases than for all other
cases. However, the average charges for the full-system dual array
neurostimulator pulse generator cases are approximately $18,000 and
$27,000 higher than the average charges for DRGs 1 and 2, respectively.
The average charges for these cases in DRG 1 are comparable to those
for DRG 543. However, the more commonly occurring cases in DRG 2 have
average charges that are less than those in DRG 543 by nearly $12,000.
We reviewed all of the procedures that will result in a case being
assigned to DRGs 1 and 2. Unlike the full-system DBS implants, we
believe for most of the cases assigned to these DRGs, there will be no
device cost to the hospital. For this reason, we believe the higher
average charges and lower length of stay for cases involving full-
system dual array neurostimulator pulse generators are likely accounted
for by the cost of the device. While it is possible that the cost of
the device itself will make the full-system DBS implants more expensive
than other cases in the DRG, the hospital's charge markup may also
explain the higher charges but lower average length of stay. As
indicated in section II.G.3.a. of this final rule, the national average
CCR for medical equipment and supplies is approximately 34 percent.
Thus, the actual cost to the hospital of the case including the full-
system dual array neurostimulator pulse generator may be much lower
than the charges would suggest.
With respect to whether the cost of the technology itself, absent a
charge markup, makes the case more expensive, in the FY 2007 IPPS
proposed rule, we stated that we intended to address this issue as we
make further refinements to the DRG system to address severity of
illness as discussed in section II.C. of this preamble.
Comment: Several commenters opposed CMS' proposed decision to
retain the current assignment of implantable dual array neurostimulator
pulse generator cases in DRGs 1 and 2. Several commenters stated that
CMS should recognize the higher resources associated with this
technology and reassign implantable dual array neurostimulator pulse
generator cases to DRG 543. Two commenters disagreed

[[Page 47942]]

with CMS' statements that markups associated with Kinetra[supreg] may
overstate the total charges of the implant procedure. Medtronic
submitted information on charge compression in which the company
contends that it conclusively finds the hospital charge markups for
implantable devices are in fact significantly lower than for other,
lower cost supplies and equipment. Medtronic and one other commenter
argued that the total charges found in the FY 2005 MedPAR data
associated with implantable dual array neurostimulator pulse generator
procedures may be understated relative to other procedures in DRG 1,
DRG 2 and DRG 543 and that reassignment of this technology to DRG 543
is fully warranted. The commenters stated that the implementation of
the CS DRGs should be deferred to at least FY 2008 and not be a factor
in CMS' decision to make DRG reassignments this year.
Response: With regard to the issue of charge compression, we are
studying this issue in our effort to improve payment accuracy in the
IPPS. The average charges for the 51 cases in DRG 1 where the patient
received a dual array neurostimulator are $17,426 or 31 percent higher
than the rest of the cases in DRG 1. The average charges are comparable
to those for DRG 543 ($73,020 for dual array neurostimulator cases and
$71,138 for DRG 543).
The average charges for the 146 cases in DRG 2 are $26,623 or 81
percent higher than the rest of the cases in DRG 2 and only $12,000
less than the average charges for DRG 543. Based on these data, we
believe that the dual array neurostimulator cases will be more
accurately paid in DRG 543 than DRGs 1 and 2. We will be implementing
this change to the DRG assignment for the full-system dual array
neurostimulator cases for FY 2007. Implantable dual array
neurostimulator pulse generator procedure cases reported with ICD-9-CM
procedure codes 02.93 and 86.95 will be reassigned to DRG 543. We are
changing the DRG title for DRG 543 to ``Craniotomy With Major Device
Implant or Acute Complex CNS Principal Diagnosis.''
b. Carotid Artery Stents
Background: Stroke is the third leading cause of death in the
United States and the leading cause of serious, long-term disability.
Approximately 70 percent of all strokes occur in people age 65 and
older. The carotid artery, located in the neck, is the principal artery
supplying the head and neck with blood. Accumulation of plaque in the
carotid artery can lead to stroke either by decreasing the blood flow
to the brain or by the plaque breaking free and lodging in the brain or
other arteries leading to the head. The percutaneous transluminal
angioplasty (PTA) procedure involves inflating a balloon-like device in
the narrowed section of the carotid artery to reopen the vessel. A
carotid stent is then deployed in the artery to prevent the vessel from
closing or restenosing. A distal filter device (embolic protection
device) may also be present, which is intended to prevent pieces of
plaque from entering the bloodstream.
Effective July 1, 2001, Medicare covered PTA of the carotid artery
concurrent with carotid stent placement when furnished in accordance
with the FDA-approved protocols governing Category B Investigational
Device Exemption (IDE) clinical trials. PTA of the carotid artery, when
provided solely for the purpose of carotid artery dilation concurrent
with carotid stent placement, was considered to be a reasonable and
necessary service only when provided in the context of such clinical
trials and, therefore, was considered a covered service for the
purposes of those trials. Performance of PTA in the carotid artery when
used to treat obstructive lesions outside of approved protocols
governing Category B IDE clinical trials remained noncovered until the
release of the October 12, 2004 NCD for PTA of the carotid artery in
post-approval studies. This decision extended coverage of PTA in the
carotid artery concurrent with placement of an FDA-approved carotid
stent for an FDA-approved indication when furnished in accordance with
the FDA-approved protocols governing post-approval studies. On March
17, 2005, CMS released an NCD that extended coverage to patients at
high risk for carotid endarterectomy (CEA) who also have symptomatic
carotid artery stenosis >=70 percent. Procedures must be performed in
CMS-approved facilities and with FDA-approved carotid artery stent(s)
with distal embolic protection. (Section 20.7 of the NCD manual which
discusses this decision may be viewed at the Web site: http://www.cms.hhs.gov/manuals/downloads/ncd103c1_Part1.pdf.
Placement of a carotid artery stent in patients who have had a
disabling stroke (modified Rankin scale >=3) is excluded from coverage.
We established codes for carotid artery stent procedures for use
with discharges occurring on or after October 1, 2004, for inpatients
who were enrolled in an FDA-approved clinical trial and who were using
on-label FDA-approved stents and embolic protection devices. These
codes are as follows:
00.61 (Percutaneous angioplasty or atherectomy of
precerebral (extracranial vessel(s)); and
00.63 (Percutaneous insertion of carotid artery stent(s)).
We assigned procedure code 00.61 to four MDCs and seven DRGs. The
most likely clinical scenario is that in which cases are assigned to
MDC 1 (Diseases and Disorders of the Nervous System) in DRGs 533
(Extracranial Procedures with CC) and 534 (Extracranial Procedures
without CC). Other DRG assignments can be found in Table 6B of the
Addendum to the FY 2005 IPPS final rule (69 FR 49624). Code 00.63 is
not considered a procedure code itself and should be used in
combination with code 00.61.
Based on the results of evaluation of PTA and carotid stents for
our FY 2006 final rule (70 FR 47300, August 12, 2005), we did not find
sufficient evidence to warrant a DRG change at that time.
We again reviewed the PTA and insertion of a carotid stent(s) for
the FY 2007 proposed rule, as manufacturer representatives suggested
that we assign all carotid stenting cases to DRG 533 only, bypassing
DRG 534. As we indicated in the FY 2007 IPPS proposed rule (71 FR
24032), we reviewed the FY 2005 MedPAR data on all cases in DRGs 533
and 534 and on those cases containing code 00.61 in combination with
00.63. The following table displays those results:

------------------------------------------------------------------------
Average
DRG Number of length of Average
cases stay (Days) charges
------------------------------------------------------------------------
DRG 533--All cases............ 44,031 3.65 $26,376
DRG 533 with codes 00.61 and 2,400 2.94 33,344
00.63 reported...............
DRG 533 with code 00.61 and 99 5.95 46,591
without 00.63................
DRG 534--All cases............ 40,381 1.72 17,196
DRG 534 with codes 00.61 and 2,056 1.52 25,000
00.63 reported...............

[[Page 47943]]

DRG 534 with code 00.61 and 55 2.31 27,895
without 00.63................
------------------------------------------------------------------------

We found that 5.5 and 5.1 percent of the cases in DRGs 533 and 534,
respectively, involved placement of a carotid artery stent. In DRG 533,
the average length of stay was 19.4 percent shorter for the carotid
stenting cases than for all other cases. In DRG 534, the average length
of stay was 11.6 percent shorter for the carotid stenting cases than
for all other cases. However, the average charges for the carotid stent
cases were higher by $6,968 in DRG 533 and $7,804 in DRG 534. We
reviewed all of the procedures that would result in a case being
assigned to DRGs 533 and 534. Unlike the carotid artery stent
placements, we believe that, for most of the other cases assigned to
these DRGs, there will be no device cost to the hospital. For this
reason, we believe the higher average charges and lower length of stay
for the cases involving carotid artery stents could be accounted for by
the cost of the device. We discussed the possibility that the cost of
the device itself makes the stent cases more expensive than other cases
in the DRG, and that the hospital's charge markup may also explain the
higher charges but lower average length of stay. We also suggested that
we intended to address this issue as we make further refinements to the
CS DRG system previously described. The use of a carotid stent or
stents may increase complexity and resource use even though the patient
is not necessarily more severely ill. We indicated that we believed
that the CS DRG system we proposed would need to be further refined to
assign cases based on complexity as well as severity to account for
technologies such as carotid stents that increase costs. For this
reason, we did not propose a change to the current DRG assignment for
these cases.
Comment: More than a dozen commenters addressed this topic. State
hospital associations, in particular, were unanimous in their
recommendation that all carotid stenting cases should immediately be
assigned only to DRG 533, bypassing DRG 534 entirely. The commenters
suggested this solution to increase payments to hospitals in order that
the higher costs associated with carotid stents are recognized within
the existing DRG system.
Response: We are opposed to this suggestion. The DRGs comprise a
native structure of the types of patients within each DRG category.
Further, this structure is based on an organizing principle. For
example, cases in DRGs 533 and 534 are organized on the principle of
surgical approach (extracranial procedures) as well as the presence or
absence of CCs. To ignore the structure of the DRG solely for the
purpose of increasing payment would set an unwelcome precedent for
defining all of the other DRGs in the system.
Comment: Several commenters mentioned that, while CMS suggested
that the higher average charges and lower lengths of stay for cases
involving carotid artery stents are likely accounted for by the cost of
the device, CMS provided no evidence to support this assertion.
Response: The average length of stay for patients in DRGs 533 and
534 with the placement of carotid stent(s) are 19.4 and 11.6 percent
shorter than the other patients assigned to DRGs 533 and 534,
respectively. Therefore, a long length of stay is not the reason for
the higher average charges. We based our assertion on the contribution
of the cost of the device to the total cost of the patients in these
DRGs compared to other cases in the DRG with longer lengths of stay. We
note that the next comment suggests that our analysis is correct that
the higher charges for the carotid artery stent cases relative to other
cases in the DRG are, in part, associated with higher supply costs.
Comment: One commenter suggested that CMS create a new pair of DRGs
with and without MCVs until the adequacy of payment under the severity
adjustment methodology is fully assessed. This commenter noted that,
while length of stay and operating room costs are lower for carotid
stenting, supply and radiology charges associated with the stent and
the angiography are higher, resulting in higher overall costs for
carotid stenting.
Response: While we recognize the creativity of this approach, we
note that the MCVs are applicable to cases in MDC 5 (Diseases and
Disorders of the Circulatory System), while DRGs 533 and 534 are in MDC
1 (Diseases and Disorders of the Nervous System). Such an approach for
MDC 1 might have merit, but we would want to evaluate the entire MDC
thoroughly before creating such a list of complicating diagnoses. We
will further consider this concept as we evaluate severity DRG systems
for adoption in FY 2008.
Comment: One commenter, while urging CMS to reconsider our decision
not to assign all carotid cases to DRG 533, noted that the current
National Coverage Determination on CAS [Carotid Artery Stenting] very
clearly states that only those patients who are at high risk for [open]
surgery due to the presence of a detailed list of complications or
comorbidities are eligible for carotid artery stenting. Therefore, by
CMS' own characterization, all patients undergoing carotid artery
stenting have complications and comorbidities and should be assigned to
DRG 533.
Response: This assumption is theoretically correct. However, the
detailed list of comorbidities or anatomical risk factors that are
required to support the surgeon's decision to perform carotid stenting
instead of a carotid endarterectomy is not the same as the CMS list of
CCs. For example, amaurosis fugax, code 362.34 (Transient arterial
occlusion) is recognized as a risk factor which would justify carotid
stenting, but is not recognized by the CMS GROUPER as a diagnosis
defined as a CC.
Comment: Several commenters suggested that CMS create two new DRGs
for the carotid stent cases.
Response: We note that the number of procedures has increased from
the data reported in the FY 2006 IPPS final rule (70 FR 47300), thus
indicating acceptance of this procedure by the medical community as a
main-stream surgical alternative. In FY 2006, as the specific codes for
carotid stenting had only been in use since October 1, 2004, we used
the existing codes 39.50 (Angioplasty or atherectomy of other
noncoronary vessel(s)) and 39.90 (Insertion of non-drug-eluting
peripheral vessel stent(s)), in combination with principal diagnosis
code 433.10 (Occlusion and stenosis of carotid artery, without mention
of cerebral infarction) as a proxy for the number of cases involved in
clinical trials. In DRG 533, we had 1,586 cases with the proxy codes
reported, and in DRG 534, there were 1,397 cases. In FY 2005, the
patients represented 3.5 percent and 3.3 percent of all cases in DRGs
533 and 534, respectively. That figure has now climbed to 2,400 cases

[[Page 47944]]

and 2,056 cases, and 5.5 percent and 5.1 percent, respectively.
In addition, the difference in the average charges are 26 percent
higher for carotid artery stent cases in DRG 533 than for the average
charges in all cases in that DRG, and 45 percent higher using the same
parameters for DRG 534. We believe these data are compelling enough to
warrant creation of a new DRG.
Accordingly, we are creating DRG 583 (Carotid Artery Stent
Procedure). This DRG will be located in MDC 1, and will be
hierarchically ordered above DRGs 533 and 534. DRG 583 will contain two
procedure codes. Code 00.61 will determine the DRG, and will be
combined with code 00.63. Both codes must be reported in order for
cases to be assigned to this DRG.
We are not splitting this DRG based on the presence or absence of a
CC as suggested by the commenters. One criterion for splitting a DRG
based on the presence or the absence of a CC is that it must have an
impact of at least $40 million. In this situation, the overall average
of the charges for all cases in DRGs 533 and 534 is $30,193. We then
subtracted the actual average charges for only the carotid stent cases
in both DRGs 533 and 534, and multiplied that figure by the actual
number of cases. For DRG 533 and DRG 534, we estimate an impact of
approximately $10 million each. Added together, the total impact would
be $20 million, falling short of our threshold of a $40 million impact
to create a CC/non-CC split. Therefore, we are not creating a CC/non-CC
split in the DRG for carotid artery stenting at this time.
We reiterate that coverage of the carotid artery stent procedure is
limited to patients at risk of developing a stroke due to narrowing or
stenosis of the carotid artery. Diagnosis code 433.10 (Occlusion and
stenosis of carotid artery without mention of cerebral infarction)
should be used to identify the site of the procedure in the carotid
artery. If it is necessary to identify bilateral occlusion or stenosis,
diagnosis code 433.30 (Occlusion and stenosis of multiple and bilateral
arteries without mention of cerebral infarction) may also be used.
These codes should be used together, as code 433.30 contains arterial
sites that are not currently covered for Medicare patients. Reporting
of code 433.30 alone will cause the case to fail the editing system at
the fiscal intermediary, and the case could be denied.
Inclusion of the fifth digit of ``1'' (with cerebral infarction)
with either 433.1x or 433.3x will cause the claim to be rejected.
3. MDC 5 (Diseases and Disorders of the Circulatory System)
a. Insertion of Epicardial Leads for Defibrillator Devices
As we indicated in the FY 2007 IPPS proposed rule (71 FR 24033), we
received a comment indicating that a change in coding advice for the
insertion of epicardial leads for CRT-D defibrillator devices affects
DRG assignment. The commenter noted that the Third Quarter 2005 issue
of the American Hospital Association's publication Coding Clinic for
ICD-9-CM instructs coders to assign code 37.74 (Insertion or
replacement of epicardial lead [electrode] into atrium) for pacemaker
or defibrillator leads inserted through use of a thoracotomy into the
epicardium. While the use of code 37.74 is standard coding practice for
pacemakers, the advice is new for defibrillators. This coding advice
was discussed at the ICD-9-CM Coordination and Maintenance Committee
meeting held on September 29 and 30, 2005. Participants at the
Committee meeting proposed modifications for the code category 37.7
(insertion, revision, replacement, and removal of pacemaker leads;
insertion of temporary pacemaker system; and revision of cardiac device
pocket). These modifications involved expanding the category so that
the codes for leads would no longer be restricted to pacemakers. This
change would guide coders to use code 37.74 for the insertion of
epicardial leads for both defibrillators and pacemakers for the ICD-9-
CM and will become effective on October 1, 2006.
The commenter indicated that this coding advice would restrict some
defibrillator cases from being assigned to the defibrillator DRGs.
Specifically, the commenter expressed concerns about the DRG logic for
the following DRGs:
DRG 515 (Cardiac Defibrillator Implant without Cardiac
Catheter)
DRG 535 (Cardiac Defibrillator Implant with Cardiac
Catheter with AMI/Heart Failure/Shock)
DRG 536 (Cardiac Defibrillator Implant with Cardiac
Catheter without AMI/Heart Failure/Shock)
Cases are assigned to one of these three DRGs when a total
defibrillator system, including both the device and one or more leads,
is implanted. The implant could be represented by the ICD-9-CM codes
for the total system, that is, code 00.51 (Implantation of cardiac
resynchronization defibrillator, total system [CRT-D]) or code 37.94
(Implantation or replacement of automatic cardioverter/defibrillator,
total system [AICD]). Cases can also be assigned to DRGs 515, 535, and
536 when a combination of a device and a lead code is reported. The
following combinations of defibrillator device and lead codes are
present in the current DRG logic:
00.52 (Implantation or replacement of transvenous lead
[electrode] into left ventricular coronary venous system) and 00.54
(Implantation or replacement of cardiac resynchronization
defibrillator, pulse generator device only [CRT-D])
37.95 (Implantation of automatic cardioverter/
defibrillator lead(s) only) and 00.54 (Implantation or replacement of
cardiac resynchronization defibrillator, pulse generator device only
[CRT-D])
37.95 (Implantation of automatic cardioverter/
defibrillator lead(s) only) and 37.96 (Implantation of automatic
cardioverter/defibrillator pulse generator only)
37.97 (Replacement of automatic cardioverter/defibrillator
lead(s) only) and 00.54 (Implantation or replacement of cardiac
resynchronization defibrillator, pulse generator device only [CRT-D])
37.97 (Replacement of automatic cardioverter/defibrillator
lead(s) only) and 37.98 (Replacement of automatic cardioverter/
defibrillator pulse generator only)
A DRG logic issue has arisen concerning the instruction to use code
37.74 for epicardial leads inserted with CRT-D defibrillators. The new
combination of a defibrillator device with an epicardial lead (code
37.74) is not included in DRGs 515, 535, and 536. The commenter
recommended that the following combinations be added to DRGs 515, 535,
and 536 so that all types of defibrillator device and lead combinations
would be included: code 37.74 and code 00.54; code 37.74 and code
37.96; and code 37.74 and code 37.98.
We agree that these three combinations should be added to the list
of combination codes included in DRGs 515, 535, and 536. This change
would result in all combinations of defibrillator devices and leads
being assigned to one of the defibrillator DRGs. Therefore, in the FY
2007 IPPS proposed rule, we proposed to add these three combinations to
the list of procedure combinations under DRGs 515, 535, and 536.
Comment: A number of commenters supported adding the new
combinations of defibrillator devices with the epicardial leads to DRGs
515, 535, and 536. One commenter stated that this change would bring
the DRGs into

[[Page 47945]]

alignment with the change in coding advice to assign code 37.74 in
conjunction with implantation of CRT-D defibrillators.
Response: We appreciate the support of commenters and agree that
this change would bring the DRGs into alignment with the change in
coding advice.
In this final rule, we are adding the following combinations of
device and lead codes to DRGs 515, 535, and 536: code 37.74 and code
00.54; code 37.74 and code 37.96; and code 37.74 and code 37.98.
b. Application of Major Cardiovascular Diagnoses (MCVs) List to
Defibrillator DRGs
In the FY 2006 IPPS final rule (70 FR 47289 and 47474 through
47479), we addressed a comment we had received in response to the FY
2006 proposed rule which noted that section 507(c) of Pub. L. 108-173
required MedPAC to conduct a study to determine how the DRG system
should be updated to better reflect the cost of delivering care in a
hospital setting. The commenter noted that MedPAC reported that the
``cardiac surgery DRGs have high relative profitability ratios.'' While
the commenter acknowledged that it may take time to conduct and
complete a thorough evaluation of the MedPAC payment recommendations
for all DRGs, the commenter strongly encouraged CMS to revise the
cardiac DRGs through patient severity refinement as part of the IPPS
final rule effective for FY 2006.
In response to this comment, we performed an extensive review of
the cardiovascular DRGs in MDC 5, particularly those DRGs that were
commonly billed by specialty hospitals. We observed that there was some
overlap between the lists of cardiovascular complications and complex
diagnoses and that these lists were already used to segregate patients
into DRGs that used greater resources. Because the hospital industry
already was familiar with the major complication and complex diagnosis
lists used within the cardiovascular DRGs, we began our analysis with
these two overlapping lists.
The two lists were originally developed for the current DRG system
because they contained conditions that could have an impact on the
resources needed to treat a patient with cardiovascular complications.
Many of the conditions were cardiovascular diagnoses and, therefore,
would be classified to MDC 5. However, we determined that some of the
diagnoses were not cardiovascular, but would still have an impact on a
patient with cardiovascular complications. The conditions that were not
cardiovascular diagnoses were not assigned to MDC 5 if they were the
principal diagnosis.
We reviewed the conditions on the two overlapping lists and
identified conditions that we believed would lead to a more complicated
patient stay requiring greater resource use. We referred to these
conditions as ``major cardiovascular conditions (MCVs).'' The MCVs
could be present as either a principal diagnosis or a secondary
diagnosis and lead to greater resource consumption. The complete list
of MCVs was published in the FY 2006 IPPS final rule (70 FR 47477 and
47478).
In the FY 2006 IPPS final rule, we also adopted new DRGs 547
through 558, effective October 1, 2005 (70 FR 47475 and 47476).
However, we emphasized that the refinements to the DRGs were being
taken as an interim step to better recognize severity in the DRG system
for FY 2006 until we could complete a more comprehensive analysis of
the APR DRG system and the CC list as part of a complete analysis of
the MedPAC recommendations that we planned to perform for FY 2007 (and
which was addressed in section II.C. of the preamble of the FY 2007
proposed rule).
Since publication of the FY 2006 IPPS final rule, we have received
a question from a commenter as to why we did not apply the MCV list to
the following defibrillator DRGs: 515, 535, and 536. The commenter
noted that the pacemaker DRGs were revised using the MCV list, but the
defibrillator DRGs were not.
As noted above, for FY 2006, we created new DRGs 546 through 558 to
identify cases with more costly and severely ill patients as an interim
step to evaluating severity DRGs. We analyzed for the first time last
year data on cases within MDC 5 and presented data that showed
significant difference for patients in certain DRGs based on the
presence or absence of an MCV. This split did not work for the
defibrillator DRGs, as we could not identify groups with significantly
different resource use. For instance, splitting DRG 515 based on the
presence of an MCV would lead to two groups with differences in charges
of only $3,430 ($89,341 for those with an MCV and $85,911 for those
without an MCV). In the data we displayed in the FY 2006 IPPS final
rule, the differences for DRGs selected for an MCV split ranged from
$10,319 to $21,035. Splitting DRG 515 based on an MCV would produce a
difference in charges of only 10.1 percent as compared to differences
of 28.7 to 47.7 percent for DRGs 547 through 558. Therefore, the data
did not support including DRG 515 among those split based on the
presence or absence of an MCV. Similar results were found when DRG 536
was split by an MCV. There was only an 8.1 percent difference in
charges between the two groups. We also identified other problems with
splitting DRG 535 based on the presence or absence of an MCV. Some of
the codes a claim must include for the case to be grouped to DRG 535
under our current system are also codes on the MCV list. Therefore,
applying the MCV list to DRG 535 would result in all cases being
assigned to the DRG with an MCV and none to the DRG without an MCV. For
these reasons, we did not subdivide DRGs 515, 535, and 536 based on the
presence or absence of an MCV.
In the FY 2007 IPPS proposed rule, we indicated that we had decided
not to propose additional refinements of the DRGs based on MCVs for FY
2007 because of our efforts to propose a broader refinement of the DRG
system, as discussed in detail in section II.C. of the proposed rule.
However, as discussed further in section II.C. of the preamble of the
proposed rule, we solicited comments on whether it would be appropriate
in FY 2007 to apply a clinical severity concept to an expanded set of
DRGs, similar to the approach we used in FY 2006 to refine cardiac DRGs
based on the presence or absence of an MCV.
Comment: Commenters agreed with the recommendation that we not
subdivide DRGs 515, 535, and 536 based on MCV. However, one commenter
expressed concerns about how the current DRGs were achieving their goal
of identifying patients with greater severity of illness. Other
commenters opposed the proposal to delay refining defibrillator DRGs
based on MCVs. These commenters believed it was appropriate for CMS to
apply a clinical severity concept similar to the approach used in FY
2006 to refine cardiac DRGs to an expanded set of DRGS (for example,
defibrillator DRGs) based on the presence or absence of an MCV.
Response: We agree with the commenters who suggested that our goal
should be to reform the Medicare DRG system to develop a better means
of capturing severity of illness and complexity. As discussed in
section II.C. of the preamble of the proposed rule, we solicited
comments on whether it would be appropriate in FY 2007 to apply a
clinical severity concept to an expanded set of DRGs, similar to the
approach we used in FY 2006 to refine cardiac DRGs based on the
presence or absence of an MCV. As discussed in section II.C.7., we are
implementing revisions to the

[[Page 47946]]

current DRGs to better recognize severity of illness. However, the
analysis we have performed to this point does not support splitting
defibrillator DRGs based on the presence or absence of an MCV. As
stated earlier, simply applying the MCVs to the defibrillator DRGs in
DRGs 515, 535, and 536 would not lead to significant improvements for
DRG 515. Applying the MCV list to DRG 535 would result in all cases
being assigned to the DRG with an MCV and none to the DRG without an
MCV. For these reasons, we did not subdivide DRGs 515, 535, and 536
based on the presence or absence of an MCV.
While we did not find additional severity improvements for
defibrillator cases, we will continue to study this area and look for
further improvements.
4. MDC 8 (Diseases and Disorders of the Musculoskeletal System and
Connective Tissue)
a. Hip and Knee Replacements
In the FY 2006 final rule (70 FR 47303), we deleted DRG 209 (Major
Joint and Limb Reattachment Procedures of Lower Extremity) and created
new DRGs 544 (Major Joint Replacement or Reattachment of Lower
Extremity) and 545 (Revision of Hip or Knee Replacement) to help
resolve payment issues for hospitals that perform revisions of joint
replacements because we found revisions of joint replacements to be
significantly more resource intensive than original hip and knee
replacements. DRG 544 includes the following code assignments:
81.51, Total hip replacement
81.52, Partial hip replacement
81.54, Total knee replacement
81.56, Total ankle replacement
84.26, Foot reattachment
84.27, Lower leg or ankle reattachment
84.28, Thigh reattachment
DRG 545 includes the following procedure code assignments:
00.70, Revision of hip replacement, both acetabular and
femoral components
00.71, Revision of hip replacement, acetabular component
00.72, Revision of hip replacement, femoral component
00.73, Revision of hip replacement, acetabular liner and/
or femoral head only
00.80, Revision of knee replacement, total (all
components)
00.81, Revision of knee replacement, tibial component
00.82, Revision of knee replacement, femoral component
00.83, Revision of knee replacement, patellar component
00.84, Revision of knee replacement, tibial insert (liner)
81.53, Revision of hip replacement, not otherwise
specified
81.55, Revision of knee replacement, not otherwise
specified
In the FY 2006 IPPS final rule (70 FR 47305), we indicated that the
American Association of Orthopaedic Surgeons had requested that, once
we receive claims data using the two DRG procedure code assignments, we
closely examine data from the use of the codes under the two DRGs to
determine if future additional DRG modifications are needed.
After publication of the FY 2006 IPPS final rule, a number of
hospitals and coding personnel advised us that the DRG logic for DRG
471 (Bilateral or Multiple Major Joint Procedures of Lower Extremity),
which utilizes the new and revised hip and knee procedure codes under
DRGs 544 and 545, also includes codes that describe procedures that are
not bilateral or that do not involve multiple major joints. DRG 471 was
developed to include cases where major joint procedures such as
revisions or replacements were performed either bilaterally or on two
joints of one lower extremity. We changed the logic for DRG 471 last
year for the first time when we added the new and revised codes. The
commenters indicated that, by adding the more detailed codes that do
not include total revisions or replacements to the list of major joint
procedures to DRG 471, we are assigning cases to DRG 471 that do not
have bilateral or multiple joint procedures. For example, when a
hospital reports a code for revision of the tibial component (code
00.81) and patellar component of the right knee (code 00.83), the
current DRG logic assigns the case to DRG 471. The commenters indicated
that this code assignment is incorrect because only one joint has
undergone surgery, but two components were used. One commenter
indicated that ICD-9-CM does not identify left/right laterality.
Therefore, it is difficult to use the current coding structure to
determine if procedures are performed on the same leg or on both legs.
The commenters raised a concern about whether CMS intended to pay
hospitals using DRG 471 for procedures performed on one joint. The
commenters indicated that the DRG assignments for these codes would
also make future data analysis misleading. The commenters recommended
removing codes from DRG 471 that do not specifically identify bilateral
or multiple joint procedures.
We agree that the new and revised joint procedure codes should not
be assigned to DRG 471 unless they include bilateral and multiple
joints. Therefore, in the FY 2007 IPPS proposed rule (71 FR 24035), we
proposed to remove the following codes from DRG 471:
00.71, Revision of hip replacement, acetabular component
00.72, Revision of hip replacement, femoral component
00.73, Revision of hip replacement, acetabular liner and/
or femoral head only
00.81, Revision of knee replacement, tibial component
00.82, Revision of knee replacement, femoral component
00.83, Revision of knee replacement, patellar component
00.84, Revision of total knee replacement, tibial insert
(liner)
81.53, Revision of hip replacement, not otherwise
specified
81.55, Revision of knee replacement, not otherwise
specified
The proposed revised DRG 471 would then contain only the following
codes:
00.70, Revision of hip replacement, both acetabular and
femoral components
00.80, Revision of knee replacement, total (all
components)
81.51, Total hip replacement
81.52, Partial hip replacement
81.54, Total knee replacement
81.56, Total ankle replacement
We proposed to assign the codes removed from DRG 471 (codes 00.71,
00.72, 00.73, 00.81, 00.82, 00.83, 00.84, 81.53, and 81.55) to DRG 545
when used either alone or in combination. This list of codes removed
from DRG 471 and added to DRG 545 includes partial revisions of the
knee and hip as well as unspecified joint procedures such as code 81.55
where it is not clear if the revision is total or partial.
Comment: Several comments supported our proposals to remove codes
00.71, 00.72, 00.73, 00.81, 00.82, 00.83, 00.84, 81.53, and 81.55 from
the combinations assigned to DRG 471 and assign cases with these codes
to DRG 545. The commenters agreed that these codes should be removed
from DRG 471 because they do not represent bilateral and multiple joint
revisions or replacements.
Response: We appreciate the commenters support to remove codes
00.71, 00.72, 00.73, 00.81, 00.82, 00.83, 00.84, 81.53, and 81.55 from
the combinations assigned to DRG 471. These cases will be assigned to
DRG 545.
We are finalizing the changes to DRG 471 and DRG 545 that we
proposed.

[[Page 47947]]

Further, as we indicated in the proposed rule, we plan to perform
extensive data analysis on the new and revised joint procedure codes as
we receive billing data to determine if future refinements of these
DRGs are needed. In addition, as indicated in section II.C. of the
preamble of the proposed rule, we are planning in the future to adopt a
revised DRG system for the IPPS that addresses severity of illness. We
encouraged commenters to evaluate how the new and revised joint
procedures should be addressed in such a revised system. We received
comments indicating that the CS DRGs that we proposed do not
distinguish between patients receiving an original joint replacement
from a revision. As we indicate elsewhere in this final rule, we will
evaluate these issues as we develop our plans for adopting a revised
DRG system that addresses severity of illness.
b. Spinal Fusion
In the FY 2006 IPPS final rule (70 FR 47307), we created new DRG
546 (Spinal Fusions Except Cervical with Curvature of the Spine or
Malignancy). DRG 546 is composed of all noncervical spinal fusions
previously assigned to DRGs 497 (Spinal Fusion Except Cervical with CC)
and 498 (Spinal Fusion Except Cervical without CC) that have a
principal or secondary diagnosis of curvature of the spine or a
principal diagnosis of a malignancy. The principal diagnosis codes that
lead to DRG 546 assignment are the following:
170.2, Malignant neoplasm of vertebral column, excluding
sacrum and coccyx
198.5, Secondary malignant neoplasm of bone and bone
marrow
213.2, Benign neoplasm of bone and articular cartilage;
vertebral column, excluding sacrum and coccyx
238.0, Neoplasm of uncertain behavior of other and
unspecified sites and tissues; Bone and articular cartilage
239.2, Neoplasms of unspecified nature; bone, soft tissue,
and skin
732.0, Juvenile osteochondrosis of spine
733.13, Pathologic fracture of vertebrae
737.0, Adolescent postural kyphosis
737.10, Kyphosis (acquired) (postural)
737.11, Kyphosis due to radiation
737.12, Kyphosis, postlaminectomy
737.19, Kyphosis (acquired), other
737.20, Lordosis (acquired) (postural)
737.21, Lordosis, postlaminectomy
737.22, Other postsurgical lordosis
737.29, Lordosis (acquired), other
737.30, Scoliosis [and kyphoscoliosis], idiopathic
737.31, Resolving infantile idiopathic scoliosis
737.32, Progressive infantile idiopathic scoliosis
737.33, Scoliosis due to radiation
737.34, Thoracogenic scoliosis
737.39, Other kyphoscoliosis and scoliosis
737.8, Other curvatures of spine
737.9, Unspecified curvature of spine
754.2, Congenital scoliosis
756.51, Osteogenesis imperfecta
The secondary diagnoses that will lead to DRG 546 assignment are:
737.40, Curvature of spine, unspecified
737.41, Curvature of spine associated with other
conditions, kyphosis
737.42, Curvature of spine associated with other
conditions, lordosis
737.43, Curvature of spine associated with other
conditions, scoliosis
After publication of the FY 2006 IPPS final rule, we received a
comment stating that creating new DRG 546 was insufficient to address
clinical severity and resource differences among spinal fusion cases
that involve fusing multiple levels of the spine. Specifically, the
commenter suggested that the spinal fusion DRGs be further modified to
incorporate Bone Morphogenic Protein (BMP), code 84.52 (Insertion of
recombinant bone morphogenetic protein). The commenter also suggested
that CMS apply a clinical severity concept to all back and spine
surgical cases similar to the approach that we used for the MCVs to
refine the cardiac DRGs in the final rule for FY 2006. The commenter
recommended recognizing additional conditions that reflect higher
resource needs, regardless of whether they are principal or secondary
diagnoses. The commenter also suggested that the spine DRGs be further
subdivided based on the use of specific spinal devices such as
artificial discs. These changes would entail the creation of 10 new
spine DRGs in addition to other changes requested.
Response: We agree that it is important to recognize severity when
classifying patients into specific DRGs. In response to recommendations
made by MedPAC last year that are discussed in section II.C. of this
final rule, we are conducting a comprehensive analysis of the entire
DRG system to determine whether to undertake significant reform to
better recognize severity of illness. At this time, we believe it is
premature to develop a severity adjustment for spine surgeries while we
are considering a more systematic approach to capturing severity of
illness across all DRGs. We also believe it would be premature to make
revisions to DRG 546 because this DRG was created on October 1, 2005,
and we do not yet have data to analyze its impact. Given the number of
innovations occurring in spinal surgery over the last several years
(for example, artificial spinal disc prostheses, kyphoplasty, and
vertebroplasty), we agree that additional analysis of the spine DRGs
would be warranted if we were to continue with the current DRG system
and not adopt CS DRGs. However, as discussed above, in the FY 2007 IPPS
proposed rule, we proposed to develop a severity-adjusted DRG system.
For this reason, we are not further researching this issue for FY 2007.
However, in the proposed rule, we encouraged commenters to examine the
proposed CS DRG system described in section II.C. of the preamble of
the proposed rule to determine whether there is a better recognition of
severity of illness and resource use in that system.
Comment: One commenter stated that it was premature to consider
splitting the spinal fusion DRGs into potentially up to 10 new DRGs at
this time. The commenter stated there is a need for additional data
analysis prior to recommending new DRGs.
Response: We agree with the commenter that it is premature to
consider splitting the spinal fusion DRGs into as many as 10 new DRGs.
We will continue to study this area. In the meantime, we will not
modify the spinal fusion DRGs for October 1, 2006.
c. CHARITE^TM Spinal Disc Replacement Device
CHARITE^TM is a prosthetic intervertebral disc. On
October 26, 2004, the FDA approved the CHARITE^TM Artificial
Disc for single level spinal arthroplasty in skeletally mature patients
with degenerative disc disease between L4 and S1. On October 1, 2004,
we created new procedure codes for the insertion of spinal disc
prostheses (codes 84.60 through 84.69). We provided the DRG assignments
for these new codes in Table 6B of the FY 2005 IPPS proposed rule (69
FR 28673). We received comments on the FY 2005 proposed rule
recommending that we change the assignments for these codes from DRG
499 (Back and Neck Procedures Except Spinal Fusion With CC) and DRG 500
(Back and Neck Procedures Except Spinal Fusion Without CC) to the DRGs
for spinal fusion, DRG 497 (Spinal Fusion Except Cervical With CC) and
DRG 498 (Spinal Fusion Except Cervical Without CC) for procedures on
the lumbar spine and to

[[Page 47948]]

DRGs 519 and 520 for procedures on the cervical spine. In the FY 2005
IPPS final rule (69 FR 48938, August 11, 2004), we indicated that DRGs
497 and 498 are limited to spinal fusion procedures. Because the
surgery involving the CHARITE^TM Artificial Disc is not a
spinal fusion, we decided not to include this procedure in these DRGs.
However, we stated that we would continue to analyze this issue and
solicited further public comments on the DRG assignment for spinal disc
prostheses.
In the FY 2006 final rule (70 FR 47353, August 12, 2005), we noted
that, if a product meets all of the criteria for Medicare to pay for
the product as a new technology under section 1886(d)(5)(K) of the Act,
there is a clear preference expressed in the statute for us to assign
the technology to a DRG based on similar clinical or anatomical
characteristics or costs. However, for FY 2006, we did not find that
the CHARITE^TM Artificial Disc met the substantial clinical
improvement criterion and, thus, did not qualify as a new technology.
Consequently, we did not address the DRG classification request made
under the authority of this provision of the Act.
However, we did evaluate whether to reassign the
CHARITE^TM Artificial Disc to different DRGs using the
Secretary's authority under section 1886(d)(4) of the Act (70 FR 47308,
August 12, 2005). We indicated that we did not have Medicare charge
information to evaluate DRG changes for cases involving an implant of a
prosthetic intervertebral disc like the CHARITE^TM and did
not make a change in its DRG assignments. We stated that we would
consider whether changes to the DRG assignments for the
CHARITE^TM Artificial Disc were warranted for FY 2007, once
we had information from Medicare's data system that would assist us in
evaluating the costs of these patients.
As we discussed in the FY 2007 IPPS proposed rule (71 FR 24036), we
received correspondence regarding the DRG assignments for the
CHARITE^TM Artificial Disc, code 84.65 (Insertion of total
spinal disc prosthesis, lumbosacral). The commenter had previously
submitted an application for the CHARITE^TM Artificial Disc
for new technology add-on payments for FY 2006 and had requested a
reassignment of cases involving CHARITE^TM implantation to
DRGs 497 and 498. The commenter asked that we examine claims data for
FY 2005 and reassign procedure code 84.65 from DRGs 499 and 500 into
DRGs 497 and 498. The commenter again stated the view that cases with
the CHARITE^TM Artificial Disc reflect comparable resource
use and similar clinical indications as do those in DRGs 497 and 498.
If CMS were to reject reassignment of the CHARITE^TM
Artificial Disc to DRGs 497 and 498, the commenter suggested creating
two separate DRGs for lumbar disc replacements.
On February 15, 2006, we posted a proposed national coverage
determination (NCD) on the CMS Web site seeking public comment on our
proposed finding that the evidence is not adequate to conclude that
lumbar artificial disc replacement with the CHARITE^TM
Artificial Disc is reasonable and necessary. The proposed NCD stated
that lumbar artificial disc replacement with the CHARITE^TM
Artificial Disc is generally not indicated in patients over 60 years
old. Further, it stated that there is insufficient evidence among
either the aged or disabled Medicare population to make a reasonable
and necessary determination for coverage. With an NCD pending to make
spinal arthroplasty with the CHARITE^TM Artificial Disc
noncovered, we indicated in the FY 2007 IPPS proposed rule that we did
not believe it was appropriate at that time to reassign procedure code
84.65 from DRGs 499 and 500 to DRGs 497 and 498.
After considering the public comments and additional evidence
received, we made a final NCD on May 16, 2006, that Medicare would not
cover the CHARITE^TM Artificial Disc for the Medicare
population over 60 years of age. For Medicare beneficiaries 60 years of
age and under, local Medicare contractors have the discretion to
determine coverage for lumbar artificial disc replacement procedures
involving the CHARITE^TM Artificial Disc. The final NCD can
be found at: http://www.cms.hhs.gov/mcd/viewncd.asp:ncd_;id-
150.10&ncd --version1& basket=ncd%3A150%2E10% 3A1%3ALumbar+
Artificial+Disc+ Replacement%280ADR%29.
Comment: Some commenters agreed with our proposed decision not to
reassign CHARITE^TM Artificial Disc at this time to the
spinal fusion DRGs. Other commenters disagreed with our proposal not to
move code 84.65 (CHARITE^TM) from DRGs 499 and 500 to DRGs
497 and 498. One commenter noted that the national noncoverage
determination for the CHARITE^TM Artificial Disc only applies
to patients over 60 years of age. The commenter further noted that
local Medicare carriers have the discretion to make coverage decisions
for Medicare beneficiaries who are under 60 years of age. The commenter
stated that patients who receive the CHARITE^TM Artificial
Disc are candidates for a fusion procedure involving an anterior
surgical approach. The commenter goes on to state that the
CHARITE^TM Artificial Disc is an alternative therapy to
spinal fusion for patients with similar diagnoses. The commenter
supplied data from FY 2005 MedPAR file in support of its request for a
DRG change. These data included 54 cases that were assigned to DRGs 499
and 500. The 23 cases in DRG 499 had mean charges of $61,750, while the
31 cases assigned to DRG 500 had mean charges of $53,802. These data
compare to mean charges of $26,974 for all cases in DRG 499 and $17,731
for all cases in DRG 500. The commenter reported mean charges of
$71,581 for DRG 497 and $55,489 for DRG 498. The commenter stated that
the 54 CHARITE^TM cases are more similar in average charges
to all cases in DRGs 497 and 498 than to DRGs 499 and 500.
Response: We agree with the commenter that it is not appropriate to
consider a DRG revision at this time for the CHARITE^TM
Artificial Disc, given the recent decision to limit coverage for
surgical procedures involving this device. Although we have reviewed
the Medicare charge data, we are concerned that there are a very small
number of cases for patients under 60 years of age who have received
the CHARITE^TM Artificial Disc. We believe it appropriate to
base the decision on a DRG change on charge data only on the population
for which the procedure is covered. We have an extremely small number
of cases for patients under 60 on which to base such a decision. For
this reason, we do not believe it is appropriate to modify the DRGs at
this time for CHARITE^TM cases.
5. MDC 18 (Infectious and Parasitic Diseases (Systemic or Unspecified
Sites)): Severe Sepsis
In FYs 2005 and 2006, we considered requests for the creation of a
separate DRG for the diagnosis of severe sepsis. Severe sepsis is
described by ICD-9-CM code 995.92 (Systemic inflammatory response
syndrome due to infection with organ dysfunction). Patients admitted
with sepsis as a principal diagnosis currently are assigned to DRG 416
(Septicemia Age > 17) and DRG 417 (Septicemia Age 0-17) in MDC 18
(Infectious and Parasitic Diseases (Systemic or Unspecified Sites)).
The commenter requested that all cases in which severe sepsis is
present on admission, as well as those cases in which it develops after
admission (which are currently classified elsewhere), be included in
this new DRG. In both FY 2005 and FY 2006 (69 FR 48975 and 70 FR
47309), we did not believe the current clinical definition of

[[Page 47949]]

severe sepsis was specific enough to identify a meaningful cohort of
patients in terms of clinical coherence and resource utilization to
warrant a separate DRG. Sepsis is found across hundreds of medical and
surgical DRGs, and the term ``organ dysfunction'' implicates numerous
currently existing diagnosis codes. While we recognize that Medicare
beneficiaries with severe sepsis are quite ill and require extensive
hospital resources, in the past we have not found that they can be
identified adequately to justify removing them from all of the other
DRGs in which they appear. For this reason, we did not create a new DRG
for severe sepsis for FY 2005 or FY 2006. We indicated that we would
continue to work with National Center for Health Statistics (NCHS) to
improve the codes so that our data on these patients improve. We also
indicated that we would continue to examine data on these patients as
we consider future modifications.
For the FY 2007 IPPS proposed rule, we again received a request to
consider creating a separate DRG for patients diagnosed with severe
sepsis (71 FR 24037). The information and data available to us from
hospital bills with respect to identifying patients with severe sepsis
have not changed since last year. However, the NCHS discussed
modifications to the current ICD-9-CM diagnosis codes for systemic
inflammatory response syndrome (SIRS), codes 995.91 through 995.94
(which include severe sepsis) at the September 29-30, 2005 ICD-9-CM
Coordination and Maintenance Committee meeting. During the meeting, it
became clear that there is still confusion surrounding the use of these
codes. As a result of the meeting and the comments received, the
Committee made modifications to the set of SIRS codes. These
modifications are reflected in Table 6E, Revised Diagnosis Code Titles,
of the Addendum to this final rule.
We believe that implementation of the modified SIRS diagnosis codes
and the updated coding guidelines over the next year could begin the
process of improving data for this group of patients. The desired
outcome is to be able to better evaluate Medicare beneficiaries with
severe sepsis with regard to their clinical coherence, resource
utilization, and charges. Therefore, in the FY 2007 IPPS proposed rule,
we did not propose to create a new DRG for severe sepsis for FY 2007.
Comment: Numerous commenters asked for changes to the current
sepsis classification. The commenters agreed that coding of systemic
inflammatory response syndrome (SIRS), sepsis, septicemia, severe
sepsis, and septic shock has been confusing to the provider community
in the last few years. Specifically, one commenter stated coding
guidelines have been revised based on clinical definitions, which in
turn has affected the DRG classification for sepsis. Another commenter
referenced the ICD-9-CM Code Book tabular section and the American
Hospital Association's (AHA) fourth quarter (4Q) 2003 Coding Clinic,
``for patients with severe sepsis, the code for the systemic infection
(038.x) or trauma should be sequenced first, followed by either code
995.92 (Systemic Inflammatory Response Syndrome due to infectious
process with organ dysfunction) or code 995.94 (Systemic inflammatory
response syndrome due to noninfectious process with organ dysfunction).
Codes for the specific organ dysfunction should also be assigned.'' The
commenter stated that as a result of this coding guideline, respiratory
failure cannot be sequenced as the principal diagnosis because it is
considered an organ dysfunction of the patient's sepsis. However,
reverting sequencing instructions would be confusing and again disrupt
the data according to some of the commenters. As a result, many
commenters stated that a new DRG for severe sepsis is not appropriate
due to the inconsistent data.
Response: We agree that there has been a great deal of confusion in
the coding and sequencing of cases with severe sepsis and SIRS. The
commenters are correct that the coding directives lead cases with
severe sepsis that are on mechanical ventilation for respiratory
failure to be assigned to DRG 416 (Septicemia Age >17) and DRG 417
(Septicemia Age 0 >17) instead of DRG 475 (Respiratory System Diagnosis
with Ventilator Support). As stated in the proposed rule, we have
continued to work with NCHS to improve the codes so that our data on
these patients improve. We believe that implementation of the modified
SIRS diagnosis codes and the updated coding guidelines over the next
year will further improve the coding of this subset of patients.
Comment: One commenter presented its analysis of the MedPAR data
and again requested the creation of two new DRGS for severe sepsis, one
medical and one surgical. The other option suggested by the commenter
was to split DRGs 415 and 416 into DRGs with and without severe sepsis
cases. The commenter expressed concern that, while there has been some
confusion over the use of the SIRS family of codes (995.90-995.94) over
the past three years, the confusion has been mainly associated with the
other codes and not the severe sepsis code (995.92). The commenter
provided information concerning the definition of severe sepsis and its
adoption following a 1992 consensus panel of the American College of
Chest Physicians and the Society of Critical Care Medicine. According
to the commenter, the panel defined severe sepsis as a systemic
inflammatory response to infection that leads to acute organ
dysfunction. The commenter noted this definition has been used
successfully to identify thousands of patients with severe sepsis and
in more than 30 large-scale clinical trials. The commenter also stated
severe sepsis cases are clinically coherent with a common underlying
problem (SIRS) leading to complications (acute organ dysfunction) and
are managed similarly, receiving advanced life support in intensive
care units. The commenter also provided examples to demonstrate how
clinical coherence leads to resource use coherence.
Response: We appreciate the commenter's analysis of the data. As
stated above, there has been significant confusion over the use of the
sepsis codes. While the definition may be well understood among the
individuals involved with the clinical trials, there has been
uncertainty in the application of the codes as evidenced by repeated
discussions at the ICD-9-CM Coordination and Maintenance Committee
meetings and comments received in response to the proposed rule. We
note that the National Center for Health Statistics has revised the
sepsis and systemic inflammatory response syndrome codes in response to
suggestions made at the Committee meetings. These revisions are shown
in Table 6E of the Addendum to this final rule and will go into effect
on October 1, 2006 (codes 995.91 through 995.94). We did not propose a
new DRG for severe sepsis for FY 2007 in the proposed rule due to the
data inconsistencies and difficulty expressed with properly assigning
the sepsis codes, among other reasons cited previously.
In the FY 2007 IPPS proposed rule, we also solicited comments on
the proposal we were considering to adopt a CS DRG system. We noted it
is possible that the proposed system would better recognize the
extensive resources that hospitals use to treat patients with severe
sepsis. We encouraged commenters to examine the proposed system and
provide comments. The comments and responses on this proposal are
discussed in section II.C of this final rule.

[[Page 47950]]

Therefore, in this FY 2007 final rule we are not creating new DRGs
for medical or surgical severe sepsis cases as requested by the
commenter.
6. Medicare Code Editor (MCE) Changes
As explained under section II.B.1. of this preamble, the Medicare
Code Editor (MCE) is a software program that detects and reports errors
in the coding of Medicare claims data. Patient diagnoses, procedure(s),
discharge status, and demographic information go into the Medicare
claims processing systems and are subjected to a series of automated
screens. The MCE screens are designed to identify cases that require
further review before classification into a DRG.
For FY 2007, we proposed to make several changes to the MCE edits
(71 FR 24038 and 24039). We received one comment on this topic. As a
result of new and modified codes approved after the annual spring ICD-
9-CM Coordination and Maintenance meeting, we make changes to the MCE.
In the past, in both the IPPS proposed and final rules, we only
provided the list of changes to the MCE in the IPPS that were brought
to our attention after the prior year's final rule. We historically
have not listed the changes we have made to the MCE as a result of the
new and modified codes approved after the annual spring ICD-9-CM
Coordination and Maintenance meeting. These changes are approved too
late in the rulemaking schedule for inclusion in the proposed rule.
Furthermore, although our MCE policies have been described in our
proposed and final rules, we have not provided the detail of each new
or modified diagnosis and procedure code edit in the final rule.
However, in response to a public comment and in the interest of making
the IPPS more transparent, we are including in this final rule a
comprehensive list of all the changes to the MCE edits for the next
fiscal year as a result of coding changes.
a. Edit: Newborn Diagnoses
We proposed to add code 780.92 (Excessive crying of infant (baby))
to the ``Newborn Diagnoses'' edit in the MCE. This edit is structured
for patients with an age of ``0''. In the Tabular portion of the ICD-9-
CM diagnosis codes, the ``excludes'' note at code 780.92 states that
this code ``excludes excessive crying of child, adolescent or adult''
and sends the coder to code 780.95 (Other excessive crying. (The new
title of this code, shown on Table 6E of the Addendum to this final
rule is ``Excessive crying of child, adolescent, or adult''.) To make a
conforming change, we also proposed that code 780.92 be removed from
the ``Pediatric Diagnoses--Age 0 Through 17'' edit.
We did not receive any public comments on the proposed edit and,
therefore, are adopting it as final.
In addition, there were diagnosis codes discussed at the March 2006
ICD-9-CM Coordination and Maintenance meeting that were approved too
late in the rulemaking schedule for inclusion in the proposed rule.
Therefore, the following ICD-9-CM diagnosis codes are added to the
``Newborn Diagnosis'' MCE edit for FY 2007:
768.7, Hypoxic-ischemic encephalopathy (HIE)
770.87, Respiratory arrest of newborn
770.88, Hypoxemia of newborn
775.81, Other acidosis of newborn
775.89, Other neonatal endocrine and metabolic
disturbances
779.85, Cardiac arrest of newborn
Because diagnosis code 775.8 (Other transitory neonatal endocrine
and metabolic disturbances) was expanded to the fifth-digit level, this
code is being deleted from the Newborn Diagnosis edit.
b. Edit: Diagnoses for Pediatric--Age 0-17 Years Old
We are adding the following new diagnosis codes to the edit for
diagnosis for pediatrics--age 0-17 years old:
V85.51, Body Mass Index, pediatric, less than 5th
percentile for age
V85.52, Body Mass Index, pediatric, 5th percentile to less
than 85th percentile for age
V85.53, Body Mass Index, pediatric, 85th percentile to
less than 95th percentile for age
V85.54, Body Mass Index, pediatric, greater than or equal
to 95th percentile for age
c. Edit: Maternity Diagnoses--Age 12 through 55
We are adding the following new codes to the edit for maternity
diagnoses--age 12 through 55:
649.00, Tobacco use disorder complicating pregnancy,
childbirth, or the puerperium, unspecified as to episode of care or not
applicable
649.01, Tobacco use disorder complicating pregnancy,
childbirth, or the puerperium, delivered, with or without mention of
antepartum condition
649.02, Tobacco use disorder complicating pregnancy,
childbirth, or the puerperium, delivered, with mention of postpartum
complication
649.03, Tobacco use disorder complicating pregnancy,
childbirth, or the puerperium, antepartum condition or complication
649.04, Tobacco use disorder complicating pregnancy,
childbirth, or the puerperium, postpartum condition or complication
649.10, Obesity complicating pregnancy, childbirth, or the
puerperium, unspecified as to episode of care or not applicable
649.11, Obesity complicating pregnancy, childbirth, or the
puerperium, delivered, with or without mention of antepartum condition
649.12, Obesity complicating pregnancy, childbirth, or the
puerperium, delivered, with mention of postpartum complication
649.13, Obesity complicating pregnancy, childbirth, or the
puerperium, antepartum condition or complication
649.14, Obesity complicating pregnancy, childbirth, or the
puerperium, postpartum condition or complication
649.20, Bariatric surgery status complicating pregnancy,
childbirth, or the puerperium, unspecified as to episode of care or not
applicable
649.21, Bariatric surgery status complicating pregnancy,
childbirth, or the puerperium, delivered, with or without mention of
antepartum condition
649.22, Bariatric surgery status complicating pregnancy,
childbirth, or the puerperium, delivered, with mention of postpartum
complication
649.23, Bariatric surgery status complicating pregnancy,
childbirth, or the puerperium, antepartum condition or complication
649.24, Bariatric surgery status complicating pregnancy,
childbirth, or the puerperium, postpartum condition or complication
649.30, Coagulation defects complicating pregnancy,
childbirth, or the puerperium, unspecified as to episode of care or not
applicable
649.31, Coagulation defects complicating pregnancy,
childbirth, or the puerperium, delivered, with or without mention of
antepartum condition
649.32, Coagulation defects complicating pregnancy,
childbirth, or the puerperium, delivered, with mention of postpartum
complication
649.33, Coagulation defects complicating pregnancy,
childbirth, or the puerperium, antepartum condition or complication
649.34, Coagulation defects complicating pregnancy,
childbirth, or the puerperium, postpartum condition or complication
649.40, Epilepsy complicating pregnancy, childbirth, or
the puerperium, unspecified as to episode of care or not applicable

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649.41, Epilepsy complicating pregnancy, childbirth, or
the puerperium, delivered, with or without mention of antepartum
condition
649.42, Epilepsy complicating pregnancy, childbirth, or
the puerperium, delivered, with mention of postpartum complication
649.43, Epilepsy complicating pregnancy, childbirth, or
the puerperium, antepartum condition or complication
649.44, Epilepsy complicating pregnancy, childbirth, or
the puerperium, postpartum condition or complication
649.50, Spotting complicating pregnancy unspecified as to
episode of care or not applicable
649.51, Spotting complicating pregnancy delivered, with or
without mention of antepartum condition
649.53, Spotting complicating pregnancy antepartum
condition or complication
649.60, Uterine size date discrepancy, unspecified as to
episode of care or not applicable
649.61, Uterine size date discrepancy, delivered, with or
without mention of antepartum condition
649.62, Uterine size date discrepancy, delivered, with
mention of postpartum complication
649.63, Uterine size date discrepancy, antepartum
condition or complication
649.64, Uterine size date discrepancy, postpartum
condition or complication
d. Edit: Diagnoses Allowed for Females Only
The following codes are now invalid codes, as shown in Table 6C of
the Addendum to the FY 2007 IPPS proposed rule and this final rule. In
the FY 2007 IPPS proposed rule, we proposed to remove them from the
``Diagnosis Allowed for Females Only'' edit in the MCE.
616.8, Other specified inflammatory diseases of cervix,
vagina, and vulva
629.8, Other specified disorders of female genital organs
Codes 616.8 and 629.8 have been expanded to the fifth-digit level.
Therefore, we proposed to place the following expanded codes in the
``Diagnoses Allowed for Females Only'' edit.
616.81, Mucositis (ulcerative) of cervix, vagina, and
vulva
616.89, Other inflammatory disease of cervix, vagina, and
vulva
629.81, Habitual aborter without current pregnancy
629.89, Other specified disorders of female genital organs
The following two codes have revised descriptions (as shown in
Table 6E of the Addendum to this final rule) which specify gender.
Therefore, we proposed to add them to ``Diagnoses Allowed for Females
Only'' edit.
V26.31, Testing of female for genetic disease carrier
status
V26.32, Other genetic testing of female
We did not receive any public comments on the proposed changes to
this edit. Therefore, we are adopting the changes as final.
In addition, we are adding the following new ICD-9-CM codes to this
edit:
618.84, Cervical stump prolapse
629.29, Other female genital mutilation status
649.00, Tobacco use disorder complicating pregnancy,
childbirth, or the puerperium, unspecified as to episode of care or not
applicable
649.01, Tobacco use disorder complicating pregnancy,
childbirth, or the puerperium, delivered, with or without mention of
antepartum condition
649.02, Tobacco use disorder complicating pregnancy,
childbirth, or the puerperium, delivered, with mention of postpartum
complication
649.03, Tobacco use disorder complicating pregnancy,
childbirth, or the puerperium, antepartum condition or complication
649.04, Tobacco use disorder complicating pregnancy,
childbirth, or the puerperium, postpartum condition or complication
649.10, Obesity complicating pregnancy, childbirth, or the
puerperium, unspecified as to episode of care or not applicable
649.11, Obesity complicating pregnancy, childbirth, or the
puerperium, delivered, with or without mention of antepartum condition
649.12, Obesity complicating pregnancy, childbirth, or the
puerperium, delivered, with mention of postpartum complication
649.13, Obesity complicating pregnancy, childbirth, or the
puerperium, antepartum condition or complication
649.14, Obesity complicating pregnancy, childbirth, or the
puerperium, postpartum condition or complication
649.20, Bariatric surgery status complicating pregnancy,
childbirth, or the puerperium, unspecified as to episode of care or not
applicable
649.21, Bariatric surgery status complicating pregnancy,
childbirth, or the puerperium, delivered, with or without mention of
antepartum condition
649.22, Bariatric surgery status complicating pregnancy,
childbirth, or the puerperium, delivered, with mention of postpartum
complication
649.23, Bariatric surgery status complicating pregnancy,
childbirth, or the puerperium, antepartum condition or complication
649.24, Bariatric surgery status complicating pregnancy,
childbirth, or the puerperium, postpartum condition or complication
649.30, Coagulation defects complicating pregnancy,
childbirth, or the puerperium, unspecified as to episode of care or not
applicable
649.31, Coagulation defects complicating pregnancy,
childbirth, or the puerperium, delivered, with or without mention of
antepartum condition
649.32, Coagulation defects complicating pregnancy,
childbirth, or the puerperium, delivered, with mention of postpartum
complication
649.33, Coagulation defects complicating pregnancy,
childbirth, or the puerperium, antepartum condition or complication
649.34, Coagulation defects complicating pregnancy,
childbirth, or the puerperium, postpartum condition or complication
649.40, Epilepsy complicating pregnancy, childbirth, or
the puerperium, unspecified as to episode of care or not applicable
649.41, Epilepsy complicating pregnancy, childbirth, or
the puerperium, delivered, with or without mention of antepartum
condition
649.42, Epilepsy complicating pregnancy, childbirth, or
the puerperium, delivered, with mention of postpartum complication
649.43, Epilepsy complicating pregnancy, childbirth, or
the puerperium, antepartum condition or complication
649.44, Epilepsy complicating pregnancy, childbirth, or
the puerperium, postpartum condition or complication
649.50, Spotting complicating pregnancy unspecified as to
episode of care or not applicable
649.51, Spotting complicating pregnancy delivered, with or
without mention of antepartum condition
649.53, Spotting complicating pregnancy antepartum
condition or complication
649.60, Uterine size date discrepancy, unspecified as to
episode of care or not applicable
649.61, Uterine size date discrepancy, delivered, with or
without mention of antepartum condition

[[Page 47952]]

649.62, Uterine size date discrepancy, delivered, with
mention of postpartum complication
649.63, Uterine size date discrepancy, antepartum
condition or complication
649.64, Uterine size date discrepancy, postpartum
condition or complication
795.06, Papanicolaou smear of cervix with cytologic
evidence of malignancy
795.82, Elevated cancer antigen 125 [CA 125]
e. Edit: Diagnoses Allowed for Males Only
Code 608.2 (Torsion of testis) is now an invalid code (as shown in
Table 6C of the Addendum to the proposed rule and this final rule).
Therefore, we proposed to remove it from the ``Diagnoses Allowed for
Males Only'' edit. This code has been expanded to the fifth-digit
level. We proposed to place the following expanded codes in the
``Diagnoses Allowed for Males Only'' edit:
608.20, Torsion of testis, unspecified
608.21, Extravaginal torsion of spermatic cord
608.22 Intravaginal torsion of spermatic cord
608.23, Torsion of appendix testis
608.24, Torsion of appendix epididymis
The following codes have been created effective for FY 2007 and are
gender specific. Therefore, we proposed to add them to the ``Diagnosis
Allowed for Males Only'' edit.
V26.34, Testing of male for genetic disease carrier status
V26.35, Encounter for testing of male partner of habitual
aborter
V26.39, Other genetic testing of male
We did not receive any public comments on our proposed changes to
this edit. Therefore, we are adopting the changes as final.
f. Edit: Procedures Allowed for Females Only
The following new codes are added to the list of female procedures:
68.41, Laparoscopic total abdominal hysterectomy
68.49, Other and unspecified total abdominal hysterectomy
68.61, Laparoscopic radical abdominal hysterectomy
68.69, Other and unspecified radical abdominal
hysterectomy
68.71, Laparoscopic radical vaginal hysterectomy [LRVH]
68.79, Other and unspecified radical vaginal hysterectomy
In addition, the following codes were expanded to the fourth digit
and, therefore, are removed from this edit:
68.4, Total abdominal hysterectomy
68.6, Radical abdominal hysterectomy
68.7, Radical vaginal hysterectomy
g. Edit: Manifestations Not Allowed as Principal Diagnosis
We proposed to add the following codes to the ``Manifestations Not
Allowed as Principal Diagnosis'' edit in the MCE:
362.03, Nonproliferative diabetic retinopathy, NOS
362.04, Mild nonproliferative diabetic retinopathy
362.05, Moderate nonproliferative diabetic retinopathy
362.06, Severe nonproliferative diabetic retinopathy
362.07, Diabetic macular edema.
We did not receive any public comments concerning this proposed
change. Therefore, we are adopting the above proposed changes as final.
In addition, we are adding the following new codes to this edit:
284.2, Myelophthisis
289.83, Myelofibrosis
323.01, Encephalitis and encephalomyelitis in viral
diseases classified elsewhere
323.02, Myelitis in viral diseases classified elsewhere
323.41, Other encephalitis and encephalomyelitis due to
infection classified elsewhere
323.42, Other myelitis due to infection classified
elsewhere
323.61, Infectious acute disseminated encephalomyelitis
(ADEM)
323.62, Other postinfectious encephalitis and
encephalomyelitis
323.63, Postinfectious myelitis
323.71, Toxic encephalitis and encephalomyelitis
323.72, Toxic myelitis
341.21, Acute (transverse) myelitis in conditions
classified elsewhere
The following codes have been expanded to the fifth-digit level of
specificity, which results in making the four-digit code invalid.
Therefore, these codes are removed from the manifestation edit:
323.0, Encephalitis in viral diseases classified elsewhere
323.4, Other encephalitis due to infection classified
elsewhere
323.6, Postinfectious encephalitis
323.7, Toxic encephalitis
In the proposed rule, we had suggested we would remove code 525.10
(Acquired absence of teeth, unspecified) from this edit in the MCE.
However, all codes in subcategory 525.1 (Loss of teeth due to trauma,
extraction, or periodontal disease) are considered manifestation codes.
Therefore, we are retracting this proposal, and are leaving code 525.10
in this edit.
h. Edit: Nonspecific Principal Diagnosis
We proposed to add the following codes to the ``Nonspecific
Principal Diagnosis'' edit in the MCE:
255.10, Hyperaldosteronism, unspecified
323.9, Unspecified causes of encephalitis, myelitis, and
encephalomyelitis
770.10, Fetal and newborn aspiration, unspecified.
780.31, Febrile convulsions (simple), unspecified
Codes 255.10, 323.9, and 780.31 appear on Table 6E, Revised
Diagnosis Codes, and are being included in this edit because of their
revised descriptions. Code 770.10 was inadvertently left off this list
for FY 2006 when the code was created.
We did not receive any public comments on the proposed changes to
this edit. Therefore, we are adopting the proposed changes as final. In
addition, we are adding the following codes to this edit:
238.75, Myelodysplastic syndrome, unspecified
276.50, Volume depletion NOS
277.30, Amyloidosis, unspecified
288.00, Neutropenia, unspecified
288.50, Leukocytopenia, unspecified
288.60, Leukocytosis, unspecified
341.20, Acute (transverse) myelitis NOS
379.60, Inflammation (infection) of postprocedural bleb,
unspecified
523.30, Aggressive periodontitis, unspecified
523.40, Chronic periodontitis, unspecified
525.60, Unspecified unsatisfactory restoration of tooth
528.00, Stomatitis and mucositis, unspecified
608.20, Torsion of testis, unspecified
649.00, Tobacco use disorder complicating pregnancy,
childbirth, or the puerperium, unspecified as to episode of care or not
applicable
649.10, Obesity complicating pregnancy, childbirth, or the
puerperium, unspecified as to episode of care or not applicable
649.20, Bariatric surgery status complicating pregnancy,
childbirth, or the puerperium, unspecified as to episode of care or not
applicable
649.30, Coagulation defects complicating pregnancy,
childbirth, or the puerperium, unspecified as to episode of care or not
applicable

[[Page 47953]]

649.40, Epilepsy complicating pregnancy, childbirth, or
the puerperium, unspecified as to episode of care or not applicable
649.50, Spotting complicating pregnancy, childbirth, or
the puerperium, unspecified as to episode of care or not applicable
649.60, Uterine size date discrepancy, unspecified as to
episode of care or not applicable
958.90, Compartment syndrome, unspecified
995.20, Unspecified adverse effect of unspecified drug,
medicinal and biological substance
995.22, Unspecified adverse effect of anesthesia
995.23, Unspecified adverse effect of insulin
995.29, Unspecified adverse effect of other drug,
medicinal and biological substance
We are removing the following codes from this edit:
362.03, Nonproliferative diabetic retinopathy NOS
525.10, Acquired absence of teeth, unspecified
793.9, Other nonspecific abnormal findings on radiological
and other examinations of body structure
Comment: Two commenters suggested that the expanded code (793.99,
Other nonspecific abnormal findings on radiological and other
examinations of body structure) be added back into this edit.
Response: We will not act on those suggestions at this time, as we
believe that code 739.9 should not originally have been in the edit as
it is more like an ``other'' code than a ``nonspecific'' code.
i. Edit: Unacceptable Principal Diagnosis
Most V-codes describe an individual's health status, but these
codes are not usually a current illness or injury. Therefore, most V-
codes are included in the ``Unacceptable Principal Diagnosis'' edit.
The following codes became invalid (as shown in Table 6C of the
Addendum to the proposed rule and this final rule) for FY 2007, and we
proposed to remove them from this edit:
V18.5, Family history, digestive disorders
V58.3, Attention to surgical dressings and sutures
V72.1, Examination of ears and hearing
The following V-codes represent either fifth-digit extensions of
the above codes, or new codes that were created effective October 1,
2006 (Table 6A of the Addendum to the proposed rule and this final
rule). Therefore, we proposed to add the following codes to the
``Unacceptable Principal Diagnosis'' edit:
V18.51, Family history, colonic polyps
V18.59, Family history, other digestive disorders
V26.34, Testing of male for genetic disease carrier status
V26.35, Encounter for testing of male partner of habitual
aborter
V26.39, Other genetic testing of male
V45.86, Bariatric surgery status
V58.30, Encounter for change or removal of nonsurgical
wound dressing
V58.31, Encounter for change or removal of surgical wound
dressing
V58.32, Encounter for removal of sutures
V72.11, Encounter for hearing examination following failed
hearing screening
V72.19, Other examination of ears and hearing
V82.71, Screening for genetic disease carrier status
V82.79, Other genetic screening
V85.51, Body mass index, pediatric, less than 5th
percentile for age
V85.52, Body mass index, pediatric, 5th percentile to less
than 85th percentile for age
V85.53, Body mass index, pediatric, 85th percentile to
less than 95th percentile for age
V85.54, Body mass index, pediatric, greater than or equal
to 95th percentile for age
V86.0, Estrogen receptor positive status [ER+]
V86.1, Estrogen receptor negative status [ER-]
We did not receive any public comments on these proposed edits.
Therefore, we are adopting the proposed changes as final.
j. Edit: Nonspecific O.R. Procedures
We proposed to remove code 00.29 (Intravascular imaging unspecified
vessel(s)) from the ``Nonspecific O.R. Procedure'' edit in the MCE.
This code was erroneously placed in this edit; it is not considered an
O.R. procedure.
We did not receive any public comments on these proposed edits.
Therefore, we are adopting the proposed changes as final.
In addition, we are removing code 68.39 (Other subtotal abdominal
hysterectomy) from this edit. Code 68.39 is not a nonspecific code, it
is considered other, and was originally included in this edit in error.
k. Edit: Noncovered Procedures
Under the proposed changes to DRG 513 (Pancreas Transplant) under
the Pre-MDCs described in section II.D.1. of the preamble of the FY
2007 IPPS proposed rule, a patient must have a history of medically
uncontrollable, insulin-dependent diabetes mellitus, that is, Type I
diabetes mellitus. Therefore, to conform the ``Noncovered Procedures''
Edit in the MCE to these proposed changes, we proposed to revise
Diagnosis List 1 in this edit to include only the following codes:
250.01, Diabetes mellitus without mention of complication,
type I [juvenile type], not stated as uncontrolled
250.03, Diabetes mellitus without mention of complication,
type I [juvenile type], uncontrolled
250.11, Diabetes with ketoacidosis, type I [juvenile
type], not stated as uncontrolled
250.13, Diabetes with ketoacidosis, type I [juvenile
type], uncontrolled
250.21, Diabetes with hyperosmolarity, type I [juvenile
type], not stated as uncontrolled
250.23, Diabetes with hyperosmolarity, type I [juvenile
type], uncontrolled
250.31, Diabetes with other coma, type I [juvenile type],
not stated as uncontrolled
250.33, Diabetes with other coma, type I [juvenile type],
uncontrolled
250.41, Diabetes with renal manifestations, type I
[juvenile type], not stated as uncontrolled
250.43, Diabetes with renal manifestations, type I
[juvenile type], uncontrolled
250.51, Diabetes with ophthalmic manifestations, type I
[juvenile type], not stated as uncontrolled
250.53, Diabetes with ophthalmic manifestations, type I
[juvenile type], uncontrolled
250.61, Diabetes with neurological manifestations, type I
[juvenile type], not stated as uncontrolled
250.63, Diabetes with neurological manifestations, type I
[juvenile type], uncontrolled
250.71, Diabetes with peripheral circulatory disorders,
type I [juvenile type], not stated as uncontrolled
250.73, Diabetes with peripheral circulatory disorders,
type I [juvenile type], uncontrolled
250.81, Diabetes with other specified manifestations, type
I [juvenile type], not stated as uncontrolled
250.83, Diabetes with other specified manifestations, type
I [juvenile type], uncontrolled
250.91, Diabetes with unspecified complication, type I
[juvenile type], not stated as uncontrolled
250.93, Diabetes with unspecified complication, type I
[juvenile type], uncontrolled

[[Page 47954]]

In addition, we proposed to remove Diagnosis List 2 from the
``Noncovered Procedures'' edit, which is comprised of the following
codes:
403.01, Hypertensive kidney disease, malignant, with
chronic kidney disease
403.11, Hypertensive kidney disease, benign, with chronic
kidney disease
403.91, Hypertensive kidney disease, unspecified, with
chronic kidney disease
404.02, Hypertensive heart and kidney disease, malignant,
with chronic kidney disease
404.03, Hypertensive heart and kidney disease, malignant,
with heart failure and chronic kidney disease
404.12, Hypertensive heart and kidney disease, benign,
with chronic kidney disease
404.13, Hypertensive heart and kidney disease, benign,
with heart failure and chronic kidney disease
404.92, Hypertensive heart and kidney disease,
unspecified, with chronic kidney disease
404.93, Hypertensive heart and kidney disease,
unspecified, with heart failure and chronic kidney disease
585.1, Chronic kidney disease, Stage I
585.2, Chronic kidney disease, Stage II (mild)
585.3, Chronic kidney disease, Stage III (moderate)
585.4, Chronic kidney disease, Stage IV (severe)
585.5, Chronic kidney disease, Stage V
585.6, End stage renal disease
585.9, Chronic kidney disease, unspecified
V42.0, Organ or tissue replaced by transplant, kidney
V43.89, Organ or tissue replaced by other means, other
organ or tissue, other
All of the comments we received regarding this proposal were
favorable. Therefore, we are adopting the above changes as final.
Lumbar Artificial Disc: CMS has found that lumbar artificial disc
replacement (LADR) with the Charite^TM lumbar artificial disc
is not reasonable and necessary for the Medicare population over 60
years of age. Therefore, we issued a national noncoverage determination
for LADR with the Charite^TM lumbar artificial disc for
Medicare patients over 60 years of age. For Medicare beneficiaries 60
years of age and under, there is no national coverage determination,
leaving such determinations to be made on a local basis. The coverage
decision memo can be viewed on the CMS Web site at http://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=170.
To conform to this decision, procedure code 84.65 (Insertion of
total spinal disc prosthesis, lumbosacral) is put on the Non-Covered
Procedure edit except when the patient is 60 years of age or less. The
logic will be as follows:
84.65, Insertion of total spinal disc prosthesis, lumbosacral
AND
Age <=61
l. Edit: Bilateral Procedure
We proposed to remove the following codes from the Bilateral
Procedure edit, as these are adjunct codes. They are not O.R. codes
recognized by the GROUPER as procedures, and the edit was created in
error last year.
00.74, Hip replacement bearing surface, metal-on-
polyethylene
00.75, Hip replacement bearing surface, metal-on-metal
00.76, Hip replacement bearing surface, ceramic-on-ceramic
We did not receive any public comments on these proposed edits.
Therefore, we are adopting the proposed changes as final.
In addition, we are deleting the following joint revision codes
from this edit, as they should not have been added last year.
00.71, Revision of hip replacement, acetabular component
00.72, Revision of hip replacement, femoral component
00.73, Revision of hip replacement, acetabular liner and/
or femoral head only
00.81, Revision of knee replacement, tibial component
00.82, Revision of knee replacement, femoral component
00.83, Revision of knee replacement, patellar component
00.84, Revision of total knee replacement, tibial insert
(liner)
81.53, Revision of hip replacement not otherwise specified
81.55, Revision of knee replacement not otherwise
specified
7. Surgical Hierarchies
Some inpatient stays entail multiple surgical procedures, each one
of which, occurring by itself, could result in assignment of the case
to a different DRG within the MDC to which the principal diagnosis is
assigned. Therefore, it is necessary to have a decision rule within the
GROUPER by which these cases are assigned to a single DRG. The surgical
hierarchy, an ordering of surgical classes from most resource-intensive
to least resource-intensive, performs that function. Application of
this hierarchy ensures that cases involving multiple surgical
procedures are assigned to the DRG associated with the most resource-
intensive surgical class.
Because the relative resource intensity of surgical classes can
shift as a function of DRG reclassification and recalibrations, we
reviewed the surgical hierarchy of each MDC, as we have for previous
reclassifications and recalibrations, to determine if the ordering of
classes coincides with the intensity of resource utilization.
A surgical class can be composed of one or more DRGs. For example,
in MDC 11, the surgical class ``kidney transplant'' consists of a
single DRG (DRG 302) and the class ``kidney, ureter and major bladder
procedures'' consists of three DRGs (DRGs 303, 304, and 305).
Consequently, in many cases, the surgical hierarchy has an impact on
more than one DRG. The methodology for determining the most resource-
intensive surgical class involves weighting the average resources for
each DRG by frequency to determine the weighted average resources for
each surgical class. For example, assume surgical class A includes DRGs
1 and 2 and surgical class B includes DRGs 3, 4, and 5. Assume also
that the average charge of DRG 1 is higher than that of DRG 3, but the
average charges of DRGs 4 and 5 are higher than the average charge of
DRG 2. To determine whether surgical class A should be higher or lower
than surgical class B in the surgical hierarchy, we would weight the
average charge of each DRG in the class by frequency (that is, by the
number of cases in the DRG) to determine average resource consumption
for the surgical class. The surgical classes would then be ordered from
the class with the highest average resource utilization to that with
the lowest, with the exception of ``other O.R. procedures'' as
discussed below.
This methodology may occasionally result in assignment of a case
involving multiple procedures to the lower-weighted DRG (in the
highest, most resource-intensive surgical class) of the available
alternatives. However, given that the logic underlying the surgical
hierarchy provides that the GROUPER search for the procedure in the
most resource-intensive surgical class, in cases involving multiple
procedures, this result is sometimes unavoidable.
We note that, notwithstanding the foregoing discussion, there are a
few instances when a surgical class with a lower average charge is
ordered above a surgical class with a higher average charge. For
example, the ``other O.R. procedures'' surgical class is uniformly
ordered last in the surgical hierarchy of each MDC in which it occurs,
regardless of the fact that the average charge for the

[[Page 47955]]

DRG or DRGs in that surgical class may be higher than that for other
surgical classes in the MDC. The ``other O.R. procedures'' class is a
group of procedures that are only infrequently related to the diagnoses
in the MDC, but are still occasionally performed on patients in the MDC
with these diagnoses. Therefore, assignment to these surgical classes
should only occur if no other surgical class more closely related to
the diagnoses in the MDC is appropriate.
A second example occurs when the difference between the average
charges for two surgical classes is very small. We have found that
small differences generally do not warrant reordering of the hierarchy
because, as a result of reassigning cases on the basis of the hierarchy
change, the average charges are likely to shift such that the higher-
ordered surgical class has a lower average charge than the class
ordered below it.
Based on the preliminary recalibration of the DRGs, in the FY 2007
IPPS proposed rule (71 FR 24039), we proposed to revise the surgical
hierarchy for Pre-MDCs, MDC 1 (Diseases and Disorders of the Nervous
System), MDC 2 (Diseases and Disorders of the Eye), MDC 3 (Diseases and
Disorders of the Ear, Nose, Mouth, and Throat), MDC 8 (Diseases and
Disorders of the Musculoskeletal System and Connective Tissue), MDC 10
(Endocrine, Nutritional and Metabolic Diseases and Disorders), and MDC
13 (Diseases and Disorders of the Female Reproductive System) as
follows:
In Pre-MDCs, we proposed to reorder DRG 481 (Bone Marrow
Transplant) above DRG 513 (Pancreas Transplant).
In MDC 1, we proposed to reorder DRGs 531-532 (Spinal Procedures,
With CC and Without CC, respectively) above DRGs 529-530 (Ventricular
Shunt Procedures, With CC and Without CC, respectively).
In MDC 2, we proposed to reorder DRG 42 (Intraocular Procedures
Except Retina, Iris and Lens) above DRG 36 (Retinal Procedures).
In MDC 3, we proposed to reorder DRGs 168-169 (Mouth Procedures,
With CC and Without CC, respectively) above DRG 57 (T&A Procedures,
Except Tonsillectomy and/or Adenoidectomy Only, Age > 17) and DRG 58
(T&A Procedures, Except Tonsillectomy and/or Adenoidectomy Only, Age 0-
17).
In MDC 8, we proposed to reorder DRG 213 (Amputation for
Musculoskeletal System and Connective Tissue Disorders) above DRG 216
(Biopsies of Musculoskeletal System and Connective Tissue).
In MDC 10, we proposed to reorder DRG 285 (Amputation of Lower Limb
for Endocrine, Nutritional and Metabolic Diseases and Disorders) above
DRG 288 (O.R. Procedures for Obesity).
In MDC 13, we proposed to reorder DRG 363 (D&C, Conization and
Radio-Implant, for Malignancy) and DRG 364 (D&C, Conization and Radio-
Implant, Except for Malignancy) above DRG 360 (Vagina, Cervix, and
Vulva Procedures).
We did not receive any public comments on the proposed changes to
the surgical hierarchy described above. Based on a test of the proposed
revisions using the March 2006 update of the FY 2005 MedPAR file and
the revised GROUPER software, we found that the revisions are still
supported by the data. Therefore, we are incorporating these proposed
revisions to the surgical hierarchy as final for FY 2007. In addition,
because, in this final rule, we are deleting 8 DRGs and creating 20 new
DRGs as discussed under section II.D.7. of this preamble, we are
reordering the following DRGs in MDC 1 (Diseases and disorders of the
Nervous System), MDC 6 (Diseases and Disorders of the Digestive
System), MDC 11 (Diseases and Disorders of the Kidney and urinary
Tract), and MDC 18 (Infectious and Parasitic Diseases (Systemic or
Unspecified Sites)):
In MDC 1, we are reordering DRG 577 (Carotid Artery Stent
Procedure) above DRG 533 (Extracranial Procedures With CC).
In MDC 6, we are reordering DRGs 567 and 568 (Stomach,
Esophageal and Duodenal Procedures Age >17 With CC With and Without
Major GI Diagnoses, respectively) above DRG 155 (Stomach, Esophageal
and Duodenal Procedures Age >17 Without CC);
In MDC 6, we are reordering DRGs 569-570 (Major Small and
Large Bowel Procedures With CC With and Without Major GI Diagnoses,
respectively) above DRG 149 (Major Small and Large Bowel Procedures
Without CC).
In MDC 11, we are reordering DRG 573 (Major Bladder
Procedures) above DRG 303 (Kidney, Ureter and Major Bladder Procedures
for Neoplasm).
In MDC 18, we are reordering DRG 578 (Infections and
Parasite Diseases With O.R. Procedure) above DRG 579 (Postoperative or
Post-Traumatic Infections With O.R. Procedure).
8. Refinement of Complications and Comorbidities (CC) List
a. Background
As indicated earlier in this preamble, under the IPPS DRG
classification system, we have developed a standard list of diagnoses
that are considered complications or comorbidities (CCs). Historically,
we developed this list using physician panels that classified each
diagnosis code based on whether the diagnosis, when present as a
secondary condition, would be considered a substantial complication or
comorbidity. A substantial complication or comorbidity was defined as a
condition that, because of its presence with a specific principal
diagnosis, would cause an increase in the length of stay by at least 1
day in at least 75 percent of the patients.
b. Comprehensive Review of the CC List
In previous years, we have made changes to the standard list of
CCs, either by adding new CCs or deleting CCs already on the list, but
we have never conducted a comprehensive review of the list. Given the
long period of time that had elapsed since the original CC list was
developed, the incremental nature of changes to it, and changes in the
way inpatient care is delivered, and in partial response to
recommendations in MedPAC's March 2005 Report to Congress on Physician-
Owned Specialty Hospitals, for the FY 2006 IPPS final rule, we reviewed
the 121-paired DRGs that were split on the presence or absence of a CC
among the 3,285 diagnosis codes on the CC list. We presented the
results of that review and summarized public comments that we received
in the FY 2006 proposed rule on the review results in the FY 2006 IPPS
final rule (70 FR 47313 through 47315). Further analysis of the CC list
and refinement to recognize the effects of differences in severity of
illness among patients is discussed in section II.C. of the preamble of
the proposed rule as part of our efforts to develop a CSDRG system for
use in the IPPS.
During this past winter, CMS began a comprehensive review of over
13,000 diagnosis codes to determine whether they should be classified
as CCs when present as a secondary diagnosis. Although we did not
complete this review because of the work we did to develop the CS DRGs,
we are considering whether to continue our analysis of the CC list as
part of an effort to develop and adopt a severity DRG system that is in
the public domain for FY 2008. As we explained in more detail above, we
may update the work we did to develop a severity DRG system in the mid-
1990s that classified patients into a base DRG that was further
subdivided based on three levels of severity depending upon whether the
patient had no CC, a CC, or a major CC in conjunction with continuing
our review of the CC list.

[[Page 47956]]

c. CC Exclusions List for FY 2007
In the September 1, 1987 final notice (52 FR 33143) concerning
changes to the DRG classification system, we modified the GROUPER logic
so that certain diagnoses included on the standard list of CCs would
not be considered valid CCs in combination with a particular principal
diagnosis. We created the CC Exclusions List for the following reasons:
(1) To preclude coding of CCs for closely related conditions; (2) to
preclude duplicative or inconsistent coding from being treated as CCs;
and (3) to ensure that cases are appropriately classified between the
complicated and uncomplicated DRGs in a pair. As we indicated above, we
developed a list of diagnoses, using physician panels, to include those
diagnoses that, when present as a secondary condition, would be
considered a substantial complication or comorbidity. In previous
years, we have made changes to the list of CCs, either by adding new
CCs or deleting CCs already on the list. We did not propose to delete
any of the diagnosis codes on the CC list for FY 2007.
In the May 19, 1987 proposed notice (52 FR 18877) and the September
1, 1987 final notice (52 FR 33154), we explained that the excluded
secondary diagnoses were established using the following five
principles:
Chronic and acute manifestations of the same condition
should not be considered CCs for one another.
Specific and nonspecific (that is, not otherwise specified
(NOS)) diagnosis codes for the same condition should not be considered
CCs for one another.
Codes for the same condition that cannot coexist, such as
partial/total, unilateral/bilateral, obstructed/unobstructed, and
benign/malignant, should not be considered CCs for one another.
Codes for the same condition in anatomically proximal
sites should not be considered CCs for one another.
Closely related conditions should not be considered CCs
for one another.
The creation of the CC Exclusions List was a major project
involving hundreds of codes. We have continued to review the remaining
CCs to identify additional exclusions and to remove diagnoses from the
master list that have been shown not to meet the definition of a
CC.\17\
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\17\ See the FY 1989 final rule (53 FR 38485, September 30,
1988), for the revision made for the discharges occurring in FY
1989; the FY 1990 final rule (54 FR 36552, September 1, 1989), for
the FY 1990 revision; the FY 1991 final rule (55 FR 36126, September
4, 1990), for the FY 1991 revision; the FY 1992 final rule (56 FR
43209, August 30, 1991) for the FY 1992 revision; the FY 1993 final
rule (57 FR 39753, September 1, 1992), for the FY 1993 revision; the
FY 1994 final rule (58 FR 46278, September 1, 1993), for the FY 1994
revisions; the FY 1995 final rule (59 FR 45334; September 1, 1994),
for the FY 1995 revisions; the FY 1996 final rule (60 FR 45782,
September 1, 1995), for the FY 1996 revisions; the FY 1997 final
rule (61 FR 46171, August 30, 1996), for the FY 1997 revisions; the
FY 1998 final rule (62 FR 45966, August 29, 1997) for the FY 1998
revisions; the FY 1999 final rule (63 FR 40954, July 31, 1998), for
the FY 1999 revisions; the FY 2001 final rule (65 FR 47064, August
1, 2000), for the FY 2001 revisions; the FY 2002 final rule (66 FR
39851, August 1, 2001), for the FY 2002 revisions; the FY 2003 final
rule (67 FR 49998, August 1, 2002), for the FY 2003 revisions; the
FY 2004 final rule (68 FR 45364, August 1, 2003), for the FY 2004
revisions; the FY 2005 final rule (69 FR 49848, August 11, 2004),
for the FY 2005 revisions; and the FY 2006 final rule (70 FR 47640,
August 12, 2005), for the FY 2006 revisions. In the FY 2000 final
rule (64 FR 41490, July 30, 1999), we did not modify the CC
Exclusions List because we did not make any changes to the ICD-9-CM
codes for FY 2000.
---------------------------------------------------------------------------

As we proposed, we are making limited revisions to the CC
Exclusions List to take into account the changes that will be made in
the ICD-9-CM diagnosis coding system effective October 1, 2006. (See
section II.D.10. of this preamble for a discussion of ICD-9-CM
changes.) We are making these changes in accordance with the principles
established when we created the CC Exclusions List in 1987.
Tables 6G and 6H in the Addendum to this final rule contain the
revisions to the CC Exclusions List that will be effective for
discharges occurring on or after October 1, 2006. Each table shows the
principal diagnoses with changes to the excluded CCs. Each of these
principal diagnoses is shown with an asterisk, and the additions or
deletions to the CC Exclusions List are provided in an indented column
immediately following the affected principal diagnosis.
CCs that are added to the list are in Table 6G--Additions to the CC
Exclusions List. Beginning with discharges on or after October 1, 2006,
the indented diagnoses will not be recognized by the GROUPER as valid
CCs for the asterisked principal diagnosis.
CCs that are deleted from the list are in Table 6H--Deletions from
the CC Exclusions List. Beginning with discharges on or after October
1, 2006, the indented diagnoses will be recognized by the GROUPER as
valid CCs for the asterisked principal diagnosis.
Copies of the original CC Exclusions List applicable to FY 1988 can
be obtained from the National Technical Information Service (NTIS) of
the Department of Commerce. It is available in hard copy for $152.50
plus shipping and handling. A request for the FY 1988 CC Exclusions
List (which should include the identification accession number (PB) 88-
133970) should be made to the following address: National Technical
Information Service, United States Department of Commerce, 5285 Port
Royal Road, Springfield, VA 22161; or by calling (800) 553-6847.
Users should be aware of the fact that all revisions to the CC
Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996,
1997, 1998, 1999, 2001, 2002, 2003, 2004, 2005, and 2006) and those in
Tables 6G and 6H of this final rule for FY 2007 must be incorporated
into the list purchased from NTIS in order to obtain the CC Exclusions
List applicable for discharges occurring on or after October 1, 2006.
(Note: There was no CC Exclusions List in FY 2000 because we did not
make changes to the ICD-9-CM codes for FY 2000.)
Alternatively, the complete documentation of the GROUPER logic,
including the current CC Exclusions List, is available from 3M/Health
Information Systems (HIS), which, under contract with CMS, is
responsible for updating and maintaining the GROUPER program. The
current DRG Definitions Manual, Version 23.0, is available for $225.00,
which includes $15.00 for shipping and handling. Version 24.0 of this
manual, which will include the final FY 2007 DRG changes, will be
available in hard copy for $250.00. Version 24.0 of the manual is also
available on a CD for $200.00; a combination hard copy and CD is
available for $400.00. These manuals may be obtained by writing 3M/HIS
at the following address: 100 Barnes Road, Wallingford, CT 06492; or by
calling (203) 949-0303. Please specify the revision or revisions
requested.
9. Review of Procedure Codes in DRGs 468, 476, and 477
Each year, we review cases assigned to DRG 468 (Extensive O.R.
Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic O.R.
Procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive
O.R. Procedure Unrelated to Principal Diagnosis) to determine whether
it would be appropriate to change the procedures assigned among these
DRGs.
DRGs 468, 476, and 477 are reserved for those cases in which none
of the O.R. procedures performed are related to the principal
diagnosis. These DRGs are intended to capture atypical cases, that is,
those cases not occurring with sufficient frequency to represent a
distinct, recognizable clinical group. DRG 476 is assigned to those
discharges

[[Page 47957]]

in which one or more of the following prostatic procedures are
performed and are unrelated to the principal diagnosis:
60.0, Incision of prostate
60.12, Open biopsy of prostate
60.15, Biopsy of periprostatic tissue
60.18, Other diagnostic procedures on prostate and
periprostatic tissue
60.21,Transurethral prostatectomy
60.29, Other transurethral prostatectomy
60.61, Local excision of lesion of prostate
60.69, Prostatectomy, not elsewhere classified
60.81, Incision of periprostatic tissue
60.82, Excision of periprostatic tissue
60.93, Repair of prostate
60.94, Control of (postoperative) hemorrhage of prostate
60.95, Transurethral balloon dilation of the prostatic
urethra
60.96, Transurethral destruction of prostate tissue by
microwave thermotherapy
60.97, Other transurethral destruction of prostate tissue
by other thermotherapy
60.99, Other operations on prostate
All remaining O.R. procedures are assigned to DRGs 468 and 477,
with DRG 477 assigned to those discharges in which the only procedures
performed are nonextensive procedures that are unrelated to the
principal diagnosis.\18\
---------------------------------------------------------------------------

\18\ The original list of the ICD-9-CM procedure codes for the
procedures we consider nonextensive procedures, if performed with an
unrelated principal diagnosis, was published in Table 6C in section
IV of the Addendum to the FY 1989 final rule (53 FR 38591). As part
of the FY 1991 final rule (55 FR 361.35), the FY 1992 final rule (56
FR 43212), the FY 1993 final rule (57 FR 23625), the FY 1994 final
rule (58 FR 46279), the FY 1995 final rule (59 FR 45336), the FY
1996 final rule (60 FR 45783), the FY 1997 final rule (61 FR 46173),
and the FY 1998 final rule (62 FR 45981), we moved several other
procedures from DRG 468 to DRG 477, and some procedures from DRG 477
to DRG 468. No procedures were moved in FY 1999, as noted in the
final rule (63 FR 40962); in FY 2000 (64 FR 41496); in FY 2001 (65
FR 47064); or in FY 2002 (66 FR 39852). In the FY 2003 final rule
(67 FR 49999) we did not move any procedures from DRG 477. However,
we did move procedure codes from DRG 468 and placed them in more
clinically coherent DRGs. In the FY 2004 final rule (68 FR 45365),
we moved several procedures from DRG 468 to DRGs 476 and 477 because
the procedures are nonextensive. In the FY 2005 final rule (69 FR
48950), we moved one procedure from DRG 468 to 477. In addition, we
added several existing procedures to DRGs 476 and 477. In FY 2006
(70 FR 47317), we moved one procedure from DRG 468 and assigned it
to DRG 477. In FY 2007, we moved one procedure from DRG 468 and
assigned it to DRGs 479, 553, and 554.
---------------------------------------------------------------------------

For FY 2007, we did not propose to change the procedures assigned
among these DRGs. We did not receive any comments on our proposal and,
therefore, are adopting it as final.
a. Moving Procedure Codes From DRG 468 or DRG 477 to MDCs
We annually conduct a review of procedures producing assignment to
DRG 468 or DRG 477 on the basis of volume, by procedure, to see if it
would be appropriate to move procedure codes out of these DRGs into one
of the surgical DRGs for the MDC into which the principal diagnosis
falls. The data are arrayed in two ways for comparison purposes. We
look at a frequency count of each major operative procedure code. We
also compare procedures across MDCs by volume of procedure codes within
each MDC.
We identify those procedures occurring in conjunction with certain
principal diagnoses with sufficient frequency to justify adding them to
one of the surgical DRGs for the MDC in which the diagnosis falls.
Based on this year's review, as proposed, we are not removing any
procedures from DRG 477 with assignment to one of the surgical DRGs. We
did not receive any comments on our proposal, and, therefore, there
will be no change to DRG 477.
However, we did receive a comment regarding DRG 468 after the
publication of the proposed rule. The comment addressed advances in
treatment technology for hypertension and noted that two procedure
codes cause cases to be assigned to DRG 468 instead of more
appropriately to DRGs in MDC 5. Therefore, we are moving the following
two codes into MDC 5, DRG 479 (Other Vascular Procedures without CC),
and paired DRGs 553 and 554 (Other Vascular Procedures with CC with and
without Major CV Diagnosis, respectively):
04.92, Implantation or replacement of peripheral
neurostimulator lead(s)
86.96, Insertion or replacement of other neurostimulator
pulse generator
b. Reassignment of Procedures Among DRGs 468, 476, and 477
We also annually review the list of ICD-9-CM procedures that, when
in combination with their principal diagnosis code, result in
assignment to DRGs 468, 476, and 477, to ascertain if any of those
procedures should be reassigned from one of these three DRGs to another
of the three DRGs based on average charges and the length of stay. We
look at the data for trends such as shifts in treatment practice or
reporting practice that would make the resulting DRG assignment
illogical. If we find these shifts, we would propose to move cases to
keep the DRGs clinically similar or to provide payment for the cases in
a similar manner. Generally, we move only those procedures for which we
have an adequate number of discharges to analyze the data.
We did not propose to move any procedure codes from DRG 476 to DRGs
468 or 477, or from DRG 477 to DRGs 468 or 476 for FY 2007. We did not
receive any public comments on our proposal and; therefore, are
adopting it as final.
c. Adding Diagnosis or Procedure Codes to MDCs
Based on our review this year, as we proposed, we are not adding
any diagnosis codes to MDCs for FY 2007. We did not receive any public
comments on our proposal and, therefore, are adopting it as final.
10. Changes to the ICD-9-CM Coding System
As described in section II.B.1. of this preamble, the ICD-9-CM is a
coding system used for the reporting of diagnoses and procedures
performed on a patient. In September 1985, the ICD-9-CM Coordination
and Maintenance Committee was formed. This is a Federal
interdepartmental committee, co-chaired by the National Center for
Health Statistics (NCHS), the Centers for Disease Control and
Prevention, and CMS, charged with maintaining and updating the ICD-9-CM
system. The Committee is jointly responsible for approving coding
changes, and developing errata, addenda, and other modifications to the
ICD-9-CM to reflect newly developed procedures and technologies and
newly identified diseases. The Committee is also responsible for
promoting the use of Federal and non-Federal educational programs and
other communication techniques with a view toward standardizing coding
applications and upgrading the quality of the classification system.
The Official Version of the ICD-9-CM contains the list of valid
diagnosis and procedure codes. (The Official Version of the ICD-9-CM is
available from the Government Printing Office on CD-ROM for $25.00 by
calling (202) 512-1800.) The Official Version of the ICD-9-CM is no
longer available in printed manual form from the Federal Government; it
is only available on CD-ROM. Users who need a paper version are
referred to one of the many products available from publishing houses.
The NCHS has lead responsibility for the ICD-9-CM diagnosis codes
included in the Tabular List and Alphabetic Index for Diseases, while
CMS has lead responsibility for the ICD-9-CM procedure codes included
in the

[[Page 47958]]

Tabular List and Alphabetic Index for Procedures.
The Committee encourages participation in the above process by
health-related organizations. In this regard, the Committee holds
public meetings for discussion of educational issues and proposed
coding changes. These meetings provide an opportunity for
representatives of recognized organizations in the coding field, such
as the American Health Information Management Association (AHIMA), the
American Hospital Association (AHA), and various physician specialty
groups, as well as individual physicians, health information management
professionals, and other members of the public, to contribute ideas on
coding matters. After considering the opinions expressed at the public
meetings and in writing, the Committee formulates recommendations,
which then must be approved by the agencies.
The Committee presented proposals for coding changes for
implementation in FY 2007 at a public meeting held on September 29-30,
2005, and finalized the coding changes after consideration of comments
received at the meetings and in writing by December 2, 2005. Those
coding changes were announced in the FY 2007 IPPS proposed rule and are
listed in Tables 6A through 6F in the Addendum to this final rule. The
Committee held its 2006 meeting on March 23-24, 2006. Proposed new
codes for which there was a consensus of public support and for which
complete tabular and indexing changes can be made by May 2006 will be
included in the October 1, 2006 update to ICD-9-CM. Code revisions that
were discussed at the March 23-24, 2006 Committee meeting could not be
finalized in time to include them in the FY 2007 IPPS proposed rule.
These additional codes are included in Tables 6A through 6F of this
final rule and are marked with an asterisk (*).
Copies of the minutes of the procedure codes discussions at the
Committee's September 29-30, 2005 meeting can be obtained from the CMS
Web site: http://cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. The minutes of the diagnosis codes discussions at the
September 29-30, 2005 meeting are found at: http://www.cdc.gov/nchs/icd9.htm. Paper copies of these minutes are no longer available and the
mailing list has been discontinued. These Web sites also provide
detailed information about the Committee, including information on
requesting a new code, attending a Committee meeting, and timeline
requirements and meeting dates.
We encourage commenters to address suggestions on coding issues
involving diagnosis codes to: Donna Pickett, Co-Chairperson, ICD-9-CM
Coordination and Maintenance Committee, NCHS, Room 2402, 3311 Toledo
Road, Hyattsville, MD 20782. Comments may be sent by E-mail to:
[email protected].
Questions and comments concerning the procedure codes should be
addressed to: Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination
and Maintenance Committee, CMS, Center for Medicare Management,
Hospital and Ambulatory Policy Group, Division of Acute Care, C4-08-06,
7500 Security Boulevard, Baltimore, MD 21244-1850. Comments may be sent
by E-mail to: [email protected].
The ICD-9-CM code changes that have been approved will become
effective October 1, 2006. The new ICD-9-CM codes are listed, along
with their DRG classifications, in Tables 6A and 6B (New Diagnosis
Codes and New Procedure Codes, respectively) in the Addendum to this
proposed rule. As we stated above, the code numbers and their titles
were presented for public comment at the ICD-9-CM Coordination and
Maintenance Committee meetings. Both oral and written comments were
considered before the codes were approved. In the FY 2007 IPPS proposed
rule, we only solicited comments on the proposed classification of
these new codes.
Comment: One commenter expressed concern about the DRG assignment
for codes 629.81 (Habitual aborter without current pregnancy) and
629.89 (Other specified disorders of female genital organs). The
commenter indicated that CMS proposed to assign both codes to DRG 368
(Infections, Female Reproductive System) within MDC-18. The commenter
posited that CMS may have erred in listing the DRG assignment as DRG
368 and instead intended to assign the code to DRG 369 (Menstrual and
Other Female Reproductive System Disorders) since these conditions are
not infections.
Response: We agree with the commenter that codes 629.81 and 629.89
do not represent infections and should not be assigned to DRG 368
within MDC 18. They should instead be assigned to DRG 369 as the
commenter suggested. Therefore, we are changing the DRG assignment for
codes 629.81 and 629.89 from DRG 368 to DRG 369. This change is shown
in Table 6A of the Addendum to this final rule.
Comment: One commenter asked whether the footnotes for codes 995.20
through 995.29 in Table 6A of the Addendum to the proposed rule was in
error. The commenter stated that the predecessor code, 995.2
(Unspecified adverse effect of drug, medicinal and biological
substance) is considered a secondary diagnosis of a ``major problem''
diagnosis that will assign a patient to DRGs 387 (Prematurity with
Major Problems) and DRG 389 (Full-Term Neonate with Major Problems)
when present only as a secondary diagnosis. However, the commenter
added, the footnote on the expanded codes 995.20 through 995.29 lists
them as principal or secondary diagnoses that will assign a patient to
DRGs 387 and 389 for neonates with major problems. The specific codes
are as follows:
995.20 (Unspecified adverse effect of unspecified drug,
medicinal and biological substance)
995.21 (Arthus phenomenon)
995.22 (Unspecified adverse effect of anesthesia)
995.23 (Unspecified adverse effect of insulin)
995.27 (Other drug allergy)
995.29 (Unspecified adverse effect of other drug,
medicinal and biological substance)
Response: The commenter is correct that we made an error in the
footnote. The predecessor code 995.2 when present as a secondary
diagnosis, will be a major problem that assigns the patient to DRGs 387
and 389. The footnote should have indicated codes 995.20 through 995.29
will only assign patients DRGs 387 and 389 when present as a secondary
diagnosis. We have corrected the footnote in Table 6A of the Addendum
to this final rule.
For codes that have been replaced by new or expanded codes, the
corresponding new or expanded diagnosis codes are included in Table 6A.
New procedure codes are shown in Table 6B. Diagnosis codes that have
been replaced by expanded codes or other codes or have been deleted are
in Table 6C (Invalid Diagnosis Codes). These invalid diagnosis codes
will not be recognized by the GROUPER beginning with discharges
occurring on or after October 1, 2006. Table 6D contains invalid
procedure codes. These invalid procedure codes will not be recognized
by the GROUPER beginning with discharges occurring on or after October
1, 2006. Revisions to diagnosis code titles are in Table 6E (Revised
Diagnosis Code Titles), which also includes the DRG assignments for
these revised codes. Table 6F includes revised procedure code titles
for FY-2007.
In the September 7, 2001 final rule implementing the IPPS new
technology add-on payments (66 FR 46906), we indicated we would attempt
to include proposals for procedure codes that

[[Page 47959]]

would describe new technology discussed and approved at the April
meeting as part of the code revisions effective the following October.
As stated previously, ICD-9-CM codes discussed at the March 23-24, 2006
Committee meeting that received consensus and that were finalized by
May 2006, are included in Tables 6A through 6F of the Addendum to this
final rule.
Section 503(a) of Pub. L. 108-173 included a requirement for
updating ICD-9-CM codes twice a year instead of a single update on
October 1 of each year. This requirement was included as part of the
amendments to the Act relating to recognition of new technology under
the IPPS. Section 503(a) amended section 1886(d)(5)(K) of the Act by
adding a clause (vii) which states that the ``Secretary shall provide
for the addition of new diagnosis and procedure codes in April 1 of
each year, but the addition of such codes shall not require the
Secretary to adjust the payment (or diagnosis-related group
classification) * * * until the fiscal year that begins after such
date.'' This requirement improves the recognition of new technologies
under the IPPS system by providing information on these new
technologies at an earlier date. Data will be available 6 months
earlier than would be possible with updates occurring only once a year
on October 1.
While section 1886(d)(5)(K)(vii) of the Act states that the
addition of new diagnosis and procedure codes on April 1 of each year
shall not require the Secretary to adjust the payment, or DRG
classification, under section 1886(d) of the Act until the fiscal year
that begins after such date, we have to update the DRG software and
other systems in order to recognize and accept the new codes. We also
publicize the code changes and the need for a mid-year systems update
by providers to capture the new codes. Hospitals also have to obtain
the new code books and encoder updates, and make other system changes
in order to capture and report the new codes.
The ICD-9-CM Coordination and Maintenance Committee holds its
meetings in the spring and fall in order to update the codes and the
applicable payment and reporting systems by October 1 of each year.
Items are placed on the agenda for the ICD-9-CM Coordination and
Maintenance Committee meeting if the request is received at least 2
months prior to the meeting. This requirement allows time for staff to
review and research the coding issues and prepare material for
discussion at the meeting. It also allows time for the topic to be
publicized in meeting announcements in the Federal Register as well as
on the CMS Web site. The public decides whether or not to attend the
meeting based on the topics listed on the agenda. Final decisions on
code title revisions are currently made by March 1 so that these titles
can be included in the IPPS proposed rule. A complete addendum
describing details of all changes to ICD-9-CM, both tabular and index,
is publicized on CMS and NCHS Web pages in May of each year. Publishers
of coding books and software use this information to modify their
products that are used by health care providers. This 5-month time
period has proved to be necessary for hospitals and other providers to
update their systems.
A discussion of this timeline and the need for changes are included
in the December 4-5, 2005 ICD-9-CM Coordination and Maintenance
Committee minutes. The public agreed that there was a need to hold the
fall meetings earlier, in September or October, in order to meet the
new implementation dates. The public provided comment that additional
time would be needed to update hospital systems and obtain new code
books and coding software. There was considerable concern expressed
about the impact this new April update would have on providers.
In the FY 2005 IPPS final rule, we implemented section
1886(d)(5)(K)(vii) of the Act, as added by section 503(a) of Pub. L.
108-173, by developing a mechanism for approving, in time for the April
update, diagnosis and procedure code revisions needed to describe new
technologies and medical services for purposes of the new technology
add-on payment process. We also established the following process for
making these determinations. Topics considered during the Fall ICD-9-CM
Coordination and Maintenance Committee meeting are considered for an
April 1 update if a strong and convincing case is made by the requester
at the Committee's public meeting. The request must identify the reason
why a new code is needed in April for purposes of the new technology
process. The participants at the meeting and those reviewing the
Committee meeting summary report are provided the opportunity to
comment on this expedited request. All other topics are considered for
the October 1 update. Participants at the Committee meeting are
encouraged to comment on all such requests. There were no requests for
an expedited April 1, 2006 implementation of an ICD-9-CM code at the
September 29-30, 2005 Committee meeting. Therefore, there were no new
ICD-9-CM codes implemented on April 1, 2006.
We believe that this process captures the intent of section
1886(d)(5)(K)(vii) of the Act. This requirement was included in the
provision revising the standards and process for recognizing new
technology under the IPPS. In addition, the need for approval of new
codes outside the existing cycle (October 1) arises most frequently and
most acutely where the new codes will capture new technologies that are
(or will be) under consideration for new technology add-on payments.
Thus, we believe this provision was intended to expedite data
collection through the assignment of new ICD-9-CM codes for new
technologies seeking higher payments.
Current addendum and code title information is published on the CMS
Web page at: www.cms.hhs.gov/icd9ProviderDiagnosticCodes/01_overview.asp#TopofPage. Information on ICD-9-CM diagnosis codes, along
with the Official ICD-9-CM Coding Guidelines, can be found on the Web
page at: www.cdc.gov/nchs/icd9.htm. Information on new, revised, and
deleted ICD-9-CM codes is also provided to the AHA for publication in
the Coding Clinic for ICD-9-CM. AHA also distributes information to
publishers and software vendors.
CMS also sends copies of all ICD-9-CM coding changes to its
contractors for use in updating their systems and providing education
to providers.
These same means of disseminating information on new, revised, and
deleted ICD-9-CM codes will be used to notify providers, publishers,
software vendors, contractors, and others of any changes to the ICD-9-
CM codes that are implemented in April. The code titles are adopted as
part of the ICD-9-CM Coordination and Maintenance Committee process.
Thus, although we publish the code titles in the IPPS proposed and
final rules, they are not subject to comment in the proposed or final
rules. We will continue to publish the October code updates in this
manner within the IPPS proposed and final rules. For codes that are
implemented in April, we will assign the new procedure code to the same
DRG in which its predecessor code was assigned so there will be no DRG
impact as far as DRG assignment. This mapping was specified by section
1886(d)(5)(K)(vii) of the Act as added by section 503(a) of Pub. L.
108-173. Any midyear coding updates will be available through the Web
sites indicated above and through the Coding Clinic for ICD-9-CM.
Publishers and software vendors currently obtain code changes through
these sources in order

[[Page 47960]]

to update their code books and software systems. We will strive to have
the April 1 updates available through these Web sites 5 months prior to
implementation (that is, early November of the previous year), as is
the case for the October 1 updates.
Comment: Many commenters recommended that the Secretary use the
regulatory process to replace ICD-9-CM with ICD-10-CM and ICD-10-PCS
expeditiously. Several commenters indicated that the April 2005 ICD-9-
CM Coordination and Maintenance Committee meeting included discussions
of limiting the creation of new procedure codes in order to allow the
classification system to last at least 2 more years. ICD-9-CM procedure
code categories 00 and 17 were created to identify a diverse group of
procedures and interventions affecting all body systems. The commenters
stressed that the establishment of these code categories represented a
deviation from the normal structure of ICD-9-CM and was a stopgap
measure to accommodate new technology when there are no other codes
available in the corresponding body system chapters (for example,
musculoskeletal system and circulatory system). The commenters
indicated that category 00 is now full, and the ICD-9-CM Coordination
and Maintenance Committee is considering proposals for codes in
category 17. The commenters stated that at the April Coordination and
Maintenance meeting a proposal was presented that would in effect leave
only 80 codes available in the new category 17. The commenters stated
that in recent years, as many as 50 new procedure codes have been
created in a single year. The commenters strongly recommended that the
Secretary use the regulatory process to implement ICD-10-CM and ICD-10-
PCS in place of ICD-9-CM expeditiously.
Several commenters indicated that limitations with ICD-9-CM make
data collected with these codes less precise. The commenters stated
that systems such as the CS DRGs could make use of the more detailed
information in ICD-10-CM and ICD-10-PCS to group claims more accurately
and better identify differences in severity and complexity. Similar
comments were received from a number of other individuals.
Response: We agree that it is important to have an accurate and
precise coding system. The Department will continue to study whether to
adopt ICD-10-CM. In the interim, we continue to update both ICD-9-CM
and ICD-10-PCS.
Comment: A number of commenters expressed concern that only nine
diagnosis codes and six procedure codes are processed by Medicare. The
commenters recommended that CMS modify its systems so that the number
of diagnoses codes processed would increase from 9 to 25 and the number
of procedures processed would increase from 6 to 25. The commenters
stated that hospitals submit claims to CMS in electronic format, and
that the HIPAA compliant electronic transaction standard, HIPAA 837i,
allows up to 25 diagnoses and 25 procedures. The commenters stated that
CMS does not require its fiscal intermediaries to process codes beyond
the first nine diagnosis codes and six procedure codes. The commenters
indicated that complex classification systems such as the proposed CS
DRGs could make use of the information in these additional codes to
better classify the patients.
One commenter stated that an incremental step in working towards a
refined DRG system is to have CMS systems process 25 diagnosis and
procedure codes.
Response: The commenters are correct that CMS does not process
codes submitted electronically on the 837i electronic format beyond the
first 9 diagnosis codes and first 6 procedure codes. While HIPAA
requires CMS to accept up to 25 ICD-9-CM diagnosis and procedure codes
on the HIPAA 837i electronic format, it does not require that CMS
process that many diagnosis and procedure codes.
As suggested by the commenters, there is value in retaining
additional data on patient conditions that would result from expanding
Medicare's data system so it can accommodate additional diagnosis and
procedure codes. We have been considering this issue while we
contemplated refinements to our DRG system to better recognize patient
severity of illness. However, extensive lead time is required to allow
for modifications to our internal and contractors' electronic systems
in order to process and store this additional information. We are
unable to move forward with this recommendation without carefully
evaluating implementation issues. We will continue to carefully
evaluate this request to expand the process capacity of our systems.
Comment: One commenter expressed concern about the process involved
with updating the ICD-9-CM Coding Guidelines. The guidelines are
updated by the cooperating parties of ICD-9-CM, including
representatives from the Centers for Disease and Prevention Control
(CDC), CMS, the AHA, and the AHIMA. The commenter complimented CMS
staff for becoming more ``provider friendly'' and using such tools as
the open door forum to involve providers in policy discussions. The
commenter requested that some of the coding guideline discussions be
held in an open meeting so that providers could give input.
Response: We agree with the commenter that it is important to
involve the provider community in activities involving the updating of
ICD-9-CM codes and guidelines. The Department utilizes the ICD-9-CM
Coordination and Maintenance Committee to discuss proposed changes to
the coding system. At times, this Committee also addresses coding
guidelines that affect code selection. The current process of approving
new and revised coding guidelines involves approval by all four
cooperating parties. It is our understanding that AHA and AHIMA
actively seek input from their members on coding issues. AHA and AHIMA
use this input when they are voting on coding issue to be published in
the AHA's Coding Clinic for ICD-9-CM and on coding guidelines. We will
refer these concerns to the cooperating parties so that they may
discuss improvements which could be made in obtaining providers' input
into coding guidelines. We will also welcome recommendations on
specific coding guideline issues that providers wish to be included in
future agendas of the ICD-9-CM Coordination and Maintenance Committee.
The Committee recently discussed coding guidelines for septicemia. We
will continue to work with the provider community to offer a public
forum for discussion of ICD-9-CM code revisions and guidelines.
11. Other Issues
a. Chronic Kidney Disease
Comment: Two commenters expressed concern regarding the revised
diagnosis codes for chronic kidney disease and their DRG assignments
which appeared in Table 6E of the Addendum to the proposed rule. The
following codes were identified as being classified to DRGs 331, 332,
and 333 (Other kidney and urinary tract diagnoses with and without CC,
and age 0-17, respectively) in MDC 11 (Diseases and Disorders of the
Kidney and Urinary Tract):
403.00 (Hypertensive chronic kidney disease, malignant,
with chronic kidney disease stage I through stage IV, or unspecified)
403.10 (Hypertensive chronic kidney disease, benign, with
chronic kidney disease stage I through stage IV, or unspecified)

[[Page 47961]]

403.90 (Hypertensive chronic kidney disease, unspecified,
with chronic kidney disease stage I through stage IV, or unspecified)
The commenters stated that revisions made to these three codes will
go into effect October 1. These changes would add the concept of
chronic kidney disease to the three codes. Therefore, these three codes
should be assigned to the same DRGs as other codes for chronic kidney
disease. The codes with chronic kidney disease are assigned to DRGs 315
(Other kidney and urinary tract procedures) and 316 (Renal failure) and
not to DRGs 331 through 333 where they were proposed.
Response: The commenters are correct. The three codes listed above
were modified to include the concept of chronic kidney disease. As
such, they should be assigned to DRG 315 (Other Kidney and Urinary
Tract Procedures) and DRG 316 (Renal Failure) (and not to DRGs 331
through 333. We have made these changes in Table 6E of the Addendum to
this final rule. Therefore, we will assign codes 403.00, 403.10, and
403.90 to DRG 315-316.
b. Bronchial Valve
Comment: Two commenters that manufacture minimally invasive
surgical therapies for patients with chronic obstructive pulmonary
disease addressed the establishment of a new code for the insertion of
a bronchial valve. This topic was discussed at the March 23-24, 2006
meeting of the ICD-9-CM Coordination and Maintenance Committee. (A
complete summary report of the meeting including handouts can be found
at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp#TopofPage.) CMS created a new code for endoscopic
insertion of a bronchial valve: code 33.71 (Endoscopic insertion or
replacement of bronchial valve(s)). The new code is listed in Table 6B
of the Addendum to this final rule. The predecessor codes that are
currently used for this procedure are:
33.22, Fiber-optic bronchoscopy
96.05, Other intubation of respiratory tract
The commenters expressed support for the creation of the new code,
but requested that the code not be assigned to the same DRG as its
predecessor codes. The predecessor codes are assigned to a medical DRG
if the patient is admitted with a respiratory diagnosis. If the patient
is admitted with a history of malignancy, the patient would be assigned
to DRG 412 (History of Malignancy with Endoscopy). The commenters
requested that code 33.71 be assigned to DRG 75 (Major Chest
Procedure). Although the commenters acknowledged that CMS has no data
on which to evaluate this request, they recommended that CMS use a
combination of the diagnosis of air leaks and treatment with
scarification as a proxy for cases that receive a bronchial valve. The
commenters stated that these patients are clinically similar and can be
expected to have similar resource intensity to patients that would
receive an endobronchial insertion or replacement of bronchial valves.
The commenters undertook their own data analysis using the FY 2005
MedPAR file. They used the following diagnosis procedure codes to
identify the proxy patients:
512.0, Spontaneous tension pneumothorax
512.8, Other spontaneous pneumothorax
34.6, Scarification of the pleura
Using these codes, the companies identified 490 patients which were
assigned to DRG 75. These patients had average charges of $56,711 as
compared to $49,698 for all patients in DRG 75. The commenters stated
that, although the resource utilization for scarification (and by
inference, valve implantation) appears to be higher than the average
for DRG 75, they believed it would still be reasonable to initially
assign code 33.71 to DRG 75 until actual cost data can be gathered
using the new procedure code.
Response: We do not agree that the endoscopic insertion of a
bronchial valve is clinically similar to scarification of the pleura.
The commenters themselves indicate that insertion of the bronchial
valve is a minimally invasive procedure. Scarification of the pleura is
a significantly invasive procedure. Furthermore, the bronchial valves
are inserted into patients admitted with chronic obstructive pulmonary
disease, not spontaneous pneumothorax. Therefore, we do not agree with
using the pneumothorax diagnoses as a proxy for patients who will
receive the bronchial valve.
The bronchial valve code 33.71 will go into effect on October 1,
2006. At this time, we have no information that suggests we should
assign this new code to a DRG that is different than the predecessor
codes. For this reason, we are classifying code 33.71, Endoscopic
insertion or replacement of bronchial valve(s) as a nonoperating room
procedure that will be assigned to DRG 412. This classification is
listed in Table 6B of the Addendum to this final rule. Once we receive
data using the new code, we will evaluate this issue further.
c. Female Reproductive System Reconstruction Procedures
Comment: One commenter recommended that CMS consider revising the
current procedure code assignments for DRG 356 (Female Reproductive
System Reconstructive Procedures) under MDC 13 (Diseases and Disorders
of the Female Reproduction System) to better reflect the clinical
coherence of those procedures that are specific to maintaining
reproductive health. The proposal suggested by the commenter would
distinguish procedures that are intended to ensure the reproductive
function of a woman from urinary conditions that cause discomfort and
emptying the bladder. The commenter suggested revising DRG 356 to limit
it to procedures that are specific to maintaining reproductive health
while creating four new DRGs that would be clinically similar for
procedures performed to repair pelvic floor defects which cause urinary
incontinence. The commenter stated these new DRGs would be timely with
the procedure code proposal they are planning to present at the
September 28-29, 2006 ICD-9-CM Coordination and Maintenance Committee
meeting.
Response: We appreciate the commenter's recommendation to create
four new DRGs in order to recognize the clinical coherence of
procedures specific to maintaining reproductive health. There are two
aspects to the commenter's proposal. The first part of the proposal
would limit DRG 356 to procedures that are intended to maintain
reproductive health. The second part of the commenter's proposal would
create four new DRGs for repairing pelvic floor defects that create
urinary incontinence. These four new DRGs would consist of two new DRG
pairs (each split based on whether or not the patient has a CC) that
would separate patients based on whether or not they had a graft
procedure.
The commenter provided no data to support its proposal. Further,
two of the four new DRGs being requested by the commenter would be
based on new and revised procedure codes that have not yet been
proposed or created. Therefore, we are unable to evaluate the request
at this time. We may consider this proposal further in the future if
the ICD-9-CM Coordination and Maintenance Committee creates the new
codes being requested by the commenter and further data are made
available for review.

[[Page 47962]]

d. Devices That Are Replaced Without Cost or Where Credit for a
Replaced Device Is Furnished to the Hospital
In recent years, there have been several field actions and recalls
with regard to failure of implantable cardiac defibrillators (ICDs) and
pacemakers. In many of these cases, the manufacturers have offered
replacement devices without cost to the hospital or credit for the
device being replaced if the patient required a more expensive device.
In some circumstances, manufacturers have also offered, through a
warranty package, to pay specified amounts for unreimbursed expenses to
persons who had replacement devices implanted. In addition, we believe
that incidental device failures that are covered by manufacturer
warranties occur routinely. While we understand that some device
malfunctions may be inevitable as medical technology grows increasingly
sophisticated, we believe that early recognition of problems would
reduce the number of people with the potential to be adversely affected
by these device problems. The medical community needs heightened and
early awareness of patterns of device failures, voluntary field
actions, and recalls so that it can take appropriate action to care for
Medicare beneficiaries. Systematic efforts must be undertaken by all
interested and involved parties, including manufacturers, insurers, and
the medical community, to ensure that device problems are recognized
and addressed as early as possible so that people's health is protected
and high quality medical care is provided. We are taking several steps
to assist in the early recognition and analysis of patterns of device
problems to minimize the potential for harmful device-related effects
on the health of Medicare patients and the public in general.
In recent years, CMS has recognized the importance of data
collection as a condition of Medicare coverage for selected services.
In 2005, CMS issued a National Coverage Determination (NCD) that
expanded coverage of ICDs and also required registry participation when
the devices were implanted for certain clinical indications. The NCD
included this requirement in order to ensure that the care received by
Medicare beneficiaries was reasonable and necessary and, therefore,
appropriately reimbursed. Presently, the American College of
Cardiology--National Cardiovascular Data Registry (ACC-NCDR) collects
these data and maintains the registry.
In addition to ensuring appropriate payment of claims, collection,
and ongoing analysis of ICD implantation, data can facilitate public
health response in the event of future device recalls. The systematic
recording of device manufacturer and model number can enhance patient
and provider notification. Analysis of registry data may uncover
patterns in complication rates (for example, device malfunction, device
related infection, or early battery depletion) associated with
particular devices that signify the need for a more specific
investigation. Patterns found in registry data may identify problems
earlier than the currently available mechanisms, which do not
systematically collect such detailed information surrounding
procedures.
We encourage the medical community to work to develop additional
registries for implantable devices, so that timely and comprehensive
information is available regarding devices, recipients of those
devices, and their health status and outcomes. While participation in
an ICD registry is required as a condition of coverage for ICD
implantation for certain clinical conditions, we believe that the
potential benefits of registries extend well beyond their application
in Medicare's specific NCDs. As medical technology continues to advance
swiftly, data collection regarding the short and long term outcomes of
new technologies, and especially concerning implanted devices that may
remain in the bodies of patients for their lifetimes, will be essential
to the timely recognition of any specific problems and patterns of
complications. This information will facilitate early interventions to
mitigate harm and improve the quality and efficiency of health care
services.
Moreover, data from registries may help further the development of
high quality, evidence-based clinical practice guidelines for the care
of patients who may receive device-intensive procedures. In turn,
widespread use of evidence-based guidelines may reduce variation in
medical practice, leading to improved personal and public health.
Registry information may also contribute to the development of more
comprehensive and refined quality metrics that may be used to
systematically assess and then improve the safety and quality of health
care. Such improvements in the quality of care that result in better
personal health will require the sustained commitment of industry,
payers, health care providers, and others towards that goal, along with
excellent and open communication and rapid systemwide responses in a
comprehensive effort to protect and enhance the health of the public.
We look forward to further discussions with the public about new
strategies to recognize device problems early and how to definitively
address them, in order to minimize both the harmful health effects and
increased health care costs that may result.
In addition, we believe that the routine identification of Medicare
claims for certain device implantation procedures in situations where a
payment adjustment is appropriate may enhance the medical community's
recognition of device problems, potentially leading to more timely
improvements in device technologies. This systematic approach, where
hospitals identify and then appropriately report selected services when
devices are replaced without cost to the hospital or with full credit
to the hospital for the cost of the replaced device, should provide
comprehensive information regarding the hospital experiences of
Medicare patients with certain devices that are being replaced. Because
Medicare patients are common recipients of implanted devices, this
claims information may be particularly helpful in identifying patterns
of device problems early in their natural history so that appropriate
strategies to reduce future problems may be developed.
In addition to our concern for the public health, we also have a
fiduciary responsibility to the Medicare Trust Fund to ensure that
Medicare pays only for covered services. Therefore, we believe that we
need to consider whether it is appropriate to reduce the Medicare
payment in cases in which an implanted device is replaced without cost
to the hospital or with full credit for the removed device. Such a
proposal could cover certain devices for which credit for the replaced
device is given or which are replaced as a result of or pursuant to a
warranty, field action, voluntary recall, involuntary recall, and
certain devices which are provided free of charge. It could provide for
a reduction in the IPPS payment when we determine that the device is
replaced without cost to the provider or beneficiary or when the
provider receives full credit for the cost of a replaced device. We
will need to develop a methodology to determine the amount of the
reduction to the otherwise payable IPPS payment. We believe that this
is appropriate because in these cases the full cost of the replaced
device is not incurred and, therefore, we believe that an adjustment to
the payment is necessary to remove the cost of the device.

E. Recalibration of DRG Weights

In the FY 2007 IPPS proposed rule, we proposed to change the DRG

[[Page 47963]]

recalibration process methodology for FY 2007 to move to an HSRV
weighting method as discussed in section II.C.2. of the preamble to the
proposed rule (71 FR 24044). For FY 2006 and years prior, we have
recalibrated the DRG weights based on charge data for Medicare
discharges using the most current charge information available (for
example, the FY 2005 MedPAR file would have been used for FY 2007). Our
thorough analysis of the March 2005 MedPAC recommendations regarding
refinement of the DRG system used for the IPPS (see discussion of the
MedPAC recommendations in section II.C.2. of this preamble) has shown
that using gross charges as a basis for setting the DRG weights has
introduced bias into the weighting process. Specifically, hospitals
that are systematically more expensive than others (that is, teaching
hospitals and specialty hospitals) tend to treat certain cases more
commonly than others, causing the weights for these cases to be
artificially high. In addition, hospitals may mark up their charges for
routine days, intensive care days, and various ancillary services by
different percentages. This practice of differential markups among
hospital cost centers may also introduce bias into the weights. For
instance, we have observed that ancillary service cost centers
generally have higher charge markups than routine services. Thus, the
charge-based relative weight methodology may result in higher weights
for DRGs that use more ancillary services relative to DRGs that use
more routine services than would occur under a system where the weights
are based on costs.
As discussed in section II.C.2. of the preamble of the proposed
rule, based on our study of the MedPAC recommendations, we developed an
alternative methodology for recalibrating the DRG weights. This
proposed method is discussed in detail beginning on 71 FR 24044. The
proposed method involved applying the HSRV methodology at the cost
center level (HSRVcc) to remove the bias introduced by hospital
characteristics (that is, teaching, disproportionate share, location,
and size, among others) and then scaling the weights to costs using
national cost center CCRs derived from cost report data. However, in
response to comments discussed in section II.C.2 of this final rule, we
have postponed the implementation of the HSRV methodology in order to
further study its effects and have subsequently revised the methodology
for setting relative weights based on cost. Further, we are adopting
the cost relative weights under a 3-year transition period such that in
FY 2007, year one of the transition, the relative weights will be a
blend of 33 percent of the relative cost weight and 67 percent of the
relative charge weight. In year two, the relative weights will be based
on 67 percent of the relative cost weight and 33 percent of the
relative charge weight and in year three, the relative weights will be
100 percent cost based.
In developing the final system of weights, we used two data
sources: Claims data and cost report data. As in previous years, the
claims data source is the MedPAR file. This file is based on fully
coded diagnostic and procedure data for all Medicare inpatient hospital
bills. The FY 2005 MedPAR data used in this proposed rule include
discharges occurring on October 1, 2004, through September 30, 2005,
based on bills received by CMS through March 31, 2006, from all
hospitals subject to the IPPS and short-term acute care hospitals in
Maryland (which are under a waiver from the IPPS under section
1814(b)(3) of the Act). The FY 2005 MedPAR file used in calculating the
relative weights includes data for approximately 12,238,146 Medicare
discharges. Discharges for Medicare beneficiaries enrolled in a
Medicare+Choice managed care plan are excluded from this analysis. The
data exclude CAHs, including hospitals that subsequently became CAHs
after the period from which the data were taken. The second data source
used in the cost relative weight methodology are the FY 2004 Medicare
cost report data files from HCRIS, which represents the most recent
full set of cost report data available. We used the March 31, 2006
update of the HCRIS cost report files for FY 2004 in setting the final
relative cost based weights.
Because we are implementing the relative weights on a transitional
basis it is necessary to calculate both charge based and cost based
relative weights. The charge-based methodology used to calculate the
DRG relative weights from the MedPAR data is the same methodology that
was in place for FY 2006 and was applied as follows:
To the extent possible, all the claims were regrouped
using the FY 2007 DRG classification revisions discussed in section
II.D. of this preamble.
The transplant cases that were used to establish the
relative weight for heart and heart-lung, liver and/or intestinal, and
lung transplants (DRGs 103, 480, and 495) were limited to those
Medicare-approved transplant centers that have cases in the FY 2005
MedPAR file. (Medicare coverage for heart, heart-lung, liver and/or
intestinal, and lung transplants is limited to those facilities that
have received approval from CMS as transplant centers.)
Organ acquisition costs for kidney, heart, heart-lung,
liver, lung, pancreas, and intestinal (or multivisceral organs)
transplants continue to be paid on a reasonable cost basis. Because
these acquisition costs are paid separately from the prospective
payment rate, it was necessary to subtract the acquisition charges from
the total charges on each transplant bill that showed acquisition
charges before computing the average charge for the DRG and before
eliminating statistical outliers.
Total charges were standardized to remove the effects of
differences in area wage levels, indirect medical education and
disproportionate share payments, and, for hospitals in Alaska and
Hawaii, the applicable cost-of-living adjustment.
The average standardized charge per DRG was calculated by
summing the standardized total charges for all cases in the DRG and
dividing that amount by the number of cases classified in the DRG. A
transfer case was counted as a fraction of a case based on the ratio of
its transfer payment under the per diem payment methodology to the full
DRG payment for non-transfer cases. That is, a transfer case receiving
payment under the transfer methodology equal to half of what the case
would receive as a non-transfer would be counted as 0.5 of a total
case.
Statistical outliers were eliminated by removing all cases
that were beyond 3.0 standard deviations from the mean of the log
distribution of both the charges per case and the charges per day for
each DRG.
The average charge for each DRG was then recomputed
(excluding the statistical outliers) and divided by the national
average standardized charge per case to determine the relative weight.
The new charge-based weights were then normalized by an adjustment
factor of 1.49338 so that the average case weight after recalibration
was equal to the average case weight before recalibration. This
normalization adjustment is intended to ensure that recalibration by
itself neither increases nor decreases total payments under the IPPS as
required by section 1886(d)(4)(C)(iii) of the Act. We note that due to
the decision in Bellevue Hosp. Center v. Leavitt, in which the Court of
Appeals for the Second Circuit (the Court) ordered CMS to apply the
occupational mix adjustment to 100 percent of the wage index effective
for FY 2007 (see section III.C. of this final

[[Page 47964]]

rule for more details of this Court decision), we are unable to
finalize the FY 2007 wage index data at this time. Since we are relying
on the wage index data as one of the standardizing factors that we use
in calculating both the charge-based and the cost-based relative
weights that are blended to set the FY 2007 transitional relative
weights, we will recalculate the FY 2007 relative weights when the wage
data becomes available and will publish these recalculated relative
weights in a subsequent Federal Register notice prior to October 1,
2006.
The methodology we used to calculate the DRG cost-based weights
from the FY 2005 MedPAR claims data and FY 2004 Medicare cost report
data is as follows:
To the extent possible, all the claims were regrouped
using the FY 2007 DRG classification revisions discussed in section
II.D. of this preamble.
The transplant cases that were used to establish the
relative weight for heart and heart-lung, liver and/or intestinal, and
lung transplants (DRGs 103, 480, and 495) were limited to those
Medicare-approved transplant centers that have cases in the FY 2005
MedPAR file. (Medicare coverage for heart, heart-lung, liver and/or
intestinal, and lung transplants is limited to those facilities that
have received approval from CMS as transplant centers.)
Organ acquisition costs for kidney, heart, heart-lung,
liver, lung, pancreas, and intestinal (or multivisceral organs)
transplants continue to be paid on a reasonable cost basis. Because
these acquisition costs are paid separately from the prospective
payment rate, it is necessary to subtract the acquisition charges from
the total charges on each transplant bill that showed acquisition
charges before computing the average cost for each DRG and before
eliminating statistical outliers.
Claims with total charges or total length of stay less
than or equal to zero were dropped. Claims that had an amount in the
total charge field that differed by more than $10.00 from the sum of
the routine day charges, intensive care charges, pharmacy charges,
special equipment charges, therapy services charges, operating room
charges, cardiology charges, laboratory charges, radiology charges,
other service charges, labor and delivery charges, inhalation therapy
charges and anesthesia charges were also dropped. At least 94 percent
of the providers in the MedPAR file had charges for 10 of the 13 cost
centers. Claims for providers that did not have charges greater than
zero for at least 10 of the 13 cost centers were dropped.
Statistical outliers were eliminated by removing all cases
that were beyond 3.0 standard deviations from the mean of the log
distribution of both the total charges per case and the total charges
per day for each DRG.
Once the MedPAR data were trimmed and the statistical outliers were
removed, the charges for each of the 13 cost groups for each claim were
standardized to remove the effects of differences in area wage levels,
indirect medical education and disproportionate share payments, and for
hospitals in Alaska and Hawaii, the applicable cost-of-living
adjustment. Charges were then summed by DRG for each of the 13 cost
groups such that each DRG had 13 standardized charge totals. These
charges were then adjusted to cost by applying the national average
CCRs developed from the FY 2004 cost report data.
The 13 cost centers that we used in the DRG cost calculation are
shown in the following table. In addition, the table shows the lines on
the cost report that we used to create the national cost center CCRs
that we used to adjust the DRG charges to cost:

BILLING CODE 4120-01-P

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[GRAPHIC] [TIFF OMITTED] TR18AU06.008

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[GRAPHIC] [TIFF OMITTED] TR18AU06.009

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[GRAPHIC] [TIFF OMITTED] TR18AU06.010

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[GRAPHIC] [TIFF OMITTED] TR18AU06.011

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[GRAPHIC] [TIFF OMITTED] TR18AU06.012

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[GRAPHIC] [TIFF OMITTED] TR18AU06.013

We developed the national average CCRs as follows:
Taking the FY 2004 cost report data, we removed CAHs, Indian Health
Service hospitals, all-inclusive rate hospitals, and cost reports that
represented time periods of less than 1 year (365 days). We included
hospitals located in Maryland as we are including their charges in our
claims database. We then created CCRs for each provider for each cost
center (see prior table for line items used in the calculations) and
removed any CCRs that were greater than 10 or less than .01. In
response to a comment from MedPAC discussed in section II.C.1. of this
preamble, we normalized the departmental CCRs by dividing the CCR for
each department by the total CCR for the hospital for the purpose of
trimming the data. We then took the logs of all of the normalized cost
center CCRs and removed any cost center CCRs where the log of the cost
center CCR was greater or less than the mean log plus/minus 3 times the
standard deviation for the log of that cost center CCR. In the proposed
rule we had used a trim of 1.96 times the standard deviation. However,
in response to comments as discussed in section II C. of this preamble,
we have subsequently revised our trim to 3 standard deviations as
commenters stated that this less stringent trim appropriately retains
more providers in the database. Once the cost report data were trimmed,
we calculated a Medicare specific CCR, again in response to a comment
from MedPAC as discussed in section II.C. of this preamble. The
Medicare specific CCR was determined by taking the Medicare charges for
each line item from worksheet D Part 4 and deriving the Medicare
specific costs by applying the hospital-specific departmental CCRs to
the Medicare specific charges for each line item from worksheet D Part
4. Once each hospital's Medicare specific costs were established, we
summed the total Medicare specific costs and divided by the sum of the
total Medicare specific charges to produce national average, charge
weighted CCRs. In the proposed rule, we used hospital-specific CCRs,
but in response to comments as discussed in section II C. of this
preamble, we have revised our methodology to use charge-weighted CCRs
in establishing the national average CCRs.
After we multiplied the total charges for each DRG in each of the
13 cost centers by the corresponding national average CCR, we summed
the 13 ``costs'' across each DRG to produce a total standardized cost
for the DRG. The average standardized cost for each DRG was then
computed as the total standardized cost for the DRG divided by the
transfer adjusted case count for the DRG. The average cost for each DRG
was then divided by the national average standardized cost per case to
determine the relative weight.
The new cost-based weights were then normalized by an adjustment
factor of 1.49338 so that the average case weight after recalibration
was equal to the average case weight before recalibration. This
normalization adjustment is intended to ensure that recalibration by
itself neither increases nor decreases total payments under the IPPS as
required by section 1886(d)(4)(C)(iii) of the Act.
When we recalibrated the DRG weights for previous years, we set a
threshold of 10 cases as the minimum number of cases required to
compute a reasonable weight. We used that same case threshold in
recalibrating the DRG weights for FY 2007. Using the FY 2005 MedPAR
data set, there are 40 DRGs that contain fewer than 10 cases. In FY
2006, we computed weights for low volume DRGs by adjusting the FY 2005
weights of these low volume DRGs by the percentage change in the
average weight of the cases in other DRGs. Because we believe that we
do not have sufficient MedPAR data to set accurate and stable HSRVcc
weights for these low-volume DRGs, we proposed to assign them the
weights of similar DRGs for which we have more complete data and
solicited comment on this proposal. The crosswalk table we proposed is
shown in the FY 2007 IPPS proposed rule (71 FR 24048).
Comment: One commenter stated that we should not assign weights
based on other DRGs but should instead supplement our current data the
data from other sources so that we can set weights for these DRGs based
on actual cases.
Response: Because we are implementing cost based weights in a
transition phase and because we intend to study the DRGs and relative
weight methodologies during the coming year we have reconsidered our
proposal to assign low volume DRGs the weights of other DRGS for FY
2007 and are reverting to our previous method of updating the prior
year's weight for these DRGs by the percentage change in the average
weight of the cases in the other DRGs. We may consider supplementing
our MedPAR data with additional claims data in the future.
Section 1886(d)(4)(C)(iii) of the Act requires that, beginning with
FY 1991, reclassification and recalibration changes be made in a manner
that assures that the aggregate payments are neither greater than nor
less than the aggregate payments that would have been made without the
changes. Although normalization is intended to achieve this effect,
equating the average case weight after recalibration to the average
case weight before recalibration does not necessarily achieve budget
neutrality with respect to aggregate

[[Page 47971]]

payments to hospitals because payments to hospitals are affected by
factors other than average case weight. Therefore, as we have done in
past years, and as discussed in section II.A.4.a. of the Addendum to
this final rule, we are making a budget neutrality adjustment to ensure
that the requirement of section 1886(d)(4)(C)(iii) of the Act is met.

F. LTC-DRG Reclassifications and Relative Weights for LTCHs for FY 2007

1. Background
In the June 6, 2003 LTCH PPS final rule (68 FR 34122), we changed
the LTCH PPS annual payment rate update cycle to be effective July 1
through June 30 instead of October 1 through September 30. In addition,
because the patient classification system utilized under the LTCH PPS
uses the same DRGs as those currently used under the IPPS for acute
care hospitals, in that same final rule, we explained that the annual
update of the long-term care diagnosis-related group (LTC-DRG)
classifications and relative weights will continue to remain linked to
the annual reclassification and recalibration of the DRGs used under
the IPPS. In that same final rule, we specified that we will continue
to update the LTC-DRG classifications and relative weights to be
effective for discharges occurring on or after October 1 through
September 30 each year. Furthermore, we stated that we will publish the
annual update of the LTC-DRGs in the proposed and final rules for the
IPPS.
In the past, the annual update to the IPPS DRGs has been based on
the annual revisions to the ICD-9-CM codes and was effective each
October 1. As discussed in the FY 2006 IPPS final rule (70 FR 47323
through 47341) and in the Rate Year (RY) 2007 LTCH PPS final rule (71
FR 27803 through 27809), with the implementation of section 503(a) of
Pub. L. 108-173, there is the possibility that one feature of the
GROUPER software program may be updated twice during a Federal fiscal
year (October 1 and April 1) as required by the statute for the IPPS.
Section 503(a) of Pub. L. 108-173 amended section 1886(d)(5)(K) of the
Act by adding a new clause (vii) which states that ``the Secretary
shall provide for the addition of new diagnosis and procedure codes in
[sic] April 1 of each year, but the addition of such codes shall not
require the Secretary to adjust the payment (or diagnosis-related group
classification) * * * until the fiscal year that begins after such
date.'' This requirement improves the recognition of new technologies
under the IPPS by accounting for those ICD-9-CM codes in the MedPAR
claims data at an earlier date. In implementing the statutory change,
the agency has provided that ICD-9-CM diagnosis and procedure codes for
new medical technology may be created and added to existing DRGs in the
middle of the Federal fiscal year on April 1. However, this policy
change will have no effect on the LTC-DRG relative weights, which will
continue to be updated only once a year (October 1), nor will there be
any impact on Medicare payments under the LTCH PPS. The use of the ICD-
9-CM code set is also compliant with the current requirements of the
Transactions and Code Sets Standards regulations at 45 CFR Parts 160
and 162, promulgated in accordance with the Health Insurance
Portability and Accountability Act of 1996 (HIPAA), Pub. L. 104-191.
As we explained in the RY 2007 LTCH PPS final rule (71 FR 27805
through 27809), in the health care industry, historically annual
changes to the ICD-9-CM codes were effective for discharges occurring
on or after October 1 each year. Thus, the manual and electronic
versions of the GROUPER software, which are based on the ICD-9-CM
codes, were also revised annually and effective for discharges
occurring on or after October 1 each year. As noted above, the patient
classification system used under the LTCH PPS (LTC-DRGs) is based on
the patient classification system used under the IPPS (CMS DRGs), which
historically had been updated annually and is effective for discharges
occurring on or after October 1 through September 30 each year. As also
mentioned above, the ICD-9-CM coding update process was revised as a
result of implementing section 503(a) of Pub. L. 108-173, which
includes a requirement for updating diagnosis and procedure codes as
often as twice a year instead of the current process of annual updates
on October 1 of each year (as discussed in greater detail in section
II.D.10. of the preamble of this final rule). The agency uses the ICD-
9-CM codes as its code set for diagnoses and procedures. Therefore, the
ICD-9-CM codes currently used under both the IPPS and LTCH PPS may be
updated as often as twice a year. This requirement is included as part
of the amendments to the Act relating to recognition of new medical
technology under the IPPS.
Despite the fact that aspects of the GROUPER software may be
updated to recognize any new technology ICD-9-CM codes, as discussed
most recently in the RY 2007 LTCH PPS final rule (71 FR 27805 through
27808), there will be no impact on either LTC-DRG assignments or
payments under the LTCH PPS at that time. That is, changes to the LTC-
DRGs (such as the creation or deletion of LTC-DRGs) and the relative
weights will continue to be updated in the manner and timing (October
1) as they are now. As noted above and as described in the RY 2007 LTCH
PPS final rule (71 FR 27805 through 27809), updates to the GROUPER for
both the IPPS and the LTCH PPS (with respect to relative weights and
the creation or deletion of DRGs) are made in the annual IPPS proposed
and final rules and are effective each October 1. We also explained
that because we do not publish a midyear IPPS rule, any April 1 code
updates will not be published in a midyear IPPS rule. Rather, we will
assign any new diagnosis or procedure codes to the same DRG in which
its predecessor code was assigned, so that there will be no impact on
the DRG assignments (as also discussed in section II.D.10. of this
preamble). Any coding updates will be available through the Web sites
provided in section II.D.10. of this preamble and through the Coding
Clinic for ICD-9-CM. Publishers and software vendors currently obtain
code changes through these sources in order to update their code books
and software system. If new codes are implemented on April 1, revised
code books and software systems, including the GROUPER software
program, will be necessary because we must use current ICD-9-CM codes.
Therefore, for purposes of the LTCH PPS, because each ICD-9-CM code
must be included in the GROUPER algorithm to classify each case into a
LTC-DRG, the GROUPER software program used under the LTCH PPS would
need to be revised to accommodate any new codes.
In implementing section 503(a) of Pub. L. 108-173, there will only
be an April 1 update if new technology codes are requested and
approved. We note that any new codes created for April 1 implementation
will be limited to those diagnosis and procedure code revisions
primarily needed to describe new technologies and medical services.
However, we reiterate that the process of discussing updates to the
ICD-9-CM has been an open process through the ICD-9-CM Coordination and
Maintenance Committee since 1995. Requestors will be given the
opportunity to present the merits for a new code and make a clear and
convincing case for the need to update ICD-9-CM codes for purposes of
the IPPS new technology add-on payment process through an April 1
update (as also discussed in section II.D.10. of this preamble).
However, as we discussed in the RY 2007 LTCH PPS final rule (71 FR
27805

[[Page 47972]]

through 27809), at the September 29-30, 2005 ICD-9-CM Coordination and
Maintenance Committee meeting, there were no requests for an April 1,
2006 implementation of ICD-9-CM codes, and, therefore, the next update
to the ICD-9-CM coding system would not occur until October 1, 2006 (FY
2007). Presently, as there were no coding changes suggested for an
April 1, 2006 update, the ICD-9-CM coding set implemented on October 1,
2005, will continue through September 30, 2006 (FY 2006). The update to
the ICD-9-CM coding system for FY 2007 is discussed above in section
II.D.10. of this preamble. Accordingly, in this final rule, as
discussed in greater detail below, we are revising the LTC-DRG
classifications and relative weights, to be effective October 1,2006
through September 30, 2007 (FY 2007). Furthermore, we will notify LTCHs
of any revisions to the GROUPER software used under the IPPS and the
LTCH PPS that will be implemented April 1, 2007. The LTC-DRGs and
relative weights for FY 2007 in this final rule are based on the IPPS
DRGs (GROUPER Version 24.0) discussed in section II.B. of the preamble
to this final rule.
Comment: Two commenters urged us to consolidate rulemaking for the
LTCH PPS into one annual cycle rather than setting the payment rates
and policy changes on a July 1 through June 30 rate year but making
changes to the LTC-DRGs and relative weights based on the Federal
fiscal year, October 1 through September 30. Both commenters noted that
this situation has caused management and planning difficulty for some
LTCHs. One of the commenters, whose LTCH has a June 1 through May 31
fiscal year, emphasizes the difficulties in ``estimating the impact of
changes in case weights as part of the final rule'' associated with the
hospital IPPS.
One commenter noted that other Medicare provider types only
experience one routine annual adjustment to their respective PPSs and
that it is not reasonable to expect the LTCH provider community to
comment on the reasonableness of a proposed payment level in February
when ``that payment level is subject to change in a second rulemaking
proposed in April or May of the same year.'' This commenter suggested
that, commencing with FY 2008, all LTCH PPS rulemaking should occur on
the same schedule as it does under the IPPS, which would maintain the
established cycle for the update of the LTC-DRGs and relative weights.
The same commenter further suggested that, should CMS make this change
in the rulemaking schedule, for the first year only, CMS should
establish a 3-month (July through September) and 12-month (October
through September) update factor to the Federal rate.
Response: In the LTCH RY 2004 final rule (68 FR 34122), we revised
our regulations at Sec. 412.535, which established a LTCH PPS rate
year with a July 1 effective date for the annual update of the Federal
payment rate and associated payment policies while also maintaining an
October 1 implementation date for the update of the LTC-DRG patient
classification system and associated weighting factors. In changing the
effective date of the annual LTCH PPS rate year update and the
resulting publication dates of the proposed and final regulations for
the LTCH PPS, we stated that this shift in the schedule would promote
``administrative feasibility and efficiency'' by avoiding concurrent
rulemaking and publication with the IPPS final rule. We also noted that
although section 1886(e)(5)(A) of the Act required that, for the IPPS,
the proposed rule be published in the Federal Register ``not later than
the April 1 before each fiscal year; and the final rule, not later than
the August 1 before such fiscal year,'' no similar requirement is
imposed on the LTCH PPS and that we believed that this schedule change
was well within the considerable discretion that Congress afforded the
Secretary in the implementation of the LTCH PPS (68 FR 34125 through
34128). We maintained at that time, and we continue to believe, that
this change to the LTCH rate year annual rulemaking schedule was not
unduly burdensome for the LTCH industry because we had not added any
requirements that LTCHs maintain payment systems or coding software in
order to be paid under the LTCH PPS, although we understood that it was
common for many hospitals, consultants, and industry associations to do
so.
With regard to the commenter who described a LTCH with a fiscal
year beginning on June 1, we would also reiterate what we stated in the
FY 2004 final rule that ``since the start of cost reporting periods for
many LTCHs, as well as acute care hospitals, have not generally
coincided with the October starting date of the Federal fiscal year,
those hospitals that choose to have their own payment software are very
familiar with the virtually seamless routine of inputting new numbers
to their existing systems when a final rule is published'' (68 FR
34127).
Therefore, we continue to believe that there is no significant
administrative burden imposed on the LTCH industry by the establishment
of the July 1 through June 30 rate year for the annual payment rate
update under the LTCH PPS while still maintaining the October 1 through
September 30 update of the LTC-DRGs and relative weights which are
linked to the annual update of the diagnosis and procedure code set
(ICD-9-CM) currently adopted by the DHHS and the IPPS DRGs and relative
weights.
However, two commenters also stated that the separate rule-making
cycles cause difficulty in ``estimating the impact of changes in case
weights,'' which will be published in April or May, when commenting on
the payment rates published in the LTCH PPS proposed rule in the
preceding January or February. From the volume of correspondence that
we receive from LTCH associations and their consultants, some of which
include detailed analyses of CMS data, we do not believe that our
annual publication in the IPPS proposed rule of the proposed updates of
the LTC-DRGs and corresponding relative weights (which are derived
solely from the best available LTCH MedPAR claims data) prohibits the
public from assessing the impact such proposed changes would have if
finalized. In fact, in their specific comments on the proposed FY 2007
LTC-DRG relative weights (discussed in greater detail below), several
commenters presented analyses of the combined effect of the policy
changes established in the RY 2007 LTCH PPS final rule, effective July
1, 2007 (for example, revisions to the short-stay outlier policy), and
the proposed changes to the LTC-DRGs and relative weights for FY 2007.
Furthermore, the comments received on the policies presented in the
LTCH PPS RY 2007 proposed rule, a number of which contained detailed
data evaluations, demonstrated the availability as well as the ability
of the public to analyze the proposed policy changes using the most
recent LTCH MedPAR claims data. Therefore, we do not believe that our
present publication schedule deprives industry stakeholders of the
opportunity to submit meaningful comments on proposed changes to
payment levels when we are establishing the payment rates and
associated policy under the LTCH PPS, even though changes to the LTC-
DRG weights are proposed in a separate notice of proposed rulemaking.
Given the considerable discretion granted to the Secretary under
the BBRA of 1999 and the BIPA of 2000 to develop the LTCH PPS, we may
revisit the rulemaking schedule for the LTCH PPS in the future. If a
revision to the schedule is proposed, the public will have the
opportunity to submit

[[Page 47973]]

comments on any proposed change to the schedule during the rulemaking
process.
2. Changes in the LTC-DRG Classifications
a. Background
Section 123 of Pub. L. 106-113 specifically requires that the
agency implement a PPS for LTCHs that is a per discharge system with a
DRG-based patient classification system reflecting the differences in
patient resources and costs in LTCHs. Section 307(b)(1) of Pub. L. 106-
554 modified the requirements of section 123 of Pub. L. 106-113 by
specifically requiring that the Secretary examine ``the feasibility and
the impact of basing payment under such a system [the LTCH PPS] on the
use of existing (or refined) hospital diagnosis-related groups (DRGs)
that have been modified to account for different resource use of long-
term care hospital patients as well as the use of the most recently
available hospital discharge data.''
In accordance with section 307(b)(1) of Pub. L. 106-554 and Sec.
412.515 of our existing regulations, the LTCH PPS uses information from
LTCH patient records to classify patient cases into distinct LTC-DRGs
based on clinical characteristics and expected resource needs. The LTC-
DRGs used as the patient classification component of the LTCH PPS
correspond to the DRGs under the IPPS for acute care hospitals. Thus,
in this final rule, we are using the IPPS GROUPER Version 24.0 for FY
2007 to process LTCH PPS claims for LTCH discharges occurring from
October 1, 2006, through September 30, 2007. The changes to the CMS-DRG
classification system used under the IPPS for FY 2007 (GROUPER Version
24.0) are discussed in section II.D. of the preamble to this final
rule.
We note that, as we discuss in section II.C.6. of the preamble to
this final rule, MedPAC, in its 2005 Report to Congress on Physician-
Owned Specialty Hospitals, recommended that CMS, among other things,
refine the current DRGs under the IPPS to more fully capture
differences in severity of illness among patients. As we also discuss
in that same section, in evaluating the MedPAC recommendation for the
IPPS, we are evaluating the APR DRG GROUPER used by MedPAC in its
analysis. Based on this analysis, we concur with MedPAC that the
modified version of the APR DRGs would account more completely for
differences in severity of illness and associated costs among
hospitals. However, as we made clear in the proposed rule and reiterate
in section II.C.6. of the preamble of this final rule, there are still
further changes that are important to make to the CS DRG system before
it is ready for adoption. At this time, we are not adopting a new
severity-adjusted DRG system, such as the APR DRGs or a modified
version of the APR DRGs, under the IPPS, as discussed in greater detail
in section II.C.6. of the preamble of this final rule. However, we are
refining the current CMS-DRG system by creating 20 new CMS DRGs and
modifying 32 others across 13 different clinical areas involving
1,666,476 cases that would improve the CMS DRG system's recognition of
severity of illness for FY 2007. We note that the LTCH PPS uses the
same patient classification system (DRGs) as the IPPS. That is, the
patient classification system used under the LTCH PPS (LTC DRGs) is
based on the patient classification system used under the IPPS (CMS
DRGs), which historically had been updated annually and is effective
for discharges occurring on or after October 1 through September 30
each year. As such, the updates to the CMS DRG classification system
used under the IPPS for FY 2007 (GROUPER Version 24.0), discussed in
section II.D. of the preamble to this final rule, will also be updates
that apply under the LTCH PPS.
Under the LTCH PPS, we determine relative weights for each of the
DRGs to account for the difference in resource use by patients
exhibiting the case complexity and multiple medical problems
characteristic of LTCH patients. In a departure from the IPPS, as we
discussed in the August 30, 2002 LTCH PPS final rule (67 FR 55985),
which implemented the LTCH PPS, and the FY 2006 IPPS final rule (70 FR
47324), we use low-volume quintiles in determining the LTC-DRG relative
weights for LTC-DRGs with less than 25 LTCH cases, because LTCHs do not
typically treat the full range of diagnoses as do acute care hospitals.
Specifically, we group those low-volume LTC-DRGs (that is, LTC-DRGs
with fewer than 25 cases) into 5 quintiles based on average charge per
discharge. (A listing of the composition of low-volume quintiles for
the FY 2006 LTC-DRGs (based on FY 2004 MedPAR data) appears in section
II.G.3. of the FY 2006 IPPS final rule (70 FR 47325 through 47332).) We
also adjust for cases in which the stay at the LTCH is less than or
equal to five-sixths of the geometric average length of stay; that is,
short-stay outlier cases (Sec. 412.529), as discussed below in section
II.F.4. of this preamble.
b. Patient Classifications Into DRGs
Generally, under the LTCH PPS, Medicare payment is made at a
predetermined specific rate for each discharge; that is, payment varies
by the LTC-DRG to which a beneficiary's stay is assigned. Just as cases
are classified into DRGs for acute care hospitals under the IPPS (see
section II.B. of this preamble), cases are classified into LTC-DRGs for
payment under the LTCH PPS based on the principal diagnosis, up to
eight additional diagnoses, and up to six procedures performed during
the stay, as well as age, sex, and discharge status of the patient. The
diagnosis and procedure information is reported by the hospital using
the ICD-9-CM codes.
As discussed in section II.B. of this preamble, the CMS-DRGs are
organized into 25 major diagnostic categories (MDCs), most of which are
based on a particular organ system of the body; the remainder involve
multiple organ systems (such as MDC 22, Burns). Accordingly, the
principal diagnosis determines MDC assignment. Within most MDCs, cases
are then divided into surgical DRGs and medical DRGs. Some surgical and
medical DRGs are further differentiated based on the presence or
absence of CCs. (See section II.B. of this preamble for further
discussion of surgical DRGs and medical DRGs.)
Because the assignment of a case to a particular LTC-DRG will
determine the amount that is paid for the case, it is important that
the coding is accurate. As used under the IPPS, classifications and
terminology used under the LTCH PPS are consistent with the ICD-9-CM
and the Uniform Hospital Discharge Data Set (UHDDS), as recommended to
the Secretary by the National Committee on Vital and Health Statistics
(``Uniform Hospital Discharge Data: Minimum Data Set, National Center
for Health Statistics, April 1980'') and as revised in 1984 by the
Health Information Policy Council (HIPC) of the U.S. Department of
Health and Human Services. We point out again that the ICD-9-CM coding
terminology and the definitions of principal and other diagnoses of the
UHDDS are consistent with the requirements of the Transactions and Code
Sets Standards under HIPAA (45 CFR Parts 160 and 162).
The emphasis on the need for proper coding cannot be overstated.
Inappropriate coding of cases can adversely affect the uniformity of
cases in each LTC-DRG and produce inappropriate weighting factors at
recalibration and result in inappropriate payments under the LTCH PPS.
LTCHs are to follow the same coding guidelines used by acute care
hospitals to ensure

[[Page 47974]]

accuracy and consistency in coding practices. There will be only one
LTC-DRG assigned per long-term care hospitalization; it will be
assigned at the time of discharge of the patient. Therefore, it is
mandatory that the coders continue to report the same principal
diagnosis on all claims and include all diagnosis codes for conditions
that coexist at the time of admission, for conditions that are
subsequently developed, or for conditions that affect the treatment
received. Similarly, all procedures performed in a LTCH, or paid for
under arrangements by a LTCH, during that stay are to be reported on
each claim.
Upon the discharge of the patient from a LTCH, the LTCH must assign
appropriate diagnosis and procedure codes from the ICD-9-CM. Completed
claim forms are to be submitted electronically to the LTCH's Medicare
fiscal intermediary. Medicare fiscal intermediaries enter the clinical
and demographic information into their claims processing systems and
subject this information to a series of automated screening processes
called the Medicare Code Editor (MCE). These screens are designed to
identify cases that require further review before assignment into a
LTC-DRG can be made.
After screening through the MCE, each LTCH claim will be classified
into the appropriate LTC-DRG by the Medicare LTCH GROUPER. The LTCH
GROUPER is specialized computer software and is the same GROUPER used
under the IPPS. After the LTC-DRG is assigned, the Medicare fiscal
intermediary determines the prospective payment by using the Medicare
LTCH PPS PRICER program, which accounts for LTCH hospital-specific
adjustments and payment rates. As provided for under the IPPS, we
provide an opportunity for the LTCH to review the LTC-DRG assignments
made by the fiscal intermediary and to submit additional information,
if necessary, within a specified timeframe (Sec. 412.513(c)).
The LTCH GROUPER is used both to classify past cases in order to
measure relative hospital resource consumption to establish the LTC-DRG
weights and to classify current cases for purposes of determining
payment. The records for all Medicare hospital inpatient discharges are
maintained in the MedPAR file. The data in this file are used to
evaluate possible DRG classification changes and to recalibrate the DRG
weights during our annual update (as discussed in section II.E. of this
preamble). The LTC-DRG relative weights are based on data for the
population of LTCH discharges, reflecting the fact that LTCH patients
represent a different patient-mix than patients in short-term acute
care hospitals.
3. Development of the FY 2007 LTC-DRG Relative Weights
a. General Overview of Development of the LTC-DRG Relative Weights
As we stated in the August 30, 2002 LTCH PPS final rule (67 FR
55981), one of the primary goals for the implementation of the LTCH PPS
is to pay each LTCH an appropriate amount for the efficient delivery of
care to Medicare patients. The system must be able to account
adequately for each LTCH's case-mix in order to ensure both fair
distribution of Medicare payments and access to adequate care for those
Medicare patients whose care is more costly. To accomplish these goals,
we adjust the LTCH PPS standard Federal prospective payment system rate
by the applicable LTC-DRG relative weight in determining payment to
LTCHs for each case. Under the LTCH PPS, relative weights for each LTC-
DRG are a primary element used to account for the variations in cost
per discharge and resource utilization among the payment groups (Sec.
412.515). To ensure that Medicare patients classified to each LTC-DRG
have access to an appropriate level of services and to encourage
efficiency, we calculate a relative weight for each LTC-DRG that
represents the resources needed by an average inpatient LTCH case in
that LTC-DRG. For example, cases in a LTC-DRG with a relative weight of
2 will, on average, cost twice as much as cases in a LTC-DRG with a
weight of 1.

b. Data

In the FY 2007 IPPS proposed rule (71 FR 24052), to calculate the
proposed LTC-DRG relative weights for FY 2007, we obtained total
Medicare allowable charges from FY 2005 Medicare LTCH bill data from
the December 2005 update of the MedPAR file, which were the best
available data at that time, and we used the proposed Version 24.0 of
the CMS GROUPER used under the IPPS (as discussed in that same proposed
rule) to classify cases. In that same proposed rule, we also proposed
that if more recent data were available, we would use that data and the
finalized Version 24.0 of the CMS GROUPER (used under the IPPS) to
determine the final LTC-DRG relative weights for FY 2007. Accordingly,
to calculate the final LTC-DRG relative weights for FY 2007 in this
final rule, we obtained total Medicare allowable charges from FY 2005
Medicare hospital bill data from the March 2006 update of the MedPAR
file (which are the most recent available data), and used the final
Version 24.0 of the CMS GROUPER used under the IPPS (as discussed in
section II.B. of this preamble) to classify cases.
We also stated in the FY 2007 IPPS proposed rule (71 FR 24052), as
we discussed in the FY 2006 IPPS final rule (70 FR 47325), we have
excluded the data from LTCHs that are all-inclusive rate providers and
LTCHs that are reimbursed in accordance with demonstration projects
authorized under section 402(a) of Pub. L. 90-248 as amended.
Therefore, consistent with the proposed rule, in the development of the
FY 2007 LTC-DRG relative weights in this final rule, we have excluded
the data of the 19 all-inclusive rate providers and the 3 LTCHs that
are paid in accordance with demonstration projects that had claims in
the FY 2005 MedPAR file.
c. Hospital-Specific Relative Value Methodology
By nature, LTCHs often specialize in certain areas, such as
ventilator-dependent patients and rehabilitation and wound care. Some
case types (DRGs) may be treated, to a large extent, in hospitals that
have, from a perspective of charges, relatively high (or low) charges.
This nonarbitrary distribution of cases with relatively high (or low)
charges in specific LTC-DRGs has the potential to inappropriately
distort the measure of average charges. To account for the fact that
cases may not be randomly distributed across LTCHs, we use a hospital-
specific relative value (HSRV) method to calculate the LTC-DRG relative
weights instead of the methodology used to determine the DRG relative
weights under the IPPS described in section II.E. of this preamble. We
believe this method will remove this hospital-specific source of bias
in measuring LTCH average charges. Specifically, we reduce the impact
of the variation in charges across providers on any particular LTC-DRG
relative weight by converting each LTCH's charge for a case to a
relative value based on that LTCH's average charge.
Under the HSRV method, we standardize charges for each LTCH by
converting its charges for each case to hospital-specific relative
charge values and then adjusting those values for the LTCH's case-mix.
The adjustment for case-mix is needed to rescale the hospital-specific
relative charge values (which, by definition, average 1.0 for each
LTCH). The average relative weight for a LTCH is its case-mix, so it is
reasonable to scale each LTCH's average

[[Page 47975]]

relative charge value by its case-mix. In this way, each LTCH's
relative charge value is adjusted by its case-mix to an average that
reflects the complexity of the cases it treats relative to the
complexity of the cases treated by all other LTCHs (the average case-
mix of all LTCHs).
In accordance with the methodology established under Sec. 412.523,
as implemented in the August 30, 2002 LTCH PPS final rule (67 FR 55989
through 55991), we standardize charges for each case by first dividing
the adjusted charge for the case (adjusted for short-stay outliers
under Sec. 412.529 as described in section II.F.4. (step 3) of this
preamble) by the average adjusted charge for all cases at the LTCH in
which the case was treated. Short-stay outliers under Sec. 412.529 are
cases with a length of stay that is less than or equal to five-sixths
the average length of stay of the LTC-DRG. The average adjusted charge
reflects the average intensity of the health care services delivered by
a particular LTCH and the average cost level of that LTCH. The
resulting ratio is multiplied by that LTCH's case-mix index to
determine the standardized charge for the case.
Multiplying by the LTCH's case-mix index accounts for the fact that
the same relative charges are given greater weight at a LTCH with
higher average costs than they would at a LTCH with low average costs,
which is needed to adjust each LTCH's relative charge value to reflect
its case-mix relative to the average case-mix for all LTCHs. Because we
standardize charges in this manner, we count charges for a Medicare
patient at a LTCH with high average charges as less resource intensive
than they would be at a LTCH with low average charges. For example, a
$10,000 charge for a case at a LTCH with an average adjusted charge of
$17,500 reflects a higher level of relative resource use than a $10,000
charge for a case at a LTCH with the same case-mix, but an average
adjusted charge of $35,000. We believe that the adjusted charge of an
individual case more accurately reflects actual resource use for an
individual LTCH because the variation in charges due to systematic
differences in the markup of charges among LTCHs is taken into account.
d. Low-Volume LTC-DRGs
In order to account for LTC-DRGs with low-volume (that is, with
fewer than 25 LTCH cases), in accordance with the methodology
established in the August 30, 2002 LTCH PPS final rule (67 FR 55984),
we group those ``low-volume LTC-DRGs'' (that is, DRGs that contained
between 1 and 24 cases annually) into one of five categories
(quintiles) based on average charges, for the purposes of determining
relative weights. Consistent with the FY 2007 IPPS proposed rule (71 FR
24052 and 24053), we will continue to employ this treatment of low-
volume LTC-DRGs in determining the FY 2007 LTC-DRG relative weights
using the best available LTCH data in this final rule. In that same
proposed rule, using LTCH cases from the December 2005 update of the FY
2005 MedPAR file, we identified 173 LTC-DRGs that contained between 1
and 24 cases. As noted above, we also proposed that if more recent data
were available, we would use that data and the finalized Version 24.0
of the CMS GROUPER (used under the IPPS) to determine the final LTC-DRG
relative weights for FY 2007. Accordingly, for this final rule, using
LTCH cases from the March 2006 update of the FY 2005 MedPAR file, we
identified 180 LTC-DRGs that contained between 1 and 24 cases. This
list of LTC-DRGs was then divided into one of the 5 low-volume
quintiles, each containing 36 LTC-DRGs (180/5 = 36). In accordance with
our established methodology, as we proposed, we then make an assignment
to a specific low-volume quintile by sorting the low-volume LTC-DRGs in
ascending order by average charge. For this final rule, this results in
an assignment to a specific low-volume quintile of the sorted 180 low-
volume LTC-DRGs by ascending order by average charge. For this final
rule, based on LTCH claims data from the March 2006 update of the FY
2005 MedPAR file and the finalized Version 24.0 of the CMS GROUPER, the
number of low-volume LTC-DRGs is evenly divisible by five (that is, the
number of low-volume quintile used to determine the LTC-DRG relative
weights). Consequently, for this final rule, it was not necessary to
employ our established methodology to determine which low-volume
quintile would receive the additional LTC-DRG(s) if the number of low-
volume LTC-DRGs had not been evenly divisible by five. However, if the
number of LTC-DRGs with less than 25 LTCH cases for this final rule had
not evenly divisible by five, we would have employed our established
methodology that compares the average charge of the low-volume LTC-
DRGs, to determine which low-volume quintile would receive the
additional LTC-DRG, as presented in greater detail in the FY 2007 IPPS
proposed rule (71 FR 24053). Because, for this final rule, the number
of LTC-DRGs with less than 25 LTCH cases was evenly divisible by five,
to determine the composition of the low-volume quintiles, in accordance
with our established methodology, as was proposed, we sorted the 180
low-volume LTC-DRGs in ascending order, and grouped the first fifth
(1st through 36th) of low-volume LTC-DRGs (with the lowest average
charge) into Quintile 1; the next fifth (37th through 72nd) of low-
volume LTC-DRGs were into Quintile 2; and so on until the last fifth
(145th through 180th) of low-volume LTC-DRGs (with the highest average
charge) were grouped into Quintile 5.
In order to determine the relative weights for the LTC-DRGs with
low volume for FY 2007, as was proposed, in accordance with the
methodology established in the August 30, 2002 LTCH PPS final rule (67
FR 55984), in this final rule, we used the five low-volume quintiles
described above. The composition of each of the five low-volume
quintiles shown in the chart below was used in determining the LTC-DRG
relative weights for FY 2007. As was proposed, for this final rule, we
determined a relative weight and (geometric) average length of stay for
each of the five low-volume quintiles using the formula that we apply
to the regular LTC-DRGs (25 or more cases), as described below in
section II.F.4. of this preamble. We assigned the same relative weight
and average length of stay to each of the LTC-DRGs that make up that
low-volume quintile. We note that, as this system is dynamic, it is
possible that the number and specific type of LTC-DRGs with a low
volume of LTCH cases will vary in the future. We use the best available
claims data in the MedPAR file to identify low-volume LTC-DRGs and to
calculate the relative weights based on our methodology.

Composition of Low-Volume Quintiles for FY 2007
------------------------------------------------------------------------
LTC-DRG Description
------------------------------------------------------------------------
Quintile 1
------------------------------------------------------------------------
29................ TRAUMATIC STUPOR & COMA, COMA <1 HR AGE >17 W/O CC.

[[Page 47976]]

31................ CONCUSSION AGE >17 W CC.
45................ NEUROLOGICAL EYE DISORDERS.
65................ DYSEQUILIBRIUM.
69................ OTITIS MEDIA & URI AGE >17 W/O CC.
83................ MAJOR CHEST TRAUMA W CC.
93................ INTERSTITIAL LUNG DISEASE W/O CC.
102............... OTHER RESPIRATORY SYSTEM DIAGNOSES W/O CC.
125............... CIRCULATORY DISORDERS EXCEPT AMI, W CARD CATH W/O
COMPLEX DIAG.
129............... CARDIAC ARREST, UNEXPLAINED.
136............... CARDIAC CONGENITAL & VALVULAR DISORDERS AGE >17 W/O
CC.
140............... ANGINA PECTORIS.
143............... CHEST PAIN.
160............... HERNIA PROCEDURES EXCEPT INGUINAL & FEMORAL AGE >17
W/O CC.
181............... G.I. OBSTRUCTION W/O CC.
183............... ESOPHAGITIS, GASTROENT & MISC DIGEST DISORDERS AGE
>17 W/O CC.
208............... DISORDERS OF THE BILIARY TRACT W/O CC.
224............... SHOULDER, ELBOW OR FOREARM PROC, EXC MAJOR JOINT
PROC, W/O CC.
237............... SPRAINS, STRAINS, & DISLOCATIONS OF HIP, PELVIS &
THIGH.
241............... CONNECTIVE TISSUE DISORDERS W/O CC.
250............... FX, SPRN, STRN & DISL OF FOREARM, HAND, FOOT AGE >17
W CC.
254............... FX, SPRN, STRN & DISL OF UPARM, LOWLEG EX FOOT AGE
>17 W/O CC.
273............... MAJOR SKIN DISORDERS W/O CC.
323............... URINARY STONES W CC, &/OR ESW LITHOTRIPSY.
324............... URINARY STONES W/O CC.
332............... OTHER KIDNEY & URINARY TRACT DIAGNOSES AGE >17 W/O
CC.
335............... MAJOR MALE PELVIC PROCEDURES W/O CC.
347............... MALIGNANCY, MALE REPRODUCTIVE SYSTEM, W/O CC.
367............... MALIGNANCY, FEMALE REPRODUCTIVE SYSTEM W/O CC.
383............... OTHER ANTEPARTUM DIAGNOSES W MEDICAL COMPLICATIONS.
399............... RETICULOENDOTHELIAL & IMMUNITY DISORDERS W/O CC.
425............... ACUTE ADJUSTMENT REACTION & PSYCHOSOCIAL
DYSFUNCTION.
432............... OTHER MENTAL DISORDER DIAGNOSES.
509............... FULL THICKNESS BURN W/O SKIN GRFT OR INH INJ W/O CC
OR SIG TRAUMA.
511............... NON-EXTENSIVE BURNS W/O CC OR SIGNIFICANT TRAUMA.
523............... ALCOHOL/DRUG ABUSE OR DEPENDENCE W/O REHABILITATION
THERAPY W/O CC.
------------------------------------------------------------------------
Quintile 2
------------------------------------------------------------------------
8................. PERIPH & CRANIAL NERVE & OTHER NERV SYST PROC W/O
CC.
11................ NERVOUS SYSTEM NEOPLASMS W/O CC.
17................ NONSPECIFIC CEREBROVASCULAR DISORDERS W/O CC.
46................ OTHER DISORDERS OF THE EYE AGE >17 W CC.
77................ OTHER RESP SYSTEM O.R. PROCEDURES W/O CC.
117............... CARDIAC PACEMAKER REVISION EXCEPT DEVICE
REPLACEMENT.
122............... CIRCULATORY DISORDERS W AMI W/O MAJOR COMP,
DISCHARGED ALIVE.
128............... DEEP VEIN THROMBOPHLEBITIS.
133............... ATHEROSCLEROSIS W/O CC.
139............... CARDIAC ARRHYTHMIA & CONDUCTION DISORDERS W/O CC.
173............... DIGESTIVE MALIGNANCY W/O CC.
175............... G.I. HEMORRHAGE W/O CC.
177............... UNCOMPLICATED PEPTIC ULCER W CC.
189............... OTHER DIGESTIVE SYSTEM DIAGNOSES AGE >17 W/O CC.
246............... NON-SPECIFIC ARTHROPATHIES.
261............... BREAST PROC FOR NON-MALIGNANCY EXCEPT BIOPSY & LOCAL
EXCISION.
276............... NON-MALIGNANT BREAST DISORDERS.
281............... TRAUMA TO THE SKIN, SUBCUT TISS & BREAST AGE >17 W/O
CC.
284............... MINOR SKIN DISORDERS W/O CC.
295............... DIABETES AGE 0-35.
301............... ENDOCRINE DISORDERS W/O CC.
325............... KIDNEY & URINARY TRACT SIGNS & SYMPTOMS AGE >17 W
CC.
348............... BENIGN PROSTATIC HYPERTROPHY W CC.
419............... FEVER OF UNKNOWN ORIGIN AGE >17 W CC.
420............... FEVER OF UNKNOWN ORIGIN AGE >17 W/O CC.
427............... NEUROSES EXCEPT DEPRESSIVE.
431............... CHILDHOOD MENTAL DISORDERS.
441............... HAND PROCEDURES FOR INJURIES.
445............... TRAUMATIC INJURY AGE >17 W/O CC.
447............... ALLERGIC REACTIONS AGE >17.
450............... POISONING & TOXIC EFFECTS OF DRUGS AGE >17 W/O CC.
479............... OTHER VASCULAR PROCEDURES W/O CC.
492............... CHEMO W ACUTE LEUKEMIA AS SDX OR W USE OF HIGH DOSE
CHEMO AGENT.
521............... ALCOHOL/DRUG ABUSE OR DEPENDENCE W CC.

[[Page 47977]]

524............... TRANSIENT ISCHEMIA.
563............... SEIZURE AGE >17 W/O CC.
------------------------------------------------------------------------
Quintile 3
------------------------------------------------------------------------
21................ VIRAL MENINGITIS.
22................ HYPERTENSIVE ENCEPHALOPATHY.
44................ ACUTE MAJOR EYE INFECTIONS.
67................ EPIGLOTTITIS.
72................ NASAL TRAUMA & DEFORMITY.
97*............... BRONCHITIS & ASTHMA AGE >17 W/O CC.
100............... RESPIRATORY SIGNS & SYMPTOMS W/O CC.
118............... CARDIAC PACEMAKER DEVICE REPLACEMENT.
119............... VEIN LIGATION & STRIPPING.
142*.............. SYNCOPE & COLLAPSE W/O CC.
157............... ANAL & STOMAL PROCEDURES W CC.
171............... OTHER DIGESTIVE SYSTEM O.R. PROCEDURES W/O CC.
199............... HEPATOBILIARY DIAGNOSTIC PROCEDURE FOR MALIGNANCY.
206*.............. DISORDERS OF LIVER EXCEPT MALIG, CIRR, ALC HEPA W/O
CC.
227............... SOFT TISSUE PROCEDURES W/O CC.
228............... MAJOR THUMB OR JOINT PROC, OR OTH HAND OR WRIST PROC
W CC.
235............... FRACTURES OF FEMUR.
259............... SUBTOTAL MASTECTOMY FOR MALIGNANCY W CC.
266............... SKIN GRAFT &/OR DEBRID EXCEPT FOR SKIN ULCER OR
CELLULITIS W/O CC.
270............... OTHER SKIN, SUBCUT TISS & BREAST PROC W/O CC.
299............... INBORN ERRORS OF METABOLISM.
312............... URETHRAL PROCEDURES, AGE >17 W CC.
338............... TESTES PROCEDURES, FOR MALIGNANCY.
339............... TESTES PROCEDURES, NON-MALIGNANCY AGE >17.
344............... OTHER MALE REPRODUCTIVE SYSTEM O.R. PROCEDURES FOR
MALIGNANCY.
346............... MALIGNANCY, MALE REPRODUCTIVE SYSTEM, W CC.
369............... MENSTRUAL & OTHER FEMALE REPRODUCTIVE SYSTEM
DISORDERS.
404............... LYMPHOMA & NON-ACUTE LEUKEMIA W/O CC.
414............... OTHER MYELOPROLIF DIS OR POORLY DIFF NEOPL DIAG W/O
CC.
449............... POISONING & TOXIC EFFECTS OF DRUGS AGE >17 W CC.
454............... OTHER INJURY, POISONING & TOXIC EFFECT DIAG W CC.
467............... OTHER FACTORS INFLUENCING HEALTH STATUS.
486............... OTHER O.R. PROCEDURES FOR MULTIPLE SIGNIFICANT
TRAUMA.
502............... KNEE PROCEDURES W PDX OF INFECTION W/O CC.
532............... SPINAL PROCEDURES W/O CC.
555............... PERCUTANEOUS CARDIOVASCULAR PROC W MAJOR CV DX.
------------------------------------------------------------------------
Quintile 4
------------------------------------------------------------------------
55................ MISCELLANEOUS EAR, NOSE, MOUTH & THROAT PROCEDURES.
63................ OTHER EAR, NOSE, MOUTH & THROAT O.R. PROCEDURES.
95*............... PNEUMOTHORAX W/O CC.
110............... MAJOR CARDIOVASCULAR PROCEDURES W CC.
124............... CIRCULATORY DISORDERS EXCEPT AMI, W CARD CATH &
COMPLEX DIAG.
193............... BILIARY TRACT PROC EXCEPT ONLY CHOLECYST W OR W/O
C.D.E. W CC.
197............... CHOLECYSTECTOMY EXCEPT BY LAPAROSCOPE W/O C.D.E. W
CC.
223............... MAJOR SHOULDER/ELBOW PROC, OR OTHER UPPER EXTREMITY
PROC W CC.
262............... BREAST BIOPSY & LOCAL EXCISION FOR NON-MALIGNANCY.
268............... SKIN, SUBCUTANEOUS TISSUE & BREAST PLASTIC
PROCEDURES.
288............... O.R. PROCEDURES FOR OBESITY.
304............... KIDNEY AND URETER PROCEDURES FOR NON-NEOPLASM W CC.
306............... PROSTATECTOMY W CC.
308............... MINOR BLADDER PROCEDURES W CC.
310............... TRANSURETHRAL PROCEDURES W CC.
336............... TRANSURETHRAL PROSTATECTOMY W CC.
345............... OTHER MALE REPRODUCTIVE SYSTEM O.R. PROC EXCEPT FOR
MALIGNANCY.
365............... OTHER FEMALE REPRODUCTIVE SYSTEM O.R. PROCEDURES.
376............... POSTPARTUM & POST ABORTION DIAGNOSES W/O O.R.
PROCEDURE.
394............... OTHER O.R. PROCEDURES OF THE BLOOD AND BLOOD FORMING
ORGANS.
401............... LYMPHOMA & NON-ACUTE LEUKEMIA W OTHER O.R. PROC W
CC.
408............... MYELOPROLIF DISORD OR POORLY DIFF NEOPL W OTHER
O.R.PROC.
487............... OTHER MULTIPLE SIGNIFICANT TRAUMA.
488............... HIV W EXTENSIVE O.R. PROCEDURE.
493............... LAPAROSCOPIC CHOLECYSTECTOMY W/O C.D.E. W CC.
496............... COMBINED ANTERIOR/POSTERIOR SPINAL FUSION.
500............... BACK & NECK PROCEDURES EXCEPT SPINAL FUSION W/O CC.
503............... KNEE PROCEDURES W/O PDX OF INFECTION.

[[Page 47978]]

506............... FULL THICKNESS BURN W SKIN GRAFT OR INHAL INJ W CC
OR SIG TRAUMA.
515............... CARDIAC DEFIBRILLATOR IMPLANT W/O CARDIAC CATH.
519............... CERVICAL SPINAL FUSION W CC.
533............... EXTRACRANIAL PROCEDURES W CC.
538............... LOCAL EXCISION & REMOVAL INT FIX DEVICES EXCEPT HIP
& FEMUR W/O CC.
539............... LYMPHOMA & LEUKEMIA W MAJOR O.R. PROCEDURE W CC.
552............... OTHER PERMANENT CARDIAC PACEMAKER IMPLANT W/O MAJOR
CV DX PERCUTANEOUS CARDIOVASCULAR PROC W DRUG-
ELUTING STENT W MAJOR CV.
557............... DX.
Quintile 5
------------------------------------------------------------------------
1................. CRANIOTOMY AGE >17 W CC.
146............... RECTAL RESECTION W CC.
150............... PERITONEAL ADHESIOLYSIS W CC.
152............... MINOR SMALL & LARGE BOWEL PROCEDURES W CC.
159............... HERNIA PROCEDURES EXCEPT INGUINAL & FEMORAL AGE >17
W CC.
168............... MOUTH PROCEDURES W CC.
191............... PANCREAS, LIVER & SHUNT PROCEDURES W CC.
195............... CHOLECYSTECTOMY W C.D.E. W CC.
200............... HEPATOBILIARY DIAGNOSTIC PROCEDURE FOR NON-
MALIGNANCY.
218............... LOWER EXTREM & HUMER PROC EXCEPT HIP, FOOT, FEMUR
AGE >17 W CC.
230............... LOCAL EXCISION & REMOVAL OF INT FIX DEVICES OF HIP &
FEMUR.
232............... ARTHROSCOPY.
257............... TOTAL MASTECTOMY FOR MALIGNANCY W CC.
293*.............. OTHER ENDOCRINE, NUTRIT & METAB O.R. PROC W/O CC.
341............... PENIS PROCEDURES.
406............... MYELOPROLIF DISORD OR POORLY DIFF NEOPL W MAJ O.R.
PROC W CC.
424............... O.R. PROCEDURE W PRINCIPAL DIAGNOSES OF MENTAL
ILLNESS.
471............... BILATERAL OR MULTIPLE MAJOR JOINT PROCS OF LOWER
EXTREMITY.
476............... PROSTATIC O.R. PROCEDURE UNRELATED TO PRINCIPAL
DIAGNOSIS.
482............... TRACHEOSTOMY FOR FACE, MOUTH & NECK DIAGNOSES.
491............... MAJOR JOINT & LIMB REATTACHMENT PROCEDURES OF UPPER
EXTREMITY.
497............... SPINAL FUSION EXCEPT CERVICAL W CC.
499............... BACK & NECK PROCEDURES EXCEPT SPINAL FUSION W CC.
504............... EXTENSIVE BURNS OR FULL THICKNESS BURNS W MV 96+ HRS
W SKIN GRAFT.
505............... EXTENSIVE BURNS OR FULL THICKNESS BURNS W MV 96+ HRS
W/O SKIN GRAFT.
529............... VENTRICULAR SHUNT PROCEDURES W CC.
531............... SPINAL PROCEDURES W CC.
535............... CARDIAC DEFIB IMPLANT W CARDIAC CATH W AMI/HF/SHOCK.
543............... CRANIOTOMY W MAJOR DEVICE IMPLANT OR ACUTE COMPLEX
CNS PDX.
544............... MAJOR JOINT REPLACEMENT OR REATTACHMENT OF LOWER
EXTREMITY.
545............... REVISION OF HIP OR KNEE REPLACEMENT.
567............... STOMACH, ESOPHAGEAL & DUODENAL PROC AGE >17 W CC W
MAJOR GI DX.
568............... STOMACH, ESOPHAGEAL & DUODENAL PROC AGE >17 W CC W/O
MAJOR GI DX.
569............... MAJOR SMALL & LARGE BOWEL PROCEDURES W CC W MAJOR GI
DX.
570............... MAJOR SMALL & LARGE BOWEL PROCEDURES W CC W/O MAJOR
GI DX.
573............... MAJOR BLADDER PROCEDURES.
------------------------------------------------------------------------
* One of the original 180 low-volume LTC-DRGs initially assigned to this
low-volume quintile; removed from this low-volume quintile in
addressing nonmonotonicity (see step 5 below)..

We note that we will continue to monitor the volume (that is, the
number of LTCH cases) in these low-volume quintiles to ensure that our
quintile assignment results in appropriate payment for such cases and
does not result in an unintended financial incentive for LTCHs to
inappropriately admit these types of cases.
4. Steps for Determining the FY 2007 LTC-DRG Relative Weights
As we noted previously, as was proposed, the FY 2007 LTC-DRG
relative weights in this final rule are determined in accordance with
the methodology established in the August 30, 2002 LTCH PPS final rule
(67 FR 55989 through 55991). In summary, LTCH cases must be grouped in
the appropriate LTC-DRG, while taking into account the low-volume LTC-
DRGs as described above, before the FY 2007 LTC-DRG relative weights
can be determined. After grouping the cases in the appropriate LTC-DRG,
we calculated the relative weights for FY 2007 in this final rule by
first removing statistical outliers and cases with a length of stay of
7 days or less, as discussed in greater detail below. Next, we adjusted
the number of cases in each LTC-DRG for the effect of short-stay
outlier cases under Sec. 412.529, as also discussed in greater detail
below. The short-stay adjusted discharges and corresponding charges are
used to calculate ``relative adjusted weights'' in each LTC-DRG using
the HSRV method described above.
Below we discuss in detail the steps for calculating the FY 2007
LTC-DRG relative weights in this final rule. These steps are the same
as the ones we presented in the FY 2007 IPPS proposed rule for
calculating the proposed FY 2007 LTC-DRG relative weights. We note
that, as we stated above in section II.F.3.b. of this preamble, we have
excluded the data of all-inclusive rate LTCHs and LTCHs that are paid
in accordance with demonstration projects that had claims in the FY
2005 MedPAR file.

[[Page 47979]]

Step 1--Remove statistical outliers.
The first step in the calculation of the FY 2007 LTC-DRG relative
weights, as was proposed, is to remove statistical outlier cases. We
define statistical outliers as cases that are outside of 3.0 standard
deviations from the mean of the log distribution of both charges per
case and the charges per day for each LTC-DRG. These statistical
outliers are removed prior to calculating the relative weights. As
noted above, we believe that they may represent aberrations in the data
that distort the measure of average resource use. Including those LTCH
cases in the calculation of the relative weights could result in an
inaccurate relative weight that does not truly reflect relative
resource use among the LTC-DRGs.
Step 2--Remove cases with a length of stay of 7 days or less.
The FY 2007 LTC-DRG relative weights reflect the average of
resources used on representative cases of a specific type. Generally,
cases with a length of stay of 7 days or less do not belong in a LTCH
because these stays do not fully receive or benefit from treatment that
is typical in a LTCH stay, and full resources are often not used in the
earlier stages of admission to a LTCH. As explained above, if we were
to include stays of 7 days or less in the computation of the FY 2007
LTC-DRG relative weights, the value of many relative weights would
decrease and, therefore, payments would decrease to a level that may no
longer be appropriate.
We do not believe that it would be appropriate to compromise the
integrity of the payment determination for those LTCH cases that
actually benefit from and receive a full course of treatment at a LTCH,
in order to include data from these very short-stays. Thus, as
explained above, in determining the FY 2007 LTC-DRG relative weights in
this final rule, as was proposed, we remove LTCH cases with a length of
stay of 7 days or less.
Step 3--Adjust charges for the effects of short-stay outliers.
After removing cases with a length of stay of 7 days or less, we
are left with cases that have a length of stay of greater than or equal
to 8 days. The next step in the calculation of the FY 2007 LTC-DRG
relative weights is to adjust each LTCH's charges per discharge for
those remaining cases for the effects of short-stay outliers as defined
in Sec. 412.529(a). (However, we note that even if a case was removed
in Step 2 (that is, cases with a length of stay of 7 days or less), it
was paid as a short-stay outlier if its length of stay was less than or
equal to five-sixths of the average length of stay of the LTC-DRG, in
accordance with Sec. 412.529.)
We make this adjustment by counting a short-stay outlier as a
fraction of a discharge based on the ratio of the length of stay of the
case to the average length of stay for the LTC-DRG for nonshort-stay
outlier cases. This has the effect of proportionately reducing the
impact of the lower charges for the short-stay outlier cases in
calculating the average charge for the LTC-DRG. This process produces
the same result as if the actual charges per discharge of a short-stay
outlier case were adjusted to what they would have been had the
patient's length of stay been equal to the average length of stay of
the LTC-DRG.
As we explained in the FY 2007 IPPS proposed rule (71 FR 24059),
counting short-stay outlier cases as full discharges with no adjustment
in determining the LTC-DRG relative weights would lower the LTC-DRG
relative weight for affected LTC-DRGs because the relatively lower
charges of the short-stay outlier cases would bring down the average
charge for all cases within a proposed LTC-DRG. This would result in an
``underpayment'' for nonshort-stay outlier cases and an ``overpayment''
for short-stay outlier cases. Therefore, in this final rule, as was
proposed, we adjust for short-stay outlier cases under Sec. 412.529 in
this manner because it results in more appropriate payments for all
LTCH cases.
Step 4--Calculate the FY 2007 LTC-DRG relative weights on an
iterative basis.
The process of calculating the LTC-DRG relative weights using the
HSRV methodology is iterative. First, for each LTCH case, we calculate
a hospital-specific relative charge value by dividing the short-stay
outlier adjusted charge per discharge (see step 3) of the LTCH case
(after removing the statistical outliers (see step 1)) and LTCH cases
with a length of stay of 7 days or less (see step 2) by the average
charge per discharge for the LTCH in which the case occurred. The
resulting ratio is then multiplied by the LTCH's case-mix index to
produce an adjusted hospital-specific relative charge value for the
case. An initial case-mix index value of 1.0 is used for each LTCH.
For each LTC-DRG, the FY 2007 LTC-DRG relative weight is calculated
by dividing the average of the adjusted hospital-specific relative
charge values (from above) for the LTC-DRG by the overall average
hospital-specific relative charge value across all cases for all LTCHs.
Using these recalculated LTC-DRG relative weights, each LTCH's average
relative weight for all of its cases (case-mix) is calculated by
dividing the sum of all the LTCH's LTC-DRG relative weights by its
total number of cases. The LTCHs' hospital-specific relative charge
values above are multiplied by these hospital-specific case-mix
indexes. These hospital-specific case-mix adjusted relative charge
values are then used to calculate a new set of LTC-DRG relative weights
across all LTCHs. In this final rule, as was proposed, this iterative
process is continued until there is convergence between the weights
produced at adjacent steps, for example, when the maximum difference is
less than 0.0001.
Step 5--Adjust the FY 2007 LTC-DRG relative weights to account for
nonmonotonically increasing relative weights.
As explained in section II.B. of this preamble, the FY 2007 CMS
DRGs, on which the FY 2007 LTC-DRGs are based, contain ``pairs'' that
are differentiated based on the presence or absence of CCs. The LTC-
DRGs with CCs are defined by certain secondary diagnoses not related to
or inherently a part of the disease process identified by the principal
diagnosis, but the presence of additional diagnoses does not
automatically generate a CC. As we discussed in the FY 2006 IPPS final
rule (70 FR 47336), the value of monotonically increasing relative
weights rises as the resource use increases (for example, from
uncomplicated to more complicated). The presence of CCs in a LTC-DRG
means that cases classified into a ``without CC'' LTC-DRG are expected
to have lower resource use (and lower costs). In other words, resource
use (and costs) are expected to decrease across ``with CC/without CC''
pairs of LTC-DRGs.
For a case to be assigned to a LTC-DRG with CCs, more coded
information is called for (that is, at least one relevant secondary
diagnosis), than for a case to be assigned to a LTC-DRG ``without CCs''
(which is based on only one principal diagnosis and no relevant
secondary diagnoses). Currently, the LTCH claims data include both
accurately coded cases without complications and cases that have
complications (and cost more), but were not coded completely. Both
types of cases are grouped to a LTC-DRG ``without CCs'' when only the
principal diagnosis was coded. Since the LTCH PPS was only implemented
for cost reporting periods beginning on or after October 1, 2002 (FY
2003), and LTCHs were previously paid under cost-based reimbursement,
which is not based on patient diagnoses, coding by LTCHs for

[[Page 47980]]

these cases may not have been as detailed as possible.
Thus, in developing the FY 2003 LTC-DRG relative weights for the
LTCH PPS based on FY 2001 claims data, as we discussed in the August
30, 2002 LTCH PPS final rule (67 FR 55990), we found on occasion that
the data suggested that cases classified to the LTC-DRG ``with CCs'' of
a ``with CC/without CC'' pair had a lower average charge than the
corresponding LTC-DRG ``without CCs.'' Similarly, as discussed in the
FY 2006 IPPS final rule (70 FR 47336 through 47337), based on FY 2004
claims data, we also found on occasion that the data suggested that
cases classified to the LTC-DRG ``with CCs'' of a ``with CC/without
CC'' pair have a lower average charge than the corresponding LTC-DRG
``without CCs'' for the FY 2006 LTC-DRG relative weights.
We believe this anomaly may be due to coding that may not have
fully reflected all comorbidities that were present. Specifically,
LTCHs may have failed to code relevant secondary diagnoses, which
resulted in cases that actually had CCs being classified into a
``without CC'' LTC-DRG. It would not be appropriate to pay a lower
amount for the ``with CC'' LTC-DRG because, in general, cases
classified into a ``with CC'' LTC-DRG are expected to have higher
resource use (and higher cost) as discussed above. Therefore,
previously when we determined the LTC-DRG relative weights in
accordance with the methodology established in the August 30, 2002 LTCH
PPS final rule (67 FR 55990) when we implanted the LTCH PPS, we grouped
both the cases ``with CCs'' and ``without CCs'' together for the
purpose of calculating the LTC-DRG relative weights. As we stated in
that same final rule, we will continue to employ this methodology to
account for nonmonotonically increasing relative weights until we have
adequate data to calculate appropriate separate weights for these
anomalous LTC-DRG pairs. We expect that, as was the case when we first
implemented the IPPS, in most instances, this problem will be self-
correcting, as LTCHs submit more completely coded data in the future.
There are three types of ``with CC'' and ``without CC'' pairs that
could be nonmonotonic; that is, where the ``without CC'' LTC-DRG would
have a higher average charge than the ``with CC'' LTC-DRG. For this
final rule, using the LTCH cases in the March 2006 update of the FY
2005 MedPAR file (the most recent and complete data available at this
time), we identified one of the three types of nonmonotonic LTC-DRG
pairs. As we stated in the August 30, 2002 LTCH PPS final rule (67 FR
55990), we believe this anomaly may be due to coding inaccuracies and
expect that, as was the case when we first implemented the acute care
hospital IPPS, this problem will be self-correcting, as LTCHs submit
more completely coded data in the future.
The first category of nonmonotonically increasing relative weights
for LTC-DRG pairs ``with and without CCs'' contains one pair of LTC-
DRGs in which both the LTC-DRG ``with CCs'' and the LTC-DRG ``without
CCs'' had 25 or more LTCH cases and, therefore, did not fall into one
of the 5 low-volume quintiles. For those nonmonotonic LTC-DRG pairs,
based on our established methodology (67 FR 55983 through 55990), we
combined the LTCH cases and computed a new relative weight based on the
case-weighted average of the combined LTCH cases of the LTC-DRGs. The
case-weighted average charge is determined by dividing the total
charges for all LTCH cases by the total number of LTCH cases for the
combined LTC-DRG. This new relative weight is then assigned to both of
the LTC-DRGs in the pair. In this final rule, for FY 2007, there were
no LTC-DRGs that fell into this category.
The second category of nonmonotonically increasing relative weights
for LTC-DRG pairs ``with and without CCs'' consists of one pair of LTC-
DRGs that has fewer than 25 cases, and each LTC-DRG is grouped to
different low-volume quintiles in which the ``without CC'' LTC-DRG is
in a higher-weighted low-volume quintile than the ``with CC'' LTC-DRG.
For those pairs, based on our established methodology, we combine the
LTCH cases and determine the case-weighted average charge for all LTCH
cases. The case-weighted average charge is determined by dividing the
total charges for all LTCH cases by the total number of LTCH cases for
the combined LTC-DRG. Based on the case-weighted average LTCH charge,
we determine within which low-volume quintile the ``combined LTC-DRG''
is grouped. Both LTC-DRGs in the pair are then grouped into the same
low-volume quintile, thus having the same relative weight. In this
final rule, for FY 2007, there were no LTC-DRGs that fell into this
category.
The third category of nonmonotonically increasing relative weights
for LTC-DRG pairs ``with and without CCs'' consists of one pair of LTC-
DRGs where one of the LTC-DRGs has fewer than 25 LTCH cases and is
grouped to a low-volume quintile and the other LTC-DRG has 25 or more
LTCH cases and has its own LTC-DRG relative weight, and the LTC-DRG
``without CCs'' has the higher relative weight. Based on our
established methodology, as proposed, we removed the low-volume LTC-DRG
from the low-volume quintile and combined it with the other LTC-DRG for
the computation of a new relative weight for each of these LTC-DRGs.
This new relative weight is assigned to both LTC-DRGs, so they each
have the same relative weight. In this final rule, for FY 2007, 5
``pairs'' of LTC-DRGs fall into this category: LTC-DRGs 94 and 95; LTC-
DRGs 96 and 97; LTC-DRGs 141 and 142; LTC-DRGs 205 and 206; and LTC-
DRGs 292 and 293.
Step 6--Determine a FY 2007 LTC-DRG relative weight for LTC-DRGs
with no LTCH cases.
As we stated above, in this final rule, as we proposed we determine
the relative weight for each LTC-DRG using total Medicare allowable
charges reported in the March 2006 update of the FY 2005 MedPAR file.
Of the 538 LTC-DRGs for FY 2007, we identified 183 LTC-DRGs for which
there were no LTCH cases in the database. That is, based on data from
the FY 2005 MedPAR file used in this final rule, no patients who would
have been classified to those LTC-DRGs were treated in LTCHs during FY
2005 and, therefore, no charge data were reported for those LTC-DRGs.
Thus, in the process of determining the LTC-DRG relative weights, we
are unable to determine weights for these 183 LTC-DRGs using the
methodology described in Steps 1 through 5 above. However, because
patients with a number of the diagnoses under these LTC-DRGs may be
treated at LTCHs beginning in FY 2007, as was proposed, for this final
rule, we assigned relative weights to each of the 183 ``no volume''
LTC-DRGs based on clinical similarity and relative costliness to one of
the remaining 355 (538 - 183 = 355) LTC-DRGs for which we are able to
determine relative weights, based on FY 2005 LTCH claims data. As there
are currently no LTCH cases in these ``no volume'' LTC-DRGs, as
proposed, we determined relative weights for the 183 LTC-DRGs with no
LTCH cases in the FY 2005 MedPAR file used in this final rule by
grouping them to the appropriate low-volume quintile. This methodology
is consistent with our methodology used in determining relative weights
to account for the low-volume LTC-DRGs described above.
As was proposed, for this final rule, our methodology for
determining the relative weights for the ``no volume'' LTC-DRGs is as
follows: We crosswalk the no volume LTC-DRGs by matching them to other
similar LTC-DRGs for

[[Page 47981]]

which there were LTCH cases in the FY 2005 MedPAR file based on
clinical similarity and intensity of use of resources as determined by
care provided during the period of time surrounding surgery, surgical
approach (if applicable), length of time of surgical procedure,
postoperative care, and length of stay. We assigned the relative weight
for the applicable low-volume quintile to the no volume LTC-DRG if the
LTC-DRG to which it is crosswalked is grouped to one of the low-volume
quintiles. If the LTC-DRG to which the no volume LTC-DRG is crosswalked
is not one of the LTC-DRGs to be grouped to one of the low-volume
quintiles, we compared the relative weight of the LTC-DRG to which the
no volume LTC-DRG is crosswalked to the relative weights of each of the
five quintiles and we assigned the no volume LTC-DRG the relative
weight of the low-volume quintile with the closest weight. For this
final rule, a list of the no volume FY 2007 LTC-DRGs and the FY 2007
LTC-DRG to which it is crosswalked in order to determine the
appropriate low-volume quintile for the assignment of a relative weight
for FY 2007 is shown in the chart below.

No Volume LTC-DRG Crosswalk and Quintile Assignment for FY 2007
----------------------------------------------------------------------------------------------------------------
Cross-
LTC-DRG Description walked LTC- Low-volume quintile
DRG assignment
----------------------------------------------------------------------------------------------------------------
2................................. CRANIOTOMY AGE >17 W/O CC........... 1 Quintile 5.
3................................. CRANIOTOMY AGE 0-17................. 1 Quintile 5.
6................................. CARPAL TUNNEL RELEASE............... 237 Quintile 1.
26................................ SEIZURE & HEADACHE AGE 0-17......... 563 Quintile 2.
30................................ TRAUMATIC STUPOR & COMA, COMA <1 HR 29 Quintile 1.
AGE 0-17.
32................................ CONCUSSION AGE >17 W/O CC........... 31 Quintile 1.
33................................ CONCUSSION AGE 0-17................. 31 Quintile 1.
36................................ RETINAL PROCEDURES.................. 46 Quintile 2.
37................................ ORBITAL PROCEDURES.................. 46 Quintile 2.
38................................ PRIMARY IRIS PROCEDURES............. 46 Quintile 2.
39................................ LENS PROCEDURES WITH OR WITHOUT 46 Quintile 2.
VITRECTOMY.
40................................ EXTRAOCULAR PROCEDURES EXCEPT ORBIT 46 Quintile 2.
AGE >17.
41................................ EXTRAOCULAR PROCEDURES EXCEPT ORBIT 46 Quintile 2.
AGE 0-17.
42................................ INTRAOCULAR PROCEDURES EXCEPT 46 Quintile 2.
RETINA, IRIS & LENS.
43................................ HYPHEMA............................. 45 Quintile 1.
47................................ OTHER DISORDERS OF THE EYE AGE >17 W/ 45 Quintile 1.
O CC.
48................................ OTHER DISORDERS OF THE EYE AGE 0-17. 45 Quintile 1.
49................................ MAJOR HEAD & NECK PROCEDURES........ 64 Quintile 4.
50................................ SIALOADENECTOMY..................... 63 Quintile 4.
51................................ SALIVARY GLAND PROCEDURES EXCEPT 63 Quintile 4.
SIALOADENECTOMY.
52................................ CLEFT LIP & PALATE REPAIR........... 63 Quintile 4.
53................................ SINUS & MASTOID PROCEDURES AGE >17.. 63 Quintile 4.
54................................ SINUS & MASTOID PROCEDURES AGE 0-17. 63 Quintile 4.
56................................ RHINOPLASTY......................... 63 Quintile 4.
57................................ T&A PROC, EXCEPT TONSILLECTOMY &/OR 69 Quintile 1.
ADENOIDECTOMY ONLY, AGE >17.
58................................ T&A PROC, EXCEPT TONSILLECTOMY &/OR 69 Quintile 1.
ADENOIDECTOMY ONLY, AGE 0-17.
59................................ TONSILLECTOMY &/OR ADENOIDECTOMY 69 Quintile 1.
ONLY, AGE >17.
60................................ TONSILLECTOMY &/OR ADENOIDECTOMY 69 Quintile 1.
ONLY, AGE 0-17.
61................................ MYRINGOTOMY W TUBE INSERTION AGE >17 69 Quintile 1.
62................................ MYRINGOTOMY W TUBE INSERTION AGE 0- 69 Quintile 1.
17.
66................................ EPISTAXIS........................... 69 Quintile 1.
70................................ OTITIS MEDIA & URI AGE 0-17......... 69 Quintile 1.
71................................ LARYNGOTRACHEITIS................... 97 Quintile 2.
74................................ OTHER EAR, NOSE, MOUTH & THROAT 69 Quintile 1.
DIAGNOSES AGE 0-17.
81................................ RESPIRATORY INFECTIONS & 69 Quintile 1.
INFLAMMATIONS AGE 0-17.
84................................ MAJOR CHEST TRAUMA W/O CC........... 93 Quintile 1.
86................................ PLEURAL EFFUSION W/O CC............. 102 Quintile 1.
91................................ SIMPLE PNEUMONIA & PLEURISY AGE 0-17 90 Quintile 2.
98................................ BRONCHITIS & ASTHMA AGE 0-17........ 97 Quintile 2.
104............................... CARDIAC VALVE & OTHER MAJOR 110 Quintile 4.
CARDIOTHORACIC PROC W CARDIAC CATH.
105............................... CARDIAC VALVE & OTHER MAJOR 110 Quintile 4.
CARDIOTHORACIC PROC W/O CARDIAC
CATH.
106............................... CORONARY BYPASS W PTCA.............. 110 Quintile 4.
108............................... OTHER CARDIOTHORACIC PROCEDURES..... 110 Quintile 4.
111............................... MAJOR CARDIOVASCULAR PROCEDURES W/O 110 Quintile 4.
CC.
137............................... CARDIAC CONGENITAL & VALVULAR 136 Quintile 1.
DISORDERS AGE 0-17.
147............................... RECTAL RESECTION W/O CC............. 171 Quintile 3.
149............................... MAJOR SMALL & LARGE BOWEL PROCEDURES 176 Quintile 3.
W/O CC.
151............................... PERITONEAL ADHESIOLYSIS W/O CC...... 160 Quintile 1.
153............................... MINOR SMALL & LARGE BOWEL PROCEDURES 152 Quintile 5.
W/O CC.
155............................... STOMACH, ESOPHAGEAL & DUODENAL 567 Quintile 5.
PROCEDURES AGE >17 W/O CC.
156............................... STOMACH, ESOPHAGEAL & DUODENAL 567 Quintile 5.
PROCEDURES AGE 0-17.
158............................... ANAL & STOMAL PROCEDURES W/O CC..... 157 Quintile 3.
161............................... INGUINAL & FEMORAL HERNIA PROCEDURES 160 Quintile 1.
AGE >17 W CC.
162............................... INGUINAL & FEMORAL HERNIA PROCEDURES 160 Quintile 1.
AGE >17 W/O CC.
163............................... HERNIA PROCEDURES AGE 0-17.......... 160 Quintile 1.
164............................... APPENDECTOMY W COMPLICATED PRINCIPAL 171 Quintile 3.
DIAG W CC.
165............................... APPENDECTOMY W COMPLICATED PRINCIPAL 171 Quintile 3.
DIAG W/O CC.

[[Page 47982]]

166............................... APPENDECTOMY W/O COMPLICATED 171 Quintile 3.
PRINCIPAL DIAG W CC.
167............................... APPENDECTOMY W/O COMPLICATED 171 Quintile 3.
PRINCIPAL DIAG W/O CC.
169............................... MOUTH PROCEDURES W/O CC............. 185 Quintile 2.
178............................... UNCOMPLICATED PEPTIC ULCER W/O CC... 160 Quintile 1.
184............................... ESOPHAGITIS, GASTROENT & MISC DIGEST 183 Quintile 1.
DISORDERS AGE 0-17.
186............................... DENTAL & ORAL DIS EXCEPT EXTRACTIONS 185 Quintile 2.
& RESTORATIONS, AGE 0-17.
187............................... DENTAL EXTRACTIONS & RESTORATIONS... 185 Quintile 2.
190............................... OTHER DIGESTIVE SYSTEM DIAGNOSES AGE 189 Quintile 2.
0-17.
192............................... PANCREAS, LIVER & SHUNT PROCEDURES W/ 191 Quintile 5.
O CC.
194............................... BILIARY TRACT PROC EXCEPT ONLY 193 Quintile 4.
CHOLECYST W OR W/O C.D.E. W/O CC.
196............................... CHOLECYSTECTOMY W C.D.E. W/O CC..... 197 Quintile 4.
198............................... CHOLECYSTECTOMY EXCEPT BY 197 Quintile 4.
LAPAROSCOPE W/O C.D.E. W/O CC.
211............................... HIP & FEMUR PROCEDURES EXCEPT MAJOR 210 Quintile 5.
JOINT AGE >17 W/O CC.
212............................... HIP & FEMUR PROCEDURES EXCEPT MAJOR 210 Quintile 5.
JOINT AGE 0-17.
219............................... LOWER EXTREM & HUMER PROC EXCEPT 210 Quintile 5.
HIP, FOOT, FEMUR AGE >17 W/O CC.
220............................... LOWER EXTREM & HUMER PROC EXCEPT 218 Quintile 5.
HIP, FOOT, FEMUR AGE 0-17.
229............................... HAND OR WRIST PROC, EXCEPT MAJOR 237 Quintile 1.
JOINT PROC, W/O CC.
234............................... OTHER MUSCULOSKELET SYS & CONN TISS 237 Quintile 1.
O.R. PROC W/O CC.
251............................... FX, SPRN, STRN & DISL OF FOREARM, 237 Quintile 1.
HAND, FOOT AGE >17.W/O CC.
252............................... FX, SPRN, STRN & DISL OF FOREARM, 253 Quintile 2.
HAND, FOOT AGE 0-17.
255............................... FX, SPRN, STRN & DISL OF 253 Quintile 2.
UPARM,LOWLEG EX FOOT AGE 0-17.
258............................... TOTAL MASTECTOMY FOR MALIGNANCY W/O 274 Quintile 3.
CC.
260............................... SUBTOTAL MASTECTOMY FOR MALIGNANCY W/ 274 Quintile 3.
O CC.
267............................... PERIANAL & PILONIDAL PROCEDURES..... 270 Quintile 3.
275............................... MALIGNANT BREAST DISORDERS W/O CC... 274 Quintile 3.
279............................... CELLULITIS AGE 0-17................. 273 Quintile 1.
282............................... TRAUMA TO THE SKIN, SUBCUT TISS & 281 Quintile 2.
BREAST AGE 0-17.
286............................... ADRENAL & PITUITARY PROCEDURES...... 292 Quintile 4.
289............................... PARATHYROID PROCEDURES.............. 63 Quintile 4.
290............................... THYROID PROCEDURES.................. 63 Quintile 4.
291............................... THYROGLOSSAL PROCEDURES............. 63 Quintile 4.
298............................... NUTRITIONAL & MISC METABOLIC 297 Quintile 1.
DISORDERS AGE 0-17.
303............................... KIDNEY AND URETER PROCEDURES FOR 318 Quintile 3.
NEOPLASM.
305............................... KIDNEY AND URETER PROCEDURES FOR NON- 318 Quintile 3.
NEOPLASM W/O CC.
307............................... PROSTATECTOMY W/O CC................ 306 Quintile 4.
309............................... MINOR BLADDER PROCEDURES W/O CC..... 308 Quintile 4.
311............................... TRANSURETHRAL PROCEDURES W/O CC..... 310 Quintile 4.
313............................... URETHRAL PROCEDURES, AGE >17 W/O CC. 312 Quintile 3.
314............................... URETHRAL PROCEDURES, AGE 0-17....... 312 Quintile 3.
319............................... KIDNEY & URINARY TRACT NEOPLASMS W/O 318 Quintile 3.
CC.
322............................... KIDNEY & URINARY TRACT INFECTIONS 321 Quintile 1.
AGE 0-17.
326............................... KIDNEY & URINARY TRACT SIGNS & 321 Quintile 1.
SYMPTOMS AGE >17 W/O CC.
327............................... KIDNEY & URINARY TRACT SIGNS & 321 Quintile 1.
SYMPTOMS AGE 0-17.
328............................... URETHRAL STRICTURE AGE >17 W CC..... 325 Quintile 2.
329............................... URETHRAL STRICTURE AGE >17 W/O CC... 325 Quintile 2.
330............................... URETHRAL STRICTURE AGE 0-17......... 325 Quintile 2.
333............................... OTHER KIDNEY & URINARY TRACT 332 Quintile 1.
DIAGNOSES AGE 0-17.
334............................... MAJOR MALE PELVIC PROCEDURES W CC... 335 Quintile 1.
337............................... TRANSURETHRAL PROSTATECTOMY W/O CC.. 306 Quintile 4.
340............................... TESTES PROCEDURES, NON-MALIGNANCY 339 Quintile 3.
AGE 0-17.
342............................... CIRCUMCISION AGE >17................ 339 Quintile 3.
343............................... CIRCUMCISION AGE 0-17............... 339 Quintile 3.
349............................... BENIGN PROSTATIC HYPERTROPHY W/O CC. 339 Quintile 3.
351............................... STERILIZATION, MALE................. 339 Quintile 3.
353............................... PELVIC EVISCERATION, RADICAL 365 Quintile 4.
HYSTERECTOMY & RADICAL VULVECTOMY.
354............................... UTERINE,ADNEXA PROC FOR NON-OVARIAN/ 365 Quintile 4.
ADNEXAL MALIG W CC.
355............................... UTERINE,ADNEXA PROC FOR NON-OVARIAN/ 365 Quintile 4.
ADNEXAL MALIG W/O CC.
356............................... FEMALE REPRODUCTIVE SYSTEM 365 Quintile 4.
RECONSTRUCTIVE PROCEDURES.
357............................... UTERINE & ADNEXA PROC FOR OVARIAN OR 365 Quintile 4.
ADNEXAL MALIGNANCY.
358............................... UTERINE & ADNEXA PROC FOR NON- 365 Quintile 4.
MALIGNANCY W CC.
359............................... UTERINE & ADNEXA PROC FOR NON- 365 Quintile 4.
MALIGNANCY W/O CC.
360............................... VAGINA, CERVIX & VULVA PROCEDURES... 365 Quintile 4.
361............................... LAPAROSCOPY & INCISIONAL TUBAL 383 Quintile 1.
INTERRUPTION.
362............................... ENDOSCOPIC TUBAL INTERRUPTION....... 383 Quintile 1.
363............................... D&C, CONIZATION & RADIO-IMPLANT, FOR 383 Quintile 1.
MALIGNANCY.
364............................... D&C, CONIZATION EXCEPT FOR 383 Quintile 1.
MALIGNANCY.
370............................... CESAREAN SECTION W CC............... 383 Quintile 1.
371............................... CESAREAN SECTION W/O CC............. 383 Quintile 1.
372............................... VAGINAL DELIVERY W COMPLICATING 383 Quintile 1.
DIAGNOSES.
373............................... VAGINAL DELIVERY W/O COMPLICATING 383 Quintile 1.
DIAGNOSES.

[[Page 47983]]

374............................... VAGINAL DELIVERY W STERILIZATION &/ 383 Quintile 1.
OR D&C.
375............................... VAGINAL DELIVERY W O.R. PROC EXCEPT 383 Quintile 1.
STERIL &/OR D&C.
377............................... POSTPARTUM & POST ABORTION DIAGNOSES 383 Quintile 1.
W O.R. PROCEDURE.
378............................... ECTOPIC PREGNANCY................... 383 Quintile 1.
379............................... THREATENED ABORTION................. 383 Quintile 1.
380............................... ABORTION W/O D&C.................... 383 Quintile 1.
381............................... ABORTION W D&C, ASPIRATION CURETTAGE 383 Quintile 1.
OR HYSTEROTOMY.
382............................... FALSE LABOR......................... 383 Quintile 1.
384............................... OTHER ANTEPARTUM DIAGNOSES W/O 383 Quintile 1.
MEDICAL COMPLICATIONS.
385............................... NEONATES, DIED OR TRANSFERRED TO 383 Quintile 1.
ANOTHER ACUTE CARE FACILITY.
386............................... EXTREME IMMATURITY OR RESPIRATORY 383 Quintile 1.
DISTRESS SYNDROME, NEONATE.
387............................... PREMATURITY W MAJOR PROBLEMS........ 383 Quintile 1.
388............................... PREMATURITY W/O MAJOR PROBLEMS...... 383 Quintile 1.
389............................... FULL TERM NEONATE W MAJOR PROBLEMS.. 383 Quintile 1.
390............................... NEONATE W OTHER SIGNIFICANT PROBLEMS 383 Quintile 1.
391............................... NORMAL NEWBORN...................... 383 Quintile 1.
392............................... SPLENECTOMY AGE >17................. 197 Quintile 4.
393............................... SPLENECTOMY AGE 0-17................ 197 Quintile 4.
396............................... RED BLOOD CELL DISORDERS AGE 0-17... 399 Quintile 1.
402............................... LYMPHOMA & NON-ACUTE LEUKEMIA W 395 Quintile 2.
OTHER O.R. PROC W/O CC.
405............................... ACUTE LEUKEMIA W/O MAJOR O.R. 404 Quintile 3.
PROCEDURE AGE 0-17.
407............................... MYELOPROLIF DISORD OR POORLY DIFF 408 Quintile 4.
NEOPL W MAJ O.R.PROC W/O CC.
411............................... HISTORY OF MALIGNANCY W/O ENDOSCOPY. 173 Quintile 2.
412............................... HISTORY OF MALIGNANCY W ENDOSCOPY... 173 Quintile 2.
417............................... SEPTICEMIA AGE 0-17................. 576 Quintile 3.
422............................... VIRAL ILLNESS & FEVER OF UNKNOWN 426 Quintile 1.
ORIGIN AGE 0-17.
433............................... ALCOHOL/DRUG ABUSE OR DEPENDENCE, 523 Quintile 1.
LEFT AMA.
443............................... OTHER O.R. PROCEDURES FOR INJURIES W/ 445 Quintile 2.
O CC.
446............................... TRAUMATIC INJURY AGE 0-17........... 445 Quintile 2.
448............................... ALLERGIC REACTIONS AGE 0-17......... 447 Quintile 2.
451............................... POISONING & TOXIC EFFECTS OF DRUGS 449 Quintile 3.
AGE 0-17.
455............................... OTHER INJURY, POISONING & TOXIC 449 Quintile 3.
EFFECT DIAG W/O CC.
481............................... BONE MARROW TRANSPLANT.............. 394 Quintile 4.
484............................... CRANIOTOMY FOR MULTIPLE SIGNIFICANT 1 Quintile 5.
TRAUMA.
485............................... LIMB REATTACHMENT, HIP & FEMUR PROC 487 Quintile 4.
FOR MULTIPLE SIGNIFICANT TRAUMA.
494............................... LAPAROSCOPIC CHOLECYSTECTOMY W/O 493 Quintile 4.
C.D.E. W/O CC.
498............................... SPINAL FUSION EXCEPT CERVICAL W/O CC 497 Quintile 5.
507............................... FULL THICKNESS BURN W SKIN GRFT OR 511 Quintile 1.
INHAL INJ W/O CC OR SIG TRAUMA.
518............................... PERCUTANEOUS CARDIOVASC PROC W/O 125 Quintile 1.
CORONARY ARTERY STENT OR AMI.
520............................... CERVICAL SPINAL FUSION W/O CC....... 497 Quintile 5.
522............................... ALCOHOL/DRUG ABUSE OR DEPENDENCE W 521 Quintile 2.
REHABILITATION THERAPY W/O CC.
525............................... OTHER HEART ASSIST SYSTEM IMPLANT... 468 Quintile 5.
528............................... INTRACRANIAL VASCULAR PROCEDURES W 1 Quintile 5.
PDX HEMORRHAGE.
530............................... VENTRICULAR SHUNT PROCEDURES W/O CC. 529 Quintile 5.
534............................... EXTRACRANIAL PROCEDURES W/O CC...... 500 Quintile 4.
536............................... CARDIAC DEFIB IMPLANT W CARDIAC CATH 517 Quintile 4.
W/O AMI/HF/SHOCK.
540............................... LYMPHOMA & LEUKEMIA W MAJOR O.R. 399 Quintile 1.
PROCEDURE W/O CC.
546............................... SPINAL FUSION EXC CERV WITH 499 Quintile 5.
CURVATURE OF THE SPINE OR MALIG.
547............................... CORONARY BYPASS W CARDIAC CATH W 517 Quintile 4.
MAJOR CV DX.
548............................... CORONARY BYPASS W CARDIAC CATH W/O 517 Quintile 4.
MAJOR CV DX.
549............................... CORONARY BYPASS W/O CARDIAC CATH W 517 Quintile 4.
MAJOR CV DX.
550............................... CORONARY BYPASS W/O CARDIAC CATH W/O 517 Quintile 4.
MAJOR CV DX.
556............................... PERCUTANEOUS CARDIOVASC PROC W NON- 125 Quintile 1.
DRUG-ELUTING STENT W/O MAJ CV DX.
558............................... PERCUTANEOUS CARDIOVASCULAR PROC W 125 Quintile 1.
DRUG-ELUTING STENT W/O MAJ CV DX.
559............................... ACUTE ISCHEMIC STROKE WITH USE OF 16 Quintile 3.
THROMBOLYTIC AGENT.
577............................... CAROTID ARTERY STENT PROCEDURE...... 533 Quintile 4
----------------------------------------------------------------------------------------------------------------

To illustrate this methodology for determining the relative weights
for the 183 LTC-DRGs with no LTCH cases, we are providing the following
examples, which refer to the no volume LTC-DRGs crosswalk information
for FY 2007 provided in the chart above.
Example 1: There were no cases in the FY 2005 MedPAR file used for
this final rule for LTC-DRG 3 (Craniotomy Age 0-17). Since the
procedure is similar in resource use and the length and complexity of
the procedures and the length of stay are similar, we determined that
LTC-DRG 1 (Craniotomy Age >17 with CC), which is assigned to low-volume
Quintile 5 for the purpose of determining the FY 2007 relative weights,
would display similar clinical and resource use. Therefore, we assigned
the same relative weight of LTC-DRG 1 of 1.6835 (Quintile 5) for

[[Page 47984]]

FY 2007 (Table 11 in the Addendum to this final rule) to LTC-DRG 3.
Example 2: There were no LTCH cases in the FY 2005 MedPAR file used
in this final rule for LTC-DRG 91 (Simple Pneumonia and Pleurisy Age 0-
17). Since the severity of illness in patients with pneumonia and
pleurisy is similar in patients regardless of age, we determined that
LTC-DRG 90 (Simple Pneumonia and Pleurisy Age >17 Without CC) would
display similar clinical and resource use characteristics and have a
similar length of stay to LTC-DRG 91. There were over 25 cases in LTC-
DRG 90 in the FY 2005 MedPAR file data used determining the FY 2007
LTC-DRG relative weights in this final rule. Therefore, it would not be
assigned to a low-volume quintile for the purpose of determining the
LTC-DRG relative weights. However, under our established methodology,
LTC-DRG 91, with no LTCH cases, would need to be grouped to a low-
volume quintile. We determined that the low-volume quintile with the
closest weight to LTC-DRG 90 (0.4958) (refer to Table 11 in the
Addendum to this final rule) would be low-volume Quintile 2 (0.5594)
(refer to Table 11 in the Addendum to this final rule). Therefore, we
assigned LTC-DRG 91 a relative weight of 0.5694 for FY 2007. We note
that we will continue to monitor the volume (that is, the number of
LTCH cases) that have few or no LTCH cases to ensure that our no volume
LTC-DRG crosswalking and relative weight assignment results in
appropriate payments for such cases and does not result in an
unintended financial incentive for LTCHs to inappropriately admit these
types of cases.
Furthermore, as was proposed, we are establishing LTC-DRG relative
weights of 0.0000 for heart, kidney, liver, lung, pancreas, and
simultaneous pancreas/kidney transplants (LTC-DRGs 103, 302, 480, 495,
512, and 513, respectively) for FY 2007 in this final rule because
Medicare will only cover these procedures if they are performed at a
hospital that has been certified for the specific procedures by
Medicare and presently no LTCH has been so certified. Based on our
research, we found that most LTCHs only perform minor surgeries, such
as minor small and large bowel procedures, to the extent any surgeries
are performed at all. Given the extensive criteria that must be met to
become certified as a transplant center for Medicare, we believe it is
unlikely that any LTCHs would become certified as a transplant center.
In fact, in the nearly 20 years since the implementation of the IPPS,
there has never been a LTCH that even expressed an interest in becoming
a transplant center.
However, if in the future a LTCH applies for certification as a
Medicare-approved transplant center, we believe that the application
and approval procedure would allow sufficient time for us to determine
appropriate weights for the LTC-DRGs affected. At the present time, we
would only include these six transplant LTC-DRGs in the GROUPER program
for administrative purposes. Because we use the same GROUPER program
for LTCHs as is used under the IPPS, removing these LTC-DRGs would be
administratively burdensome.
Again, we note that, as this system is dynamic, it is entirely
possible that the number of LTC-DRGs with a zero volume of LTCH cases
based on the system will vary in the future. We used the best most
recent available claims data in the MedPAR file to identify zero volume
LTC-DRGs and to determine the relative weights in this final rule.
Table 11 in the Addendum to this final rule lists the LTC-DRGs and
their respective relative weights, geometric mean length of stay, and
five-sixths of the geometric mean length of stay (to assist in the
determination of short-stay outlier payments under Sec. 412.529) for
FY 2007.
We also wish to point out that in section VI.A.5. of the preamble
of this rule, we discuss our revision to the regulations for
grandfathered HwHs, grandfathered hospital satellite facilities, and
grandfathered satellite units at Sec. Sec. 412.22(f), 412.22(h), and
412.25(e), respectively. In addition, in section VI.A.6. of the
preamble of this final rule, we discuss our revision and clarification
to the existing policies governing the determination of LTCHs' CCRs and
the reconciliation of high-cost and short-stay outlier payments under
the LTCH PPS based on the proposal presented in the FY 2007 IPPS
proposed rule (71 FR 24126 through 24135).
5. Summary of Public Comments and Departmental Responses
Comment: Numerous commenters opposed the proposed changes in the
LTC-DRG weights, which they noted would result in an approximately 1.4
percent decrease in estimate aggregate payments to LTCHs. Several of
the commenters noted that LTCHs had been subject to a number of
``significant Medicare payment reductions in recent years,'' including
an estimated 4.2 percent reduction as a result of the reweighting of
the LTC-DRGs for FY 2006; a zero update (as opposed to a 3.4 percent
market-basket increase) in the Federal rate for RY 2007; an estimated
3.7 percent decrease caused by the revised short-stay outlier payment
policy for RY 2007; and, most recently, the estimated 1.4 percent
reduction as a result of the proposed reclassification and reweighting
of the LTC-DRGs for FY 2007. The commenters maintained that the
cumulative effect of these established and proposed Medicare payment
reductions is not sustainable for the LTCH industry and will cause much
``volatility'' for LTCH providers, and also restrict access to LTCHs
for patients.
One commenter provided a chart that indicated that if CMS finalizes
the proposed LTC-DRG relative weights, LTCH industry-wide margins would
approximate 0 percent. Another commenter, an association that
represents large LTCH chains, urged CMS to postpone implementation of
the proposed FY 2007 reweighting of the LTC-DRGs until an analysis of
the impact of this change on payment adequacy, as well as other payment
changes established for RY 2007, is conducted.
Response: While we understand the commenters' concerns with the
estimated decrease of 1.4 percent in LTCH PPS payments as a result of
the proposed changes in the LTC-DRGs, and relative weights for FY 2007,
we did not propose any changes in the methodology used to determine the
proposed recalibration of the LTC-DRG relative weights for FY 2007. (We
note that based on the final LTCH-DRG relative weights for FY 2007 the
estimate is a 1.3 percent decrease.) The proposed update to the LTC-DRG
relative weights for FY 2007 is based on the proposed Version 24.0 of
the CMS GROUPER (including the proposed changes in the DRG
classifications relative weights and geometric mean length of stay) and
FY 2005 LTCH claims data. For this final rule, we used updated data as
described previously. In the FY 2003 final rule for the LTCH PPS, which
first implemented the payment system, we described in great detail, the
methodology for the development of the LTC-DRG relative weights, and we
have reiterated these steps in every subsequent rulemaking cycle. (When
we revised our regulations at Sec. 412.535, establishing the LTCH PPS
rate year, while still publishing the LTC-DRG updates on the Federal
fiscal year (October through September) cycle, we continued to include
a brief write-up of our LTC-DRG update methodology in the annual LTCH
PPS proposed and final rules and a comprehensive description of the
policy in the annual IPPS proposed and final rules (67 FR 55984-55995;
68 FR

[[Page 47985]]

34131-34132; 69 FR 25681; 69 FR 48989-48999; 70 FR 24177-24178; 70 FR
37323-37341; and 71 FR 27808).) There has been no methodological change
in the way in which the LTC-DRG relative weights are computed since the
implementation of the LTCH PPS. The annual determination of the LTC-DRG
relative weights is data-driven; that is, based on claims data in the
most current MedPAR files which are derived from patient bills
submitted by LTCHs.
We agree with the commenters who noted that the LTCH industry has
indeed been impacted by significant changes since the start of the LTCH
PPS for FY 2003. Since we first established the LTCH PPS, the
unadjusted Federal payment rate, which began at $34,956.15, increased
to $38,086.64 for RY 2006. (The zero percent update finalized in the RY
2007 LTCH PPS final rule (71 FR 27798) resulted in the stabilization of
this amount for RY 2007.) From RY 2005 to RY 2006, there was a 5.7
percent increase in estimated aggregate LTCH PPS payments (70 FR
24217). The average Medicare payment per case for FY 2003 was reported
at $26,751, while, for RY 2006, it was estimated to be $33,208, which
is an increase of over 24 percent. Significantly, there was a 13.8
percent increase in estimated Medicare payments to LTCHs in RY 2005
alone. The results of the first 2 years of this ``volatility'' were
aggregate industry margins estimated at 7.8 percent for FY 2003, and
for FY 2004, preliminary cost report data revealed an estimated average
Medicare margin of 12.7 percent, as stated in the RY 2007 LTCH PPS
final rule (71 FR 27819).
The commenters noted the Medicare payment reductions in recent
years, including the estimated 4.2 percent reduction for FY 2006 due to
the recalibration of the LTC-DRG weights and the estimated 1.4 percent
decrease in aggregate LTCH PPS payments due to the proposed update to
the LTC-DRG relative weights for FY 2007. As noted above, the decrease
in average case-mix based on the proposed LTC-DRG relative weights for
FY 2007 as compared to FY 2006, as well as the decrease in average
case-mix from FY 2006 as compared to FY 2005, which were estimated to
result in an aggregate estimated decrease in LTCH PPS payments, were
data driven. For this final rule they remain data driven as well. In
the FY 2006 IPPS proposed rule (70 FR 23667), we noted that we
continued to observe a significant increase of relatively lower charge
cases being assigned to LTC-DRGs with higher relative weights in the
prior year. The addition of these lower charge cases resulted in a
decrease in many of the LTC-DRG relative weights from FY 2005 to FY
2006. This decrease in many of the LTC-DRG relative weights, in turn,
resulted in an estimated decrease in LTCH PPS payments from FY 2005 to
FY 2006. As we explained in that same rule, contributing to this
increased number of relatively lower charge cases being assigned to
LTC-DRGs with higher relative weights in the prior year were
improvements in coding practices, which are typically found when moving
from a reasonable cost-based payment system to a PPS.
Our analyses of data from the March 2005 update of the FY 2004
MedPAR files, which were used to calculate the FY 2006 LTC-DRG relative
weights, and the most recent update of the FY 2005 MedPAR files which
were used to determine the proposed and final FY 2007 LTC-DRG relative
weights continue to show an increase of relatively lower charge cases
being assigned to LTC-DRGs with higher relative weights in the prior
year. As we explained in the FY 2006 IPPS final rule (70 FR 47335) and
the FY 2007 IPPS proposed rule (71 FR 24413), the impact of including
cases with relatively lower charges into LTC-DRGs that had a relatively
higher relative weight in the previous fiscal year's GROUPER is a
decrease in the average relative weight for those LTC-DRGs, which, in
turn, may result in an estimated aggregate decrease in LTCH PPS
payments.
The commenters also mentioned the zero update to the RY 2007
standard Federal rate as one of the ``significant Medicare payment
reductions in recent years.'' In the RY 2007 LTCH PPS final rule (71 FR
27819 through 27827), we explained our rationale for establishing a
zero percent update to the standard Federal rate for the 2007 LTCH PPS
rate year, which was based on the most recent estimate in the
Rehabilitation, Psychiatric and Long-Term Care (RPL) market basket
offset by an adjustment for changes in coding practices that are
unrelated to case mix, rather than solely using the most recent
estimate of the RPL market basket to update the RY 2006 Federal rate.
This market basket offset resulted from a number of factors that
included our ongoing monitoring activities, which prompted us to
examine the changes in LTCHs' patient case-mix index and margins since
the inception of the LTCH PPS for FY 2003 (67 FR 56014).
First, we noted that there has been tremendous growth in the number
of LTCHs reimbursed by Medicare. Specifically, the number of LTCHs
almost doubled from approximately 200 LTCHs in FY 2003 to 378 LTCHs at
the start of FY 2005. In addition, Medicare spending for LTCHs has also
grown rapidly, as noted in MedPAC's June 2004 Report to Congress (page
122). Rapid increases in LTCH growth and Medicare spending under the
LTCH PPS, in conjunction with the fact that over 98 percent of LTCHs
are currently paid based fully on the Federal rate (rather than
choosing to be paid under a blend of the reasonable cost-based (TEFRA)
payment amount and the LTCH PPS Federal rate payment amount), prompted
us to examine changes in LTCHs' patient case-mix index and margins
under the LTCH PPS. We believed the zero percent update factor for RY
2007, which was based on the most recent estimate of the RPL market
basket at that time, adjusted to account for coding changes, was
supported by our findings regarding the case-mix index, Medicare
margins, and patient census based on the most recent complete LTCH
data.
As we explained in considerable detail in the RY 2007 final rule
for the LTCH PPS (71 FR 27818 through 27824), a LTCH's case-mix index
is defined as the case-weighted average LTC-DRG relative weight for all
its discharges in a given period. Changes in the case-mix index consist
of two components: ``real'' case-mix index changes and ``apparent''
case-mix index changes. Real case-mix index increase is defined as the
increase in the average LTC-DRG relative weights resulting from the
hospital's treatment of more resource intensive patients. Apparent
case-mix index increase is defined as the increase in computed case-mix
index that is due to changes in coding practices (including better
documentation of the medical record by physicians and more complete
coding of the medical record by coders). Observed case-mix index
increase is defined as real case-mix index increase plus the apparent
case-mix index increase.
If LTCH patients have more costly impairments, lower functional
status, or increased comorbidities, and thus require more resources in
the LTCH, we consider this a real change in case-mix. Conversely, if
LTCH patients have the same impairments, functional status, and
comorbidities but are coded differently resulting in higher payment, we
consider this an apparent change in case-mix. We believe that changes
in payment rates should accurately reflect changes in LTCHs' true cost
of treating patients (real case-mix index increase), and should not be
influenced by changes in coding practices (apparent case-mix index
increase). Apparent case-mix index increase results in a case

[[Page 47986]]

being grouped to a LTC-DRG with a higher weight than it would be
without such changes in coding practices, which results in a higher
payment to the LTCH that does not necessarily reflect the true cost of
treating the patient. Therefore, in the RY 2007 LTCH PPS final rule (71
FR 27798) under the broad discretionary authority conferred upon the
Secretary by section 123 of the BBRA as amended by section 307(b) of
the BIPA to include appropriate adjustments, including updates, in the
establishment of the LTCH PPS, we revised the annual update to the LTCH
PPS standard Federal rate set forth at Sec. 412.523(a)(2) for the 2007
LTCH PPS rate year to adjust the payment amount for LTCH inpatient
hospital services to eliminate the effect of coding or classification
changes that do not reflect real changes in LTCHs' case-mix.
Our determination to specifically provide a zero update resulted
from data analysis by 3M Health Information Systems (3M) regarding
changes in case-mix and coding since the implementation of the LTCH
PPS, based on the most recently available data, which compared FY 2003
LTCH claims data from the first year of implementation of the PPS with
FY 2004 LTCH claims data, and also looked at FY 2001 claims data
(generated prior to the implementation of the LTCH PPS). (The FY 2001
data was the same LTCH claims data used to develop the LTCH PPS.) The
analysis indicated, among other things, that the average annual case-
mix index increase from FY 2001 to FY 2003 was 2.75 percent. Since
coding of diagnoses was not a factor in determining payments under the
former reasonable cost-based (TEFRA) payment system, and since payments
were not directly tied to diagnosis codes, there was no incentive for
LTCHs to attempt to influence payments through changes in coding
practices. Therefore, it was reasonable to assume that the observed
2.75 percent change in case-mix in the years prior to the
implementation of the LTCH PPS represent the value for the real case-
mix index increase (that is, we assumed that the 2.75 percent increase
in case-mix is due to treatment of more resource intensive patients,
rather than to improvements in documentation or more complete coding of
the medical record during this period). Using the average annual 2.75
percent observed case-mix index increase as a baseline, we separated
the computed case-mix index increase between FY 2003 and FY 2004 into
the real case-mix index increase, which is based on the treatment of
more resource intensive patients, and the apparent case-mix index
increase, due to improvements in documentation and coding practices.
As we stated in the RY 2007 LTCH PPS final rule (71 FR 27820), the
calculated observed case-mix index increase between FY 2003 and FY 2004
was 6.75 percent. Assuming that the real case-mix index increase
observed (on average) from FY 2001 to FY 2003 remained relatively
constant into FY 2004, then the difference of 4.0 percent (6.75 percent
minus 2.75 percent) represented the apparent case-mix index increase
that was due to improvements in documentation and coding. This was
considerably higher than the 0.34 percent behavioral offset originally
estimated by the CMS Office of the Actuary, which was used in the
development of the FY 2003 LTCH PPS standard Federal rate (67 FR
56033). Therefore, we believed that it was appropriate that the market
basket be offset by an adjustment to account for changes in coding
practices that do not reflect changes in real case mix. This adjustment
was implemented to ensure that the LTCH PPS payment rates continue to
reflect, as closely as possible, the true costs of treating LTCH
patients. It was our intent that such an adjustment to the most recent
estimate of the LTCH PPS market basket would eliminate the effect of
coding or classification changes that did not reflect real changes in
LTCHs' case-mix in prior years.
Regarding the impact of the revised short-stay outlier policy on
Medicare payments to LTCHs, we continue to believe that the revisions
we established to the short-stay outlier payment adjustments in the RY
2007 LTCH PPS final rule were highly appropriate and that they provide
fair and reasonable payment for short-stay patients in LTCHs, which are
required to meet the same certification criteria as short-term acute
care hospitals set forth in section 1861(e) of the Act and generally
have an average length of stay of greater than 25 days. Therefore, our
present policy under the short-stay outlier policy at Sec. 412.529,
effective for discharges beginning on or after July 1, 2006, is to base
Medicare payment on the least of 100 percent of the estimated costs of
the discharge, 120 percent of the LTC-DRG per diem payment amount
multiplied by the length of stay, the full LTC-DRG payment, or a LTCH
PPS payment based on a blend of the IPPS-comparable per diem payment
amount (capped at the full IPPS comparable payment amount) and a
payment based on 120 percent of the LTC-DRG per diem amount.
We believe that this finalized policy clearly demonstrates our
rationale, which is that as the length of a short-stay outlier case
increases, the case begins to resemble a more ``typical'' LTCH stay as
defined under section 1886(d)(1)(B)(IV)(I) of the Act and envisioned by
the statutes authorizing the establishment of the LTCH PPS.
Furthermore, the estimated 3.7 percent decrease in payments cited by
the commenters will only have an impact on payments to those LTCHs that
continue to admit a large number of very short-stay patients. We
believe that the previous short-stay outlier policy, under which
Medicare paid the least of 120 percent of the estimated cost of the
case, 120 percent of the per diem LTC-DRG multiplied by the length of
stay, or the full LTC-DRG, inadvertently provided an incentive for a
LTCH to inappropriately admit patients who could otherwise have been
treated in acute care hospitals and paid for under the IPPS. Therefore,
we believe the provisions of the short-stay outlier policy that were
finalized in the RY 2007 LTCH PPS final rule (71 FR 27845 through
27872) will result in fair and equitable payment for short-stay
patients at LTCHs.
In response to the commenter who provided a chart that indicated
industry-wide margins of approximately zero percent because of the
proposed changes in the LTC-DRG relative weights that are anticipated
to result from the 1.4 percent payment reduction, we continue to
believe that our case-mix analysis (case-mix index) and Medicare
margins analysis are sound. In the RY 2007 final rule for the LTCH PPS,
we calculated ``revenue-weighted'' Medicare margins, which are the sum
of hospital inpatient Medicare revenue (payments) minus the sum of
hospital inpatient Medicare expenses (costs) divided by the sum of
hospital inpatient Medicare revenue (payments). This margin analysis,
which is also utilized by MedPAC in its analyses, is used to evaluate
the overall financial status of LTCHs in general. In our analysis of
the latest available LTCH data, we found that LTCH Medicare margins for
FY 2003 (the first year of the LTCH PPS) were 7.8 percent, and
preliminary data for FY 2004 based on the most recent HCRIS data
revealed an even higher Medicare margin of 12.7 percent. Moreover, our
analysis of LTCHs' payments and costs per discharge based on the latest
available cost report data supports our adjustment to account for
changes in coding practices that do not reflect changes in real case
mix because it shows that, while payments (revenue) increased
approximately 15 percent from FY 2002 to FY 2003, costs

[[Page 47987]]

(expenses) per discharge increased by only 8 percent for the same
period.
Thus, payments to LTCHs from FY 2002 to FY 2003 increased almost
twice as much as the increase of costs for the same period. We also
noted that even though we established a zero update to the Federal
payment rate for RY 2007, we continue to believe that, based on the
sizeable Medicare margins among LTCHs, the standard rate for the RY
2007 LTCH PPS will not affect beneficiary access to LTCH services
because LTCHs will continue to be paid adequately to reflect the cost
of resources needed to treat Medicare beneficiaries. We also note that
MedPAC's March 2006 Report to Congress on Medicare Payment Policy
included similar data on margins and, based on its indepth evaluation
of payment adequacy for LTCHs for 2006, MedPAC recommended that there
be no update to the LTCH PPS Federal rate for RY 2007.
In addition, we do not believe that it would be appropriate to
``postpone implementation'' of the proposed reweighting of the LTC-DRGs
pending an analysis of the impact on LTCH payment adequacy of this
change, as well as other payment changes established for LTCHs for RY
2007. The annual recalibration of the LTC-DRG relative weights, which
is based on patient data, is one of the cornerstones of all prospective
payment systems. To reiterate, we believe that the policies finalized
for RY 2007, including the zero percent update to the standard Federal
rate and the payment adjustment for short-stay outlier cases, do not
provide any impediment to the ability of LTCHs to continue to maintain
the quality or the availability of appropriately delivered LTCH
services to Medicare beneficiaries.
Comment: Several comments questioned the methodology that we used
that distinguishes between payment ``reductions'' resulting from the
zero update to the standard Federal rate finalized in the RY 2007 LTCH
PPS final rule and payment reductions resulting from the proposed
reweighting of the LTC-DRGs for FY 2007. One commenter asserted that
CMS has utilized the same rationale as a basis to propose to reduce the
FY 2007 LTC-DRG relative weights that were used to apply a zero percent
update in the RY 2007 LTCH PPS final rule. The commenters believed CMS
has double-counted the same phenomenon.
Another commenter stated that, because the LTC-DRG relative weights
are not updated in a budget-neutral manner, through the annual
recalibration of the weights, the LTC-DRG system will ``self-correct
over time'' without the need for any lowering of the Federal payment
rate. The commenter believed that this non-budget neutral weight
recalibration will continue to correct for the case-mix creep until
coding improvement reaches a plateau, at which point annual case-mix
variation will reflect actual variations in case-mix intensity. Citing
our justification of ``apparent'' as opposed to real case-mix increase
based on FY 2004 LTCH data for the zero percent update to the Federal
rate for RY 2007, the commenter believed that CMS has overpenalized
LTCHs by a net 4.2 percent. The commenter recommended that CMS work
with the industry to establish an update system that eliminates the
possibility of ``over reduction'' due to case-mix creep by one of the
following options: implementing a budget neutral recalibration system
and address case-mix creep through the update; or alternatively,
maintaining the current non-budget neutral weight recalibration system
but foregoing any future Federal rate update reduction for case-mix
creep.
Response: The commenters have expressed concern that, if we
finalize the proposed change in the FY 2007 LTC-DRG relative weights,
the change would result in an estimated 1.4 percent decrease in
payments. Because we have already finalized the zero update to the RY
2007 standard Federal rate, the commenters believe we will have reduced
payments to LTCHs twice for the same phenomenon. We would like to
remind the commenters that the ``zero percent'' update to the Federal
rate for RY 2007 did not reduce LTCH PPS payments from their previous
level. Instead, the Federal rate remained at $38,086.04 from RY 2006 to
RY 2007. Furthermore, we disagree and do not believe that LTCHs are
being penalized twice, once through adjustment of the standard Federal
rate and again due to the proposed and finalized recalibration of the
LTC-DRG relative weights for FY 2007.
In the LTCH PPS RY 2007 final rule, we addressed a similar
allegation by commenters that we were ``unfairly penalizing'' LTCHs
twice in proposing the zero percent update to the standard Federal rate
as a remedy for inappropriate Medicare payments to LTCHs resulting from
``case-mix creep'' (that is, the ``apparent'' case-mix index increase)
between FYs 2003 and 2004. At that time, several commenters stated that
CMS had already corrected any coding issues from FY 2004 by the annual
recalibration of the LTC-DRGs for FY 2006 based on case-mix changes
from FYs 2003 and 2004, which resulted in an estimated decrease of 4.2
percent in payments to LTCHs.
In the RY 2007 LTCH PPS final rule (71 FR 27882), we presented the
explanation of the distinction between the annual reweighting of the
LTC-DRGs, which we expect to result in appropriate payments for the
forthcoming fiscal year's LTCH discharges, and determinations regarding
the appropriate application of adjustments to the market basket
increase applied to the standard Federal rate which was established to
account for payments made in a prior year that were based on improved
coding rather than increased patient severity (71 FR 27821). At that
time, we reviewed the discussion in the FY 2006 IPPS final rule (70 FR
47701-47702) in which we estimated that a payment reduction of -4.2
percent would result from the FY 2006 recalibration of the LTC-DRG
relative weights, which were based on LTCH claims data from the FY 2004
MedPAR file. We stated ``* * * [t]hus FY 2004 LTCH claims data, which
reflected improved coding, were used to determine the LTC-DRG relative
weights used to pay LTCH PPS discharges occurring during FY 2006. While
it is true that the reweighting of the LTC-DRGs using FY 2004 LTCH
claims served to update the relative weights based on actual claims
data in each LTC-DRG, which also reflects coding improvements that
occurred in FY 2004, the recalibration of LTC-DRG weights only corrects
for any coding improvement for the purpose of making accurate LTCH PPS
payments in FY 2006.'' (71 FR 27822)
However, annual recalibration does not serve to account for
payments that were made based on improved coding (rather than patient
severity) in prior years. The case-mix adjustment to the market basket
in determining the RY 2007 Federal rate is meant to reduce current
payments to account for the increase payments that occurred in FY 2004
that resulted from the CMI increase that is attributable to ``case-
mix'' creep in that year 71 FR 27822).
We also explained the rationale and computations underlying our
update for RY 2007 in that same final rule: ``In the RY 2007 LTCH PPS
proposed rule, we proposed to offset the market basket by an amount
equal to the increase in case mix that was due solely to improved
documentation and coding rather than changes in real case mix. At the
time of the proposed rule, that increase was within rounding error of
the market basket, and therefore resulted in a proposed Federal rate
for RY 2007 that was equal to the RY 2006 Federal rate, and not a
reduction to the RY 2006

[[Page 47988]]

Federal rate.'' (71 FR 27821). Therefore, this policy determination
regarding the market basket increase of zero percent for RY 2007 was
based on changes in the LTCHs' case-mix indices in conjunction with a
broader analysis of trends in the LTCH industry (noted most recently by
MedPAC in the Commission's March 2006 Report to the Congress (page
211)) and in particular, driven by a detailed analysis of LTCH margins
since the implementation of the LTCH PPS. As we stated in that same
final rule, we believe that, in determining the Federal rate update for
RY 2007, it is appropriate to apply an adjustment to the most recent
estimate of the LTCH PPS market basket to eliminate the effects of
coding and classification changes that do not reflect changes in real
case-mix. This adjustment is necessary to account for prior year
payments that were made based on improved coding practices (rather than
increased patient severity) (71 FR 27821). Furthermore, we note that FY
2004 LTCH claims data were used to determine the adjustment to the
market basket to account for changes in coding practices in
establishing the zero percent update to the Federal rate for RY 2007,
while FY 2005 LTCH claims data were used to determine the proposed and
final FY 2007 LTC-DRG relative weights. Because LTCH claims data from
different years were used to determine the two adjustments noted by the
commenters, we further disagree that we ``double counted the same
phenomenon.''
Regarding our margins analysis, based on data from the LTCHs' cost
reports received as of December 31, 2005, updated LTCH margins analysis
for the LTCH PPS RY 2007 final rule continued to show high Medicare
margins among LTCHs since the implementation of the LTCH PPS in FY
2003. As noted in the RY 2007 LTCH PPS final rule, ``[w]e calculated
`revenue-weighted' Medicare margins, which are the sum of hospital
inpatient Medicare revenue (payments) minus the sum of hospital
inpatient Medicare expenses (costs) divided by the sum of hospital
inpatient Medicare revenue (payments). This margin calculation, also
utilized by MedPAC in its analyses, is used to evaluate the overall
financial status of LTCHs in general. In an analysis of the latest
available LTCH cost reports, we found that LTCH Medicare margins for FY
2003 (the first year of the LTCH PPS) were 7.8 percent and preliminary
cost report data for FY 2004 based on the most recent update to the
cost report data in HCRIS reveal an even higher Medicare margin of 12.7
percent. For periods prior to the implementation of the LTCH PPS (that
is, FY 1999 through FY 2002), we found that aggregate Medicare margins
ranged between a minimum of -2.3 percent in FY 2000, and a maximum of
1.5 percent in FY 2002.'' (71 FR 27823).
We wish to emphasize that, as we specified in the RY 2007 LTCH PPS
proposed rule, the large observed increase in LTCH case-mix was not
accompanied by a corresponding increase in Medicare costs. This was
consistent with our belief expressed earlier that a significant part of
this observed increase in case-mix was ``apparent'' and not ``real.''
In conjunction with an increase in real case-mix (that is, patient
severity), we would have expected to see a significant increase in
costs per discharge, even taking into account LTCH operating
efficiencies, to pay for the resources needed to treat sicker patients.
Consistent with MedPAC's most recent research discussed in its March
2006 Report to Congress (section 4C), our margins analysis indicated
that, in spite of the estimated real increase in case-mix (severity of
patients), payments to LTCHs under the LTCH PPS are generally more than
adequate to cover the Medicare costs of the inpatient hospital services
provided to LTCH patients.
Therefore, for the reasons discussed above, we disagree with the
commenters who believe that we ``double counted the same phenomenon.''
To summarize, the purpose of the adjustment to the market basket which
was to account for changes in coding practices that resulted in a zero
percent update to the Federal rate for RY 2007 and the changes in
payments that will result from the proposed and final reweighting of
the LTC-DRGs are different. Specifically, the objective of our
adjustment to the standard Federal rate update for RY 2007 was to
adjust payments to account for prior year payments made by the Medicare
program that were due to changes in coding practices, that did not
reflect actual costs of beneficiary care. However, the annual
recalibration of the relative weights for LTC-DRGs reflects the
variation in coding practices and charges from the previous year and it
helps ensure that the LTC-DRG relative weights in the upcoming fiscal
year will result in appropriate payments to LTCHs for the resources
they expend to treat patients. This was the case for FY 2006, when LTC-
DRG relative weight recalibrations were estimated to result in a
payment decrease of 4.2 percent and it was also the case for the
estimated 1.4 percent decrease based on the proposed LTC-DRG relative
weights for FY 2007. It is also the case for the estimated 1.3 percent
decrease in this final rule due to the recalibration of the LTC-DRG
relative weights.
Therefore, in response to the commenter who presented an ``either/
or'' scenario suggesting that we should adjust payments based on case-
mix variation through the present (that is, not budget neutral)
recalibration of the LTC-DRG relative weights but forego any future
Federal rate update for case-mix creep, or we should address ``case-mix
creep'' through the annual update in the Federal rate but implement a
budget neutral recalibration system, we do not believe that this
approach is appropriate, given that, as discussed in greater detail
above, the purposes of the case-mix adjustments in each context are
distinct. It is possible that if coding practices stabilize and reach
``a plateau,'' as one of the commenters suggested, and case-mix
variation only reflects real variations in case-mix intensity, the
``self-correcting'' mechanism of the annual recalibrations of LTC-DRG
relative weights may be a reliable indication of actual costs at LTCHs
by DRG. However, we emphasize that there is a distinct difference
between the payment adjustments that could result from data-driven
determinations that we consider, as described earlier, when we
promulgate our policy regarding the annual application of the market
basket update to the standard Federal rate and the data-driven effects
of the recalibration of the LTC-DRG relative weights. Moreover, we do
not believe that the zero update to the standard Federal rate
implemented for RY 2007, which was intended to adjust for payments that
were reflective of payments that were made based on improved coding
rather than patient severity in 2004, and the reweighting of the
relative weights for the LTC-DRGs, which would only address making
appropriate payments for FY 2007, have resulted in an ``over
reduction'' of payments to LTCHs, or overpenalized the LTCH industry.
As we have stated most recently in the RY 2007 LTCH PPS final rule,
we discussed a potential framework to update payments to LTCHs that
would account for appropriate factors that affect efficient delivery of
services and care to Medicare beneficiaries (71 FR 27818), and we have
solicited comments on the presentation of a model for such a framework
presented in Appendix A of that final rule. Presently, however, in the
absence of a more comprehensive update framework, we believe that it is
necessary and appropriate for us to evaluate the need of applying an

[[Page 47989]]

adjustment to the full market-basket increase, based upon the best
available data and policy considerations. Similarly, we believe it is
appropriate to update the LTC-DRG relative weights based on the latest
available data because the more recent data ensure that the LTC DRG
relative weights for FY 2007 best reflect the resources actually used
in the treatment of LTCH patients.
Comment: Several commenters discussed the impact of policies that
we proposed under the IPPS for short-term, acute care hospitals (that
is, the adoption of severity-adjusted DRGs; and the implementation of
HSRVcc (cost-based weights) methodology for calibration of DRG weights)
in their evaluation of the proposed 1.4 decrease in the LTC-DRG
payments based on the proposed LTC-DRG changes for FY 2007. Both
commenters urged us not to implement the proposed LTC-DRG relative
weights because they believe that the discussion of the severity-
adjusted DRGs in the proposed rule emphasized the fact that the LTC-DRG
classifications, as they currently exist, do not accurately capture the
full measure of severity for LTCH patients.
One commenter commissioned a study by the Lewin Group that utilized
claims data from the FY 2005 MedPAR file and cost report data from FY
2003 to simulate the HSRVcc methodology set forth in the proposed rule.
The commenter stated that the result was that, rather than a estimated
1.4 percent payment reduction, the HSRVcc method of determining LTC-DRG
relative weights resulted in an estimated 1.5 percent increase in LTCH
PPS payments. The commenter added that this indicates that there can be
reasonable differences as to what is the most accurate method of
establishing relative weights under PPSs and that the Secretary should
adjust the LTC-DRG weights this year on a budget-neutral basis, thus
eliminating the estimated 1.4 percent decrease based on the proposed
LTC-DRG relative weights. The commenter recommended that, although the
authorizing legislation contemplates that CMS use the most recently
available LTC-DRG weights for an annual update, the Secretary could use
his broad authority to modify the LTC-DRG payments, as appropriate, and
in order to accurately reflect current LTCH patient care. The commenter
believed that the FY 2006 LTC-DRG relative weights should be maintained
for FY 2007 because they more accurately account for the expected
resources to be used by LTCH patients in FY 2007.
Another commenter noted that, based on the discussion in the FY
2007 proposed rule, CMS believes that severity-adjusted DRGs would
improve the accuracy of the DRG system under the IPPS, and
consequently, the commenter believed that, for FY 2008, severity-
adjusted LTC-DRGs could be considered because they may better account
for differences in severity of illnesses and associated costs across
hospitals. This commenter further stated that higher weighted LTC-DRGs
(and the LTCHs that treat them) are more vulnerable to the payment
reductions proposed for FY 2007 based on proposed LTC-DRG relative
weights because payment rates for higher acuity LTCH patients will be
diluted by the FY 2005 upcoding of many lower severity cases to the
higher weighted DRGs. In addition, the commenter pointed to the revised
short-stay outlier policy established in the RY 2007 LTCH PPS final
rule which, they believe, is intended to reduce the number of lower-
acuity patients being treated in LTCHs, and stated that those LTCH
patients that are not short-stay outlier cases will be more typical of
LTCH patients and, therefore, have higher acuity. The same commenter
also mentioned that the FY 2005 data that are being proposed to be used
to reweight the LTC-DRGs for FY 2007 represent a system ``still in
flux'' because the system is still transitioning to full payment under
the LTCH PPS and only a portion of each case is being paid based on
LTC-DRGs. For these reasons, the commenter urged CMS to postpone
further LTC-DRG rate reductions and instead recommended that CMS
address coding improvements comprehensively in FY 2008 under the LTCH
PPS in the context of the improved severity measures proposed under the
IPPS for FY 2008 (or earlier).
Response: We understand that the commenters are concerned with the
1.4 percent decrease in estimated aggregated LTCH PPS payments for FY
2007 due to the proposed reweighting of the LTC-DRGs. We also
understand that the commenters believe that the adoption of a severity-
adjusted patient classification system under the LTCH PPS applied to
the LTC-DRGs and the use of cost-based weights (HSRVcc) methodology
could result in a different estimated aggregate payment change for FY
2007. However, as we discussed in greater detail below, we do not agree
that the FY 2006 relative weights would more accurately represent
resource use by LTCH patients for FY 2007 and that it would be
necessary or appropriate to postpone the finalization of the annual
reweighting of the LTC-DRGs. The current (FY 2006) LTC-DRG relative
weights were determined based on FY 2004 LTCH claims data from the
MedPAR files. For FY 2007, we proposed to use our existing relative
weight methodology (established when the LTCH PPS was implemented for
FY 2003) and FY 2005 LTCH claims data from the MEDPAR files to
recalibrate the LTC-DRG relative weights, as these were currently the
most recent complete LTCH claims data. As was proposed, for this final
rule, we are using the March 2006 update of the FY 2005 MedPAR files
because this is currently the most recent and complete LTCH claims
data. We believe that the FY 2005 data are the best LTCH data available
that reflect LTCHs' current treatment practice and coding patterns.
Therefore, because the FY 2005 LTCH claims data better reflects current
LTCH behavior than the FY 2004 LTCH claims data that was used to
determine the FY 2006 LTC-DRG relative weights, we believe that using
this updated (FY 2005) LTCH claims data with our existing relative
weight methodology will result in LTC-DRG relative weights for FY 2007
that will best reflect the resources actually utilized by LTCHs in
treating their Medicare patients.
With respect to the accuracy of the current LTCH-DRG system, we
note the following. For FY 2003, we decided to adopt the current LTC-
DRG system stating, ``the LTC-CMS-DRG system is a system that is
familiar to hospitals because it is based on the current DRG system
under the acute care hospital inpatient prospective payment system. We
believe that the familiarity of the LTC-CMS-DRG model may best
facilitate the transition from the reasonable cost-based system to the
prospective payment system as well as providing continuity in payment
methodology across related sites of care (for example, an acute care
hospitalization for a patient with a chronic condition)'' (67 FR
55966). However, we have noted that we believed that there may be
significant advantages in the use of severity-adjusted LTC-DRGs. In
fact, when we were developing the LTCH PPS for FY 2003, we seriously
considered using a specially modified version of the APR-DRGs (67 FR
55966-55967). At that time, we stated:
``The LTC-APR-DRGs, a condensed version of 3M's all-patient refined
DRGs (APR-DRGs) for acute care hospitals, was developed by 3M Health
Information Systems, for exclusive use in LTCHs. The LTC-APR-DRG system
was designed to reflect the clinical characteristics of LTCH patients.
This case-mix classification model contains 26 base LTC-APR-DRGs,
subdivided by 4 severity of illness levels to yield 104 classification
levels. In this system, the

[[Page 47990]]

patient's secondary diagnoses, their interaction, and their clinical
impact on the primary diagnosis determine the severity level assigned
to each of the 26 LTC-APR-DRGs'' (67 FR 55966).
When we decided to use the same patient classification system as
the IPPS, following a comprehensive analysis of both the LTC-APR-DRGs
and the existing DRG system (modified by the use of quintiles for low
volume DRGs) for the particular purposes of patient classification at
LTCHs, we indicated that we believed that either classification system
would result in appropriate payments for LTCHs under the PPS. However,
we noted several issues to consider concerning the LTC-APR-DRG system,
including--
``* * * its complexity, its clinical subjectivity, and its utility
as it relates to other Medicare prospective payment systems. The LTC-
APR-DRG model provides a clinical description of the population of
LTCHs, patients exhibiting a range of severity of illness with multiple
comorbidities as indicated by secondary diagnoses. The clinical
interaction of the primary diagnosis with these comorbidities
determines the severity level of the primary diagnoses, resulting in
the final assignment to a LTC-APR-DRG by the GROUPER software designed
for this system'' (67 FR 55966).
We further noted that ``* * * determining whether particular
comorbidities increase the cost of a case for a LTCH patient is
complicated by the nature of the clinical characteristics of these
patients. More specifically, many LTCH patients have numerous
conditions that may not all be relevant to the cost of care for a
particular discharge. Although the patient actually has a specific
condition, including this condition among secondary diagnoses coded
under the LTC-APR-DRG system may assign an inaccurate severity level to
the primary diagnosis and result in inappropriate LTC-APR-DRG payment.
We also believe that reliance on existing comorbidity information
submitted on LTCH bills could result in significant variation in the
assignment of the specific LTC-APR-DRGs'' (67 FR 55967).
We concluded our explanation in the FY 2003 final rule for the LTCH
PPS by stating that ``[e]ven though we are using LTC-DRGs in the LTCH
prospective payment system in this final rule, we may have the
opportunity to propose a severity-adjusted patient classification for
LTCHs in the future, particularly if the acute care hospital inpatient
prospective payment system moves in this direction'' (67 FR 55967). As
we noted in the FY 2007 IPPS proposed rule, if and when a severity-
adjusted patient classification system is adopted under the IPPS, we
would need to consider whether to propose revisions to the patient
classification system used under the LTCH PPS. Any proposed changes to
the patient classification system would be done through notice and
comment rulemaking (71 FR 24051). Subsequently, in 2005, MedPAC
recommended we refine the entire inpatient acute care CMS DRG system to
take into account severity of illness and apply HSRV weights to DRGs.
However, we believe that it is advantageous to the LTCH community to
wait for CMS to first finalize its policies regarding any refinements
to the DRG system for the IPPS so that we can fully analyze what the
effects of such changes would be on LTCH PPS payments. To the extent
any changes for severity-adjusted DRGs for the IPPS system have been
finalized, an analysis could then be performed to determine whether it
is appropriate to propose the same severity-adjusted patient
classification for LTCHs. As we stated in the FY 2007 IPPS proposed
rule:
``At that time, we would need to consider whether to propose
revisions to the patient classification system under the LTCH PPS. Any
proposed changes to the patient classification system would be done
through notice and comment rulemaking'' (71 FR 24051).
The commenters cited the virtues of the severity-adjusted DRGs and
one commenter commissioned the above described study to assess the
validity of our proposed update to the LTC-DRG relative weights for FY
2007. In response to these comments, we reiterate that, while we
understand that applying the severity-adjusted DRGs under the LTCH PPS
could have an impact on setting relative weights used in determining
LTCH PPS payments, we would consider their use in the LTCH PPS after we
evaluate any DRG refinements for the IPPS, as noted above.
We note that while severity-adjusted DRGs had been proposed under
the IPPS system for FY 2008 (or earlier), we did not propose to revise
the current patient classification system used under the LTC PPS.
Because, as we explained above, we believe any refinement due to
severity-adjusted DRGs for the IPPS system would need to be evaluated
to determine whether it is appropriate to use the same severity-
adjusted DRGs for LTCHs, we will, at that time, take into consideration
such issues as the impact of treating higher acuity patients.
We have noted that some commenters believe it is not appropriate
that LTCHs be impacted by decreasing payments because of the upcoding
of lower acuity patients to higher weighted LTC-DRGs, as discussed in
the previous responses. However, as we discussed in the FY 2007 IPPS
proposed rule (71 FR 24413), many of the LTC-DRG relative weights
proposed for FY 2007 are lower than the current (FY 2006) LTC-DRG
relative weight because based on the latest available LTCH claims data,
we continue to observe an increase in the number of relatively lower
charge cases being assigned to LTC-DRGs with higher relative weights in
prior years. As explained previously, we believe that using updated (FY
2005) LTCH claims data will result in LTC-DRG relative weights for FY
2007 that best reflect the resources actually utilized by LTCHs in
treating their Medicare patients and thereby act to ensure appropriate
LTCH PPS payments in FY 2007. The commenter is correct in noting that
it was our intention, when we revised the short-stay outlier policy
described above, to reduce the number or type of short-stay patients
being treated in LTCHs that do not utilize the resources of ``typical''
LTCHs. Many of these very short stay cases require more appropriate
treatment at another hospital setting, such as an acute care hospital.
Therefore, we are not convinced that reducing the number of short stay
patients treated at LTCHs will necessarily result in higher LTC-DRG
weights in all LTC-DRGs or even in higher weighted LTC-DRGs.
Moreover, since the implementation of the LTCH PPS in FY 2003, we
have accounted for very short-stay and short-stay outliers cases in our
LTC-DRG relative weight methodology. Specifically, we have removed
cases with a length of stay of 7 days or less because we believed that
they could ``significantly bias payments against inlier cases'' (67 FR
55989). In addition, the methodology includes a step to adjust charges
for the effects of short-stay outliers by ``counting a short-stay
outlier as a fraction of a discharge based on the ratio of the length
of stay of the case to the average length of stay for the LTC-DRG.''
Without this adjustment, we maintained at that time that we believed
that ``the relatively lower charges of the short-stay outlier cases
bring down the average charge for all cases within a LTC-DRG * * *
[and] result in an `underpayment' to nonshort-stay outlier cases * *
*'' (67 FR 55990). Therefore, we do not believe that the changes that
we have made in the short-stay outlier policy in the RY 2007 LTCH PPS
final rule will affect the DRG weights because our methodology has

[[Page 47991]]

always accounted for this potential effect so that a reduction in
short-stay outlier cases will not necessarily result in a significant
change to the DRG weights.
During the previous 4 years, while we phased in to full payments
under the LTCH PPS, we have reweighted the LTC-DRGs, with the result
that for the first year, there was an estimated negligible increase in
average payments based upon the reweighting of the LTC-DRGs (FY 2004 +
0.4 percent) and a negligible decrease in estimated payments based on
the LTC-DRG update in FY 2005 (FY 2005, -0.5 percent). For the
subsequent 2 years, there were decreases (FY 2006, -4.2 percent;
proposed FY 2007, -1.4 percent). Although the LTCH PPS has been
evolving, we believe that using the updated (FY 2005) LTCH claims data
with our existing relative weight methodology will result in LTC-DRG
relative weights for FY 2007 that will best reflect the resources
actually utilized by LTCHs in treating its Medicare patients since the
FY 2005 data is the best LTCH data available that reflects LTCHs'
current treatment practice and coding patterns. Therefore, we do not
find it either necessary or appropriate to postpone the FY 2007 update
of the LTC-DRG relative weights until we consider the adoption of a
classification system with ``improved severity measures.''
Comment: Numerous commenters suggested that CMS forgo the proposed
approximately 1.4 percent decrease in estimated aggregate LTCH PPS
payments and, instead, establish a policy of budget neutrality for the
annual updates of the LTC-DRG relative weights. The commenters believed
a policy of budget neutrality would mitigate the estimated LTCH PPS
payment reductions that CMS estimates would result from the proposed
changes to the LTC-DRGs and relative weights for FY 2007. MedPAC also
endorsed adopting a policy of budget neutrality for the annual
recalibration of the LTC-DRG weights and noted that the adoption of the
budget neutrality process that CMS uses in recalibrating the annual
weights for the IPPS for the LTCH would avoid the estimated decrease in
payments of 1.4 percent for FY 2007.
One commenter asserted that the absence of a budget neutrality
adjustment for the annual recalibration of the LTC-DRGs provides a
negative incentive for efficiency, because assigning cases that
appropriately use fewer hospital resources to a particular LTC-DRG will
result in a lower weight for that LTC-DRG. Therefore, the commenter
urged CMS not to implement the proposed reweighting for FY 2007 prior
to a full analysis of the impact of the proposed reweighting along with
other payment policy changes provided in the RY 2007 LTCH PPS on the
overall adequacy of payments to LTCHs. In addition, the commenters
expressed eagerness to review the recommendations currently under
development by RTI International for patient and facility criteria for
LTCHs. Several commenters further suggested that no additional
reimbursement reductions under the LTCH PPS should be imposed until the
RTI report is complete and the industry works with CMS to implement its
findings.
Response: We understand that the commenters are concerned with the
estimated decrease in payments under LTCH PPS based upon the changes in
the LTC DRGs and relative weights proposed for FY 2007. However, as
discussed above, we are not postponing the proposed FY 2007
reclassification and recalibration of the LTC-DRGs. In addition, the
payment policies that were finalized in the RY 2007 LTCH PPS final
rule, such as the zero update to the standard Federal rate and the
revised short-stay outlier policy, will be effective for LTCH
discharges beginning on July 1, 2007, as established in that rule.
We further acknowledge that the commenters and also MedPAC are
urging us to establish a budget neutrality requirement for the annual
reclassification and recalibration of the LTC-DRGs so that, in future
years, the LTCH PPS would avoid an estimated decrease in aggregate
payments such as the estimated 1.3 percent based on the LTC-DRG weights
that we are finalizing for FY 2007.
In the responses to comments addressed above, we have noted several
reasons for the annual fluctuations in LTC-DRG relative weights that
resulted in an estimated increase in aggregate payments for FY 2004, a
negligible estimated decrease in aggregate payments for FY 2005, and
decreases in aggregate payments for FYs 2006 and 2007. We reiterate
that the LTCH PPS has existed since FY 2003, and we believe that
several factors are occurring that affect the changes to the relative
weights, including actual improvements in coding so that cases are
appropriately assigned to LTC-DRGs. Each year, we recalibrate the LTC-
DRG relative weights based on the most recent available LTCH claims
data, which reflect current LTCH patient mix and coding practices. The
annual recalibration of the LTC-DRG relative weights to which LTCH
cases are assigned will appropriately reflect more or less resource use
than the previous year's LTC-DRG relative weights.
We understand the concerns expressed by the commenters regarding
this fiscal year's estimated decrease in payments based upon the
proposed (and finalized) FY 2007 reweighting of the LTC-DRGs. However,
we remind the commenters that establishing a budget-neutrality policy
for the LTC-DRG weights would have precluded the increase in payments
that occurred during FY 2004 as well as any increase that an analysis
of future data may warrant.
Under the IPPS, there is a statutory requirement in section
1886(d)(4)(C)(iii) of the Act that requires that, beginning with FY
1991, reclassification and recalibration changes be made in a manner
that assures that the aggregate payments are neither greater than nor
less than the aggregate payments that would have been made without the
changes. However, there is no statutory or regulatory requirement that
the annual update to the LTC-DRG classifications and relative weights
be done in a budget neutral manner. In addition, after FY 2003, the
year that the LTCH PPS was implemented, there was no statutory
requirement for budget neutrality for any component of the LTCH PPS.
However, as we have already noted, the LTCH PPS, having been first
implemented for cost reporting periods beginning on or after the start
of FY 2003, will soon end its transition period and payment will be
based solely on the Federal rate with cost reporting periods beginning
in FY 2007. In the RY 2007 LTCH PPS final rule, we provided that we
would reevaluate all payment adjustments that were originally
considered for the LTCH PPS prior to its implementation and also
determine the appropriateness of a one-time prospective adjustment to
the standard Federal rate (Sec. 412.523(d)(3)) so that the effect of
any significant differences between actual payments and estimated
payments for the first year of the LTCH PPS would not be perpetuated in
the PPS for future years. Given the considerable discretion granted to
the Secretary under the BBRA of 1999 and the BIPA of 2000 to develop
the LTCH PPS, it is possible, however, that at the same time, the
Secretary would consider using his broad authority to establish a
policy of budget neutrality for the annual update of the LTC-DRG
classifications and relative weights. As noted above, currently the
best available LTCH data (FY 2005) are from the second full year of the
PPS, and LTCHs

[[Page 47992]]

may still be modifying their behavior to the change in payment
methodology. If, upon reevaluation of our payment policies based on
future LTCH data as the data become available, we find that it would be
appropriate to propose making the updates to the LTC-DRGs and relative
weights in a budget neutral manner, the public will have the
opportunity to submit comments on any proposed change during the
rulemaking process.
The commenters mentioned their eagerness to review the
recommendations currently being developed by RTI regarding the
feasibility of patient and facility level admissions criteria for
LTCHs. We anticipate that RTI will submit its final report and
recommendations during RY 2007. We place considerable importance on
RTI's work, and we will encourage a dialogue with the public based on
the report. We note that, while we believe the report will have a
substantial impact on future Medicare policy for LTCHs, we still
believe that the retention of many of the specific payment adjustment
features of the LTCH PPS presently in place and the development of
additional or revised adjustments may still be both necessary and
appropriate for purposes of protecting the integrity of the Medicare
trust fund.
Comment: Several commenters believed that the changes to the LTC-
DRG relative weights will have a more significant impact on high case-
mix providers than on low-case mix providers. One commenter referred to
a LTCH which, as a high acuity provider, will experience an approximate
5 percent drop in total case mix index. This commenter requested that
CMS make a weighted average calculation available when it publishes the
impacts of changes in the relative weights. The commenter further
suggested that CMS produce an impact statement focusing on changes
across all DRGs that will enable providers to understand the impacts on
their individual LTCHs.
Response: We believe we published a comprehensive description of
the impact of the reweighting of the LTC-DRGs for FY 2007 in the
proposed rule (71 FR 24413). Specifically, in section VII, Effects of
Other Proposed Policy Changes, in subsection A, under the heading,
Effects of LTC-DRG Reclassifications and Relative Weights for LTCHs, we
included a detailed analysis of the impact that would result from our
proposals.
In that section, we stated: ``When we compared the GROUPER Version
23.0 (FY 2006) LTC-DRG relative weights to the proposed GROUPER Version
24.0 (FY 2007) proposed LTC-DRG relative weights, we found that
approximately 62 percent of the LTC-DRGs would have a higher relative
weight under Version 23.0, while the remaining approximately 38 percent
of the LTC-DRGs would have a higher relative weight under Version 24.0.
We also found that, based on FY 2005 LTCH cases, the GROUPER Version
23.0 LTC-DRG relative weights were, on average, approximately 3.1
percent higher than the proposed GROUPER Version 24.0 LTC-DRG relative
weights. In addition, based on an analysis of the most recent available
LTCH claims data from the FY 2005 MedPAR file, we continue to observe
that the average proposed LTC-DRG relative weight decreases due to an
increase of relatively lower charge cases being assigned to LTC-DRGs
with higher relative weights in the prior year.
Contributing to this increase in these relatively lower charge
cases being assigned to proposed LTC-DRGs with higher relative weights
in the prior year are improvements in coding practices, which are
typical when moving from a reasonable cost-based payment system to a
PPS. The impact of including additional cases with relatively lower
charges in LTC-DRGs that had a relatively higher relative weight in the
GROUPER Version 23.0 (FY 2006) is a decrease in the average relative
weight for those LTC-DRGs in the proposed GROUPER Version 24.0. As
noted above in section II.F. of the preamble to this proposed rule,
LTCHs are a specialized provider type that typically do not treat a
broad spectrum of patients in their facilities with many different
diagnoses. While there are 526 valid proposed GROUPER Version 24.0 LTC-
DRGs, 191 LTC-DRGs have no LTCH cases. In addition, another 173 LTC-
DRGs are categorized as `low volume' (that is, have less than 25 cases
annually). Consequently, only about 162 LTC-DRGs are used by most LTCHs
on a `regular basis' (that is, nationally LTCHs discharge, in total, an
average of 25 or more of these cases annually).
Of these 162 LTC-DRGs that are used on a regular basis, we found
that approximately 60 percent of the LTC-DRGs would have higher
relative weights under GROUPER Version 23.0 in comparison to proposed
GROUPER Version 24.0, and the remaining 40 percent of the 162 LTC-DRGs
that are used on a `regular basis' would have higher relative weights
under proposed GROUPER Version 24 in comparison to GROUPER Version
23.0. In addition, about 25 percent of the 162 LTC-DRGs that are used
on a `regular basis' would experience a decrease in the average charge
per case as compared to the average charge per case in that DRG based
on FY 2004 data, which generally results in a lower relative weight.
Moreover, of the 162 LTC-DRGs that are used on a `regular basis,'
approximately 63 percent of those LTC-DRGs would experience a change in
the average charge per case from FY 2004 LTCH data as compared to FY
2005 LTCH data that is less than the increase in overall average LTCH
charges across all LTC-DRGs from FY 2004 to FY 2005 of about 8.3
percent. Accordingly, those LTC-DRGs would also have a proposed
reduction in their relative weight as compared to the relative weight
in FY 2006. For those LTC-DRGs in which the average charge within the
LTC-DRG increase is less than 8.3 percent, the proposed relative
weights for those LTC-DRGs would decrease because the average charge
for each of those LTC-DRGs is being divided by a larger number (that
is, the average charge across all LTC-DRGs). For the reasons discussed
above, we believe that the proposed changes in the LTC-DRG relative
weights, which include a significant number of LTC-DRGs with lower
proposed relative weights, would result in approximately a 1.4 percent
decrease in estimated aggregate LTCH PPS payments'' (71 FR 24413).
The above paragraphs, published in the FY 2007 IPPS proposed rule,
clearly indicated the impact of the reweighting of the LTC-DRGs. All of
the impact percentages listed are ``weighted averages,'' as was the
proposed estimated 1.4 percent decrease in aggregate LTCH PPS payments.
That is, all LTCH cases in the December 2005 update of the FY 2005
MedPAR file were used to determine the LTC-DRG impact figures presented
in the FY 2007 IPPS proposed rule. Therefore, the latest data on the
types of patients treated across all LTCHs were used to determine the
impact and not just the proposed changes to the LTC-DRG weights. The
proposed and final FY 2007 reweighting of the LTC-DRGs may indeed have
a more significant impact on a high acuity provider because many of the
proposed and final LTC-DRG weights in relatively high weighted LTC-DRGs
would decrease compared to their current values. However, we also note
that Medicare payments for several of the highest acuity LTC-DRGs have
yielded substantial margins. For example, an analysis of MedPAR data
from FY 2004 indicated that, for LTC-DRG 475 (Ventilator Support) with
a relative weight of 2.1358 for FY 2004, average aggregate (dollar
weighted) margins for all providers was 21.09 percent, and for LTC-DRG
87 (Pulmonary Edema/Respiratory

[[Page 47993]]

Support) with a relative weight of 1.6513 for FY 2004, average
aggregate margins were 26.93 percent. Even for cases requiring somewhat
less resource intensity, such as LTC-DRG 416 (Septicemia) with a
relative weight of 0.9191 for FY 2004, which is also one of the
diagnoses most frequently found in LTCHs, the aggregate margin is 11.54
percent and for LTC-DRG 249 (After Care Musculoskeletal) with a
relative weight of 0.7829 for FY 2004, the margin is 9.69 percent.
Therefore, we believe that the reweighting of the LTC-DRGs for FY 2007,
even for those high-acuity providers who experience a more significant
impact, should not impede the efficient and effective delivery of care
to Medicare beneficiaries, because, as described above, several of the
highest-acuity LTC-DRGs have yielded substantial margins. Furthermore,
even though the recalibration of the LTC-DRG relative weights will
result in a decrease in the relative weight for some high-acuity LTC-
DRGs, because the recalibration is based on the most recent available
LTCH claims data (FY 2005), it ensures the most accurate payments for
FY 2007 based on current LTCH treatment and coding practices.
In response to the commenter who requested impacts that reflected a
weighted average calculation, as noted above, the impact of the
proposed changes to the LTC-DRGs for FY 2007 presented in the FY 2007
IPPS proposed rule (71 FR 24413) are based on a weighted average
calculation. That is, all FY 2005 LTCH cases in the December 2005
update of the MedPAR data were used to determine the impact figures
presented in the proposed rule. This means that only the proposed
changes to the relative weights for LTC-DRGs that had LTCH cases in
those DRGs based on the FY 2005 LTCH data contributed to the impact.
This continues to be true for the impact of the final LTC--DRG weights
which are based on the most recent update of the FY 2005 MedPAR data.
It also means that, for example, LTCH cases in LTC-DRG 475 represent
approximately 12 percent of all LTCH cases in FY 2005 and therefore, 12
percent of the impact presented in the proposed rule was due to the
proposed change in the LTC-DRG weight for LTC-DRG 475. We believe that
the commenter may have mistakenly believed that we measured the impact
of the proposed LTC-DRG changes based on the changes proposed for each
LTC-DRG without accounting for the volume of LTCH cases treated in each
LTC-DRG. In addition, we note that if a provider is eager to determine
the specific impact of the annual proposed LTC-DRG reweighting on an
individual LTCH or a particular weight, the provider needs only to
compare an application of the LTC-DRG weights published in the previous
year's final rule (Table 11) of its cases to the proposed LTC-DRG
relative weights that are published in the current year's proposed rule
(Table 11; 71 FR 24395-24403) as applied to the same set of cases.
Comment: Several commenters maintained that the proposed 1.4
percent decrease in aggregate payments to LTCHs due to the proposed
LTC-DRG reclassification and recalibration for FY 2007, in addition to
payment cuts established for RY 2007 represent a ``misinterpretation''
of MedPAC's recommendation in its March 2006 Report to the Congress for
a zero update for LTCHs. MedPAC cited Medicare margins for 2004 of 9.0
for the LTCH industry and projected 7.8 percent margins for 2006, but
the commenters believed that these projections did not factor in the
impact of the ``25 percent policy'' for co-located LTCHs or the
estimated payment reductions associated with the revised short-stay
outlier policy.
Response: As we have noted elsewhere in earlier responses to
comments, the estimated 1.4 percent decrease aggregate in LTCH PPS
payments due to the proposed LTC-DRG reclassification and recalibration
for FY 2007 is a data-driven result of the annual recalibration of the
relative weights for LTC-DRGs based on the latest available LTCH claims
data from the MedPAR files (FY 2005). Therefore, for FY 2007, based on
the updated LTC-DRGs classifications and relative weights, estimated
payments to LTCHs will be 1.3 percent less than they would have been
based on the prior fiscal year's (that is, FY 2006) classifications and
relative weights for the same LTCH cases. Similarly, LTCH claims data
from the FY 2006 MedPAR files will be used to determine the proposed
LTC-DRG relative weights for FY 2008, and the resulting aggregate LTCH
PPS payments, absent a regulatory or statutory change implementing
recalibration of relative weights in a budget neutral manner, may
either decrease or increase, based upon the FY 2006 data and DRG
classification changes. In setting the annual relative weights for the
LTC-DRG system for FY 2007, we have followed the requirements
established with the implementation of the LTCH PPS in FY 2003 (67 FR
55984-55995). Although the proposed recalibrated LTC-DRG relative
weights were estimated to result in 1.4 percent decrease in LTCH PPS
payments for FY 2007 (and based on final policies established in this
final rule, the updated LTC-DRGs for FY 2007 are estimated to result in
a 1.3 percent decrease in aggregate LTCH PPS payments for FY 2007, as
noted above), we do not believe that this adjustment is relevant to
MedPAC's recommendation for the zero percent update to the LTCH PPS
Federal rate for RY 2007.
The annual LTC-DRG update is separate from the Federal rate update;
specifically, their purposes are different and independent. The
standard Federal base rate is an estimate of the national average cost
per case which is adjusted by the LTC-DRG relative weights to reflect
the resource consumption of the particular case; that is, a case with a
relative weight of 2.0 is twice as costly/uses twice the resources as a
case with a relative weight of 1.0. The LTC-DRG relative weights are
recalibrated annually based on the most recent available LTCH data to
reflect resources used by LTCHs in treating each type of case. The
update to the Federal rate is to adjust the Federal rate to account for
various adjustments to that rate, including inflation.
MedPAC's data analysis, in its March 2006 Report to the Congress,
indicated that the average Medicare margin for LTCHs was 9.0 percent
for FY 2005 and was projected at 7.8 percent for 2006. (As we stated in
our RY 2007 LTCH PPS final rule, MedPAC also noted that ``LTCH HwHs
were found to have higher margins than freestanding LTCHs in RY 2005''
(71 FR 27823).) Based on its analysis, MedPAC stated that ``* * *
evidence from the indicators we have examined suggests that LTCHs can
accommodate the cost of caring for Medicare beneficiaries in 2007
without an increase in the base rate'' (p. 218). Consistent with
MedPAC's recommendation, after incorporating an adjustment to account
for changes in coding practices that did not reflect ``real'' case-mix,
we finalized a zero percent update for FY 2007 (71 FR 27819). As stated
earlier, this adjustment is not a function of, or related to, the
update to the relative weights for LTC-DRGs.
The commenters' also reference the 25-percent threshold payment
adjustment for co-located LTCHs (Sec. 412.534) established beginning
in FY 2005 and the newly revised short stay outlier payment policy
(Sec. 412.529) beginning in RY 2007. We believe that the commenters
are seeking to connect these adjustments, which are also estimated to
result in a decrease in aggregate LTCH PPS payments in the absence of a
change in admission

[[Page 47994]]

practices by LTCHs to the estimated impact of the updated LTC-DRG
relative weights. However, the policies cited by the commenters are not
related to the impact of the updating of the LTCH-DRG relative weights,
but each independently, furthers the goal of establishing fair and
reasonable Medicare payments under the LTCH PPS.
The HwH ``25 percent rule,'' that is, the special payment
provisions for LTCH HwHs and satellites, was established at Sec.
412.534 in the FY 2005 IPPS final rule. Under that policy, we provide a
payment adjustment for those patients discharged from co-located LTCHs
(that is, HwHs and satellites) admitted from host hospitals that
exceeded a specified threshold percentage (in most cases, 25 percent).
Medicare patients who reach high-cost outlier status in the host
hospital are excluded from the count of the percentage of patients
admitted directly from the host. As we discussed in the FY 2005 IPPS
final rule, when we implemented the ``25 percent rule,'' we were unable
to estimate the impact of this policy because we anticipated behavioral
changes by both the host and the co-located LTCHs resulting from the
provision that exempted high-cost outliers from the percentage
threshold calculation (69 FR 49771).
MedPAC further addressed this issue in the March 2006 Report, where
it noted that it ``* * * cannot foresee how HwHs/ behavior will change
in response to this rule. CMS has discussed scenarios (CMS 2005). For
example, patients admitted to an HwHs from the host hospital after
becoming an outlier are not counted in the limit, thus HwHs may admit
more outlier cases under this rule. Alternatively, host hospitals may
discharge fewer patients to their HwHs because of constraints from the
25 percent rule, in which case HwHs' volume might fall. In cities where
there is another LTCH, an acute care hospital might discharge patients
to a different long-term care hospital than the one on its grounds. The
Office of Inspector General or the QIOs may want to monitor acute care
hospitals' and HwHs' behavior in response to the 25 percent rule.
Because we have no evidence of how HwHs will react, we have not modeled
margins incorporating this policy change.'' (p. 218)
Because the policy at Sec. 412.534 exempts patients admitted from
the host hospital if they had already achieved high-cost outlier status
under the IPPS, from the LTCHs' percentage threshold calculation (as
noted above), we believe that even with some adjustments resulting in a
decrease in payments to some co-located LTCHs, Medicare payments to co-
located LTCHs on average will continue to exceed the Medicare costs of
the inpatient hospital services provided to its patients, even with a
zero percent update to the Federal rate for RY 2007 (71 FR 27823).
Furthermore, we believe that the 25-percent threshold policy and the
short stay outlier payment revision that that we have established,
first for co-located LTCHs at Sec. 412.534 for FY 2004 and the
revisions to the short-stay outlier policies at Sec. 412.529 that we
finalized for RY 2007, each have a firm and consistent basis in our
general policy considerations under the LTCH PPS.
As we noted in the RY 2007 final rule for the LTCH PPS, we do not
believe that the change to the short-stay outlier policy will result in
an adverse impact on LTCHs. As a result of the change to the short-stay
outlier payment formula, we believe that LTCHs will have an incentive
to significantly reduce the number of very short-stay cases that they
admit. We believe that, by paying appropriately for short-stay outlier
cases and by removing the financial incentive for LTCHs to admit those
very short stay cases that could otherwise receive appropriate
treatment at an acute care hospital (and paid under the IPPS), LTCHs
will change their admission patterns for these patients. We further
believe that payment decreases to LTCHs resulting from this policy
would only occur if LTCHs were to continue to admit the same number of
short-stay outlier patients with very short lengths of stay. We believe
this policy is needed to assure that payments for short-stay outlier
cases are appropriate.
Therefore, we disagree with the commenter that we have
``misinterpreted'' MedPAC's recommendation of a zero percent update for
2007 in our proposed update to the LTC-DRGs for FY 2007. We maintain
that the rationale for each of the policy features mentioned by the
commenter, when evaluated independently, is clear and reasonable. In
addition, they are independent of the DRG recalibration that occurs
every year based on an established formula. We strongly disagree with
the allegations that their implementation represents a
``misinterpretation'' of MedPAC's margin analysis and recommendation
(discussed above) in the March 2006 Report to the Congress. As
discussed above, this update is not based on MedPAC's analysis and we
believe that updating the LTC-DRG relative weights for FY 2007 based on
FY 2005 LTCH claims data will result in more appropriate LTCH PPS
payments since the relative resource intensity of each LTC-DRG (that
is, the relative weight) will be determined from the most recent
available LTCH data (FY 2005) reflecting LTCHs' current practice and
treatment patterns.
Comment: Several commenters, including MedPAC, recommended that we
adopt severity-adjusted DRGs as the patient classification system for
the LTCH PPS. In particular, MedPAC analyzed FY 2004 CMS LTCH data
using both standardized charges and standardized hospital-specific
costs (removing the effect of local wages) using Version 23 (FY 2006)
of the GROUPER and stated that, on a preliminary basis, CS DRGs are
relatively homogeneous in resource use for the kinds of cases treated
in LTCHs. They believed that this indicates that the CS DRGs proposed
for IPPS hospitals may also ``be promising for LTCHs.''
Response: We are aware of the heightened interest in severity-
adjusted DRGs by the provider community, and in section II.C.6.of this
final rule, we discuss the revisions that we are making to the DRG
classifications structure for the IPPS and our expectations for
adopting severity adjustments for DRGs under the IPPS in FY 2008. We
appreciate the data analysis that MedPAC produced to demonstrate the
potential utility of CS DRGs for classifying patients being treated in
LTCHs. It is possible that the modified version of the APR DRGs or
another severity-adjusted patient classification system may account for
differences in severity of illness and associated costs among
hospitals. In section II.C. of this preamble, we discuss the issues
that we are dealing with respect to the adoption of a severity adjusted
DRG system. Once we have addressed those issues under the IPPS, we
would need to consider whether it is appropriate to propose similar
revisions to the patient classification system under the LTCH PPS. As
stated in the FY 2007 IPPS proposed rule, we would emphasize that any
proposed changes to the patient classification system for LTCHs would
be done through notice and comment rulemaking.

G. Add-On Payments for New Services and Technologies

1. Background
Sections 1886(d)(5)(K) and (L) of the Act establish a process of
identifying and ensuring adequate payment for new medical services and
technologies (sometimes collectively referred to in this section as
``new technologies'') under the IPPS. Section 1886(d)(5)(K)(vi) of the
Act specifies

[[Page 47995]]

that a medical service or technology will be considered new if it meets
criteria established by the Secretary after notice and opportunity for
public comment. Section 1886(d)(5)(K)(ii)(I) of the Act specifies that
the process must apply to a new medical service or technology if,
``based on the estimated costs incurred with respect to discharges
involving such service or technology, the DRG prospective payment rate
otherwise applicable to such discharges under this subsection is
inadequate.''
The regulations implementing this provision establish three
criteria for new medical services and technologies to receive an
additional payment. First, Sec. 412.87(b)(2) defines when a specific
medical service or technology will be considered new for purposes of
new medical service or technology add-on payments. The statutory
provision contemplated the special payment treatment for new medical
services or technologies until such time as data are available to
reflect the cost of the technology in the DRG weights through
recalibration. There is a lag of 2 to 3 years from the point a new
medical service or technology is first introduced on the market and
when data reflecting the use of the medical service or technology are
used to calculate the DRG weights. For example, data from discharges
occurring during FY 2005 are used to calculate the FY 2007 DRG weights
in this final rule. Section 412.87(b)(2) provides that a ``medical
service or technology may be considered new within 2 or 3 years after
the point at which data begin to become available reflecting the ICD-9-
CM code assigned to the new medical service or technology (depending on
when a new code is assigned and data on the new medical service or
technology become available for DRG recalibration). After CMS has
recalibrated the DRGs, based on available data, to reflect the costs of
an otherwise new medical service or technology, the medical service or
technology will no longer be considered `new' under the criterion for
this section.''
The 2-year to 3-year period during which a medical service or
technology can be considered new would ordinarily begin with FDA
approval, unless there was some documented delay in bringing the
product onto the market after that approval (for instance, component
production or drug production had been postponed until FDA approval due
to shelf life concerns or manufacturing issues). After the DRGs have
been recalibrated to reflect the costs of an otherwise new medical
service or technology, the special add-on payment for new medical
services or technology ceases (Sec. 412.87(b)(2)). For example, an
approved new technology that received FDA approval in October 2005 and
entered the market at that time may be eligible to receive add-on
payments as a new technology until FY 2008 (discharges occurring before
October 1, 2007), when data reflecting the costs of the technology
would be used to recalibrate the DRG weights. Because the FY 2008 DRG
weights will be calculated using FY 2006 MedPAR data, the costs of such
a new technology would likely be reflected in the FY 2008 DRG weights.
Section 412.87(b)(3) further provides that, to receive special
payment treatment, new medical services or technologies must be
inadequately paid otherwise under the DRG system. To assess whether
technologies would be inadequately paid under the DRGs, we establish
thresholds to evaluate applicants for new technology add-on payments.
In the FY 2004 IPPS final rule (68 FR 45385, August 1, 2003), we
established the threshold at the geometric mean standardized charge for
all cases in the DRG plus 75 percent of 1 standard deviation above the
geometric mean standardized charge (based on the logarithmic values of
the charges and transformed back to charges) for all cases in the DRG
to which the new medical service or technology is assigned (or the
case-weighted average of all relevant DRGs, if the new medical service
or technology occurs in many different DRGs). Table 10 in the Addendum
to the FY 2004 IPPS final rule (68 FR 45648) listed the qualifying
threshold by DRG, based on the discharge data that we used to calculate
the FY 2004 DRG weights.
However, section 503(b)(1) of Pub. L. 108-173 amended section
1886(d)(5)(K)(ii)(I) of the Act to provide for ``applying a threshold *
* * that is the lesser of 75 percent of the standardized amount
(increased to reflect the difference between cost and charges) or 75
percent of 1 standard deviation for the diagnosis-related group
involved.'' The provisions of section 503(b)(1) apply to classification
for fiscal years beginning with FY 2005. We updated Table 10 from the
Federal Register document that corrected the FY 2004 final rule (68 FR
57753, October 6, 2003), which contained the thresholds that we used to
evaluate applications for new service or technology add-on payments for
FY 2005, using the section 503(b)(1) measures stated above, and posted
these new thresholds on our Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp. In the FY 2005 IPPS final rule (in
Table 10 of the Addendum), we included the final thresholds that were
being used to evaluate applicants for new technology add-on payments
for FY 2006. (Refer to section IV.D. of the preamble to the FY 2005
IPPS final rule (69 FR 49084, August 11, 2004) for a discussion of a
revision of the regulations to incorporate the change made by section
503(b)(1) of Pub. L. 108-173.) Table 10 of the Addendum to the FY 2006
final rule (70 FR 47680) contained the final thresholds that are being
used to evaluate applications for new technology add-on payments for FY
2007.
Section 412.87(b)(1) of our existing regulations provides that a
new technology is an appropriate candidate for an additional payment
when it represents ``an advance that substantially improves, relative
to technologies previously available, the diagnosis or treatment of
Medicare beneficiaries.'' For example, a new technology represents a
substantial clinical improvement when it reduces mortality, decreases
the number of hospitalizations or physician visits, or reduces recovery
time compared to the technologies previously available. (Refer to the
September 7, 2001 final rule (66 FR 46902) for a complete discussion of
this criterion.)
The new medical service or technology add-on payment policy
provides additional payments for cases with high costs involving
eligible new medical services or technologies while preserving some of
the incentives under the average-based payment system. The payment
mechanism is based on the cost to hospitals for the new medical service
or technology. Under Sec. 412.88, Medicare pays a marginal cost factor
of 50 percent for the costs of a new medical service or technology in
excess of the full DRG payment. If the actual costs of a new medical
service or technology case exceed the DRG payment by more than the 50-
percent marginal cost factor of the new medical service or technology,
Medicare payment is limited to the DRG payment plus 50 percent of the
estimated costs of the new technology.
The report language accompanying section 533 of Pub. L. 106-554
indicated Congressional intent that the Secretary implement the new
mechanism on a budget neutral basis (H.R. Conf. Rep. No. 106-1033,
106th Cong., 2nd Sess. at 897 (2000)). Section 1886(d)(4)(C)(iii) of
the Act requires that the adjustments to annual DRG classifications and
relative weights must be made in a manner that ensures that aggregate
payments to hospitals are not affected. Therefore, in the past, we
accounted for projected payments under the new medical

[[Page 47996]]

service and technology provision during the upcoming fiscal year at the
same time we estimated the payment effect of changes to the DRG
classifications and recalibration. The impact of additional payments
under this provision was then included in the budget neutrality factor,
which was applied to the standardized amounts and the hospital-specific
amounts.
Section 1886(d)(5)(K)(ii)(III) of the Act, as amended by section
503(d)(2) of Pub. L. 108-173, provides that there shall be no reduction
or adjustment in aggregate payments under the IPPS due to add-on
payments for new medical services and technologies. Therefore, add-on
payments for new medical services or technologies for FY 2005 and later
years have not been budget neutral.
Applicants for add-on payments for new medical services or
technologies for FY 2008 must submit a formal request, including a full
description of the clinical applications of the medical service or
technology and the results of any clinical evaluations demonstrating
that the new medical service or technology represents a substantial
clinical improvement, along with a significant sample of data to
demonstrate the medical service or technology meets the high-cost
threshold, no later than October 15, 2006. Applicants must submit a
complete database no later than December 30, 2006. Complete application
information, along with final deadlines for submitting a full
application, will be available at our Web site: http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp. To allow interested parties to
identify the new medical services or technologies under review before
the publication of the proposed rule for FY 2008, the Web site will
also list the tracking forms completed by each applicant.
2. Public Input Before Publication of a Notice of Proposed Rulemaking
on Add-On Payments
Section 1886(d)(5)(K)(viii) of the Act, as amended by section
503(b)(2) of Pub. L. 108-173, provides for a mechanism for public input
before publication of a notice of proposed rulemaking regarding whether
a medical service or technology represents a substantial clinical
improvement or advancement. The process for evaluating new medical
service and technology applications requires the Secretary to--
Provide, before publication of a proposed rule, for public
input regarding whether a new service or technology represents an
advance in medical technology that substantially improves the diagnosis
or treatment of Medicare beneficiaries.
Make public and periodically update a list of the services
and technologies for which applications for add-on payments are
pending.
Accept comments, recommendations, and data from the public
regarding whether a service or technology represents a substantial
clinical improvement.
Provide, before publication of a proposed rule, for a
meeting at which organizations representing hospitals, physicians,
manufacturers, and any other interested party may present comments,
recommendations, and data regarding whether a new service or technology
represents a substantial clinical improvement to the clinical staff of
CMS.
In order to provide an opportunity for public input regarding add-
on payments for new medical services and technologies for FY 2007
before publication of the FY 2007 IPPS proposed rule, we published a
notice in the Federal Register on December 23, 2005 (70 FR 76315) and
held a town hall meeting at the CMS Headquarters Office in Baltimore,
MD, on February 16, 2006. In the announcement notice for the meeting,
we stated that the opinions and alternatives provided during the
meeting would assist us in our evaluations of applications by allowing
public discussions of the substantial clinical improvement criterion
for each of the FY 2007 new medical service and technology add-on
payment applications before the publication of the FY 2007 IPPS
proposed rule.
Approximately 35 participants registered and attended the town hall
meeting in person, while additional participants listened over an open
telephone line. The participants focused on presenting data on the
substantial clinical improvement aspect of their products, as well as
the need for additional payments to ensure access to Medicare
beneficiaries. In addition, we received written comments regarding the
substantial clinical improvement criterion for the applicants. We
considered these comments in our evaluation of each new application for
FY 2007 in the proposed rule and in this final rule. We have summarized
these comments or, if applicable, indicated that no comments were
received, at the end of the discussion of the individual applications.
We received two general comments about application of the newness
and substantial clinical improvement criteria.
Comment: One commenter encouraged CMS to amend the definition of
substantial clinical improvement for the IPPS new technology provision
to conform to the OPPS definition of substantial clinical improvement
used in 2001. Specifically, AdvaMed requested that after ``decreased
pain, bleeding, or other quantifiable symptom,'' CMS should insert the
following language: ``such as convenience, durability, ease of
operation or make other improvements in quality of life.''
Response: We believe we addressed this concern in the FY 2006 IPPS
final rule (70 FR 47360). We use similar standards to evaluate
substantial clinical improvement in the IPPS and OPPS and, in both
systems, we employ identical language to explain and elaborate on the
kinds of considerations that are taken into account in determining
whether a new technology represents a substantial clinical improvement.
We do not believe a change to the regulations text is necessary.
Comment: One commenter suggested that CMS should not use
``substantial similarity'' to evaluate newness without also determining
whether the product is a substantial clinical improvement. The
commenter argued that CMS is applying a concept that is not defined in
regulations. If CMS applies the concept as part of determining whether
a product is new without evaluating substantial clinical improvement,
the commenter recommended that CMS should define substantial similarity
through notice and comment rulemaking.
Response: We addressed this comment in the FY 2006 IPPS final rule
(70 FR 47350 through 47351). We refer readers to that final rule for a
detailed response to this comment.
Section 1886(d)(5)(K)(ix) of the Act, as added by section 503(c) of
Pub. L. 108-173, requires that, before establishing any add-on payment
for a new medical service or technology, the Secretary shall seek to
identify one or more DRGs associated with the new technology, based on
similar clinical or anatomical characteristics and the costs of the
technology and assign the new technology into a DRG where the average
costs of care most closely approximate the costs of care using the new
technology. No add-on payment will be made if the new technology is
assigned to a DRG that most closely approximates its costs.
At the time an application for new technology add-on payments is
submitted, the DRGs associated with the new technology are identified.
We only determine that a new DRG assignment is necessary or a new
technology add-on

[[Page 47997]]

payment is appropriate when the payment under these currently assigned
DRGs is not adequate and the technology otherwise meets the newness,
cost, and substantial clinical improvement criteria.
In this final rule, we evaluate whether new technology add-on
payments will continue in FY 2007 for the three technologies that
currently receive such payments. In addition, we present our
evaluations of three applications for add-on payments in FY 2007.
Comment: One commenter stated that section 503 of Pub. L. 108-173
provided new funding for new technology add-on payments by no longer
requiring that these payments be budget neutral. The commenter stated
that this provision was enacted to ensure that the IPPS would better
account for new drugs, devices, and services. However, the commenter
believed that CMS continues to resist approval of new technologies and
considers only a few technologies a year for add-on payments.
Another commenter called upon CMS to be more willing to indicate
its preliminary views regarding whether a new technology application
meets the criteria for add-on payments in the proposed rule. The
commenter expressed particular concern that CMS had not given a strong
indication of whether any of the initial new technology applications
would meet the substantial clinical improvement criterion and noted
that doing so would enhance stakeholder dialogue with CMS on the
evaluation of the new technology criteria during the comment period.
Another commenter believed that CMS' definition of new technology
is contrary to the statute. The commenter explained that CMS uses the
FDA approval date to determine newness while the statute clearly
requires that new technology add-on payments begin on the date an ICD-
9-CM code is issued. The commenter urged CMS to use the date an ICD-9-
CM code is issued to determine whether a technology is new instead of
the FDA approval date.
Response: With respect to the comment that CMS resists approval of
new technologies and considers only a few technologies a year for add-
on payments, we note that we encourage companies with new-technologies
that believe that they may meet the new technology criteria to apply
for add-on payments. In our view, we have not resisted approving new
technologies or been overly stringent in our application of the
criteria. Our review of new technology focuses on the merits of the
application and the requirements under the statute. The experience of
our review process indicates that a significant number of new
technologies have met the criteria. In fact, we have approved over 50
percent (6 of 11) of applications where we had to apply judgment about
whether the technology met the criteria for an add-on payment. From FY
2003 to FY 2006, we received a total of 25 applications, but only 21
were unique (four applicants applied twice in subsequent years for the
same technology). Of the applications that we received, 8 were already
beyond the timeline to be considered new, 1 had not received FDA
approval, and 1 did not meet the cost criterion. In our view, we denied
these applications using objective criteria and without having to apply
any subjective judgment. Of the remaining 11 applications, 6 were
approved for new technology add-on payment, while the other 5 were not
approved because we determined that these applications were not
substantially different from older technologies or did not meet the
substantial clinical improvement criterion. Therefore, to date, we have
approved over 50 percent of applications where we needed to apply
judgment about whether a new technology met the criteria for an add-on
payment. These statistics obviously reflect the recent experience of
new technology applications, and, depending on the ability of
applications to meet the criteria in the future, will likely change. We
note that the merits of each application determine whether it should be
approved. The aggregate statistics reflect the ability of applicants to
satisfy the criteria, and should not be construed as a measure of the
appropriateness of the review process. We also note that over the
years, the cost criterion has been lowered, giving applicants a lower
threshold to meet the cost criterion. We encourage and welcome
additional applications in future years so that we can continue to make
payments for those technologies that meet the criteria and warrant new
technology add-on payments.
With respect to the comment that CMS should be more willing to
indicate our preliminary views regarding whether a new technology meets
the criteria for an add-on payment, we provided our initial concerns
regarding the two pending applications in the proposed rule. For the C-
Port[supreg] System, we described our concerns about both the newness
(``various forms of surgical staples and clips have been used for more
than a decade in a wide range of surgical procedures'') and substantial
clinical improvement (``the applicant submitted evidence suggesting
that device does not always produce reliable anastomoses'') criteria
and also indicated that the device appears to meet the cost threshold
(71 FR 24071). Similarly, for the X STOP Interspinous Process
Decompression System, we indicated our belief that ``the device
satisfies the newness and cost threshold criteria'' and described our
concerns about substantial clinical improvement (71 FR 24072). As a
result of information provided in the proposed rule, the applicants
were afforded the opportunity to address the specific concerns we
raised. For example, the applicant for the C-Port[supreg] system was
able to address our concerns about similarity to predicate devices to
allow us to determine that the device meets the newness criterion.
Similarly, the applicant for X STOP was able to address the concerns we
raised in the proposed rule about whether the device meets the
substantial clinical improvement criterion during the comment period.
Finally, with respect to the comment that CMS should use the
issuance of an ICD-9-CM code as the date on which ``newness'' would
begin, we have addressed this issue several times before, including in
the FY 2005 IPPS final rule (69 FR 49002) and the FY 2006 IPPS final
rule (70 FR 47343).
Comment: One commenter proposed that CMS allow manufacturers to
apply for a new technology add-on payment on an ongoing basis and
recommended that the agency issue quarterly updates announcing the
approval of new technology add-on payments, similar to the outpatient
setting.
Response: Section 1886(d)(5)(K)(i) of the Act requires that new
technology add-on payments be established after notice and opportunity
for public comments (in the publication required by subsection (e)(5)
for a fiscal year or otherwise). In addition, pursuant to section
1886(d)(5)(K)(viii) of the Act, we are also required to hold an annual
town hall meeting prior to the IPPS proposed rule to obtain public
input about whether a new technology meets the substantial clinical
improvement criterion. Given the requirements in the statute, it is not
feasible to process applications on a quarterly basis.
Comment: Some commenters expressed disappointment that CMS has not
increased the payment rate for new technology add-on payments from a
maximum of 50 percent to a maximum of 80 percent of the marginal cost
factor of the new medical service or technology, consistent with the
outlier payment methodology. The commenters stated that increasing the
marginal cost factor from 50 percent to 80 percent

[[Page 47998]]

would offer some stability and consistency for hospitals thus enabling
hospitals to more easily provide their patients access to new
technologies.
Other commenters noted that CMS has approved so few technologies
for new technology add-on payments that it would make more sense to
compensate hospitals with a full add-on payment by paying on a cost
basis using the average sales price plus six percent for FDA approved
drugs and biologicals and list price plus a percentage for devices. The
commenters believed that such a payment methodology would ensure that,
``providers recoup their costs, Medicare pays a fair rate, and that
payment is harmonized across treatment settings.'' Finally, one
commenter requested that CMS provide clear guidance and greater
transparency as to how determinations of newness will be made for a
technology that already has an ICD-9-CM code but is later approved by
the FDA for a new indication.
Response: We did not propose any changes to the marginal cost
factor in the proposed rule. Furthermore, we continue to believe that a
50-percent marginal cost factor is appropriate for the reasons
described in detail in the new technology final rule (66 FR 46919,
September 7, 2001).
Also, we have already discussed the situation in which a technology
is described under an existing ICD-9-CM code, but subsequently receives
approval for a new indication from the FDA. That discussion can be
found in the September 7, 2001 new technology final rule (66 FR 46915)
and in the FY 2005 IPPS final rule (69 FR 49011) concerning
InFUSE[supreg] Bone Graft for tibia fractures.
Comment: Several commenters stated that CMS did not address how the
proposed changes to the DRGs would affect new technology add-on
payments. Another commenter stated that it is essential that CMS
maintain new technology add-on payments for FY 2007 and beyond. Another
commenter recommended that CMS broaden the new technology criteria to
ensure that new technologies are accounted for within a cost-based DRG
system.
Response: Although we are adopting a system of cost relative
weights in this final rule (section III.C. of this preamble), we will
continue to apply the cost criterion using standardized charges
consistent with the statute. The statute requires that we apply ``a
threshold specified by the Secretary that is the lesser of 75 percent
of the standardized payment amount (increased to reflect the difference
between costs and charges) or 75 percent of one standard deviation for
the diagnosis-related group involved.'' Changes to the DRG system to
better recognize severity in the DRG will also have no effect on our
application of the new technology criteria. Any changes to the DRG
system will merely result in us calculating different thresholds for
the revised DRGs. In addition, once a technology is approved for new
technology add-on payments, we will continue to use the ICD-9-CM code
to identify the technology for determining when new technology add-on
payments are appropriate.
Finally, section 1886(d)(5)(K) and (L) of the Act establishes a
process of identifying and ensuring adequate payment for new medical
services and technologies. Because no changes have been made to this
section of the statute, we will continue to make new technology add-on
payments for FY 2007 and beyond for those technologies that meet the
criteria.
Comment: One commenter recommended that, because CMS proposed to
implement a cost-based weight DRG system, CMS should reconsider whether
applicants for FY 2007 new technology add-on payments meet the cost
criterion based on a revised data set.
Response: As stated above, Table 10 of the Addendum to the FY 2006
IPPS final rule (70 FR 47680) contained the final thresholds that are
being used to evaluate applications for new technology add-on payments
for FY 2007. We use the thresholds contained in Table 10 that were
published in the previous year's final rule (that is, FY 2006) to
determine whether a technology is inadequately paid for the next fiscal
year (that is, FY 2007). We publish Table 10 in the proposed rule in
order to give the public notice and the opportunity to submit comments
before we finalize the thresholds in the final rule. Also, it is
necessary for applicants to have the thresholds from Table 10 during
the application process so that both the applicants and CMS can
establish if the applicant's technology meets the cost criterion.
Further, as we note above, we believe that the statute requires us to
establish the cost thresholds using charges.
Comment: One commenter noted that section 503 of Pub. L. 108-173
included a provision to expand the inpatient new technology add-on
payment to include a broader range of technologies. The commenter added
that this legislation was made to ensure that adequate payments were
made to hospitals until hospital charges include the costs for these
technologies. The commenter explained that CMS' narrow interpretation
has created a situation where few, if any, products can qualify for new
technology add-on payments and a process that is opaque and thus,
costly, especially for small companies, to apply for add-on payments.
The commenter requested that CMS provide greater opportunity for
technologies to qualify for add-on payments to ensure patient access to
new technologies as Congress intended.
Response: Section 503 of Pub. L. 108-173 amended the law to: (1)
require that we establish diagnosis and procedure codes annually on
April 1 as well as October 1; (2) change the application of the cost
threshold; (3) require a process for obtaining public input on new
technology applications prior to the proposed rule; and (4) eliminate
the budget neutrality requirement for new technology add-on payments.
We believe that we have implemented section 503 as Congress intended.
As we discussed in the FY 2006 IPPS final rule (70 FR 47344), we do
not believe that our criteria present an inordinately cumbersome burden
for small companies that want to apply for new technology add-on
payments. We have received applications for FY 2007 from relatively
small companies compared to some of the companies that have applied in
the past. Further, we have already been approached by other small
companies seeking new technology add-on payments for FY 2008. We
encourage potential applicants to contact us before their technology is
available on the market if they have questions about the new technology
application process.
Comment: One commenter requested that it be given the opportunity
to work closely with CMS to help refine the regulatory framework under
which CMS evaluates new innovative treatments for Medicare
beneficiaries. The commenter suggested ideas such as creating a pathway
for small companies under FDA review to elect to meet with CMS to
discuss coverage, payment, and coding issues. In addition, the
commenter recommended that CMS establish a committee and annual public
workshop to assist emerging technologies and small companies with the
new technology add-on payment process.
Response: We have been committed to providing ample opportunity for
applicants and other interested parties to make their views known to us
throughout the application process, at the annual public meeting, and
during the comment period on the proposed rule. We encourage interested
parties to contact CMS staff for more information about the new
technology add-on application process. Interested parties

[[Page 47999]]

may contact Tiffany Swygert at (410) 786-4642 or Michael Treitel at
(410) 786-4552.
Comment: One commenter requested that CMS broaden the definition of
substantial clinical improvement. The commenter explained that, in the
outpatient setting, CMS views as a separate factor ``improvements in
the medical technology itself that are so significant that we may wish
to recognize them for separate payment even though they do not directly
result in substantial clinical improvements.'' For example,
technological advancements may result in improvement of a product's
``convenience, durability [or] ease of operation such as the strength
of materials, increased battery life, [and] miniaturization.'' The
commenter suggested that CMS could recognize these additional
improvements along with others when evaluating substantial clinical
improvement in the inpatient setting.
Response: The commenter's specific reference to language that was
included in the November 2, 2001 OPPS final rule was taken out of
context. The language quoted above by the commenter from that OPPS
final rule stated that CMS ``may,'' under the OPPS, recognize
technologies for separate payment even though they do not directly
result in substantial clinical improvements. To date, under the OPPS,
we have only applied the explicit substantial clinical improvement
criteria to pass-through device category applications. In the OPPS
context, CMS has not found any applications for technologies ``that are
so significant that we may wish to recognize them for separate payment
(as opposed to packaged payments) even though they do not result in
substantial clinical improvements'' (67 FR 66783). In fact, the
historical OPPS experience has indicated that, in general, highly
significant advances in medical technology from characteristics such as
longer battery life commonly result in substantial clinical
improvements that may be appropriately evaluated according to the
substantial clinical improvement criteria alone. We have not made a
determination to apply these standards within the IPPS. However, as
noted in the FY 2005 IPPS final rule (69 FR 49021), we will continue to
consider whether to employ specific factors such as those identified
for the OPPS in the IPPS.
Comment: One commenter urged CMS not to use the FDA section 510(k)
approval process as a bar to a determination of meeting the newness
criterion because the ``predicate'' devices identified through the
section 510(k) approval process are not necessarily substantially
similar to the new technology; rather the approval indicates that the
new device is at least as safe and effective as its predicate(s).
Response: We appreciate the commenter's concern and agree that the
mere existence of a predicate device(s) identified in the FDA section
510(k) approval process should not automatically preclude a product
from meeting the newness criterion. Although we may consider the
predicate devices that are listed in the FDA section 510(k) approval,
we will evaluate whether a new technology is substantially similar to
existing products on a case-by-case basis. We refer readers to the
discussion in the FY 2006 final rule (70 FR 47350-47352) for more
detailed information on substantial similarity.
3. FY 2007 Status of Technologies Approved for FY 2006 Add-On Payments
a. Kinetra[supreg] Implantable Neurostimulator (Kinetra[supreg]) for
Deep Brain Stimulation
Medtronic, Inc. submitted an application for approval of the
Kinetra[supreg] implantable neurostimulator device for new technology
add-on payments for FY 2005. In the IPPS final rule for FY 2005 (69 FR
49019, August 11, 2004), we approved Kinetra[supreg] for new technology
add-on payments.
As noted above, the period for which technologies are eligible to
receive new technology add-on payments is 2 to 3 years after the
product becomes available on the market and data reflecting the cost of
the technology are reflected in the DRG weights. This technology
received FDA approval on December 16, 2003. Therefore, the technology
will be beyond the 2- to 3-year period during which it can be
considered new during FY 2007. Therefore, we proposed in the FY 2007
IPPS proposed rule (71 FR 24070), to discontinue add-on payments for
the Kinetra[supreg] rechargeable, implantable neurostimulator device
for FY 2007.
The manufacturer submitted a request that we consider a higher-
paying DRG assignment for dual array neurostimulator pulse generator
cases. We have taken this request into consideration and have reviewed
the FY 2005 Medicare charge data for cases that use implantable
neurostimulator for deep brain stimulation. Our findings and a full
discussion of this issue can be found in section II.D.2.a. of the
preamble of this final rule.
Comment: A number of commenters were concerned that the expiration
of the new technology add-on payment for Kinetra[supreg] will lead to
inadequate payments for full system Kinetra[supreg] implants. One
commenter requested that CMS reconsider its decision to end payments
for the Kinetra[supreg] implantable neurostimulator. Other commenters
thanked CMS for its efforts in granting add-on payments for the
Kinetra[supreg] during the last 2 years.
Response: As noted above, the Kinetra[supreg] technology will be
beyond the 2-year to 3-year period during which it can be considered
new during FY 2007. Therefore, we are finalizing our proposal from the
FY 2007 IPPS proposed rule (71 FR 24070) to discontinue add-on payments
for the Kinetra[supreg] rechargeable implantable neurostimulator for FY
2007.
b. Endovascular Graft Repair of the Thoracic Aorta
W. L. Gore & Associates, Inc. submitted an application for
consideration of its Endovascular Graft Repair of the Thoracic Aorta
(GORE TAG) for new technology add-on payments for FY 2006. The
manufacturer argued that endovascular stent-grafting of the descending
thoracic aorta provides a less invasive alternative to the traditional
open surgical approach required for the management of descending
thoracic aortic aneurysms. The GORE TAG device is a tubular stent-graft
mounted on a catheter-based delivery system, and it replaces the
synthetic graft normally sutured in place during open surgery. The
device was initially identified using ICD-9-CM procedure code 39.79
(Other endovascular repair (of aneurysm) of other vessels). The
applicant also requested a unique ICD-9-CM procedure code. As noted in
Table 6B of the FY 2006 IPPS final rule (70 FR 47637), new procedure
code 39.73 (Endovascular implantation of graft in thoracic aorta) was
assigned to this technology.
In the FY 2006 IPPS final rule (70 FR 47356), we approved the GORE
TAG device for new technology add-on payment for FY 2006. We noted that
any substantially similar device that is FDA-approved before or during
FY 2006 that uses the same ICD-9-CM procedure code as GORE TAG and is
assigned to the same DRGs as those approved for new technology add-on
payments may also receive the new technology add-on payment associated
with this technology in FY 2006.
FDA approved GORE TAG on March 23, 2005. The technology remains
within the 2- to 3-year period during which it can be considered new.
Therefore, as we proposed (71 FR 24070), we are continuing add-on

[[Page 48000]]

payments for the endovascular graft repair of the thoracic aorta for FY
2007.
Comment: Some commenters supported our proposal to continue new
technology add-on payments for GORE TAG for FY 2007.
Response: We thank the commenters for their support and, as noted
above, we are continuing new technology add-on payments for GORE TAG
for FY 2007.
c. Restore[supreg] Rechargeable Implantable Neurostimulator
Medtronic Neurological submitted an application for new technology
add-on payments for its Restore[supreg] Rechargeable Implantable
Neurostimulator for FY 2006. The Restore[supreg] Rechargeable
Implantable Neurostimulator is designed to deliver electrical
stimulation to the spinal cord to block the sensation of pain. The
technology standard for neurostimulators uses internal sealed batteries
as the power source to generate the electrical current. These internal
batteries have finite lives, and require replacement when their power
has been completely discharged. According to the manufacturer, the
Restore[supreg] Rechargeable Implantable Neurostimulator ``represents
the next generation of neurostimulator technology, allowing the
physician to set the voltage parameters in such a way that fully meets
the patient's requirements to achieve adequate pain relief without fear
of premature depletion of the battery.'' The applicant stated that the
expected life of the Restore[supreg] rechargeable battery is 9 years,
compared to an average life of 3 years for conventional neurostimulator
batteries. We approved new technology add-on payments for all
rechargeable, implantable neurostimulators for FY 2006. Cases involving
these devices, made by any manufacturer, are identified by the presence
of newly created ICD-9-CM code 86.98 (Insertion or replacement of dual
array rechargeable neurostimulator pulse generator).
As noted above, the period for which technologies are eligible to
receive new technology add-on payments is 2 to 3 years after the
product becomes available on the market and data reflecting the cost of
the technology are reflected in the DRG weights. The FDA approved the
Restore[supreg] Rechargeable Implantable Neurostimulator in 2005.
However, as noted above and in the FY 2006 IPPS final rule (70 FR
47358), at least one similar product was approved by the FDA as early
as April 2004. Nevertheless, consistent with current policy (70 FR
47362) and decisions for prior products (that is, bone morphogenetic
products and CRT-D devices), as we proposed (71 FR 24070 through
24071), we are continuing new technology add-on payments for
rechargeable, implantable neurostimulators in FY 2007 because the
product will be beyond the 3-year period only in the latter 6 months of
the fiscal year.
Comment: Some commenters supported our decision to continue add-on
payments for the Restore[supreg] Rechargeable Implantable
Neurostimulator.
Response: We appreciate the commenters' support and as noted above,
we are continuing new technology add-on payments for Restore[supreg]
Rechargeable Implantable Neurostimulator for FY 2007.
4. FY 2007 Applications for New Technology Add-On Payments
a. C-Port[supreg] Distal Anastomosis System
Cardica, Inc. submitted an application for new technology add-on
payments for FY 2007 for its Cardica C-Port[supreg] Distal Anastomosis
System. The manufacturer stated that the C-Port[supreg] System is
indicated for all patients requiring a vein as a conduit during a
coronary bypass operation for bypassing a coronary artery stenosis or
occlusion. The manufacturer contended that the C-Port[supreg] System is
specifically designed to create a reliable and consistent end-to-side
anastomosis between a conduit, such as a venous graft, and a small
arterial vessel during the bypass surgery. The device consists of eight
stainless steel clips and a delivery system. Once the vein graft has
been loaded into the device and the device positioned against the
target vessel, the anastomosis is created by pushing a single button.
Cardica, Inc. stated the main purpose of the device is to replace a
conventional hand-sewn, distal anastomosis with an automated,
compliant, mechanical anastomosis.
We received the following public comments at the new technology
town hall meeting regarding whether this technology meets the
substantial clinical improvement criteria:
Comment: The manufacturer argued that this technology meets the
substantial clinical improvement criterion because:
It achieves higher patency rates at 6 months compared to
conventional hand-sewn anastomoses.
Use of the device will result in less surgeon-to-surgeon
variability in the quality of the anastomosis compared to hand sewing.
The device leads to reduced operative time.
The product allows for the creation of an anastomosis
during minimally invasive surgery.
In addition, we received written comments expressing support for
approval of new technology add-on payments for the C-Port[supreg]
System. These commenters noted that--
The device allows the anastomosis to be completed quickly,
reducing patient complications during surgery from ischemia.
The device will allow for smaller incisions during heart
surgery and physicians will not have to position their hands in the
chest cavity in order to hand-sew the anastomosis.
The rapidly deployed anastomosis clamp provides patients
with a surgical alternative where one would otherwise not be available
due to the comorbidities associated with the more invasive CABG
procedures.
Response: We appreciate the time and effort the applicant took to
present at the town hall meeting. We indicated in the proposed rule
that we would consider the information presented in the written
comments and at the town hall meeting, and invoted interested parties
to submit objective data that would support the assertions presented
above by the commenters.
The C-Port[supreg] System was granted section 510(k) approval from
the FDA on November 10, 2005. While the device appeared to meet the
criteria for being considered new based on its FDA approval date, we
were concerned that various forms of surgical staples and clips have
been used for more than a decade in a wide range of surgical
procedures. In fact, the FDA found that the C-Port[supreg] System ``is
substantially equivalent to the predicate devices with regard to
indications, device characteristics, method of use, labeling and
materials.'' Thus, given its similarity to other devices currently on
the market, we were concerned that the C-Port[supreg] System may not
qualify as new. In the FY 2007 IPPS proposed rule, we solicited
specific comments on whether this device is new and how it could be
distinguished from predicate devices that perform the same or a similar
function.
We received the following public comments in response to the
proposed rule.
Comment: The manufacturer commented that the C-Port[supreg] System
meets the newness criterion for the following reasons:
The FDA section 510(k) approval process identifies
predicate devices as having ``a similar, not necessarily identical use
and function.''

[[Page 48001]]

There is no other ``fully-integrated anastomotic system
cleared by the FDA for the creation of an anastomosis between a blood
vessel graft and a target coronary artery.'' There are no ``clip or
staple-based automated distal coronary anastomotic devices such as [C-
Port[supreg]] approved by the FDA.'' The manufacturer argued that while
the devices they identified in the FDA section 510(k) approval process
are similar to C-Port[supreg] system, none of them are identical.
C-Port[supreg] was FDA approved in November 2005, thus
enabling the device to still qualify as new based on its FDA approval
date.
There is no clinical precedence for the use of a stapling
device in creating distal coronary anastomoses, and there are no ICD-9
CM codes for stapling devices--the lack of the procedure code means
that CMS does not have charge data for C-Port[supreg] and that the
device's costs are not reflected in the current DRG weights.
CMS approved Kinetra[supreg] in 2004 and stated that the
Kinetra[supreg] device was not ``significantly different in terms of
how it achieves its desired clinical results from its predecessor
Soletra[supreg].'' The manufacturer believed that the approval of
Kinetra[supreg] sets precedence for C-Port[supreg] approval.
Response: We appreciate the manufacturer's clarification of the
questions we posed in the proposed rule about whether the C-
Port[supreg] would meet the newness criterion. The additional
information submitted has allowed us to determine that the C-
Port[supreg] meets the newness criterion.
In response to the commenter's statement about Kinetra[supreg], we
indicated that Soletra[supreg] and Kinetra[supreg] achieve the desired
clinical result through the same stimulation mechanism. However, we did
not find Soletra[supreg] and Kinetra[supreg] to be substantially
similar products. We noted that Soletra[supreg] controls symptoms only
on one side of a patient's body, while Kinetra[supreg] provides
bilateral control of neurological symptoms through a single device. We
determined in the FY 2005 IPPS final rule (69 FR 49019) that
Kinetra[supreg] represented a substantial clinical improvement over the
previous Soletra[supreg] device.
In the proposed rule, we also noted that there is currently no ICD-
9-CM code used to identify how the anastomosis is performed. The
surgical technique used to graft the bypass to the arterial vessel is
part of the surgical procedure itself and is not separately identified
in our current coding structure. Although there is not an explicit code
to identify C-Port[supreg], the hospital's charge for the device will
be included on its bill. The hospital is permitted to charge for all
items and services it furnishes irrespective of whether a particular
item is identified by an explicit ICD-9-CM code. The charges included
on hospital bills for the device will be part of the relative weight
calculation 2 years later (that is, FY 2005 hospital charge data are
used to set the FY 2007 relative weights).
Comment: The manufacturer of C-Port[supreg] urged CMS to
differentiate between ``distinct procedures involving the creation of
anastomosis'' by creating the following codes: (a) Anastomosis, manual;
and (b) anastomosis, automated, using single or multiple clip array
deployment technology. The manufacturer commented that a new code
should be created for C-Port[supreg] because the C-Port[supreg] Distal
Anastomosis procedure is not a typical part of the bypass procedure
code and the use of the C-Port[supreg] system requires training and
proctoring for physicians and OR staff to use the equipment because the
C-Port[supreg] system comprises new steps and preparation in the bypass
procedure. Finally, the manufacturer stated that CMS set a precedent
for the creation of a new code by creating a code for a drug-eluting
stent even though ICD-9-CM procedure codes already existed for stent
procedures and by creating a new code to distinguish single versus dual
channel-pulse generator devices (Kinetra[supreg] by Medtronic).
Response: While the use of the C-Port[supreg] device may represent
a difference in technique of creating a distal anastomosis, we do not
agree that it is a distinct procedure. Historically, we have subdivided
procedures involving the insertion of specific devices that are
designed to achieve a specific therapeutic purpose, but we have not
assigned a code for specific tools used to perform surgery.
Kinetra[supreg], a stent and a pacemaker, is an example of a device
that is implanted in a patient to treat an illness that is
appropriately assigned a code. To date, we have not used a code to
identify a specific type of surgical tool such as a scalpel, saw, or
clamp. Similarly, we view C-Port[supreg] as a surgical tool (albeit far
more sophisticated or innovative than those just mentioned) that should
also not be recognized by its own ICD-9-CM code.
The applicant made several arguments in support of the device
meeting the cost criterion. Cardica, Inc. estimated that the cost of
each device will be approximately $1,200. The applicant assumed a
hospital markup of 100 percent, with an average use of 2.5 C-
Port[supreg] devices per case. Therefore, it estimated that the total
average charge per patient will be $6,000. The C-Port[supreg] System
would be used when a coronary artery bypass graft is performed. Thus,
we assessed whether it meets the cost criterion in relation to the
threshold for DRGs 106 (Coronary Bypass with Percutaneous Transluminal
Coronary Angioplasty), 547 (Coronary Bypass with Cardiac Catheter with
Major CV Diagnosis), 548 (Coronary Bypass with Cardiac Catheter without
Major CV Diagnosis), 549 (Coronary Bypass without Cardiac Catheter with
Major CV Diagnosis), and 550 (Coronary Bypass without Cardiac Catheter
without Major CV Diagnosis). We note that the data analysis for this
technology is slightly unusual, as the DRGs to which the technology
would have been assigned in FY 2005 (the MedPAR data we are currently
using) are DRGs 107 and 109. These DRGs were terminated in FY 2006, and
4 new coronary bypass DRGs were created for these cases (DRGs 547, 548,
549, and 550). The manufacturer provided estimates showing a case-
weighted threshold for DRGs 106, 547, 548, 549 and 550 of $75,373. The
applicant projected a 20-percent market penetration for the device in
FY 2007 or its use in approximately 23,000 cases across the 5 DRGs. The
applicant submitted data showing average standardized charges for cases
using the C-Port[supreg] System of $80,887. Therefore, the applicant
argued that the device meets the cost threshold for a new technology
add-on payment. Our internal data analysis of the technology, using the
FY 2005 MedPAR data and Table 10 thresholds for FY 2005, shows a case-
weighted threshold of $68,416. We identified cases using coronary
bypass procedure codes 36.10, 36.11, 36.12, 36.13 and 36.14, and
concluded that the case-weighted average standardized charge for these
bypass cases was $79,394. Thus, our internal data also suggested that
the device meets the cost threshold.
As we discussed in the proposed rule, the applicant made several
arguments in support of the device meeting the substantial clinical
improvement criterion. The manufacturer argued that the C-Port[supreg]
creates a reliable and fully compliant end-to-side anastomosis between
a vein graft and a coronary artery, in less time than is required to
create a hand-sewn distal anastomosis. The applicant also stated that
the C-Port[supreg] System integrates deployment of the anastomotic
clips and creation of the arteriotomy, thus enabling deployment to
occur without occlusion of blood flow through the target vessel.
However, we note that the applicant submitted evidence suggesting that
the device does not always produce reliable

[[Page 48002]]

anastomoses; specifically, a study of 130 patients receiving 132
devices reported 13 incomplete anastomoses in 12 patients, and the
study also noted that additional manual stitches were required in the
majority of the patients studied. Therefore, we were concerned that
these studies suggested that the C-Port[supreg] System may not
represent a substantial clinical improvement over the traditional hand-
sewn technique. At the town hall meeting, the applicant noted that
these results were associated with inexperience preparing the target
vessel, vein thickness assessment, proper device alignment and
anastomosis site selection rather than problems with the device itself.
The applicant believed that these problems will become infrequent as
surgeons have more experience with the device. In the FY 2007 IPPS
proposed rule, we solicited further information from commenters that
would suggest how the product meets the substantial clinical
improvement criterion.
We received the following comment in response to the proposed rule.
Comment: The manufacturer submitted the following comments to be
considered in our evaluation of whether C-Port[supreg] met the
substantial clinical improvement criterion:
Intraoperative anastomotic failures with the hand-sewn
technique occur in approximately 10 percent of patients. Falk, et al.,
evaluated vein graft patency using a meta-analysis of 28 published
studies with over 28,000 grafts and found that occlusion within 30 days
occurs in about 12 percent of vein grafts while occlusion within 6
months occurs in 20 percent.
The C-Port[supreg] device may mitigate some of the
negative factors found in hand-sewn anastomoses that impact vein graft
patency. Post-operative vein graft patency rates using the hand-sewn
technique were 88 percent at 30 days and 80 percent at 6 months (data
obtained from historical controls); whereas patency rates using the C-
Port[supreg] device were 99 percent at discharge and 96 percent at 6
months.
In the greater than 1-year followup group, none of the
patients in the pivotal C-Port[supreg] study required a reintervention.
The ``10 percent failure rate'' cited in a C-Port[supreg]
publication referred to a failure in surgeons using the device (due to
lack of experience using it), not a failure of the device itself.
Response: We are concerned that information presented by the
applicant does not demonstrate that this technology is a sufficient
improvement over hand-sewing the distal anastomosis. Although patency
rates using the C-Port[supreg] device were reportedly higher than those
found using the hand-sewn technique (99 percent at discharge and 96
percent at 6 months compared to 88 percent at 30 days and 80 percent at
6 months), we also found that the data on the hand-sewn patency rates
was derived from a meta-analysis of over 28,000 bypass grafts to
different coronary vessels, many of which may have been comparatively
poor candidates for bypass grafting, suggesting a possible selection
bias in the arteries in the C-Port[supreg] study. We believe that a
clinical study demonstrating substantial clinical improvement in
outcomes is necessary for this technology because the comparison is of
the CABG procedure using the C-Port[supreg] device to the hand-sewn
technique. In some cases, our approval of a technology was based on a
clinical assessment that at least one of the criteria for evaluating
substantial clinical improvement listed in the new technology final
rule (66 FR 46914) was met. For example, our approval of the Restore
rechargeable neurostimulator was based on evidence that showed it
decreased the ``rate of subsequent * * * therapeutic interventions'' by
avoiding a surgery to replace a battery. Similarly, we approved GORE
TAG because it ``offers a treatment option for patient population
unresponsive to, or ineligible for, currently available treatments.''
In these cases, we were less reliant on a clinical study to demonstrate
improvement over an existing technology than our clinical judgment that
the product achieved its intended purposes which itself is a
substantial clinical improvement. With C-Port[supreg] or with a hand-
sewn anastomosis, the treatment is the same (a CABG for coronary artery
vessel disease). Thus, clinical studies demonstrating an improvement in
CABG outcomes using the C-Port[supreg] device relative to the hand-sewn
technique are critical to approving the device for new technology add-
on payments.
Given the relatively high rates of success of both the hand sewn
and the automated technique, we were not able to determine that the C-
Port[supreg] device is a substantial clinical improvement over the
traditional hand-sewn technique. Accordingly, after consideration of
the comments received, we are not approving the C-Port[supreg] Distal
Anastomosis System for FY 2007 new technology add-on payment.
There are several potential criteria listed in the new technology
final rule that C-Port[supreg] could potentially meet. For instance, it
is possible that C-Port[supreg] will reduce recovery time or lead to
more rapid beneficial resolution of the disease process treatment.
Given the potential benefits of C-Port[supreg], it is likely that we
would approve the technology for add-on payments with a study that more
definitively demonstrates substantial clinical improvement. For
instance, our main concern with the study presented was that the
control group and the study population used to demonstrate substantial
clinical improvement may not have been directly comparable. If there
was a study that showed similar improvements in patency rates between
the control group and a study population where the patients were
directly comparable in their coronary artery vessel disease, we believe
it would be more likely to demonstrate that the substantial clinical
improvement criterion was met.
b. NovoSeven[supreg] for Intracerebral Hemorrhage
The Pinnacle Health Group in conjunction with Novo Nordisk Inc.
(the manufacturer) submitted an application for new technology add-on
payments for FY 2007 for NovoSeven[supreg] for Intracerebral
Hemorrhage. However, the applicant withdrew its application for new
technology add-on payment on June 07, 2006.
We received the following public comments regarding this
application for new technology add-on payments in response to the FY
2007 IPPS proposed rule.
Comment: One commenter supported approving new technology add-on
payments for NovoSeven[supreg]. The commenter believed that the
availability of an add-on payment would help facilitate patient access
to this important and costly therapy.
Response: We appreciate the commenter's response to the proposed
rule. We note that, during the comment period, the applicant withdrew
its application from consideration for new technology add-on payments
for FY 2007.
We appreciate the applicant for its submittal of an application for
new technology add-on payments and encourage a resubmission of an
application upon FDA approval of its technology.
c. X STOP Interspinous Process Decompression System
St. Francis Medical Technologies submitted an application for new
technology add-on payments for the X STOP Interspinous Process
Decompression System for FY 2007. Lumbar spinal stenosis describes a
condition that occurs when the spaces between bones in the spine become

[[Page 48003]]

narrowed due to arthritis and other age-related conditions. This
narrowing, or stenosis, causes nerves coming from the spinal cord to be
compressed, thereby causing symptoms including pain, numbness, and
weakness. It particularly causes symptoms when the spine is in
extension, as occurs when a patient stands fully upright or leans back.
The X STOP device is inserted between the spinous processes of adjacent
vertebrae in order to provide a minimally invasive alternative to
conservative treatment (exercise and physical therapy) and invasive
surgery (spinal fusion). It works by limiting the spine extension that
compresses the nerve roots while still preserving as much motion as
possible. The device is inserted in a relatively simple, primarily
outpatient procedure using local anesthesia. However, in some
circumstances, the physician may prefer to admit the patient for an
inpatient stay. The manufacturer described the device as providing ``a
new minimally invasive, stand-alone alternative treatment for lumbar
spinal stenosis.''
The X STOP Interspinous Process Decompression system received pre-
market approval from the FDA on November 21, 2005. The device is
currently described by ICD-9-CM code 84.58 (Implantation of
Interspinous process decompression device) (excluding: fusion of spine
(codes 81.00 through 81.08, and 81.30 through 81.39)). This ICD-9-CM
code went into effect on October 1, 2005.
The manufacturer provided data in support of the device meeting the
cost threshold criterion. The applicant stated that there would be an
average of 1.6 units used per case. Each unit costs $5,500; therefore,
the technology is expected to cost $8,800 per case. The device is
currently assigned to DRGs 499 (Back and Neck Procedures Except Spinal
Fusion with CC) and 500 (Back and Neck Procedures Except Spinal Fusion
without CC). The manufacturer projected that there would be
approximately 424 patients eligible to receive the device in DRG 499 in
FY 2007, while there may be approximately 1,700 patients who receive
the device in DRG 500. The manufacturer also provided data for cases
involved in the clinical trials. The average standardized charge for
the cases in FY 2004 was $24,065. The weighted threshold for DRGs 499
and 500 is $20,096. However, the manufacturer argued that because
significantly less than 20 percent of patients receiving the X STOP
experienced complications or had comorbidities, the threshold should be
calculated by estimating that 20 percent of patients would be assigned
to DRG 499 and 80 percent would to DRG 500. The manufacturer stated in
its application that, using this methodology, the applicable threshold
should be $19,796. Using either calculation, it appears that the
technology meets the cost threshold for new technology add-on payments.
The applicant also submitted information in support of its claim of
meeting the substantial clinical improvement criterion. The
manufacturer stated that the X STOP device is placed between the
spinous processes to limit extension of the symptomatic level(s), yet
allowing flexion, axial rotation, and lateral bending (that is, the
device limits pressure on the spinal nerves and the resulting pain
symptoms when the patient is in an upright position or leans backward
while also preserving the patient's ability to turn side-to-side, bend
forward, and to turn to either side). The applicant contended that this
technology provides an alternative with improved clinical outcomes to
conservative and surgical treatments. The manufacturer further stated
that the device may offer a new alternative to lumbar spinal
decompression procedures such as laminectomy and laminotomy. Additional
information included in the application suggested that the device
preserves spinal motion and is superior to a spinal decompression
procedure that requires concomitant fusion (with or without
instrumentation). The applicant argued that the advantages over spinal
decompression include reduced risk, shorter hospital stay, and earlier
improvement in pain and function. The manufacturer further contended
that disease progression at adjacent levels is minimal following X STOP
implantation compared to the known risk associated with surgical
decompression and concomitant fusion. The applicant stated that the X
STOP is comparable to traditional surgical decompression of lumbar
spinal stenosis with respect to improved quality of life
postoperatively. According to the applicant, the device provides
advantages over nonoperative care, including better symptom relief,
improved function, and increased patient satisfaction.
We received the following public comments through the new
technology town hall meeting process regarding this application for
add-on payments.
Comment: The applicant asserted that the X STOP Interspinous
Process Decompression system has the following advantages:
It retains spinal anatomy and all spinal structures.
The device allows for increased function and less pain
after implantation as evidenced by radiographic measures that showed
increases in the spinal canal area by 18 percent, diameter by 9
percent, and subarticular diameter (the route that the nerves exit the
spine) by 50 percent. In lateral view: area increased by 25 percent and
width by 41 percent.
The X STOP is a reversible procedure that causes no damage
to facets or disks.
The device allows for a treatment option for patients that
cannot undergo surgeries with general anesthesia.
The rate of complications associated with implantation of
the device is below 1 percent.
Response: In the proposed rule, we indicated that we would evaluate
these assertions as we further considered this application for new
technology add-on payments for the final rule. We also noted that the
study that the applicant summarized at the town hall meeting for the X
STOP used a randomized study that targeted lumbar spinal stenosis
patients with mild to moderate symptoms. The control group did not
require operative care. In the proposed rule, we solicited information
from the comments that demonstrates how the study populations showed
substantial clinical improvement compared to the control group.
We believe that the device satisfies the newness and cost threshold
criteria for new technology add-on payments. However, in the FY 2007
IPPS proposed rule, we expressed our concern that the information
included with the application may raise issues about substantial
clinical improvement. During the FDA approval process, the Center for
Devices and Radiological Health (CDRH) Advisory Panel voted against
premarket approval (PMA) in August 2004 because of concerns about
proper patient selection as well as the lack of objective endpoints,
especially radiographic endpoints. The Panel also mentioned the overall
low clinical efficacy rate in the study population. The device
subsequently received PMA approval, but only on the condition that it
be used in the context of a long term (5 year) follow-up study. In the
proposed rule, we solicited information from commenters that addressed
the concerns raised by the CDRH Advisory Panel or other information
bearing on the issue of whether this product meets the substantial
clinical improvement criterion.
We note that the town hall meeting produced contradictory
information regarding whether this procedure is generally performed in
inpatient or

[[Page 48004]]

outpatient settings. The presenter indicated that over 90 percent of
his patients were treated as outpatients. The manufacturer noted that
90 percent of non-U.S. patients and approximately two-thirds of U.S.
patients since FDA approval have been treated in inpatient settings.
While the setting where the procedure is typically performed has no
bearing on whether the product represents a substantial clinical
improvement, we noted that we believe the physician should select the
most appropriate site to perform the procedure based on the clinical
needs of the patient.
We received the following comments in response to the FY 2007 IPPS
proposed rule.
Comment: The manufacturer commented that the contradictory
information we noted in the proposed rule about whether the procedure
in general performed in the outpatient or inpatient setting was likely
the result of the presenter at the town hall meeting misspeaking when
he said that the device was used in the outpatient setting about 90
percent of the time. Although the device may be used with local
anesthesia, the manufacturer predicted that many clinicians attending
to Medicare patients will choose general anesthesia and will use the
procedure in an inpatient setting. The manufacturer stated that the X
STOP device is currently used in the inpatient setting about 90 percent
of the time.
Response: We appreciate the commenter's clarification of this
point. As we indicated in the proposed rule, the site of service has no
bearing on whether we will determine the technology to be a substantial
clinical improvement. However, given the similarity in the criteria we
apply in the two settings for determining substantial clinical
improvement, we note that a decision to approve a device for inpatient
new technology add-on payment may have implications for outpatient new
technology pass-through payment.
Comment: In response to our request for additional information
supporting that the X STOP device meets the substantial clinical
improvement criterion, the manufacturer reiterated many of the comments
that it submitted through the new technology town hall meeting process.
Mainly, the commenter stated that X STOP offers an alternative to
surgery that is associated with fewer and less severe complications, is
a reversible procedure, and offers a faster recovery time than more
invasive surgery. The commenter also stated that X STOP meets the
criterion when compared to other disease management modalities for
lumbar spinal stenosis patients, as evidenced by symptom relief,
physical functioning, treatment satisfaction, and health-related
quality of life, and that use of X STOP results in--
Comparable treatment efficacy when compared to laminectomy
Lower rates of intraoperative complications compared to
surgical decompression with or without concomitant fusion
Lower reoperation rates for unresolved stenosis systems
compared to other surgical treatments.
In addition, the manufacturer stated that it addressed the issues
that the Advisory Panel to the FDA cited as reasons for voting against
approving X STOP. Those issues were in regards to proper patient
selection, a lack of objective endpoints, especially radiographic
endpoints and an overall low clinical efficacy rate in the study
population. The manufacturer claimed that it addressed the concerns of
the Advisory Panel by submitting additional data and analyses to the
FDA that--
Identified patients with LSS and moderately impaired
physical function at baseline as the appropriate indication.
Supplemented ``the showing of the mechanism of effect on
the spine in cadavers with in vivo clinical radiographic data.''
Addressed the issue of low clinical efficacy rates, by
showing that the success rates using X STOP were comparable to those of
more invasive procedures that are covered by Medicare.
The manufacturer further noted that the Advisory Panel wrote in its
Summary of Safety and Effectiveness document that ``the X STOP device
met the primary clinical study endpoint for success, exceeding the
success rate of the control in every statistical analysis.'' Finally,
the manufacturer noted that the FDA requirement that X STOP's approval
was conditioned on a 5-year followup study was not uncommon for spinal
implant devices and that, over the past 10 years, all nine spinal
implant FDA approvals have had similar conditional requirements. The
manufacturer also commented that CMS approved the INFUSE Bone Graft
device and noted that the FDA required a 6-year followup study as a
condition of its approval of that device.
Several commenters who were individual physicians who have had
experience using the X STOP device indicated that X STOP provides an
alternative to more invasive surgery such as a laminectomy after
conservative treatment has failed. All of the commenters supported
approving the device for new technology add-on payment. In addition to
commenters' support that the device is minimally invasive and has short
operative and recovery time, some of the commenters mentioned other
positive outcomes that the X STOP procedure--
Increases foraminal height and produces minimal reversal
of the lordosis, as measured by post operative x-rays;
Reduced the pain reported by patients by half in some
cases;
Provided alleviation of neurogenic claudication symptoms;
and
Benefited patients with significant comorbidities,
including cardiothoracic problems, specifically chronic obstructive
pulmonary disease or coronary artery disease
In addition, some commenters noted that the X STOP device can very
easily be implanted in the outpatient setting (assuming appropriate
patient-selection), thus allowing high inpatient costs to be avoided.
Response: We appreciate the commenters' submittal of comments in
support of X STOP. With respect to substantial clinical improvement, we
continue to be concerned that the FDA Advisory Panel noted the overall
low clinical efficacy rate in the study population and only approved
the technology conditional on a 5 year followup study. Nevertheless, we
note that the FDA did approve the technology, meaning that it is safe
and effective (that is, it achieves its intended purpose). Further, we
note that the applicant was able to address the FDA concern about lack
of objective endpoints by the showing of the mechanism of effect on the
spine in cadavers with in vivo clinical radiographic data. That is, the
applicant was able to show that the X STOP device limits spine
extension that compresses the nerve. Thus, we believe that the
technology has promise for providing a less invasive alternative to
procedures such as laminectomy or fusion for patients that have failed
conservative treatment (exercise, physical therapy and medication). The
X STOP system represents a new level of treatment on the continuum of
care for patients with lumbar spinal stenosis that previously did not
exist.
Accordingly, after consideration of the comments received, we are
approving the X STOP Interspinous Process Decompression System for new
technology add-on payment for FY 2007. However, we remain interested in
seeing whether the clinical evidence from the 5-year followup study
required by the FDA demonstrates that X STOP

[[Page 48005]]

continues to be effective. Cases involving X STOP will be identified by
ICD-9-CM code 84.58 (Implantation of interspinous process decompression
device). These cases are generally included in DRG 499 (Back and Neck
Procedures Except Spinal Fusion with CC) and DRG 500 (Back and Neck
Procedures Except Spinal Fusion without CC). As noted in the proposed
rule, the manufacturer submitted data to support its estimated cost per
case involving the X STOP procedure of $8,800. Accordingly, we are
finalizing a maximum add-on payment of $4,400 for cases that involve
this technology.
5. Interim and Final Cost Threshold Tables Due to Changes to Wage Index
and Budget Neutrality Factors
Table 10 of the IPPS proposed and final rules contains the cost
thresholds that are used to determine whether a technology meets the
criteria for new technology add-on payments. We are publishing an
interim Table 10 in this final rule. We use the national adjusted
operating standardized amounts in calculating the cost threshold. As
noted in section III. and in the Addendum to this final rule, the final
national adjusted operating standardized amounts will be published
subsequent to this final rule when the wage index and budget neutrality
factors are finalized for FY 2007. Therefore, we will also publish a
revised version of Table 10, containing the final thresholds for FY
2008 between August 1 and October 1.

III. Changes to the Hospital Wage Index

A. Background

Section 1886(d)(3)(E) of the Act requires that, as part of the
methodology for determining prospective payments to hospitals, the
Secretary must adjust the standardized amounts ``for area differences
in hospital wage levels by a factor (established by the Secretary)
reflecting the relative hospital wage level in the geographic area of
the hospital compared to the national average hospital wage level.'' In
accordance with the broad discretion conferred under the Act, we
currently define hospital labor market areas based on the definitions
of statistical areas established by the Office of Management and Budget
(OMB). A discussion of the FY 2007 hospital wage index based on the
statistical areas, including OMB's revised definitions of Metropolitan
Areas, appears under section III.B. of this preamble.
Beginning October 1, 1993, section 1886(d)(3)(E) of the Act
requires that we update the wage index annually. Furthermore, this
section provides that the Secretary base the update on a survey of
wages and wage-related costs of short-term, acute care hospitals. The
survey must exclude the wages and wage-related costs incurred in
furnishing skilled nursing services. This provision also requires us to
make any updates or adjustments to the wage index in a manner that
ensures that aggregate payments to hospitals are not affected by the
change in the wage index. The adjustment for FY 2007 is discussed in
section II.B. of the Addendum to this final rule.
As discussed below in section III.G. of this preamble, we also take
into account the geographic reclassification of hospitals in accordance
with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when calculating
the wage index. Under section 1886(d)(8)(D) of the Act, the Secretary
is required to adjust the standardized amounts so as to ensure that
aggregate payments under the IPPS after implementation of the
provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act
are equal to the aggregate prospective payments that would have been
made absent these provisions. The budget neutrality adjustment for FY
2007 is discussed in section II.A.4.b. of the Addendum to this final
rule.
Section 1886(d)(3)(E) of the Act also provides for the collection
of data every 3 years on the occupational mix of employees for short-
term, acute care hospitals participating in the Medicare program, in
order to construct an occupational mix adjustment to the wage index. A
discussion of the occupational mix adjustment that we are applying
beginning October 1, 2006 (the FY 2007 wage index) appears under
section III.C. of this preamble.

B. Core-Based Statistical Areas for the Hospital Wage Index

The wage index is calculated and assigned to hospitals on the basis
of the labor market area in which the hospital is located. In
accordance with the broad discretion under section 1886(d)(3)(E) of the
Act, beginning with FY 2005, we define hospital labor market areas
based on the Core-Based Statistical Areas (CBSAs) established by OMB
and announced in December 2003 (69 FR 49027). OMB defines a CBSA,
beginning in 2003, as ``a geographic entity associated with at least
one core of 10,000 or more population, plus adjacent territory that has
a high degree of social and economic integration with the core as
measured by commuting ties.'' The standards designate and define two
categories of CBSAs: Metropolitan Statistical Areas (MSAs) and
Micropolitan Statistical Areas (65 FR 82235).
According to OMB, MSAs are based on urbanized areas of 50,000 or
more population, and Micropolitan Statistical Areas (referred to in
this discussion as Micropolitan Areas) are based on urban clusters with
a population of at least 10,000 but less than 50,000. Counties that do
not fall within CBSAs are deemed ``Outside CBSAs.'' In the past, OMB
defined MSAs around areas with a minimum core population of 50,000, and
smaller areas were ``Outside MSAs.''
The general concept of the CBSAs is that of an area containing a
recognized population nucleus and adjacent communities that have a high
degree of integration with that nucleus. The purpose of the standards
is to provide nationally consistent definitions for collecting,
tabulating, and publishing Federal statistics for a set of geographic
areas. CBSAs include adjacent counties that have a minimum of 25
percent commuting to the central counties of the area. (This is an
increase over the minimum commuting threshold of 15 percent for
outlying counties applied in the previous MSA definition.) We consider
CBSAs that are MSAs to be urban, and CBSAs that are Micropolitan
Statistical Areas as well as areas outside of CBSAs to be rural. In
addition, where an MSA has been divided into Metropolitan Division to
comprise the labor market areas for purposes of calculating the wage
index (69 FR 49029).
The revised CBSAs established by OMB comprised MSAs and
Micropolitan Areas based on Census 2000 data. (A copy of the
announcement may be obtained at the following Internet address: http://www.whitehouse.gov/omb/bulletins/fy04/b04-03.html.) The revised
definitions recognize 49 MSAs and 565 Micropolitan Areas, and
extensively changed the composition of many of the MSAs that existed
prior to the revisions.
The revised area designations resulted in a higher wage index for
some areas and a lower wage index for others. Further, some hospitals
that were previously classified as urban are now in rural areas. Given
the significant payment impacts upon some hospitals because of these
changes, we provided a transition period to the new labor market areas
in the FY 2005 IPPS final rule (69 FR 49027 through 49034). As part of
that transition, we allowed urban hospitals that became rural under the
new definitions to maintain their assignment to the MSA where they were
previously located for the 3-year period of FY 2005, FY 2006, and FY
2007.

[[Page 48006]]

Specifically, these hospitals were assigned the wage index of the urban
area to which they previously belonged. (For purposes of the wage index
computation, the wage data of these hospitals remained assigned to the
statewide rural area in which they are located.) The hospitals
receiving this transition will not be considered urban hospitals;
rather, they will maintain their status as rural hospitals. Thus, the
hospital would not be eligible, for example, for a large urban add-on
payment under the capital PPS. In other words, it is the wage index,
but not the urban or rural status, of these hospitals that is being
affected by this transition. The higher wage indices that these
hospitals are receiving are also being taken into consideration in
determining whether they qualify for the out-migration adjustment
discussed in section III.I. of this preamble and the amount of any
adjustment.
FY 2007 will be the third year of this transition period. We will
continue to assign the wage index for the urban area in which the
hospital was previously located through FY 2007. In order to ensure
this provision remains budget neutral, we will continue to adjust the
standardized amount by a transition budget neutrality factor to account
for these hospitals. Doing so is consistent with the requirement of
section 1886(d)(3)(E) of the Act that any ``adjustments or updates [to
the adjustment for different area wage levels] * * * shall be made in a
manner that assures that aggregate payments * * * are not greater or
less than those that would have been made in the year without such
adjustment.''
Beginning in FY 2008, these hospitals will receive their statewide
rural wage index, although they will be eligible to apply for
reclassification by the MGCRB both during this transition period and in
subsequent years. These hospitals will be considered rural for
reclassification purposes.
Consistent with the FY 2005 and FY 2006 IPPS final rules, as we did
beginning in FY 2006, for FY 2007 we are providing that hospitals
receive 100 percent of their wage index based upon the CBSA
configurations. Specifically, we will determine for each hospital a
wage index for FY 2007 employing wage index data from FY 2003 hospital
cost reports and using the CBSA labor market definitions.

C. Occupational Mix Adjustment to the FY 2007 Wage Index

As stated earlier, section 1886(d)(3)(E) of the Act provides for
the collection of data every 3 years on the occupational mix of
employees for each short-term, acute care hospital participating in the
Medicare program, in order to construct an occupational mix adjustment
to the wage index, for application beginning October 1, 2004 (the FY
2005 wage index). The purpose of the occupational mix adjustment is to
control for the effect of hospitals'' employment choices on the wage
index. For example, hospitals may choose to employ different
combinations of registered nurses, licensed practical nurses, nursing
aides, and medical assistants for the purpose of providing nursing care
to their patients. The varying labor costs associated with these
choices reflect hospital management decisions rather than geographic
differences in the costs of labor.
Comment: Some commenters expressed concern about the occupational
mix adjustment relative to the proposed implementation of changes to
the DRG system. A few stated that the purpose of the occupational mix
adjustment is to ensure that hospitals are not paid through both the
wage index and the resource-based DRG system for the additional
resources needed for certain procedures. The commenters suggested that
the occupational mix adjustment is not necessary if a robust severity-
adjusted DRG system is implemented. Other commenters indicated that CMS
should consider deferring the implementation of the proposed hospital-
specific cost weighting methodology and severity DRGs until at least FY
2008 to alleviate the burden on hospitals that will be negatively
affected by a redistribution of Medicare payments under the new
occupational mix adjustment.
Response: We remind the commenters that an occupational mix
adjustment to the wage index is required under section 1886(d)(3)(E) of
the Act. Although we understand the commenters' concerns that some
hospitals may be negatively affected by the new occupational mix
adjustment, we also believe that it is important for us to move forward
with implementing changes in the DRG system that would recognize that
some more complex cases may require a higher DRG payment because the
services are provided by more highly skilled workers.
Comment: A few commenters opposed the occupational mix adjustment.
One commenter believed that the initial application of the occupational
mix adjustment had unintended results, benefiting fewer rural hospitals
and more large urban hospitals than anticipated. The commenter stated
that this problem has been compounded by the additional pressure from
the decision in Bellevue Hosp. Center v. Leavitt, 443 F.3d 163 (2nd
Cir. 2006), and, therefore, recommended that CMS approach Congress
about repealing the mandate for the occupational mix adjustment.
Another commenter indicated that the occupational mix survey is
confusing and burdensome to hospitals.
Response: As held in Bellevue Hosp. Center v. Leavitt, 443 F.3d 163
(2nd Cir. 2006), adjusting the wage index for occupational mix is
required by Congress. Therefore, commenters who believe that the
occupational mix should be eliminated would need to approach the
Congress with such concerns. As for the initial application of the
occupational mix, we believe the unexpected outcomes may have been due
to a combination of factors, including the newness of the survey and
changing trends in hospital employment. We have modified the survey for
2006, and these modifications should reduce the risk of reporting and
measurement errors. These modifications are based largely on
suggestions we received from MedPAC and the hospital community. We
understand the commenter's concern that completing the survey causes a
burden to hospitals; however, the statute requires us to collect data
on occupational mix every 3 years. In response to similar concerns
expressed for the 2003 survey, we streamlined the 2006 survey and
clarified the instructions in an effort to reduce the burden. We will
continue to work with hospitals and associations to explore ways to
improve the survey to ensure the accuracy of the occupational mix
adjustment while reducing the reporting burden for hospitals.
1. Development of Data for the FY 2007 Occupational Mix Adjustment
In our initial FY 2007 IPPS proposed rule (71 FR 23996), we
discussed our proposals for calculating the proposed FY 2007
occupational mix adjustment. We proposed to use the same CMS Wage Index
Occupational Mix Survey and Bureau of Labor Statistics (BLS) data that
we used for the FY 2005 and FY 2006 wage indices, with a few
exceptions. We also proposed to adjust 10 percent of the FY 2007 wage
index by a factor reflecting occupational mix. However on April 3,
2006, in Bellevue Hosp. Center v. Leavitt, 443 F.3d 163 (2nd Cir. 2006)
the Court of Appeals for the Second Circuit (the Court) ordered CMS to
apply the occupational mix adjustment to 100 percent of the wage index
effective for FY 2007. The Court ordered CMS to ``immediately * * *
collect data that are sufficiently robust to permit full application of
the

[[Page 48007]]

occupational mix adjustment.'' The Court also ordered that all ``data
collection and measurement and any other preparations necessary for
full application be completed by September 30, 2006, at which time the
agency is to immediately apply the adjustment in full.'' For more
information, we refer the readers to Bellevue Hosp. Center v. Leavitt,
443 F.3d 163, 179 (2nd Cir. 2006).
To comply with the Court's order, on April 21, 2006, we issued a
Joint-Signature Memorandum (JSM-06412) to all Medicare fiscal
intermediaries announcing our plans to collect new occupational mix
data from hospitals. The Joint-Signature Memorandum is available on the
CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS. Click on
``Wage Index Files'' and the link is titled: 2006 Occupational Mix
Survey--Interim Data Collection--CMS Memo to Fiscal Intermediaries.
On May 17, 2006, we also published in the Federal Register (71 FR
28644) a second proposed rule that proposed to revise the methodology
for calculating the occupational mix adjustment by applying the
occupational mix adjustment to 100 percent of the wage index using the
new occupational mix data collected from hospitals. The second proposed
rule also proposed to modify hospitals' procedures for withdrawing
requests to reclassify for the FY 2007 wage index and for supplementing
the FY 2008 reclassification application with official data used to
develop the FY 2007 wage index. In addition, we proposed to replace in
full the descriptions of the data and methodology that would be used in
calculating the occupational mix adjustment discussed in the initial FY
2007 IPPS proposed rule.
As stated earlier, section 1886(d)(3)(E) of the Act requires us to
conduct a new survey at least once every 3 years. On October 14, 2005,
we published a notice in the Federal Register (70 FR 60092) proposing
to use a new survey, the 2006 Medicare Wage Index Occupational Mix
Survey (the 2006 survey) to apply an occupational mix adjustment to the
FY 2008 wage index. In the proposed 2006 survey, we included several
modifications based on the comments and recommendations we received on
the 2003 survey, including (1) allowing hospitals to report their own
average hourly wage rather than using BLS data; (2) extending the
prospective survey period; and (3) reducing the number of occupational
categories but refining the subcategories for registered nurses.
We made the changes to the occupational categories in response to
MedPAC comments to the FY 2005 IPPS final rule (69 FR 49036).
Specifically, MedPAC recommended that CMS assess whether including
subcategories of registered nurses would result in a more accurate
occupational mix adjustment. MedPAC believed that including all
registered nurses in a single category may obscure significant wage
differences among the subcategories of registered nurses, for example,
the wages of surgical registered nurses and floor registered nurses may
differ. Also, to offset additional reporting burden for hospitals,
MedPAC recommended that CMS should combine the general service
categories that account for only a small percentage of a hospital's
total hours with the ``all other occupations'' category because most of
the occupational mix adjustment is correlated with the nursing general
service category.
In addition, in response to the public comments on the October 14,
2005 notice, we modified the 2006 survey. On February 10, 2006, we
published a Federal Register notice (71 FR 7047) that solicited
comments and announced our intent to seek OMB approval on the revised
occupational mix survey (Form CMS-10079 (2006)).
The revised 2006 survey provides for the collection of hospital-
specific wages and hours data, a 6-month prospective reporting period
(that is, January 1, 2006, through June 30, 2006), the transfer of each
general service category that comprised less than 4 percent of total
hospital employees in the 2003 survey to the ``all other occupations''
category (the revised survey focuses only on the mix of nursing
occupations), additional clarification of the definitions for the
occupational categories, an expansion of the registered nurse category
to include functional subcategories, and the exclusion of average
hourly rate data associated with advance practice nurses.
The 2006 survey includes only two general occupational categories:
Nursing and ``all other occupations.'' The nursing category has four
subcategories: registered nurses, licensed practical nurses, aides,
orderlies, attendants, and medical assistants. The registered nurse
subcategory includes two functional subcategories: management personnel
and staff nurses or clinicians. As indicated above, the 2006 survey
provides for a 6-month data collection period, from January 1, 2006
through June 30, 2006. However, we allowed flexibility for the
reporting period begin and end dates to accommodate some hospitals' bi-
weekly payroll and reporting systems. That is, the 6-month reporting
period must begin on or after December 25, 2005, and must end before
July 9, 2006.
To comply with the order of the court in Bellevue Hosp. Center v.
Leavitt, as discussed above, we proposed to collect new survey data,
instead of using the 2003 survey data proposed in the FY 2007 IPPS
proposed rule, to calculate the occupational mix adjustment for the FY
2007 wage index. Because hospitals were already collecting data for the
revised 2006 survey, we proposed to use the first 3 months of that data
(that is, from January 1, 2006, through March 31, 2006) to calculate
the FY 2007 occupational mix adjustment. In order to allow sufficient
time for hospitals, fiscal intermediaries, and CMS to collect, review,
and correct the new data, and for CMS to perform required analyses and
apply the new data in calculating the FY 2007 occupational mix
adjustment, we determined that it would be impossible for us to apply
the full 6 months of data by October 1, 2006.
Comment: Several commenters stated that hospitals were sometimes
unsure of the placement of certain employees on the survey. For
example, hospitals were uncertain as to the category that would include
surgical technicians and paramedics who are employed by the hospital
and who usually work in the emergency department. The commenters urged
CMS to evaluate where these employees should be placed on the survey
for future collections.
The commenters also stated that they agreed with CMS' efforts to
ensure consistent reporting by specifying the cost centers for
collecting nursing personnel data. They agreed that the cost centers
included on the survey are where the majority of nurses are employed
within hospitals. The commenters added that the use of the cost centers
significantly reduces the burden for hospitals by allowing them to
focus on only the listed cost centers. However, the commenters urged
CMS to consider refining the list of cost centers for future
collections. The commenters advised that every hospital has a different
method for attributing costs to cost centers; therefore, some hospitals
may have a few cost centers that contain a significant number of
nursing personnel that were not included in the current survey.
The commenters recommended that CMS work with the hospital
community to explore potential changes to the survey occupational
categories and cost centers. Even if they are warranted, the commenters
suggested that CMS should not make any changes to the ongoing survey
collection, as it would

[[Page 48008]]

necessitate the resubmission of the 1st quarter 2006 data to ensure
that both 1st and 2nd quarters could be used for the FY 2008 and the FY
2009 occupational mix adjustment.
Response: We appreciate the assistance we have already received
from the hospital community in developing the 2006 occupational mix
survey. On May 25, 2006, in response to questions from hospitals and
associations, we distributed supplemental instructions to the
intermediaries, hospitals (via the intermediaries), and national
hospital associations (and posted the instructions on our Web site) to
clarify the placement of nursing and nonnursing personnel on the
occupational mix survey. We will continue to work with MedPAC and the
hospital community to determine if changes to the occupational
categories and cost centers included on the survey are reasonable and
necessary for future collections. We agree with not changing the
instructions for the 2006 survey. As the commenters indicated, to
change the survey with the 1st quarter data collection already
completed would require substantial rework on the part of hospitals,
fiscal intermediaries, and CMS.
Comment: A few commenters expressed concern that hospitals in
States with mandatory nurse-staffing ratios for inpatient facilities
and hospitals that use higher levels of registered nurses to improve
the quality of care will be adversely affected by the occupational mix
adjustment. One commenter stated that the current survey is designed to
benefit parts of the country that make greater use of lesser skilled
nurses and allied health professionals, and to reduce payment in areas
that make greater use of registered nurses in nursing positions. The
commenter speculated that the occupational mix adjustment will likely
reduce the payments for its hospitals, thus reducing the quality of
care they can provide to Medicare beneficiaries.
Another commenter indicated that the wage index and occupational
mix adjustments penalize hospitals that invest in quality and
efficiency at the same time that Congress is trying to improve quality
and efficiency under the Medicare program. The commenter stated that
the effect of these adjustments on hospitals that use higher levels of
registered nurses reduces or eliminates the annual Medicare inflation
increase provided to address the increasing costs these hospitals
incur. The commenter further indicated that this reduction would not be
a savings to the program, but rather it would be a redistribution of
Medicare payments to hospitals that have not been as efficient or as
focused on improving the quality of care.
Response: As stated earlier, the statute requires implementation of
an occupational mix adjustment to the wage index. In addition, the
purpose of the occupational mix adjustment is to control the effect of
a hospital's employment mix on its average hourly wage for the wage
index. The adjustment standardizes the employment mix for hospitals so
that the wage index more accurately compares wage rates among labor
market areas for a constant mix of labor. As the commenters noted, the
occupational mix adjustment would lower the wage index for an area
employing a mix of more highly paid and skilled labor than the national
average. Although we understand the commenters' concerns regarding the
effect of the occupational mix on their areas' Medicare payments, we
disagree that the wage index and occupational mix adjustments penalize
hospitals that invest in quality and efficiency. We note that CMS is
moving toward adoption of a severity-based DRG system that will better
recognize severity of illness and provide improved payments to those
hospitals that need more highly skilled labor to care for more severely
ill patients. Even under the current system, the labor costs incurred
by hospitals that provide more highly skilled services are currently
reflected in the hospital's DRG payments and illustrated through a
higher case mix index. Reflecting the costs associated with more highly
skilled labor in both the case mix and the wage index is essentially
counting them twice.
To comply with the order of the court in Bellevue Hosp. Center v.
Leavitt, as a final policy, we are adopting our proposal to use the new
1st quarter 2006 survey data to calculate the occupational mix
adjustment for the FY 2007 wage index.
2. Timeline for the Collection, Review, and Correction of the
Occupational Mix Data
The Joint-Signature Memorandum (JSM-06412) that we issued on April
21, 2006, instructed all fiscal intermediaries to immediately alert the
hospitals they service to the changes in the schedule for submitting
the occupational mix data files.
The Joint-Signature Memorandum provided hospitals and fiscal
intermediaries with the revised schedule for the occupational mix
survey data that would be used in the FY 2007 wage index. The schedule
included deadlines for--
Hospitals to submit occupational mix data. The deadline
was June 1, 2006.
Fiscal intermediary review of the submitted data. The
deadline was June 22, 2006.
Availability of the submitted data on the CMS Web site.
The deadline was June 29, 2006.
Hospitals to submit requests to their fiscal
intermediaries for corrections to their interim occupational mix data.
The deadline was July 13, 2006.
Fiscal intermediaries to submit corrected interim
occupational mix survey data for the January 1, 2006, through March 31,
2006 period. The deadline was July 27, 2006.
We noted that it was critical that hospitals provide information
according to the dates provided in the schedule in order to be able to
appeal any disputed calculations at a later point to the Provider
Review Reimbursement Board (PRRB). The final deadline for the fiscal
intermediaries to make occupational mix data available to CMS was July
27, 2006. These data would reflect fiscal intermediary review and the
resolution of any errors or adjustments between the hospitals and
fiscal intermediary. Once these data are available on the CMS Web site,
changes to a hospital's occupational mix data would be allowed only in
those very limited situations involving an error by the fiscal
intermediary or CMS that the hospital could not have known about before
its review of the final occupational mix data file. Specifically,
neither the fiscal intermediary nor CMS would approve the following
types of requests:
Requests for occupational mix data corrections that were
submitted too late to be included in the data transmitted to CMS by
fiscal intermediaries on or before July 27, 2006.
Requests for correction of errors that were not, but could
have been, identified during the hospital's review of the June 29, 2006
occupational mix file.
Verified corrections to the occupational mix received by the fiscal
intermediaries and CMS (that is, by July 13, 2006) would be
incorporated into the final wage index for FY 2007, to be effective
October 1, 2006.
We created the process described above to resolve all substantive
occupational mix correction disputes before we finalize the wage and
occupational mix data for the FY 2007 payment rates. Accordingly,
hospitals that did not meet the procedural deadlines set forth above
will not be

[[Page 48009]]

afforded a later opportunity to submit occupational mix data
corrections or to dispute the fiscal intermediary's decision with
respect to requested changes. Specifically, our policy is that
hospitals that do not meet the procedural deadlines set forth above
will not be permitted to challenge later, before the PRRB, the failure
of CMS to make a requested data revision. (See W.A. Foote Memorial
Hospital v. Shalala, No. 99-CV-75202-DT (E.D. Mich.2001) and Palisades
General Hospital v. Thompson, No. 99-1230 (D.D.C. 2003)). We also refer
the reader to the FY 2000 IPPS final rule (64 FR 41513) for a
discussion of the parameters for appealing to the PRRB for wage index
data corrections.
We believe the occupational mix data correction process described
above provided hospitals with the opportunity to bring errors in their
occupational mix data to the fiscal intermediary's attention.
Because hospitals had access to the final occupational mix data by
June 29, 2006, we believe they had the opportunity to detect any data
entry or tabulation errors made by the fiscal intermediary or CMS
before the development and publication of the final FY 2007 wage index
and the implementation of the FY 2007 wage index on October 1, 2006. We
believe that if hospitals availed themselves of the opportunities
afforded to provide and make corrections to the occupational mix data,
the wage index implemented on October 1, 2006, will be accurate. In the
event that errors are identified by hospitals and brought to our
attention after July 13, 2006, we will only make mid-year changes to
the wage index in accordance with Sec. 412.64(k). For a detailed
discussion, see section III.J. of this preamble.
Comment: One commenter stated that the 6-month reporting period for
the 2006 survey, originally planned for the FY 2008 wage index, is an
improvement over the 2003 survey process. However, the commenter urged
CMS to initiate a survey with a full-year reporting period for the FY
2009 wage index.
Response: We appreciate the commenter's recognition of our efforts
to improve the occupational mix survey process. We also appreciate the
commenter's suggestion for expanding the survey reporting period to a
full year for the FY 2009 wage index. While we appreciate the
willingness expressed in the comment to collect a complete year of data
in order to achieve more accurate survey results, we note that
hospitals are currently obligated to collect data for the period April
1, 2006, to June 30, 2006, by August 31 in order for us to use 6 months
of data to apply the occupational mix adjustment for FY 2008. If we
were to use a full year of 2006 survey data to apply an occupational
mix adjustment for FY 2009, hospitals would have to submit data for the
last 6 months of calendar year 2006. Hospitals have already been
required to submit occupational mix survey data for two different 3-
month periods in 2006. At this time, we believe it would be burdensome
to require a third occupational mix data collection from hospitals for
2006 in order to apply the adjustment based on a full year of data for
FY 2009. We also note that collecting a full year of calendar year 2007
data, from January 1, 2007, through December 31, 2007, would not
provide enough time for a thorough review and correction period before
the FY 2009 proposed rule would be published in April 2008. Our normal
wage index review and correction process before the proposed rule
publication begins in early October and ends in late February. This
would mean that hospitals and intermediaries would have only
approximately 2 months, from January to late February, to review and
correct a year's worth of occupational mix data. We believe that such
an abbreviated review and correction period would not be in the
hospitals' best interest. However, we will consider expanding the
survey reporting period to a full year for a future collection.
Comment: Some commenters expressed concern that the 3-month survey
period for FY 2007 will lead to inaccurate results for several reasons:
Having no advance notice of the expedited data collection; some
hospitals had not yet begun, or had just begun, to plan for the 2006
survey data collection and had little or no resources available to
complete the survey for all or part of the 3-month time period; the new
survey, though improved over the previous survey, is more complicated
and requires more effort to complete; due to the short timeframe for
developing and submitting the data (4 months), some normal review
processes had to be eliminated by hospitals; not enough time was
allowed for the types of corrections that can be made during the annual
wage index survey process; due to the infrequent collection of the
occupational mix data, many hospitals may underestimate its importance;
there was not enough time for hospital groups to review the data for
individual hospitals in the area, a process that often raises questions
that leads to more accurate data.
Response: We understand the commenters' concerns about the
potential for inaccurate occupational mix survey data to be used due to
the abbreviated data collection and reporting periods. However, CMS has
established a process that we believe will maximize the opportunity for
accurate occupational mix data to be used to adjust area wage indices.
Hospitals were required to submit occupational mix survey data to their
fiscal intermediaries by June 1, 2006. CMS provided fiscal
intermediaries with a desk review program to assist in identifying
erroneous or aberrant data. Fiscal intermediaries then had 3 weeks (or
until June 22) to review the data and submit it to CMS. CMS made the
occupational mix survey data available on the CMS Web site on June 29
to facilitate review by hospitals, fiscal intermediaries, and others.
The June 29 posting of occupational survey data resulted in hospitals,
State hospital associations, wage index consultants, and others
identifying errors and other aberrant data. These parties then
initiated action to correct the occupational mix survey data by the
July 13 deadline. While there is no additional time available to
correct the survey data for the FY 2007 wage index, we will, however,
allow hospitals to submit any additional revisions and corrections to
both 3-month periods of data for the FY 2008 wage index. We strongly
encourage hospitals to take full advantage of the FY 2008 wage index
correction process. Hospitals will be notified early in the Fall of
2006 regarding the revision/correction process for the FY 2008 wage
index for both the cost report wage data and the 2006 occupational mix
survey data.
3. Calculation of the Occupational Mix Adjustment
In the May 17, 2006 proposed rule, we proposed a series of steps to
be used in calculating the FY 2007 occupational mix adjustment factor.
In this final rule, we are adopting the proposed steps with one minor
exception. In response to comments (discussed below), we have made an
adjustment to step 7 so that the percentage of worker salaries
attributable to the nursing category is based on salaries and not on
hours. For 2007, we will calculate the occupational mix adjustment
factor using the following steps:
Step 1--For each hospital, determine the percentage of the total
nursing category attributable to a nursing subcategory by dividing the
nursing subcategory hours by the total nursing category's hours
(registered nurse management personnel and registered nurse staff
nurses or clinicians are treated as separate nursing

[[Page 48010]]

subcategories). Repeat this computation for each of the five nursing
subcategories: Registered nurse management personnel, registered nurse
staff nurses or clinicians, licensed practical nurses; nursing aides,
orderlies, and attendants; and medical assistants.
Step 2--Determine a national average hourly rate for each nursing
subcategory by dividing a subcategory's total salaries for all
hospitals in the occupational mix survey database by the subcategory's
total hours for all hospitals in the occupational mix survey database.
Step 3--For each hospital, determine an adjusted average hourly
rate for each nursing subcategory by multiplying the percentage of the
total nursing category (from Step 1) by the national average hourly
rate for that nursing subcategory (from Step 2). Repeat this
calculation for each of the five nursing subcategories.
Step 4--For each hospital, determine the adjusted average hourly
rate for the total nursing category by summing the adjusted average
hourly rate (from Step 3) for each of the nursing subcategories.
Step 5--Determine the national average hourly rate for the total
nursing category by dividing total nursing category salaries for all
hospitals in the occupational mix survey database by total nursing
category hours for all hospitals in the occupational mix survey
database.
Step 6--For each hospital, compute the occupational mix adjustment
factor for the total nursing category by dividing the national average
hourly rate for the total nursing category (from Step 5) by the
hospital's adjusted average hourly rate for the total nursing category
(from Step 4).
If the hospital's adjusted average hourly rate is less than the
national average hourly rate (indicating the hospital employs a less
costly mix of nursing employees), the occupational mix adjustment
factor would be greater than 1.0000. If the hospital's adjusted average
hourly rate is greater than the national average hourly rate, the
occupational mix adjustment factor would be less than 1.0000.
Step 7--For each hospital, calculate the occupational mix adjusted
salaries and wage-related costs for the total nursing category by
multiplying the hospital's total salaries and wage-related costs (from
Step 5 of the unadjusted wage index calculation in section III.F. of
this preamble) by the percentage of the hospital's total workers
attributable to the total nursing category (using the occupational mix
survey data, this percentage is determined by dividing the hospital's
total nursing category salaries by the hospital's total salaries for
``nursing and all other'') and by the total nursing category's
occupational mix adjustment factor (from Step 6 above).
The remaining portion of the hospital's total salaries and wage-
related costs that is attributable to all other employees of the
hospital is not adjusted by the occupational mix. A hospital's all
other portion is determined by subtracting the hospital's nursing
category percentage from 100 percent.
Step 8--For each hospital, calculate the total occupational mix
adjusted salaries and wage-related costs for a hospital by summing the
occupational mix adjusted salaries and wage-related costs for the total
nursing category (from Step 7) and the portion of the hospital's
salaries and wage-related costs for all other employees (from Step 7).
To compute a hospital's occupational mix adjusted average hourly
wage, divide the hospital's total occupational mix adjusted salaries
and wage-related costs by the hospital's total hours (from Step 4 of
the unadjusted wage index calculation in section III.F. of this
preamble).
Step 9--To compute the occupational mix adjusted average hourly
wage for an urban or rural area, sum the total occupational mix
adjusted salaries and wage-related costs for all hospitals in the area,
then sum the total hours for all hospitals in the area. Next, divide
the area's occupational mix adjusted salaries and wage-related costs by
the area's hours.
Step 10--To compute the national occupational mix adjusted average
hourly wage, sum the total occupational mix adjusted salaries and wage-
related costs for all hospitals in the Nation, then sum the total hours
for all hospitals in the Nation. Next, divide the national occupational
mix adjusted salaries and wage-related costs by the national hours.
Step 11--To compute the occupational mix adjusted wage index,
divide each area's occupational mix adjusted average hourly wage (Step
9) by the national occupational mix adjusted average hourly wage (Step
10).
Step 12--To compute the Puerto Rico specific occupational mix
adjusted wage index, follow Steps 1 through 11 above.
Comment: MedPAC and a few other commenters noted that Step 7 of
CMS' proposed calculation for the occupational mix adjustment uses the
occupational mix survey's paid hours to determine the portion of the
salaries and wage-related costs to adjust for occupational mix (that
is, the total nursing portion) and the portion to remain unadjusted
(that is, the all other occupations portion). One of the commenters
stated that this approach was reasonable using the 2003 survey data
because hospital-specific paid salaries data were not collected.
However, the commenter also noted that the actual share of wages for
either the nursing category or the all other occupations category could
differ using an allocation that is based on paid hours compared to paid
salaries. The commenters suggested that, since the 2006 survey provides
for the collection of paid salaries data, CMS should use paid salaries
instead of paid hours to more accurately determine the wage costs that
should be adjusted for occupational mix and those that should not.
Response: As discussed above, we evaluated the commenters'
recommendation and agree that it is reasonable to use the occupational
mix survey salaries instead of hours in computing the portion of a
hospital's salaries and wage-related costs to adjust for occupational
mix and the portion to remain unadjusted. Accordingly, we revised Step
7 of the final calculation for the occupational mix adjustment to
reflect this change.
We received no other comments on the steps used in calculating the
occupational mix adjustment. As a final policy, we are adopting the
proposed calculation, with the change to Step 7, for the occupational
mix adjustment to the FY 2007 wage index. Also, to comply with the
order of the court in Bellevue Hosp. Center v. Leavitt, we will apply
this adjustment to 100 percent of the wage index.
The table below is an illustrative example of the final
occupational mix adjustment. (Note: We have revised this example from
that included in the proposed rule to reflect the change in step 7
discussed above. We have added an additional column for provider
occupational mix salaries and the Provider Percent by Total is
determined by dividing the hospital's total nurse salaries (and
separately, Total All Other Salaries) by Total Employee Salaries.
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Because the occupational mix adjustment is required by statute, all
hospitals that are subject to payments under the IPPS, or any hospital
that would be subject to the IPPS if not granted a waiver, must
complete the occupational mix survey, unless the hospital has no
associated cost report wage data that are included in the FY 2007 wage
index.
For the FY 2005 and FY 2006 final wage indices, we used the
unadjusted wage data for hospitals that did not submit occupational mix
survey data. For calculation purposes, this equates to applying the
national nursing mix to the wage data for these hospitals, because
hospitals having the same mix as the Nation would have an occupational
mix adjustment factor equaling 1.0000. However, an adjustment may not
be equitable in situations where the hospital has a higher or lower
than average occupational mix than the Nation as a whole. If the
hospital's occupational mix is higher than the average for the nation
as a whole, hospitals in other areas are disadvantaged by the hospital
not providing occupational mix information. If the hospital's
occupational mix is lower than the average for the Nation as a whole,
other hospitals in the same geographic area would be disadvantaged by
the hospital not providing the information.
In the FY 2005 and FY 2006 IPPS final rules (69 FR 49035 and 70 FR
47368), we noted that we would revisit this matter with subsequent
collections of the occupational mix data. In the May 17, 2006 proposed
rule, for the FY 2007 wage index, we proposed to use one of four
options for treating the occupational mix data for nonresponsive
hospitals: (1) Assign the hospital an occupational mix adjustment
factor of 1.0000 as we did for FY 2005 and FY 2006; (2) assign the
hospital the average occupational mix adjustment factor for its labor
market area; (3) assign the hospital the lowest occupational mix
adjustment factor for its labor market area; or (4) assign the hospital
the average occupational mix factor for similar hospitals, based on
factors such as, geographic location, bed size, teaching versus non-
teaching status and case mix. We requested comments on these or other
alternatives for equitably addressing the situation of hospitals that
are not responsive to the occupational mix survey.
Comment: A majority of the commenters believed that, in order for
the wage index to be computed accurately, it is critical for all IPPS
hospitals to complete the occupational mix survey. Many of the
commenters suggested that CMS should penalize hospitals that did not
submit a survey. However, the commenters indicated that no hospitals
should be penalized for not completing the survey for the 1st quarter
of FY 2006 (to be used in calculating the FY 2007 wage index) because
of the short notification and timeframe for the collection of that
data. Some suggested future penalties such as a 1 to 2 percent
reduction in the hospital's wage index value or a set percentage of the
standardized amount, whichever is administratively feasible. However,
the commenters also suggested that any penalty should be hospital-
specific and should not affect the wage index amounts for other
hospitals in the area. Commenters suggested that CMS should first
calculate the area wage index using proxy data for a nonresponsive
hospital's occupational mix adjustment, and then CMS should assess a
penalty on its wage index value or national standardized amount.
The commenters supported all of the ideas we raised in the proposed
rule except option 3. Commenters unanimously opposed assigning the
hospital the lowest occupational mix adjustment factor for its labor
market area, because they believed this option would have the most
negative impact on other hospitals in the labor market area. MedPAC
recommended option 4, to assign the hospital the average occupational
mix factor for similar hospitals, based on factors such as, geographic
location, bed size, teaching versus nonteaching status and case-mix.
MedPAC suggested other factors that CMS should consider, such as share
of ICU days and types of services offered. Some commenters recommended
an option that we did not describe. These commenters recommended that
CMS substitute data from the previous 2003 survey for hospitals that
did not submit 2006 survey data for the FY 2007 wage index.
Alternatively, several commenters recommended that CMS could substitute
the national average hourly wage (that is, option 1, an occupational
mix adjustment of 1.0000) for nonresponsive hospitals in calculating an
area's wage index, while others favored option 2 because it would have
the least affect on the labor market area. One commenter recommended
assigning the lower of the hospital's occupational mix adjustment in FY
2006 or the average for the hospital's labor market in FY 2007. The
commenter believed that the best proxy for a hospital's missing FY 2007
data is its FY 2006 occupational mix adjustment, even though there was
a change in the formula to calculate the FY 2007 adjustment. The
commenter stated that CMS should provide an exception for an exogenous
event affecting all hospitals in the labor market area. In this
scenario, the commenter recommended using the average FY 2007
adjustment.
Response: We agree with the commenters that hospitals that did not
respond to the occupational mix survey should not benefit from the
participation of others. We also agree that, due to the unusual
circumstances of the Court's order and the short timeframe that
hospitals were provided for completing and submitting their data, it
would not be fair to apply a penalty to nonresponsive hospitals for the
2007 wage index. However, we believe that section 1886(d)(5)(I)(i) of
the Act provides us with the authority to penalize hospitals that do
not submit occupational mix survey data. That section authorizes us to
provide for exceptions and adjustments to the payment amounts under
IPPS as the Secretary deems appropriate. We will give serious
consideration to applying a hospital-specific penalty such as those
suggested by the commenters if a hospital does not comply with
regulations requiring submission of occupational mix survey data in
future years. We will address this issue in the FY 2008 IPPS proposed
rule.
Regarding the treatment of data for nonresponsive hospitals, we
have chosen not to adopt option 3, because it would be punitive to
other hospitals in the area that submitted occupational mix data. We
also have not chosen option 1 because it does not provide an incentive
for hospitals to respond if they have a higher mix of employees than
the national average. We will not use data from the 2003 survey, as
some commenters suggested, because the 2007 wage index, we believe,
should be exclusively based on the newly collected data. In addition,
there was concern about the sufficient robustness of such data to
support 100 percent adjustments. We also do not believe it would be
entirely feasible, for 2007, to implement MedPAC's recommendation,
option 4, due to the wide range of parameters that could be used for
developing proxies for the missing hospitals and the fact that the
exact set of such parameters was not subject to comment. So many
variables might be of relevance that our selection of any particular
variables might be subject to controversy, and hospitals may wish to
have an opportunity to comment on the exact variables that would be
used. MedPAC's recommendation to add more variables to further refine
the analysis

[[Page 48014]]

could be so limiting as to result in few or no hospitals to use for
comparison.
For the FY 2007 wage index, we have adopted option 2--using the
average occupational mix adjustment for the labor market area. We
believe this option would have the least impact on the wage index for
other hospitals in the area and does not have the disadvantages of the
options discussed above. Although we believe this option is the best of
the ones we considered for nonresponsive hospitals for FY 2007, we
reserve the right to apply a different approach in future years,
including potentially penalizing nonresponsive hospitals. If there is
only one hospital in the labor market area, and that hospital failed to
submit occupational mix data, or, if there are no hospitals in the
labor market area, we would apply the national occupational mix factor
of 1.0000 in calculating the area's FY 2007 occupational mix adjusted
wage index.
Comment: Some commenters recommended that CMS allow hospitals that
failed to submit their 1st quarter data by June 1, 2006, to submit that
data when the 2nd quarter data is due (that is, by August 31, 2006).
The commenters also suggested that CMS allow hospitals that submitted
their 1st quarter data by June 1, an opportunity to correct that data
when the 2nd quarter data are due. The commenters indicated that
allowing hospitals to submit the data at this time would improve the
survey response rate and eliminate the need for penalties for hospitals
that would otherwise be nonresponsive and improve the accuracy of the
data for the FY 2008 and the FY 2009 occupational mix adjustment.
Response: We agree with the commenters. Hospitals that did not
submit occupational mix data for the 1st quarter of 2006 will be
permitted to submit 1st and 2nd quarter data by August 31. We included
the 1st quarter data for some hospitals that submitted survey data
after June 1. However, submissions that were received too late to
include in the FY 2007 occupational mix adjustment will be included in
the desk review process for the occupational mix adjustment for the FY
2008 wage index. As we previously mentioned, we will also allow
hospitals an opportunity to revise both their 1st quarter and 2nd
quarter 2006 occupational mix data for the FY 2008 wage index. Further,
we stated that we will notify hospitals early in the Fall of 2006
regarding the revision/correction process for the FY 2008 wage index
for both the cost report wage data and the 2006 occupational mix survey
data.

D. Worksheet S-3 Wage Data for the FY 2007 Wage Index

The FY 2007 wage index values (effective for hospital discharges
occurring on or after October 1, 2006, and before October 1, 2007) that
will be published separately from this final rule will be based on the
data collected from the Medicare cost reports submitted by hospitals
for cost reporting periods beginning in FY 2003 (the FY 2006 wage index
was based on FY 2002 wage data).
The FY 2007 wage index will include the following categories of
data associated with costs paid under the IPPS (as well as outpatient
costs):
Salaries and hours from short-term, acute care hospitals
(including paid lunch hours and hours associated with military leave
and jury duty).
Home office costs and hours.
Certain contract labor costs and hours (which includes
direct patient care, certain top management, pharmacy, laboratory, and
nonteaching physician Part A services).
Wage-related costs, including pensions and other deferred
compensation costs.
Consistent with the wage index methodology for FY 2006, the final
wage index for FY 2007 also will exclude the direct and overhead
salaries and hours for services not subject to IPPS payment, such as
SNF services, home health services, costs related to GME (teaching
physicians and residents) and certified registered nurse anesthetists
(CRNAs), and other subprovider components that are not paid under the
IPPS. The final FY 2007 wage index also will exclude the salaries,
hours, and wage-related costs of hospital-based rural health clinics
(RHCs), and Federally qualified health centers (FQHCs) because Medicare
pays for these costs outside of the IPPS (68 FR 45395). In addition,
salaries, hours, and wage-related costs of CAHs will be excluded from
the wage index, for the reasons explained in the FY 2004 IPPS final
rule (68 FR 45397).
Data collected for the IPPS wage index are also currently used to
calculate wage indices applicable to other providers, such as SNFs,
home health agencies, and hospices. In addition, they are used for
prospective payments to IRFs, IPFs, and LTCHs, and for hospital
outpatient services. We note that, in the IPPS rules, we do not address
comments pertaining to the wage indices for non-IPPS providers. Such
comments should be made in response to separate proposed rules for
those providers.
Comment: Several commenters addressed CMS' policy of excluding data
from CAHs when computing the wage index. They stated that, as of FY
2007, 1,191 CAHs (representing approximately 24 percent of all IPPS
hospitals in FY 2000, and approximately 55 percent of all rural
hospitals in FY 2000) have been removed from the wage index. The
commenters indicated that CAHs have lower average hourly wages than the
typical IPPS hospital and eliminating their data from the wage index
overstates the national average hourly wage by an estimated 0.707
percent. They added that increases in the national average hourly wage,
in turn, are offset with the application of a negative budget
neutrality adjustment, which understates IPPS operating payments
according to the commenters. The commenters believed that the
artificial increase in the national average hourly wage has lowered the
budget neutrality adjustment by an estimated $1.52 billion over 5 years
(2003-2007). The commenters stated that CMS should apply a one-time
positive budget neutrality adjustment in FY 2007 to compensate for the
prior underpayments. They did not believe similar future adjustments
would be necessary because very few hospitals are expected ``to convert
to CAH status now that the necessary provider designation is no longer
an option.''
Other commenters asked that CMS use estimated CAH wage data to
compute the FY 2007 wage index, and that an occupational mix factor of
1.0000 be assigned to these hospitals. The commenters noted that MedPAC
has recommended that CAH data be included in the wage index, at least
in computing the national average hourly wage. The commenters asserted
that because CAHs in rural areas still compete with rural IPPS
hospitals for scarce resources, their data should be included in the
wage index.
Commenters also requested that CMS obtain wage data from CAHs and
subject that data to the same rigorous review by the fiscal
intermediaries as is done for IPPS hospitals. Another commenter
suggested that an alternative to including the CAHs in wage index would
be to not factor in any increases in the national average hourly wage
that are attributable to the removal of CAHs' wage data.
Response: In the August 1, 2003 final rule (68 FR 45397-8), we
explained the reasons for our decision to remove CAH data from the wage
index immediately upon conversion to CAH status, even if the hospital
was paid under the IPPS during the cost reporting period used in
calculating the current fiscal year's wage index. The primary reason
for excluding CAHs from the wage index was that

[[Page 48015]]

they are a separate provider type and are unique compared to other
short term, acute care hospitals with respect to factors such as their
location and bed size. We discussed the payment impact, mentioning the
substantial negative impact CAHs typically have on the wage indexes in
the areas where they are located, and the minimal impact they have on
other areas. We also stated that we would not be holding other
hospitals' payments harmless for this change, consistent with our
general wage index policy.
As the commenters indicated, in the FY 2006 IPPS final rule, we
addressed a comment from MedPAC recommending that data from CAHs be
included in the wage index (70 FR 47370). MedPAC had recommended that
CMS begin collecting wage data from CAHs in 2005. Although we agree
with MedPAC that CAHs have recently become more similar to other rural
hospitals, in structure, location, and services provided, largely due
to changes in the CAH statute resulting from section 405 of Pub. L.
108-173 (MMA), the wage index must be based on data from ``subsection
(d),'' short-term, acute care hospitals, consistent with section
1886(d)(3)(E) of the Act. Therefore, we cannot use any wage data
collected from CAHs in the IPPS wage index. Because Pub. L. 108-173 was
enacted at the end of calendar year 2003, it would not affect the wage
index at least until FY 2008, which would be computed from cost
reporting periods beginning in FY 2004. Accordingly, we continue to
believe that it has been prudent policy to remove the wage data for
hospitals that later became CAHs from the wage index.
We do not believe that the elimination of these data has resulted
in an overstated national average hourly wage, nor has the budget
neutrality adjustment been inappropriately reduced. The national
average hourly wage appropriately reflects only those wages paid by
IPPS hospitals. To determine the budget neutrality adjustment for FY
2007, we equate IPPS payments using the FY 2006 and FY 2007 wage
indices using FY 2005 MedPAR data that excludes any hospitals that
became CAHs as of February 17, 2006. The calculation excludes CAHs from
the determination of IPPS payments using both the FY 2006 and FY 2007
wage indices so the budget neutrality adjustment reflects only
information from IPPS hospitals and is not overstated. Consequently, we
will not apply a one-time positive budget neutrality adjustment in FY
2007.

E. Verification of Worksheet S-3 Wage Data

The wage data for the final FY 2007 wage index will be obtained
from Worksheet S-3, Parts II and III of the FY 2003 Medicare cost
reports. Instructions for completing the Worksheet S-3, Parts II and
III are in the Provider Reimbursement Manual, Part I, sections 3605.2
and 3605.3. The data file used to construct the wage index will include
FY 2003 data submitted to us as of June 28, 2006. As in past years, we
will perform an intensive review of the wage data, mostly through the
use of edits designed to identify aberrant data.
We asked our fiscal intermediaries to revise or verify data
elements that resulted in specific edit failures. While some of the
edits failures were resolved, we did remove the wage data of some
hospitals from the final FY 2007 wage index. For the final FY 2007 wage
index in this final rule, we removed the data for 229 hospitals from
our database: 189 hospitals designated as CAHs by 7 or more days prior
to the posting of the preliminary February public use file, and 30
hospitals were low Medicare utilization hospitals or failed edits that
could not be corrected because the hospitals terminated the program or
changed ownership. In addition, we removed the wage data for 10
hospitals with incomplete or inaccurate data resulting in zero or
negative, or otherwise aberrant, average hourly wages. As a result, the
final FY 2007 wage index is calculated based on FY 2003 wage data from
3,570 hospitals.
In constructing the final FY 2007 wage index, we will include the
wage data for facilities that were IPPS hospitals in FY 2003, even for
those facilities that have since terminated their participation in the
program as hospitals, as long as those data do not fail any of our
edits for reasonableness. We believe that including the wage data for
these hospitals is, in general, appropriate to reflect the economic
conditions in the various labor market areas during the relevant past
period. However, we exclude the wage data for CAHs as discussed in 68
FR 45397.
Section 4410 of Pub. L. 105-33 provides that, for the purposes of
section 1886(d)(3)(E) of the Act, for discharges occurring on or after
October 1, 1997, the area wage index applicable to any hospital that is
located in an urban area of a State may not be less than the area wage
index applicable to hospitals located in rural areas in the State. This
provision is commonly referred to as the ``rural floor.'' In the August
11, 2004 IPPS final rule (69 FR 49109), we discussed situations where a
State has only urban areas and no geographically rural areas, or a
State has geographically rural areas but no IPPS hospitals are located
in those rural areas. As a result, these States did not have rural IPPS
hospitals from which to compute and apply a ``rural floor.'' In that
final rule, we developed a policy for imputing a ``rural floor'' for
these States, effective for the FYs 2005, 2006, and 2007 wage indices,
so that a ``rural floor'' could be applicable to IPPS urban hospitals
in those States in the same manner that a ``rural floor'' is applicable
to IPPS urban hospitals in States that have IPPS rural hospitals. We
revised the regulations at Sec. 412.64(h) to describe the methodology
for computing the imputed ``rural floors'' for these States and to
define an all-urban State. Specifically, Sec. 412.64(h)(5) defines an
all-urban State as ``a State with no rural areas * * * or a State in
which there are no hospitals classified as rural. A State with rural
areas and with hospitals reclassified as rural under Sec. 412.103 is
not an all-urban State.''
We have received questions as to what area wage index CMS would
apply in the instance where a new rural IPPS hospital opens in a State
that has an imputed ``rural floor'' because it has rural areas but had
no hospitals classified as rural. In addition, we have been asked
whether a new IPPS hospital could submit its wages and hours data to be
used in computing the wage index, even though the hospital did not file
a cost report as an IPPS provider for the cost report base year that is
used in calculating that wage index.
A new hospital can be an entirely new facility that did not exist
before, or it can be a hospital that participated in Medicare under a
previous provider number, but has acquired a new Medicare provider
number (such as when a CAH converts to IPPS status, or vice versa). As
a new IPPS hospital (in this case, rural), the hospital would not yet
have filed any wages and hours data on a Medicare cost report. Even in
the situation where a new IPPS hospital previously participated in
Medicare as a non-IPPS provider, wages and hours data collected as a
non-IPPS provider would not be suitable for calculating an IPPS wage
index because section 1886(d)(3)(E) of the Act specifies that the wage
index must be based on data from ``subsection (d)'' hospitals. Thus,
CMS could not include wages and hours from a period during which a
hospital was not an IPPS provider. Furthermore, even once the hospital
files its first Medicare cost report under the new IPPS provider
number, that first cost report is not used in computing the wage index
for the hospital's geographic

[[Page 48016]]

area until 4 years later (for example, we use the 2003 data to compute
the wage index for FY 2007). Therefore, if a new rural IPPS hospital
opens in a State that has an imputed ``rural floor'' and has rural
areas, for FY 2007, the hospital would receive the imputed ``rural
floor'' as its wage index. The imputed rural floor is set to expire on
September 30, 2007. However, we expect that we would address the 2008
implications for a new rural hospital that is the only rural hospital
in the State in the FY 2008 proposed rule.
Comment: Two commenters stated that CMS' above policy conflicts
with the policy of excluding the wage data of IPPS hospitals that
convert to CAH status. The commenters also asserted that in the years
before the hospital's own wage data is used, the rural hospital will be
paid at the imputed rural floor, which they contend is unrelated to the
hospital's own labor market costs. The commenters also asserted that if
the new rural hospital's average hourly wage is greater than the
imputed rural floor, the hospital would suffer underpayments until its
index could be based upon its own wage data. One commenter suggested
that, at least for CAHs converting to IPPS status, CMS should use wage
data filed by the hospital when it was a CAH.
The commenters urged CMS to include the wage data of a new rural
IPPS hospital in the wage index ``as soon as a full year's cost report
with the hospital operating as a PPS hospital is available.''
Response: We disagree with the commenters. Our consistent policy is
that new hospitals must first develop their wage data and have it
reviewed by our fiscal intermediaries prior to the wage data being
included in the wage index. The submission and review process requires
a 4-year period, in order to allow time for all hospitals to complete
and submit their wage data for the fiscal year, for the fiscal
intermediaries to review the data, for the fiscal intermediaries to
present the results of their review to hospitals, for hospitals to
review any potential errors in the wage index files, for us to resolve
any disputes between the fiscal intermediary and the hospital, and
finally, for the final wage indices to be calculated and published in
advance of the fiscal year. For a discussion of the wage data review
and correction process, refer to section III.J. of this preamble. This
policy applies to all new hospitals, not just rural hospitals. Although
a new rural IPPS hospital that previously was a CAH may be willing to
provide CMS with wage data from the period during which it was a CAH,
the wage index must be based on data from IPPS hospitals, consistent
with section 1886(d)(3)(E) of the Act. A CAH is not an IPPS hospital;
thus, we cannot include the hospital's wages and hours from the period
during which it was a CAH. Indeed, even if a CAH previously existed as
an IPPS hospital (that is, it previously was an IPPS hospital,
converted to CAH status, and then converted back to IPPS status), its
historical wage data would have been submitted from years prior to the
cost reports used to calculate the FY 2007 wage index (that is, the FY
2003 cost reports). If a CAH converts back to IPPS status in FY 2007,
there would be no wage data for the FY 2007 wage index because such a
provider did not file Medicare cost reports as an IPPS provider in FY
2003.
We recognize, as one commenter pointed out that in the past we have
noted the importance of including ``all'' available wage data in the
wage index calculation. However, our past statements to this effect
were discussing the inclusion of all IPPS hospital wage data, not data
from non-IPPS hospitals. In the FY 2003 IPPS final rule (67 FR 50023),
we discussed our policy of including data from IPPS hospitals that have
since closed. We stated that such data should be included because,
``any hospital that is in operation during the data collection period
used to calculated the wage index should be included in the database,
since the hospital's data reflect conditions occurring in that labor
market area during the period surveyed.'' Our statement, however, was
directed at the inclusion of IPPS hospital data--not the inclusion of
data from hospitals that were not IPPS hospitals during the data
collection period. As stated earlier, section 1886(d)(3)(E) of the Act
requires the wage index to be based upon a survey of ``subsection (d)
hospitals.''
Lastly, we think it is false logic to state that our policy
excluding data from hospitals that become CAHs necessarily requires
inclusion of data from hospitals that switch from CAH status to IPPS
status. As stated in the FY 2003 IPPS final rule, we exclude hospitals
that convert to CAH status because our analysis showed that the wage
data for these hospitals, in general, are significantly different from
other short-term hospitals (68 FR 45397). CAHs that convert to IPPS
status, in contrast, could not, under the statute, be included in the
wage index survey because they are not IPPS hospitals at the time of
the survey.
Comment: A few commenters recommended that CMS propose now to
extend the imputed rural floor to coincide with the rural floor
established under section 4410 of Pub. L. 105-33, in order to place all
50 states on a level playing field.
Response: As stated above, our policy for imputing a ``rural
floor'' is effective for the FYs 2005, 2006, and 2007 wage indices. We
will determine the appropriateness of extending that policy beyond FY
2007 and state our proposal in the FY 2008 proposed rule. Commenters
will be have sufficient time during the FY 2008 IPPS comment period to
assess and comment on such a proposal.
Comment: One commenter suggested that CMS should select one
national contractor as part of the Medicare Administrative Contractor
(MAC) bidding process (provided for under section 1847A of the Act as
added by section 911 of Pub. L. 108-173) to do wage index reviews. The
commenter believed that the use of the MAC process to solicit a single
``national'' contractor would ensure that the wage data and
occupational mix data reviews are handled consistently and accurately,
so that all hospitals are subject to the same policy interpretations.
The commenter noted the importance of the wage index in determining
Medicare payments to hospitals and indicated that any variation among
contractors in the handling of hospitals' wage index data could be
detrimental to hospitals in certain geographic regions. The commenter
also stated that the inclusion of a 100 percent occupational mix
adjustment intensifies the need for a contractor approach going
forward.
Response: We appreciate the suggestion and will consider it as we
develop our program acquisition strategies.

F. Computation of the FY 2007 Unadjusted Wage Index

The method used to compute the FY 2007 wage index without an
occupational mix adjustment follows:
Step 1--As noted above, we based the FY 2007 wage index on wage
data reported on the FY 2003 Medicare cost reports. We gathered data
from each of the non-Federal, short-term, acute care hospitals for
which data were reported on the Worksheet S-3, Parts II and III of the
Medicare cost report for the hospital's cost reporting period beginning
on or after October 1, 2002, and before October 1, 2003. In addition,
we include data from some hospitals that had cost reporting periods
beginning before October 2002 and reported a cost reporting period
covering all of FY 2003. These data are included because no other data
from these hospitals would be available for

[[Page 48017]]

the cost reporting period described above, and because particular labor
market areas might be affected due to the omission of these hospitals.
However, we generally describe these wage data as FY 2003 data. We note
that, if a hospital had more than one cost reporting period beginning
during FY 2003 (for example, a hospital had two short cost reporting
periods beginning on or after October 1, 2002, and before October 1,
2003), we include wage data from only one of the cost reporting
periods, the longer, in the wage index calculation. If there was more
than one cost reporting period and the periods were equal in length, we
include the wage data from the later period in the wage index
calculation.
Step 2--Salaries--The method used to compute a hospital's average
hourly wage excludes certain costs that are not paid under the IPPS. In
calculating a hospital's average salaries plus wage-related costs, we
subtract from Line 1 (total salaries) the GME and CRNA costs reported
on Lines 2, 4.01, 6, and 6.01, the Part B salaries reported on Lines 3,
5 and 5.01, home office salaries reported on Line 7, and exclude
salaries reported on Lines 8 and 8.01 (that is, direct salaries
attributable to SNF services, home health services, and other
subprovider components not subject to the IPPS). We also subtract from
Line 1 the salaries for which no hours were reported. To determine
total salaries plus wage-related costs, we add to the net hospital
salaries the costs of contract labor for direct patient care, certain
top management, pharmacy, laboratory, and nonteaching physician Part A
services (Lines 9 and 10), home office salaries and wage-related costs
reported by the hospital on Lines 11 and 12, and nonexuded area wage-
related costs (Lines 13, 14, and 18).
We note that contract labor and home office salaries for which no
corresponding hours are reported are not included. In addition, wage-
related costs for nonteaching physician Part A employees (Line 18) are
excluded if no corresponding salaries are reported for those employees
on Line 4.
Step 3--Hours--With the exception of wage-related costs, for which
there are no associated hours, we compute total hours using the same
methods as described for salaries in Step 2.
Step 4--For each hospital reporting both total overhead salaries
and total overhead hours greater than zero, we then allocate overhead
costs to areas of the hospital excluded from the wage index
calculation. First, we determine the ratio of excluded area hours (sum
of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours
(Line 1 minus the sum of Part II, Lines 2, 3, 4.01, 5, 5.01, 6, 6.01,
7, and Part III, Line 13 of Worksheet S-3). We then compute the amounts
of overhead salaries and hours to be allocated to excluded areas by
multiplying the above ratio by the total overhead salaries and hours
reported on Line 13 of Worksheet S-3, Part III. Next, we compute the
amounts of overhead wage-related costs to be allocated to excluded
areas using three steps: (1) We determine the ratio of overhead hours
(Part III, Line 13) to revised hours (Line 1 minus the sum of Lines 2,
3, 4.01, 5, 5.01, 6, 6.01, 7, 8, and 8.01); (2) we compute overhead
wage-related costs by multiplying the overhead hours ratio by wage-
related costs reported on Part II, Lines 13, 14, and 18; and (3) we
multiply the computed overhead wage-related costs by the above excluded
area hours ratio. Finally, we subtract the computed overhead salaries,
wage-related costs, and hours associated with excluded areas from the
total salaries (plus wage-related costs) and hours derived in Steps 2
and 3.
Step 5--For each hospital, we adjust the total salaries plus wage-
related costs to a common period to determine total adjusted salaries
plus wage-related costs. To make the wage adjustment, we estimate the
percentage change in the employment cost index (ECI) for compensation
for each 30-day increment from October 14, 2002, through April 15,
2004, for private industry hospital workers from the BLS' Compensation
and Working Conditions. We use the ECI because it reflects the price
increase associated with total compensation (salaries plus fringes)
rather than just the increase in salaries. In addition, the ECI
includes managers as well as other hospital workers. This methodology
to compute the monthly update factors uses actual quarterly ECI data
and assures that the update factors match the actual quarterly and
annual percent changes. The factors used to adjust the hospital's data
were based on the midpoint of the cost reporting period, as indicated
below.

Midpoint of Cost Reporting Period
------------------------------------------------------------------------
Adjustment
After Before factor
------------------------------------------------------------------------
10/14/2002.................................... 11/15/2002 1.06058
11/14/2002.................................... 12/15/2002 1.05679
12/14/2002.................................... 01/15/2003 1.05304
01/14/2003.................................... 02/15/2003 1.04915
02/14/2003.................................... 03/15/2003 1.04513
03/14/2003.................................... 04/15/2003 1.04108
04/14/2003.................................... 05/15/2003 1.03713
05/14/2003.................................... 06/15/2003 1.03325
06/14/2003.................................... 07/15/2003 1.02948
07/14/2003.................................... 08/15/2003 1.02584
08/14/2003.................................... 09/15/2003 1.02231
09/14/2003.................................... 10/15/2003 1.01878
10/14/2003.................................... 11/15/2003 1.01510
11/14/2003.................................... 12/15/2003 1.01127
12/14/2003.................................... 01/15/2004 1.00743
01/14/2004.................................... 02/15/2004 1.00367
02/14/2004.................................... 03/15/2004 1.00000
03/14/2004.................................... 04/15/2004 0.99644
------------------------------------------------------------------------

For example, the midpoint of a cost reporting period beginning
January 1, 2003, and ending December 31, 2003, is June 30, 2003. An
adjustment factor of 1.02948 would be applied to the wages of a
hospital with such a cost reporting period. In addition, for the data
for any cost reporting period that began in FY 2003 and covered a
period of less than 360 days or more than 370 days, we annualize the
data to reflect a 1-year cost report. Dividing the data by the number
of days in the cost report and then multiplying the results by 365
accomplishes annualization.
Step 6--Each hospital is assigned to its appropriate urban or rural
labor market area before any reclassifications under section
1886(d)(8)(B), section 1886(d)(8)(E), or section 1886(d)(10) of the
Act. Within each urban or rural labor market area, we add the total
adjusted salaries plus wage-related costs obtained in Step 5 for all
hospitals in that area to determine the total adjusted salaries plus
wage-related costs for the labor market area.
Step 7--We divide the total adjusted salaries plus wage-related
costs obtained under both methods in Step 6 by the sum of the
corresponding total hours (from Step 4) for all hospitals in each labor
market area to determine an average hourly wage for the area.
Step 8--We add the total adjusted salaries plus wage-related costs
obtained in Step 5 for all hospitals in the Nation and then divide the
sum by the national sum of total hours from Step 4 to arrive at a
national average hourly wage. Using the data as described above, the
national average hourly wage is $29.6521.
Step 9--For each urban or rural labor market area, we calculate the
hospital wage index value, unadjusted for occupational mix, by dividing
the area average hourly wage obtained in Step 7 by the national average
hourly wage computed in Step 8.
Step 10--Following the process set forth above, we develop a
separate Puerto Rico-specific wage index for purposes of adjusting the
Puerto Rico standardized amounts. (The national Puerto Rico
standardized amount is

[[Page 48018]]

adjusted by a wage index calculated for all Puerto Rico labor market
areas based on the national average hourly wage as described above.) We
add the total adjusted salaries plus wage-related costs (as calculated
in Step 5) for all hospitals in Puerto Rico and divided the sum by the
total hours for Puerto Rico (as calculated in Step 4) to arrive at an
overall average hourly wage of $13.0915 for Puerto Rico. For each labor
market area in Puerto Rico, we calculate the Puerto Rico-specific wage
index value by dividing the area average hourly wage (as calculated in
Step 7) by the overall Puerto Rico average hourly wage.
Step 11--Section 4410 of Pub. L. 105-33 provides that, for
discharges on or after October 1, 1997, the area wage index applicable
to any hospital that is located in an urban area of a State may not be
less than the area wage index applicable to hospitals located in rural
areas in that State. (For all-urban States, we establish an imputed
floor (69 FR 49109). Furthermore, this wage index floor is to be
implemented in such a manner as to ensure that aggregate IPPS payments
are not greater or less than those that would have been made in the
year if this section did not apply. For FY 2007, the areas affected by
this provision, after the occupational mix adjustment is applied, will
be by a footnote in Tables 4A-1 and 4A-2 that are to be published
separate from this final rule.

G. Implementation of the FY 2007 Occupational Mix Adjustment to the
Wage Index

For the final FY 2005 and FY 2006 wage indices, we used a blend of
the occupational mix adjusted wage index and the unadjusted wage index.
Specifically, we adjusted 10 percent of the FY 2005 and FY 2006 wage
index adjustment factor by a factor reflecting occupational mix. We
refer readers to the FY 2005 IPPS final rule at 69 FR 49052 and the FY
2006 IPPS final rule at 70 FR 47376 for a detailed discussion of the
blended wage index.
As discussed in section III.C. of this preamble, for FY 2007, we
are applying the occupational mix adjustment to 100 percent of the FY
2007 wage index. We will calculate the occupational mix adjustment
using the first 3 months of the 2006 survey data, using the methodology
described in section III.C. of this preamble.
Comment: One commenter suggested that, for the FY 2007 wage index,
CMS should apply the Bellevue Hosp. Center v. Leavitt decision only to
hospitals in the Second Circuit, and not on a nationwide basis. For
States outside the Second Circuit, the commenter recommended that CMS
apply the occupational mix adjustment at 10 percent, as it did in FYs
2005 and 2006. The commenter noted that there is a CMS (then HCFA)
precedent for applying a court's order to only hospitals in the States
in the Circuit where the decision was rendered, citing HCFA Ruling 97-
2, pertaining to the inclusion of ``eligible but unpaid'' Medicaid days
in the DSH calculation.
Response: The commenter did not address whether the 10-percent
adjustment would use the new 2006 occupational mix survey data or the
prior 2003 data. Therefore, it is not clear how the commenter is
suggesting we apply the policy. Nevertheless, we believe the most
appropriate policy is to apply the occupational mix adjustment
uniformly nationwide, using the same survey data and a 100 percent
adjustment for all hospitals. It is important to keep in mind that the
occupational mix adjustment is an adjustment to the wage index factor
that represents the ratio of a labor market area's average hourly wage
to the national average hourly wage. DSH adjustments, in contrast, are
not based upon individual hospital information compared to a national
average. If we were to use separate sets of data depending upon
geographic location, hospitals located in the Second Circuit would be
compared to one national benchmark, whereas hospitals located elsewhere
would be compared to a different one. We believe such a policy would
undermine the calculation of the wage index that is a relative measure
of differences in area wage levels that uses a uniform national
baseline for purposes of comparison. In addition, we note that the New
York labor market area includes counties located both inside and
outside of the Second Circuit. The New York-White Plains-Wayne, NY-NJ
CBSA includes three New Jersey Counties: Bergen, Hudson, and Passaic
Counties. These counties are located in the Third Circuit, not the
Second Circuit. Therefore, applying the Bellevue Hosp. Center v.
Leavitt decision only in the Second Circuit would result in two area
wage index values for the New York labor market area, adding further
complexity to the wage index calculation.
Comment: One commenter believed that section 1886(d)(6) of the Act
requires CMS to publish its actual wage tables and other factors by
August 1. The commenter also cited the Balanced Budget Act of 1997
(BBA), Pub. L. 105-33, under which Congress moved the deadline in
section 1886(d)(6) of the Act from September 1 to August 1. The
commenter contended that Congress would not have needed to move the
deadline if the final data were not to be published as of August 1.
Response: The relevant language of section 1886(d)(6)of the Act
states: ``The Secretary shall provide for publication in the Federal
Register, on or before August 1 before each fiscal year * * * of a
description of the methodology and data used in computing the adjusted
DRG prospective payment rates under this subsection.'' We believe the
plain language of section 1886(d)(6) of the Act requires merely a
description of the data and methodology that are used to compute the
IPPS rates and does not require actual publication of the rates.
With respect to the comments about the statutory change that moved
the deadline for the IPPS rule from September 1 to August 1, section
4644 of the BBA was an amendment to conform section 1886(h)(6) of the
Act to the requirements of the Congressional Review Act. The
Congressional Review Act does not allow a major rule to go into effect
for 60-days unless there is an act of Congress allowing the rule to go
into effect earlier. The publication date in section 1886(d)(6) of the
Act was changed accordingly so that the IPPS final rule could take
effect no sooner than 60 days after publication, or by the beginning of
the Federal fiscal year on October 1 without Congress having to act.
However, Congress did not alter section 1886(d)(6) of the Act with
respect to the information that is to be included in the final rule. We
agree with the commenter that it is our usual practice to publish the
wage tables and other factors along with the final rule consistent with
42 CFR 412.8. However, due to our implementation of the Bellevue Hosp.
Center v. Leavitt decision, it is not possible to follow this procedure
for FY 2007. In the proposed rule, we explained our intent to post the
FY 2007 occupational mix adjusted wage index tables and related impacts
on the CMS Web site after we publish the FY 2007 IPPS final rule, and
in advance of October 1, 2006 (71 FR 28652). We have modified 42 CFR
412.8 accordingly. The change we are making to Sec. 412.8 is a
procedural rule that we are making effective upon publication.
Comment: A few commenters expressed concern that the new
occupational mix adjustment may have a negative impact on some
hospitals, and they would not know how they are affected until the
final FY 2007 wage index tables are published. Some commenters
recommended that CMS allow hospitals more time to review their data,
comment on the survey results, and make adjustments and/or

[[Page 48019]]

revisions to their occupational mix survey data. One commenter
requested that CMS publish the occupational mix regulations and data as
an interim final rule with a full 60-day comment period so that
providers will have an opportunity to comment further. Another
commenter urged CMS to consider either delaying the implementation of
the occupational mix adjustment, or consider allowing retroactive
correction to any errors discovered after October 1. A few commenters
recommended that CMS use its discretionary authority to ``smooth out''
the impact of this change on adversely affected hospitals and apply a
multiyear transition of the occupational mix survey data.
Response: As we indicated above, while we understand the
commenters' concerns about the potential for inaccurate occupational
mix survey data to be used due to the abbreviated data collection and
reporting periods, we believe we have established a review and
correction process that is intended to minimize errors. We cannot delay
the implementation of, or transition in, the occupational mix
adjustment for the FY 2007 wage index because the Second Circuit Court
required that all ``data collection and measurement and any other
preparations necessary for full application should be complete by
September 30, 2006, at which time we instruct the agency to immediately
apply the adjustment in full.'' Also, we believe that the 30-day
comment period after the May 17, 2006 publication of the amended FY
2007 IPPS proposed rule provided ample opportunity for the public to
comment on the new occupational mix survey data and adjustment for the
FY 2007 wage index. Hospitals are usually afforded 60 days to comment
on the entire IPPS rule. In addition, we cannot allow retroactive
changes to the FY 2007 wage index for errors discovered after October
1, 2006, unless a hospital's correction request meets the strict
criteria of Sec. 412.64(k)(1) of our existing regulations (also see
section III.J. of this preamble). However, as previously mentioned, we
will allow hospitals an additional opportunity to revise both their 1st
quarter and 2nd quarter 2006 occupational mix data for the FY 2008 wage
index.
Comment: One commenter recommended that CMS publish the corrected
1st quarter 2006 survey data as a public use file prior to the
publication of the final FY 2007 wage index tables.
Response: Intermediaries are required to transmit the corrected 1st
quarter 2006 survey data to CMS by July 27, 2007. Unfortunately, due to
our short timeframe after July 27 for reviewing the survey data and
computing, analyzing, and publishing the final FY 2007 occupational mix
adjusted wage index, we cannot publish the corrected 1st quarter survey
data before we publish final FY 2007 wage index tables.
The final wage index values for FY 2007 (except those for hospitals
receiving wage index adjustments under section 505 of Pub. L. 108-173)
will be included in Tables 4A-1, 4A-2, 4B, 4C-1, 4C-2, and 4F that are
to be posted on our Web site and published in a Federal Register notice
subsequent to this final rule.
Tables 3A and 3B in the separate issuance will list the 3-year
average hourly wage for each labor market area before the redesignation
of hospitals, using the wages included in the calculation for the FYs
2005, 2006, 2007 wage indices. Table 3A in the separate issuance will
list these data for urban areas and Table 3B in the separate issuance
will list these data for rural areas. In addition, Table 2 in the
separate issuance will include the adjusted average hourly wage for
each hospital from the FY 2001 and FY 2002 cost reporting periods, as
well as the FY 2003 period used to calculate the FY 2007 wage index.
The 3-year averages will be calculated by dividing the sum of the
dollars (adjusted to a common reporting period using the method
described previously) across all 3 years, by the sum of the hours. If a
hospital is missing data for any of the previous years, its average
hourly wage for the 3-year period will be calculated based on the data
available during that period.
The final wage index values in Tables 4A-1, 4A-2, 4B, 4C-1, 4C-2,
and 4F and the average hourly wages in Tables 2, 3A, and 3B to be
posted on our Web site and published in a subsequent Federal Register
notice will include the occupational mix adjustment.

H. Revisions to the Wage Index Based on Hospital Redesignations

1. General
Under section 1886(d)(10) of the Act, the Medicare Geographic
Classification Review Board (MGCRB) considers applications by hospitals
for geographic reclassification for purposes of payment under the IPPS.
Hospitals must apply to the MGCRB to reclassify by September 1 of the
year preceding the year during which reclassification is sought.
Generally, hospitals must be proximate to the labor market area to
which they are seeking reclassification and must demonstrate
characteristics similar to hospitals located in that area. The MGCRB
issues its decisions by the end of February for reclassifications that
become effective for the following fiscal year (beginning October 1).
The regulations applicable to reclassifications by the MGCRB are
located in Sec. Sec. 412.230 through 412.280.
Section 1886(d)(10)(D)(v) of the Act provides that, beginning with
FY 2001, a MGCRB decision on a hospital reclassification for purposes
of the wage index is effective for 3 fiscal years, unless the hospital
elects to terminate the reclassification. Section 1886(d)(10)(D)(vi) of
the Act provides that the MGCRB must use the 3 most recent years'
average hourly wage data in evaluating a hospital's reclassification
application for FY 2003 and any succeeding fiscal year.
Section 304(b) of Pub. L. 106-554 provides that the Secretary must
establish a mechanism under which a statewide entity may apply to have
all of the geographic areas in the State treated as a single geographic
area for purposes of computing and applying a single wage index, for
reclassifications beginning in FY 2003. The implementing regulations
for this provision are located at Sec. 412.235.
Section 1886(d)(8)(B) of the Act requires the Secretary to treat a
hospital located in a rural county adjacent to one or more urban areas
as being located in the MSA to which the greatest number of workers in
the county commute, if the rural county would otherwise be considered
part of an urban area under the standards for designating MSAs and if
the commuting rates used in determining outlying counties were
determined on the basis of the aggregate number of resident workers who
commute to (and, if applicable under the standards, from) the central
county or counties of all contiguous MSAs. In light of the new CBSA
definitions and the Census 2000 data that we implemented for FY 2005
(69 FR 49027), we undertook to identify those counties meeting these
criteria. The eligible counties are identified under section III.H.4.
of this preamble.
2. Effects of Reclassification/Redesignation
Section 1886(d)(8)(C) of the Act provides that the application of
the wage index to redesignated hospitals is dependent on the
hypothetical impact that the wage data from these hospitals would have
on the wage index value for the area to which they have been
redesignated. These requirements for determining the wage index values
for redesignated hospitals is applicable both to the hospitals located
in rural counties deemed urban under section 1886(d)(8)(B) of the Act
and hospitals

[[Page 48020]]

that were reclassified as a result of the MGCRB decisions under section
1886(d)(10) of the Act. In compliance with section 1886(d)(8)(C) of the
Act, as well as with the rules CMS has established by regulation, the
wage index values were determined by considering the following:
If including the wage data for the redesignated hospitals
would reduce the wage index value for the area to which the hospitals
are redesignated by 1 percentage point or less, the area wage index
value determined exclusive of the wage data for the redesignated
hospitals applies to the redesignated hospitals.
If including the wage data for the redesignated hospitals
reduces the wage index value for the area to which the hospitals are
redesignated by more than 1 percentage point, the area wage index
determined inclusive of the wage data for the redesignated hospitals
(the combined wage index value) applies to the redesignated hospitals.
If including the wage data for the redesignated hospitals
increases the wage index value for the urban area to which the
hospitals are redesignated, both the area and the redesignated
hospitals receive the combined wage index value. Otherwise, the
hospitals located in the urban area receive a wage index excluding the
wage data of hospitals redesignated into the area.
The wage data for a reclassified urban hospital is
included in both the wage index calculation of the area to which the
hospital is reclassified (subject to the rules described above) and the
wage index calculation of the urban area where the hospital is
physically located.
Rural areas whose wage index values would be reduced by
excluding the wage data for hospitals that have been redesignated to
another area continue to have their wage index values calculated as if
no redesignation had occurred (otherwise, redesignated rural hospitals
are excluded from the calculation of the rural wage index).
The wage index value for a redesignated rural hospital
cannot be reduced below the wage index value for the rural areas of the
State in which the hospital is located.
In cases where urban hospitals have reclassified to rural
areas under 42 CFR 412.103, the urban hospital wage data are: (a)
Included in the rural wage index calculation, unless doing so would
reduce the rural wage index; and (b) included in the urban area where
the hospital is physically located.
3. FY 2007 MGCRB Reclassifications
Under section 1886(d)(10) of the Act, the MGCRB considers
applications by hospitals for geographic reclassification for purposes
of payment under the IPPS. The specific procedures and rules that apply
to the geographic reclassification process are outlined in Sec.
412.230 through Sec. 412.280.
In the FY 2007 IPPS proposed rule (71 FR 24377), we identified
hospitals that have reclassifications effective in FY 2007. As
specified in Sec. 412.273, hospitals that have been reclassified by
the MGCRB are permitted to withdraw an application for reclassification
or terminate an existing 3-year reclassification for FY 2007. The
request must be received by the MGCRB within 45 days of publication of
the IPPS proposed rule.
However, as a result of our compliance with the Bellevue Hosp.
Center v. Leavitt court decision, as discussed earlier, we will be
recalculating wage indices using new occupational mix data and applying
the occupational mix to 100 percent of the wage index. Wage tables in
the IPPS proposed rule did not include the new survey data, nor did
they adjust 100 percent for occupational mix. Thus, the data that
hospitals might have used to make withdrawal or termination decisions
are obsolete. The necessary data (including wage indices and out-
migration adjustments) hospitals generally utilize in evaluating
whether to withdraw or terminate a reclassification will not be
available until after this IPPS final rule has been published.
Therefore, in the May 17, 2006 proposed rule (71 FR 28650), in this
limited circumstance, we suspended the 45-day deadline and have
established the new procedure described below to withdraw from or
terminate reclassifications for FY 2007. Some hospitals may have
adhered to the established process and notified the MGCRB of their
decision to withdraw or terminate a reclassification, in accordance
with Sec. 412.273, before publication of that proposed rule.
Because hospitals made these decisions based on information in the
FY 2007 IPPS proposed rule that is now obsolete, in the May 17, 2006
proposed rule, we proposed that the MGCRB not act on these withdrawal
or termination requests. Instead, we have applied the following
procedures for withdrawal and termination determinations for all
hospital reclassifications for FY 2007. We will make reclassification
withdrawal and termination determinations based on what we perceive
would be most advantageous to the hospital. We will use our best
efforts to determine what would provide the hospital with the highest
possible wage index. Specifically, we will choose among: section 508
reclassifications, section 1886(d)(10) reclassifications, section 505
out-migration adjustments, and certain other changes to the wage index
(for example, the special exceptions policy explained in the FY 2005
IPPS rule (69 FR 49105) or Lugar status if we determine that it is in
the hospital's best interest to waive the Lugar/section 1886(d)(8)(B)
redesignation in order to receive the section 505 out-migration
adjustment).
We also will make the final occupational mix adjusted wage indices
and out-migration adjustments and our interim decisions on hospital
reclassifications available to the public in the Federal Register and
on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp after August 1, 2006, and before October 1, 2006. We will
allow hospitals a 30-day period from the date the final data and our
interim decisions are made available on the Web site to notify CMS in
writing, with a copy to the MGCRB, of whether they wish to reverse the
reclassification decision made by CMS or to choose another
reclassification for which they are eligible. We will make every effort
to provide the final data before September 1, 2006, so that the 30-day
period to make these determinations will end before October 1, 2006,
and no retroactive adjustments will be necessary. Requests to reverse a
decision made by CMS must be received, in writing, no later 30 days
after the data are made available on the CMS Web site at the following:
Division of Acute Care, C4-08-06, 7500 Security Boulevard,
Baltimore, MD 21244, Attn: Marianne Myers;
AND a copy to
Medicare Geographic Classification Review Board, 2520 Lord
Baltimore Drive, Suite L, Baltimore, MD 21244-2670.
Prior to FY 2004, hospitals had been able to apply to be
reclassified for purposes of either the wage index or the standardized
amount. Section 401 of Pub. L. 108-173 established that all hospitals
will be paid on the basis of the large urban standardized amount,
beginning with FY 2004. Consequently, all hospitals are paid on the
basis of the same standardized amount, which made such
reclassifications moot. Although there could still be some benefit in
terms of payments for some hospitals under the DSH payment adjustment
for operating IPPS, section 402 of Pub. L. 108-173 equalized DSH
payment adjustments for rural and urban hospitals, with the exception
that the rural DSH adjustment is capped at 12 percent (except that
rural referral centers and, effective for discharges

[[Page 48021]]

occurring on or after October 1, 2006, MDHs have no cap). (A detailed
discussion of this application appears in section IV.I. of the preamble
of the FY 2005 IPPS final rule (69 FR 49085). The exclusion of MDHs
from the 12 percent DSH cap under Pub. L. 109-171 is discussed under
section IV.F.4. of this preamble.)
Comment: Several commenters asked CMS to clarify its position on
withdrawing reclassifications as well as the timeframe of submitting
applications for geographic reclassification.
Response: The normal timetable of 45 days after the publication of
the proposed rule for hospitals to withdraw or terminate a
reclassification under section 508 of Pub. L. 108-173, section
1886(d)(10) of the Act, or section 1886(d)(8)(B) of the Act (in order
to receive a section 505 out-migration adjustment) does not apply for
FY 2007. For this reason, any withdrawal or termination requests
submitted to the MGCRB and/or CMS following publication of the FY 2007
IPPS proposed rule are not reflected in the reclassification tables
shown in this final rule.
We will make best efforts to give each hospital the highest FY 2007
wage index after reviewing applicable data using the 100 percent
occupational adjusted wage index. Hospitals will have 15 days from the
display date of this final rule to notify us of whether, in the absence
of viewing the final 100 percent occupational mix-adjusted wage index
data, they wish to choose a particular wage index for which they are
eligible (such as to definitively maintain a reclassification that they
received or to definitively terminate or withdraw from a
reclassification). Written requests to maintain, terminate, or withdraw
a reclassification, in the absence of viewing the final wage tables,
must be received at the following address no later than 5 p.m. EDT 15
days from the date this final rule appears on public display at the
Office of the Federal Register:
Division of Acute Care, C4-08-06, 7500 Security Boulevard,
Baltimore, MD 21244, Attn: Marianne Myers.
If we do not receive notice from the hospital within such 15-day
timeframe, we will make determinations for the hospital using our best
efforts to determine what we believe results in the highest wage index
for the hospital. If applicable, we will give the hospital its home
wage index with the out-migration adjustment, if that option results in
the highest wage index. In some cases, we may determine that it is most
advantageous for a hospital to terminate its Lugar/section
1886(d)(8)(B) reclassification in order to receive the out-migration
adjustment. Because this termination would result in the hospital
losing urban status, we will separately publish a table identifying
these hospitals that move from Lugar/urban status to rural status with
the out-migration adjustment. For section 508 hospital individual
reclassifications, we may make half-year terminations/withdrawals on
behalf of hospitals, using the procedures identified in our proposed
rule. That is, for a section 508 hospital that applied for an
individual reclassification under section 1886(d)(10), we would give
the section 508 hospital the higher of its home wage index, section 508
or 1886(d)(10) wage index for the first half of the year. For the
second half of the year, we would give the section 508 hospital the
higher of its home wage index or its section 1886(d)(10)
reclassification. (However, in no case could such a hospital receive
its home wage indes for the first half of the year and its MGCRB
reclassification for the second half, or vice versa. For group
reclassifications, we will apply the higher of the home wage index or
the section 1886(d)(10) reclassification for the entire year. For group
reclassifications that include a section 508 hospital, we will apply
the decision that was on the MGCRB application for groups that followed
the procedural rules (that is, the group either: (1) Withdrew from its
section 1886(d)(10) reclassification for the first half of FY 2007 and
will only receive a second half FY 2007 section 1886(d)(10)
reclassification; or (2) the group is reclassified under section
1886(d)(10) of the Act for the entire year and the section 508 hospital
withdraws from its section 508 reclassification for the first half of
the FY 2007) unless the group informs us differently after publication
of the final occupational mix adjusted wage indices. Groups that
include a section 508 hospital will be able to make decisions as a
group, separately for the first and second half of the year. Thus, the
group may decide to withdraw a section 1886(d)(10) reclassification
that would be applicable only for the second half of FY 2007. Again,
however, in no case could a group whose 508 hospital chose to waive its
508 reclassification (and therefore accept the MGCRB reclassification
for the first half of FY 2007) withdraw its MGCRB reclassification for
the first half of the year, but not the second (or vice versa).
We acknowledge that hospitals may base withdrawal/termination
decisions on factors other than simply what results in the highest wage
index for the upcoming fiscal year. For this reason, we will allow a
hospital to change a decision that is made by CMS on its behalf.
Hospitals should note that we will not recalculate the wage indices or
budget neutrality factors after the final notice announcing the FY 2007
occupational mix adjusted wage indices. That is, we will not further
recalculate the wage indices or standardized amounts based on hospital
decisions that further revise decisions made by CMS on the hospitals'
behalf.
We will post the final occupational mix adjusted wage indices, out-
migration adjustments, and our interim decisions on hospital
reclassification on the CMS Web site, as discussed above, sometime
after August 1, 2006, and before October 1, 2006. We will post the same
tables on the CMS Web site that appear in the Federal Register final
notice of the occupational mix adjusted wage indices to be published
after August 1, 2006 and before October 1, 2006. Hospitals will be able
to determine the reclassification decision applied on their behalf by
reviewing Tables 9A through 9C for hospitals that are reclassified
under section 1886(d)(8)(B) of the Act, section 508 of Pub. L. 108-173,
or section 1886(d)(10) of the Act. The applicable wage index for these
hospitals will be found on Table 2. If a hospital is not listed in
Tables 9A through 9C, CMS will have made a decision not to reclassify
the hospital and its home wage index will apply, including the effect
of the out-migration adjustment, will be found in Table 2. The
applicable out-migration adjustment for the hospital will be found in
Table 4J. As indicated above, we will separately publish a table
identifying hospitals that we move from Lugar/urban status to rural
status with the out-migration adjustment in Table 9D. Hospitals will
have 30 days after the data are placed on the CMS Web site to submit,
in writing, whether they wish to revise the decision made on their
behalf by CMS. Written requests to revise a decision made on behalf of
a hospital by CMS must be received by CMS no later than 5 p.m. EDT,
with a copy sent to the MGCRB, within 30 days from the date the
information appears on the CMS Web site at http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp at the following addresses:
Division of Acute Care, C4-08-06, 7500 Security Boulevard,
Baltimore, MD 21244, Attn: Marianne Myers;
AND a copy to
Medicare Geographic Classification Review Board, 2520 Lord
Baltimore Drive, Suite L, Baltimore, MD 21244-2670.

[[Page 48022]]

If a hospital fails to notify CMS that it is revising a
determination made on its behalf within 30 days from the date the
information appears on the CMS Web site, the interim decision made by
CMS on the hospital's behalf will be final for FY 2007. Therefore, if
CMS makes a decision on a hospital's behalf to terminate or withdraw a
reclassification and the hospital does not reverse or modify CMS's
decision, we will deem the hospital's reclassification is withdrawn or
terminated. Once CMS's decision on the hospital's behalf is in effect,
it will be treated in the same manner as if the hospital(s) had made
the reclassification decision on its own. Thus, for example, because a
hospital cannot have overlapping reclassifications, if we decide a
hospital should accept a FY 2007 through 2009 reclassification, any
reclassification the hospital previously had for FY 2006 through 2008
would be permanently terminated.
Section 1886(d)(10)(C)(ii) of the Act indicates that a hospital
requesting a change in geographic classification for a FY must submit
its application to the MGCRB no later than the first day of the 13-
month period ending on September 30 of the preceding fiscal year. Thus,
the statute requires that FY 2008 reclassification applications be
submitted to the MGCRB no later than September 1, 2006. Hospitals must
submit applications for geographic reclassification for FY 2008 by
September 1, 2006. However, because the 3-year average hourly wage of
hospitals for the FY 2007 final rule will not be available by the
September 1, 2006 deadline for submitting FY 2008 geographic
reclassification applications, we will allow hospitals to supplement
incomplete reclassification applications with the official data used to
develop the FY 2007 wage index after filing their initial application.
As indicated above, the 3-year average hourly wage information that
will be necessary for FY 2008 reclassification applications will be
available subsequent to this final rule after August 1, and before
October 1, 2006. The information will be available on the CMS Web site
at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp and then
accessing the page titled ``MGCRB Reclassification Data for FY 2008
Applications.'' Applications and other information about MGCRB
reclassifications may be obtained via the CMS Internet Web site at:
http://www.cms.hhs.gov/mgcrb/, or by calling the MGCRB at (410) 786-
1174. The mailing address of the MGCRB is: 2520 Lord Baltimore Drive,
Suite L, Baltimore, MD 21244-2670.
Comment: Several commenters requested a revision in the geographic
reclassification rules so that in the future the occupational mix
adjusted average hourly wage data is used as a point of comparison for
eligibility. The commenters believed this change would make
reclassification decisions consistent with the new basis for the wage
index. The commenters also suggested that hospitals should not be
allowed to apply for reclassification if they do not provide complete
occupational mix data.
Response: Section 1886(d)(10)(D)(vi) of the Act requires the MGCRB
to use the 3-year average of the average hourly wage data from the most
recently published hospital wage survey data, as well as the preceding
2 fiscal years' published surveys. Because our published surveys of
wage data include adjustments for occupational mix (10 percent in FYs
2005 and 2006 and 100 percent in FY 2007), the MGCRB uses mix-adjusted
wage indices in making reclassification decisions. Therefore, for FY
2008 reclassification applications, the MGCRB will use the average of
the average hourly wages for FYs 2005 through 2007. These data will be
based on an occupational mix adjustment of 10 percent for FY 2005 and
FY 2006 and 100 percent for FY 2007.
With respect to the comment about precluding hospitals that did not
submit occupational mix survey data from reclassifying, we believe that
due to the unusual circumstances of the Court's order and the short
timeframe that hospitals were provided for completing and submitting
their data, it would not be fair to apply a penalty to non-responsive
hospitals for the 2008 reclassification applications. However, as
indicated earlier, we will give serious consideration to applying some
sort of penalty in the future if a hospital does not comply with
regulations requiring submission of occupational mix survey data.
4. Procedures for Hospitals Applying for Reclassification Effective in
FY 2008 and Reinstating Reclassifications in FY 2008
Applications for FY 2008 reclassifications are due to the MGCRB by
September 1, 2006. We note that this deadline also applies for
canceling a previous wage index reclassification withdrawal or
termination under Sec. 412.273(d). As we noted in the FY 2007 IPPS
proposed rule (71 FR 24083), applications and other information about
MGCRB reclassifications may be obtained, beginning in mid-July 2006, on
the CMS Web site at: http://www.cms.hhs.gov/mgcrb/, or by calling the
MGCRB at (410) 786-1174.
The MGCRB, in evaluating a hospital's request for reclassification
for FY 2008 for the wage index, must utilize the official data used to
develop the FY 2007 wage index. The wage data used to support the
hospital's wage comparisons must be from the CMS hospital wage survey.
Generally, the source for these data is the IPPS final rule to be
published on or before August 1, 2006. However, as we stated earlier,
the wage tables identifying the 3-year average hourly wage of hospitals
will not be available in time to include them in this FY 2007 IPPS
final rule. Therefore, we will make the data available subsequent to
August 1, 2006, but before October 1, 2006.
Section 1886(d)(10)(C)(ii) of the Act indicates that a hospital
requesting a change in geographic classification for a FY must submit
its application to the MGCRB not later than the first day of the 13-
month period ending on September 30 of the preceding FY. Thus, the
statute requires that FY 2008 reclassification applications be
submitted to the MGCRB by no later than September 1, 2006. For this
reason, hospitals must file an FY 2008 reclassification application by
the September 1, 2006 deadline even though the average hourly wage data
used to develop the final FY 2007 wage indices will not yet be
available. We note that, under Sec. 412.256(c), the MGCRB must review
applications and notify the hospital if it determines that the
application is incomplete. We are also allowing hospitals 30 days from
the date the final wage data is posted on the CMS Web site to request
to cancel a withdrawal or termination in order to reinstate its
reclassification for FY 2008 or FY 2009, or both fiscal years. Requests
to cancel a withdrawal or termination in order to reinstate a
hospital's reclassification for FY 2008 or FY 2009, or both fiscal
years, should be forwarded to the following addresses:
Medicare Geographic Classification Review Board, 2520 Lord
Baltimore Drive, Suite L, Baltimore, MD 21244-2670;
AND a copy to
Division of Acute Care, C4-08-06, 7500 Security Boulevard,
Baltimore, MD 21244, Attn: Marianne Myers.
As outlined in Sec. 412.256(c)(2), hospitals with incomplete
applications have the opportunity to request that the MGCRB grant a
hospital that has submitted an application by September 1, 2006, an
extension beyond September 1, 2006, to complete its application. Thus,
while hospitals must file an application for reclassification to the

[[Page 48023]]

MGCRB by September 1, 2006, they will be able to supplement the
reclassification application with official data used to develop the FY
2007 wage index after filing their initial application. We are
providing that hospitals file a supplement to the reclassification
application with official data used to develop the FY 2007 wage index
no later than 30 days after the data are made available on the CMS Web
site. These same rules will apply to canceling a withdrawal or
termination of a geographic reclassification.
5. FY 2007 Redesignations Under Section 1886(d)(8)(B) of the Act
Beginning October 1, 1988, section 1886(d)(8)(B) of the Act
required us to treat a hospital located in a rural county adjacent to
one or more urban areas as being located in the MSA if certain criteria
were met. Prior to FY 2005, the rule was that a rural county adjacent
to one or more urban areas would be treated as being located in the MSA
to which the greatest number of workers in the county commute, if the
rural county would otherwise be considered part of an urban area under
the standards published in the Federal Register on January 3, 1980 (45
FR 956) for designating MSAs (and New England County Metropolitan Areas
(NECMAs)), and if the commuting rates used in determining outlying
counties (or, for New England, similar recognized areas) were
determined on the basis of the aggregate number of resident workers who
commute to (and, if applicable under the standards, from) the central
county or counties of all contiguous MSAs (or NECMAs). Hospitals that
met the criteria using the January 3, 1980 version of these OMB
standards were deemed urban for purposes of the standardized amounts
and for purposes of assigning the wage data index.
Effective beginning FY 2005, we use OMB's 2000 CBSA standards and
the Census 2000 data to identify counties qualifying for redesignation
under section 1886(d)(8)(B) for the purpose of assigning the wage index
to the urban area. We provided the chart below with the listing of the
rural counties designated as urban under section 1886(d)(8)(B) of the
Act in the FY 2007 IPPS proposed rule. For discharges occurring on or
after October 1, 2006, hospitals located in the first column of this
chart will be redesignated for purposes of using the wage index of the
urban area listed in the second column.
The following table is subject to revision if CMS decides it is
most advantageous for a county to waive its county Lugar status in
order for a hospital within that county to receive a section 505 out-
migration adjustment.

Rural Counties Redesignated as Urban Under Section 1886(d)(8)(B) of the
Act
[Based on CBSAs and Census 2000 data]
------------------------------------------------------------------------
Rural County CBSA
------------------------------------------------------------------------
Cherokee, AL........................... Rome, GA.
Macon, AL.............................. Auburn-Opelika, AL.
Talladega, AL.......................... Anniston-Oxford, AL.
Hot Springs, AR........................ Hot Springs, AR.
Windham, CT............................ Hartford-West Hartford-East
Hartford, CT.
Bradford, FL........................... Gainesville, FL.
Flagler, FL............................ Deltona-Daytona Beach-Ormond
Beach, FL.
Hendry, FL............................. West Palm Beach-Boca Raton-
Boynton, FL.
Levy, FL............................... Gainesville, FL.
Walton, FL............................. Fort Walton Beach-Crestview-
Destin, FL.
Banks, GA.............................. Gainesville, GA.
Chattooga, GA.......................... Chattanooga, TN-GA.
Jackson, GA............................ Atlanta-Sandy Springs-Marietta,
GA.
Lumpkin, GA............................ Atlanta-Sandy Springs-Marietta,
GA.
Morgan, GA............................. Atlanta-Sandy Springs-Marietta,
GA.
Peach, GA.............................. Macon, GA.
Polk, GA............................... Atlanta-Sandy Springs-Marietta,
GA.
Talbot, GA............................. Columbus, GA-AL.
Bingham, ID............................ Idaho Falls, ID.
Christian, IL.......................... Springfield, IL.
DeWitt, IL............................. Bloomington-Normal, IL.
Iroquois, IL........................... Kankakee-Bradley, IL.
Logan, IL.............................. Springfield, IL.
Mason, IL.............................. Peoria, IL.
Ogle, IL............................... Rockford, IL.
Clinton, IN............................ Lafayette, IN.
Henry, IN.............................. Indianapolis-Carmel, IN.
Spencer, IN............................ Evansville, IN-KY.
Starke, IN............................. Gary, IN.
Warren, IN............................. Lafayette, IN.
Boone, IA.............................. Ames, IA.
Buchanan, IA........................... Waterloo-Cedar Falls, IA.
Cedar, IA.............................. Iowa City, IA.
Allen, KY.............................. Bowling Green, KY.
Assumption Parish, LA.................. Baton Rouge, LA.
St. James Parish, LA................... Baton Rouge, LA.
Allegan, MI............................ Holland-Grand Haven, MI.
Montcalm, MI........................... Grand Rapids-Wyoming, MI.
Oceana, MI............................. Muskegon-Norton Shores, MI.
Shiawassee, MI......................... Lansing-East Lansing, MI.
Tuscola, MI............................ Saginaw-Saginaw Township North,
MI.
Fillmore, MN........................... Rochester, MN.
Dade, MO............................... Springfield, MO.

[[Page 48024]]

Pearl River, MS........................ Gulfport-Biloxi, MS.
Caswell, NC............................ Burlington, NC.
Granville, NC.......................... Durham, NC.
Harnett, NC............................ Raleigh-Cary, NC.
Lincoln, NC............................ Charlotte-Gastonia-Concord, NC-
SC.
Polk, NC............................... Spartanburg, NC.
Los Alamos, NM......................... Santa Fe, NM.
Lyon, NV............................... Carson City, NV.
Cayuga, NY............................. Syracuse, NY.
Columbia, NY........................... Albany-Schenectady-Troy, NY.
Genesee, NY............................ Rochester, NY.
Greene, NY............................. Albany-Schenectady-Troy, NY.
Schuyler, NY........................... Ithaca, NY.
Sullivan, NY........................... Poughkeepsie-Newburgh-
Middletown, NY.
Wyoming, NY............................ Buffalo-Niagara Falls, NY.
Ashtabula, OH.......................... Cleveland-Elyria-Mentor, OH.
Champaign, OH.......................... Springfield, OH.
Columbiana, OH......................... Youngstown-Warren-Boardman, OH-
PA.
Cotton, OK............................. Lawton, OK.
Linn, OR............................... Corvallis, OR.
Adams, PA.............................. York-Hanover, PA.
Clinton, PA............................ Williamsport, PA.
Greene, PA............................. Pittsburgh, PA.
Monroe, PA............................. Allentown-Bethlehem-Easton, PA-
NJ.
Schuylkill, PA......................... Reading, PA.
Susquehanna, PA........................ Binghamton, NY.
Clarendon, SC.......................... Sumter, SC.
Lee, SC................................ Sumter, SC.
Oconee, SC............................. Greenville, SC.
Union, SC.............................. Spartanburg, SC.
Meigs, TN.............................. Cleveland, TN.
Bosque, TX............................. Waco, TX.
Falls, TX.............................. Waco, TX.
Fannin, TX............................. Dallas-Plano-Irving, TX.
Grimes, TX............................. College Station-Bryan, TX.
Harrison, TX........................... Longview, TX.
Henderson, TX.......................... Dallas-Plano-Irving, TX.
Milam, TX.............................. Austin-Round Rock, TX.
Van Zandt, TX.......................... Dallas-Plano-Irving, TX.
Willacy, TX............................ Brownsville-Harlingen, TX.
Buckingham, VA......................... Charlottesville, VA.
Floyd, VA.............................. Blacksburg-Christiansburg-
Radford, VA.
Middlesex, VA.......................... Virginia Beach-Norfolk-Newport
News, VA.
Page, VA............................... Harrisonburg, VA.
Shenandoah, VA......................... Winchester, VA-WV.
Island, WA............................. Seattle-Bellevue-Everett, WA.
Mason, WA.............................. Olympia, WA.
Wahkiakum, WA.......................... Longview, WA.
Jackson, WV............................ Charleston, WV.
Roane, WV.............................. Charleston, WV.
Green, WI.............................. Madison, WI.
Green Lake, WI......................... Fond du Lac, WI.
Jefferson, WI.......................... Milwaukee-Waukesha-West Allis,
WI.
Walworth, WI........................... Milwaukee-Waukesha-West Allis,
WI.
------------------------------------------------------------------------

As in the past, hospitals redesignated under section 1886(d)(8)(B)
of the Act are also eligible to be reclassified to a different area by
the MGCRB. Affected hospitals are permitted to compare the reclassified
wage index for the labor market area in Tables 4C-1 and 4C-2 into which
they have been reclassified by the MGCRB to the wage index for the area
to which they are redesignated under section 1886(d)(8)(B) of the Act
once the final wage index data are posted on the CMS Web site.
6. Reclassifications Under Section 508 of Pub. L. 108-173
Under section 508 of Pub. L. 108-173, a qualifying hospital could
appeal the wage index classification otherwise applicable to the
hospital and apply for reclassification to another area of the State in
which the hospital is located (or, at the discretion of the Secretary,
to an area within a contiguous State). We implemented this process
through notices published in the Federal Register on January 6, 2004
(69 FR 661), and February 13, 2004 (69 FR 7340). Such reclassifications
are applicable to discharges occurring during the 3-year period
beginning April 1, 2004, and ending March 31, 2007. Under section
508(b), reclassifications under this process do not affect the wage
index computation for any area or for any

[[Page 48025]]

other hospital and cannot be effected in a budget neutral manner.
Some hospitals currently receiving a section 508 reclassification
are eligible to reclassify to that same area under the standard
reclassification process as a result of the new labor market
definitions that we adopted for FY 2005. The governing regulations
indicate that ``if a hospital is already reclassified to a given
geographic area for wage index purposes for a 3-year period, and
submits an application to the same area for either the second or third
year of the 3-year period, that application will not be approved.''
However in the FY 2006 IPPS final rule (70 FR 47382), we stated that
hospitals that indicated in their FY 2007 MGCRB applications that they
agreed to waive their section 508 reclassification for the first 6
months of FY 2007 if they were granted a 3-year reclassification under
the traditional MGCRB process will not be subject to the rule cited
above. Thus, in applying for a 3-year MGCRB reclassification beginning
in FY 2007, hospitals that are already reclassified to the same area
under section 508 should have indicated in their MGCRB reclassification
requests that if they receive the MGCRB reclassification, they would
forfeit the section 508 reclassification for the first 6 months of FY
2007.
Under 1886(d)(10)(D)(v) of the Act, CMS has the authority to
``establish procedures'' under which a hospital may elect to terminate
a reclassification before the end of a 3-year period. In the FY 2006
IPPS final rule (70 FR 47382), we discussed our decision to exercise
this authority to establish a procedural rule for section 508 hospitals
to retain their section 508 reclassification through its expiration on
March 31, 2007, and reclassify under the regulations at 42 CFR Part
412, Subpart L, for the second half of FY 2007. We provided further
detail above on how we will apply decisions regarding section 508
reclassifications in the context of the Bellevue Hosp. Center v.
Leavitt court decision. Again, we will select the reclassification
option that provides the highest wage index for the hospital and will
give the hospital 30 days to revise the decision made on its behalf by
CMS. We refer readers to the discussion above for further details about
how section 508 hospitals that have applied for an individual
reclassification and hospitals groups that include a section 508
hospital can revise a CMS decision.
We will apply a similar rule for purposes of the out-migration
adjustment for FY 2007 discussed in section III.I. of this preamble.
The statute states that a hospital cannot receive an out-migration
adjustment if it is reclassified under section 1886(d)(10) of the Act.
Therefore, eligible hospitals that are not reclassified during any part
of FY 2007 will, by default, receive an out-migration adjustment during
that time period. If the hospital is reclassified for all of FY 2007,
the hospital will be ineligible for the out-migration adjustment. If a
hospital has a half fiscal year reclassification, the hospital will be
eligible for the out-migration adjustment for the portion of the fiscal
year that it is not reclassified.
The procedural rules described in the FY 2006 IPPS final rule were
intended to address specific circumstances where individual and group
reclassifications involve a section 508 hospital. The rules were
designed to recognize the special circumstances of section 508 hospital
reclassifications ending mid-year during FY 2007 and were intended to
provide flexibility in our regulations that would allow previously
approved reclassifications to continue through March 31, 2007, and new
reclassifications to begin April 1, 2007, upon the conclusion of the
section 508 reclassifications. As we indicated in the proposed rule, we
have received questions about the application of these special
procedural rules to non-section 508 hospitals that are part of group
applications that previously were awarded an individual
reclassification that continues into FY 2007. These hospitals are
concerned that the procedural rules imply that such prior
reclassification would be terminated beginning October 1, 2006, because
the rules specify that ``the remainder of the group receives the home
wage index'' for the period October 1, 2006, through March 31, 2007, if
the group reclassification application specified that the section
1886(d)(10) group reclassification would not begin until April 1, 2007.
We did not specifically contemplate preexisting individual
reclassifications when we drafted the special procedural rules for
group reclassifications that involve section 508 hospitals. However, we
did not intend to adopt a less favorable policy for non-section 508
hospitals in a group with a pending individual geographic
reclassification than we did for section 508 hospitals. Thus, we
clarified our procedural rule with respect to non-section 508 hospitals
with preexisting individual reclassifications that are part of group
reclassifications that include a section 508 hospital. For the first
half of FY 2007, we intend to either apply (a) the area wage index
where the hospital is physically located if there is no
reclassification pending, or (b) the hospital's individual
reclassification wage index if the hospital was part of a group awarded
a group reclassification and the group followed the procedural rules
for postponing reclassification until April 1, 2007. However, once the
hospital begins its new section 1886(d)(10) reclassification for the
period April 1, 2007, through September 30, 2009, any prior
reclassifications are permanently terminated, consistent with 42 CFR
412.274(b)(2)(ii). We are also reiterating that the special procedural
rules that we have adopted for half fiscal year reclassifications and
terminations are intended only to address the special circumstances
created by section 508 of Pub. L. 108-173 with respect to
reclassifications beginning and ending mid-way through a fiscal year.
These special procedural rules do not change any of the permanent
provisions currently in effect with respect to reclassifications under
subpart L of 42 CFR Part 412.
We show the reclassifications effective under the one-time appeal
process in tentative Table 9B in the Addendum to this final rule. All
section 1886(d)(10) reclassifications are listed in tentative Table 9A
in the Addendum to this final rule.
Comment: Many commenters stated their appreciation and support of
CMS' flexibility relating to the expiration of section 508 and in
facilitating the transition between the end of section 508 and
reclassifications occurring under section 1886(d)(10) of the Act.
Response: We thank the commenters for their support.
7. Wage Indices for Reclassified Hospitals and Reclassification Budget
Neutrality Factor
Under the procedural rules described under section III.H.6. of this
preamble, different wage indices may be in effect for the first 6
months and the second 6 months of FY 2007. Specifically, there may be
different wage indices in effect for the first and second half of FY
2007 due to the special circumstances of section 508 reclassifications
ending in the middle of a fiscal year and half of FY 2007 geographic
reclassifications under section 1886(d)(10) beginning on April 1, 2007.
This unique circumstance will not change as a result of the Bellevue
Hosp. Center v. Leavitt court decision.
The half fiscal year section 1886(d)(10) reclassifications present
issues related to the calculation of the reclassified wage indices and
reclassification budget neutrality factor. Section 1886(d)(8)(C) of the
Act provides requirements for determining

[[Page 48026]]

the wage index values for both hospitals located in rural counties
deemed urban under section 1886(d)(8)(B) of the Act and hospitals that
were reclassified as a result of the MGCRB decisions under section
1886(d)(10) of the Act. As provided in the statute, we are required to
calculate a separate wage index for hospitals reclassified to an area
if including the wage data for the reclassified hospitals would reduce
the area wage index by more than 1 percent. We proposed to issue two
separate reclassified wage indices for affected areas (one effective
from October 1, 2006, through March 31, 2007, and a second reclassified
wage index effective April 1, 2007, through September 30, 2007). The
reclassified wage indices will be calculated based on the wage data for
hospitals reclassified to the area in the respective half of the fiscal
year. We only received public comments supporting this proposal.
The half fiscal year reclassifications also have implications for
budget neutrality. The overall effect of geographic reclassification is
required by section 1886(d)(8)(D) of the Act to be budget neutral. We
apply an adjustment to the IPPS standardized amounts to ensure that the
effects of geographic reclassification are budget neutral. We proposed
calculating one budget neutrality adjustment that reflects the average
of the adjustments required for first and second half fiscal year
reclassifications, respectively, as discussed in section II.A.4.b. of
the Addendum to this final rule. We only received public comments
supporting this proposal.

I. FY 2007 Wage Index Adjustment Based on Commuting Patterns of
Hospital Employees

In accordance with the broad discretion under section 1886(d)(13)
of the Act, as added by section 505 of Pub. L. 108-173, beginning with
FY 2005, we established a process to make adjustments to the hospital
wage index based on commuting patterns of hospital employees. The
process, outlined in the FY 2005 IPPS final rule (69 FR 49061),
provides for an increase in the wage index for hospitals located in
certain counties that have a relatively high percentage of hospital
employees who reside in the county but work in a different county (or
counties) with a higher wage index. Such adjustments to the wage index
are effective for 3 years, unless a hospital requests to waive the
application of the adjustment. A county will not lose its status as a
qualifying county due to wage index changes during the 3-year period,
and counties will receive the same wage index increase for those 3
years. However, a county that qualifies in any given year may no longer
qualify after the 3-year period, or it may qualify but receive a
different adjustment to the wage index level. Hospitals that receive
this adjustment to their wage index are not eligible for
reclassification under section 1886(d)(8) or section 1886(d)(10) of the
Act. Adjustments under this provision are not subject to the budget
neutrality requirements under section 1886(d)(3)(E) of the Act.
Hospitals located in counties that qualify for the wage index
adjustment are to receive an increase in the wage index that is equal
to the average of the differences between the wage indices of the labor
market area(s) with higher wage indices and the wage index of the
resident county, weighted by the overall percentage of hospital workers
residing in the qualifying county who are employed in any labor market
area with a higher wage index. We employ the pre-reclassified wage
indices in making these calculations.
In the FY 2007 IPPS proposed rule (71 FR 24264 through 24272), in
the Out-Migration Adjustment table, Table 4J, we identified hospitals
located in qualifying counties. Table 4J also listed the proposed
adjustments calculated for qualifying hospitals. Hospitals that newly
qualified for the adjustment in FY 2005 or FY 2006 are eligible to
receive the same adjustment in FY 2007. In the FY 2007 IPPS proposed
rule, we determined county eligibility based on a 10 percent
occupational mix adjustment to the wage index. However, under the May
17, 2006 proposed rule discussed in section III.C. of this preamble,
for FY 2007 we are applying the occupational mix adjustment to 100
percent of the FY 2007 wage index. Therefore, we must reevaluate which
counties are newly eligible for the out-migration adjustment in FY 2007
using the 100 percent occupational mix adjusted wage index data. We
will publish an updated version of Table 4J showing eligible hospitals
and their corresponding wage index adjustments on the CMS Web site
after we publish this IPPS final rule, and in advance of October 1,
2006, using the procedures discussed in section III.H.of this preamble.
We will use the same formula described in the FY 2005 final rule (69 FR
49064) to calculate the out-migration adjustment.
The adjustments calculated for qualifying hospitals will be listed
in the revised Table 4J that will be issued separately from this final
rule. These adjustments will be effective for each county for a period
of 3 fiscal years. Hospitals that received the adjustment in FY 2006
will be eligible to retain that same adjustment for FY 2007. For
hospitals in newly qualified counties, adjustments to the wage index
are effective for 3 years, beginning with discharges occurring on or
after October 1, 2006.
As previously noted, hospitals receiving the wage index adjustment
under section 1886(d)(13)(F) of the Act are not eligible for
reclassification under sections 1886(d)(8) or (d)(10) of the Act, or
under section 508 of Pub. L. 108-173, unless they waive such out-
migration adjustment. As announced in the FYs 2005 and 2006 final
rules, hospitals redesignated under section 1886(d)(8) of the Act or
reclassified under section 1886(d)(10) of the Act or under section 508
of Pub. L. 108-173 will be deemed to have chosen to retain their
redesignation or reclassification, unless they explicitly notified CMS
that they elected to receive the out-migration adjustment instead
within 45 days from the publication of the FY 2007 proposed rule.
As previously noted, hospitals receiving the wage index adjustment
under section 1886(d)(13)(F) of the Act are not eligible for
reclassification under sections 1886(d)(8) or (d)(10) of the Act, or
under section 508 of Pub. L. 108-173, unless they waive such out-
migration adjustment. Ordinarily, our rule is to presume that a
hospital wishes to retain its reclassification, unless it notifies us
within 45 days of the proposed rule that it wishes to receive the out-
migration adjustment in lieu of the reclassification. However, for FY
2007, as stated earlier, we will be making reclassification withdrawal
and termination decisions on behalf of hospitals. Thus, the ordinary
45-day rule would not apply in FY 2007. Rather, hospitals will have 15
days from the display date of this final rule to notify us of whether,
in the absence of viewing the final 100 percent occupational mix-
adjusted wage index data, they wish to choose a particular wage index
for which they are eligible (such as to definitively maintain a
reclassification which they received or to definitively terminate or
withdraw from a reclassification). Otherwise, we will make withdrawal
and termination decisions on behalf of the hospital (including a
decision as to whether to accept an out-migration adjustment instead of
a reclassification), and the hospital will then have 30 days to reverse
or modify our decision, as applicable.

J. Process for Requests for Wage Index Data Corrections

In the FY 2005 IPPS final rule (68 FR 27194), we revised the
process and

[[Page 48027]]

timetable for application for development of the wage index, beginning
with the FY 2005 wage index. The preliminary and unaudited wage index
data for FY 2007 were made available on October 7, 2005, through the
Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS. In a memorandum dated October 7, 2005, we instructed
all Medicare fiscal intermediaries to inform the IPPS hospitals they
service of the availability of the wage index data files and the
process and timeframe for requesting revisions (including the specific
deadlines listed below). We instructed the fiscal intermediaries to
advise hospitals that these data are also made available directly
through their representative hospital organizations.
If a hospital wished to request a change to its data as shown in
the October 7, 2005 wage index data files, the hospital was to submit
corrections along with complete, detailed supporting documentation to
its fiscal intermediary by December 5, 2005. Hospitals were notified of
this deadline and of all other possible deadlines and requirements,
including the requirement to review and verify their data as posted on
the preliminary wage index data file on the Internet, through the
October 7, 2005 memorandum referenced above.
The fiscal intermediaries notified the hospitals by mid-February
2006 of any changes to the wage index data as a result of the desk
reviews and the resolution of the hospitals' early December 2005 change
requests. The fiscal intermediaries also submitted the revised data to
CMS by mid-February 2006. CMS published the proposed wage index PUFs
that included hospitals' revised wage data on February 24, 2006. Also,
in a memorandum dated February 14, 2006, we instructed fiscal
intermediaries to notify all hospitals regarding the availability of
the proposed wage index PUFs and the criteria and process for
requesting corrections and revisions to the wage index data. Hospitals
had until March 13, 2006, to submit requests to the fiscal
intermediaries for reconsideration of adjustments made by the fiscal
intermediaries as a result of the desk review, and to correct errors
due to CMS's or the fiscal intermediary's mishandling of the wage index
data. Hospitals were also required to submit sufficient documentation
to support their requests.
After reviewing requested changes submitted by hospitals, fiscal
intermediaries transmitted any additional revisions resulting from the
hospitals' reconsideration requests by April 14, 2006. The deadline for
a hospital to request CMS intervention in cases where the hospital
disagreed with the fiscal intermediary's policy interpretations was
April 21, 2006.
Hospitals were also instructed to examine Table 2 in the Addendum
to the proposed rule. Table 2 contained each hospital's adjusted
average hourly wage used to construct the wage index values for the
past 3 years, including the FY 2003 data used to construct the proposed
FY 2007 wage index. We noted that the hospital average hourly wages
shown in Table 2 only reflected changes made to a hospital's data and
transmitted to CMS by March 1, 2006.
As discussed in section III.C. of this preamble, on May 17, 2006,
we published in the Federal Register (71 FR 28644) a proposed rule that
proposed to revise the methodology for calculating the occupational mix
adjustment by applying the occupational mix adjustment to 100 percent
of the wage index using the new 2006 occupational mix data. In section
III.C.2 of this preamble, we discussed in detail the timeline and
process for collecting, reviewing, and correcting the FY 2006
occupational mix survey data. The 1st quarter 2006 occupational mix
data PUF was released on June 29, 2006, to hospital associations and
the public on the Internet at http://www.cms.hhs.gov/AcuteInpatientPPS.
The release of this file superseded any and all of the 2003
occupational mix survey data that we had previously published and
proposed to use for the FY 2007 wage index. Hospitals had until July 13
to submit to the intermediaries their requests for corrections to the
new 2006 survey data. Intermediaries were to submit all corrected
occupational mix data to CMS by July 27, 2007. Also, as discussed in
section III.C., the occupational mix data could not be finalized in
time to include in this final rule, so we are releasing the final
occupational mix adjusted wage index data and tables after the
publication of this final rule, but before October 1, 2006.
Because hospitals had access to the final occupational mix data by
June 29, 2006, we believe they had the opportunity to detect any data
entry or tabulation errors made by the fiscal intermediary or CMS
before the development and publication of the final FY 2007 wage index
and the implementation of the FY 2007 wage index on October 1, 2006. We
believe that if hospitals availed themselves of the opportunities
afforded to provide and make corrections to the occupational mix data,
the wage index implemented on October 1, 2006, will be accurate. In the
extent that errors are identified by hospitals and brought to our
attention after July 13, 2006, we will only make mid-year changes to
the wage index in accordance with Sec. 412.64(k) (see below for a
detailed discussion).
The final Worksheet S-3 wage data PUF was released in May 2006 to
hospital associations and the public on the Internet at http://www.cms.hhs.gov/AcuteInpatientPPS (hereon, referred to as the May 2006
PUF). The May 2006 PUF was made available solely for the limited
purpose of identifying any potential errors made by CMS or the fiscal
intermediary in the entry of the final Worksheet S-3 wage data that
result from the correction process described above (revisions submitted
to CMS by the fiscal intermediaries by April 14, 2006). If, after
reviewing the May 2006 PUF, a hospital believed that its Worksheet S-3
wage data were incorrect due to a fiscal intermediary or CMS error in
the entry or tabulation of the final data, the hospital was to send a
letter to both its fiscal intermediary and CMS outlining why the
hospital believed an error existed and to provide all supporting
information, including relevant dates (for example, when it first
became aware of the error). CMS and the fiscal intermediaries were to
receive these requests no later than June 12, 2006. (We note that the
June 12, 2006 date was revised from the June 9, 2006 date originally
specified in the October 7, 2005 letter to hospitals.) Requests mailed
to CMS were to be sent to: Centers for Medicare & Medicaid Services,
Center for Medicare Management, Attention: Wage Index Team, Division of
Acute Care, C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244-
1850.
Each request also was to be sent to the fiscal intermediary. The
fiscal intermediary was to review requests upon receipt and contact CMS
immediately to discuss its findings.
After the release of the May 2006 PUF, changes to the hospital
Worksheet S-3 wage data were only to be made in those very limited
situations involving an error by the fiscal intermediary or CMS that
the hospital could not have known about before its review of the final
wage data file. Specifically, neither the intermediary nor CMS would
approve the following types of requests:
Requests for Worksheet S-3 wage data corrections that were
submitted too late to be included in the data transmitted to CMS by
fiscal intermediaries on or before April 14, 2006.
Requests for correction of errors that were not, but could
have been, identified during the hospital's review

[[Page 48028]]

of the February 24, 2006 wage index data file.
Requests to revisit factual determinations or policy
interpretations made by the fiscal intermediary or CMS during the wage
index data correction process.
Verified corrections to the Worksheet S-3 wage data received timely
by CMS and the fiscal intermediaries (that is, by June 12, 2006) are
incorporated into the final wage index and will be reflected in the FY
2007 final wage index tables that will be published in a separate
issuance after the publication of this final rule.
We created the processes described above to resolve all substantive
wage index data correction disputes before we finalize the wage and
occupational mix data for the FY 2007 payment rates. Accordingly,
hospitals that did not meet the procedural deadlines set forth above
will not be afforded a later opportunity to submit wage index data
corrections or to dispute the fiscal intermediary's decision with
respect to requested changes. Specifically, our policy is that
hospitals that did not meet the procedural deadlines set forth above
will not be permitted to challenge later, before the Provider
Reimbursement Review Board, the failure of CMS to make a requested data
revision. (See W. A. Foote Memorial Hospital v. Shalala, No. 99-CV-
75202-DT (E.D. Mich. 2001) and Palisades General Hospital v. Thompson,
No. 99-1230 (D.D.C. 2003.) We refer the reader also to the FY 2000
final rule (64 FR 41513) for a discussion of the parameters for
appealing to the Provider Reimbursement Review Board for wage index
data corrections.
We believe the wage index data correction process described above
provides hospitals with sufficient opportunity to bring errors in their
wage index data to the fiscal intermediaries' attention. Nevertheless,
in the event that errors are identified by hospitals and brought to our
attention after June 12, 2006, for Worksheet S-3 wage data, or after
July 13, 2006, for the 1st quarter 2006 occupational mix data, we
retain the right to make midyear changes to the wage index under very
limited circumstances.
Specifically, in accordance with Sec. 412.64(k)(1) of our existing
regulations, we make midyear corrections to the wage index for an area
only if a hospital can show that: (1) The fiscal intermediary or CMS
made an error in tabulating its data; and (2) the requesting hospital
could not have known about the error or did not have an opportunity to
correct the error, before the beginning of the fiscal year. For
purposes of this provision, ``before the beginning of the fiscal year''
means by the June deadline for making corrections to the wage data for
the following fiscal year's wage index. With regard to the FY 2007 wage
index, this means by June 12 for Worksheet S-3 wage data and by July 13
for 1st quarter 2006 occupational mix data. This provision is not
available to a hospital seeking to revise another hospital's data that
may be affecting the requesting hospital's wage index for the labor
market area. As indicated earlier, since CMS makes the wage data
available to a hospital on the CMS Web site prior to publishing both
the proposed and final IPPS rules, and the fiscal intermediaries notify
hospitals directly of any wage data changes after completing their desk
reviews, we do not expect that midyear corrections would be necessary.
However, under our current policy, if the correction of a data error
changes the wage index value for an area, the revised wage index value
will be effective prospectively from the date the correction is made.
In the FY 2006 IPPS final rule (70 FR 47385), we revised Sec.
412.64(k)(2) to specify that, effective on October 1, 2005, that is
beginning with the FY 2006 wage index, a change to the wage index can
be made retroactive to the beginning of the Federal fiscal year only
when: (1) The fiscal intermediary or CMS made an error in tabulating
data used for the wage index calculation; (2) the hospital knew about
the error and requested that the fiscal intermediary and CMS correct
the error using the established process and within the established
schedule for requesting corrections to the wage index data, before the
beginning of the fiscal year for the applicable IPPS update (that is,
for the FY 2007 wage index, by the June 12, 2006 deadline for Worksheet
S-3 data and the July 13, 2006 deadline for 1st quarter 2006
occupational mix data); and (3) CMS agreed that the fiscal intermediary
or CMS made an error in tabulating the hospital's wage index data and
the wage index should be corrected.
In those circumstances where a hospital requests a correction to
its wage index data before CMS calculates the final wage index (that
is, for the FY 2007 wage index, by the June 12, 2006 deadline for
Worksheet S-3 wage data and the July 13, 2006 deadline for 1st quarter
2006 occupational mix data), and CMS acknowledges that the error in the
hospital's wage data was caused by CMS's or the fiscal intermediary's
mishandling of the data, we believe that the hospital should not be
penalized by our delay in publishing or implementing the correction. As
with our current policy, we indicated that the provision is not
available to a hospital seeking to revise another hospital's data. In
addition, the provision cannot be used to correct prior years' wage
index data; it can only be used for the current Federal fiscal year. In
other situations, we continue to believe that it is appropriate to make
corrections prospectively only. We note that, as with prospective
changes to the wage index, the final retroactive correction will be
made irrespective of whether the change increases or decreases a
hospital's payment rate. In addition, we note that the policy of
retroactive adjustment will still apply in those instances where a
judicial decision reverses a CMS denial of a hospital's wage index data
revision request.

K. Labor-Related Share for the Wage Index for FY 2007

Section 1886(d)(3)(E) of the Act directs the Secretary to adjust
the proportion of the national prospective payment system base payment
rates that are attributable to wages and wage-related costs by a factor
that reflects the relative differences in labor costs among geographic
areas. It also directs the Secretary to estimate from time to time the
proportion of hospital costs that are labor-related: ``The Secretary
shall adjust the proportion (as estimated by the Secretary from time to
time) of hospitals' costs which are attributable to wages and wage-
related costs of the DRG prospective payment rates * * *'' We refer to
the portion of hospital costs attributable to wages and wage-related
costs as the labor-related share. The labor-related share of the
prospective payment rate is adjusted by an index of relative labor
costs, which is referred to as the wage index.
Section 403 of Pub. L. 108-173 amended section 1886(d)(3)(E) of the
Act to provide that the Secretary must employ 62 percent as the labor-
related share unless this ``would result in lower payments to a
hospital than would otherwise be made.'' However, this provision of
Pub. L. 108-173 did not change the legal requirement that the Secretary
estimate ``from time to time'' the proportion of hospitals'' costs that
are ``attributable to wages and wage-related costs.'' We believe that
this reflected Congressional intent that hospitals receive payment
based on either a 62-percent labor-related share, or the labor-related
share estimated from time to time by the Secretary, depending on which
labor-related share resulted in a higher payment.
We have continued our research into the assumptions employed in
calculating the labor-related share. Our research involves analyzing
the compensation share separately for urban

[[Page 48029]]

and rural hospitals, using regression analysis to determine the
proportion of costs influenced by the area wage index, and exploring
alternative methodologies to determine whether all or only a portion of
professional fees and nonlabor intensive services should be considered
labor-related.
In the FY 2006 IPPS final rule (70 FR 47392), we presented our
analysis and conclusions regarding the frequency and methodology for
updating the labor-related share for FY 2006. We also recalculated a
labor-related share of 69.731 percent, using the FY 2002-based PPS
market basket for discharges occurring on or after October 1, 2005. In
addition, we implemented this revised and rebased labor-related share
in a budget neutral manner, but consistent with section 1886(d)(3)(E)
of the Act, we did not take into account the additional payments that
would be made as a result of hospitals with a wage index less than or
equal to 1.0 being paid using a labor-related share lower than the
labor-related share of hospitals with a wage index greater than 1.0.
The labor-related share is used to determine the proportion of the
national PPS base payment rate to which the area wage index is applied.
In this final rule, we are not making any changes to the national
average proportion of operating costs that are attributable to wages
and salaries, fringe benefits, professional fees, contract labor, and
labor intensive services. Therefore, we are continuing to use a labor-
related share of 69.731 percent for discharges occurring on or after
October 1, 2006. Tables 1A and 1B which will be issued as part of a
document separate from this final rule, as discussed in section III.C.
of this final rule, will reflect this labor-related share. We note that
section 403 of Pub. L. 108-173 amended sections 1886(d)(3)(E) and
1886(d)(9)(C)(iv) of the Act to provide that the Secretary must employ
62 percent as the labor-related share unless this employment ``would
result in lower payments to a hospital than would otherwise be made.''
We also are continuing to use a labor-related share for the Puerto
Rico-specific standardized amounts of 58.7 percent for discharges
occurring on or after October 1, 2006. Consistent with our methodology
for determining the national labor-related share, we added the Puerto
Rico-specific relative weights for wages and salaries, fringe benefits,
contract labor, nonmedical professional fees, and other labor-intensive
services to determine the labor-related share. Puerto Rico hospitals
are paid based on 75 percent of the national standardized amounts and
25 percent of the Puerto Rico-specific standardized amounts. For Puerto
Rico hospitals, the national labor-related share will always be 62
percent because the wage index for all Puerto Rico hospitals is less
than 1.0. A Puerto Rico-specific wage index is applied to the Puerto
Rico-specific portion of payments to the hospitals. The labor-related
share of a hospital's Puerto Rico-specific rate will be either 62
percent or the Puerto Rico-specific labor-related share depending on
which results in higher payments to the hospital. If the hospital has a
Puerto Rico-specific wage index of greater than 1.0, we will set the
hospital's rates using a labor-related share of 62 percent for the 25
percent portion of the hospital's payment determined by the Puerto Rico
standardized amounts because this amount will result in higher
payments. Conversely, a hospital with a Puerto Rico-specific wage index
of less than 1.0 will be paid using the Puerto Rico-specific labor-
related share of 58.7 percent of the Puerto Rico-specific rates because
the lower labor-related share will result in higher payments. The
Puerto Rico labor-related share of 58.7 percent for FY 2007 will be
reflected in the Table 1C of the separately issued document referenced
under sections III.C. and III.H. of this preamble.
Comment: One commenter suggested that, for hospitals with a wage
index greater than one, CMS should use the FY 1992-based labor share of
71.1 percent rather than continue to use the FY 2002-based IPPS labor
share of 69.7 percent.
Response: The labor-related share is used to determine the
proportion of the national PPS based payment rate to which the area
wage index is applied. For IPPS, the labor share remains constant until
the market basket is rebased. As discussed in the August 12, 2005 IPPS
final rule (70 FR 47393), the labor-related share for the FY 2002-based
market basket was calculated by adding the relative weights of the
labor-related operating cost categories of that market basket. These
cost categories are: wages and salaries, fringe benefits, professional
fees, contract labor, and labor-intensive services. Their relative
weights were derived from the FY 2002 Medicare cost reports, which
represented the most recent and complete data available when the FY
2002-based market basket was developed.
A return to the considerably older FY 1992-based labor share, where
the relative weights were determined using FY 1992 Medicare cost
reports, would mean relying on outdated information and thus is not
optimal.
Finally, although the wage index and the labor-related share are
interrelated regarding final payments, it is important to note that the
labor-related share is calculated completely independently of the wage
index. For these reasons, we will continue to use a labor-related share
of 69.731 percent for discharges occurring on or after October 1, 2006.

L. Proxy for the Hospital Market Basket

In the FY 2006 IPPS final rule (70 FR 47387), we changed the base
year cost structure for the IPPS hospital index for the hospital market
basket for operating costs from FY 1997 to FY 2002. As discussed in
that final rule, the IPPS hospital index primarily uses the BLS data as
price proxies, which are grouped in one of the three BLS categories.
The categories are Producer Price Indexes (PPIs), Consumer Price
Indexes (CPIs), and Employment Cost Indexes (ECIs), discussed in detail
in the FY 2006 IPPS final rule (70 FR 47388 through 47391). We evaluate
the price proxies using the criteria of reliability, timeliness,
availability, and relevance. The PPIs, CPIs, and ECIs selected by us
and used for this final rule meet these criteria as described in the FY
2006 IPPS final rule. We believe they continue to be the best measures
of price changes for the cost categories.
Beginning April 2006 with the publication of March 2006 data, the
BLS' ECI will use a different classification system, the North American
Industrial Classification System (NAICS), instead of the Standard
Industrial Codes (SIC), which will no longer exist. We have
consistently used the ECI as the data source for our wages and salaries
and other price proxies in the IPPS market basket and are not making
any changes to the usage at this time. However, we did solicit comments
in the IPPS proposed rule on our continued use of the BLS ECI data in
light of the BLS change in system usage to the NAICS-based ECI. CMS
received no comments on use of the BLS ECI data. As the SIC-based ECIs
no longer exist, we will therefore adopt the proposed policy of using
the BLS NAICS-based ECIs to replace the SIC-based ECIs as price proxies
in the market basket.

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

A. Reporting of Hospital Quality Data for Annual Hospital Payment
Update (Sec. 412.64(d)(2))

1. Background
Section 5001(a) of the Deficit Reduction Act of 2005, Pub. L. 109-
171 (DRA) sets out new requirements for the Reporting Hospital Quality
Data for

[[Page 48030]]

Annual Payment Update (RHQDAPU) program. The RHQDAPU program was
established to implement section 501(b) of Pub. L. 108-173 (MMA). It
builds on our ongoing voluntary Hospital Quality Initiative which is
intended to empower consumers with quality of care information to make
more informed decisions about their health care while also encouraging
hospitals and clinicians to improve the quality of care.
Section 5001(a) of Pub. L. 109-171 revises the mechanism used to
update the standardized amount for payment for hospital inpatient
operating costs. New sections 1886(b)(3)(B)(viii)(I) and (II) of the
Act provide that the payment update for FY 2007 and each subsequent
fiscal year will be reduced by 2.0 percentage points for any
``subsection (d) hospital'' that does not submit certain quality data
in a form and manner, and at a time, specified by the Secretary.
New sections 1886(b)(3)(B)(viii)(III) and (IV) of the Act require
that we expand the ``starter set'' of 10 quality measures that we have
used since 2003. Specifically, the Secretary is required to expand,
consistent with the provisions of section 5001(a) of Pub. L. 109-171,
the set of measures that the Secretary determines to be appropriate for
the measurement of the quality of care furnished by hospitals in
inpatient settings. In expanding these measures, section
1886(b)(3)(B)(viii)(IV) of the Act provides that we must begin to adopt
the baseline set of performance measures as set forth in a 2005 report
issued by the Institute of Medicine (IOM) of the National Academy of
Sciences under section 238(b) of Pub. L. 108-173,\19\ effective for
payments beginning with FY 2007. The IOM measures include the Hospital
Quality Alliance (HQA) measures (the HQA is a public-private
collaboration to improve the quality of care provided by the nation's
hospitals by measuring and publicly reporting on that care), the
HCAHPS[supreg] patient perspective survey, and three structural
measures. The structural measures included in the IOM report are: ``(1)
Implementation of computerized provider order entry for prescriptions,
(2) staffing of intensive care units with intensivists, and (3)
evidence-based hospital referrals. These measures originate from the
Leapfrog Group's original ``three leaps,'' and are part of the
[National Quality Forum's] 30 safe practices.''
---------------------------------------------------------------------------

\19\ Institute of Medicine, ``Performance Measurement:
Accelerating Improvement,'' December 1, 2005, available at http://www.iom.edu/CMS/3809/19805/31310.aspx.
---------------------------------------------------------------------------

New sections 1886(b)(3)(B)(viii)(V) and (VI) of the Act require
that, effective for payments beginning with FY 2008, we add other
quality measures that reflect consensus among affected parties, and
provide the Secretary with the discretion to replace any quality
measures or indicators in appropriate cases, such as where all
hospitals are effectively in compliance with a measure, or the measures
or indicators have been subsequently shown to not represent the best
clinical practice. Thus, the Secretary has broad discretion to replace
measures on the basis that they are not appropriate.
New section 1886(b)(3)(B)(viii)(VII) of the Act requires that we
establish procedures for making quality data available to the public
after ensuring that a hospital has the opportunity to review, in
advance, its data that are to be made public. In addition, this section
requires that we report quality measures of process, structure,
outcome, patients' perspective on care, efficiency, and costs of care
that relate to services furnished in inpatient settings on the CMS Web
site.
Like the provisions of section 501(b) of Pub. L. 108-173, the
provisions of section 5001(a) of Pub. L. 109-171 do not apply to
hospitals and hospital units excluded from the IPPS, or to payments to
hospitals under other prospective payment systems such as the hospital
outpatient PPS. New section 1886(b)(3)(B)(viii)(I) of the Act also
provides that any reduction will apply only with respect to the fiscal
year involved, and will not be taken into account for computing the
applicable percentage increase for a subsequent fiscal year.
Initially, section 1886(b)(3)(B)(vii) of the Act provided for a
reduction of 0.4 percentage points to the update percentage increase
for each of FYs 2005 through 2007 for any ``subsection (d) hospital''
that did not submit data on the starter set of 10 quality measures
established by the Secretary of Health and Human Services as of
November 1, 2003. Section 5001(a) of Pub. L. 109-171 limits the 0.4
percentage point reduction to FY 2005 and FY 2006, and establishes a
2.0 percentage point reduction for FY 2007 and subsequent fiscal years.
The starter set of 10 quality measures we established as of
November 1, 2003 are:

Heart Attack (Acute Myocardial Infarction)

Was aspirin given to the patient upon arrival to the
hospital?
Was aspirin prescribed when the patient was discharged?
Was a beta-blocker given to the patient upon arrival to
the hospital?
Was a beta-blocker prescribed when the patient was
discharged?
Was an ACE inhibitor given for the patient with heart
failure?

Heart Failure (HF)

Did the patient get an assessment of his or her heart
function?
Was an ACE inhibitor given to the patient?

Pneumonia (PNE)

Was an antibiotic given to the patient in a timely way?
Had the patient received a pneumococcal vaccination?
Was the patient's oxygen level assessed?
We adopted these measures after the Secretary of HHS initiated a
partnership with several collaborators intended to promote hospital
quality improvement and public reporting of hospital quality
information. These collaborators included the American Hospital
Association, the Federation of American Hospitals, the Association of
American Medical Colleges, the Joint Commission on Accreditation of
Healthcare Organizations (JCAHO), the National Quality Forum (NQF), the
American Medical Association, the Consumer-Purchaser Disclosure
Project, the American Association of Retired Persons, the American
Federation of Labor-Congress of Industrial Organizations, the Agency
for Healthcare Research and Quality (AHRQ), as well as CMS, Quality
Improvement Organizations (QIOs), and others.
This collaboration, originally known as the National Voluntary
Hospital Reporting Initiative, is now known as the HQA. Hospital data
are submitted through the QualityNet Exchange secure Web site
(www.qnetexchange.org). This Web site meets or exceeds all current
Health Insurance Portability and Accountability Act requirements. Data
from this initiative were initially used to populate the Hospital
Compare Web site, www.hospitalcompare.hhs.gov. This Web site assists
beneficiaries and the general public by providing information on
hospital quality of care for consumers who need to select a hospital.
It further serves to encourage consumers to work with their doctors and
hospitals to discuss the quality of care they provide to patients,
thereby providing an additional incentive to improve the quality of
that care.
This starter set of 10 quality measures, all of which have been
endorsed by the NQF, is a subset of measures currently collected for
the JCAHO as part of its

[[Page 48031]]

certification program. NQF is a voluntary consensus standard-setting
organization established to standardize health care quality measurement
and reporting through its consensus development process We chose these
10 quality measures in order to collect data that will: (1) provide
useful and valid information about hospital quality to the public; (2)
provide hospitals with a sense of predictability about public reporting
expectations; (3) begin to standardize data and data collection
mechanisms; and (4) foster hospital quality improvement. Most hospitals
have participated in the HQA, and are continuing to submit data to the
QIO Clinical Warehouse. Since the HQA released the starter set of 10
quality measures, it has continued to release additional quality
measures, and has released 11 additional NQF-endorsed quality measures
to date. Many HQA-participating hospitals have been voluntarily
reporting on these additional quality measures, although only the
starter set of 10 quality measures were subject to potential reductions
in hospitals' annual payment update percentages under section 501(b) of
Pub. L. 108-173.
To implement section 501(b) of Pub. L. 108-173, we created the
RHQDAPU program. Originally, the program set out the form, manner, and
timeframes for hospitals to submit data regarding the starter set of 10
quality measures. For the FY 2005 payment update, we permitted
hospitals to withdraw from the RHQDAPU program at any time up to August
1, 2004. Hospitals that withdrew from the program did not receive the
full payment update and, instead, received a reduction of 0.4
percentage points in their payment update. We did not establish a
deadline for withdrawal for the FY 2006 payment update.
For FY 2006, in order to receive a full payment update, hospitals
were required to continuously submit to the QIO Clinical Warehouse
abstracted data regarding the starter set of 10 quality measures each
calendar quarter according to the schedule found on the QualityNet
Exchange Web site. New participants were required to submit these data
using the same schedule, starting with the quarter they began
discharging patients. The data for each quarter had to be submitted on
time and pass all of the edits and consistency checks required in the
QIO Clinical Warehouse. Hospitals that did not treat a condition or
that had very few discharges were not penalized, and they received the
full payment update if they submitted appropriate data on each of the
10 quality measures that they treated for patients who were discharged
during the reporting periods.
2. New Procedures for Hospital Reporting of Quality Data
a. Two Percentage Point Reduction
In the FY 2007 IPPS proposed rule (71 FR 24091), we proposed to
amend our regulations at Sec. 412.64(d)(2) to reflect the 2.0
percentage point reduction in the payment update for FY 2007 and
subsequent fiscal years for hospitals that do not comply with
requirements for reporting quality data as provided for under section
5001(a) of Pub. L. 109-171.
Comment: One commenter stated that the increase from a 0.4
percentage point reduction in the annual payment update to a 2.0
percentage point reduction was too great and that this increase could
cause some small hospitals to close.
Response: The increase from a 0.4 percentage point reduction to a
2.0 percentage point reduction is mandated by section
1886(b)(3)(B)(viii)(I) of the Act.
Comment: One commenter asked if the 2.0 percentage point reduction
in the market basket update would ever apply retroactively.
Response: The amount of the reduction and the payment update to
which a reduction applies are governed by statute. Section
1886(b)(3)(B)(viii)(I) of the Act requires a 2.0 percentage point
reduction for FY 2007 ``and each subsequent fiscal year.'' Section
1886(b)(3)(B)(viii)(I) also provides that the 2.0 percentage point
reduction ``shall apply only to the fiscal year involved.'' Therefore,
the 2.0 percentage point reduction will not affect the annual payment
update for a hospital for any fiscal year prior to FY 2007.
b. New Procedures
We also revised the RHQDAPU program's procedures to reflect our
experience with this program and to implement section 5001(a) of Pub.
L. 109-171, including the new requirement for the reporting of an
expanded set of quality measures. In addition to publication in this
final rule, all revised procedures will be added to the ``Reporting
Hospital Quality Data for Annual Payment Update Reference Checklist''
section of the QualityNet Exchange Web site. This checklist also
contains all of the forms to be completed by hospitals participating in
the program. In order to participate in the hospital reporting
initiative, hospitals must follow these steps:
Identify a QualityNet Exchange Administrator who follows
the registration process and submits the information through the QIO.
This must be done regardless of whether the hospital uses a vendor for
transmission of data.
Complete the revised ``Reporting Hospital Quality Data for
Annual Payment Update Notice of Participation'' form. All hospitals
must send this form to their QIO, no later than August 15, 2006. In
addition, before participating hospitals initially begin reporting
data, they must register with the QualityNet Exchange, regardless of
the method used for submitting data. Although, we proposed that this
form be submitted by August 1, 2006, we have chosen to extend the due
date to August 15, 2006 to provide hospitals with additional time to
notify their QIOs regarding their intent to participate. We received no
comments on this proposal.
Continue to collect data for all 10 ``starter set''
quality measures (or begin collecting such data, if newly participating
in the program), and submit the data to the QIO Clinical Warehouse
either using the CMS Abstraction & Reporting Tool (CART), the JCAHO
ORYX[supreg] Core Measures Performance Measurement System, or another
third-party vendor tool that has met the measurement specification
requirements for data transmission to QualityNet Exchange. The QIO
Clinical Warehouse will submit the data to CMS on behalf of the
hospitals. The submission will be done through QualityNet Exchange.
Because the information in the QIO Clinical Warehouse is considered QIO
information, it is subject to the stringent QIO confidentiality
regulations in 42 CFR Part 480. We proposed that hospitals continue to
submit data regarding the starter set of 10 quality measures because
the existing data submission schedule that we will use for the FY 2007
update relies on discharges that occurred in calendar year (CY) 2005.
Because the first three quarters of CY 2005 data already have been
submitted, we did not propose to require hospitals to submit any
additional CY 2005 data to address the new quality measures. However,
we again note that many hospitals have been providing data on these
additional measures since they were first included in the HQA set,
although these measures did not affect hospitals' annual payment
adjustment under the RHQDAPU program implementing section 501(b) of
Pub. L. 108-173.
For the FY 2007 update, we proposed that hospitals also
would be required to complete and return a written form on which they
pledge to submit data on the set of expanded

[[Page 48032]]

quality measures starting with discharges that occur in CY 2006. The
proposed 21 quality measures which we included in the proposed rule are
part of the HQA-released measures that the 2005 IOM report recommended
we use as expanded ``starter'' measures, and they include the 10
measures that we originally adopted for the RHQDAPU program. As
discussed above, new section 1886(b)(3)(B)(viii)(IV) of the Act
requires us to begin to adopt the baseline set of performance measures
set forth in the 2005 IOM report effective for payments beginning with
FY 2007. We proposed that hospitals would be required to submit data on
the expanded measures to the QIO Clinical Warehouse beginning with
discharges that occur in the first calendar quarter of 2006 (January
through March discharges). We also stated that the deadline for
hospitals to submit their data for first calendar quarter of 2006 would
be August 15, 2007.
Comment: Over 100 commenters opposed our proposal that hospitals
submit data using the expanded quality measures for discharges
occurring in calendar year 2006. Even though data for the first
calendar quarter of 2006 are not required to be submitted until August
15, 2006, commenters stated that using the first calendar quarter as a
starting date for submissions would create a hardship for hospitals,
and require that their staff re-review records. Commenters recommended
that the expanded measure set be used for future reviews only, and that
all changes made to reporting should be done with a future effective
date. Most of the commenters recommended that we require hospitals to
begin reporting using the expanded quality measures starting with
discharges occurring in the third calendar quarter of 2006.
Response: After careful review and consideration of the operational
issues raised by commenters, CMS has decided to modify the starting
quarter for hospital reporting of the expanded 21 quality measures. In
reviewing this matter, we recognized that hospitals who concurrently
abstract data may have been required to reabstract data from records
that had already been completed. Others would have the burden of
reconsidering the additional data elements after the timeframe for
which they are preparing to submit data. Given the goal of improving
quality through public reporting in an efficient manner that does not
create undue burden, CMS believes it is appropriate in this instance to
modify the starting quarter for the expanded measures. Therefore,
hospitals will now be required to submit data on the specified expanded
set of 21 quality measures to the QIO Clinical Data Warehouse beginning
with discharges that occur in the third calendar quarter of 2006 (July
through September discharges). The deadline for hospitals to submit
this data for third calendar quarter of 2006 is February 15, 2007. The
measures that are part of this expanded measure set are described
below.
Comment: Several commenters stated that not all hospitals are
currently submitting data on the expanded measure set. These commenters
noted that hospitals that do not currently submit data using the
expanded measure set may need to hire and train new staff to handle the
new increased data abstraction requirements that we proposed to
implement in the proposed rule. Some of these commenters suggested that
reporting data on the expanded measure set should start with January
2007 discharges in order to allow hospitals additional time to make the
necessary changes for the extra work.
Response: Although hospitals are not currently required to submit
data on the full set of 21 quality measures identified in the proposed
rule, many of them are already submitting these data on a voluntary
basis under the HQA initiative. As noted in our response to the
previous set of comments, we have modified our proposal in response to
concerns expressed by commenters. Hospitals will now be required to
submit data on a specified expanded set of measures to the QIO Clinical
Data Warehouse beginning with discharges that occur in the third
calendar quarter of 2006 (July through September discharges). The
deadline for hospitals to submit this data for third quarter 2006 is
February 15, 2007. We believe that this will provide adequate
additional time for hospitals to hire or train staff regarding the
expanded quality measures.
Comment: One commenter expressed concern that the proposed rule
requires hospitals to start collecting data on the expanded quality
measures immediately.
Response: As indicated above, we have modified our original
proposal to ease the hospitals' transition to reporting using the
expanded quality measures. For the expanded measures reporting
requirement, hospitals will now be required to pledge to submit data on
the expanded measures beginning with discharges that occur in the third
calendar quarter of 2006 (July through September discharges). Hospitals
are given 4\1/2\ months following the last day of a discharge quarter
to submit accurate data into the QIO Clinical Data Warehouse.
Therefore, under our revised policy, we believe that hospitals will
have sufficient time to plan when they will begin to collect data on
the expanded quality measures.
We would also like to note that we have taken steps to ensure that
the burden on hospitals to submit data on the expanded measures is as
minimal as possible. For example, in addition to being described in
this rule, all of the measures that must be reported, including the 11
newly required measures, are also described in the ``Specifications
Manual for National Hospital Quality Measures,'' which is a manual that
is jointly issued and maintained by CMS and JCAHO. The manual contains
all of the specifications, data definitions, data collection rules and
algorithms related to all 21 measures (the 10 RHQDAPU PROGRAM measures
and the 11 measures that are being voluntarily reported under the HQA
initiative). All specifications for each of these measures as used by
CMS for the RHQDAPU program are identical to, or ``aligned'' with,
those used by JCAHO. The CMS and JCAHO alignment results in a single
standardized process for the reporting of measures that is accepted by
both CMS and JCAHO. In an effort to reduce the reporting burden on
hospitals, CMS and the JCAHO work together to refine the data
collection process for hospitals for the purposes of validation, public
reporting, and the RHQDAPU program. Additionally, CMS and JCAHO have
agreed to release all documents associated with data collection at a
minimum of 120 days prior to implementation.
Comment: One commenter stated that the time frames for data
collection in the proposed rule do not provide hospitals the
opportunity to change or correct mistakes.
Response: The current data submission timeframe is designed to
provide sufficient time for hospitals to meet all reporting
requirements. Hospitals are given 4\1/2\ months following the last day
of a discharge quarter to submit accurate data into the QIO Clinical
Data Warehouse. We believe that this is a sufficient timeframe for the
vendor, hospital, QIO or other interested party to identify data errors
and submit corrections in advance of the data submission deadline.
Additionally, abstractions can begin as early during the quarter as the
day the patient is actually admitted. As such, hospitals actually have
up to 3 months in addition to the 4\1/2\ months following the last day
of the discharge quarter to collect and submit data. In

[[Page 48033]]

addition, under Sec. 482.24 of our regulations, all elements of the
medical record (for example, documentation) are required to be complete
within 30 days following discharge, so we believe that hospitals have
adequate time for the record abstraction and submission.
To ensure that data submission problems are recognized and
corrected early, we encourage hospitals to submit their data
continuously or to conduct test transmissions prior to the quarterly
posted data transmission deadlines. Testing transmissions ensures that
hospitals' computer systems are equipped with the proper software and
configuration required to successfully transmit data through QualityNet
Exchange Web site. We note that it is a hospital's responsibility to
ensure that its data are submitted successfully to the QIO Clinical
Data Warehouse. To make it easier for hospitals to verify whether their
data were successfully submitted, the QualityNet Exchange Web site has
a function that enables hospitals to run reports during test
transmissions and after final transmission of data that indicate which
records were successfully submitted, with and without errors, and/or
which data were rejected by the warehouse. We recommend that hospitals
run these reports following each submission of data. Submitting test
files early also allows hospitals to check the reports to identify and
change or correct mistakes.
Comment: Two commenters stated that the retrospective way that data
are reviewed does not offer sufficient opportunity to quickly correct a
problem in the hospital setting. One commenter recommended that
abstracting occur concurrently with discharge, thereby preventing
discharge if additional clinical requirements need to be met. The
commenter suggested that a real-time data system be developed to
capture this information. The system would alert health care providers
when clinical requirements have not been met so that hospitals can
remedy these requirements prior to discharging the patient. The
commenter also suggested that CMS sponsor a demonstration project for
this activity. It would give CMS the opportunity to lead the way for
improved technology dissemination in hospitals.
Response: As we discussed in our discussion of value-based
purchasing in the FY 2007 IPPS proposed rule (71 FR 24098), one of the
challenges we face is minimizing the length of time between our receipt
of, and our ability to provide feedback to hospitals on, the data they
submit. We agree that hospitals also face this same issue with data
they collect. CMS encourages hospitals to take steps toward the
adoption of electronic medical records (EMRs) that will allow for the
reporting of clinical quality data. In general, whether to abstract on
a concurrent or on a retrospective basis is a hospital's decision,
although we recognize there may be a necessary period of retrospective
abstraction due to the implementation of new measures. We do not
believe that a demonstration project is needed.
Comment: Several commenters noted that expanding the measure set
retroactively will require hospitals to re-negotiate contracts with
their vendors.
Response: We disagree that our proposal to require hospitals to
submit data beginning with first quarter 2006 discharges would have
expanded the measure set retroactively. However, as noted above, in
response to the comments we received, we will require that hospitals
begin using the expanded measure set for submissions due February 15,
2007 relating to discharges occurring in the third calendar quarter of
2006. We believe that this change will afford hospitals adequate notice
to prepare for reporting using the expanded quality measures. CMS
provides information in a manner that is timely for purposes of meeting
the requirements outlined. CMS does not comment on the contractual
arrangements between private parties such as hospitals and their
vendors. CMS will continue to work with all to assist with their timely
performance, but this issue remains a private contractual arrangement
between those parties. As an alternative, CMS also provides the CART
tool to ensure that hospitals may timely meet its requirements for the
annual payment update.
Comment: Sixteen commenters requested that CMS consider publishing
the proposal to expand the set of measures at least one full year prior
to the start of the fiscal year to which the proposal would apply.
Seven other commenters requested a 6-month to 1-year lead-time to
prepare for reporting additional quality measures adopted by the
Secretary as part of the RHQDAPU program.
Response: We have used the rulemaking process to adopt new quality
measures under the RHQDAPU program, and we believe that this process
provides sufficient notice for hospitals to comply for the annual
payment update. We also note that all of the measures we have adopted
to date for reporting under the RHQDAPU program were previously
reported by many hospitals under other voluntary reporting initiatives.
Comment: One commenter suggested that CMS publicly release a list
of the hospitals that do not meet quality reporting requirements each
year. This would allow the affected hospitals to know immediately that
they are not in compliance with quality reporting.
Response: Hospitals that met the current CMS requirements for
quality data reporting and received their full annual payment update
(APU) for FY 2006 are listed on www.qualitynet.org. In the future,
QualityNet will display a list of those hospitals receiving their full
APU for FY 2007. CMS currently does not have a system in place for
individually notifying hospitals that fail to meet the RHQDAPU program
requirements. CMS is currently considering how to inform those
hospitals that do not receive their full annual payment update for FY
2007.
c. Expanded Quality Measures
In the FY 2007 IPPS proposed rule (71 FR 24093), we listed 21
proposed quality measures, including the 10 ``starter set'' measures
and 11 new measures. The expanded set of measures includes:

Heart Attack (Acute Myocardial Infarction)

Aspirin at arrival
Aspirin prescribed at discharge
ACE inhibitor (ACE-I) or Angiotensin Receptor Blocker
(ARBs) for left ventricular systolic dysfunction
Beta blocker at arrival
Beta blocker prescribed at discharge
Thrombolytic agent received within 30 minutes of hospital
arrival
Percutaneous Coronary Intervention (PCI) received within
120 minutes of hospital arrival
Adult smoking cessation advice/counseling

Heart Failure (HF)

Left ventricular function assessment
ACE inhibitor (ACE-I) or Angiotensin Receptor Blocker
(ARBs) for left ventricular systolic dysfunction
Discharge instructions
Adult smoking cessation advice/counseling

Pneumonia (PNE)

Initial antibiotic received within 4 hours of hospital
arrival
Oxygenation assessment
Pneumococcal vaccination status
Blood culture performed before first antibiotic received
in hospital
Adult smoking cessation advice/counseling
Appropriate initial antibiotic selection
Influenza vaccination status

[[Page 48034]]

Surgical Care Improvement Project (SCIP)--Named SIP for Discharges
Prior to July 2006 (3Q06)

Prophylactic antibiotic received within 1 hour prior to
surgical incision
Prophylactic antibiotics discontinued within 24 hours
after surgery end time
Comment: Six commenters fully supported the progress CMS has made
on the identification and reporting of quality measures.
Response: CMS appreciates the comments and looks forward to
continued support for this effort.
Comment: One commenter suggested that, with regard to hospital
acquired infections, CMS make it clear that process measures are an
interim step prior to the reporting in the near future of the actual
rates of common hospital acquired infections.
Response: CMS believes that the information obtained from both
process and outcome measures (an example of which would be the rates of
common hospital acquired infections) are important and complementary in
stimulating the system changes necessary for quality improvement. With
regard to nosocomial or hospital-acquired infections, we appreciate the
comment and would note that the NQF is currently evaluating measures of
hospital acquired infections with the goal of endorsing a set of
measures by 2007. The NQF is a voluntary consensus standard-setting
organization established to standardize healthcare quality measurement
and reporting, for its review and endorsement through its consensus
development process. In addition, we are working with the Centers for
Disease Control (CDC) and the AHRQ, two government agencies that
collaborate with CMS on the SCIP on ways to further reduce surgical
complications and infections and improve the kinds of information
collected related to this goal.
Comment: One commenter urged CMS to recognize new technology
promptly and appropriately to ensure that measures do not provide
incentives for hospitals to keep older technologies in place after they
are outdated.
Response: CMS is constantly reviewing the medical literature and
maintains technical expert panels and consultants for its performance
measure sets so that its measures remain up to date with current
technologies. Additionally, we have regular conference calls with the
relevant specialty societies, such as the American College of Surgeons,
the American Society of Anesthesiologists, and the Association of
periOperative Registered Nurses), to obtain their input on new evidence
and changing best practices that might warrant a change to our
performance measures.
Comment: One commenter stated that in small hospitals, one person
may be responsible for many jobs. In this situation, the commenter felt
that submitting data regarding more measures was very redundant.
Response: For each of the conditions (such as pneumonia) for which
we adopt measures, the measures focus on individual aspects of care
that are considered standard for every patient. The addition of
measures represents a more comprehensive view of the quality of
services provided to each patient. We believe that additional
information from the added measures will contribute to quality
improvement in patient care.
Comment: Twenty-four commenters stated that their hospitals do not
currently collect data for the surgical infection prevention (SIP)
measures. They contend that the FY 2007 IPPS proposed rule's
requirement that they establish a procedure for abstracting and
collecting these measures for first quarter 2006 would be very
burdensome for hospitals. Many of the commenters requested a delay in
the implementation of the collection of SIP measures until third
calendar quarter of 2006. Another commenter noted that the hospital's
data collecting vendor would require additional funds to collect and
process data to support the SIP measure data collection for January and
February of 2006.
Response: As noted above, in this final rule we have revised the
implementation date for hospital reporting using the expanded quality
measures (including the SIP/SCIP measures) so that reporting will begin
starting with discharges occurring in the third calendar quarter of
2006. We also note that submitting data via vendors is not the only
route available to hospitals. Currently hospitals have available to
them three mechanisms by which to submit data into the QIO Clinical
Warehouse. It is the hospital's choice which mechanism it will utilize
to report its data. The following data reporting mechanisms are
available to hospitals:
Quality Improvement Organization Program (QIO)--CMS makes
available to hospitals data reporting assistance via QIOs. QIOs provide
technical assistance to hospitals as they report data, and if need be
will report the data on behalf of the hospital.
Self reporting--Hospitals can report their own data. All
data collection, including SIP/SCIP can be accomplished by using the
CMS Abstraction & Reporting Tool (CART). This application tool is
available at no charge to hospitals or other organizations.
JCAHO vendor--A hospital may authorize a JCAHO Performance
Measurement System (PMS) vendor that has met the CMS measurement
specifications to transmit data into the QIO Clinical Warehouse on its
behalf.
These reporting mechanisms are also described on the QualityNet
Exchange Web site (www.qualitynet.org).
Comment: Nine commenters noted that the data requirement for SCIP
would result in unplanned costs to hospitals including the hiring of
additional abstractors, additional training, and additional medical
assistance to pull the pertinent charts.
Response: Under section 5001(a) of Pub. L. 109-171, we are required
to begin to adopt the baseline set of performance measures as set forth
in the 2005 IOM report, which include the SIP/SCIP measures. In
considering which of these measures we would adopt for the RHQDAPU
program, we weighed the burden for the hospital to report additional
quality data for the measure against the benefits of addressing
recognized gaps in quality and providing beneficiaries with useful
information on the quality of hospital care. We believe that the SIP/
SCIP measures strike the appropriate relative balance of interests.
That balance is appropriate and valuable on three levels given the
potential improvements in surgical site infections that can occur
through proper antibiotic use. It is estimated that over half of the
127,000 surgical site infections that are contracted by Medicare
beneficiaries were preventable (Best, WR, Khuri SF, et al.; Identifying
Patient Preoperative Risk Factors and Postoperative Adverse Events in
Administrative Databases: Results from the Department of Veterans
Affairs National Surgical Quality Improvement Program. J Am Coll Surg
2002;194:257-266. 2002 by the American College of Surgeons).
SCIP measures are designed as a framework to help hospitals
organize and coordinate care. Evidence has shown that when hospitals
change their internal systems to reliably deliver the care mandated in
the SCIP measures, they are more efficient and safer for patients. For
example, a nationwide collaborative dedicated to improve the processes
of care outlined in the proposed SCIP Infection measures demonstrated a
significant reduction in surgical site infection (Dellinger EP,
Hausmann SM, et al., Hospitals collaborate to decrease surgical site

[[Page 48035]]

infections. Am J Surg. 2005 Jul;190(1):9-15.). And reliable processes
of care aimed at assuring the correct deep venous thrombosis prevention
as outlined in the proposed SCIP VTE measures ``markedly reduced'' the
rates of these complications in patients at risk (Kucher, N, Koo S, et
al.; Electronic Alerts to Prevent Venous Thromboembolism among
Hospitalized Patients N Engl J Med 2005;352:969-77).
Comment: One commenter stated that the sample size for SCIP for
large hospitals will be onerous for these facilities. The commenter
requested that the sample size be calculated using the entire
organization's activity rather than each specialty. Under this
approach, hospitals could decide on an individual basis if they want to
drill down for more information.
Response: Specialty-specific sample sizes are required to provide
more precise measures by specialty. Much of the existing research about
antibiotic administration is specialty-specific, and the exclusion
criteria and process measure rates differ by specialty. The increased
sample size is necessary to incorporate these specialty-specific
differences into hospital-level estimates of antibiotic administration.
The SCIP sample is designed to provide precise hospital level
measures for all SCIP measures, including the SCIP Infection 1 and 3
measures included in this rule. CMS believes that the SCIP specialty-
specific sample is designed to produce precise measures for the entire
SCIP expanded measure set.
Comment: One commenter agreed with the inclusion of the SIP
measures. This commenter believed that there was not sufficient
information provided by the two measures alone. The commenter urged CMS
to include SIP-2 in the measures.
Response: We agree with the commenter. CMS will evaluate how we can
include SIP 2 (SCIP 2), appropriate selection of prophylactic
antibiotics, in the future.
Comment: One commenter recommended that CMS review the way some of
the indicators are measured. Two commenters recommended that quality
measures should conform to clinically appropriate care established by
peer-reviewed literature or professional consensus. One commenter
suggested that there needs to be a more scientific method when setting
up indicators.
Response: We believe that the quality measures in this rule and on
Hospital Compare have a strong evidence base and represent technical
guidelines from relevant stakeholder societies such as the American
College of Cardiology and the American Heart Association. They are
maintained by CMS working with the JCAHO through ongoing assessments of
changes in the clinical literature, evaluation of trends in
performance, and review by technical experts. In addition, all measures
currently being reported, as well as those that we are adopting in this
rule, have been endorsed by the NQF, a national consensus body whose
mission is to identify a common set of standardized evidence-based
measures for quality reporting. Detailed specifications for each of the
measures, including information concerning the underlying literature
and clinical evidence that led to their endorsement and adoption, are
included in the Specifications Manual for National Hospital Quality
Measures, at www.qualitynet.org.
Comment: Two commenters stated that financial incentives must allow
sufficient flexibility to meet the unique needs of individual patients,
and not encourage hospitals to avoid the most difficult cases.
Response: As noted in our response to the previous commenter, we
have adopted evidence-based quality measures which have been endorsed
by the NQF. There is no question that any payment system potentially
contains incentives for unintended consequences that may be counter to
the intent of those who design the system. We share the commenters'
concern regarding this issue and will consider it as we monitor the
impact of hospitals reporting data to receive the full market basket
update under section 5001(a) of Pub. L. 109-171, and as we develop our
plan for implementing a value-based purchasing, under section 5001(b)
of Pub. L. 109-171.
Comment: Eight commenters stated payment for 2007 will be reduced
by 2.0 percentage points for performance indicators that have a track
record of poor reliability, such as the working diagnosis of pneumonia.
The commenters noted that some hospitals resort to answering working
diagnosis for pneumonia as a ``yes'' for all pneumonia charts
regardless of actual documentation, since the penalty is
disproportionately more severe if the no answer is found to be
incorrect. The commenters noted that a couple of mismatches on the
``no'' response to working diagnosis can drive the hospitals to the
brink of losing 2.0 percentage points of their annual payment update.
Response: The working diagnosis element is only one of over 15
elements in a single episode of care that is used to calculate the
pneumonia measures. Many of the hospitals that failed quarterly
validation due to submitting inaccurate pneumonia elements did not
submit additional elements used in the calculation of pneumonia
measures and validation score. All hospitals are able to submit all
elements potentially used to calculate validation scores, and we
encourage hospitals to submit all of these elements to improve their
likelihood to pass quarterly validation.
Comment: Two commenters recommended that for future measure
development, CMS select measures only from those used by the HQA for
public reporting.
Response: CMS strongly values its participation in the HQA, which
was established as a public-private collaboration to promote voluntary
hospital public reporting on quality of care. Led by representatives of
the hospital industry, with membership that includes consumer groups,
unions, purchasers, providers, health plans and government, accrediting
and standard-setting organizations, the HQA has been instrumental in
helping to identify and find common ground among the diverse interests
of these stakeholders. Congress recognized the HQA's role when it
included the ``starter set'' of 10 measures, first identified by the
HQA for reporting on Hospital Compare, in the Pub. L. 108-173 RHQDAPU
program provisions (section 501(b)). As we now implement section
5001(a) of Pub. L. 109-171 and expand the measure set for FY 2007 and
beyond, we are asking hospitals to report on the 21 HQA-approved
measures. In addition, HQA has strongly supported the development and
use of the HCAHPS tool for assessment of patient experience with care.
We expect to continue to work closely with the HQA in our future
efforts, as well.
In addition, we expect to add HCAHPS[supreg] measures to the
RHQDAPU program's reporting set as soon as feasible. The HCAHPS[supreg]
survey is designed to make ``apples to apples'' comparisons of
patients'' perspectives on hospital care including communications with
doctors, communications with nurses, responsiveness of hospital staff,
cleanliness and quietness of the hospital, pain control, communication
about medicines, and discharge information.
Comment: One commenter requested a clear definition for antibiotic
administration time. In the commenter's opinion, the current standard
requiring that no longer than one-hour pass between the administration
of the antibiotic and the making of a surgical

[[Page 48036]]

incision does not have adequate clinical support.
Response: The performance measures that we have adopted for the
RHQDAPU program, including the timing of prophylactic antibiotic
administration prior to surgery, are evidence-based, consensus-derived
measures. The measurement specifications each of these measures
includes the supporting evidence basis for the measure, and can be
found in the Specifications Manual for National Hospital Quality
Measures, at www.qualitynet.org. In addition, as part of our routine
maintenance review of the measures, we monitor any changes in the
medical literature that would require modification of the measures.
Comment: One commenter suggested ``retiring'' the oxygenation
assessment measure. New section 1886(b)(3)(B)(viii)(VI) of the Act
specifies that CMS has the ability to replace measures ``where all
hospitals are effectively in compliance.'' The commenter noted that the
average performance on this measure is 99 percent and that retiring
this measure would be a signal to hospitals that CMS is willing to
reduce the burden of data collection as the set evolves.
Response: The commenter's points are well taken. The oxygenation
measure was previously endorsed by the NQF. The NQF has recently
initiated a ``maintenance'' review of all of its previously-endorsed
pulmonary care measures, including the oxygenation measure, under which
process these measures will be reevaluated by panels of experts and
health care stakeholders (including CMS) to determine their continuing
technical merit. CMS will defer its decision on the oxygenation measure
until after this group has completed its deliberations.
Comment: Several commenters stated that the measures recommended by
the Leapfrog Group (computerized provider order entry, intensive care
intensivists, and evidence-based hospital referrals) and included in
the 2005 IOM report do not meet the quality measure standards necessary
for inclusion in CMS' national quality measurement initiatives. In
addition, commenters noted that rural hospitals have not previously
been asked to comply with these measures. These commenters believe that
it would be unwise for CMS to adopt these measures. Another commenter
wrote in support of the use of such structural measures. This commenter
noted, however, that in terms of burden on hospitals, such programs
span multiple years, must be approved on an annual basis, and require
board approval. They also require significant financial resources,
human resources, and time to develop and implement. The commenter
stated that requiring such programs, which present a challenge to
either fund or risk reduction in payment, would not appear to be
reasonable. For example, the commenter stated that the phased-approach
implementation of computerized provider order entry for prescriptions
(CPOE) for its facility is projected to be completed by 2009 with an
estimated cost of up to $2 million.
Response: We thank the commenters for their input. For FY 2007, we
are not proposing that hospitals submit data on the three structural
measures recommended by the three Leapfrog Group and included in the
2005 IOM report. However, as we continue to expand the set of measures
on which hospitals report, we will consider whether to include these
measures, as well as other structural measures and will bear the
commenters' observations in mind.
Comment: Several commenters agreed that measures selected should be
those that are endorsed by NQF and aligned with JCAHO's reporting
requirements. The commenters also proposed that methods for maintaining
measures be developed and implemented. Since medical knowledge
continues to evolve, the science behind clinical practice guidelines
must be monitored for changing evidence that previously accepted
clinical practices no longer define the best care. Without this
important step, measures cannot continue to evaluate best quality of
care delivered to patients. The commenters proposed that CMS create a
plan, including method and frequency for monitoring new evidence that
impacts established measures, in addition to monitoring for adjustments
needed to improve their implementation.
Response: We agree with the commenters. CMS continuously monitors
new evidence and works with panels of experts, as well as with the
relevant specialty societies and other groups that develop practice
guidelines, to assure that the measures are up to date, and to verify
that measures reflect best clinical practice. In addition, we work with
JCAHO experts to assure that the detailed specifications and
instructions for collection of data used to calculate the rates
reflects the most up to date information about medications, coding, and
other issues.
Comment: A commenter suggested that as new measures are added and
mandated for public reporting, payment should not be based on simply
the indicator percentage, but should also include the percentage change
of improvement or the quarters of sustained improvement. The commenter
stated that data collected based on such process improvement would be
test data until the processes being measured were stable. Just as
indicators are tested and validated, process improvement provides data
that is test data. Transparency of data reporting connected to payment
needs to allow a test period for data to not ``count'' toward payment.
Response: The commenter has made several important suggestions that
are relevant to our ongoing deliberations about measures for both
reporting quality data and for value-based payment systems (discussed
more fully in section IV.B. of this preamble). In proposing that CMS
consider measures that highlight improvement over time, rather than
just performance during a single time period, the commenter has offered
an important suggestion that addresses our goal of identifying a set of
measures that will support sustained quality improvement. We also
raised this issue in the 2007 IPPS proposed rule in our discussion of
value-based purchasing (71 FR 24098). As we consider further expansion
of the measure set, we will consider this suggestion, as well as the
commenter's suggestion that hospitals be given the opportunity to
``test'' the reporting of new measures before they are included in any
payment incentive arrangement.
Comment: Three commenters strongly urged CMS to adopt measures
identified in the 2005 IOM report as well as consider and adopt as many
additional NQF-endorsed measures as can be feasibly collected, for
example:

Outcomes

30-day heart failure mortality
30-day heart attack mortality
Failure to rescue

Complications

Urinary catheter-associated infection rate
Central line-associated blood stream infection rate
Ventilator associated pneumonia rate

Clinical

Surgery patients with recommended venous thromboembolism
prophylaxis ordered
Surgery patients who received appropriate venous
thromboembolism prophylaxis within 24 hours prior to surgery to 24
hours after surgery
Response: We appreciate the specific recommendations of the
commenters and will consider them as we look to expand the set of
measures.

[[Page 48037]]

Comment: One commenter recommended that CMS continue to work to
ensure the accuracy of the information posted on the Hospital Compare
Web site. The methodology adopted should be fully transparent to all
stakeholders to clearly assess hospital-level reliability. The
commenter recommended that we also engage representatives from the
research, provider, and consumer communities to obtain input on the
different potential methodologies and their impact on data validity,
accuracy, and completeness.
Response: We agree with the commenter. The integrity of the
information posted on the Web site depends on the accuracy of the
underlying data. In the 2007 IPPS proposed rule, we solicited input on
proposed revisions to our methodology, and CMS remains open to advice
and suggestions concerning how to continue to improve its processes to
assess and assure hospital-level reliability.
Comment: Two commenters urged CMS to include outcome measures based
on the best available science and consensus, rather than permanently
focus on the process measures that it has adopted. Ultimately,
consumers want to see the results of hospital practices, that is,
whether the processes measured actually yield higher quality care as
indicated by results, such as better mortality rates and fewer
infections.
Response: We appreciate the specific recommendations of the
commenter and will consider them as we look to further expand the set
of measures. We are particularly interested in considering measures
that have been endorsed by consensus building entities such as the NQF
that take into account the issues of validity, reliability, impact and
feasibility of the measures and involve a wide array of stakeholders.
We also anticipate issuing a rulemaking in the near future that would
propose to adopt a number of outcome measures, which may include 30-day
post-admission mortality rates for patients with acute myocardial
infarction and heart failure
Comment: Two commenters requested that, as we consider new
measures, we involve all stakeholders in the process.
Response: CMS agrees with the commenter that stakeholder input is
an essential part of the measure selection process. CMS receives input
from stakeholders through multiple vehicles such as the NQF, the HQA
and the notice and comment rulemaking process. CMS remains committed to
the goal of including stakeholders in the process.
Comment: One commenter suggested that because CMS makes its
hospital quality data public, the data should be risk adjusted, and
technical standards should be applied to the data to assure fair
treatment of hospitals.
Response: The set of measures currently reported on Hospital
Compare are process measures for which no risk adjustment is needed,
since they are constructed to reflect the proportion of cases in which
a patient received the care that is appropriate for his or her clinical
needs. The measures are constructed to exclude cases for which an
intervention would not be appropriate. We expect that, as we consider
whether to expand the set of measures to include outcome measures, we
will need to address concerns about risk-adjustment and patient-mix.
Comment: Two commenters suggested that CMS develop measures that
examine quality and costs of care within and across settings over time.
A commenter also recommended allowing variation in the implementation
of new measures due to variability across the country.
Response: We appreciate the recommendations of the commenters. As
we work to expand the set of measures that hospitals report under the
RHQDAPU program, we will consider such issues as how to assess care
coordination both within and across hospitals and health care
providers, as well as how to account for expected and unexpected
variations in performance across providers.
Comment: One commenter expressed concern about the negative effects
of requiring hospitals to report measures when it is actually the
physician who orders the care. This particularly happens in the case of
small rural hospitals. This commenter indicated that the hospital
should not be responsible for physician mistakes.
Response: Hospitals cannot abrogate their responsibility for the
care that is practiced at their own facilities. Given that virtually
all significant treatment decisions are initiated with a physician's
order, this argument would absolve hospitals of virtually all
responsibility for quality and safety.
Comment: One commenter recommended addressing the alignment of
physician and hospital indicators. If alignment is not possible, the
commenter recommended that we have physician-driven indicators that
apply to physicians only.
Response: CMS is working collectively with the hospital and
physician communities to improve the overall quality of health care for
Americans. As part of this effort, CMS to use a common focus on quality
by clinicians and providers to achieve improvement in the quality of
healthcare. One example of this is the Surgical Care Improvement
Project (SCIP). The use of metrics that focus on surgical quality from
both the physician and provider perspective offer the best opportunity
to improve the surgical quality of care. In addition, CMS launched a
Physician Voluntary Reporting Program (PVRP) that incorporated
indicators that will align physician interests with hospitals. More
information on PVRP can be found at www.cms.hhs.gov/pvrp.
d. HCAHPS[supreg] Survey
As recommended in the IOM report, we will be implementing the
HCAHPS[supreg] survey in October 2006 as a part of the HQA.
HCAHPS[supreg] is designed to make ``apples to apples'' comparisons of
patients'' perspectives on hospital care including communications with
doctors, communications with nurses, responsiveness of hospital staff,
cleanliness and quietness of the hospital, pain control, communication
about medicines, and discharge information. More information on this
survey can be found on our Web site: www.cms.hhs.gov/HospitalQualityInits/downloads/HospitalHCAHPSFactSheet200512.pdf. We
intend to report the first three quarters of these survey data in late
2007 on the Web site: www.hospitalcompare.hhs.gov. HCAHPS[supreg] was
endorsed by the NQF in May 2005. However, we did not propose to include
HCAHPS[supreg] as a part of the revised FY 2007 ``Reporting Hospital
Quality Data for Annual Payment Update Notice of Participation'' form.
We believe that the procedures and expanded measure set that we
proposed to adopt in the FY 2007 IPPS proposed rule meets the
requirement of section 1886(b)(3)(B)(viii)(IV) of the Act that, ``for
payments beginning with fiscal year 2007, in expanding the number of
measures, under subclause (III), the Secretary shall begin to adopt''
the 2005 IOM report's set of baseline measures. Section
1886(b)(3)(B)(viii)(III) of the Act states that we must expand, for FY
2007 and each subsequent fiscal year, the set of measures that the
Secretary determines to be ``appropriate'' for the measurement of the
quality of care furnished by hospitals in inpatient settings beyond the
original quality measures that applied in FY 2005 and FY 2006.
We believe that the statute gives the Secretary the discretion to
choose what ``begin to adopt'' should involve in FY 2007 and the number
of additional

[[Page 48038]]

measures, if any that would be ``appropriate'' during this time. In
proposing our revised procedures, designing the methods that hospitals
will use to report during FY 2007, establishing a set of expanded
measures based on the 2005 IOM report, and revising RHQDAPU program
materials, we believe that we have met the statutory requirements. We
will continue to explore the feasibility of adopting additional
measures for purposes of the FY 2008 update, including the
HCAHPS[supreg] survey described in the IOM report and other measures
that reflect consensus among affected parties, as required by new
sections 1886(b)(3)(B)(viii)(III) through (V) of the Act.
Comment: One commenter expressed support for the HCAHPS[supreg]
initiative, but requested that CMS make the survey available in
languages other than English and Spanish. The commenter noted that in
areas with diverse patient populations such as New York City, hospitals
will not be able to conduct the survey adequately in only two
languages.
Response: The HCAHPS[supreg] survey is currently available only in
English and Spanish. We intend to solicit comments from participating
hospitals and survey vendors regarding additional languages for
HCAHPS[supreg]. This information can be submitted to our HCAHPS
mailbox, [email protected]. Based on the information we
receive, we will establish priorities for HCAHPS[supreg] translation
into additional languages.
Comment: One commenter recommended that we offer hospitals
sufficient time to incorporate the HCAHPS[supreg] measures into their
care protocols. The commenter suggested that we establish an
implementation schedule that provides for sufficient time for hospitals
to become familiar with data submission, and instructions explaining
how to use the tool for feedback. The commenter noted that such an
approach would allow for development of more accurate data.
Response: We agree that hospitals and survey vendors must become
familiar with the HCAHPS[supreg] instrument, data collection, and data
submission procedures prior to participation in the national
implementation of the survey. To this end, CMS offered free training to
hospitals and survey vendors in February and April of this year.
Additionally, to gain experience in all aspects of the survey,
hospitals that will participate in the national implementation of
HCAHPS[supreg] in October 2006 were required to take part in a ``dry
run'' of the survey in April, May, or June of this year. Data submitted
to CMS from this dry run will not be publicly reported. CMS is planning
to offer additional training and dry run opportunities for hospitals
that will join the HCAHPS[supreg] initiative after October 2006.
Comment: One commenter recommended that the following question be
added to the HCAHPS[supreg] patient survey proposed for October 2006,
``Did you get an infection while you were in the hospital or after any
surgery or other procedure?'' The commenter stated that most patients
would know about the existence of an infection, and this would be a
more precise way to identify significant problems than more general and
subjective HCAHPS[supreg] questions, such as questions that address the
``cleanliness and quietness of the hospital.''
Response: We appreciate this suggestion, but at this time we are
not planning to add new items to the current version of the
HCAHPS[supreg] survey (which can be found on www.hcahpsonline.org))
based on our evaluation of the survey and on comments we received on
the survey in response to multiple Federal Register notices that we
published (for example, 68 FR 5889, 68 FR 38346, 68 FR 68087, and 70 FR
67476). However, we will keep this suggestion in mind for future
versions of the survey.
Comment: Two commenters stated that for FY 2008, CMS needs to more
than merely explore the feasibility of adopting additional measures for
FY 2008 update. There should be a substantial expansion of measures for
hospitals to obtain the FY 2008 annual update. The commenters agreed
with the Consumer-Purchaser Disclosure Project recommendations that CMS
adopt the additional measures identified in the 2005 IOM report
(HCAHPS[supreg] and three structural measures), as well as consider and
adopt a number of other NQF-endorsed measures.
Response: We note that in addition to the expanded measure set that
we are adopting in this rule, we will begin national implementation of
the HCAHPS[supreg] survey in October 2006. We also anticipate further
expanding the measure set for FY 2008 and will consider adopting other
NQF-endorsed measures at that time.
Comment: A commenter suggested that CMS identify and develop, in
collaboration with the long-term care hospital (LTCH) industry,
appropriate quality measurement indicators and begin collecting and
public reporting results across providers.
Response: At this time, we are not working on developing measures
for the long term care hospital setting. However we will consider, in
the future, the commenter's suggestions regarding the collection of
quality measures from long term care hospitals. HCAHPS[supreg] has been
developed for use by short-term, acute-care hospitals, which
encompasses all hospitals that are eligible to submit clinical measures
for public reporting. At this time, other types of hospitals, including
LTCHs, are not eligible to participate in HCAHPS[supreg]. CMS will, in
the future, consider whether and how an HCAHPS[supreg] survey could be
re-designed for appropriate use by other types of hospitals, including
LTCHs.
Comment: Several commenters stated that there is no ``no-cost''
alternative to using a vendor to participate in HCAHPS[supreg], unlike
the situation of the collection of clinical chart abstraction data.
They noted that this presented a significant burden to hospitals that
will have no alternative to using commercial vendors to satisfy a
Federal mandate. In addition, the commenters stated that a substantial
number of hospitals do not currently conduct a patient experience
survey and that the Federal government has committed only to providing
the interface to upload data to QualityNet Exchange. Some commenters
suggested that it would be helpful if we provided clear and concise
guidance on HCAHPS[supreg] sampling.
Response: From the inception of the survey, CMS has been attentive
to the costs to hospitals that participate in HCAHPS[supreg].
HCAHPS[supreg] has been designed to allow a hospital to either conduct
the survey on its own, or to conduct the survey through the use of a
survey vendor. A hospital that elects to self-administer HCAHPS[supreg]
must meet a series of minimum survey requirements related to prior
survey experience, capacity to conduct HCAHPS[supreg], and its ability
to satisfy quality control procedures. In addition, HCAHPS[supreg] was
designed to be compatible with a range of popular survey practices. It
is made available in four modes of administration (mail, telephone,
mail with telephone follow-up, or active IVR), and can be implemented
as a stand-alone survey, or integrated within an ongoing patient
survey. Because of the nature of the HCAHPS[supreg], the tool developed
for HCAHPS[supreg] is different from the CART tool. However, CMS has
designed an HCAHPS[supreg] on-line tool that allows hospitals that
self-administer the survey to enter and upload the survey data into the
QualityNet Exchange data base. There is no charge for use of the
HCAHPS[supreg] on-line tool.
Further, in February and April 2006 CMS offered free training on
participation in the HCAHPS[supreg] survey.

[[Page 48039]]

Among its topics, this training included detailed instruction on
sampling. Additional iterations of this training program are currently
being planned. CMS also provides readily available guidance on sampling
and other HCAHPS[supreg] issues through its HCAHPSonline.org help desk.
In addition, QualityNet Exchange maintains a help desk that provides
assistance on matters related to submission to the HCAHPS[supreg] data
warehouse. All of these services are available free of charge.
An independent study of the benefits and costs of HCAHPS[supreg]
estimated that the average cost of HCAHPS[supreg] collected as a
separate survey to be between $3,300 and $4,575 per hospital. The cost
of combining HCAHPS[supreg] with an existing hospital survey would be
about $978 per hospital (Abt Associates Inc.: Costs and Benefits of
HCAHPS, October 5, 2005). Additionally, hospitals have the option to
use a survey vendor or conduct HCAHPS[supreg] on their own if they have
prior survey experience.
e. Data Submission
For the FY 2007 update, we specify that hospitals must submit
complete data regarding the quality measures in accordance with the
joint CMS/JCAHO sampling requirements located on the QualityNet
Exchange Web site. These requirements specify that hospitals must
submit a random sample or complete population of cases for each of
three topics (acute myocardial infarction, heart failure, and
pneumonia) covered by the starter set of 10 quality measures. Hospitals
are expected to continuously meet these sampling requirements for the
starter set of 10 quality measures for discharges in each quarter.
We do not anticipate significant additional burden on hospitals
regarding the starter set of 10 quality measures or the anticipated 21
clinical quality measures because all JCAHO-accredited hospitals are
currently required to adhere to these sampling requirements in acute
myocardial infarction, heart failure, pneumonia, and surgical infection
prevention for accreditation and core measure reporting purposes.
Comment: One commenter suggested that CMS consider a methodology
that would allow resubmission of data in cases where incorrect data has
been identified by the submitting provider, while still maintaining the
integrity of the data validation process for payment purposes. The
commenter suggested that this could be accomplished through the use of
two databases. One database would be frozen once the final submission
deadline for a quarter has passed to be used for Clinical Data
Abstraction Center (CDAC) validation. However, if the providers
discovered errors in its data submission after the quarterly deadline,
it would be able to use a second database to submit updated data. The
commenter believed that this would improve the data available on
Hospital Compare.
Response: We believe that the commenter's suggestion that we create
two separate databases has the potential to maintain the integrity of
the validation process as well as to improve the quality of the
publicly reported data. We will review the methodology and take this
suggestion into consideration.
Comment: One commenter requested that CMS create meaningful and
useful reports that would be available to vendors after data submission
is complete each quarter. The reports should identify actionable steps
that hospitals are required to take to make sure they successfully
submit data for the RHQDAPU program. CMS should also modify the current
Failure and Success Reports so that any data elements needed to
populate or calculate measures reported for the annual payment update
can be identified as a critical error and result in the rejection of
the record. The hospital should be able to download the entire report,
without having to download it into several reports.
Response: CMS thanks the commenter for the suggestions on how to
improve the reports. The following reports are currently available to
hospitals and vendors:

------------------------------------------------------------------------
Provider
Title of report Vendor access access
------------------------------------------------------------------------
QIO Clinical Warehouse Import Detail X................... X
by Provider--Provides case import
status into warehouse; options for
queries include topic, upload
status, discharge dates, types of
messages (critical, informational
and measures) and various sort
options.
QIO Clinical Warehouse Import Detail X................... X
by Error Code--Provides case import
status into warehouse; options for
queries include topic, upload
status, discharge dates and various
sort options.
QIO Clinical Warehouse Submission X................... X
Summary--Case submission summary.
Case Status Summary Report--Includes Based on hospital X
measure inclusion status and reason authorization.
for exclusion.
Measure Status Summary Report-- Based on hospital X
Summary of number of cases authorization.
indicated per quality measure for
cases accepted into the QIO
Clinical Warehouse.
------------------------------------------------------------------------

CMS is currently reviewing the data submission reports and
considering modifications to improve and enhance the existing feedback
reports. In the interim, we released two additional reports in June
2006 to provide more detailed information to hospitals.
QIO Clinical Warehouse Measure Status by Category; this
report will provide information by measure to include total cases as
well as the number of cases by measure category (A-E).
QIO Clinical Warehouse Measure Status by Case; this report
will provide by measure for each case whether the case was eligible for
the denominator, passed the measure (numerator), was excluded from
measure calculation and the reason for exclusion.
CMS and its contractors routinely conduct training to provide
additional assistance concerning how to access and utilize QualityNet
Exchange Reports. Information on these trainings can be found on
QualityNet Exchange Web site.
Comment: Two commenters requested that corporate owners and vendors
have access to QualityNet reports about their specific hospitals, and
believe that these reports should not be provided only to hospitals.
The commenters stated that having access to these reports will allow
hospitals to discern whether errors in data transmission have occurred
and whether data should be resubmitted before the deadline.
Response: Hospitals have had the ability to grant third parties
such as health care systems and vendors permission to access select
QualityNet Exchange Reports since December 2004 through QualityNet
Exchange Self-Serve. Health care system users and vendors obtain
permission to access hospital reports by completing a QualityNet
registration form and submitting the form to the QualityNet help desk.
The QualityNet help desk will process the registration form. When

[[Page 48040]]

a QualityNet user account is assigned, the health care system or vendor
user can then request access to reports through the QualityNet Self
Serve. The healthcare system's or vendor's report request is then sent
to the hospital for report access approval. Detailed instructions for
using QualityNet Exchange Self-Serve are available in Chapter 2,
Section 2 of the User Guide located on www.QualityNet.org.
Comment: One commenter opposed CMS' intent to develop measures
specifications and a system or mechanism to accept data without
converting it into XML.
Response: CMS does not intend to develop measures specifications
and a system or mechanism to accept data without converting it into
XML. Our intent is to continue to utilize the XML format for file
submissions.
Comment: Four commenters disagreed with CMS' opinion that no
additional burden would be placed on hospitals. The commenters noted
that JCAHO participating hospitals are not required to submit the data
regarding all 21 measures found in the proposed rule. Therefore, it
would be an additional burden on the hospitals to have to submit more
measures than are required by the current JCAHO requirements.
Response: We acknowledge this concern, but we are required by new
section 1886(b)(3)(B)(viii)(IV) of the Act to begin to adopt the
measures as specified in the 2005 IOM report. We believe that the
measures we have selected are appropriate because we believe these
quality measures will: (1) Provide useful and valid information about
hospital quality to the public; (2) provide hospitals with a sense of
predictability about public reporting expectations; (3) begin to
standardize data and data collection mechanisms; and (4) foster
hospital quality improvement.
We have also taken steps to ensure that the burden on hospitals is
as minimal as possible. First, while some hospitals report through
JCAHO vendors, we make available the CART tool for reporting on all of
the measures in the expanded measures set, at no additional cost to the
hospital. Second, our data analysis indicates that although hospitals
are not currently required to submit data regarding the 21 measures
identified in the proposed rule, many of them are already submitting
these data as part of our HQA voluntary reporting initiative. Many
hospitals have participated in the HQA, and are continuing to submit
data to the QIO Clinical Warehouse. Many HQA-participating hospitals
have been voluntarily reporting on the additional quality measures
Comment: One commenter stated that the additional requirements for
reporting are too burdensome for rural hospitals. The commenter noted
that additional resources required for this work takes away from time
the staff can provide for actual care and that the costs associated
with submitting the additional measures are too prohibitive for rural
hospitals.
Response: Although we acknowledge that the additional reporting
requirements will potentially require hospitals to begin collecting
data that they have not, to date, been collecting, this potential
burden must be weighed against the goals of improving quality of care
and meeting the needs of patients. As we stated in response to a
previous comment above, we have taken a series of steps to minimize the
burden for all hospitals.
Comment: One commenter stated that the QUEST system does not
provide consistent answers to questions about abstraction. This
commenter stated that there are flaws in the current system. Therefore,
the commenter stated that payment should not be based on this system.
Response: The QUEST system is the question and answer system that
is available on the internet at QualityNet.org. Questions can be
submitted by anyone and they are answered by CMS or its contractors.
CMS is working to improve the QUEST system. New processes have been
implemented in order to avoid inconsistent answers to questions about
abstraction. However, payment is not based on the QUEST system, but is
based on compliance with the full set of RHAQDAPU requirements. The
primary source for abstraction clarification is the Specifications
Manual for National Hospital Quality Measures, available on the
QualityNet Exchange Web site.
f. RHQDAPU Program Withdrawal and Chart Validation Requirements
For the FY 2007 update, hospitals may withdraw from the revised
RHQDAPU program at any time up to August 1, 2006. If a hospital
withdraws from the program, it will receive a 2.0 percentage point
reduction in its payment update.
For the FY 2007 update, and until further notice, we will continue
to require that hospitals meet the chart validation requirements that
we implemented in the FY 2006 IPPS final rule. There were no chart-
audit validation criteria in place for FY 2005. Based upon our
experience with the FY 2005 submissions and our requirement for
reliable and validated data, in the FY 2006 IPPS final rule, we
discussed additional requirements that we had established for the data
that hospitals were required to submit in order to receive the full FY
2006 payment update (70 FR 47421 and 47422). These requirements, as
well as additional information on validation requirements, will
continue and are being placed on the QualityNet Exchange Web site.
For the FY 2007 payment update, and until further notice, hospitals
must pass our validation requirement of a minimum of 80 percent
reliability, based upon our chart-audit validation process, for the
first three quarters of data from CY 2005. These data were due to the
QIO Clinical Warehouse by July 15, 2005 (first quarter CY 2005
discharges), November 15, 2005 (second quarter CY 2005 discharges), and
February 15, 2006 (third quarter CY 2005 discharges).
We use confidence intervals to determine if a hospital has achieved
an 80-percent reliability aggregated over the three quarters. The use
of confidence intervals allows us to establish an appropriate range
below the 80-percent reliability threshold that demonstrates a
sufficient level of reliability to allow the data to still be
considered validated. We estimate the percent reliability based upon a
review of five charts, and then calculate the upper 95-percent
confidence limit for that estimate. If this upper limit is above the
required 80-percent reliability, the hospital data are considered
validated.
We are using the design-specific estimate of the variance for the
confidence interval calculation, which, in this case, is a stratified
single stage cluster sample, with unequal cluster sizes. (For
reference, see Cochran, William G.: Sampling Techniques, John Wiley &
Sons, New York, chapter 3, section 3.12 (1977); and Kish, Leslie.:
Survey Sampling, John Wiley & Sons, New York, chapter 3, section 3.3
(1964).) Each quarter is treated as a stratum for variance estimation
purposes.
We use a two-step process to determine if a hospital is submitting
valid data. In the first step, we calculate the percent agreement for
all of the variables submitted in all of the charts. If a hospital
falls below the 80-percent cutoff, we restrict the comparison to those
variables associated with the starter set of 10 quality measures. We
recalculate the percent agreement and the estimated 95-percent
confidence interval and again compare to the 80-percent cutoff point.
If a hospital passes under this restricted set of variables, the
hospital is considered to be submitting

[[Page 48041]]

valid data for purposes of the RHQDAPU program.
Comment: Four commenters recommended that CMS consider a validation
process that would focus more resources on those hospitals that are
having difficulty in passing the validation thresholds on a consistent
basis.
Response: QIOs, on behalf of CMS, work to assist hospitals with all
aspects of hospital reporting activity. QIOs are available to provide
training and assistance to those hospitals experiencing difficulty
passing the validation thresholds. This training and assistance is
designed to improve the validation scores of hospitals with failing
validation scores through better performance measurement techniques and
medical record documentation.
Comment: One commenter recommended using an alternative method of
data validation and suggested that we use the monthly data points of
each clinical measure instead of relying on chart abstraction. Under
this methodology, a monthly data point that exceeds three (3) standard
deviations would be considered an outlier.
Response: The current validation methodology measures abstraction
accuracy of hospital submitted data elements, and thereby measures the
accuracy of reported data. The suggested alternative methodology is
designed to identify outlier measures at the aggregate hospital level,
and does not identify the specific source of errors. CMS believes that
its current validation methodology more accurately measures abstraction
accuracy at the element level for the RHQDAPU program.
Comment: One commenter stated that it is incongruent to require
results from the first three quarters of 2005 for validation with an
effective date of the final rule that is after the data submissions.
Response: Section 1886(b)(3)(B)(viii)(I) of the Act requires an
annual determination of payment eligibility, and we believe that we can
make accurate payment determinations based on three quarters of
validated data. In order to make timely payments to hospitals under the
IPPS during FY 2007, we need to complete our payment determinations
prior to the start of FY 2007 that is, prior to October 1, 2006. Data
submitted in connection with discharges that occurred during the first
three quarters of 2005 constitute the most current data that we can use
to make our payment determination for FY 2007.
Comment: Two commenters suggested that if we are going to increase
the penalties for failure, there needs to be more timely feedback
allowing organizations to correct their submission errors. These
commenters recommended that the validation process take into account at
least 6 quarters of data to allow for learning and to accommodate the
constant changes in the specifications.
Response: We use quarterly validation results in order to make a
single annual determination. The first three quarters of 2005
constitute the complete set of most currently available data to
determine FY 2007 payment eligibility by September 1, 2006. We believe
that using three quarters of data is sufficient to allow us to make
accurate payment assessments. We will continue to review whether using
additional quarters of data can improve the reliability of hospital
results under the RHQDAPU program. In addition, as we noted in response
to an earlier comment, hospitals and their vendors can use test
transmissions in order to identify problems before the submission
deadlines. Also, in an effort to reduce hospital burdens, CMS and JCAHO
have agreed to release aligned measure changes 120-days prior to their
implementation. This allows both hospitals and vendors adequate time to
prepare for those changes prior to implementation. However, hospitals
are responsible for ensuring that their vendors submit accurate and
timely data. It is the responsibility of each vendor, and ultimately of
the hospital, to adhere to the requirements listed in the
specifications manual for the set discharge time period.
Comment: One commenter recommended a provision to allow CMS and the
hospital to have the flexibility to meet 2 of 3, or 3 of 4 quarters.
This would provide some assurance that if and when the processes break
down, hospitals are not unilaterally punished while providing quality
care.
Response: The 3 quarter validation determination is designed to
provide a single overall estimate of hospital abstraction accuracy over
the entire period. This single overall estimate pools the quarterly
samples to increase the overall reliability of the abstraction accuracy
estimate for that period. The expectation is that hospitals will
abstract and submit cases every quarter with consistency. The entire
period would not be reflected if hospitals are allowed the flexibility
to meet 2 of 3, or 3 of 4 quarters. To utilize fewer quarters decreases
the overall reliability of the abstraction accuracy estimate.
Comment: One commenter suggested that the annual payment update not
be tied to validation until the JCAHO and CMS have aligned the
measures, resulting in making the guidelines clear and consistent.
Response: As of July 1, 2004 discharges, all data elements within
the 10-starter set were CMS and JCAHO aligned. As of January 1, 2005
discharges, all data elements for the expanded 21 measure set were
aligned. The changes are designed to keep the measures current with the
accepted evidence base of medical research, and to improve the clarity
and reliability of the abstraction instructions. CMS and its
contractors have and will continue to work diligently to ensure that
alignment issues do not affect a hospital's eligibility for receiving
the full annual payment update.
Comment: One commenter requested that hospitals not be held
responsible when data processing and communication errors, under the
control of CMS or that occur as a result of actions of its contractors,
cause a failure in validation.
Response: When a hospital reports data processing and communication
errors, the errors are thoroughly researched. CMS has not held a
hospital responsible for data processing and communication errors that
were clearly under the control of CMS or its contractors. However, CMS
does hold the hospital responsible for its own errors in data
processing and communication. If the error is by the hospital's
contracted vendor, the hospital is held responsible.
Under the standard appeal process, all hospitals are given the
detailed results of CDAC reabstraction along with their estimated
percent reliability and the upper bound of the 95-percent confidence
interval. If a hospital does not meet the required 80-percent
threshold, the hospital has 10 working days to appeal these results to
its QIO. The QIO will review the appeal with the hospital and make a
final determination on the appeal. The QIO receives from the hospital
the element or elements that are to be evaluated during the appeal
process, along with the hospital's rationale for the difference between
the hospital's abstraction and the CDAC reabstraction. In this
validation appeal process, the QIO reviews the appeal using the medical
record to evaluate the data elements that are being appealed. This
process allows for an independent review and is designed to find coding
errors on the part of abstractors. QIO appeal decisions are based on
the data that the hospital submitted to the QIO Clinical Warehouse. The
QIO has 20 calendar days to make a final decision. The QIO can either
uphold or reverse the CDAC validation decision. If the QIO does not
agree with the hospital's

[[Page 48042]]

appeal, the original results stand. However, if the QIO agrees with the
hospital, new validation results are calculated and provided to the
hospital through the usual processes. This validation appeal process is
described in detail at the QualityNet Exchange Web site.
Comment: Twelve commenters recommended expanding the appeal process
to include any indicator, regardless of whether the overall validation
score for the hospitals is at or above 80 percent. The commenters
believed that this would allow hospitals the opportunity for
improvement. The commenters also felt that this was significant due to
the aggregations of validation results for multiple quarters, and for
the resolution of discrepancies between the hospital and the CDAC.
Response: Currently the appeals process is only available to those
hospitals that had an overall reliability rate of less than 80 percent
for the quarter. However, CMS encourages all hospitals to use their
validation results as a tool for improving abstraction accuracy.
Comment: Seventeen commenters urged CMS to review, on a case-by-
case basis, any instance in which a hospital's payment would be put in
jeopardy as a result of the validation process. These commenters did
not feel that the validation process is reliable enough to warrant a
hospital losing its update due to faulty validation. If a hospital has
made a good faith effort to submit valid data, one commenter felt that
the hospital should receive its update regardless of whether the data
are deemed accurate enough for display.
Response: CMS believes that the current validation process provides
a reliable estimate of abstraction accuracy on an annual basis. CMS and
its contractors work closely with the CDAC regarding issues that are
raised by hospitals about the validation processes. If a hospital
identifies an issue where it believes that its validation score is
incorrect, CMS conducts a comprehensive review. We work diligently to
ensure that validation issues do not impact eligibility for receiving
the full market basket update.
Comment: Two commenters requested that hospitals receive more time
to file validation appeals. One commenter suggested increasing the time
for filing validation appeals from 10 days to 30 days.
Response: The current time frame for a hospital to file an appeal
is 10 business days after the results are posted to QualityNet
Exchange. The hospital is notified by electronic mail when its
validation results are posted so it receives the information quickly,
and it has the full 10 business days to review and appeal the results.
The QIO then has an additional 20 calendar days to review and respond
to this appeal by forwarding the information to the CDAC or upholding
the CDAC decision while providing education to the hospital. CMS
believes this is adequate time to file an appeal. The current
validation and appeal process can extend as much as 6-9 months beyond
the last day of a discharge quarter. To extend the time allowed to file
appeals would further lengthen this time for hospitals to receive final
results.
Comment: One commenter recommended that we use an impartial party
to decide appeals. The commenter felt that the CDAC should not be
responsible for both the abstraction as well as reabstraction if there
is an appeal.
Response: All data successfully submitted into the QIO Clinical
Data Warehouse are subject to the hospital data validation process. The
CDAC reabstraction process that occurs during the appeal is a very
objective process. Both the hospitals and the CDAC abstract the records
using the same guidelines, the Specifications Manual for National
Hospital Quality Measures. The hospital's abstraction is compared to
the CDAC's reabstraction in order to determine mismatches and the
validation score. A hospital that scores at least 80 percent overall
for the quarter is considered to be supplying valid data for that
quarter. A hospital that scores less than 80 percent overall for the
quarter has the opportunity to file an appeal with its QIO. The
hospital must supply to the QIO the rationale for the appeal and the
QIO will review a copy of the same record the CDAC completed during its
reabstraction. The QIO will then determine the final outcome of the
appeal. The QIO has the final say in appeal decisions.
Comment: One commenter expressed several concerns with the
validation process.
The method that is used to construct the numerator and
denominator on the summary report is unclear.
Response: We are unsure specifically which numerator & denominator
the commenter is referring to. If we interpret the comment correctly,
the commenter is referring to the Submission Feedback report. The
denominator in the summary report refers to the number of elements in
the sampled records used to calculate the measures, and the numerator
refers to the number of correctly abstracted elements in the sampled
records used to calculate the measures. Two measure lists are used to
determine the denominator list of elements, one list for the ten
starter set measures versus the second list for the expanded measure
set. We believe that the documentation regarding these reports,
available on the QualtyNet.org Web site, provides clear explanation of
how the numerator and denominator are determined.
CMS does not accept documentation from hospitals after the
validation results have been published.
Response: Although we do not accept documentation from hospitals
after the validation results have been published, we do have several
safeguards in place to prevent this from happening. The CDAC works
diligently with the QIOs and CMS to ensure that the requirements for
hospital reporting of quality data are efficiently and effectively
being addressed. We have devoted a great deal of resources to ensuring
that the CDAC process, including the receipt of documentation, is
consistent, reliable and accurate. Due in part to our adherence to the
fixed time schedule in the hospital data validation process, and for
security purposes, the CDAC utilizes an in-house system to track and
monitor the end-to-end processing of each medical record request from
hospitals. The CDAC also relies on external contractors like Federal
Express or the U.S. Postal Service (within HIPAA guidelines) with their
tracking systems to ship and track medical records. The CDAC goes so
far as to contact each provider when all requested medical records are
not received.
Hospitals have failed validation due to the CDAC not
receiving all materials, although the hospital verified that all of the
materials were sent in a timely manner.
Response: CMS has several safeguards in place to prevent this from
happening. The CDAC works diligently with QIOs and CMS to ensure that
the requirements of the QIO program are efficiently and effectively
being met. We have devoted a great deal of resources to ensuring that
the CDAC process is consistent, reliable and accurate. Due in part to
our adherence to the fixed time schedule in the hospital data
validation process, and for security purposes, the CDAC utilizes an in-
house system to track and monitor the end-to-end processing of each
medical record request from hospitals. The CDAC also relies on external
contractors like Federal Express or the U.S. Postal Service (within
HIPAA guidelines) with their tracking systems to ship and track medical
records. The CDAC goes so far as to contact each provider when all

[[Page 48043]]

requested medical records are not received.
There is no information to verify the reliability of
abstraction.
Response: Hospitals that score below 80 percent are able to appeal
abstraction results, and these results are documented. If the hospital
believes that it scored below 80 percent due to an abstraction error on
the part of the CDAC, there is an appropriate process by which the
hospital can appeal the validation results.
For most hospitals, the sample size is too small to
determine condition-specific indicator accuracy.
Response: The validation sample is designed to provide overall
quarterly feedback on abstraction accuracy and to provide an annual
estimate for payment eligibility determination. However, hospitals can
use several quarters' validation results to estimate condition-specific
accuracy.
In reviewing the hospital data, we will combine the samples for
first quarter, second quarter, and third quarter (15 cases) into a
single stratified sample to determine whether the 80-percent
reliability level is met. This gives us the greatest accuracy when
estimating the reliability level. The confidence interval approach
accounts for the variation in coding among the five charts pulled each
quarter and for the entire year around the overall hospital mean score
(on all individual data elements compared). The closer each case's
reliability score is to the hospital mean score, the tighter the
confidence interval established for that hospital. A hospital may code
each chart equally inaccurately, achieve a tight confidence interval,
and not pass, even though its overall score is just below the passing
threshold (75 percent, for example). A hospital with more variation
among charts will achieve a broader confidence interval, which may
allow it to pass, even though some charts score very low and others
score very high.
We believe we have adopted the most suitable statistical tests for
the hospital data we are trying to validate. In the FY 2007 IPPS
proposed rule, we solicited comments from hospitals on this passing
threshold, the confidence interval, and the sampling approach (71 FR
24094). Based on analytical results from FY 2006, we found confidence
intervals using only five charts widely varied in size. As a result of
these findings, we decided to combine multiple quarters of validation
samples into a single stratified sample to shrink and/or decrease the
variation and produce a more reliable estimate of abstraction
reliability to determine if any changes in our methodology are
required. We will make any necessary revisions to the sampling
methodology and the statistical approach through manual issuances and
other guidance to hospitals.
Comment: Several commenters objected to our validation process.
They indicated that this process places a large burden on hospitals
working with vendors that require the submission of 100 percent of the
hospitals' cases. Additionally, this process will not provide timely
feedback, and will only add to the burden of receiving untimely
feedback while attempting to continue abstraction. Two commenters
expressed concern about the accuracy of the validation process due to
large fluctuations in the data dictionary guidelines. One of the
commenters suggested that any modifications to the technical process
should be published 120 days before the effective/implementation date
and that the parameters of the validation process should be stated
explicitly and documented. Several commenters suggested that hospitals
should be notified about any validation rule changes at least 120 days
before abstraction and that any validation process should not penalize
hospitals for technical data issues.
Response: The current validation process of 5 charts per quarter is
designed to provide hospitals, regardless of size, with an estimate of
their abstraction accuracy. The quarterly interval is designed to
minimize abstraction burden by coinciding with required submission
requirements for JCAHO-accredited hospitals. Non-JCAHO accredited
hospitals also need periodic feedback about their abstraction accuracy
for quality improvement, and the current process is designed to provide
this feedback. As noted above, CMS and JCAHO have agreed to release
documents at a minimum of 120 days before implementation. All manuals
contain data file submission requirements and programming formats for
each quarter. Hospitals are encouraged to be aware of the release
schedule and to ensure the proper Specifications Manual (data
dictionary) is being used for the discharge time period specified. We
will explore modifying the release date of updated Specifications
Manuals to provide additional time to hospitals and vendors to
incorporate these modifications.
Comment: Three commenters did not believe the validation process of
using 5 charts over 4 patient populations is statistically reliable.
The commenters recommended that we use 4 quarters of data to increase
the number of charts. A commenter also recommended that we use as many
as 25 charts.
Response: As we noted above, although we will consider using
additional quarters of data, we believe that the current 3 quarters
stratified sample provides sufficiently reliable results. The
abstraction accuracy estimate is an element level estimate, and the
chart is considered a cluster of elements. Each quarterly validation
sample generally contains 50 to 100 elements clustered in 5 charts.
Analysis of previous quarters of submitted data indicates that the
clustering effect increases sampling variability by a relatively small
proportion. However, the increase in sampling variability is so small
that the sample still produces reliable validation rate estimates. The
median hospital standard error using the three quarter stratified
sample was about 3 percent.
Time limitations prevent us from using 2005 fourth quarter calendar
year discharges for purposes of making the FY 2007 annual payment
determination, since the scheduled completion date of appeals would not
occur until after the September 1, 2006 scheduled release date of the
list of hospitals receiving full payment update. However, we will
consider using 4 quarters of validation results (that is, fourth
quarter 2005 through third quarter 2006) for the FY 2008 determination.
Additionally, CMS factored cost, burden, and precision of the
validation results in determining the current validation sampling
methodology. The goal of the chart audit validation process is to
ensure that the hospital is abstracting and submitting accurate data.
In order to calculate quality measures, which are used to determine the
standard of care, complete and accurate data are necessary.
Comment: Eight commenters stated that hospitals may be negatively
affected by the way CMS will determine the 80 percent reliability. The
stratified sampling method could result in a passing score for the
first two quarters, but may result in an overall failure rating based
on the results of the third quarter.
Response: The stratified sampling method is designed to produce a
single estimate of abstraction accuracy using three combined quarters
of validation results. CMS uses three quarters' results to provide a
reliable estimate of sustained abstraction accuracy. Combining results
from multiple quarters improves the reliability of the estimate, since
it is possible that abstraction accuracy varies widely from quarter to
quarter. Thus, it is possible

[[Page 48044]]

that one or two quarterly validation samples achieve a passing score
above 80percent, but a single quarterly validation score below 80
percent would drop the three combined quarter score below 80 percent.
It is the weight of cases for a particular quarter that determines how
much impact a single quarter will have on the overall reliability
calculation. However, the aggregate approach improves the ability to
accurately calculate the reliability of data submissions.
g. Data Validation and Attestation
For the FY 2007 update, we will revise and post up-to-date
confidence interval information on the QualityNet Exchange Web site
explaining the application of the confidence interval to the overall
validation results. The data are being validated at several levels.
There are consistency and internal edit checks to ensure the integrity
of the submitted data; there are external edit checks to verify
expectations about the volume of the data received.
In the FY 2007 proposed IPPS rule, we proposed that hospitals
attest to the completeness and accuracy of the data submitted to the
QIO Clinical Warehouse in order to improve aspects of the validation
checks (71 FR 24094). In order to meet this requirement, for each
quarter, hospitals will have to verify the completeness and accuracy,
including the volume, of the data submitted. We plan to provide
additional information to explain the data completeness requirement as
well as provide the relevant form to be completed on the QualityNet
Exchange Web site.
Comment: One commenter supported the requirement for hospitals to
attest to the validity of their data. One commenter also suggested
requiring hospitals to not only attest to the data, but to also subject
a small number of hospitals to a random audit. Another commenter felt
there are still significant issues with the completeness and adherence
to sampling requirements.
Response: CMS appreciates the commenter's support for the
attestation requirement and strives to continually improve the accuracy
and reliability of the hospital quality data. In addition to the
attestation requirement, CMS is currently studying the need, cost, and
feasibility of alternative methods for assessing submission
completeness and adherence to sampling requirements, including on-site
random audits.
Comment: One commenter did not want the hospital attestations to
become too burdensome. The commenter recommended that if the
attestation can be a part of the review period, the QualityNet Exchange
Administrator should be allowed to review the data in the preview
period, and electronically sign for its accuracy. At a minimum, the
attestations should be able to be delivered electronically.
Response: We welcome this suggestion, and agree that the electronic
attestation would increase efficiency and lessen the burden for
hospitals. We will investigate aspects, such as operational and legal
requirements for attestation pertaining to electronic submission.
Comment: One commenter requested that CMS establish and communicate
to the field which quarters will be used in the calculation of the
validation threshold. The commenter believes that CMS should provide
notice to RHQDAPU program eligible hospitals which quarters will be
included in the annual payment update prior to the beginning of the
rulemaking process each year.
Response: CMS is aware of and understands the commenters concerns
in regards to the calculation of the validation threshold. However, we
believe that the appropriate way to announce the quarters for which
data must be submitted under the program is to announce them as part of
the rulemaking process.
h. Public Display and Reconsideration Procedures
We will continue to display quality information for public viewing
as required by new section 1886(b)(3)(B)(viii)(VII) of the Act. Before
we display this information, hospitals will be permitted to review
their information as we have it recorded.
For hospitals that CMS has determined do not meet the RHQDAPU
program requirements for the applicable fiscal year who wish to appeal
this determination, the appeals process set forth in 42 CFR Part 405,
Subpart R (a Provider Reimbursement Review Board (PRRB) appeal)
applies. However, in the FY 2007 IPPS proposed rule (71 FR 24095) we
noted that we believe it may be appropriate to establish a structured
reconsideration process to precede the PRRB appeal for FY 2008 and
subsequent fiscal years.
Currently, a hospital may submit a letter setting out its reasons
for requesting that we reconsider our decision that the hospital did
not meet the RHQDAPU program requirements. We proposed to continue this
process for FY 2007 RHQDAPU program decisions (71 FR 24095). However,
we proposed to establish a deadline of November 1, 2006, for hospitals
to make such requests related to the FY 2007 RHQDAPU program decisions,
which will give hospitals a minimum of 30 days to submit
reconsideration requests from the dates that the decisions are made
public. Further, we proposed that the November 1, 2006 deadline also
would apply to FY 2005 and FY 2006 RHQDAPU program decisions and that a
November 1 deadline would apply in all future fiscal years. CMS will
officially respond to the letters submitted by hospitals.
Further, we sought public comment specifically on the need for a
more structured reconsideration process to precede any PRRB appeal for
FY 2008 and subsequent fiscal years (71 FR 24095). We also sought
comment on what such a process would entail. For example, we noted that
such a process, if established, could include--
A limited time, such as 30 days from the public release of
the decision, for requesting a reconsideration;
Who in a hospital organization can request such a
reconsideration and be notified of its outcome;
The specific factors that CMS will consider in such a
reconsideration, such as an inability to submit data timely due to CMS
systems failures;
Specific requirements for submitting a reconsideration
request, such as a written request for reconsideration specifically
stating all reasons and factors, including specific data elements, why
the hospital believes it did meet the RHQDAPU program requirements;
Specific CMS components that would participate in the
reconsideration process; and
The timeframe, such as 60 days, for CMS to provide its
reconsideration decision to the hospital.
We also solicited comments on the reasons for not establishing such
a reconsideration process.
Comment: One commenter recommended a structured reconsideration
process for FY 2007 RHQDAPU program decisions. This commenter supported
reconsideration predicated on a written request specifically stating
all reasons and factors why a hospital believes it did not meet the
RHQDAPU program requirements. The commenter agreed with the deadline of
November 1 for RHQDAPU program decisions, and a maximum of 60 days for
a CMS response to the reconsideration.
Response: We are pleased that the commenter supports
reconsideration predicated on a written request stating all reasons and
factors for a hospital not meeting the RHQDAPU program requirements and
concurs with the timeframes we proposed. We expect to

[[Page 48045]]

move forward with establishing a structured reconsideration process for
future RHQDAPU program decisions.
Comment: Three commenters stated that the PRRB may not be the best
review mechanism for appeals. A commenter suggested that CEOs should be
able to submit their appeals in writing, stating all reasons and facts
and that CMS should then establish a pre-PRRB review panel that does
not involve any of the individuals who make the original determination.
If the pre-PRRB review panel renders a decision against the hospital,
the hospital can then go before the PRRB for a review.
Response: We are pleased that the commenter supports
reconsideration predicated on a written request stating all reasons and
factors for a hospital not meeting the RHQDAPU program requirements. We
expect to move forward with establishing a structured reconsideration
process for future RHQDAPU program decisions. We will examine the
feasibility of using a panel structure that does not include
individuals involved in the original determination. However, because of
the highly technical nature of this process, it may be necessary to
consult with those individuals due to their specialized expertise.
Comment: Three commenters supported establishing a process that
could consider the reasons why a hospital did not meet the RHQDAPU
program requirements. A commenter suggested that QIOs could be very
helpful in developing and administering a reconsideration process.
Response: We appreciate these comments and will consider the
suggestion that QIOs have a role in a reconsideration process as we
begin to implement the reconsideration process for FY 2007 and
subsequent fiscal years.
i. Conclusion
After consideration of the public comments received, because the
change in the percentage point reduction from 0.4 percentage points to
2.0 percentage points is required by section 1886(b)(3)(B)(viii)(I) of
the Act, we are adopting as final, without modification, the proposed
changes to Sec. 412.64(d) of our regulations.
After careful consideration of the public comments received, we are
adopting as final the expanded quality measures we proposed.
In response to public comments, we will require that reporting of
the expanded quality measures begin with discharges occurring on or
after the third calendar quarter of 2006 (July through September
discharges). The deadline for hospitals to submit data for this quarter
will be February 15, 2007. We are also setting the deadline for
hospitals to complete and send the revised ``Reporting Hospital Quality
Data for Annual Payment Update Notice of Participation'' form to their
respective QIO, no later than August 15, 2006. With these
modifications, after careful consideration of the public comments
received, we are adopting these procedures as final.
3. Electronic Medical Records
In the FY 2006 IPPS final rule, we encouraged hospitals to take
steps toward the adoption of electronic medical records (EMRs) that
will allow for reporting of clinical quality data from the EMRs
directly to a CMS data repository (70 FR 47420). We intend to begin
working toward creating measures specifications and a system or
mechanism, or both, that will accept the data directly without
requiring the transfer of the raw data into an XML file as is currently
done. The Department continues to work cooperatively with other Federal
agencies in the development of Federal health architecture data
standards. We encouraged hospitals that are developing systems to
conform them to both industry standards and, when developed, the
Federal Health Architecture Data standards, and to ensure that the data
necessary for quality measures are captured. Ideally, such systems will
also provide point-of-care decision support that enables high levels of
performance on the measures. Hospitals using EMRs to produce data on
quality measures will be held to the same performance expectations as
hospitals not using EMRs.
Due to the low volume of comments we received on this issue in
response to the FY 2006 proposed IPPS rule, in the proposed IPPS rule
for FY 2007 (71 FR 24095), we again invited comments on these
requirements and options. In section IV.B.6. of the preamble to the FY
2007 IPPS proposed rule, we also invited comments on the potential role
of effective, interoperable health information on technology in value-
based purchasing.
Comment: Most of the comments that were submitted on the adoption
of electronic health records in the hospital settings focused on:
HIT associated cost implication for hospitals.
The time frame for implementation should be at least a 10-
year window, to allow hospitals to obtain the financial and technical
support needed for this initiative.
CMS statutory authority to encourage the use and adoption
of HIT without new legislation.
Support for the initiative but recommended that CMS
develop partnerships with affected parties to ensure its successful
development.
Response: After consideration of the public comments received, we
will continue to pursue the adoption of electronic health records for
the reporting of hospital quality data. In addition, for the future we
will take all comments submitted under consideration as we move
forward.

B. Value-Based Purchasing

1. Introduction
CMS has undertaken a number of activities to improve the quality
and efficiency of care delivered to Medicare beneficiaries. Currently,
there are several different fee-for-service payment systems under
Medicare that are used to pay health professionals and other providers
based on the number and complexity of services provided to patients. In
general, all providers to which a specific Medicare payment system
applies receive the same amount for a service, regardless of its
quality or efficiency. As a result, Medicare's payment systems can
direct more resources to hospitals that deliver care that is not of the
highest quality or include unnecessary services (for example,
duplicative tests and services or services to treat avoidable
complications). Therefore, we are examining the concept of ``value-
based purchasing,'' which may use a range of incentives to achieve
identified quality and efficiency goals, as a means of promoting better
quality of care and more effective resource use in the Medicare payment
systems. In considering the concept of value-based purchasing, we are
working closely with stakeholder partners, including health
professionals and providers. In the FY 2007 IPPS proposed rule (71 FR
24095), we sought public comment on value-based purchasing as related
specifically to hospitals.
We discussed CMS' and Congress' initial steps toward hospital
value-based purchasing, which include the Premier Hospital Quality
Incentive Demonstration, the RHQDAPU program authorized by section
501(b) of Pub. L. 108-173 (MMA), and the extended and expanded RHQDAPU
program authorized by section 5001(a) of Pub. L. 109-171 (DRA). (The
RHQDAPU program was also discussed in section IV.A. of the preamble to
the proposed rule.) In addition, we discussed the issues that must be
considered in

[[Page 48046]]

developing a plan to implement a value-based purchasing plan beginning
with FY 2009 for Medicare payments for subsection (d) hospitals. This
plan is required by section 5001(b) of Pub. L. 109-171. For each of the
required planning issues (measures, data infrastructure, incentives),
we discussed CMS' activities to date and solicited comments on
outstanding policy questions. Next, we discussed options for
implementation of section 5001(c) of Pub. L. 109-171, which authorizes
quality adjustment to DRG payments for certain conditions that were not
present on hospital admission. We solicited input about detailed design
considerations related to each of these issues and the advantages and
disadvantages of possible approaches to planning and implementing
hospital value-based purchasing.
Finally, we discussed and invited comments on how to encourage
hospitals to effectively use health information technology to improve
efficiency, processes, and health care outcomes, through, for example,
adopting interoperable health information technology.
2. Premier Hospital Quality Incentive Demonstration
One of the ways in which CMS is testing innovative potential
approaches to improving quality is through demonstrations and pilot
projects. The demonstration most relevant to hospitals is the Premier
Hospital Quality Incentive Demonstration. Premier, Inc., a nationwide
alliance of not-for-profit hospitals, submitted an unsolicited proposal
for consideration by CMS.\20\ We have partnered with Premier to conduct
a demonstration that is designed to test whether the quality of
inpatient care for Medicare beneficiaries improves when financial
incentives are provided. Under the demonstration, about 270 hospitals
are voluntarily providing data on 34 quality measures related to 5
clinical conditions: heart attack, heart failure, pneumonia, coronary
artery bypass graft, and hip and knee replacements.
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\20\ The Premier Hospital Quality Incentive Demonstration was
authorized under section 402 of Pub. L. 90-248, Social Security
Amendments of 1967 (42 U.S.C. 1395b-1). This section authorizes
certain types of demonstration projects that waive compliance with
the regular payment methods used in the Medicare program.
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Using the quality measures, CMS identifies hospitals with the
highest quality performance in each of the five clinical areas.
Hospitals scoring in the top 10 percent in each clinical area receive a
2-percent bonus payment in addition to the regular Medicare DRG payment
for the measured condition. Hospitals in the second highest 10 percent
receive a 1-percent bonus payment. In the third year of the
demonstration, some hospitals that do not achieve absolute improvements
above the demonstration's first year composite score baseline (the
lowest 20 percent) for that condition will have their DRG payments
reduced by 1 or 2 percent, depending on how far their performance is
below the baseline.
Following the first year of the demonstration (FY 2004), CMS
awarded a total of $8.85 million to participating hospitals in the top
two deciles for each clinical area. In the aggregate, quality of care
improved in all five clinical areas that were measured. Preliminary
information from the second year of the demonstration indicates that
quality is continuing to improve, particularly for the poorest
performing hospitals. Additional information on the Premier Hospital
Quality Incentive Demonstration is available on the CMS Web site at:
http://www.cms.hhs.gov/HospitalQualityInits/35_HospitalPremier.asp.
3. RHQDAPU Program
We believe that the acts of collecting and submitting performance
data and of publicly reporting comparative information about hospital
performance seem to be a strong incentive to encourage hospital
accountability. Measurement and reporting can help focus the attention
of hospitals and consumers on specific goals and on hospitals'
performance relative to those goals.
a. Section 501(b) of Pub. L. 108-173 (MMA)
Since 2003, we have operated the Hospital Quality Initiative,\21\
which is designed to stimulate improvements in hospital care by
standardizing hospital performance measures and data transmission to
ensure that all payers, hospitals, and oversight and accrediting
entities use the same measures when publicly reporting on hospital
performance. Section 501(b) of Pub. L. 108-173 authorized us to link
the collection of data for an initial starter set of 10 quality
measures to the Medicare annual update of the standardized payment
amount for hospital inpatient operating costs (also known as the
RHQDAPU program). For FYs 2005 and 2006, hospitals that met the RHQDAPU
program's requirements received the full annual payment update to their
inpatient operating costs, while hospitals that did not comply received
an update that was reduced by 0.4 percentage points. For FY 2005,
virtually every hospital in the country that was eligible to
participate submitted data (98.3 percent), and approximately 96 percent
of all participating hospitals met the requirements to receive the full
update. The data regarding the starter set of 10 quality measures as
well as additional, voluntarily-reported data on other quality
measures, are available to the public through the Hospital Compare Web
site at: http://www.hospitalcompare.hhs.gov.
---------------------------------------------------------------------------

\21\ For more information about CMS' Hospital Quality
Initiative, see http://www.cms.hhs.gov/HospitalQualityInits/.
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b. Section 5001(a) of Pub. L. 109-171 (DRA)
As discussed in section IV.A. of the FY 2007 IPPS proposed rule (71
FR 24091), for FY 2007 and each subsequent year, section 5001(a) of
Pub. L. 109-171 amended section 1886(b)(3)(B) of the Act and made
changes to the program established under section 501(b) of Pub. L. 108-
173. These changes require us to expand the number of measures for
which data must be submitted, and to change the percentage point
reduction in the annual payment update from 0.4 percentage points to
2.0 percentage points for subsection (d) hospitals that do not report
the required quality measures in a form and manner, and at a time,
specified by the Secretary. Effective for payments beginning with FY
2007, new section 1886(b)(3)(B)(viii)(IV) of the Act requires the
Secretary to begin to adopt the expanded set of performance measures
set forth in the IOM's 2005 report entitled, ``Performance Measurement:
Accelerating Improvement.'' \22\ Those measures include the HQA
measures, the HCAHPS[supreg] patient perspective survey, and three
structural measures.\23\ Effective for payments beginning with FY 2008,
the Secretary must add other measures that reflect consensus among
affected parties and may replace existing measures as appropriate. New
section 1886(b)(3)(B)(viii)(VII) of the Act requires the Secretary to
establish procedures for making hospital quality data on these measures
available to the public. We discuss our responses to

[[Page 48047]]

public comments on these requirements in section IV.A. of this
preamble.
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\22\ Institute of Medicine, ``Performance Measurement:
Accelerating Improvement,'' December 1, 2005, available at http://www.iom.edu/CMS/3809/19805/31310.aspx.
\23\ The three structural measures are: (1) Computerized
provider order entry; (2) intensive care intensivists; and (3)
evidence-based hospital referrals.
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4. Plan for Implementing Hospital Value-Based Purchasing Beginning With
FY 2009
Section 5001(b) of Pub. L. 109-171 requires us to develop a plan to
implement hospital value-based purchasing beginning with FY 2009. The
plan must consider the following issues: (a) The ongoing development,
selection, and modification process for measures of quality and
efficiency in hospital inpatient settings; (b) the reporting,
collection, and validation of quality data; (c) the structure of
payment adjustments, including the determination of thresholds of
improvements in quality that would substantiate a payment adjustment,
the size of such payments, and the sources of funding for the payments;
and (d) the disclosure of information on hospital performance. Section
5001(b) of Pub. L. 109-171 also calls for us to consult with affected
parties and to consider relevant demonstrations in developing the plan.
Each of these issues (measure development and refinement, data
infrastructure, incentives, and public reporting) is discussed below,
along with our activities to date and outstanding policy questions.
In the FY 2007 IPPS proposed rule (71 FR 24097), we sought comments
on these issue areas and outstanding policy questions. We received 50
items of correspondence, which included 37 comments from hospitals and
health care systems, including the American Hospital Association and
many State hospital associations, the Federation of American Hospitals,
the National Association of Public Hospitals, the Association of
American Medical Colleges, and the Catholic Health Association. From
the purchaser and consumer perspectives, we received comments from The
Leapfrog Group, the National Business Coalition on Health, the
Consumer-Purchaser Disclosure Project, the National Breast Cancer
Coalition Fund, and Consumers Union. The medical device and information
technology industries also provided comments.
As a preliminary matter, almost half of all commenters also made
recommendations on the process for developing the Medicare value-based
purchasing plan. The AHA, the State hospital associations, the
Voluntary Hospital Association, and the Federation of American
Hospitals all stressed that the HQA be the foundation for planning.
Several other commenters noted the value of an iterative process, with
multiple opportunities for public comment to build consensus.
We present a summary of the comments by major issue area below and
our response.
a. Measure Development and Refinement
As we explore the potential connections between performance
measurement and incentives, we would like to better understand how to
develop valid, meaningful, current performance measures that are
aligned with other hospital measurement activities, and an enterprise
for development, validation, consensus building, and maintenance of
these measures. In addition, before measures could be used to compare
the relative quality or cost of care provided by hospitals, we believe
that the information would need to be appropriately adjusted to account
for relevant differences among hospitals and among their patients. The
availability of appropriate measures on which consensus might be
achieved depends on the state of the art of research on measure
development.
We believe that it is desirable for performance measures to be
based on appropriate evidence, effectively related to desired outcomes,
derived in a transparent fashion involving consultation with experts
and affected hospitals, and routinely updated. MedPAC's 2005 Report to
Congress \24\ stated that measures should be evidence-based; that
collecting and analyzing data should not be unduly burdensome for the
provider or for CMS; that risk adjustment should be sufficient to deter
providers from avoiding patients who might lower performance scores;
that most providers should be able to improve on the measures; that
measures should apply to a broad range of care and providers; that
measures should capture aspects of care that are under the control of
the providers being measured; and that areas of care being measured
should be those needing improvement.
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\24\ Medicare Payment Advisory Commission: Report to Congress:
Medicare Payment Policy, March 2005, pp. 186-187, available at:
http://www.medpac.gov/publications/generic_report_display.cfm?report_type_id=1&sid=2&subid=0.
---------------------------------------------------------------------------

The IOM's December 2005 report, ``Performance Measurement:
Accelerating Improvement'' \25\ recommended that measure sets should
build on the work of key public- and private-sector organizations; that
national performance measures that have been approved through ongoing
consensus processes led by major stakeholder groups are an appropriate
starting point; that the limited scope of current measures should be
broadened to address efficiency, equity, and patient-centeredness; that
quality, costs, and outcomes of care should be measured over longer
time intervals; and that measures be applicable to more than one
setting so that providers can share accountability for a patient's care
(pp. 8-11).
---------------------------------------------------------------------------

\25\ Institute of Medicine, ``Performance Measurement:
Accelerating Improvement,'' December 1, 2005, available at http://www.iom.edu/CMS/3809/19805/31310.aspx.
---------------------------------------------------------------------------

The plan for hospital value-based purchasing mandated by Pub. L.
109-171 must address the ongoing development, selection, and
modification process for measures of quality and efficiency in hospital
inpatient settings. We have worked collaboratively in defining
consistent, meaningful performance measures for hospitals and other
providers for a number of years. The efforts of CMS and its stakeholder
partners to develop standardized performance measures increase the
likelihood that the measures will be valid, reliable, and widely
accepted as viable indicators of performance. Standardized measures
also reduce the burden for hospitals that would otherwise have to
report different measures to multiple entities, such as accrediting
bodies and State agencies.
CMS and the HQA (which includes representatives from consumers,
hospitals, health professionals, purchasers, and accreditation
organizations) collectively selected a starter set of 10 consensus-
derived quality measures for public reporting, which was incorporated
into the RHQDAPU program authorized by section 501(b) of Pub. L. 108-
173. (See section IV.A. of the preamble to the FY 2007 IPPS proposed
rule (71 FR 24091) for a detailed discussion of the RHQDAPU program.)
The measures were endorsed by the NQF, a nonprofit voluntary
organization that represents a broad range of health care stakeholders
and endorses consensus-based national performance standards. CMS has
also worked with the JCAHO to align hospital performance measures that
we share in common, thereby reducing hospitals' reporting burden.
In April and September 2005, CMS and the HQA identified additional
NQF-endorsed measures of hospital performance. In section IV.A. of the
preamble to the FY 2007 IPPS proposed rule (71 FR 24093), we listed
these measures and proposed to require hospital reporting on these
measures under an expanded version of the RHQDAPU program authorized by
section 5001(a) of Pub. L. 109-171. These measures are discussed in
more

[[Page 48048]]

detail on the CMS Web site at: http://www.cms.hhs.gov/HospitalQualityInits/ HospitalQualityInits/ downloads/HospitalHQA2004 --2007200512.pdf. In
this final rule, we have included the 20 NQF-endorsed measures
currently reported on our Hospital Compare Web site, as well as two
additional NQF-endorsed measures, as requirements for hospital
reporting under the FY 2007 RHQDAPU program.
Two additional outcome measures (30-day mortality for heart attack
and heart failure) have been endorsed by the NQF for public reporting.
Further, in October 2006, we will be implementing the HCAHPS[supreg]
survey of inpatient perceptions of their hospital care experiences,
with the intention that an aggregate HCAHPS[supreg] measure will become
a publicly reported performance measure. HCAHPS[supreg] was endorsed by
the NQF in May 2005. Beyond these, we could also consider including
additional measures from the Surgical Care Improvement Project,
measures relating to a hospital's use of information technology that
result in improved patient outcomes, implementation of data standards,
and preventable readmissions as quality reporting measures under the
RHQDAPU program or the hospital value-based purchasing program.
Comment: Virtually all of the commenters discussed the measures
issues. The commenters focused on three major topics: (1) The use of
quality versus efficiency measures, (2) the use of process versus
outcome measures, and (3) the importance of including measures that
capture aspects of care from the patient experience, including access,
respect, and disparities/differences experienced by patients of
different races and ethnic backgrounds.
From the perspective of virtually all provider associations, the
hospital value-based purchasing program should focus on evidence-based
process measures. The majority of commenters also believed that, for
now, measures should focus solely on quality and that measures of
efficiency are premature. Several commenters also stressed that the
goal of the program should be to improve overall quality of care,
rather than to decrease costs.
Commenters from the medical device industry raised the concern that
a reliance on process measures when assessing efficiency could inhibit
access to new technologies and urged that risk-adjusted outcome
measures be used instead. Two provider associations urged that payment
systems must ensure that evolving and improved technologies continue to
be available to all patients and that efficiency measures not inhibit
the adoption of new quality-enhancing technologies.
Commenters representing the purchaser and consumer perspectives
stressed the importance of including measures that reflect quality,
efficiency, equity, patient experience, and structure and urged that
all measures be nationally endorsed, scientifically valid, risk-
adjusted, and regularly updated. Several consumer groups and safety net
providers also noted the importance of including measures that could
capture disparities in care experienced by patients of different races
and ethnic backgrounds. On a related note, the Association of American
Medical Colleges and safety net providers emphasized the importance of
assuring a level playing field to account for differences among types
of hospitals and patient demographics.
Several commenters noted that developing measures is a public good
and that substantial funding should be provided to support the
development of consumer-relevant measures to fill existing gaps,
especially for measures of efficiency and equity.
Several commenters supported including measures from the Surgical
Care Improvement Program (SCIP) because surgical wounds and infections
are among the most common and harmful hospital-acquired infections.
Regarding information technology, the response was mixed. Some
commenters supported the inclusion of measures that would encourage IT
adoption, while others noted the obstacle of ongoing issues with
current health IT standards.
b. Data Infrastructure
Implementing measures on which to base a value-based purchasing
system would require an infrastructure that could collect appropriate
information from hospitals, store and aggregate it as necessary, and
prepare it for use in determining appropriate incentives. Hospitals
would likely need to be able to generate appropriate data as input for
calculation of the measures. For some measures, data that hospitals
already submit with claims for payment or for some other administrative
purpose may be sufficient. For other measures, hospitals might need to
provide information regarding their structure and resources or about
the specifics of medical care provided to patients or the outcomes of
that care. For that information, hospitals may need special software to
assist with data collection and secure channels by which they can
transmit data. In the FY 2007 IPPS proposed rule, we solicited comments
on how to develop an infrastructure that would facilitate the efficient
transmission and storage of data, and especially, as discussed in
sections IV.A.3. and IV.B.6. of the preamble to that proposed rule (71
FR 24095, 24100). We especially solicited comments on how electronic
medical and health record systems could help improve care and be
integrated into or facilitate the data collection process.
We did not receive any comments specific to this issue.
Implementation would require communication channels and data
warehouses with sufficient capacity and flexibility to acquire and
store data from hospitals. We are considering how we might validate the
submitted data, determine incentives based on that data, and transmit
these values to Medicare's fiscal intermediaries. The potential
infrastructure would need to be extremely secure and afford the most
privacy protection permitted by law. It would also need to minimize the
burden of data collection and transmission on providers. It would need
to be accurate, efficient, and cost-effective for CMS to administer.
The plan for hospital value-based purchasing mandated by Pub. L.
109-171 must address the reporting, collection, and validation of
quality data. Over the past few years, we have developed a data
collection and reporting infrastructure for the RHQDAPU program that
can transmit performance measurement data via secure channels for its
submission, storage, analysis, validation, and reporting. Specifically,
to facilitate data collection, we have developed the CART software to
assist hospitals in the collection of clinical and administrative data
used to measure performance improvement. CART, which is provided to
hospitals free of charge, is a powerful application that hospitals and
their designees can use to abstract clinical data needed for
performance measurement from medical records. This tool was designed
and developed by CMS with input from the JCAHO and the Medicare QIOs.
We have also developed the QualityNet Exchange system for secure
transmission of data to the QIO Clinical Warehouse. QNetExchange.org is
the CMS-approved Web site for secure communications and data exchange
between two or more of the following: Hospitals, performance
measurement system vendors, end stage renal disease networks and
facilities, QIOs, and CMS.
For data warehousing, we have a claims warehouse for Medicare Part
A data, which maintains the claims for the most recent 42 months. We
also have a QIO Clinical Warehouse that currently

[[Page 48049]]

contains information on the starter set of 10 quality measures
collected under the RHQDAPU program, as well as additional voluntarily
reported measures. We must assess the validity of the RHQDAPU
information because of its use for quality improvement, public
reporting, and determining hospitals' annual payment updates under the
RHQDAPU program. Validation activities assess the reliability of the
data that a hospital has submitted, as evidenced by the consistency
between a hospital's abstraction and reabstraction by an independent
party.
We are currently using a contractor, the CDAC, to carry out the
validation process under the RHQDAPU program. Hospitals are required to
submit certain quality data to the QIO Clinical Warehouse within 4.5
months of the end of each quarterly reporting period. The steps in the
validation process are: (1) Check for duplicates; (2) draw a sample;
(3) obtain copies of medical records; (4) request and complete CDAC
abstraction; (5) post results on QualityNet Exchange for hospitals'
review; and (6) resolve validation appeals. In the FY 2007 IPPS
proposed rule (71 FR 24098), we sought comments on how the data
submission and validation processes that we currently use for the
RHQDAPU program might be adaptable to a hospital value-based purchasing
program.
We did not receive any comments specific to this issue.
One of the key challenges we face in considering implementation of
hospital value-based purchasing is minimizing the length of time
between our receipt of data and our ability to provide feedback to
hospitals on the data. Some of the hospitals that are participating in
the RHQDAPU program and the Premier Hospital Quality Incentive
Demonstration have asked for more timely feedback on their performance.
We recognize that a long delay between the provision of services and
feedback about the quality of those services may impede both
improvement efforts and a hospital's motivation to improve. The current
lag time between the end of the quarterly reporting period and the
availability of performance feedback under the RHQDAPU program is
approximately 9 months. Hospitals have 4.5 months to complete their
paper medical records and to submit information to the QIO Clinical
Warehouse, which roughly coincides with JCAHO's timeline for submission
of data to their ORYX[supreg] Core Measure Performance Measurement
System. Another 4.5 months are required to accomplish the steps in the
validation process.
We are considering options to decrease the overall length of time
between our receipt of data and our ability to provide feedback to
hospitals, and we are interested in comments on these options. First,
we are considering whether more frequent data submissions, such as
monthly submissions, would decrease the time between the provision of
services and feedback about the quality of those services. We are aware
that some hospitals and their vendors already submit quality data on a
monthly basis to JCAHO. However, unless we reduced the sample size per
reporting period, the process of validating each month the same number
of records that are currently validated each quarter would increase
costs significantly. On the other hand, if we reduced the sample size
per reporting period, the monthly numbers might be too small to provide
for adequate validation. Second, we could shorten the data submission
period, which is a significant source of lag time. This option would
require hospitals to submit information to the data warehouse more
quickly, which could increase the possibility that hospitals would
submit less complete data. In addition, this option would require
coordination with JCAHO to keep submission timelines congruent, which
reduces hospitals' reporting burden. Third, we could eliminate the
validation appeals process, which would reduce the lag time by up to 2
months. Fourth, we could create an expanded role for the third party
vendors that assist hospitals with submitting quality data to CMS and
JCAHO. For example, CMS could certify third party vendors to also
provide standardized validation services and quick performance feedback
to their hospital customers.
Comment: Approximately half of the commenters' responses included
comments specific to data issues. The commenters addressed two issues
in particular: (1) The data challenges confronted by small hospitals
and (2) the timeliness of feedback versus the burden of submission.
A quarter of commenters raised the special challenges confronted by
small, in particular rural, hospitals because of the small sample sizes
they often encounter for many measures and the volatility and
instability in measure results under these circumstances.
Regarding timeliness and the lag time between reporting and
feedback, commenters from different stakeholder groups had opposing
perspectives. Provider commenters were concerned that monthly reporting
would be extremely burdensome, while purchaser and consumer advocate
commenters suggested that monthly submission could improve the
timeliness of data. All commenters stressed the importance of data
validation. Consumers Union stressed that validation is critical and
need not increase the time lag. It recommended the use of rolling
publication of data with quarterly updates. Two commenters endorsed the
concept that the data submission and validation processes could be
streamlined through use of electronic health records (EHRs), which
could also provide an incentive for adoption of EHRs. The Federation of
American Hospitals found none of the options presented in the proposed
IPPS rule for reducing the lag time between submission and feedback to
be acceptable.
Several commenters mentioned the benefits of augmenting billing
forms with clinical data elements and cited the approach of the
Pennsylvania Healthcare Cost Containment Council.
c. Incentive Methodology
While measurement of the quality of care and of resources use may
be advantageous in itself, we are considering whether and what kind of
incentives can further improve outcomes. The potential design of
incentives in a value-based purchasing system presents many choices.
The implementation plan for hospital value-based purchasing mandated by
Pub. L. 109-171 must address the structure of payment adjustments,
including the determination of thresholds of improvements in quality
that would substantiate a payment adjustment, the size of such
payments, and the sources of funding for the value-based payments. In
the FY 2007 IPPS proposed rule (71 FR 24098), we sought comments on the
merits of and alternatives to all of the approaches to the design of a
value-based purchasing methodology that are discussed below.
(1) How should incentives be structured?
A number of options exist for the structure of potential
incentives. The incentive methodology could include differential
incentives depending on whether hospitals exceed a particular standard
of performance. To reflect expectations of continued improvement among
hospitals, the standard could be raised in predictable steps over time.
Alternatively, incentives could be structured to reward hospitals that
improve from a baseline level of performance. These approaches could be
combined to develop an incentive

[[Page 48050]]

methodology that includes both attaining benchmarks and improving care.
Comment: Approximately half of the commenters responded to at least
one of the questions on incentives, and comments varied widely on these
issues. Most commenters saw the combination of incentives to reward
continuous improvement over time and incentives for attainment of
specific benchmarks as most desirable. However, there was disagreement
about the value of absolute benchmarks. Several commenters favored
developing a fixed standard, rewarding hospitals that meet or exceed
the standard, and when the majority achieves this standard, either
raising the standard or selecting another measure with a fixed
standard. They commented that the bar should be high enough to serve as
an effective target, but not so high as to become attainable by only a
small number of providers. By contrast, one commenter believed that a
fixed benchmark discourages hospitals, particularly small and rural
hospitals, because it might not reflect their unique circumstances.
Almost half of all commenters emphasized the importance of aligning
hospital and physician incentives so that everyone will be working
toward the same goals of improving quality and providing appropriate
care.
(2) What level of incentive is needed?
Value-based purchasing incentives should be targeted to that level
needed to achieve a desired level of performance. Our experience with
implementing section 501(b) of Pub. L. 108-173 indicates that a
targeted incentive, coupled with active management by CMS, can
encourage reporting on quality measures. Nearly every eligible hospital
has been willing and able to submit the required data in order to
receive the full payment update under the RHQDAPU program. Similarly,
our experience with the Premier Hospital Quality Incentive
Demonstration indicates that a 1 or 2 percent bonus, coupled with
potential reductions for poor performance, may stimulate improvement.
Further experience in ascertaining how hospitals respond to incentives
will be important for examining incentives over time.
Comment: A number of commenters across the stakeholder spectrum
responded that the annual IPPS update is proving to be a sufficient
incentive to encourage virtually all hospitals to participate in the
RHQDAPU program and that the current level of a 1-2 percent incentive
is appropriate. Commenters noted that an additional portion of the
update could be made conditional upon achieving specified performance
goals.
Many provider commenters stated that a system of rewards should
increase payments or reduce regulatory burden for successful providers
and urged that incentives involving penalties should not be used
because the basic level of DRG payment does not now cover costs for
more than one-third of hospitals. Several provider commenters suggested
that rewards should be large enough to cover the costs of implementing
process changes and to allow for reinvestment in quality improvement
efforts. One provider commenter also urged that incentive structures
should be gradual to avoid ``cliff'' effects in either rewards or
penalties.
(3) What should be the source of incentives?
The President's FY 2007 Budget indicates support for identifying
and testing ``budget-neutral incentives that will stimulate Medicare
providers to improve performance on quality and efficiency measures.''
\26\ We do not believe that providing additional aggregate funding to
finance performance-based incentives is either supportable or
necessary. One approach might be to examine how we could identify and
apply measurable savings achieved by reducing care that is unnecessary
or otherwise inappropriate. For example, we may examine possibilities
of improving care coordination, whether this could produce measurable
savings, and whether some of the savings generated in one payment
system could be used for incentives in another, as long as these
reforms do not provide inappropriate incentives to stop providing
necessary care. For instance, appropriate quality of care and effective
resource use in hospitals and other institutional providers might
generate savings that could be used for incentives for both physicians
and facilities.
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\26\ Budget of the United States Government, Fiscal Year 2007,
available at: http://www.whitehouse.gov/omb/budget/fy2007/.
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Comment: Several hospital association and individual provider
commenters suggested that savings from improved care coordination could
be a source of funding for incentives and recommended studying whether
savings generated in one payment system could be used for payments in
another setting.
One commenter noted the importance of assuring that funds
designated for rewards be fully allocated to hospitals and urged that a
program designed to reward improving quality should not become an
arbitrary cost-cutting mechanism.
The budget-neutral shared savings approach currently used in the
Leapfrog Hospital Rewards Program was cited by several commenters as a
model worth considering, though the commenters noted that savings are
harder to identify in the Medicare DRG-based system than in the
commercial per diem systems where the Leapfrog Program is currently
operating.
(4) What should the form of incentives be?
Potential approaches for incentives include making an add-on
payment to the base payment for individual inpatient hospital services
or providing periodic, lump-sum payments on a monthly, quarterly, or
annual basis. Under the RHQDAPU program, hospitals that do not submit
the required data receive a decrease in the standardized payment amount
made for all inpatient operating costs for the applicable fiscal year.
In a hospital value-based purchasing system, per-service payments might
be made only in connection with the services directly associated with
the particular measure for which the hospital achieved a good result.
Alternatively, lump-sum payments might be made on a periodic basis to
hospitals that achieve particular performance targets. The preferable
approach may depend on operational concerns, the strength of incentive
effects, and other aspects of the design. In the FY 2007 IPPS proposed
rule (71 FR 24099), we sought comments on this issue.
Comment: We received three comments on this issue, and all
commenters favored periodic lump-sum payments over other options.
(5) What should the timing of incentives be in relation to performance?
Any value-based purchasing system should seek a balance between
rewarding desired performance close to when it occurs and ensuring the
accuracy of both performance measurement and incentives. Given the lag
times for collecting and reviewing different types of data, some
measures may be calculated quickly after the period of performance,
while data lag times for other measures may be longer. For instance,
structural measures could affect incentives soon after they are
collected. Other measures that are based on experience over a time
interval may require some time for measured events to manifest. An
example of this type of measure would be the rate of mortality within
30 days of hospitalization.

[[Page 48051]]

We did not receive any comments specific to this issue.
(6) How should we develop composite scores?
Encouraging improved performance could be facilitated by valid and
reliable methods to aggregate performance data into single composite
scores. Composite scoring may also improve consumer understanding of
complex performance indicators by combining measures of many dimensions
of care into a single score. One example of a composite scoring
methodology that we used for the Premier Hospital Quality Incentive
Demonstration (discussed in detail above) is a modification of the
``opportunity model,'' which can be used to address individual
weighting, missing data, and sensitivity to case volumes. For example,
a hospital that has few or no cases for a particular dimension of care
could receive a low score, yet that measure is equally weighted with
others in the composite. Under the opportunity model, a composite may
be developed for a disease category by dividing the total number of
successful interventions by the total number of opportunities for the
same targeted interventions. Some of the advantages of the opportunity
model are that individual measures are weighted by the volume of
opportunities for the associated intervention for a particular
hospital; missing values for a particular aspect of care provided by an
individual hospital would not prevent that hospital from being
represented in a public report; and composite measures may easily
accommodate the addition of individual measures.
The ``appropriate care measure'' (ACM) is another composite scoring
methodology, which we used in connection with the QIOs. The ACM scoring
methodology is patient-centric. For a hospital to receive credit for
treating a patient well, the hospital must have met the standard for
every measure applicable to that patient's condition. There are also a
number of proprietary composite measures, such as those used by
Solucient, Healthgrades, CareScience, and U.S. News & World Report. In
the FY 2007 IPPS proposed rule (71 FR 24099), we solicited comments on
the use of composite scoring for hospital value-based purchasing and on
the various composite scoring methodologies.
Comment: Five commenters supported the use of the ``opportunity
model.'' No comments were received regarding the ``appropriate care
model.''
Several commenters urged that further research and consumer testing
be done around the development and display of measure composites.
Several other commenters urged that while composites are useful, they
should not be the only information available; instead, information
should be presented in various ways, including composite scores,
individual scores making up the composite, statistics supporting the
score, and graphics.
Value-based purchasing methods are still under development, and
anticipating their potential effects on the health care system is
difficult. We understand that unintended consequences may result from
the implementation of these methods. We believe that we will need to
assess incentives and evaluate their effects so that we can revise them
quickly as we learn more about their impact on hospitals and on
inpatient hospital services provided to Medicare beneficiaries.
We did not receive any comments specific to this issue.
d. Public Reporting
The plan for hospital value-based purchasing mandated by Pub. L.
109-171 must address the public disclosure of information on hospital
performance. CMS currently provides public reporting of quality
information through the ``Compare'' Web sites for hospitals, nursing
homes, home health agencies, and dialysis facilities.\27\ The Compare
Web sites provide comparative quality information to consumers and
others to help guide choices and drive improvements in the quality of
care delivered in these settings. Besides providing Medicare
beneficiaries and their health professionals with information to assist
them in making informed health care decisions, public reporting of
comparative performance data also provides information that is useful
to health care consumers who are not Medicare beneficiaries. For
example, a consumer who has a Health Savings Account can access CMS'
Hospital Compare Web site to gather comparative quality information to
assist in choosing a high quality hospital. CMS is contributing to the
Administration's Consumer-Directed Health Care Initiative by working
with our private- and public-sector partners to make health care
information more transparent and available to consumers than ever
before. (Refer to section IV.M. of the preamble to the FY 2007 IPPS
proposed rule (71 FR 24120) for more information.) In the FY 2007 IPPS
proposed rule (71 FR 24100), we sought comments on how we can further
stimulate public reporting to increase the transparency and
meaningfulness of healthcare performance information.
---------------------------------------------------------------------------

\27\ See CMS' Hospital Compare Web site, available at: http://www.hospitalcompare.hhs.gov/; Nursing Home Compare Web site,
avaialble at: http://www.medicare.gov/NHCompare; Home Health Compare
Web site, avaialble at: http://www.medicare.gov/HHCompare/Home.asp;
Dialysis Facility Compare Web site, available at: http://www.medicare.gov/Dialysis.
---------------------------------------------------------------------------

Comment: Five commenters made recommendations regarding public
reporting. One commenter stressed that informed decision-making about
performance cannot occur if reported costs are divorced from
information about quality. A second commenter noted the importance of
providing a formal appeals process for providers that disagree with
their performance ratings. Consumers Union urged CMS to use multiple
approaches to get consumers more engaged in using quality information,
suggesting that Hospital Compare be promoted continuously, that tools
be developed to support comparisons in different ways, and that
information on Hospital Compare to be updated more frequently than once
a year to be relevant to the patient and fair to the hospital.
Response: We thank all commenters for their thoughtful and valuable
input. We will use these comments to inform our design of the plan for
Medicare hospital value-based purchasing, as mandated by Pub. L. 109-
171. This rulemaking process is the first opportunity for the public to
be involved in our planning process. We will also be hosting public
listening sessions in 2007 to receive public input on drafts of the
plan. We encourage your participation in those listening sessions.
5. Considerations Related to Certain Conditions, Including Hospital-
Acquired Infections
Medicare's IPPS encourages hospitals to treat patients efficiently.
Hospitals receive the same DRG payment for stays that vary in length.
In many cases, complications acquired in the hospital do not generate
higher payments than the hospital would otherwise receive for other
cases in the same DRG. To this extent, the IPPS does encourage
hospitals to manage their patients well and to avoid complications,
when possible. However, complications, such as infections, acquired in
the hospital can trigger higher payments in two ways. First, the
treatment of complications can increase the cost of hospital stays
enough to generate outlier payments. However, the outlier payment
methodology requires that hospitals experience large losses on outlier
cases (in FY 2006, hospitals must lose $23,600 before a case qualifies
for outlier payments, and the hospital

[[Page 48052]]

would then only receive 80 percent of its costs above the outlier
threshold). Second, there are about 121 sets of DRGs that split based
on the presence or absence of a complication or comorbidity (CC). The
CC DRG in each pair would generate a higher Medicare payment. If an
infection acquired during the beneficiary's hospital stay is one of the
conditions on the CC list, the result may be a higher payment to the
hospital under a CC DRG. (See section II.C. of the FY 2007 IPPS
proposed rule (71 FR 24006) for a detailed discussion of proposed DRG
reforms.)
Section 5001(c) of Pub. L. 109-171 requires the Secretary to
identify, by October 1, 2007, at least two conditions that are (a) high
cost or high volume or both, (b) result in the assignment of a case to
a DRG that has a higher payment when present as a secondary diagnosis,
and (c) could reasonably have been prevented through the application of
evidence-based guidelines. For discharges occurring on or after October
1, 2008, hospitals would not receive additional payment for cases in
which one of the selected conditions was not present on admission. That
is, the case would be paid as though the secondary diagnosis was not
present. Section 5001(c) provides that we can revise the list of
conditions from time to time, as long as it contains at least two
conditions. Section 5001(c) also requires hospitals to submit the
secondary diagnoses that are present at admission when reporting
payment information for discharges on or after October 1, 2007. In the
FY 2007 IPPS proposed rule (71 FR 24100), we sought input about which
conditions and which evidence-based guidelines should be selected.
We received 44 comments on this section from hospitals and health
care systems, provider associations, consumer groups, purchasers,
medical device manufacturers, information technology companies, and
health care research organizations.
Comment: The majority of commenters addressed conceptual issues
concerning the selection, measurement, and prevention of hospital-
acquired infections. While most of the commenters focused on broad
factors CMS should consider, some of the commenters included specific
recommendations of conditions for possible inclusion in the payment
changes. We found these comments very helpful and constructive, and we
look forward to further input as we work towards implementation of this
section. In the following discussion, we present a summary of the major
themes of the commenters and list the specific hospital-acquired
complications presented in the comments.
Many commenters encouraged CMS to engage in a collaborative
discussion with relevant experts in designing, evaluating, and
implementing this section. The commenters urged CMS to include
individuals with expertise in infection control and prevention, as well
as representatives from the provider community, in this discussion.
Nearly half of the commenters expressed concern about the
difficulty in distinguishing between hospital-acquired and community-
acquired infections. Multiple commenters indicated that community-
acquired infections often cannot be diagnosed on admission and thus
would not be included as secondary diagnoses at the time of admission.
These commenters indicated that it would be costly and inefficient to
attempt to diagnose all community-acquired infections at the time of
admission. The commenters requested that CMS provide technical guidance
to assist providers in distinguishing between hospital and community-
acquired infections.
Many commenters discussed the statutory requirement for hospitals
to submit information regarding secondary diagnoses present on
admission beginning FY 2008. Some commenters supported this requirement
and suggested that it would better enable CMS and health care providers
to more accurately differentiate between comorbidities and hospital-
acquired complications. MedPAC, in particular, noted that this
requirement was recommended in its March 2005 Report to Congress and
indicated that this information is important to Medicare's value-based
purchasing efforts. Other commenters suggested that CMS delay
implementation of this provision, given the significant payment changes
contained in the FY 2007 IPPS proposed rule.
Many commenters, including States, health care associations, and
health care providers with experience in hospital-acquired infection
prevention, cautioned us about potential problems with relying on
secondary diagnosis codes to identify hospital-acquired complications.
These commenters indicated that secondary diagnosis codes may be an
inaccurate method for identifying true hospital-acquired complications.
Some of the commenters referred to research showing a wide discrepancy
between hospital-acquired infections identified through claims data and
hospital-acquired infections identified through active surveillance
and/or chart review. According to the commenters, this research found
that active surveillance conducted by trained infection control
practitioners was the most accurate method for identifying hospital-
acquired infections. The commenters also noted that there is currently
no standardized and validated method for using claims data to identify
hospital-acquired infections.
A number of commenters expressed concerns about the data coding
requirements for this payment change. They asked for detailed guidance
from CMS to help them identify and document hospital-acquired
complications. The commenters also noted that there are currently no
standard definitions or guidance to code the present on admission
indicator. In addition, there was concern that the current system of
bill coding does not support a present on admission indicator and that
future versions of the bill coding systems may not be implemented in
time to meet the data reporting requirements for this payment change.
The commenters also urged CMS to allow adequate time for hospitals to
implement the necessary changes to their billing and coding systems and
to conduct appropriate staff training.
Almost half of the commenters expressed concern that not all
hospital-acquired infections are preventable. In particular, the
commenters noted that sicker and more complex patients are at greater
risk for hospital-acquired infections and complications. The commenters
urged CMS to use discretion in implementing this section to ensure that
the program does not punish hospitals taking care of sicker and more
complex patients.
To address this issue, many of the commenters suggested that CMS
include standardized infection-prevention process measures, in addition
to outcome measures of hospital-acquired infections. The commenters
proposed that hospitals should not be penalized if they follow
evidence-based infection prevention measures. Specifically, a number of
commenters referenced the Surgical Care Improvement Program (SCIP) and
suggested that CMS build on this initiative. These commenters
recommended that CMS include exceptions to the payment changes for
cases in which the hospital performed evidence-based infection-
prevention measures.
Some commenters proposed that CMS expand the scope of the payment
changes beyond the statutory minimum of two conditions. They noted that
the death, injury, and cost of hospital-acquired infections are too
high to limit this provision to only two conditions. Commenters also
recommended that

[[Page 48053]]

CMS annually select additional hospital-acquired complications for the
payment change.
Conversely, a number of commenters proposed that CMS initially
begin with limited demonstrations to test CMS'' methodology before
nationwide implementation. The commenters specifically mentioned the
Michigan Hospital Association Keystone Center, the Pittsburgh Regional
Health Initiative, and the Maryland Patient Safety Center as possible
models. In addition, several commenters suggested that CMS work with
states that currently collect information on diagnoses present on
admission.
A commenter recommended that CMS include appropriate consumer
protections to prevent providers from billing patients for the non-
reimbursed costs of the hospital-acquired complications and to prevent
hospitals from selectively avoiding patients perceived at risk for
complications.
In addition to the broad conceptual suggestions, some commenters
recommended specific conditions for possible inclusion in the payment
changes. The specific conditions mentioned in the comments are listed
below:
Surgical site infections. Some commenters recommended
including surgical site infections because of their high frequency and
cost. Commenters also noted that evidence-based measures to prevent the
occurrence of these infections are currently measured and reported as
part of SCIP. Many commenters suggested that CMS work with SCIP
partners to identify appropriate post-surgical hospital-acquired
infections for possible inclusion in the payment changes. Other
commenters expressed concern that administrative data may not be a
reliable source for identifying surgical site infections. Commenters
also cautioned that surgical site infections often do not manifest and
thus cannot be diagnosed until after the patient has been discharged
from the hospital.
Ventilator-associated pneumonia. Commenters also mentioned
ventilator-associated pneumonia as a possible condition for inclusion
in the payment changes because this condition is currently measured and
reported through SCIP. Other commenters recommended against this
condition due to the subjective and labor-intensive nature of defining
the diagnosis.
Catheter-associated bloodstream infections. Commenters
recommended catheter-associated bloodstream infections, including
central line infections, as possible conditions. Commenters noted that
these infections are currently reported through SCIP.
Urinary tract infections. One commenter recommended
nosocomial urinary tract infection for possible inclusion in the
payment change. Another commenter argued against this condition because
it has limited impact on patient mortality and morbidity.
Pressure ulcers. Multiple commenters suggested that CMS
consider pressure ulcers as an alternative to hospital-acquired
infections.
Hospital falls. Several commenters suggested that CMS
consider hospital falls as an alternative to hospital-acquired
infections.
Deep vein thromboses. Commenters also suggested that CMS
consider deep vein thromboses as an alternative to hospital-acquired
infections.
Response: We would like to express our gratitude to all of the
commenters for their thoughtful and helpful recommendations. We will
carefully consider their views as we move toward implementing this
section. CMS will be working closely with our colleagues at the Centers
for Disease Control and Prevention over the coming months to select
appropriate conditions to propose for implementation. We anticipate
that the next opportunity for formal public comment will be the FY 2008
IPPS proposed rule-making, which will be published in spring of 2007.
We encourage the public to comment on our proposal at that time.
6. Promoting Effective Use of Health Information Technology
We recognize the potential for health information technology (HIT)
to facilitate improvements in the quality and efficiency of health care
services. One recent RAND study found that broad adoption of electronic
health records could save more than $81 billion annually and, at the
same time, improve quality of care.\28\ The largest potential savings
that the study identified was in the hospital setting because of
shorter hospital stays promoted by better coordinated care; less
nursing time spent on administrative tasks; better use of medications
in hospitals; and better utilization of drugs, laboratory services, and
radiology services in hospital outpatient settings. The study also
identified potential quality gains through enhanced patient safety,
decision support tools for evidence-based medicine, and reminder
mechanisms for screening and preventive care. Despite such large
potential benefits, the study found that only about 20 to 25 percent of
hospitals have adopted HIT systems.
---------------------------------------------------------------------------

\28\ RAND News Release: Rand Study Says Computerizing Medical
Records Could Save $81 Billion Annually and Improve the Quality of
Medical Care, September 14, 2005, available at: http://rand.org/news.press.05/09.14.html.
---------------------------------------------------------------------------

It is important to note the caveats to the RAND study. The
projected savings are across the health care sector, and any Federal
savings would be a reduced percentage. In addition, there are
significant assumptions made in the RAND study. National savings are
projected in some cases based on one or two small studies. Also, the
study assumes patient compliance, in the form of participation in
disease management programs and following medical advice. For these
reasons, extreme caution should be used in interpreting these results.
There are some mixed signals about the potential of HIT to reduce
costs. Some studies have indicated that HIT adoption does not
necessarily lead to lower costs and improved quality. In addition, some
industry experts have stated that factors such as an aging population,
medical advances, and increasing provider expenses would offset any
projected savings.
In his 2004 State of the Union Address, President Bush announced a
plan to ensure that most Americans have electronic health records
within 10 years.\29\ One part of this plan involves developing
voluntary standards and promoting the adoption of interoperable HIT
systems that use these standards. The 2007 Budget states that ``The
Administration supports the adoption of health information technology
(IT) as a normal cost of doing business to ensure patients receive high
quality care.''
---------------------------------------------------------------------------

\29\ Transforming Health Care: The President's Health
Information Technology Plan, available at: http://www.whitehouse.gov/infocus/technology/economic_policy200404/chap3.html.
---------------------------------------------------------------------------

Over the past several years, CMS has undertaken several activities
to promote the adoption and effective use of HIT in coordination with
other Federal agencies and with the Office of the National Coordinator
for Health Information Technology. One of those activities is promotion
of data standards for clinical information, as well as for claims and
administrative data. In addition, through our 8th Scope of Work
contract with the QIOs, we are offering assistance to hospitals on how
to adopt and redesign care processes to effectively use HIT to improve
the quality of care for Medicare beneficiaries, including computerized
physician order entry (CPOE) and bar coding systems. In section IV.A.3.
of the FY 2007 IPPS proposed rule (71 FR

[[Page 48054]]

24095), we again invited comments on streamlining the submission of
clinical quality data by using standards-based electronic medical
records. (We used the term ``electronic medical records'' in section
IV.A.3. instead of the term ``electronic health records'' that is used
in this section in order to maintain consistency with our request for
comments in the FY 2006 IPPS final rule.) Finally, our Premier Hospital
Quality Incentive Demonstration provides additional financial payments
for hospitals that achieve improvements in quality, which effective HIT
systems can facilitate.
We are considering the role of interoperable HIT systems in
increasing the quality of hospital services while avoiding unnecessary
costs. As noted above, the Administration supports the adoption of HIT
as a normal cost of doing business. Whereas payments under the IPPS do
not vary depending on the adoption and use of HIT, hospitals that
leverage HIT to provide better quality services may more efficiently
reap the reward of any resulting cost savings. In addition, the
adoption and use of HIT may contribute to improved processes and
outcomes of care, including shortened hospital stays and the avoidance
of adverse drug reactions.
In the preamble to the FY 2007 IPPS proposed rule (71 FR 24101), we
sought comments on our statutory authority to encourage the adoption
and use of HIT. We also sought comments on the appropriate role of HIT
in any value-based purchasing program, beyond the intrinsic incentives
of the IPPS, to provide efficient care, encourage the avoidance of
unnecessary costs, and increase quality of care. In addition, we sought
comments on promotion of the use of effective HIT through hospital
conditions of participation (CoPs), perhaps by adding a requirement
that hospitals use HIT that is compliant with and certified in its use
of the HIT standards adopted by the Secretary. We anticipate that the
American Health Information Community will provide advice to the
Secretary on these issues.
We received 30 comments on this section. Below is a summary of the
comments addressing: (1) CMS'' statutory authority to encourage
adoption of effective health information technology (HIT); (2) the role
that HIT should play in value-based purchasing; and (3) whether CMS
should promote the adoption of effective HIT through our CoPs. In
addition to these areas in which we sought comments, we also received
several comments on the challenges of implementing HIT, which were
particularly focused on overcoming the high cost of implementation. We
conclude the summary with additional commenter input on the adoption
and use of HIT.
Comment: Seven comments addressed our statutory authority to
encourage adoption and use of HIT. Two of the seven commenters stated
that the HHS has the authority to encourage adoption of HIT. Those
commenters referred to the Hill Burton Act, the Medicare Modernization
Act, the Deficit Reduction Act, and the FY 2006 Health and Human
Services Appropriations Act as bases for our statutory authority. Other
commenters stated that we do not have the authority to encourage
adoption and use of HIT. Those commenters pointed out the need for
legislation to specifically authorize support for HIT implementation.
Nineteen commenters addressed the role of HIT in a value-based
purchasing program. Only 2 of the 19 commenters stated that HIT should
be directly tied to value-based purchasing. An overwhelming majority of
the commenters believed that HIT funding should not be tied to value-
based purchasing; rather those commenters stated that HIT
implementation should be tied to increases in hospital payment.
However, nearly all of the commenters agreed that use of effective HIT
could increase health care quality, efficiency, patient safety, and
care coordination. A few commenters recognized that HIT will likely
reduce the burden of reporting to a value-based purchasing system.
We received 14 comments on the promotion of HIT through our CoPs.
Of those comments, only three were in favor of including HIT in the
CoPs. Of these comments, only three were in favor of including adoption
of certified, interoperable HIT in the CoPs. The majority of commenters
opposed this proposal and termed such a requirement a potential
``unfunded mandate.''
There were a total of 19 comments addressing the high costs
associated with HIT implementation. Commenters identified cost as the
greatest barrier to HIT implementation and stated that the short term
benefits do not justify the costs. Several commenters noted that HIT is
a public good and felt strongly that funding for HIT implementation
should be provided through government loan guarantees and grants. Two
commenters felt that safety-net hospitals should be the primary
beneficiaries of any federal funding for HIT. One commenter observed
that the governments of other countries funds HIT. Nine commenters
observed that the proposed rule failed to recognize that a major
finding of the RAND study was that HIT investments accrue more to the
payers and purchasers than to hospitals and health systems, which the
commenters believed indicates that purchasers and plans should make a
greater share of investment in HIT.
We received 11 comments addressing the challenges of HIT
implementation beyond costs. Many of the commenters noted that HIT
adoption takes careful planning and requires many internal workflow
process changes. Several comments addressed the variation in health
care delivery systems and the vastly different needs for HIT across
systems, as well as vastly differing abilities to accomplish HIT
implementation. Many felt strongly that inoperability standards must
precede implementation.
Several thoughtful ideas were addressed by a small proportion of
commenters. Two commenters felt that until HIT is fully implemented,
hospitals should be required to report a unique identifier for each
coded procedure, capture referring and ordering providers for each
procedure, record vital signs at presentation, include any do not
resuscitate (DNR) orders, and record time of admission. Along the same
lines, another commenter felt that until HIT is in place, hospitals
should be required to notify dialysis facilities via phone, fax, or e-
mail, when a kidney failure patient is admitted.
Response: We thank all commenters for their thoughtful and valuable
discussion of the issues. In the HIT section of the preamble to the
proposed rule, we recognized the potential for effective HIT to
facilitate improvements in the quality and efficiency of health care
services. We also pointed out CMS' promotion of the adoption and
effective use of HIT in coordination with other Federal agencies and
the Office of the National Coordinator of Health Information
Technology. Here, we will discuss three areas that we are emphasizing
to promote the effective use of HIT, in light of the comments we
received: (1) Value-based purchasing, (2) the e-prescribing rule, and
(3) infrastructure and interoperability standards. We believe that
these activities will address the barriers to HIT implementation that
were presented by the commenters and will increase the benefits of HIT
adoption relative to the costs.
We continue our work toward the implementation of value-based
purchasing payment system reforms because we believe that, among other
advantages, value-based purchasing can encourage hospitals to invest in
activities , such as effective HIT, that

[[Page 48055]]

have the potential to improve quality and decrease unnecessary costs.
However, linking a portion of Medicare payments to valid measures of
quality and effective use of resources could give hospitals more direct
incentives to implement innovative ideas and approaches that may result
in improved value of care. We agree with the commenters that noted that
the use of effective HIT could increase quality, efficiency, patient
safety, and care coordination. We also agree with the commenters that
noted that effective use of HIT can be used to decrease the burden of
reporting to value-based purchasing programs. However, we disagree with
the commenters that recommended direct government funding of HIT. As
stated in the President's 2007 Budget, ``the Administration supports
the adoption of [HIT] as a normal cost of doing business to ensure
patients receive high quality care.''
Commenters noted that multiple stakeholders in the health care
system, including purchasers and payers, benefit from provider adoption
and use of effective HIT and should share in the cost. CMS and OIG are
in the process of issuing final rules to allow hospitals and other
health care providers under some circumstances to donate electronic
prescribing and electronic health records technology to physicians and
others without running afoul of the Stark (physician self-referral) and
anti-kickback statutes. We believe that these rules will facilitate the
adoption of HIT by physicians and other health care providers who might
otherwise have been unable or unwilling to invest in the technology. We
also believe that these regulatory changes will help to stimulate the
adoption of effective HIT, and that, as HIT use spreads, the benefits
relative to the costs of implementation may increase for all
stakeholders.
The majority of commenters pointed out that the current lack of HIT
infrastructure, including lack of interoperability standards, is a
major obstacle to adoption and effective use of HIT. To address the
lack of infrastructure, the Secretary has undertaken a national
strategy that calls for Federal agencies to collaborate with private
stakeholders in the development of architecture, standards,
certification processes, and methods of governance to facilitate the
adoption of effective HIT. In September 2005, the Secretary selected 16
commissioners to serve on the American Health Information Community
(AHIC), which is a federally chartered collaborative forum of private
and public interests charged with advising the Secretary on how to make
health information digital and interoperable. The goals of the
Community include immediate access to vital medical information at the
point of care, privacy protection, better data for research, and
overall cost savings. The work of the Community has been divided among
four workgroups: (1) the Electronic Health Records Workgroup, (2) the
Chronic Care Workgroup, (3) the Consumer Empowerment Workgroup, and (4)
the Biosurveillance Workgroup. The AHIC Workgroups have made
recommendations, as their initial ``breakthroughs,'' pertaining to: an
electronic medication summary and registration history; secure
messaging capabilities for individuals with chronic disease;
biosurveillance monitoring; and, through secure means, broadening the
availability and access to current and historical laboratory results
and interpretations. More information about the Community is available
at: http://www.hhs.gov/healthit/ahic.html.
In conclusion, we are not adopting at this time our proposal to
require adoption of certified, interoperable HIT as a Medicare CoP.
Rather, we are reserving judgment on the imposition of such a
requirement and will continue to research the feasibility of doing so.
We may revisit this issue in the FY 2008 IPPS proposed rule or in
another rulemaking proceeding.

C. Sole Community Hospitals (SCHs) (Sec. 412.92) and Medicare-
Dependent, Small Rural Hospitals (MDHs) (Sec. 412.108)

1. Background
Under the IPPS, special payment protections are provided to a sole
community hospital (SCH). Section 1886(d)(5)(D)(iii) of the Act defines
an SCH as a hospital that, by reason of factors such as isolated
location, weather conditions, travel conditions, absence of other like
hospitals (as determined by the Secretary), or historical designation
by the Secretary as an essential access community hospital, is the sole
source of inpatient hospital services reasonably available to Medicare
beneficiaries. The regulations that set forth the criteria that a
hospital must meet to be classified as an SCH are located in Sec.
412.92.
Under the IPPS, separate special payment protections also are
provided to a Medicare-dependent, small rural hospital (MDH). Section
1886(d)(5)(G)(iv) of the Act defines an MDH as a hospital that is
located in a rural area, has not more than 100 beds, is not an SCH, and
that has a high percentage of Medicare discharges (not less than 60
percent in its 1987 cost reporting year or in 2 of its most recent 3
audited and settled Medicare cost reporting years). The regulations
that set forth the criteria that a hospital must meet to be classified
as an MDH are located in Sec. 412.108.
Although SCHs and MDHs are paid under special payment
methodologies, they are section 1886(d) hospitals. Like all section
1886(d) IPPS hospitals, SCHs and MDHs are paid for their discharges
based on the DRG weights calculated under section 1886(d)(4) of the
Act.
Effective with hospital cost reporting periods beginning on or
after October 1, 2000, section 1886(d)(5)(D)(i) of the Act (as amended
by section 6003(e) of Pub. L. 101-239) and section 1886(b)(3)(I) of the
Act (as added by section 405 of Pub. L. 106-113 and further amended by
section 213 of Pub. L. 106-554), provide that SCHs are paid based on
whichever of the following rates yields the greatest aggregate payment
to the hospital for the cost reporting period:
The Federal rate applicable to the hospital;
The updated hospital-specific rate based on FY 1982 costs
per discharge;
The updated hospital-specific rate based on FY 1987 costs
per discharge; or
The updated hospital-specific rate based on FY 1996 costs
per discharge.
For purposes of payment to SCHs for which the FY 1996 hospital-
specific rate yields the greatest aggregate payment, payments for
discharges during FYs 2001, 2002, and 2003 were based on a blend of the
FY 1996 hospital-specific rate and the greater of the Federal rate or
the updated FY 1982 or FY 1987 hospital-specific rate. For discharges
during FY 2004 and subsequent fiscal years, payments based on the FY
1996 hospital-specific rate are 100 percent of the updated FY 1996
hospital-specific rate.
For each cost reporting period, the fiscal intermediary determines
which of the payment options will yield the highest rate of payment to
the SCH. Payments are automatically made at the highest rate using the
best data available at the time the fiscal intermediary makes the
determination. However, it may not be possible for the fiscal
intermediary to determine in advance precisely which of the rates will
yield the highest payment by year's end. In many instances, it is not
possible to forecast the outlier payments, the amount of the DSH
adjustment, or the IME adjustment, all of which are applicable only to
payments based on the Federal rate. The fiscal intermediary makes a
final adjustment at the close of the cost reporting period after it

[[Page 48056]]

determines precisely which of the payment rates would yield the highest
payment to the hospital.
If an SCH disagrees with the fiscal intermediary's determination
regarding the final amount of program payment to which it is entitled,
it has the right to appeal the fiscal intermediary's decision in
accordance with the procedures set forth in Subpart R of Part 405,
which concern provider payment determinations and appeals.
Through and including FY 2006, under section 1886(d)(5)(G) of the
Act, MDHs are paid based on the Federal national rate or, if higher,
the Federal national rate plus 50 percent of the difference between the
Federal national rate and the updated hospital-specific rate based on
FY 1982 or FY 1987 costs per discharge, whichever is higher. However,
section 5003 of Pub. L. 109-171 (DRA) modified these rules for
discharges occurring on or after October 1, 2006. Section 5003(c)
changed the 50-percent adjustment to 75 percent. Section 5003(b)
requires that an MDH use the 2002 cost reporting year as its base year
(that is, the FY 2002 hospital-specific rate), if that use results in a
higher payment. An MDH does not have the option to use its FY 1996
hospital-specific rate. We discussed our proposed changes to implement
section 5003 of the DRA in section IV.C.4 of the preamble to the FY
2007 IPPS proposed rule (71 FR 24104).
2. Volume Decrease Adjustment for SCHs and MDHs
Section 1886(d)(5)(D)(ii) of the Act requires that the Secretary
make a payment adjustment to an SCH that experiences a decrease of more
than 5 percent in its total number of inpatient discharges from one
cost reporting period to the next, if the circumstances leading to the
decline in discharges were beyond the SCH's control. Section
1886(d)(5)(G)(iii) of the Act requires that the Secretary make a
payment adjustment to an MDH that experiences a decrease of more than 5
percent in its total number of inpatient discharges from one cost
reporting period to the next, if the circumstances leading to the
decline in discharges were beyond the MDH's control. These adjustments
were designed to compensate an SCH or MDH for the fixed costs it incurs
in the year following the reduction in discharges (this is, the second
year), which it may be unable to reduce. Such costs include the
maintenance of necessary core staff and services. Our records indicate
that three to four SCHs/MDHs request this adjustment each year.
However, we believe that not all staff costs can be considered
fixed costs. Using a standardized formula specified by us, the SCH or
MDH must demonstrate that it appropriately adjusted the number of staff
in inpatient areas of the hospital based on the decrease in the number
of inpatient days. This formula examines nursing staff in particular.
If an SCH or MDH has an excess number of nursing staff, the cost of
maintaining those staff members is deducted from the total adjustment.
One exception to this policy is that no SCH or MDH may reduce its
number of staff to a level below what is required by State or local
law. In other words, an SCH or MDH will not be penalized for
maintaining a level of staff that is consistent with State or local
requirements.
The process for determining the amount of the volume decrease
adjustment can be found in section 2810.1 of the Provider Reimbursement
Manual. Fiscal intermediaries are responsible for establishing whether
an SCH or MDH is eligible for a volume decrease adjustment and, if so,
the amount of the adjustment. To qualify for this adjustment, the SCH
or MDH must demonstrate that: (a) A 5 percent or more decrease of total
discharges has occurred; and (b) the circumstance that caused the
decrease in discharges was beyond the control of the hospital. Once the
fiscal intermediary has established that the SCH or MDH satisfies these
two requirements, it will calculate the adjustment. The adjustment
amount is determined by subtracting the second year's DRG payment from
the lesser of: (a) The second year's costs minus any adjustment for
excess staff; or (b) the previous year's costs multiplied by the
appropriate IPPS update factor minus any adjustment for excess staff.
The SCH or MDH receives the difference in a lump-sum payment.
The adjustment for excess staff is currently broken into two parts:
the routine acute care area (excluding intensive care unit areas)
excess staff adjustment and the intensive care unit excess staff
adjustment. (For purposes of this section of the preamble, any
subsequent references to the routine acute care area of an SCH or MDH
refer to the routine acute care area excluding any intensive care unit
areas.) In order to determine whether or not the hospital is
appropriately staffing its routine acute care and its intensive care
unit area, the fiscal intermediary compares the hospital's actual
number of nursing staff in each area with the staffing of like-size
hospitals in the same census region. Currently, fiscal intermediaries
obtain average nurse staffing data from the American Hospital
Association's HAS/Monitrend Data Book. (More information on the HAS/
Monitrend Data Book follows.) If a hospital employs more than the
reported average number of nurses in the routine acute care or
intensive care unit area for hospitals of its size and census region,
the fiscal intermediary reduces the amount of the adjustment by the
cost of maintaining the additional staff. The amount of the reduction
is calculated by multiplying the actual number of nursing staff above
the reported average by the average nurse salary for that hospital as
reported on the Medicare cost report. The complete process for
determining the amount of the adjustment can be found at section 2810.1
of the Provider Reimbursement Manual.
Representatives from several SCH and MDH hospitals have contacted
CMS with concerns regarding the current use of the HAS/Monitrend data
for determining the volume decrease adjustment for SCHs and MDHs.
Because the most recent HAS/Monitrend Data Book was published in 1989
and is no longer updated, the hospitals expressed concern that the
information in the publication is too outdated for current use.
Therefore, in the FY 2007 IPPS proposed rule (71 FR 24102), we
presented for public comment a new methodology for calculating the
adjustment for excess staff.
a. HAS/Monitrend Data
From the mid-1960's to 1989, the Healthcare Administrative Services
Division of the American Hospital Association (AHA) published
biannually the HAS/Monitrend Data Book, a collection of aggregate
hospital statistics. Hospitals completed surveys based on 6 months of
data; these data were categorized into one of five bed-size groups and
into one of nine census regions. The bed size groups were 0-49, 50-99,
100-199, 200-399, and 400 or more beds. The census regions include: (1)
New England (Connecticut, Maine, Massachusetts, New Hampshire, Rhode
Island, and Vermont); (2) Middle Atlantic (New Jersey, New York, and
Pennsylvania); (3) South Atlantic (Delaware, District of Columbia,
Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia,
and West Virginia); (4) East North Central (Illinois, Indiana,
Michigan, Ohio, and Wisconsin); (5) East South Central (Alabama,
Kentucky, Mississippi, and Tennessee); (6) West North Central (Iowa,
Kansas, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota);
(7) West South Central (Arkansas, Louisiana, Oklahoma, and Texas); (8)
Mountain (Arizona, Colorado, Idaho, Montana, Nevada, New

[[Page 48057]]

Mexico, Utah, and Wyoming); and (9) Pacific (Alaska, California,
Hawaii, Oregon, and Washington).
The survey collected data on nearly 400 items pertaining to
utilization, resource allocation, departmental productivity,
departmental direct expenses, and staffing. In order for aggregate data
to be published for a category, at least three hospitals in the same
census region and bed-size group had to have responded to the survey.
For the final 1989 publication, 996 acute care hospitals completed the
survey. CMS has used the HAS/Monitrend Data Book since 1984 to
determine the volume decrease adjustment for SCHs; the data also have
been used for the volume decrease adjustment for MDHs since 1990. In
particular, CMS has used the HAS/Monitrend data on the number of paid
nursing hours per patient day (``paid hours/patient day'') in both the
general acute care area (``Medical and Surgical Units'') and the
intensive care unit (``Med & Surg Intensive Care Unit''). More
information on the HAS/Monitrend Data Book is available from the
American Hospital Association, 840 North Lake Shore Drive, Chicago,
Illinois 60611.
b. HAS/Monitrend Data Book Replacement Alternative
In the FY 2007 IPPS proposed rule (71 FR 24102), we proposed an
alternative method for determining an SCH's or MDH's target number of
core staff using data from the Medicare cost report and the
occupational mix survey. However, this methodology would only establish
one combined average number of nursing hours per patient day for both
the inpatient routine care and the intensive care unit areas. We
proposed to use the Medicare cost report and occupational mix survey
data beginning with requests for adjustments for FY 2008 cost reports.
We invited comments from the public on this proposal.
(1) Occupational Mix Survey
As discussed in the FY 2007 IPPS proposed rule (71 FR 24075), the
CMS occupational mix survey collects from each hospital data on the mix
of employees in the areas of the hospital payable under the IPPS for a
limited number of hospital occupational categories. For the 2006
survey, these categories include registered nurses, licensed practical
nurses, aides, orderlies, attendants, and medical assistants. The
registered nurse subcategory includes two functional subcategories:
management personnel and staff nurses or clinicians. For example,
hospitals may choose to employ different combinations of registered
nurses, licensed practical nurses, and nurses' aides for the purpose of
providing nursing care to their patients. The varying labor costs
associated with these choices reflect hospital management decisions
rather than geographic differences in the costs of labor. The data
collected on the survey are used to adjust hospitals' wage data to
account for each hospital's mix within the general occupational
categories. Hospitals completed the first occupational mix survey using
FY 2003 data. A second survey will be completed this year (FY 2006).
Under the proposed method, we would calculate the nursing hours per
inpatient day for each SCH or MDH by dividing the number of paid
nursing hours (for registered nurses, licensed practical nurses, and
nursing aides) reported on the occupational mix survey by the number of
inpatient days reported on the Medicare cost report. The results would
be grouped into the same bed-size groups and census regions as the HAS/
Monitrend Data Book. CMS would publish the mean number of nursing hours
per patient day for each census region and bed-size group in the
Federal Register. (We proposed to include licensed practical nurse and
nursing aide hours as well as registered nurse hours to reflect the
various levels of nursing staff employed by hospitals to provide direct
patient care.)
The results that would be published in the Federal Register would
be the target number of core nursing hours per patient day. For
purposes of the volume decrease adjustment, the published data would be
utilized in the same way as the HAS/Monitrend data: The fiscal
intermediary would multiply the SCH's or MDH's number of inpatient days
by the applicable published hours per patient day. This figure would be
divided by the average number of worked hours per year per nurse (for
example, 2,080 for a standard 40-hour week). The result would be the
target number of core nursing staff for the particular SCH or MDH. If
necessary, the cost of any excess staff (number of FTEs that exceed the
published number) would be removed from the second year's costs or, if
applicable, the previous year's costs multiplied by the IPPS update
factor when determining the volume decrease adjustment. Because we
would consider registered nurses, licensed practical nurses, and
nursing aides, the fiscal intermediary would calculate the excess staff
adjustment by multiplying the number of excess staff by the average
salary among the three groups, taking into account how many registered
nurses, licensed practical nurses, and nursing aides work at the
facility. (For instance, if the hospital's average salary for a
registered nurse is $50,000 and the hospital's average salary for a
licensed practical nurse is $30,000 and the hospital employs 5
registered nurses, 3 licensed practical nurses, and no nursing aides,
the calculated average salary would be $42,500 for one FTE (((5 x
$50,000) + (3 x $30,000))/8 = $42,500).
We proposed to use the results of the FY 2006 occupational mix
survey and begin applying the proposed methodology for adjustments
resulting from a decrease in discharges between FYs 2007 to 2008.
Because the occupational mix survey is conducted once every 3 years, we
would update the data set every 3 years. We proposed to use the FY 2006
survey results and not to utilize the FY 2003 survey results to take
into account comments we received in response to the first set of
results from the occupational mix survey, and to ensure that hospitals
have had some experience with the occupational mix survey before it is
used in determining these adjustments. Because we have used the HAS/
Monitrend data for so many years, we stated our belief that it was
appropriate to continue to use these data for one more year and wait
for the results of the FY 2006 survey. We stated that this would give
hospitals an opportunity to have some experience with the occupational
mix survey before it is used in these adjustments, and would allow us
to compare the data from the FY 2006 occupational mix survey with the
data reported in the 2003 survey, if necessary. However, for purposes
of describing how we would implement this methodology, we applied the
proposed calculation to the FY 2003 occupational mix survey data. While
we did not propose to use the FY 2003 data, we stated our belief that
it was the best data available at the time to help explain our proposed
methodology.
To calculate the results below, we merged the FY 2003 occupational
mix survey results into the FY 2003 cost report file. We eliminated all
observations for non-IPPS providers, providers who failed to complete
the occupational mix survey, and providers for which provider numbers,
bed counts and/or day counts were missing. We also only included
providers with 12 months' worth of data. This resulted in a pool of
approximately 3,541 providers.
For each provider in this pool, we calculated the number of nursing
hours by adding the number of registered nurse, license practical
nurse, and nursing aide hours reported on the occupational mix survey.
We divided

[[Page 48058]]

the result of this calculation by the total number of inpatient days
reported on the cost report to determine the number of nursing hours
per patient day.
For purposes of calculating the census regional averages for the
various bed-size groups, we proposed to only include observations that
fall within 3 standard deviations of the mean of all observations, thus
removing potential outliers in the data. Below are the results of this
calculation.
We realize that, in the chart, some results may appear to be
anomalous (for example, 0-49 beds for census regions 4, 6, and 8). We
believe a small number of outlier data may have skewed the mean, which
was the basis for identifying data within 3 standard deviations to
include in the calculations. Therefore, we solicited comments on
whether we should consider another method for determining the
appropriateness of using available data in calculating the average
number of nursing hours per patient day. For instance, in this case,
the results are based on the inclusion of data within 3 standard
deviations of the mean. Alternatively, we stated that we could use
another measure of central tendency.

Paid Nursing Hours Per Patient Day
----------------------------------------------------------------------------------------------------------------
Census region
Number of beds --------------------------------------------------------------------------------
1 2 3 4 5 6 7 8 9
----------------------------------------------------------------------------------------------------------------
0-49........................... 16.38 8.33 19.26 30.76 11.72 26.70 20.50 31.00 17.39
50-99.......................... 13.71 11.07 15.66 17.37 13.69 15.53 12.51 16.63 16.11
100-199........................ 11.98 10.99 14.38 13.44 11.93 17.03 13.91 14.33 13.32
200-399........................ 12.40 12.19 14.19 13.00 10.57 16.20 11.35 14.06 15.33
400 or more.................... 13.32 9.42 12.77 15.39 9.51 19.70 12.36 17.64 13.32
----------------------------------------------------------------------------------------------------------------

(2) American Hospital Association Annual Hospital Survey
In the process of evaluating different sources of data to replace
the HAS/Monitrend Data Book, we considered using the results of the
AHA's Annual Hospital Survey. This survey includes over 700 data fields
that cover facilities and services, utilization, finances, and
staffing. On average, 6,000 hospitals complete the survey each year.
Section E of the Annual Survey Database includes total facility
staffing data. FTE counts are available for registered nurses,
practical and vocational nurses, nursing assistive personnel, and other
personnel. However, FTEs in outpatient areas, excluded units, and
nursing home units within the hospital are also included in the
aggregated FTE counts. It is not possible to separately identify how
many of the total reported nursing FTEs are attributable to the general
acute care facility and how many to a distinct part unit or outpatient
facility. Due to varying staffing needs in distinct part units and
outpatient areas, in the proposed rule we stated our belief that it
would be best for any calculation of average staffing for the inpatient
acute care area to consist of data solely from the inpatient acute care
area of the hospital. In the FY 2007 IPPS proposed rule (71 FR 24104),
we requested comments on this issue.
We received 16 public comments on our proposal.
Comment: Many commenters believed that it is not appropriate to use
the FY 2006 occupational mix survey for making determinations under the
volume decrease adjustment. The commenters believed the FY 2006
occupational mix survey consists of unreliable data due to the rushed
nature of the collection. The commenters suggested that CMS use the AHA
Annual Survey data to determine nursing levels per patient day. One
commenter expressed concern that the data from the occupational mix
survey and the hospital cost report data were not for the same time
period and that annualizing the data from the occupational mix survey
may distort the data. Another commenter noted that the occupational mix
survey collects data from ancillary areas similar to the AHA Annual
Survey data and, therefore, use of either data source would result in a
similar calculation. One commenter recommended that CMS work with the
AHA to develop a new survey tool to collect this information. In the
interim, the commenter recommended continuing to use the latest HAS
Monitrend data.
One commenter suggested that CMS no longer require fiscal
intermediaries to compare a hospital's nursing staff per patient day
with other hospitals of like size in the same area. Rather, the
commenter suggested that fiscal intermediaries should be able to
evaluate a hospital's individual needs and circumstances. The commenter
also suggested that CMS only consider registered nurse and licensed
practical nurse hours and eliminate nursing aide hours from the
calculation. The commenter further suggested that CMS compare SCHs and
MDHs to a smaller sample than the current census regions; for instance,
CMS could compare hospitals in the same State.
Response: We do not agree with the commenters who stated that the
occupational mix survey results are unreliable. The data is supplied
solely by hospitals, and because this is the second time hospitals have
completed the survey, we believe they are familiar with the
requirements and are providing accurate information. In addition,
although the collection may have been more hurried in 2006 due to the
Bellevue decision, as explained in section III.C. of this preamble,
hospitals had opportunities to review, validate and correct their
occupational mix data. For 2006, the occupational mix collection will
include three months of data. Therefore, it will be necessary to
annualize the data to reflect staffing levels for a one year period. We
do not believe this distorts an individual hospital's average staffing
levels throughout the year unless the hospital experiences a unique
event that either greatly increases or reduces hospital utilization
and/or the hospital's ability to recruit and maintain staff. However,
it is for this reason that we require a minimum number of hospitals in
each bed-size/census group to have reported staffing data before
calculating an average for that category. We believe that by combining
the results of at least three hospitals of like size in an area, we
reduce the chance of unique events affecting individual hospitals
distorting the averages.
As previously mentioned, we stated in the proposed rule that it
would be best to collect nursing data from only the inpatient, acute
care portion of the hospital and that this would be a justification for
using occupational mix survey data. However, in this final rule, we are
correcting this statement, since the occupational mix survey--like the
wage survey--collects data on both the

[[Page 48059]]

inpatient and outpatient areas of the hospital. Also, it is our
understanding that hospital nursing staff may, and often do, rotate
between the inpatient and outpatient areas of the hospital as
necessary. In addition, inpatients often utilize services in the
outpatient (or ancillary) areas of the hospital. Given that the
occupational mix survey collects data on both outpatient and inpatient
areas of the hospital, and given that most commenters stated that they
preferred to use the AHA Annual Survey data and not the occupational
mix data, our final policy will be to allow an SCH or MDH that has
experienced a 5 percent or greater reduction in the number of
discharges from one cost reporting period to the next the option of
using either the AHA Annual Survey results or the occupational mix data
to compare the number of hospital's core staff with other like-sized
hospitals in its geographic area.
We recognize that the AHA data includes staffing data from distinct
part units and skilled nursing facilities. While it is possible to
identify which hospitals have skilled nursing facilities, it is not
possible to distinguish between those hospitals with distinct part
units and those without. Our data indicate that there are currently
1230 hospital-based skilled nursing facilities. If we eliminated all
hospitals with skilled nursing facilities from the pool of comparison
hospitals that responded to the FY 2004 AHA Annual Survey, roughly
3,000 hospitals would remain. We believe this is a sufficient number of
hospitals with which to calculate staffing averages and our final
policy will be that when using the AHA Annual Survey, we will eliminate
hospitals with hospital-based skilled nursing facilities. Also,
consistent with the HAS/Monitrend Databook, we will only calculate the
average number of nursing staff for a bed-size/census group if there
are data available for three or more hospitals.
In order to account for staff in the distinct part units, we would
include in the patient day count the number of inpatient days from
these units. While this may still lower the average number of staff per
patient day, as discussed in more detail later in this section, a
hospital may decide whether this data most closely resembles its
staffing or whether the HAS/Monitrend data or occupational mix data
better represents hospitals in its bed-size/census group. In light of
this, we do not believe it is necessary for the AHA to develop a new
survey tool to collect staffing information for purposes of this
adjustment.
In response to the commenter who suggested that the fiscal
intermediaries take into account the individual circumstances of each
SCH/MDH that experiences a decrease in discharges, we note that the
commenter failed to suggest how this may be achieved. In light of our
goal of maintaining a uniform standard for calculating the amount of
the volume decrease adjustments, we believe that it is more appropriate
for the fiscal intermediaries to utilize either the same or comparable
data sources for all hospitals. The AHA Annual Survey, occupational mix
survey, and HAS/Monitrend Databook offer this standard. We note,
however, that the AHA Annual Survey, the occupational mix survey and
the HAS/Monitrend Databook are not identical data sources, as described
above. Therefore, fiscal intermediaries and hospitals should work
together to determine which data source best represents the staffing
needs of the hospital. In addition, the fiscal intermediaries must
consider any minimum staffing requirement set by the State. If the
average number of nursing hours per patient day for a bed-size/census
group is below the State's minimum staffing requirement, the fiscal
intermediaries may not reduce the amount of a hospital's volume
decrease adjustment to reflect a core number of nursing staff below
what is required by law. In addition, we are continuing to employ the
census areas defined by the AHA in the HAS/Monitrend Databook. The
larger size of the census areas ensures that a sufficient number of
hospitals respond in every bed-size category for each census region.
We have considered the commenter's statement that we should only
consider registered nurse and licensed practical nurse staff when
computing the number of nursing staff per patient day. However, we
believe that nursing aides play an integral part in the delivery of
nursing care and, therefore, should be considered part of the
hospital's nursing staff for purposes of this determination. Therefore,
we will continue to calculate the average number of reported registered
nurse, licensed practical nurse, and nursing aide hours per patient
day. As previously noted, the registered nurse, licensed practical
nurse, and nursing aide FTEs in the AHA Annual Survey data include
employees from outpatient areas and distinct part units of the
hospital. Therefore, the fiscal intermediaries will include SCH or MDH
registered nurse, licensed practical nurse, and nursing aide FTEs for
all areas of the hospital, including any distinct part units, when
conducting the comparison.
We had proposed to use the results of the 2006 occupational mix
survey but not until FY 2008. At that time, we were not aware that we
would have the results of the FY 2006 survey available to use for
adjustments for decreases in discharges occurring in 2006. However, due
to the shortened collection period necessitated by the decision in
Bellevue Hospital Center v. Leavitt, these data will now be available
for use for volume decrease adjustments for decreases in discharges
between the 2005 and 2006 cost reporting periods. These data will be
updated every 3 years. The results of the FY 2006 survey may be used
for volume decrease adjustment calculations for decreases in discharges
occurring during the 2006, 2007 and 2008 cost reporting periods.
After consideration of the public comments received, we are
finalizing a policy to allow SCHs and MDHs the option of using the
results of (1) the occupational mix survey, (2) the AHA Annual Survey,
or (3) the HAS/Monitrend Databook for purposes of determining the
amount of the volume decrease adjustment for any open adjustment
requests. Beginning with adjustment requests for decreases in
discharges occurring beginning with 2007, the amount of the volume
decrease adjustment will be based on either the AHA Annual Survey or
the occupational mix survey results. Therefore a SCH or MDH that has
experienced a decrease in discharges in 2007 as compared to 2006 will
no longer be permitted to use the HAS/Monitrend Databook results to
calculate the amount of the volume decrease adjustment.
If the SCH/MDH opts to use the results of the occupational mix
survey, the fiscal intermediaries will determine the SCH's or MDH's
total hospital nursing staff per inpatient day for the year of the
volume decrease and compare that figure to the number published for the
hospital's census area and bed-size division. As described in the FY
2007 proposed rule, we will calculate the average number of nursing
hours per patient day for all IPPS hospitals that responded to the
occupational mix survey. We will begin by annualizing the results. We
will then divide this figure by the number of inpatient days reported
on the hospital cost report. At this point, we will eliminate results
that fall outside three standard deviations of the mean in order to
eliminate any potential outlier data. Hospitals will then be grouped by
bed-size and census area and the average number of nursing hours per
patient day will be calculated. We will post the

[[Page 48060]]

results of the occupational mix survey grouped by census division and
bed-size group on the CMS Web site. Core staffing results and salaries
will be compared to the salaries reported for both the inpatient and
outpatient areas of the hospital.
In place of the occupational mix survey results (or the HAS/
Monitrend Databook, which may be used only for open adjustment
requests) hospitals may also opt to use the AHA Annual Survey results.
Where available, these AHA Annual Survey Results may be used for all
open adjustment requests, as well as for requests involving decreases
experienced in 2007 or thereafter. Currently, the AHA has published the
annual results including the FY 2004 survey. Fiscal intermediaries will
use the survey results from the year in which the decrease occurred.
For instance, if a hospital experiences a decrease between its 2002 and
2003 cost reporting periods, the fiscal intermediaries will compare the
hospital's 2003 staffing with the results of the FY 2003 AHA Annual
Survey. We will calculate the results of the Annual Survey in a similar
method to the occupational mix survey (eliminating from our data-set
any hospitals with hospital-based SNFs). We will begin by multiplying
the number of reported nurse FTEs by 2080 to derive the number of
nursing hours per year (based on a 40 hour work week). We will then
divide this number by the total number of inpatient days, including
inpatient days from distinct part units, as reported on the hospital
cost report. We will then eliminate all providers with results outside
of three standard deviations from the mean. The hospitals will then be
grouped by bed-size and census area and the average number of nursing
hours per patient day will be calculated for each category. If the
hospital chooses to use the results of the AHA Annual Survey, the
fiscal intermediary will include the hospital's number of nursing staff
in the distinct part units, as well as distinct part unit inpatient
days, in the determination. Bed-size groups will also be determined
based on the total number of beds in the inpatient areas and distinct
part units as reported on the hospital cost report. We will post the
results of the Annual Survey grouped by census division and bed-size
group on the CMS Web site. If a particular year is unavailable on the
Web site or there are no results for a particular bed-size/census
group, the fiscal intermediaries may contact CMS for the data.
If the fiscal intermediary determines that the SCH or MDH has a
disproportionately high number of staff on a per inpatient day basis as
compared to area hospitals, the fiscal intermediary will modify the
amount of the adjustment to reflect the cost of the excess staff. As
stated above, because we are including registered nurses, licensed
practical nurses, and nursing aides in this determination, the fiscal
intermediary will calculate the excess staff adjustment by multiplying
the number of excess staff by the average weighted salary among the
three groups, taking into account the number of registered nurses,
licensed practical nurses, and nursing aides at the facility.
3. Mandatory Reporting Requirements for Any Changes in the
Circumstances Under Which a Hospital Was Designated as an SCH or MDH
Under Sec. 412.92(b)(3) and Sec. 412.108(b)(4) respectively, once
a facility has been designated as an SCH or MDH, the classification
remains in effect without need for reapproval unless there is a change
in the hospital's circumstances. Currently, the regulations do not
contain an explicit requirement that an SCH report to CMS or the fiscal
intermediary a change in circumstances that would affect its status as
an SCH. Likewise, the current regulations for MDHs do not contain an
explicit requirement that an MDH report to CMS or the fiscal
intermediary a change in the circumstances affecting its MDH status.
However, the fiscal intermediary is required to evaluate on an ongoing
basis whether a hospital continues to qualify for MDH status.
We have become aware of several hospitals that have been paid based
on SCH or MDH status even after the original circumstances that led to
the respective classification changed. In the FY 2007 IPPS proposed
rule (71 FR 24104), we proposed to amend Sec. 412.92(b)(3) for SCHs
and Sec. 412.108(b)(4) for MDHs to require an SCH or MDH to report to
its appropriate CMS Regional Office when the circumstances under which
the hospital was approved for SCH or MDH status have changed. The CMS
Regional Office would then determine whether the SCH or MDH continues
to meet the criteria for classification under Sec. 412.92 or Sec.
412.108. If an SCH or MDH no longer meets these criteria, the CMS
Regional Office would issue a letter canceling the classification
within 30 days of its determination. If the circumstances affecting a
hospital's SCH or MDH classification change and the hospital does not
disclose the information to the CMS Regional Office, CMS would cancel
the hospital's SCH or MDH designation effective on the earliest
discernable date on which the fiscal intermediary can determine that
the hospital no longer met the criteria for classification.
For MDHs, this reporting requirement is in addition to the fiscal
intermediary's ongoing evaluations of whether a hospital continues to
qualify for MDH status as set out in our existing regulations at Sec.
412.108(b)(5).
We received 41 comments on this proposal.
Comment: Most commenters agreed that hospitals that no longer meet
the qualification criteria for either SCH or MDH status should not
continue to be paid as SCHs or MDHs. However, several commenters
disagreed with the proposed requirement that an SCH or MDH notify the
CMS Regional Office when any change in the circumstances that led to
their classification occurs. They contended that the fiscal
intermediary should be responsible for monitoring such conditions. One
commenter argued that hospitals should not be required to report
changes they cannot control, such as the building of new roads or
hospitals.
Another commenter noted that some of the criteria are very
difficult for hospitals to monitor, such as patient stays at other
hospitals in the area. The commenter stated that to monitor these
criteria would impose a tremendous administrative burden on SCHs and
MDHs.
One commenter suggested that if CMS is to require that an SCH or
MDH report on changes in the circumstances that led to its
classification, the circumstances required to be reported be limited to
those for which the hospital has readily available data, such as the
opening of a new hospital within an SCH's mileage criterion. One
commenter suggested that CMS not finalize any reporting requirement for
SCHs or MDHs.
Response: We understand that some criteria may be difficult for
hospitals to monitor. However, because a hospital cannot control the
changes in circumstances should not imply that the hospital not be
required to report changes of which it becomes aware. We agree with the
commenters who suggested that certain criteria may be excessively
burdensome for a hospital to monitor because they do not have ready
access to the necessary data. For instance, we recognize that a
hospital may not have the resources available to determine what
percentage of patients in their service area has been admitted to other
facilities in that area. For this reason, CMS often provides this data
to hospitals seeking initial SCH classification. Therefore, we are
modifying the change to the regulations to specify that SCHs will only
be

[[Page 48061]]

expected to report changes that would effect the distance between it
and another like-hospital, its geographic classification status (urban/
rural), the number of beds (if the SCH was eligible under Sec.
412.92(a)(1)(ii)), and travel time between itself and a like-provider.
For instance, an SCH would be expected to report the opening of a new
hospital or road, whether its geographic classification changed from
rural to urban, and/or an increase in the number of beds at the
hospital if the SCH was eligible under Sec. 412.92(a)(1)(ii). An MDH
would only be required to report if there is a change to the number of
beds in the facility that increase the bed count to more than 100 and/
or if its geographic classification changed from rural to urban. We
will not expect an SCH or MDH to have knowledge of other factors that
could affect SCH or MDH status. However, if it is subsequently shown
that the hospital had knowledge of those factors, we would terminate
SCH or MDH status as of the date the hospital became aware of the
event. For example, we would not expect an SCH to be aware of the
conversion of a nearby CAH to a short term acute care hospital.
However, if there is documentation clearly indicating that the SCH had
prior knowledge of the CAH's conversion and the converted hospital is
located within the mileage criterion precluding SCH status, we will
rescind the SCH designation to the time when the documentation
indicates the SCH became aware of the conversion. The SCH/MDH must
report any changes of which it becomes aware that affect SCH or MDH
status within 30 days of the event occurring. We are updating the
regulations text at Sec. 412.92 and Sec. 412.108 to reflect these
requirements.
We are also modifying the proposed change to the regulations to
require that an SCH or MDH report any changes to the fiscal
intermediary and not the regional office. Fiscal intermediaries are
responsible for accepting and reviewing applications for SCH and MDH
designations. Therefore, we believe it is appropriate for all
documentation to continue to be sent to the fiscal intermediary. The
fiscal intermediary will forward the information submitted by the SCH
or the MDH and its recommendation to the appropriate regional office.
Comment: Several commenters disagreed with the proposal to
``retroactively'' withdraw SCH or MDH classification if it could be
expected that the hospital was aware of a change in the circumstances
that led to its classification but did not report those changes to the
fiscal intermediary. The commenters noted that such a change in
reimbursement could be financially devastating to a hospital and
recommended that CMS develop a prospective process for withdrawing the
hospital's special payment status. One commenter suggested that an SCH
or MDH in such a position lose their status immediately, but not
retroactively. Several commenters requested clarification of how far
back CMS would retroactively terminate SCH or MDH status.
Response: As explained earlier, we have modified the proposal to
withdraw SCH or MDH status when the provider was expected to be aware
of limited changes in circumstances that caused the provider to be no
longer eligible for such designation or when documentation shows that
an SCH or MDH was aware of a change outside of those listed in the
revised regulations at Sec. 412.92(b)(3)(ii) and Sec.
412.108(b)(4)(ii) that would affect its classification and did not
report these changes to the fiscal intermediary. In those
circumstances, we believe it is appropriate to withdraw the special
payment rate effective with the date the change occurred or, with
respect to changes that an SCH or MDH is not required to report, when
the provider becomes aware of the event. However, we understand the
need to establish a limit to how far back CMS may rescind SCH or MDH
status. We believe that withdrawal of the classification status falls
within the framework of the reopening rules at 42 CFR 405.1885.
Accordingly, we will withdraw such status for cost reporting periods
that are within the 3-year reopening period. Therefore, if the
triggering event (as noted in the revised regulations) changes the
circumstances under which the SCH or the MDH received such designation
occurs within the three-year reopening period, under the reopening
rules, we will withdraw the SCH or MDH designation for those periods.
If the event occurred prior to the 3-year reopening period, we will
only withdraw SCH or MDH designation for those cost reporting periods
subject to the reopening period.
Comment: Several commenters expressed concern that an SCH or MDH
would be penalized for a change in circumstances even if it were
unaware of such a change.
Response: If an SCH or an MDH is not expected to be aware of a
change in circumstances, they will not be penalized if one has occurred
and it is not reported. We acknowledge the commenter's concern and as
noted above revised the regulations to take his concern into account.
If due to the change in circumstances the SCH or the MDH is out of
compliance with the criteria for classification and the change was not
one of those specifically listed above and the SCH or MDH was not
previously aware of the change, the provider's status will be
terminated 30 days after the Regional Office has determined that the
provider no longer meets the criteria for classification.
Comment: Several commenters disagreed with the termination of SCH
or MDH status within 30 days of the determination that the hospital no
longer met the qualifications for such status. One commenter suggested
that CMS continue to pay the provider as an SCH or MDH for either 6
months or to the end of the cost reporting period, whichever comes
later. Several commenters suggested that CMS extend the period to 12
months. One commenter requested that CMS only finalize these policies
for future SCHs and MDHs, in effect grandfathering all current SCHs and
MDHs.
Response: We do not agree that an SCH or an MDH that no longer
meets the eligibility requirements for such designation should continue
to receive enhanced payments. Currently, when the Regional Office
determines that an SCH or MDH no longer meets the classification
criteria, it issues a letter informing the provider that in 30 days the
SCH or MDH status will terminate. As noted above, we will only
terminate the provider's status 30 days after the Regional Office has
determined that the provider no longer meets the criteria for
classification if due to a change in circumstances the SCH or the MDH
is out of compliance with the criteria for classification and the
change was not one of those specifically listed above and the SCH or
MDH was not previously aware of the change.
Comment: One commenter requested that CMS retain the current
grandfathering provision for SCHs that permits any hospital that was an
SCH as of December 19, 1989 to maintain that status despite any change
of circumstances.
Response: Section 6003(e)(1) of Pub. L. 101-239 modified the
criteria for being eligible for SCH status by reducing the number of
miles between providers from 50 to 35 and by requiring the Secretary to
establish a criterion that takes into consideration the travel time
between two providers. Section 6003(e)(3) of Pub. L. 101-239 exempted
hospitals that already had SCH status from meeting either of these
requirements. In other words, any hospital that was an SCH in 1989 is
protected under this grandfathering provision from the mileage
criterion and whether or not it meets the criterion for

[[Page 48062]]

classification concerning travel time at Sec. 412.92(a)(3). However,
we note that this grandfathering provision is limited to these two
circumstances. Hospitals with SCH designation in effect prior to 1989
can lose SCH status if they fail to meet any of the other eligibility
criteria.
Comment: One commenter suggested that CMS use this rule to change
the regulation at Sec. 412.92(a)(1)(i), which requires that no more
than 25 percent of residents who become hospital inpatients or 25
percent of Medicare beneficiaries who become hospital inpatients in the
hospital's service area are admitted to other like hospitals within a
35-mile radius, or, if larger, the hospital's service area. The
commenter suggested that CMS require that either an SCH initially meet
this requirement but later meet a lower threshold or that the SCH be
required to demonstrate compliance in two out of the three most recent
cost reporting periods.
Response: We believe that this comment falls outside the scope of
the proposed change in policy. However, we will keep this comment in
mind when evaluating SCH policy in the future.
Comment: Several commenters requested that CMS revise the
definition of ``like hospital,'' especially in response to the growing
number of specialty hospitals. Several commenters recommended that CMS
not consider a specialty hospital to be a ``like hospital'' for
purposes of determining eligibility and compliance with SCH criteria.
One commenter expressed concern that the policy of considering any
hospital whose number of inpatient days from units or wards generally
payable under the IPPS is 8 percent or more of the total number of
inpatient days from units or wards generally payable under the IPPS at
the SCH a ``like hospital'' is arbitrary and should be reviewed. The
commenter suggested that CMS increase the 8-percent threshold to at
least 10 percent. Another commenter requested that CMS allow SCHs to
retain its status even if a like hospital opens in its service area as
long as the SCH's case mix index exceeds those of the like hospitals.
Response: While we understand the commenters' concerns, we believe
that this comment is outside of the scope of the proposed policy
change. However, we will keep this comment in mind when evaluating SCH
policy in the future. In the meantime, we refer commenters to the
discussion of ``like hospital'' in the preamble of the FY 2003 IPPS
final rule (67 FR 50053-56). As we noted in that preamble, our goal for
defining ``like hospital'' was to strike a balance between the need to
ensure that SCHs do not lose their special status due to specialty
hospitals opening nearby and the need to ensure that only hospitals
that are the sole source of short-term acute hospitals services for
their community qualify as SCHs. We originally proposed to consider any
hospital that overlapped on 3 percent of more of services rendered to
be considered a like hospital. However, in response to the public
comments received, we finalized a definition of ``like hospital'' as a
hospital paid under the IPPS with 8 percent or more of the total number
of inpatient days as the SCH.
After consideration of the public comments received, we are
finalizing a change to the regulations to specify that SCHs and MDHs
will be required to report to the fiscal intermediary specific changes
it becomes aware of that would affect the criteria under which it was
eligible for such designation. For an SCH, the changes are as follows:
distance between it and another like hospital, its geographic
classification status (urban/rural), the number of beds if the SCH was
eligible under Sec. 412.92(a)(1)(ii), and the travel time between
itself and a like-provider. An MDH will be required to report if there
is a change to the number of beds in the facility that increase the bed
count to more than 100 and/or if its geographic classification changed
from rural to urban.
4. Payment Changes for MDHs Under the DRA of 2005 (Sec. 412.79, Sec.
412.90(j) and Sec. 412.108)
a. Background
Under Sec. 412.108(a) of our regulations, in order to be
classified as an MDH, a hospital must: (1) Be located in a rural area
(as defined in 42 CFR Part 412, Subpart D); (2) have 100 or fewer beds
(as defined at Sec. 412.105(b)) during the cost reporting period; (3)
must not be classified as an SCH (as defined in Sec. 412.92); and (4)
have no less than 60 percent of its inpatient days or discharges
attributable to inpatients receiving Medicare Part A benefits during
either its cost reporting period beginning in FY 1987, or in two of the
last three of its audited cost reports that have been settled.
MDHs have been eligible for a series of special payment rates under
the IPPS. Section 6003(f) of Pub. L. 101-239 created the first IPPS
special payment methodology for MDHs. Effective for cost reporting
periods beginning on or after April 1, 1990, and ending on or before
March 31, 1993, an MDH was paid based on whichever of the following
rates yielded the greatest aggregate payment for the cost reporting
period:
The Federal payment rate applicable to the MDH;
The MDH's updated hospital-specific rate based on its FY
1982 base period costs per discharge; or
The MDH's updated hospital-specific rate based on its FY
1987 base period costs per discharge.
Section 13501(e)(1) Pub. L. 103-66 extended the MDH payment
provisions through 1994 and provided that, for discharges occurring
after March 31, 1993, if an MDH's applicable hospital-specific rate
exceeded the Federal payment rate, the additional payment was limited
to 50 percent of the amount by which the applicable updated hospital-
specific rate exceeded the Federal rate. These provisions expired
effective for cost reporting periods beginning on or after October 1,
1994.
Section 4204(a)(3) of Pub. L. 105-33 amended sections
1886(d)(5)(G)(i) and (d)(5)(G)(ii)(II) of the Act to reinstate these
special MDH payment provisions, including the 50-percent limitation,
for cost reporting periods ``beginning on or after October 1, 1997, and
before October 1, 2001.'' Section 321(b)(1) of Pub. L. 106-113 made a
technical amendment to these provisions of the Act (which describes the
time periods for which some of the special payment provisions apply and
the time periods during which a hospital may be considered an MDH under
section 1886(d)(1)(G)(iv) of the Act) by striking the language
``beginning on or after October 1, 1997, and before October 1, 2001''
and replacing it with ``discharges occurring on or after October 1,
1997, and before October 1, 2001''. This change was made effective as
if included in Pub. L. 105-33. Pub. L. 106-113 also provided for a 5-
year extension of the MDH special payment provisions. Section 404(a) of
that law further amended sections 1886(d)(1)(G)(i) and
(d)(1)(G)(ii)(II) of the Act by striking the phrase ``and before
October 1, 2001'' and inserting the phrase ``and before October 1,
2006''.
Section 5003(a) of Pub. L. 109-171 (DRA of 2005) amended the MDH
special payment provisions in the Act. It amended section 1886(d)(5)(G)
of the Act and made a conforming amendment under section 1886(b)(3)(D)
of the Act to provide for another 5-year extension of the special MDH
payment methodology. Under this extension, a revised special MDH
payment methodology will apply for discharges occurring on or after
October 1, 2006, and before October 1, 2011.
As stated earlier, MDHs currently are paid using whichever rate
yields the

[[Page 48063]]

greatest aggregate payment: the Federal payment rate or, if higher, the
Federal payment rate plus 50 percent of the difference between the
Federal payment rate and the updated hospital-specific rate based on FY
1982 or FY 1987 base period costs per discharge.
Section 5003(b) of Pub. L. 109-171 provides that, for discharges
occurring on or after October 1, 2006, and before October 1, 2011, an
MDH's updated hospital-specific rate will be the FY 2002 base period
costs per discharges if the FY 2002 based hospital-specific rate
results in a payment increase. In cases where no payment increase
results from using FY 2002 hospital-specific rate, an MDH will continue
to be paid based on the higher of its updated FY 1982 or FY 1987
hospital-specific rates, if using one of those rates results in a
payment higher than that under the Federal payment rate. (Unlike an
SCH, an MDH does not have the option of using its updated FY 1996
hospital-specific rate.)
Under section 5003(c) of Pub. L. 109-171, for discharges occurring
on or after October 1, 2006, and before October 1, 2011, if an MDH's
applicable hospital-specific rate exceeded the Federal payment rate,
the additional payment is limited to 75 percent (as opposed to the
previous 50 percent) of the amount by which the applicable updated
hospital-specific rate exceeded the Federal rate.
Section 5003(d) of Pub. L. 109-171 enhances the DSH adjustment for
MDHs for discharges occurring on or after October 1, 2006. Further
discussion concerning the implementation of this provision can be found
in section IV.F.4. of the preamble to the FY 2007 IPPS final rule.
b. Regulation Changes
In this FY 2007 IPPS final rule, we are amending our regulations to
implement section 5003(a) through (c) of Pub. L. 109-171. We are adding
a new Sec. 412.79 that describes how we will compute and update the
MDH hospital-specific rate based on its FY 2002 base period. In
addition, we are revising Sec. 412.90(j) to reflect the extension of
the MDH special payment provisions to discharges occurring before
October 1, 2011. We also are amending Sec. 412.108 by revising
paragraph (a) and adding a new paragraph (c)(2)(iii) to reflect the
changes to the special payment methodology effective for discharges
occurring on or after October 1, 2006, and before October 1, 2011.
Comment: One commenter pointed out that the proposed language in
the new Sec. 412.79(a) in the proposed rule differs from the language
provided in section 5003 of the statute. That is, the proposed
regulatory language reads ``ending on or before October 1, 2001'';
however, the commenter believed it should read ``beginning on or after
October 1, 2001'' as specified in the statute.
Response: We agree with the commenter that the regulatory language
should mirror the statutory language and are making the appropriate
changes to the regulatory language in this final rule.
Comment: One commenter supported the proposed changes made as well
as CMS' timely implementation of the provisions from the DRA of 2005.
Response: We appreciate the commenter's support.
We received no other comments on these proposed changes. Therefore,
we are adopting the proposed changes to the regulations as final, with
the indicated change to the regulatory text to reflect the FY 2002 base
period statutory language.
In addition, as we proposed, in this FY 2007 IPPS final rule, as a
part of the amendments to Sec. 412.90(j) and Sec. 412.108(a), we are
making two technical corrections. Section 412.90(j) describes when an
MDH may receive a special payment adjustments, while Sec. 412.108(a)
discusses the definition of an MDH. Each of these sections now refers
to ``cost reporting periods beginning on or after April 1, 1990 and
before October 1, 1994, or beginning on or after October 1, 1997 and
before October 1, 2006''. However, as noted above, sections
1886(d)(5)(G)(i) and (d)(5)(G)(ii)(II) of the Act, the provisions of
the Act from which these time periods were drawn, were amended by Pub.
L. 106-113. Sections 321(b)(1) and 404(a) of Pub. L. 106-113 amended
sections 1886(d)(5)(G)(i) and (d)(5)(ii)(II) of the Act so that the
phrase in each section ``beginning on or after October 1, 1997, and
before October 1, 2001'' was replaced with the phrase ``discharges
occurring on or after October 1, 1997, and before October 1, 2006''.
(Section 5003(a)(1) of Pub. L. 109-171 changed the ending date in these
provisions from ``before October 1, 2006'' to ``before October 1,
2011''.)
Therefore, we are removing the incorrect phrase ``beginning on or
after October 1, 1997'' from each of these regulations and inserting
the phrase, ``discharges occurring on or after October 1, 1997'', to
conform the regulations to the statute.
We did not receive any public comments on these technical changes.
5. Technical Change
As we proposed, in this final rule, we are correcting the spelling
of the word ``adjustment'' in paragraph (b)(2)(iv) of Sec. 412.92, by
changing it to ``adjustment''.
We did not receive any public comments on this technical change.

D. Rural Referral Centers (Sec. 412.96)

Under the authority of section 1886(d)(5)(C)(i) of the Act, the
regulations at Sec. 412.96 set forth the criteria that a hospital must
meet in order to qualify under the IPPS as a rural referral center. For
discharges occurring before October 1, 1994, rural referral centers
received the benefit of payment based on the other urban standardized
amount rather than the rural standardized amount. Although the other
urban and rural standardized amounts are the same for discharges
occurring on or after October 1, 1994, rural referral centers continue
to receive special treatment under both the DSH payment adjustment and
the criteria for geographic reclassification.
Section 402 of Pub. L. 108-173 raised the DSH adjustment for other
rural hospitals with less than 500 beds and rural referral centers.
Other rural hospitals with less than 500 beds are subject to a 12-
percent cap on DSH payments. Rural referral centers are not subject to
the 12 percent cap on DSH payments that is applicable to other rural
hospitals (with the exception of rural hospitals with 500 or more
beds). Rural referral centers are not subject to the proximity criteria
when applying for geographic reclassification, and they do not have to
meet the requirement that a hospital's average hourly wage must exceed
106 percent of the average hourly wage of the labor market area where
the hospital is located.
Section 4202(b) of Pub. L. 105-33 states, in part, ``[a]ny hospital
classified as a rural referral center by the Secretary * * * for fiscal
year 1991 shall be classified as such a rural referral center for
fiscal year 1998 and each subsequent year.'' In the August 29, 1997
final rule with comment period (62 FR 45999), we also reinstated rural
referral center status for all hospitals that lost the status due to
triennial review or MGCRB reclassification, but not to hospitals that
lost rural referral center status because they were now urban for all
purposes because of the OMB designation of their geographic area as
urban. However, subsequently, in the August 1, 2000 final rule (65 FR
47089), we indicated that we were revisiting that decision.
Specifically, we stated that we would permit hospitals that previously
qualified as a rural referral center and lost their status due to OMB
redesignation of the county in which they are located from rural to
urban to be reinstated as a rural referral center.

[[Page 48064]]

Otherwise, a hospital seeking rural referral center status must satisfy
the applicable criteria. We used the definitions of ``urban'' and
``rural'' specified in Subpart D of 42 CFR Part 412.
One of the criteria under which a hospital may qualify as a rural
referral center is to have 275 or more beds available for use (Sec.
412.96(b)(1)(ii)). A rural hospital that does not meet the bed size
requirement can qualify as a rural referral center if the hospital
meets two mandatory prerequisites (a minimum CMI and a minimum number
of discharges) and at least one of three optional criteria (relating to
specialty composition of medical staff, source of inpatients, or
referral volume) (Sec. 412.96(c)(1) through (c)(5)). (See also the
September 30, 1988 Federal Register (53 FR 38513).) With respect to the
two mandatory prerequisites, a hospital may be classified as a rural
referral center if--
The hospital's CMI is at least equal to the lower of the
median CMI for urban hospitals in its census region, excluding
hospitals with approved teaching programs, or the median CMI for all
urban hospitals nationally; and
The hospital's number of discharges is at least 5,000 per
year, or, if fewer, the median number of discharges for urban hospitals
in the census region in which the hospital is located. (The number of
discharges criterion for an osteopathic hospital is at least 3,000
discharges per year, as specified in section 1886(d)(5)(C)(i) of the
Act.)
1. Case-Mix Index
Section 412.96(c)(1) provides that CMS will establish updated
national and regional CMI values in each year's annual notice of
prospective payment rates for purposes of determining rural referral
center status. The methodology we use to determine the national and
regional CMI values is set forth in regulations at Sec.
412.96(c)(1)(ii). The national median CMI value for FY 2007 includes
all urban hospitals nationwide, and the regional values for FY 2007 are
the median values of urban hospitals within each census region,
excluding those hospitals with approved teaching programs (that is,
those hospitals receiving indirect medical education payments as
provided in Sec. 412.105(f)). These values are based on discharges
occurring during FY 2005 (October 1, 2004 through September 30, 2005)
and include bills posted to CMS' records through March 2006.
In the FY 2007 IPPS proposed rule (71 FR 24106), we proposed that,
in addition to meeting other criteria, if they are to qualify for
initial rural referral center status for cost reporting periods
beginning on or after October 1, 2006, rural hospitals with fewer than
275 beds must have a CMI value for FY 2005 that is at least--
1.3365; or
The median CMI value (not transfer-adjusted) for urban
hospitals (excluding hospitals with approved teaching programs as
identified in Sec. 412.105(f)) calculated by CMS for the census region
in which the hospital is located. (See the table set forth in the
proposed FY 2007 IPPS proposed rule at 71 FR 24106.)
Based on the latest data available (FY 2005 bills received through
March 2006), in addition to meeting other criteria, if they are to
qualify for initial rural referral center status for cost reporting
periods beginning on or after October 1, 2006, rural hospitals with
fewer than 275 beds must have a CMI value for FY 2005 that is at
least--
1.3132; or
The median CMI value (not transfer-adjusted) for urban
hospitals (excluding hospitals with approved teaching programs as
identified in Sec. 412.105(f)) calculated by CMS for the census region
in which the hospital is located.
The final median CMI values by region are set forth in the
following table:

------------------------------------------------------------------------
Case-mix
Region index
value
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)...................... 1.2313
2. Middle Atlantic (PA, NJ, NY).............................. 1.2619
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)....... 1.3252
4. East North Central (IL, IN, MI, OH, WI)................... 1.3118
5. East South Central (AL, KY, MS, TN)....................... 1.2926
6. West North Central (IA, KS, MN, MO, NE, ND, SD)........... 1.2344
7. West South Central (AR, LA, OK, TX)....................... 1.3872
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)................. 1.3877
9. Pacific (AK, CA, HI, OR, WA).............................. 1.3366
------------------------------------------------------------------------

Hospitals seeking to qualify as rural referral centers or those
wishing to know how their CMI value compares to the criteria should
obtain hospital-specific CMI values (not transfer-adjusted) from their
fiscal intermediaries. Data are available on the Provider Statistical
and Reimbursement (PS&R) System. In keeping with our policy on
discharges, these CMI values are computed based on all Medicare patient
discharges subject to the IPPS DRG-based payment.
2. Discharges
Section 412.96(c)(2)(i) provides that CMS will set forth the
national and regional numbers of discharges in each year's annual
notice of prospective payment rates for purposes of determining rural
referral center status. As specified in section 1886(d)(5)(C)(ii) of
the Act, the national standard is set at 5,000 discharges. In the FY
2007 IPPS proposed rule (71 FR 24106), we proposed to update the
regional standards based on discharges for urban hospitals' cost
reporting periods that began during FY 2003 (that is, October 1, 2002
through September 30, 2003), which is the latest available cost report
data we had at that time.
Therefore, in the FY 2007 IPPS proposed rule (71 FR 24106), we
proposed that, in addition to meeting other criteria, a hospital, if it
is to qualify for initial rural referral center status for cost
reporting periods beginning on or after October 1, 2006, must have as
the number of discharges for its cost reporting period that began
during FY 2003 a figure that is at least--
5,000 (3,000 for an osteopathic hospital); or
The median number of discharges for urban hospitals in the
census region in which the hospital is located. (See the table set
forth in the FY 2007 IPPS proposed rule at 71 FR 24106.)
Based on the latest discharge data available at this time, that is,
for cost reporting periods that began during FY 2003, the final median
number of discharges for urban hospitals by census region area are as
follows:

------------------------------------------------------------------------
Number of
Region discharges
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)..................... 7,366
2. Middle Atlantic (PA, NJ, NY)............................. 10,307
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)...... 10,546
4. East North Central (IL, IN, MI, OH, WI).................. 9,200
5. East South Central (AL, KY, MS, TN)...................... 7,519
6. West North Central (IA, KS, MN, MO, NE, ND, SD).......... 7,441
7. West South Central (AR, LA, OK, TX)...................... 7,239
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)................ 10,419
9. Pacific (AK, CA, HI, OR, WA)............................. 7,965
------------------------------------------------------------------------

We note that the median number of discharges for hospitals in each
census region is greater than the national standard of 5,000
discharges. Therefore, 5,000 discharges is the minimum criterion for
all hospitals.
We reiterate that if an osteopathic hospital is to qualify for
rural referral

[[Page 48065]]

center status for cost reporting periods beginning on or after October
1, 2006, the hospital would be required to have at least 3,000
discharges for its cost reporting period that began during FY 2003.
Comment: Commenters indicated the case-mix index values that are
used as criteria for rural referral center status have been fluctuating
significantly in the past few years (2005 through 2007), where they had
been relatively stable in prior years. They questioned the methodology
used to calculate the values.
Response: While we agree that there have been changes in the case-
mix index values over the past few years, in our view, they have not
been significant. The methodology for determining the case-mix index
values for rural referral center status has not changed. The FY 2007
final case-mix index values are based on a more complete file than the
proposed values and are more in line with the prior year's values.
Although the methodology for calculating the indices has not changed,
in response to the commenters' concerns, we will continue to evaluate
whether there are other factors that would cause the observed shift in
the values.
Comment: One commenter recommended that CMS clarify the last
sentence of the ``Case-Mix Index'' section which states that ``In
keeping with our policy on discharges, these case-mix index values are
computed based on all Medicare patient discharges subject to DRG-based
payment.'' The commenter believed it would be inappropriate to include
discharges paid under the LTC DRG payment system. The commenter
recommended that, assuming that discharges paid under the LTC DRG-based
payment system are excluded, this sentence should be changed to specify
``under the inpatient PPS DRG-based payment system.''
Response: We agree with the commenter and have revised the preamble
language in this final rule. The sentence now states, ``In keeping with
our policy on discharges, these case-mix index values are computed
based on all Medicare patient discharges subject to the IPPS DRG-based
payment.''
Comment: Two commenters addressed the issue of which cost reporting
period is to be used to determine the number of discharges of a
hospital applying for initial rural referral center status. One
commenter referenced 42 CFR 412.96(c)(2)(ii), which states that an
osteopathic hospital applying for rural referral center status ``must
have at least 3,000 discharges during its most recently completed cost
reporting period to meet the number of discharges criterion.'' This
commenter believed that the preamble language in the proposed rule
should be corrected to reflect the use of the hospital's most recently
completed cost reporting period, rather than a cost reporting period
specified by a fiscal year. The second commenter expressed an opposite
view and stated that the cost reporting period specified by a fiscal
year in the rule should apply and not the ``most recently completed
cost reporting period'' specified in the regulations.
Response: We have considered this issue and have decided to clarify
the regulations to be consistent with our longstanding practice as well
as the policy we proposed in the FY 2007 IPPS proposed rule of using
the same cost reporting period used to develop the regional medians. In
this way, we derive the regional medians (to which the hospital's
discharges may be compared) as well as the hospital's own discharge
data using the same time period. Because we use the FY 2003 data for
developing the regional medians, we will also use this data for
determining the hospital's own discharges. This is in keeping with our
longstanding and consistent policy of publishing in our preamble a
specific cost reporting period that we consider to have the latest
available cost report data at the time of publication of the rule. We
have made technical revisions to Sec. 412.96 to reflect our proposed
policy. The language at Sec. 412.96(c)(2)(i) will now state, ``the
hospital's cost reporting period that began during the same fiscal year
as the cost reporting periods used to compute the regional median
discharges under paragraph (i) of this section.'' We are also making
similar revisions to the references to ``the hospital's most recently
completed cost reporting period'' in Sec. 412.96(c)(2)(ii) and
412.96(i)(3). In addition, in Sec. 412.96(c)(2)(ii), we are deleting
the last sentence that references ``the triennial review.''

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

1. Background
Section 1886(d)(5)(B) of the Act provides that prospective payment
hospitals that have residents in an approved graduate medical education
(GME) program receive an additional payment to reflect the higher
indirect patient care costs of teaching hospitals relative to
nonteaching hospitals. The regulations regarding the calculation of
this additional payment, known as the indirect medical education (IME)
adjustment, are located at Sec. 412.105.
The Balanced Budget Act of 1997 (Pub. L. 105-33) established a
limit on the number of allopathic and osteopathic residents that a
hospital may include in its full-time equivalent (FTE) resident count
for direct GME and IME payment purposes. Under section 1886(h)(4)(F) of
the Act, a hospital's unweighted FTE count of residents may not exceed
the hospital's unweighted FTE count for its most recent cost reporting
period ending on or before December 31, 1996. Under section
1886(d)(5)(B)(v) of the Act, the limit on the FTE resident count for
IME purposes is effective for discharges occurring on or after October
1, 1997. A similar limit is effective for direct GME purposes for cost
reporting periods beginning on or after October 1, 1997.
2. IME Adjustment Factor for FY 2007
The IME adjustment to the DRG payment is based in part on the
applicable IME adjustment factor. The IME adjustment factor is
calculated using a hospital's ratio of residents to beds, which is
represented as r, and a formula multiplier, which is represented as c,
in the following equation: c x [{1 + r{time} ^.405 - 1]. The
formula is traditionally described in terms of a certain percentage
increase in payment for every 10-percent increase in the resident-to-
bed ratio.
Section 502(a) of Pub. L. 108-173 modified the formula multiplier
(c) to be used in the calculation of the IME adjustment. Prior to the
enactment of Pub. L. 108-173, the formula multiplier was fixed at 1.35
for discharges occurring during FY 2003 and thereafter. Section 502(a)
modified the formula multiplier beginning midway through FY 2004 and
provided for a new schedule of formula multipliers for FY 2005 and
thereafter. In the FY 2005 IPPS rule, we announced the schedule of
formula multipliers to be used in the calculation of the IME adjustment
and incorporated the schedule in our regulations at Sec.
412.105(d)(3)(viii) through (d)(3)(xii). In the FY 2007 IPPS proposed
rule (71 FR 24107), we specified that for any discharges occurring
during FY 2007, the statutorily mandated formula multiplier is 1.32.
Previously, for FY 2007, the mandated formula multiplier was 1.42. We
estimate that application of the mandated formula multiplier for FY
2007 will result in an increase of 5.35 percent in IME payment for
every approximately 10-percent increase in the resident-to-bed ratio.
Comment: While acknowledging that the formula multiplier for FY
2007 is mandated in law, several commenters expressed opposition to the
reduced

[[Page 48066]]

IME payment resulting from the application of the formula multiplier.
Response: As noted by the commenters, the schedule of formula
multipliers to be used in the calculation of the IME adjustment is
mandated in law. In this rule, we are simply reiterating that, for any
discharges occurring during FY 2007, the formula multiplier is 1.32.
3. Technical Change to Revise Cross-Reference
In the FY 2007 IPPS proposed rule (71 FR 24107), we proposed to
revise the cross-references included in paragraph (f)(1)(ii)(C) of
Sec. 412.105 that specify the criteria for counting FTE residents who
spend time in nonprovider settings for IME payment adjustment purposes.
Currently, this paragraph only cites the criteria set forth in
Sec. Sec. 413.78(c) or 413.78(d). We should have also cited the
provisions of Sec. 413.78(e), which state that the time residents
spend in nonprovider settings such as freestanding clinics, nursing
homes, and physicians' offices in connection with approved programs may
be included in determining the number of FTE residents in the
calculation of a hospital's resident count if other applicable
conditions specified in paragraph (e) are met.
We did not receive any specific public comments on the proposed
addition of a cross-reference to Sec. 413.78(e) to Sec.
412.105(f)(1)(ii)(C) and are therefore adopting it as final without
modification.
We note that in sections IV.H.2.,3.,4., and 5. of the FY 2007 IPPS
proposed rule (71 FR 24111), we discussed other policy changes and
clarifications to the methodology for counting FTE residents for the
purposes of direct GME payments, which also would be applicable to IME
payments. We respond to public comments received on those proposals
below in the specified sections.

F. Payment Adjustment for Disproportionate Share Hospitals (DSHs)
(Sec. 412.106)

1. Background
Section 1886(d)(5)(F) of the Act provides for additional payments
to subsection (d) hospitals that serve a disproportionate share of low-
income patients. The Act specifies two methods for a hospital to
qualify for the Medicare disproportionate share hospital (DSH)
adjustment. Under the first method, hospitals that are located in an
urban area and have 100 or more beds may receive a DSH payment
adjustment if the hospital can demonstrate that, during its cost
reporting period, more than 30 percent of its net inpatient care
revenues are derived from State and local government payments for care
furnished to indigent patients. These hospitals are commonly known as
``Pickle hospitals.'' The second method, which is also the most
commonly used method for a hospital to qualify, is based on a complex
statutory formula under which payment adjustments are based on the
level of the hospital's DSH patient percentage, which is the sum of two
fractions: the ``Medicare fraction'' and the ``Medicaid fraction.'' The
Medicare fraction is computed by dividing the number of patient days
that are furnished to patients who were entitled to both Medicare Part
A and Supplemental Security Income (SSI) benefits by the total number
of patient days furnished to patients entitled to benefits under
Medicare Part A. The Medicaid fraction is computed by dividing the
number of patient days furnished to patients who, for those days, were
eligible for Medicaid but were not entitled to benefits under Medicare
Part A by the number of total hospital patient days in the same period.
[GRAPHIC] [TIFF OMITTED] TR18AU06.094

2. Technical Corrections
In the FY 2007 IPPS proposed rule (71 FR 24108), we proposed to
make a technical correction to Sec. 412.106(a)(1)(iii) to reflect the
statutory requirement at section 1886(d)(8)(E) of the Act that, as of
January 1, 2000, hospitals reclassified under Sec. 412.103 are
considered rural for purposes of this DSH regulation. We also proposed
to correct the regulation to eliminate the reference to Sec.
412.62(f). These corrections reflect current policy and already-
existing statutory requirements.
We did not receive any public comments regarding the proposed
corrections to Sec. 412.106(a)(1)(iii) to reflect the statutory
requirement that section 1886(d)(8)(E) of the Act that hospitals
reclassified under Sec. 412.103 are considered rural for purposes of
this DSH regulation and to eliminate the reference to Sec. 412.62(f).
Therefore, we are adopting the corrections as final without
modification.
3. Reinstatement of Inadvertently Deleted Provisions on DSH Payment
Adjustment Factors
In an interim final rule published in the Federal Register on June
13, 2001 (66 FR 32174 and 32194) (which was finalized in the Federal
Register on August 1, 2001 (66 FR 39827)), we incorporated into our
regulations at Sec. 412.106(d)(2) the provisions of section 211(b) of
Pub. L. 106-554. Section 211(b) amended section 1886(d)(5)(F) of the
Act to revise the calculation of the disproportionate share percentage
adjustment for hospitals affected by the revised DSH qualifying
threshold percentages specified in section 211(a) of Pub. L. 106-554.
When the section 211 changes were incorporated into the Code of Federal
Regulations at Sec. 412.106(d)(2), the regulation text at Sec.
412.106(d)(2)(v) was inadvertently deleted during the transcribing of
the new text into the existing regulations. Section 412.106(d)(2)(v)
specifies the payment adjustment factors for hospitals that meet the
following criteria under Sec. 412.106(c)(2) for discharges occurring
on or after April 1, 1990, and before October 1, 1991, and on or after
October 1, 1991: Hospitals located in an urban area, that have 100 or
more beds, and that can demonstrate that, during their cost reporting
period, more than 30 percent of their net inpatient care revenues are
derived from State and local government payments for care furnished to
indigent patients.
In the FY 2007 IPPS proposed rule (71 FR 24108), we proposed to
reinstate the inadvertently deleted text of Sec. 412.106(d)(2)(v). We
noted that this is a correction to the regulations; we did not propose
to change the payment adjustment factors for hospitals that meet the
criteria under Sec. 412.106(c)(2).
We did not receive any public comments on this proposal and are,
therefore, adopting it as final without modifications.

[[Page 48067]]

4. Enhanced DSH Adjustment for MDHs
The DSH adjustment factor for most categories of hospitals is
capped at 12 percent. Urban hospitals with more than 100 beds, rural
hospitals with more than 500 beds, and rural referral centers, are
exempt from this cap.
Section 5003(d) of Pub. L. 109-171 (DRA of 2005) amended section
1886(d)(5)(F) of the Act to revise the DSH payment adjustment factor
for MDHs, effective for discharges occurring on or after October 1,
2006. Specifically, section 5003(d) amended section
1886(d)(5)(F)(xiv)(II) of the Act to exclude MDHs from the 12-percent
DSH adjustment factor cap.
For all discharges occurring on or after October 1, 2006, the
fiscal intermediary will not apply the cap when calculating the DSH
payments. These payments will be subject to revision upon final
settlement of the cost reporting period. We note that this change will
not affect the calculation of the disproportionate patient percentage.
In the FY 2007 IPPS proposed rule (71 FR 24108), we proposed to
amend the regulations at Sec. 412.106 to include this provision under
proposed new paragraph (d)(2)(iv)(D).
We did not receive any public comments of the proposed addition of
Sec. 412.106(d)(2)(iv)(D) to our regulations to reflect the revision
to section 1886(d)(5)(F)(xiv)(II) of the Act made by section 5003 of
Pub. L. 109-171. Therefore, we are adopting the proposed revision as
final.

G. Geographic Reclassifications (Sec. Sec. 412.103, 412.230, and
412.234)

1. Background
With the creation of the MGCRB, beginning in FY 1991, under section
1886(d)(10) of the Act, hospitals could request reclassification from
one geographic location to another for the purpose of using the other
area's standardized amount for inpatient operating costs or the wage
index value, or both (September 6, 1990 interim final rule with comment
period (55 FR 36754), June 4, 1991 final rule with comment period (56
FR 25458), and June 4, 1992 proposed rule (57 FR 23631)). As a result
of legislative changes under section 402(b) of Pub. L. 108-7, section
402 of Pub. L. 108-89, and section 401 of Pub. L. 108-173, the
standardized amount reclassification criterion for large urban and
other areas is no longer necessary or appropriate and has been removed
from our reclassification policy. We implemented this policy in the FY
2005 IPPS final rule (69 FR 49103). As a result, hospitals can request
reclassification for the purposes of the wage index only and not the
standardized amount. Implementing regulations in Subpart L of 42 CFR
Part 412 (Sec. Sec. 412.230 et seq.) set forth criteria and conditions
for reclassifications for purposes of the wage index from rural to
urban, rural to rural, or from an urban area to another urban area,
with special rules for SCHs and rural referral centers.
Under section 1886(d)(8)(E) of the Act, an urban hospital may file
an application to be treated as being located in a rural area if
certain conditions are met. The regulations implementing this provision
are located under Sec. 412.103.
Effective with reclassifications for FY 2003, section
1886(d)(10)(D)(vi)(II) of the Act provides that the MGCRB must use the
average of the 3 years of hourly wage data from the most recently
published data for the hospital when evaluating a hospital's request
for reclassification. The regulations at Sec. 412.230(d)(2)(ii)
stipulate that the wage data are taken from the CMS hospital wage
survey used to construct the wage index in effect for prospective
payment purposes. To evaluate applications for wage index
reclassifications for FY 2007, the MGCRB used the 3-year average hourly
wages published in Table 2 of the August 12, 2005 IPPS final rule (70
FR 47508). These average hourly wages are taken from data used to
calculate the wage indexes for FY 2004, FY 2005, and FY 2006, based on
cost reporting periods beginning during FY 2000, FY 2001, and FY 2002,
respectively.
2. Reclassifications under Section 508 of Pub. L. 108-173
Under section 508 of Pub. L. 108-173, a qualifying hospital could
appeal the wage index classification otherwise applicable to the
hospital and apply for reclassification to another area of the State in
which the hospital is located (or, at the discretion of the Secretary,
to an area within a contiguous State). Such reclassifications are
applicable to discharges occurring during the 3-year period beginning
April 1, 2004, and ending March 31, 2007. Under section 508(b),
reclassifications under this process do not affect the wage index
computation for any area or for any other hospital and cannot be
achieved in a budget neutral manner.
Some hospitals currently receiving a section 508 reclassification
are eligible to reclassify to that same area under the standard
reclassification process as a result of the new labor market
definitions that we adopted for FY 2005. In applying for a 3-year MGCRB
reclassification beginning in FY 2007, hospitals that are already
reclassified to the same area under section 508 should have indicated
in their MGCRB reclassification requests that if they receive the MGCRB
reclassification, they would forfeit the section 508 reclassification
for the first 6 months of FY 2007.
We refer readers to section III.H. of this preamble for a
discussion of our updated procedural rules established under section
1886(d)(10)(D)(v) of the Act in which a section 508 hospital may retain
its section 508 reclassification through its expiration on March 31,
2007, and accept a reclassification approved by the MGCRB for the
second half of FY 2007 (April 1, 2007, through September 30, 2007). We
also clarified the procedural rules for an already individually
reclassified hospital that is part of a group that includes a section
508 hospital. For nonsection 508 hospitals in a group with a pending
individual geographic reclassification, we will apply one of the
following for the first half of FY 2007: (a) The area wage index where
the hospital is physically located if there is no reclassification
pending, or (b) the hospital's individual reclassification wage index
if the hospital was part of a group awarded a group reclassification
and the group followed the procedural rules for postponing
reclassification until April 1, 2007. Final Table 9B will include a
final list of section 508 reclassifications for the 1st half of FY 2007
and will be included in a subsequent Federal Register notice as well as
posted to the CMS Web site after August 1, 2006, and before October 1,
2006.
3. Multicampus Hospitals (Sec. 412.230(d)(2)(iii))
Subsequent to the publication of the FY 2005 IPPS final rule, we
became aware of a situation in which, as a result of the new labor
market areas implemented in FY 2005 for the IPPS, a multicampus
hospital previously located in a single MSA is now located in more than
one CBSA. Under our existing policy, a multi-campus hospital with
campuses located in the same labor market area receives a single wage
index. However, if the campuses are located in more than one labor
market area, payment for each discharge is determined using the wage
index value for the MSA (or Metropolitan Divisions, where applicable)
in which the campus of the hospital is located. Prior to FY 2006, the
criteria for a hospital being reclassified to another wage area by the
MGCRB did not address the circumstances under which a single campus of
a multicampus hospital may seek reclassification. The regulations

[[Page 48068]]

require that a hospital provide data from the CMS hospital wage survey
for the average hourly wage comparison that is used to support a
request for reclassification. Because a multicampus hospital is
required to report data for the entire hospital on a single cost
report, there is no wage survey data for the individual hospital campus
that can be used in a reclassification application.
In the FY 2006 IPPS final rule (70 FR 47444 through 47446 and
47487), we modified the reclassification rules at Sec.
412.230(d)(2)(iii) to allow campuses of multicampus hospitals located
in separate wage index areas to support a reclassification application
to an area where another campus is located using the average hourly
(composite) wage data submitted on the cost report for the entire
multi-campus hospital as its hospital-specific data. This special rule
applies for reclassification applications for FY 2006, FY 2007, and FY
2008 and will not be in effect for FY 2009 reclassification requests
and beyond. Because reclassification applications to the MGCRB for FY
2009 must be filed in September 2007, or 1 month before the effective
date of the FY 2008 IPPS rule, we addressed whether to extend the
special rule for multicampus hospitals beyond FY 2008 in this FY 2007
final rule. In the FY 2006 IPPS final rule, we indicated that we would
continue to explore options that would allow individual campuses of
multi-campus hospitals to submit wage data necessary for geographic
reclassification and also monitor the number of multi-campus hospitals
affected by this provision (70 FR 47445 and 47446).
After reviewing this situation further, we are finalizing our
proposed policy. Beginning with FY 2009 reclassifications, we will no
longer allow a campus of a multicampus hospital to use the average
hourly wage the entire hospital system to support its reclassification
application. Because a cost report is filed for an entire hospital, the
campus would have to obtain a separate provider number and be treated
for Medicare payment purposes as an independent entity in order to be
able to provide wage data for the specific campus. If a hospital were
to make a change in FY 2007 to its organizational structure to provide
campus specific data to support a reclassification application, the
earliest fiscal year that the campus would be eligible to reclassify
would be FY 2012 because the cost report data that are used for
geographic reclassification precede the payment year by 5 years (that
is, FY 2003 cost report data will be used to determine the FY 2008
geographic reclassifications).
To our knowledge, only one hospital has used the special rule for
multicampus hospitals. This hospital has since joined a successful FY
2007 urban county group reclassification application to the same area
to which it was approved under the multicampus hospital rule. Thus,
this hospital is no longer required to meet the multicampus hospital
rule. Given that there is only one hospital that has used this rule and
this hospital was able to reclassify under the normal reclassification
rules, we believe the special reclassification rule that applies to
multi-campus hospitals is no longer needed. We proposed in the FY 2007
IPPS proposed rule, to not extend the special rule beyond FY 2008.
After considering comments (discussed below) we have decided to adopt
the proposal not to extend the multicampus rule beyond 2008. For
reclassification requests for FY 2009 and thereafter, a campus of a
multicampus hospital would be required to obtain a separate provider
number in order to provide the required wage data from the CMS hospital
wage survey for the average hourly wage comparison in its MGCRB
reclassification application.
Comment: Several commenters requested that CMS continue to allow
multi-campus hospitals to use the average hourly wage for the entire
hospital system as its wage data to support a reclassification
application to an area where another one of the campuses is located.
One commenter argued that, once the new census data are available,
there may be more hospitals in need of the provision. Two commenters
asked CMS to retain the provision because they believed eliminating the
multi-campus hospital rule will preclude both reclassifications of
groups from areas where one of the hospital campuses is located as well
as a campus of a multicampus provider from reclassifying as an
individual hospital. These commenters argued that the multicampus
hospital rule is necessary in order for an individual campus of a
multi-campus hospital to provide wage data to join a group
reclassification. Given how few hospitals are expected to use this
option, the commenters asked that CMS extend the current rule for at
least 5 more years.
Response: The next decennial census is in 2010. Using past
experience as a guide, we would not be developing new labor market
areas based on the decennial census until FY 2014 or FY 2015 and it is
unknown whether such a special rule will be needed at that time. We do
not believe a special time limited rule that was intended to give us
time to address the particular circumstances of a situation should be
retained for nearly 10 more years merely on the possibility that it
will be needed. We can reconsider whether to reestablish this special
rule if necessary when OMB publishes new MSA definitions following the
2010 Census. Further, as stated in the proposed rule, we believe that
hospitals should have to support an individual reclassification
application with their own data.
With respect to the comments about group reclassifications, we
believe the commenters misunderstand our current rules on
reclassification. We are not changing these already existing rules,
under which a satellite campus of a multicampus hospital located in a
CBSA different from the main hospital would not be required to provide
campus-specific wage data in order to join the group and for the MGCRB
to approve a group reclassification application. (When a campus of a
multicampus hospital joins a group reclassification, the group uses
average hourly wage information for the county that was used to develop
the wage index for the labor market area. These data do not include
wage information for an individual campus of a multicampus hospital.)
As we stated in the proposed rule, a campus of a multicampus hospital
can join a group reclassification under our normal rules (71 FR 24109).
That is, the special rule for multicampus hospitals would not be needed
when a campus of a multicampus hospital joins a group reclassification
application. As we allow for new hospitals that are part of group
reclassifications, an individual campus of a multicampus hospital may
join a group reclassification under 42 CFR 412.234 without having to
provide campus-specific wage data. The rationale for this policy was
explained in the proposed rule and is the same for both new hospitals
and individual campuses of multicampus hospitals that join group
reclassifications (71 FR 24110).
After consideration of the public comments received, we are not
making any further changes in this final rule to our policy relating to
multicampus hospitals.
4. Urban Group Hospital Reclassifications (Sec. 412.234(a)(3)(iii))
Section 412.234(a)(3)(iii) of the regulations sets forth criteria
for urban hospitals to be reclassified as a group for FY 2007 and
thereafter. Under these criteria, ``hospitals located in counties that
are in the same Combined Statistical Area (CSA) (under the MSA
definitions announced by the OMB on June 6, 2003) as the urban area to
which

[[Page 48069]]

they seek redesignation qualify as meeting the proximity requirement
for reclassification to the urban area to which they seek
redesignation.''
Last year, several commenters brought to our attention that, while
the CSA standard allows for urban county group reclassifications in
large urban areas throughout the United States (including 10 of the 11
CBSAs containing Metropolitan Divisions), the CSA standard precludes
urban county group reclassifications between three Metropolitan
Divisions within one CBSA in Florida. They urged us to modify our
policy to also allow hospitals located in counties that are in the same
CBSA (in the case of Metropolitan Divisions) as the area to which they
seek redesignation to be considered to have met the proximity
requirement. We agree with the commenter's proposed modification. The
proximity standard for group reclassifications is intended to allow all
of a county's hospitals to reclassify to an adjacent area where there
is sufficient economic integration that there can be an expectation
that both areas are competing in a similar labor market area. We
believe there is sufficient economic integration between Metropolitan
Divisions within a CBSA that urban county reclassifications within a
CBSA or a CSA should be permitted. A CBSA, as defined by the OMB, is a
``geographic entity associated with at least one core of 10,000 or more
population, plus adjacent territory that has a high degree of social
and economic integration with the core as measured by commuting ties.''
Therefore, in the FY 2007 IPPS proposed rule (71 FR 24110), we
proposed to revise Sec. 412.234(a)(3) by adding a new paragraph (iv)
to expand the proximity criteria to allow urban county groups to apply
for reclassification to another area within the same CBSA. We proposed
to require that, beginning with FY 2008, hospitals must be located in
counties that are in the same CSA or CBSA (under the MSA definitions
announced by OMB on June 6, 2003) as the urban area to which they seek
redesignation to qualify as meeting the proximity requirement for
reclassification to the urban area to which they seek redesignation.
Comment: Several commenters supported CMS' proposal to allow
hospitals located in counties that are in the same CBSA as the county
in which they seek redesignation to be considered to have met the
proximity requirement for an urban county group reclassification. These
commenters indicated that use of the CBSA criteria appropriately
recognizes economic integration among different metropolitan divisions
for purposes of applying the proximity standard within the urban county
group reclassification regulations. Commenters further indicated that
the new proximity criteria should be applied retroactively and be
effective for urban group reclassifications beginning on October 1,
2006 (as opposed to October 1, 2007) under specified circumstances.
Response: We appreciate the commenters' support for our proposed
change to the regulations, but we do not believe the changes should be
made retroactively. The IPPS system, including any wage indices
associated with a hospital's geographic classification or
reclassification is a prospective system. In addition, under section
1886(d)(10) of the Act, the MGCRB makes decisions about
reclassifications, not CMS. Applications for reclassifications for a
fiscal year are required to be submitted in September, 13 months before
the reclassification would go into effect (for example, a
reclassification application for FY 2007 would have had to be submitted
by September 2005). Reclassification decisions issued through the
statutory process are final and binding and are not subject to judicial
review. Making a reclassification criterion retroactive would interfere
with the prospective nature of the MGCRB reclassification decisions,
and we believe would conflict with the prospective nature of the entire
IPPS system. In addition, it could require a recalculation of the
budget neutrality adjustment required by section 1886(d)(8)(C) of the
Act. Modifying the FY 2006 reclassification budget neutrality
adjustment for all hospitals nationwide, we believe would not be
feasible at this late date.
After consideration of the public comments received, we are
adopting as final, without modification, the proposed revision to Sec.
412.234(a)(3) to add a new paragraph (iv) to expand the proximity
criteria to allow urban county groups to apply for reclassification to
another area within the same CBSA.
5. Effect of Change of Ownership on Urban County Group
Reclassifications (Sec. Sec. 412.230, 412.234, and 489.18)
We have received questions asking for clarification of our policy
regarding whether newly constructed hospitals and hospitals that do not
accept assignment of the previous owner's provider agreement can join
an urban county group reclassification.
The Medicare regulations at Sec. 412.230 require that, for
individual hospital reclassifications, a hospital must provide a
weighted 3-year average of its average hourly wages using data from the
CMS hospital wage survey used to construct the wage index in effect for
prospective payment purposes. Section 489.18(c) of the regulations
provides that, when there is a change of ownership, the existing
provider agreement will automatically be assigned to the new owner when
there is a change of ownership as defined in the rules. Section
412.230(d)(2)(iv) of the regulations specifies that, in situations
where a hospital becomes a new provider and the existing hospital's
provider agreement is not assigned under Sec. 489.18, the wage data
associated with the previous hospital's provider number will not be
used in calculating the new hospital's 3-year average hourly wage. This
policy is consistent with how we treat hospitals whose ownership has
changed for other Medicare payment purposes. The regulations also state
that once a new hospital has accumulated at least 1 year of wage data
using survey data from the CMS hospital wage survey used to determine
the wage index, it is eligible to apply for reclassification on the
basis of those data.
While the regulations preclude a new provider from individually
reclassifying until the hospital accumulates at least 1 year of wage
data from the CMS hospital wage survey used to determine the wage
index, a new provider may join a group reclassification under Sec.
412.234. Under Sec. 412.234, all hospitals in an urban county must
apply for redesignation as a group. If we did not permit a new hospital
to join group reclassifications, all hospitals in the county would not
be part of the reclassification application and the urban county group
would be precluded from reclassifying for 3 years until the new
hospital accumulated at least 1 year of wage data. We believe it would
be inequitable to preclude a group reclassification merely because
there was one newly constructed hospital or one hospital in the county
changed ownership and did not accept the prior owner's provider
agreement. Alternatively, we believe that allowing group applications
without a new hospital would be inconsistent with our regulations and
unfair to new hospitals because it would put them at a competitive
disadvantage with other hospitals in the county. Because such
reclassifications are effective for 3 years, a new hospital that was
not allowed to join a group reclassification would have to accept a
lower wage index than all other hospitals in the county with which it
competes for labor for up to 3 years.
Comment: One commenter suggested that where there is already an
approved

[[Page 48070]]

group reclassification, the new provider should be automatically
granted the wage index of all the other hospitals in the county.
Alternatively, the commenter suggested that the Secretary could use the
broad authority provided in the statute to grant an urban county group
reclassification already in progress to a new hospital in the same
county.
Response: There is currently no provision that allows a hospital to
join a county-wide group reclassification already in effect. The
existing regulations at Sec. 412.234 provide that all hospitals in an
urban county must apply for redesignation as a group. The MGCRB
decision applies to only those hospitals listed on the application.
However, it is possible that the urban county group can apply for
another reclassification to a different area with the new provider.
6. Requested Reclassification for Hospitals Located in a Single
Hospital MSA Surrounded by Rural Counties
In the FY 2006 IPPS final rule (70 FR 47448), we presented a
commenter's concern about the special circumstances of a hospital
located in a single hospital MSA surrounded by rural counties in
relation to the wage index and the rules governing geographic
reclassification. The commenter stated that an isolated hospital in a
single hospital MSA is at a competitive disadvantage because the rural
hospitals that surround the hospital have been reclassified to higher
wage index areas or have been designated as rural referral centers,
SCHs, MDHs, or CAHs. The urban hospital is ineligible for
reclassification to a higher wage index area either as an individual
hospital or as part of a group under the existing regulations. The
commenter emphasized that this concern is especially significant given
the fact that an isolated hospital in a single hospital MSA is the only
hospital in its urban area, and, therefore, has an even greater
obligation to the communities it serves.
The commenter advocated a change to the urban county group
reclassification regulations whereby a hospital in a single hospital
MSA surrounded by rural counties would be able to reclassify to the
closest urban area that is part of a CSA located in the same State as
the hospital. We did not adopt this suggested policy for FY 2006
because we did not believe it would be prudent to adopt the suggested
policy in a final rule without first soliciting public comment. In the
FY 2007 IPPS proposed rule, we solicited comments on this issue.
Comment: Commenters supported allowing a hospital that is the only
hospital in its MSA to reclassify to the closest urban area that is
part of a CSA located in the same State, when the hospitals in
surrounding areas have all been reclassified to and/or are located in
areas that receive wage index reimbursement significantly higher than
the surrounding hospitals' actual wages. Without this reclassification,
the commenters indicated that the hospital must continually work to
keep wages competitive, purchase new technology, and provide services
needed by Medicare beneficiaries in its community. The commenters also
stated that a single hospital in an urban county must offer a broad
range of services to meet the needs of the Medicare beneficiaries in
its large service area, while potentially competing with hospitals that
offer fewer services yet receive increased reimbursement due to their
ability to reclassify. Some commenters also recommended that proximity
criteria should focus more on competition as demonstrated through
economic connection, rather than location. The commenters argued that
there is an anomaly in the reclassification rules that allows a
reclassified hospital to receive a wage index that is higher than its
own average hourly wage. Such a hospital has an advantage relative to
its competitors in the single hospital MSA by being able to take the
excess revenue and invest in technology and services. One commenter
stated that making an exception for the hospital addressed here would
be an unnecessary expansion of the geographic reclassification
provisions. The commenter indicated that it was not unsympathetic to
the situation described of a hospital that is surrounded by rural
hospitals that have all received special payment status. The commenter
opposed allowing the hospital to reclassify to a distant area but
indicated that it might support some accommodation that was
particularized to this situation.
Response: We disagree with the notion that receiving a higher wage
index than a hospital's own average hourly wage is an anomaly of
reclassification. The wage index represents an average of all hospitals
in a labor market area. Using the commenter's logic, such an
``anomaly'' would not be limited to reclassification. It would also be
a feature of the wage index in a labor market area with multiple
hospitals. Some hospitals would have higher wages than the labor market
area average, and others, lower. The only policy option for addressing
such a concern would be to have a hospital-specific wage index. We
believe such an option would not be permitted under the section
1886(d)(3)(E) of the Act, which requires us to adjust IPPS rates for
``area differences in hospital wage levels'' to reflect the ``relative
hospital wage level in the geographic area of the hospital compared to
the national average hospital wage level.'' The statute clearly directs
the Secretary to use area, and not hospital-specific, differences in
wage levels in creating the wage index.
We believe that allowing hospitals in single hospital MSAs
surrounded by rural counties to reclassify to the closest urban area
that is part of a CSA located in the same State as the hospital would
be an unnecessary expansion of the geographic reclassification
provisions. If we adopted the commenters' change to the
reclassification provisions, we would be allowing a hospital group to
reclassify to a labor market area that is farther away from, rather
than closer to, urban market areas. Such a change would be inconsistent
with the geographic reclassification regulations that require a
hospital to demonstrate proximity to the area where it requests
reclassification. For individual hospital reclassifications, the
proximity requirement is demonstrated by either meeting a mileage
requirement or showing that at least 50 percent of the hospital's
employees reside in the area to which it wishes to reclassify. For
group reclassifications, the proximity requirement is met if the county
demonstrates that it is adjacent to the area where it is seeking
reclassification and has a sufficient degree of economic integration to
suggest that both areas compete for the same labor. The commenter's
approach would allow a hospital to reclassify to a labor market that is
more than 75 miles away from the requested area. In general, we believe
it is highly unlikely that two areas more than 75 miles apart compete
for the same labor.
In accord with the comment from a national hospital association, we
agree that the geographic reclassification rules should not be revised
to accommodate this situation. However, as suggested in the comment, we
considered an accommodation to address the particular circumstances of
this situation. In this situation, a number of the surrounding
hospitals benefit from being an MDH, SCH, or RRC. There are also two
hospitals within approximately 35 miles of the hospital in the single
hospital urban area that do not receive special payment under these
provisions but receive a special wage index under

[[Page 48071]]

section 508 of Pub. L. 108-173. Therefore, the hospital in the single
hospital urban area has neighboring hospitals that either receive
special payment provisions such as RRC and SCH status or benefit from
the special circumstances of section 508 that provided them with
temporary higher wage indices. The section 508 reclassifications were
special one-time reclassification provisions that permitted certain
hospitals to reclassify that ordinarily would not be able to. Thus, the
reclassification of the two neighboring hospitals, in conjunction with
the special payment of the other surrounding hospitals, represents a
situation that would not ordinarily occur under our reclassification of
labor market area rules. Due to the combination of these factors and
the unique circumstances surrounding the section 508 reclassifications,
we are invoking our special exceptions and adjustment authority under
section 1886(d)(5)(I)(i) of the Act for this situation. The special
exceptions and adjustment authority authorizes us to provide ``for such
other exceptions and adjustments to [IPPS] payment amounts * * * as the
Secretary deems appropriate.'' We believe it is appropriate in these
circumstances to give the hospital in the single hospital urban area
the same wage index as the nearby 508 hospitals until the expiration of
the provision on March 31, 2007. We note that in somewhat analogous
circumstances, we used the special exceptions authority to address
hospitals co-located with other hospitals that received a special
temporary wage index increase. In that case, a special exception was
granted where individual hospitals were part of a failed group
application, where a significant proportion of the group (one-third)
was able to otherwise reclassify, and where the hospitals that did
reclassify received wage indices at least 10 percent higher than the
wage index of the MSA where the hospital was located (69 FR 49105).
Comment: One commenter indicated that when competing hospitals are
geographically located in two separate MSAs they may experience large
differences in their wage indices, thus leading to reimbursement
differentials. The commenter stated that a hospital in a single
hospital MSA could not rectify its situation simply by increasing labor
compensation, thereby resulting in a higher hospital-specific wage
index, because the wage index is based on wage data from 3 years
earlier and, in addition, the wage index is only paid on the labor-
related share of the standardized amount. Thus, the commenter
concluded, a hospital could not receive dollar-for-dollar returns on
its own labor costs for any particular year, even though it receives a
wage index based on its own wage data.
Response: We disagree with the commenter's suggestion that the use
of MSAs do not provide a sound basis for identifying hospital labor
market areas. As noted in the FY 2005 IPPS final rule (69 FR 29027),
exhaustive research has been completed since the mid-1990's on use of
alternatives to using MSA definitions for inpatient hospital labor
market. While individual hospitals may sometimes be disadvantaged by
the use of OMB statistical area definitions for the Medicare IPPS labor
market areas, there has been no consensus among interested parties that
there are any better alternatives. Dividing the country into geographic
areas used to determine wage indices, as is required by section
1886(d)(3)(E) of the Act, will necessarily result in different wage
indices across different labor market areas. The commenter is correct
that hospitals can neither change the proportion of their payment that
is adjusted by the wage index nor shorten the period between when
hospitals pay wages to their employees and when those wages are used in
determining the wage index. However, these circumstances are not unique
to hospitals in single-hospital MSAs. All hospitals experience a delay
between the date hospital wage costs are incurred and the date those
costs are used to determine the wage index. Similarly, all hospitals
are paid based upon a set labor-related share.
Commenters: provided the following suggestions for revising the
reclassification rules for single hospital MSAs:
Exempt the hospital from the requirement that its wages be
at least 108 percent of the average hourly wage of all other hospitals
in its area, since a single hospital alone in its MSA could not, by
definition, meet this test.
Combine single hospital areas with neighboring MSAs, for
the same reasons CMS treated micropolitan areas as rural when it
adopted new labor market areas in FY 2005.
Allow urban hospitals that qualify to be SCHs or rural
referral centers other than being located in a rural area to reclassify
using the special rules that apply to hospitals with such a status.
Response: We are not adopting any of the above recommendations in
this final rule. We do not believe the reclassification rules should be
modified to abolish the 108 percent test in the case of a hospital in a
single-hospital MSA. The 108-percent test exists precisely to create a
specific threshold for reclassifying and to ensure that a reclassifying
hospital's own wages are significantly higher than the wages used in
calculating the index of its home area. Allowing a hospital receiving
100 percent of its area wages to be exempt from this test, we believe,
could potentially undermine the 108-percent test for all hospitals, and
we are not certain how we would distinguish between a hospital with
wages at, for example, 105 or 107 percent of its area wages and the
single hospital with a wage index at 100 percent of its area wages. We
note that section 1886(d)(10)(D)(i)(I) of the Act specifically directs
us to include in our reclassification guidelines ``guidelines for
comparing wages * * * in the area in which the hospital is
classified.''
We also disagree with the suggestion that we should combine
adjacent urban areas into one labor market area where one of the MSAs
has a single hospital. As we indicated above, the MSAs have
consistently been used by CMS to designate geographic areas and there
has been no consensus among interested parties in favor of any
alternatives. Combining MSAs could also potentially disadvantage
hospitals in the urban area with multiple hospitals. For the same
reason, we also disagree with the suggestion of the commenter that
indicated a hospital that meets all of the requirements to be an SCH or
a rural referral centers except rural status should be able to take
advantage of the special reclassification provisions that apply to
hospitals with these designations. As rural hospitals, these hospitals
are afforded advantages that do not apply to urban hospitals. Congress
has repeatedly recognized the special circumstances of rural hospitals.
For example, Congress, in section 1886(d)(10)(D)(iii) of the Act,
exempted rural referral centers from certain wage comparison rules used
in reclassification.
Finally, hospitals in single hospital MSAs already have another
reclassification option available where the 108-percent test does not
need to be met. A hospital in a single hospital MSA can apply to an
adjacent area using the group reclassification rules. Under these
rules, the hospital must be located in a county that is in the same CSA
or CBSA as the urban area where they are seeking reclassification. The
CSA and CBSA requirement is intended to identify economic integration
among different areas. To be part of an optional CSA, the OMB standard
requires that there be at least a 15-percent employment interchange
between the areas (25 percent for CBSAs). We do not see a need to
exempt a hospital in a single

[[Page 48072]]

hospital MSA from wage data comparison because it can apply to an
adjacent MSA within the same CSA using the group reclassification rules
without having to meet the 108-percent test. If a hospital in a single
hospital MSA cannot meet group reclassification criteria because of the
CSA standard, it means there is not a sufficient degree of employment
interchange to suggest that the areas compete for the same labor.
7. Special Adjustment for Hospital Group Reclassification Denied on the
Basis of Incomplete CSA Listing
In this final rule, we are also invoking our special exceptions and
adjustment authority under section 1886(d)(5)(I)(i) of the Act to
adjust the wage index of a hospital group that failed to reclassify on
the basis of incomplete OMB guidance for FY 2007 only. The hospital
group in question timely applied to the MGCRB for geographic
reclassification. On December 5, 2005, the OMB issued a bulletin,
Bulletin 06-01, listing the MSAs that comprise various CSAs throughout
the country. The bulletin did not include the hospital group's county
as being part of the CSA to which the group sought reclassification.
CMS regulations at 42 CFR 412.234 require a group to be in the same CSA
as the urban area to which it seeks reclassification. Thus, the MGCRB
properly denied the hospital group's request.
However, subsequent to the MGCRB denial, the OMB corrected its
December 5, 2005 bulletin. On April 25, 2006 and then again on May 26,
2006, OMB issued correction bulletins stating that it had omitted from
Bulletin 06-01 certain MSAs that should have been part of the CSA
listing. The correction bulletin resulted in the hospital group
becoming part of the same CSA as the urban area to which it had sought
reclassification. However, by the time OMB issued its correction, the
deadline for appealing the MGCRB denial to the Administrator (15 days
from the date of the MGCRB decision) under 42 CFR 412.276(a) had
passed. In addition, the time for the Administrator to issue a decision
on his or her own motion (105 days following the issuance of an MGCRB
decision) had also expired. As provided under Sec. 412.276(b), MGCRB
decisions are final and binding unless reviewed and changed by the
Administrator.
Four other hospital groups were affected by OMB's correction
bulletin(s). However, all of these groups were able to receive a
positive determination by the Administrator. In one case, the
Administrator was able to toll the timeframe for deciding the group's
appeal under Sec. 412.278(f)(2)(i). In the other three cases, the
Administrator affirmed the MGCRB's decision but then amended the
decision on May 30 within the 15 days allotted under Sec.
412.278(g)(2).
The special exceptions and adjustment authority authorizes us to
provide ``for such other exceptions and adjustments to [IPPS] payment
amounts * * * as the Secretary deems appropriate.'' We believe it is
appropriate in these circumstances to adjust the hospital group's wage
index to reflect the reclassification it would have received had OMB's
initial CSA listing been complete. First, of the five hospital groups
affected by the OMB bulletin(s), four were granted reclassifications
under the procedures for Administrator review. Only the remaining
hospital group was unable to reclassify because the deadline for the
Administrator discretionary review expired on May 17, 2006, and the OMB
did not issue its correction bulletin until May 26, 2006. The
circumstances of the five cases are identical in that each was denied
reclassification by the MGCRB by virtue of not meeting the CSA standard
that was later corrected by OMB. We believe it would be inequitable for
the one remaining hospital group to be the only group of the five
similarly situated not to benefit from the correction of the errors to
OMB Bulletin 06-01. Second, the MGCRB's decision was based upon an
incomplete OMB listing. We do not believe the hospital group should
experience an adverse determination solely on the basis of OMB
omissions. Third, OMB issued its correction only 9 days after
expiration of the discretionary review period for the Administrator to
take review. Taken in conjunction, we believe that these three factors,
the reclassification of all other similarly situated hospital groups;
the governmental omission; and the closeness in time between OMB's
correction and the expiration of the Administrator discretionary review
period, support a special adjustment. We note that we are not
retroactively granting a reclassification to the hospital group in
question. Rather, we will adjust payment to reflect the wage index it
would have received (for example, we will give the hospital group that
wage index for hospitals reclassified to the requested area). The
hospitals in the group will not receive the section 505 out-migration
adjustment in FY 2007.
Finally, we note that the hospital group in question may reapply
for geographic reclassification to the same area for the period FY 2008
through FY 2010. As specified in section III.H. of the preamble of this
final rule, the deadline for FY 2008 reclassification applications is
September 1, 2006. We encourage hospitals to closely review the special
instructions provided in section III.H. of this preamble elsewhere in
this final rule affecting the procedures for applying for
reclassification for FY 2008, considering the unique circumstances of
occupational mix wage adjusted average hourly wages not being available
until after August 1 and prior to October 1.

H. Payment for Direct Graduate Medical Education

1. Background
Section 1886(h) of the Act, as added by section 9202 of the
Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 (Pub. L.
99-272) and implemented in regulations at existing Sec. Sec. 413.75
through 413.83, establishes a methodology for determining payments to
hospitals for the costs of approved graduate medical education (GME)
programs. Section 1886(h)(2) of the Act, as added by COBRA, sets forth
a methodology for the determination of a hospital-specific, base-period
per resident amount (PRA) that is calculated by dividing a hospital's
allowable costs of GME for a base period by its number of residents in
the base period. The base period is, for most hospitals, the hospital's
cost reporting period beginning in FY 1984 (that is, the period
beginning between October 1, 1983, through September 30, 1984).
Medicare direct GME payments are calculated by multiplying the PRA
times the weighted number of full-time equivalent (FTE) residents
working in all areas of the hospital (and nonhospital sites, when
applicable), and the hospital's Medicare share of total inpatient days.
The base year PRA is updated each year for inflation. However, as
specified in section 1886(h)(2)(D)(ii) of the Act, for cost reporting
periods beginning on or after October 1, 1993, through September 30,
1995, each hospital-specific PRA for the previous cost reporting period
is not updated for inflation for any FTE residents who are not either a
primary care or an obstetrics and gynecology resident. As a result,
hospitals that train primary care and obstetrics and gynecology
residents, as well as nonprimary care residents in FY 1994 or FY 1995,
have two separate PRAs: one for primary care and obstetrics and
gynecology residents and one for nonprimary care residents.
Pub. L. 106-113 amended section 1886(h)(2) of the Act, effective
October 1, 2000, to establish a methodology for the use of a national
average PRA in computing direct GME payments for

[[Page 48073]]

cost reporting periods beginning on or after October 1, 2000.
Specifically, Pub. L. 106-113 established a ``floor'' for FY 2001 such
that a hospital-specific PRA should not be less than 70 percent of the
locality-adjusted national average PRA. In addition, it established a
``ceiling'' that froze or limited the annual inflation adjustment to a
hospital-specific PRA if the PRA exceeded 140 percent of the locality-
adjusted national average PRA. Section 511 of Pub. L. 106-554 increased
the ``floor'' established by Pub. L. 106-113 to equal 85 percent of the
locality-adjusted national average PRA for PRAs in existence in FY
2002. Existing regulations at Sec. 413.77(d)(2)(iii) specify that, for
purposes of calculating direct GME payments, each hospital-specific PRA
is compared to the floor (for FY 2001 and FY 2002) and the ceiling (for
FY 2001 through 2013) to determine whether a hospital-specific PRA
should be revised. We note that, under existing regulations at Sec.
413.77(c), if a hospital-specific PRA for FY 2001 or FY 2002 is revised
due to application of the floor PRA, the revised PRA is the starting
point for the PRA in future years, subject to the annual inflation
adjustment and any other applicable adjustments.
Section 1886(h)(4)(F) of the Act established caps on the number of
allopathic and osteopathic residents that hospitals may count for
purposes of calculating direct GME payments. For most hospitals, the
caps were the number of allopathic and osteopathic FTE residents
training in the hospital's most recent cost reporting period ending on
or before December 31, 1996. Section 422 of Pub. L. 108-173 added
section 1886(h)(7) of the Act which provided for one-time reductions to
the resident caps of teaching hospitals that were training a number of
FTE residents below their cap in a reference period, and authorized a
one-time ``redistribution'' of FTE resident slots to hospitals that
could demonstrate a likelihood of using the additional resident slots
within the first three cost reporting periods beginning on or after
July 1, 2005.
2. Determination of Weighted Average Per Resident Amounts (PRAs) for
Merged Teaching Hospitals (Sec. 413.77)
As stated in the background section above, in accordance with
section 1886(h) of the Act, Medicare pays teaching hospitals for the
direct costs of GME based on the per resident direct GME costs in a
base year. For most hospitals, the base year is FY 1984 (cost reporting
periods beginning between October 1, 1983, and September 30, 1984).
Although section 1886(h) of the Act provides for the establishment of a
PRA for a hospital that trained residents in the 1984 base year, the
statute does not address how to treat the PRA(s) of teaching hospitals
that subsequently merge.
Our policy has always been that when two or more teaching hospitals
merge, we determine a weighted average PRA for the surviving merged
hospital using direct GME costs and resident data from the base year
cost report for each teaching hospital involved in the merger. This
policy was detailed in Questions and Answers on Medicare GME Payments
issued on November 8, 1990: ``[When] two hospitals merge * * * the
merged hospital's per resident amount * * * [is] based on the weighted
average of the per resident amounts of both hospitals.'' We believe
this is an equitable way to determine a PRA for the surviving merged
hospital because it is based on the relative costs and sizes of the GME
training programs in the respective facilities. Moreover, we believe
this policy minimizes the role Medicare GME payments play in the choice
of the surviving hospital entity. For example, there is no incentive to
choose the surviving hospital based in part on the hospitals' relative
PRAs.
To calculate the weighted average PRA for the merged entity, the
fiscal intermediary begins by determining the base year PRAs and the
base year FTE resident counts of the hospitals that merge. The weighted
average PRA is calculated by adding the product of each hospital's base
year PRA and its base year FTE resident count, and dividing that number
by the total number of the base year FTE residents for those hospitals.
When our current methodology was first established for calculating
the new PRA for a merged hospital, we adopted a policy to use base year
PRAs and FTE resident counts. It was appropriate and workable to use
data from the PRA base year because the base year data (usually for the
1984 fiscal year) associated with the hospital-specific PRAs were
easily accessible. However, these data are now often over 20 years old
and it has become administratively burdensome for both CMS and the
fiscal intermediaries to access base year information in calculating
the weighted average of the PRAs for merged hospitals.
In addition to it being administratively burdensome to use base
year cost report data, where a hospital has two PRAs (one for primary
care and obstetrics and gynecology residents and another for nonprimary
care residents), these two PRAs are not being taken into account in
developing the weighted average PRA for the merged hospital. As
discussed earlier, hospitals that were training nonprimary care
residents in FYs 1994 and 1995 have a separate nonprimary care PRA
because there was no update for inflation applied to the PRA for
nonprimary care residents in those years (Sec. 413.77(c)(2)).
Accordingly, many teaching hospitals currently have two PRAs: one for
primary care and obstetrics and gynecology residents and one for all
other residents. (Hospitals that first train residents after FY 1995
would only have a single PRA, even if they train both primary care
residents and nonprimary care residents.) Because the current
methodology for calculating the weighted average PRA for a merged
teaching hospital is based solely on data from the PRA base year (which
is usually prior to the years during which the PRAs were not adjusted
for inflation to reflect nonprimary care residents), this methodology
does not take into account that the merged hospitals may currently have
more than one PRA.
In the FY 2007 IPPS proposed rule (71 FR 24111 through 24113), we
proposed, effective for cost reporting periods beginning on or after
October 1, 2006, rather than using the direct GME FTE resident count
and PRA from hospitals' base year cost reports, to simplify and revise
the weighted average PRA methodology for determining a merged teaching
hospital's PRA by using FTE resident data and PRA data from the most
recently settled cost reports of the merging hospitals. We believe it
is less administratively burdensome to use these data because these
data are more recent and, therefore, more accessible. In addition,
these data would reflect both a primary care and obstetrics and
gynecology PRA and, if applicable, a nonprimary care PRA.
We noted that, prior to FY 2003, our policy for calculating the PRA
for a new teaching hospital was to calculate the PRA based on the lower
of the new teaching hospital's actual cost per resident in its base
period or a weighted average of all the PRAs of existing teaching
hospitals in the same geographic wage area, as that term is used under
the prospective payment system (existing Sec. 413.77(e)(1)). (For ease
of discussion, we refer to a hospital that did not participate in
Medicare or that did not have any approved medical residency training
programs during the period beginning between October 1, 1983, through
September 30, 1984, and has since commenced participating in Medicare
and begun training residents in an approved program, as a ``new
teaching hospital.'') The weighted average PRA of teaching hospitals
within a particular geographic wage area

[[Page 48074]]

was determined using the base year PRA and the base year FTE resident
count of each respective teaching hospital within the geographic wage
area. However, as discussed in the August 1, 2002 IPPS final rule (67
FR 50067) effective October 1, 2002, we revised our policy to use PRAs
and FTE resident data from the most recently settled cost reports of
teaching hospitals in the same CBSA as the new teaching hospitals,
rather than data from the 1984 base year (existing Sec.
413.77(e)(1)(ii)(B)). We revised this policy for establishing PRAs for
new teaching hospitals because it is less administratively burdensome
to use data from the hospitals' most recently settled cost reports and
because the more recent data takes into account that hospitals have a
primary care PRA and a nonprimary care PRA. In the FY 2007 IPPS
proposed rule, we proposed a similar policy revision for establishing a
merged teaching hospital's PRA.
We proposed that the fiscal intermediaries would use the following
steps to calculate the weighted average PRA for the merged teaching
hospital:
Step 1: Identify the primary care and obstetrics and gynecology FTE
resident count, the nonprimary care FTE resident count for hospitals
with two PRAs, or the single FTE resident count for hospitals with a
single PRA, for each teaching hospital involved in the merger. (Use the
sum of the FTE resident counts from Line 3.07, Line 3.08, and Line 3.11
of the hospital's most recently settled Medicare cost report, CMS 2552-
96, Worksheet E-3, Part IV.)
Step 2: Identify the PRAs (either a hospital's primary care and
obstetrics and gynecology PRA and nonprimary care PRA or, if
applicable, a hospital's single PRA) from the most recently settled
cost report for each hospital involved in the merger, and update the
PRAs using the CPI-U inflation factor to coincide with the fiscal year
end of the surviving teaching hospital. For example, if the surviving
teaching hospital's fiscal year end is December 31, 2006, and the most
recently settled cost report of the teaching hospital(s) involved in
the merger is June 30, 2003, the PRAs from this cost report would be
updated for inflation to December 31, 2006.
Step 3: Calculate the weighted average PRA for the single merged
hospital using the PRAs and FTE resident counts from Step 1 and Step 2.
For each teaching hospital in the merger:
(a) For hospitals with two PRAs, multiply the primary care PRA by
the number of primary care and obstetrics and gynecology FTE residents.
(b) For hospitals with two PRAs, multiply the nonprimary care PRA
by the number of nonprimary care FTE residents.
(c) For hospitals with a single PRA, multiple the single PRA by the
hospital's total number of FTE residents.
(d) Add the products from applicable Steps 3(a), (b), and (c) for
all teaching hospitals that merged.
(e) Add the number of FTE residents from Step 1 for all hospitals.
(f) Divide the sum from Step 3(d) by the sum from Step 3(e). The
result is the weighted average PRA for the merged hospital.
As mentioned above, many hospitals currently have two PRAs, one for
primary care residents and another for nonprimary care residents. An
advantage to using data from the most recently settled cost reports of
the hospitals involved in a merger is that the two PRAs are taken into
account in determining the weighted average PRA for the merged
hospital. Because two PRAs would be taken into account under this
proposal, we considered whether a primary care PRA and a nonprimary
care PRA should, therefore, be determined for the merged hospital.
Although it would be possible to determine and retain two PRAs for a
merged hospital when one or more hospitals involved in the merger had
two PRAs, we did not propose to do so. We proposed that a single PRA
also be determined for the merged hospital in this situation because it
is more administratively straightforward for the fiscal intermediaries
and the merged hospitals and since the merged hospital itself was not
in existence in the years that the two PRAs were established (FY 1994
and FY 1995), we do not believe it is necessary to retain the two PRAs.
Furthermore, because the two existing pre-merger PRAs are taken into
account when establishing the single PRA for the merged hospital, and
the statutory provision that resulted in the creation of two PRAs has
no continuing effect (because the updates were prohibited only for FY
1994 and FY 1995), we see no compelling reason to continue to carry two
PRAs for a merged hospital.
The following was presented as an example of how to calculate a
weighted average PRA under the proposed revised methodology:
Example: Assume that Hospital A, Hospital B, and Hospital C merge
and Hospital B with a fiscal year end of December 31, 2006, is the
surviving hospital. In their respective most recently settled cost
reports, Hospital A has 200 primary care and obstetrics and gynecology
FTE residents and 150 nonprimary care FTE residents, and Hospital B has
50 primary care and obstetrics and gynecology FTE residents and 60
nonprimary care FTE residents. Hospital C became a teaching hospital in
2000 and has 25 FTE residents. After updating the primary care and
nonprimary care PRAs for inflation by the CPI-U to December 31, 2006,
Hospital A has a primary care PRA of $120,000 and a nonprimary care PRA
of $115,000, Hospital B has a primary care PRA of $100,000 and a
nonprimary care PRA of $97,000, and Hospital C has a single PRA of
$90,000.
(a) Primary care:

Hospital A: $120,000 x 200 FTEs = $24,000,000
Hospital B: $100,000 x 50 FTEs = $5,000,000
(b) Nonprimary care:

Hospital A: $115,000 x 150 FTEs = $17,250,000
Hospital B: $97,000 x 60 FTEs = $5,820,000
(c) Single PRA: Hospital C: $90,000 x 25 FTEs = $2,250,000
(d) $24,000,000 + $5,000,000 + $17,250,000 + $5,820,000 +
$2,250,000 = $54,320,000
(e) 200 + 50 + 150 + 60 + 25 = 485 total FTEs
(f) $54,320,000/485 FTEs = $112,000, the weighted average of the
hospitals involved in the merger for fiscal year end December 31, 2006.
Comment: One commenter commended our proposal to revise the
weighted average PRA methodology for determining a merged teaching
hospital's PRA by using direct GME FTE resident data and PRA data from
the most recently settled cost reports of the merging hospitals.
However, the commenter suggested that because a teaching hospital's
reimbursement is calculated using the hospital's rolling average FTE
count, and not the hospital's current year FTE count, the rolling
average FTE count of merging hospitals (Lines 3.16 and 3.22 of
Worksheet E-3, Part IV) should be used to determine a merged teaching
hospital's PRA. The commenter also pointed out that a new teaching
hospital's FTE count only appears on Lines 3.16 and 3.22 and in the
case where one of the hospitals involved in a merger is a new teaching
hospital, if CMS were to use the current year FTE counts, the new
teaching hospital's PRA would not be taken into account in the weighted
average PRA determination for the merged hospital.
Response: We appreciate the commenter's support for the proposed
policy revision; however, we disagree with the commenter's suggestion.
The intent of the policy revision is to ease

[[Page 48075]]

the administrative burden for hospitals and fiscal intermediaries by
using more accessible cost reporting data for determining a merged
hospital's weighted average PRA. We do not believe it is appropriate to
change which FTE counts are used to make a PRA determination for a
merged hospital. While it is true that the statute requires that direct
GME payment be determined based on a 3-year rolling average of the
hospital's FTE counts, that provision is intended by Congress to
moderate the impact of year-to-year changes in hospitals' FTE counts.
However, to calculate a weighted PRA for merging teaching hospitals, we
believe it is appropriate to weight each hospital's PRA based on the
FTE resident count for each hospital's current year. We do agree with
the commenter that in the case of a merger that involves a new teaching
hospital or an existing teaching hospital which, in accordance with 42
CFR 413.79(d)(5), included residents in ``new teaching programs'' on
Lines 3.16 and/or 3.22 of Worksheet E-3, Part IV, the merged hospital's
weighted average PRA will be computed by including the ``new teaching
program'' FTE residents from those lines.
Comment: One commenter suggested that a separate primary care PRA
and nonprimary care PRA be determined for a merged hospital. The
commenter believed that because most existing teaching hospitals
currently have two PRAs, it would be appropriate to determine two PRAs
for a merged teaching hospital as well. In addition, the commenter
believed that determining one PRA for a merged hospital might result in
inaccurate reimbursement should the surviving hospital's mix of primary
and nonprimary care residents or programs change significantly.
Response: Although we initially proposed to determine a single PRA
for the merged hospital, after considering this comment, we are
convinced that it is appropriate to determine two PRAs for a merged
teaching hospital. Although we do not believe the determination of a
single PRA for a merged hospital would necessarily result in
``inaccurate reimbursement,'' we do recognize the commenter's point
that the application of a single PRA for a merged hospital would be
inconsistent with the application of two PRAs for most other teaching
hospitals (typically, a lower one for residents in nonprimary care
specialties), and could produce some unintended incentives.
Specifically, we recognize that the two PRAs have the continuing effect
of discouraging shifts from primary care and obstetrics and gynecology
programs to nonprimary care programs. Therefore, we are revising the
steps for calculating the weighted average PRAs for a merged teaching
hospital. The following steps should be used by fiscal intermediaries
to calculate the primary care weighted average PRA for a merged
teaching hospital for mergers that occur on or after October 1, 2006:
Step 1: From the most recently settled cost report of each hospital
involved in the merger, identify the primary care and obstetrics and
gynecology FTE resident count (Line 3.07 and ``new program'' residents
from Line 3.22 of Worksheet E-3, Part IV).
Step 2: From the most recently settled cost report of each hospital
involved in the merger, identify the hospital's primary care and
obstetrics and gynecology PRA (or a hospital's single PRA when
applicable). Update the hospitals' PRAs to the midpoint of the
surviving provider's cost reports that precede the cost report in which
the merger occurs using a special CPI-U inflation factor obtained from
the CMS Central Office. All of the merging hospitals' PRAs should be
updated to coincide with the surviving hospital's fiscal year end for
the cost reporting period prior to the merger. (For example, if the
surviving teaching hospital's cost reporting period fiscal year end
prior to the merger is December 31, 2006, and the most recently settled
cost report of the teaching hospital(s) involved in the merger is June
30, 2003, the PRAs from this cost report would be updated for inflation
to December 31, 2006).
Step 3: Calculate the weighted average primary care PRA for the
merged hospital using the PRAs and FTE resident counts from Steps 1 and
2.
(a) For hospitals with two PRAs, multiply the primary care PRA by
the number of primary care and obstetrics and gynecology FTE residents.
(b) For hospitals with a single PRA, multiply the single PRA by the
number of primary care FTE residents.
(c) Add the products from each hospital from Steps 3(a) and (b).
(d) Add the number of FTE residents from each hospital from Step 1.
(e) Divide the sum from Step 3(c) by the sum from Step 3(d). The
result is the weighted average primary care PRA for the merged
hospital.
Fiscal intermediaries will follow these same steps to calculate the
weighted average nonprimary care PRA for a merged teaching hospital.
For the weighted average nonprimary care PRA, the merging hospitals'
nonprimary care FTE counts (Lines 3.08 and 3.11 and ``new program''
residents on Line 3.22 from Worksheet E-3, Part IV) and nonprimary care
PRAs (or a single PRA for a hospital with one PRA) should be used.
Comment: One commenter requested that CMS provide a detailed
example that includes the merger date and the fiscal year ends for each
merging hospital's cost report.
Response: The following is a detailed example of how a weighted
average primary care PRA would be determined for a merged hospital. The
changes to the proposed policy revision discussed previously have been
incorporated into this example.
Example: Assume that Hospital A, Hospital B, and Hospital C will
merge on February 1, 2007. On their most recently settled cost reports,
Hospital A has 200 primary care and obstetrics and gynecology FTE
residents, Hospital B has 50 primary care and obstetrics and gynecology
FTE residents, and Hospital C has 10 primary care and obstetrics and
gynecology FTE residents. The surviving hospital is Hospital C whose
fiscal year end prior to the merger is December 31, 2006. Hospital A's
and Hospital B's most recently settled cost report is September 30,
2002 and Hospital C's most recently settled cost report is December 31,
2003. Since Hospital C is the surviving provider and Hospitals A and B
have fiscal year ends (that is, September 30, 2006) that differ from
the fiscal year end of Hospital C (that is, December 31, 2006),
Hospitals A and B's PRAs must be made concurrent with the PRA of
Hospital C for fiscal year end December 31, 2006. The fiscal
intermediary should contact the CMS Central Office for special update
factors and for instructions on making the PRAs concurrent. Additional
special update factors will be necessary to determine the direct GME
payment, pre-merger and post-merger, as indicated in response to the
next comment. After updating the PRAs for inflation by the appropriate
CPI-U update factor to December 31, 2006, Hospital A has a primary care
PRA of $120,000, Hospital B has a primary care PRA of $100,000, and
Hospital C has a single PRA of $90,000.
(a) Hospital A: $120,000 x 200 FTEs = $24,000,000
Hospital B: $100,000 x 50 FTEs = $5,000,000
(b) Hospital C: $90,000 x 10 FTEs = $900,000
(c) $24,000,000 + $5,000,000 + 900,000 = $29,900,000
(d) 200 + 50 + 10 = 260 total FTEs
(e) $29,900,000/260 FTEs = $115,000, the weighted average primary
care PRA for Hospital C, the surviving hospital, effective February 1,
2007, the date of

[[Page 48076]]

the merger. The weighted average nonprimary care PRA would be
calculated using the merging hospitals' nonprimary care FTE counts and
nonprimary care PRAs (or single PRA for Hospital C).
Comment: One commenter requested clarification on how CMS would
treat a merger that occurs in the middle of the surviving hospital's
cost reporting period. More specifically, the commenter questioned
whether, in such a situation, the surviving hospital would have two
PRAs, a pre-merger PRA and post-merger PRA.
Response: In the case described by the commenter, the surviving
hospital would indeed be reimbursed with two sets of PRAs, a set of
pre-merger PRAs and a set of post-merger PRAs. To calculate the direct
GME payment for the surviving hospital for the cost reporting period in
which the merger occurred, the fiscal intermediary performs a series of
off-the-cost-report calculations, treating the pre-merger and post-
merger periods of the surviving hospital's cost reporting period as if
they are two short cost reporting periods. The fiscal intermediary
would first calculate the direct GME reimbursement for the surviving
hospital for the portion of the cost reporting period prior to the
merger using only the surviving hospital's FTEs and PRA(s) and Medicare
utilization rate. Second, the fiscal intermediary would calculate the
surviving hospital's post-merger direct GME reimbursement using the
weighted average PRA(s) updated with special CPI-U factors, a combined
rolling average FTE count reflecting the merged hospitals' FTEs, and a
combined Medicare utilization rate reflecting the portion of the cost
reporting period after the merger. Then the fiscal intermediary would
add the pre-merger and post-merger payments to determine the surviving
hospital's total reimbursement for that cost reporting period. (Note
that, although not the topic of this discussion, similar pre-merger and
post-merger calculations are done for the resident-to-bed ratio for IME
purposes as well).
Comment: One commenter believed that varying methodologies have
been used in the past to determine the PRA for a merged teaching
hospital and that our statement in the proposed rule that CMS' policy
``has always been that when two or more teaching hospitals merge, we
determine a weighted average PRA for the surviving merged hospital'' is
inaccurate. The commenter further believed that the reference to the
1990 GME Questions and Answers is poor evidence that CMS' current
policy is to determine a weighted average PRA for the surviving merged
hospital. Finally, the commenter believed that CMS should promulgate a
policy that gives latitude to a merged hospital to have a PRA
determined that takes into consideration the surviving hospital's post-
merger operations. The commenter suggested that CMS adopt a policy that
provides a merged hospital the option of having its PRA determined as
the weighted average PRA or the surviving provider's PRA.
Response: We disagree with the commenter's assertion that varying
policies have been used in the past to determine the PRA for a merged
hospital. In addition to the 1990 Questions and Answers on Medicare GME
Payments, we have consistently expressed our policy to determine a
weighted average PRA for a merged hospital. For example, our policy was
clearly cited in the May 12, 1998 Federal Register (63 FR 26239) in
which we state that ``in implementing the COBRA 1985 provision
establishing a hospital-specific per resident amount in the situation
of a merger, we have calculated the revised per resident amount for the
merged hospital using an FTE weighted average of each of the respective
hospital's per resident amount which is part of the merger.'' We have
worked with numerous fiscal intermediaries in determining weighted
average PRAs for merged hospitals and are unaware of any instance that
a weighted average PRA was not determined for a merged hospital.
Our current policy, as revised by this final rule, applies
prospectively for cost reporting periods beginning on or after October
1, 2006. Our main concern in making these clarifications and changes to
our policy is to adopt a policy that can be applied consistently and
that recognizes the nature of a merger of hospital entities. We believe
it is appropriate to adopt a policy that takes into account each of the
various merging hospitals' preexisting, statutorily established PRAs.
We have adopted a policy under which the PRA(s) determined for a merged
hospital is based on the weighted average of the different merging
hospitals' PRAs precisely because it takes all of the merging
hospitals' PRAs into account. We do not believe it is appropriate to
provide a merged hospital the option of adopting the surviving
hospital's PRA instead of the average weighted PRA because, aside from
the fact that such a policy would ignore the fact that the merger is a
result of multiple hospitals with individual PRAs joining together,
such a policy could inappropriately provide an incentive to choose the
surviving hospital based on which surviving hospital's PRA would yield
the highest reimbursement.
Comment: Several commenters requested that this policy revision be
included as a provision in the regulatory text of Sec. 413.77, the
regulation that deals with the determination of PRAs.
Response: We agree with the commenters. In this final rule, we are
revising Sec. 413.77 by adding a new paragraph (h) to reflect the
policy on determining the PRA for the surviving hospital when multiple
hospitals merge, effective October 1, 2006.
3. Determination of Per Resident Amounts (PRAs) for New Teaching
Hospitals (Sec. 413.77(e))
As we discussed earlier in the background portion of this section,
the hospital-specific, base-period PRA used in the payment methodology
for determining Medicare direct GME payments is calculated by dividing
a hospital's allowable direct costs of GME in a base period by its
number of residents in that base period. In the case of a hospital that
did not train residents in its FY 1984 cost reporting period, a PRA is
determined by comparing and taking the lower of a PRA based on direct
GME costs and FTE residents in a base year or the updated weighted mean
value of PRAs of all hospitals located in the same geographic wage
area. For ease of discussion, we refer to a hospital that did not
participate in Medicare or have any approved medical residency training
programs during the base period beginning between October 1, 1983,
through September 30, 1984, and has since commenced participating in
Medicare and begun training residents in an approved program, as a
``new teaching hospital.'' A new teaching hospital's PRA is established
by using the lower of its hospital-specific PRA based on the actual
allowable direct GME costs and FTE residents during a base period as
defined in Sec. 413.77(e) or the updated weighted mean value of PRAs
of other teaching hospitals in the same geographic area.
Existing regulations at Sec. 413.77(e) specify that the base year
for establishing a PRA for a new teaching hospital is the first cost
reporting period in which the new teaching hospital participates in
Medicare and the residents are on duty during the first month of that
period. If the new teaching hospital begins training residents but does
not have residents on duty during the first month of the first cost
reporting period in which training occurs, the new teaching hospital is
paid on a reasonable cost basis under Sec. 413.77(e) for any GME costs
incurred

[[Page 48077]]

by that hospital during that period. The intent of this policy for new
teaching hospitals is to make a more accurate determination of a PRA
based on the hospital's per resident direct GME costs in a cost
reporting period in which GME costs have been incurred for that entire
period. As we noted in a response to comments in a final rule published
in the Federal Register on September 29, 1989 (54 FR 40310), we believe
that where the new teaching hospital's cost reporting period begins on
a date other than July 1 (the beginning of the academic year), for
example, October 1 or January 1, the cost reporting period that
includes costs and resident counts from the first year of the training
program may not be reflective of the actual average costs per resident
of the program because the full complement of residents might not be on
duty, and those that are on duty might be receiving a salary for as few
as 1 or 2 months of the cost reporting period. In the usual case,
training in the program would continue into the following cost
reporting period and residents would thus be on duty in the first month
of this next cost reporting period. Consequently, our existing
regulations at Sec. 413.77(e)(1) specify that the PRA is to be
determined by using the cost and resident data from the first cost
reporting period during which residents are training in the first month
of the cost reporting period.
It has come to our attention that, in rare instances, it is
possible for a new teaching hospital, either through happenstance or by
purposeful gaming of the policy, to continue to be reimbursed for
direct GME costs on a reasonable cost basis even beyond the first cost
reporting period during which residents begin training at the hospital
as long as no residents are on duty at the new teaching hospital in the
first month of the subsequent cost reporting period(s). We believe this
scenario is contrary to the statutory intent of section 1886(h) of the
Act, which instructs that instead of payment on a reasonable cost
basis, the Secretary is to determine and base direct GME payments on a
PRA for each hospital with a residency program. For that reason, in the
FY 2007 IPPS proposed rule (71 FR 24113), we proposed to revise Sec.
413.77(e)(1) and (e)(1)(i) to provide that we will make a PRA
determination even where residents are not on duty in the first month
of a cost reporting period but where residents began training at the
hospital in the prior cost reporting period. We proposed that,
effective for cost reporting periods beginning on or after October 1,
2006, if a new teaching hospital begins training residents in a cost
reporting period beginning on or after October 1, 2006, and no
residents are on duty during the first month of that period, the fiscal
intermediary establishes a PRA for the hospital using the lesser of:
(1) The cost and resident data from the cost reporting period
immediately following the one for which GME training at the hospital
was first reported (that is, the base period); or (2) the updated
weighted mean value of PRAs of all hospitals located in the same
geographic wage area. We note that, as with existing policy, the base
year need not be a full cost reporting year.
Comment: One commenter noted that CMS should clarify that the PRA
will be based on ``the lesser of'' the cost and resident data from the
cost report, or the updated weighted mean value of PRAs of all
hospitals located in the same geographic wage area.
Response: We agree with the commenter and have revised the language
in the preamble of this final rule accordingly.
After consideration of the public comments received, we are
adopting as final, without modifications, the proposed changes to Sec.
413.77(e)(1) and (e)(1)(i) to provide that ``effective for cost
reporting periods beginning on or after October 1, 2006, if a new
teaching hospital does not have residents on duty during the first
month of that period, the PRA will be determined using information from
the cost reporting period immediately following the cost reporting
period during which the hospital participates in Medicare and residents
began training at the hospital even if the residents are not on duty
during the first month of that period.''
4. Requirements for Counting and Appropriate Documentation of FTE
Residents: Clarification (Sec. Sec. 412.105(f), 413.75(d), 413.78(b)
and (e), 413.80, and 413.81)
Despite the fact that current policies concerning the counting of
FTE residents for IME and direct GME payment purposes have been in
effect since October 1985, we continue to receive questions on the
proper counting and appropriate documentation for FTE residents for IME
and direct GME payment purposes. As a result of these continuing
questions, in the FY 2007 IPPS proposed rule (71 FR 24113), we included
a clarification of policies that apply in determining hospitals' FTE
resident counts for Medicare GME payment purposes.
In the existing regulations at Sec. 413.78(b) for direct GME
payments, we specify that no individual may be counted as more than one
FTE, and that a hospital cannot claim the time spent by residents
training at another hospital. Therefore, if a resident spends time
training in more than one hospital, the residents counts as a partial
FTE based on the portion of time the resident trains at the hospital
(and a nonhospital setting if the hospital meets the requirements of
Sec. 413.78(e)) to the total time worked. (The same provisions apply
to part-time residents as specified in Sec. 413.78(b)). A similar
policy exists at Sec. 412.105(f)(1)(ii) and (iii) for purposes of
counting FTE residents for IME payment purposes. As we have explained
in previous Federal Register documents (55 FR 36064 and 67 FR 50077),
these policies apply even when a hospital actually incurs the cost of
training the resident(s) at another hospital(s). For example, during a
cost reporting year, a full-time resident trains at Hospital A for 6
months and trains at Hospital B for 6 months. Hospital A is paying the
salary and fringe benefits of the resident for the entire year. In this
case, each hospital would only count 0.5 of an FTE at the most for that
resident. Hospital A would not be able to count the entire FTE for that
resident, regardless of the fact that it incurred all of the training
costs for the resident during that training year.
We also have become aware of issues that have arisen due to a
hospital's failure to document the number of FTE residents claimed on
its cost report. Proper documentation is required so that Medicare
fiscal intermediaries can determine where and when a resident(s) is
training and to allow the fiscal intermediary to make payment to the
hospital based on the time the resident(s) spends at the hospital,
which may be a percentage of the total time trained. A rotation
schedule is the primary documentation that can be used to support the
direct GME and IME resident counts but other similar documentation may
be acceptable. The following is a situation about which we learned that
illustrates how inadequate documentation resulted in inappropriate
counting of FTEs. Two hospitals, Hospital C and D, were ``associated''
with each other, with residents training at both hospitals. However,
instead of differentiating between the number of FTEs and the actual
amount of time spent at each hospital, Hospitals C and D split the FTEs
50/50. Since, in reality, the number of residents actually training at
each hospital differed, splitting the FTE

[[Page 48078]]

count 50/50 resulted in inappropriate payment to both hospitals.
Hospitals are not permitted to decide among themselves how their FTEs
will be counted. A hospital may not count a greater number of FTE
residents than is actually training at the hospital (or its nonhospital
sites) during the year. Each hospital must have documentation which
demonstrates, for the entire cost reporting period, the amount of time
that the resident trained at the hospital and, if applicable, a
nonhospital site. Furthermore, to the extent that residents train in
nonhospital sites, the hospital claiming the FTEs in the nonhospital
site must meet the requirements at Sec. 413.78(e).
Situations such as the one described above involving Hospital C and
Hospital D are particularly harmful when one or more of the hospitals
involved incorrectly reported FTEs in the cost reporting period used to
establish one or more of the hospitals' FTE resident caps, and as a
result, the caps were established incorrectly. Unless the incorrect
caps can be revised pursuant to our regulations regarding review and
revision of agency determinations, those caps must be applied to the
hospital(s) in future years. For instance, we have learned of
situations where a hospital's FTE resident caps were established
incorrectly a number of years earlier and, due to administrative
finality of settled cost reports, can no longer be adjusted. However,
going forward, that cap will be applied to the hospital's count of
FTEs, which must reflect the number of FTE residents actually training
in the hospital (or in nonhospital sites where applicable).
In order to ensure that FTEs are being properly counted, hospitals
are required to furnish specific documentation to support the number of
FTE residents included in the hospital's FTE count. Section 413.75(d)
specifies the requirements concerning documentation of FTE residents.
Proper documentation must include the following information: The name
and social security number of the resident; the type of residency
program in which the individual participates and the number of years
the resident has completed in all types of residency programs; the
dates the resident is assigned to the hospital and any hospital-based
providers (similar to the rotation schedule); the dates the resident is
assigned to other hospitals, or other freestanding providers, and any
nonprovider setting during the cost reporting period, if any; and the
name of the employer paying the resident's salary. In addition, the
documentation should include the name of the medical, osteopathic,
dental, or podiatric school from which the resident graduated and the
date of graduation, and whether the resident is a foreign medical
graduate, including documentation concerning whether the resident has
satisfied the regulatory requirements for foreign medical graduates at
Sec. 413.80. The information must be certified by an official of the
hospital and, if different, an official responsible for administering
the residency program. Again, proper documentation on where and when a
FTE resident is training during a cost reporting period is essential in
order for the hospital to receive direct GME and IME payments based on
the correct number of FTE resident(s). Inaccurate, incomplete, or
inappropriate documentation will lead to Medicare disallowing certain
FTE residents from being counted for purposes of direct GME and IME
payments. We note that we are not expanding or making any changes to
current policy for proper documentation of FTEs. Rather, we are
clarifying the existing regulations concerning proper counting and
documentation of FTEs.
Comment: Several commenters noted that the issue of proper
documentation has been a frequent topic of discussion between teaching
hospitals and fiscal intermediaries and that concerns involving the
``lack of uniform standards'' for documentation, burdens related to
``duplicative documentation requests,'' and matters pertaining to the
``Medicare audit process'' have been communicated to the CMS central
office. Several commenters asserted that the Medicare Intern and
Resident Information System (IRIS) is used by many teaching hospitals
as a means of documentation and verification of FTE resident rotations
and counts. One commenter noted further that since teaching hospitals
and fiscal intermediaries use the IRIS ``* * *as the key reporting tool
for resident information * * *'' CMS should contribute further
resources and consideration to maintaining the IRIS and ensuring that
the program itself and its technical support systems are ``state-of-
the-art.'' Specifically, the commenter stated that because CMS is the
agency responsible for the management of the Medicare program, it has
the responsibility to update the IRIS so that it is a ``user-friendly''
tool for teaching hospitals. In addition, the commenter noted that
because the IRIS has not recently been updated, teaching hospitals have
had to rely on private software in order to use the IRIS. The commenter
stated that it is inappropriate that teaching hospitals have had to
rely on private software to make the IRIS work. The commenter suggested
that CMS form an IRIS task force comprised of ``* * * CMS policy staff,
CMS audit staff, and industry and intermediary representation * * *''
to attend to concerns involving the IRIS.
Response: We believe that Sec. 413.75(d) clearly specifies the
documentation that is required to allow a hospital to count FTE
residents for Medicare payment purposes. However, we encourage
hospitals and fiscal intermediaries to contact CMS with questions they
have about proper documentation. With regards to the use of the IRIS in
determining a hospital's FTE resident count and as a source for
documentation purposes, we note that currently the IRIS does not
contain all of the specific documentation requirements cited under
Sec. 413.75(d) and Sec. 412.105(f)(1). Furthermore, the IRIS does not
serve as the evidence/documentation that supports the accuracy of the
FTE resident counts reported in the cost report, which is the subject
of section IV.H.4. of this preamble. The hospitals prepare the IRIS
using actual records (for example, rotation schedules or similar
documentation) that could be proper evidence/documentation to support
the accuracy of the FTE resident counts reported in the cost report. In
addition, we are aware that, for whatever reasons, the FTE resident
counts computed using the IRIS information do not always match the FTE
resident counts reported in the related cost reports. Thus, the IRIS is
not, in itself, a sufficient mechanism for hospitals to meet their
obligation to furnish information required under Sec. 413.75(d) to
support the FTE resident counts reported in the cost report. We
emphasize that rotation schedules or other similar documentation should
stand as the primary evidence to support hospitals' FTE resident
counts. Regarding the commenter's assertion that it is inappropriate
that teaching hospitals have had to rely on a private software program
for IRIS use, we note that CMS does not mandate that fiscal
intermediaries purchase separate software packages to supplement the
IRIS. Where the hospitals or the fiscal intermediaries utilize a
private software program for the IRIS, those fiscal intermediaries can
use the IRIS in conjunction with the rotation schedule or similar
documentation as an audit tool to identify duplicates, that is, the
counting of the same resident by more than one hospital.
Comment: One commenter noted that in order for hospitals and
intermediaries to determine proper GME reimbursement improved guidance
and reporting systems are necessary, and

[[Page 48079]]

that, without better guidance, mistakes will continue to be made by
hospitals and intermediaries. Furthermore, the commenter stated that in
order to maintain a cost effective policy, GME payment policy should be
evaluated from time to time ``* * * to determine operational efficiency
and effectiveness.'' The commenter stated that maintaining a cost
effective approach includes limiting disagreements between teaching
hospitals and fiscal intermediaries which requires that Medicare direct
hospitals and fiscal intermediaries, ``* * * on the spirit and intent
of the law.'' The commenter stated that, although the law imparts that
payment be rooted in rules of nongovernmental organizations, ``* * *
such as the American Council of Graduate Medical Education (ACGME) and
American Board of Medical Specialties (ABMS),'' the rules of these
organizations ``* * * are not enforced rigidly and do not have the
force of the law.'' The commenter understands that policy cannot cover
every issue but stated that ``* * * financial auditors will not allow a
situation unless it is specifically addressed in regulation and other
directives.''
The commenter asserted that, ``improper payment is usually due to
the intermediaries' lack of knowledge about a policy or
misunderstanding about the GME rules and, [t]o remedy the fact that
intermediaries are not well versed in many of the basic principles
required for GME audit work, there is a need for Medicare GME payment
specialists.'' In addition, the commenter stated that hospitals must
deal with inconsistencies from year to year due to different auditors
and the auditors' requirements for documentation. The commenter further
stated that Medicare policies established to adhere with the law are
instituted without an adequate understanding of how teaching programs
and hospitals function. The commenter asserted that it is time to
provide further guidance to fiscal intermediaries and hospitals on
Medicare GME payment policy and one way CMS could provide further
guidance is to revise the Provider Reimbursement Review Manual (PRM)
instead of issuing instructions through multiple Federal Registers.
In addition, the commenter stated that a cost effective measure to
take to correctly count FTE residents would be to modify the IRIS
because the system currently does not incorporate sufficient
information to meet the regulatory requirement to report all training
locations for an individual resident, and only identifies a range of
dates where some FTE time is counted for the same resident by more than
one hospital. Furthermore, the commenter stated that fiscal
intermediaries interpret software limitations as the need for hospitals
to provide supplementary documentation. The commenter noted that ``[i]n
practice, neither the intermediary nor the hospitals have followed the
regulatory requirement to report all training locations of a resident''
and therefore recommended that ``* * * CMS clarify that hospitals must
obtain a report from the entity sponsoring the training program that
lists each resident's training location.'' Furthermore, the commenter
asserted that ``[t]he intermediary's level of acceptable documents has
been increasingly stringent * * *'' and that there have been occasions
where disallowances have occurred because the submitted documentation
did not meet individual intermediary requirements. The commenter also
provided other examples of situations where auditors have disallowed
FTE residents.
Response: We acknowledge that the PRM should be revised and updated
to incorporate current GME policies. However, we disagree with the
commenters' assertion that not enough guidance is provided to teaching
hospitals concerning Medicare's GME payment policies. In addition to
clarifying policy through public Q&As and Federal Registers, we meet
with teaching hospitals and intermediaries on hospital-specific issues
and with associations representing teaching hospitals in order to
clarify GME policy. We urge hospitals and fiscal intermediaries to
contact us regarding questions they have about appropriate
documentation. With regards to the use of the IRIS in determining a
hospital's FTE resident count, we note that the IRIS is only intended
to serve as an audit tool to help identify duplicates and does not
contain all of the specific documentation requirements listed under
Sec. 413.75(d) and Sec. 412.105(f)(1) and, therefore, additional
documentation is required. As previously mentioned, the fact that the
IRIS does not meet the regulatory provision to report all training
locations for an individual resident is not the only reason that the
IRIS cannot serve as the evidence/documentation to support the accuracy
of the FTE resident counts reported in the cost report. Modification of
the IRIS would not eliminate the need for auditable evidence to support
the cost report and the information included in the IRIS. We specified
in the preamble background and the previous response in this section
that CMS considers the rotation schedules or similar documentation as
the primary evidence to support the FTE resident counts. In response to
the commenter's recommendation that sponsoring institutions submit
documentation listing residents' training locations, the rotation
schedules are prepared by the Director of the GME program of the
sponsoring institution. These types of rotation schedules should be
used by the hospital to determine the cost report FTE resident counts
and be furnished by the hospital to the fiscal intermediary when
requested for audit purposes.
Comment: One commenter noted that the documentation submitted in
accordance with Sec. 413.75(d) needs to be certified by an official of
the hospital or by an official responsible for administering the
residency program. The commenter was unclear as to what exactly needs
to be certified, and in what format, and asked if submission and
certification of the IRIS report meets the certification requirement.
Response: The IRIS report does not contain all the information
listed in Sec. 413.75(d) or Sec. 412.105(f)(1). Therefore, in itself,
it does not meet all the requirements of these sections regardless of
whether it is certified or not. Therefore, in addition to submitting
the IRIS report, the hospital must submit the other documentation
elements specified in Sec. 413.75(d), and those must be certified by a
hospital or GME program official.
Comment: One commenter expressed concern over the policies
regarding the proper counting of FTE residents. Specifically, the
commenter expressed dismay that a hospital can count resident training
time for GME payment purposes when the resident rotates to a
nonhospital site but not when a resident is training at another
hospital even if the teaching hospital is incurring all the training
costs of that resident at that other hospital. The commenter noted that
this policy is particularly detrimental to emergency medicine. The
commenter stated that the Accreditation Council for Graduate Medical
Education (ACGME) sets forth a required case volume for residency
training in emergency medicine and that this volume requirement limits
the number of rural emergency medical residency training programs. The
commenter noted that in an effort to provide residents in emergency
medicine with experience in rural practice, attempts have been made to
expand training to rural hospitals. The commenter noted that since few
small rural hospitals ``* * * want to undertake the burden of becoming
teaching hospitals in their

[[Page 48080]]

own right * * *,'' the major teaching hospitals have continued to pay
the costs of those residents training at the rural hospitals. The
commenter stated that the current policy opposes efforts of
governmental agencies to increase training in rural areas and further
stated that more residency program directors would make rural training
available if they were permitted to continue to count residents that
were rotating to rural hospitals. The commenter urged CMS to change its
policy to allow payment to the primary teaching institution for
resident time spent in rural hospitals in situations where it is not
economically feasible for the rural hospital to become a teaching
hospital.
Response: We agree that efforts should be made to ensure that
residency training is occurring at rural facilities so that residents
are prepared to work in these environments upon completion of their
residency training programs. However, we do not believe that it is
consistent with the requirements at sections 1886(d)(5)(B)(IV) and
1886(h)(4)(E) of the Social Security Act to expand the policy to allow
hospitals to count residents training at rural hospitals even if the
hospital seeking to count the resident is paying the cost of training
for those residents rotating to the rural hospital. In addition,
section 1886(h)(4)(B) of the Social Security Act requires that the
regulations take into account individuals who serve as residents
simultaneously in more than one hospital. Therefore, we believe that
the statute contemplates allowing a hospital to count only those
residents actually training in that hospital. We do not believe it is
appropriate for the ``primary'' teaching hospital to include time spent
by residents at other hospitals in its FTE count, even when the
``primary'' teaching hospital is incurring the costs of training the
residents.
Comment: One commenter stated that fiscal intermediaries may be
using the IRPs set forth in the August 30, 1996 Federal Register. The
commenter noted that in the August 30, 1996 Federal Register, CMS set
an IRP of 2 years for podiatry residency programs. The commenter noted,
however, that since at least 2003, the Council on Podiatric Medical
Education (CPME) has stated that there exists both a 2-year podiatric
medicine and surgery-24 program and a 3-year podiatric medicine and
surgery-36 program. The commenter requested that all intermediaries use
the most recent information regarding the length of the relevant
training programs as set forth by the relevant accrediting
organizations, in this case the CPME.
Response: We did not propose any changes in policy regarding IRPs
in the FY 2007 IPPS proposed rule. We consider this comment out of the
scope of the proposed rule. Therefore, we are not responding to this
comment at this time.
5. Resident Time Spent in Nonpatient Care Activities as Part of
Approved Residency Programs (Sec. Sec. 413.9 and 413.78(a))
In section IV.H.4. of this preamble, we discussed the importance of
properly documenting where and when residents are training in a
particular hospital or nonhospital site, in order for that hospital to
count those FTE residents for purposes of direct GME and IME payment.
In addition, it is important for hospitals to be able to document the
activities in which residents are engaged because there are certain
activities that are not allowable for direct GME or IME payment
purposes, even though those activities may be performed as part of an
approved residency program. Specifically, it has come to our attention
that there may be some confusion in the provider community as to
whether the time that residents spend in nonpatient care activities
that are part of the approved residency program may be counted for the
purpose of direct GME and IME payments. We have most recently received
questions as to whether the time residents spend in nonhospital sites
in didactic activities such as journal clubs or classroom lectures may
be included in determining the allowable FTE resident counts. To
respond to these inquiries and to resolve any confusion, in the FY 2007
IPPS proposed rule (71 FR 24114 and 24115), we included a clarification
of our policy concerning the counting of time spent in nonpatient care
activities for the purpose of direct GME and IME payments in both
hospital and nonhospital settings.
With respect to training in nonhospital settings, the time that
residents spend in nonpatient care activities as part of an approved
program, including didactic activities, cannot be included in a
hospital's direct GME or IME FTE resident count. This longstanding
policy is based on the statutory requirements for counting FTE
residents training in nonhospital sites. For the purpose of direct GME
payments, providers have been allowed since July 1, 1987, to count the
time residents spend training in nonhospital sites under certain
conditions. Section 1886(h)(4)(E) of the Act specifies that the
implementing regulations concerning computation of direct GME for
training in nonhospital sites ``shall provide that only time spent in
activities relating to patient care shall be counted and that all the
time so spent by a resident under an approved medical residency
training program shall be counted towards the determination of full-
time equivalency, without regard to the setting in which the activities
are performed, if the hospital incurs all, or substantially all, of the
costs for the training program in that setting'' (emphasis added).
For IME payment purposes, hospitals were first allowed to count the
time residents spend training in nonhospital sites for discharges
occurring on or after October 1, 1997. Section 1886(d)(5)(B)(iv) of the
Act was amended by Pub. L. 105-33 in 1997 to provide that ``all the
time spent by an intern or resident in patient care activities under an
approved medical residency program at an entity in a nonhospital
setting shall be counted towards the determination of full-time
equivalency if the hospital incurs all, or substantially all, of the
costs for the training program in that setting'' (emphasis added).
We understand that, as part of an approved medical residency
program, residents are often required to participate in didactic and
``scholarly'' activities such as educational conferences, journal
clubs, and seminars. Some of these activities may take place in
nonhospital sites, such as freestanding clinics or physicians' offices,
or in conference rooms at nonhospital settings. In implementing section
1886(h)(4)(E) of the Act for direct GME payment purposes, we
specifically stated that ``only time spent in activities relating to
patient care may be counted [in nonhospital sites]'' (54 FR 40292,
September 29, 1989). In 1998, when we implemented the statute allowing
FTE residents to be counted in nonhospital sites for IME, we reiterated
that a hospital may only count resident training time ``in nonhospital
sites for indirect and direct GME, respectively, if the resident is
involved in patient care'' (63 FR 40986, July 31, 1998). While we have
not explicitly defined in regulations ``patient care activities,'' we
have applied the plain meaning of that term. In addition, we note that
the scope of the term ``patient care'' had been well-established in the
Medicare program even prior to issuance of the first rules on counting
FTE residents for purposes of direct GME and IME payments. For example,
prior to the IPPS, acute care hospitals were paid by Medicare for
inpatient services based on their reasonable operating costs, or costs
relating to the provision of reasonable and necessary ``patient care.''
The

[[Page 48081]]

longstanding regulation at 42 CFR 413.9, entitled ``Costs related to
patient care,'' states that ``all payments to providers of services
must be based on the reasonable cost of services covered under Medicare
and related to the care of beneficiaries.'' Thus, the scope of costs
recognized as reasonable under Medicare had been limited to those
relating to ``patient care,'' or to those relating to covered services
for the care of beneficiaries. Although the agency appears to have made
a conflicting statement in a letter directed to a particular individual
implying that didactic time spent in nonhospital settings could be
counted for direct GME and IME, that statement was inaccurate. We have
applied and continue to apply the plain meaning of the statutory terms
``patient care activities'' and ``activities relating to patient care''
in the context of approved GME programs. That is, the plain meaning of
patient care activities would certainly not encompass didactic
activities. Rather, the plain meaning refers to the care and treatment
of particular patients, or to services for which a physician or other
practitioner may bill. Time spent by residents in such patient care
activities may be counted for direct GME and IME payment purposes in
the nonhospital site. Time spent by residents in other activities in
the nonhospital site that do not involve the care and treatment of
particular patients, such as didactic or ``scholarly'' activities, is
not allowable for direct GME and IME payment purposes.
We note that there is a difference in the rules for counting FTE
resident time for IME and direct GME payments when residents are
training in a hospital. For direct GME payment purposes, under Sec.
413.78(a), ``residents in an approved program working in all areas of
the hospital complex may be counted.'' As explained in the September
29, 1989 Federal Register document (54 FR 40286), the hospital complex
consists of the hospital and the hospital-based providers and
subproviders. Therefore, the distinction between patient care
activities and nonpatient care activities is not relevant to direct GME
FTE count determinations when the residents are training in the
hospital complex. However, for IME payment purposes, consistent with
the regulations at Sec. 413.9, only time spent in patient care
activities in the hospital may be counted. It has been our longstanding
policy that, regardless of the site of training, ``* * * we do not
include residents in the IME count to the extent that the residents are
not involved in furnishing patient care * * *'' (66 FR 39897, August 1,
2001).
Comment: Many commenters took issue with CMS's ``clarification''
that FTE resident time spent in didactic activities while training in
the hospital could not be counted for purposes of IME payment, and
while training in a nonhospital site could not be counted for either
direct GME or IME payments. The commenters urged CMS to ``revert'' to
the position expressed in a letter in 1999, and questioned whether, in
light of that 1999 letter, CMS is actually ``clarifying'' its policy
rather than changing existing policy. One commenter suggested that to
``avoid challenges'' to CMS's policy, a definition of ``patient care
activities'' should be promulgated under the Administrative Procedures
Act (APA). Another commenter argued that it is ``improper'' for CMS to
exclude nonpatient care time from the IME count for fiscal years prior
to 2001 (as the April 25, 2006 proposed rule would) because CMS did not
enact regulations requiring the exclusion of nonpatient care activities
from the IME count until 2001. The commenter observed that in the April
25, 2006 proposed rule, as in the 2001 rule (66 FR 39898), CMS stated
that the rule excluding nonpatient care time from the IME count was
``longstanding'' policy and applies to periods prior to 2001. The
commenter asserted that it is inappropriate for the agency to apply the
policy expressed in the April 25, 2006 proposed rule retroactively (as
was done in 2001) because it ``amends the agency's policy prior to 2001
without notice and comment rulemaking as required by the APA.'' Another
commenter noted that, as justification for CMS's ``longstanding
policy'' concerning patient care activities, CMS quoted from the August
1, 2001 final rule (66 FR 39897) which states that ``we do not include
residents in the IME count to the extent that the residents are not
involved in furnishing patient care * * *.'' The commenter stated that
CMS ``failed'' to include the remainder of the text, which states ``but
are instead engaged exclusively in research.'' The commenter argued
that the excluded phrase indicates that CMS only meant to exclude
research activities that are not patient-related from the IME count,
and that ``nowhere is the word `didactic' ever mentioned.''
Response: We disagree with the commenters' assertion that the
provision in the proposed rule concerning the time residents spend in
nonpatient care activities is a change in policy, rather than a
clarification of existing policy. With respect to residency training
occurring in nonhospital settings, in the April 25, 2006 proposed rule
(71 FR 24115), we enumerated several examples to illustrate that the
requirement for residents to spend time in patient care activities is
fundamental to including the FTE resident time in the count for direct
GME and IME purposes. Specifically, in implementing section
1886(h)(4)(E) of the Act, which allows hospitals to count time spent by
residents training in nonhospital sites for direct GME payment purposes
under certain circumstances including that the resident time be spent
in activities related to patient care, we reiterated that ``only time
spent in activities relating to patient care may be counted'' (54 FR
40292, September 29, 1989). In 1998, when we implemented section
1886(d)(5)(B)(iv), which first allowed hospitals to count time spent by
residents in nonhospital sites for purposes of IME under certain
conditions including that the resident time be spent in patient care
activities, we reiterated that a hospital may only count resident
training time ``in nonhospital sites for indirect and direct GME,
respectively, if the resident is involved in patient care'' (63 FR
40986, July 31, 1998). In addition, we noted in the April 25, 2006
proposed rule that the scope of the term ``patient care'' had been
well-established in the Medicare program even prior to issuance of the
first rules on counting FTE residents for purposes of direct GME and
IME payments.
While we have not explicitly defined ``patient care activities'' in
regulations, we have consistently used the plain meaning of that term.
This is the case despite the agency's erroneous response to a question
on this issue in a September 24, 1999 letter. The commenters refer to
this 1999 letter to support their argument that the ``clarification''
in the proposed rule demonstrates that CMS has changed its position
since 1999. In the September 24, 1999 letter, CMS (then HCFA) wrote:
``HCFA interprets the phrase `patient care activities' broadly to
include any patient care oriented activities that are part of the
residency program. * * * [T]his can include resident participation in
``(1) the direct delivery of patient care, such as clinical rounds,
discussions, and conferences, and (2) scholarly activities, such as
educational seminars, classroom lectures, research conferences, patient
care related research as part of the residency program, and
presentations of papers and research results to fellow residents,
medical students, and faculty.''
As we stated in the April 25, 2006 proposed rule (71 FR 24115), in
this

[[Page 48082]]

September 24, 1999 letter, we inaccurately stated our interpretation of
the phrase ``patient care activities,'' implying that didactic time
spent in nonhospital settings could be counted for direct GME and IME
purposes. While there is no explanation of the phrase ``patient care
activities'' in the conference report language accompanying the change
in the laws allowing the counting of FTE residents in nonhospital sites
in 1987 for direct GME and in 1997 for IME, we believe that Congress
intended to limit in some meaningful way the types of activities for
which FTE resident time could be counted in the nonhospital setting. If
the term ``patient care'' in the statutory phrase ``only time spent in
activities relating to patient care'' (section 1886(h)(4)(E) of the
Act) was to be interpreted as broadly as suggested in the agency's
September 24, 1999 letter, there would be virtually no limit to the
types of activities that could be counted, rendering the entire phrase,
and particularly, the word ``only,'' meaningless. If Congress had
desired that all FTE time as part of an approved program be counted in
nonhospital sites, then it need not have added the limiting language
concerning patient care. It could have stated simply that time spent in
an approved program at a nonhospital site should be counted. We do not
believe that Congress would have included a superfluous phrase in the
statute. As the commenters point out, CMS had not defined the term
``patient care'' prior to the enactment of either of the statutory
provisions in 1987 and 1997. Therefore, we believe that when Congress
used the term ``patient care'', it meant to give the term its plain
meaning. Such a plain meaning of the statutory language is in direct
conflict with the exceedingly broad definition of ``patient care
activities'' articulated in the September 24, 1999 letter. We do not
believe it would be appropriate to adopt a broad definition of patient
care activities as was expressed in the 1999 letter when that
definition would conflict with the plain meaning of a limiting phrase
in the statute--to the extent that it would give little or no meaning
to the statutory phrase. Moreover, we believe it would be particularly
inappropriate to adopt such a broad construction when the definition
has not been promulgated through notice and comment rulemaking, but
rather, expressed in a single letter directed to a single individual.
We also question whether the provider community would actually have
relied as heavily as commenters suggest on the September 24, 1999
letter when it was clearly directed to a single attorney in response to
his specific inquiry, and not to a broader audience, nor was it (nor
any similar guidance) disseminated by the Agency to its fiscal
intermediaries. Furthermore, although we believe that the letter
responding to this attorney contained an inartful and incorrect
expression of the policy concerning nonpatient care activities, we do
not believe that expression should be used to permit the indiscriminate
inclusion of FTE resident time spent in nonpatient care activities in
nonhospital sites.
With respect to residency training in the hospital, our policy
limiting the IME count to only time spent in patient care activities is
rooted in the creation and the purpose of the IME adjustment. The IME
adjustment is a payment to a teaching hospital for its higher costs of
patient care. Before Congress passed the 1983 law that included the IME
adjustment in the IPPS, the Secretary submitted a report to Congress in
1982 that (in part) explained that, ``the indirect costs of graduate
medical education are higher patient care costs incurred by hospitals
with medical education programs'' (Report to Congress required by the
Tax Equity and Fiscal Responsibility Act of 1982, December 1982, pp.
48-49, italics emphasis added). Similarly, in passing the IPPS
legislation in 1983, the House Committee on Ways and Means acknowledged
the link between higher patient care costs and teaching hospitals, and
noted that the IME adjustment was important due to concerns about
whether the PPS could adequately account for factors such as the
severity of illness of patients utilizing the more specialized
treatment programs at teaching hospitals. Thus, the reasons for the IME
adjustment enumerated by Congress and by the Secretary are directly
linked to the involvement of residents in patient care. The August 1,
2001 final rule (66 FR 39897) also lists discussions in other Federal
Register notices in the 1980s that clearly state that the indirect
costs of medical education are the additional operating costs that
teaching hospitals incur in furnishing patient care. We reiterated this
longstanding policy in the August 1, 2001 final rule and stated that,
``* * * consistent with the purpose of IME payments and general
Medicare reimbursement principles, in determining the FTE count with
respect to the IME adjustment, it has been our longstanding policy that
we do not include residents to the extent that the residents are not
involved in patient care [but are instead engaged exclusively in
research]'' (66 FR 39897). One of the commenters stated that, in the
discussion in the April 25, 2006 proposed rule (71 FR 24115), ``CMS
failed to include the remainder of the text which states `but are
instead engaged exclusively in research.' These excluded words put in
context what CMS was trying to convey in that rule--that in terms of
research activities, only those that are patient-related may be
counted. Nowhere is the word `didactic' ever mentioned.'' We did not
include the remainder of that text in the proposed rule because the
focus of the discussion in the proposed rule was on didactic
activities, not research. However, we reiterate that, just as residents
engaged in activities that are exclusively research are not engaged in
patient care activities, and are not included in the IME count in the
hospital, residents in the hospital engaged in didactic, nonpatient
care activities are also not counted for the purpose of IME.
Comment: Several commenters pointed to what they believe is an
``inconsistency of logic'' concerning CMS' position regarding the time
that may be included in the resident count at nonhospital settings, and
the policy concerning the time for which a hospital must incur the
costs relating to a teaching physician in those settings. On the one
hand, CMS argues that in order for hospitals to receive direct GME and
IME payments relating to residents training in nonhospital settings,
the hospital must pay for the costs of the time spent by teaching
physicians in educating residents, even when the activities are not
associated with patient care. On the other hand, CMS precludes
hospitals from counting FTE resident time not spent in patient care
activities. According to the commenters, these ``conflicting
positions'' where the hospitals must pay for costs of training time
that they cannot count for purposes of direct GME and IME payments will
result in confusion in the provider community.
Response: We are aware of what the commenter views as a paradox in
the requirements concerning the time that residents train in
nonhospital settings. Nevertheless, the statute clearly requires that
hospitals must incur ``all, or substantially all, of the costs for the
training program'' in the nonhospital setting in order to count any FTE
residents training at a nonhospital site for IME and direct GME
purposes (Sec. 1886(d)(5)(B)(iv) and Sec. 1886(h)(4)(E) of the Act).
The definition of ``all or substantially all of the costs for the
training program in the nonhospital

[[Page 48083]]

site'' at Sec. 413.75(b) is consistent with what CMS (and previously
HCFA) has always considered to be ``direct costs'' of a GME program,
inlcuding ``the residents' salaries and fringe benefits * * * and the
portion of the cost of teaching physicians'' salaries and fringe
benefits attributable to direct GME.'' The direct costs of GME
associated with teaching physicians were historically paid for under
Part A of the Medicare Trust Fund, while payment for billable, patient
care services provided by residents supervised by teaching physicians
are generally paid under Medicare Part B. Therefore, the costs
associated with patient care activities in which the teaching
physicians are involved are not included in the direct costs of the GME
program. Yet, in allowing hospitals to count FTE residents training in
nonhospital sites, the statutory provision regarding direct GME also
states that ``only time spent in activities relating to patient care
shall be counted * * *'' (Sec. 1886(h)(4)(E) of the Act). Similarly,
the statutory provision regarding IME states, ``all the time spent by
an intern or resident in patient care activities * * * shall be counted
* * *'' (Sec. 1886(d)(5)(B)(iv)). Consequently, hospitals are not
permitted to count a portion of the FTE resident time (that is, the
nonpatient care time) even though they must incur the training program
costs associated with that time.
Comment: Several commenters stated that the IME and direct GME
statute pertaining to nonhospital sites supports the counting of
didactic activities, and that Congress wanted to encourage, not limit,
residency training in nonhospital sites. The commenters believe that
the reference to ``patient care activities'' in the IME and direct GME
nonhospital statutes refers generally to patient care settings, such as
physicians' offices and other ambulatory care sites. One commenter
cited the statutory language as the reason why hospitals exclude
extended periods of time spent exclusively in ``bench'' research
outside of the hospital, or time spent by preventive medicine residents
in state and local public health departments from the IME and direct
GME FTE counts, since these activities do not involve ``patient care.''
Another commenter implied that didactic time in nonhospital sites is
allowed for IME purposes since the conference agreement accompanying
the legislative language in the BBA states, ``The conference agreement
includes new permission for hospitals to rotate residents through
nonhospital settings, which include primarily ambulatory care settings,
without reduction indirect medical education funds'' (emphasis added).
Commenters also stated that Congress was ``well aware'' that residency
training involves didactic components, and Congressional actions in
both COBRA 1986 (enacting the direct GME nonhospital site provision)
and BBA 1997 (enacting the IME nonhospital site provision) make it
clear that Medicare would allow hospitals to count time spent in
nonhospital sites for purposes of direct GME and IME.
Response: We believe the commenters have erroneously concluded that
because Congress desired to encourage increased residency training in
nonhospital sites, the nonhospital IME and direct GME statutes must,
therefore, also support the counting of FTE residents engaged in
didactic activities in nonhospital sites. In fact, despite the lack of
an explicit explanation of what was intended by the term ``patient care
activities,'' when the Conference committee report language is viewed
in conjunction with the statute, we believe the obvious and correct
conclusion is that Congress wanted to encourage more training in
nonhospital settings, but only for the purpose of increasing patient
care training in outpatient, ambulatory settings. This Congressional
intent is evident in the legislative history of both the direct GME and
the IME provisions on nonhospital settings. First, legislative history
associated with passage of the direct GME provision (as part of Pub. L.
99-509) indicates that ``[s]ince it is difficult to find sufficient
other sources of funding [other than hospitals and Medicare] for the
costs of such training, [that is, training in freestanding primary care
settings such as family practice clinics or ambulatory surgery centers]
assignments to these settings are discouraged [under the pre-enactment
payment scheme]. It is the Committee's view that training in these
settings is desirable, because of the growing trend to treat more
patients out of the inpatient hospital setting and because of the
encouragement it gives to primary care.'' (Emphasis added.) (H.R. Rep.
No. 99-727, 99th Cong., 1st Sess., 70 (1986).) Thus, from the start of
the provision allowing hospitals to count FTE resident training in
nonprovider sites, we believe Congress intended to create a monetary
incentive (or remove the disincentive) for hospitals to rotate
residents from the hospital to the nonhospital settings for the purpose
of treating patients in those ambulatory settings, not for the purpose
of spending time in didactic activities in those settings. We believe
this is the reason why Congress specifically added the ``patient care
activities'' requirement to the direct GME (and later, the IME)
statute. Similarly, in the Conference committee report accompanying the
provision of Pub. L. 105-33 on counting resident training time in
nonhospital settings for IME, Congress stated that ``[t]he conference
agreement includes new permission for hospitals to rotate residents
through nonhospital settings, without reduction in indirect medical
education funds'' (emphasis added, H.R. Conf. Rep. No. 105-217, 105th
Cong., 1st Sess., 817 (1997).) We believe that by the phrase ``without
reduction in indirect medical education funds,'' Congress intended that
when hospitals send residents to nonhospital sites for training, the
IME payments relating to those FTE residents would not cease; that is,
the hospitals would continue to receive IME, in addition to the direct
GME payments they were already receiving when residents rotate from the
hospitals to nonhospital settings. Furthermore, as we stated in the
August 1, 2003 final rule in the context of redistribution of cost and
community support principles (68 FR 45436), legislative intent becomes
even more evident when the nature of the IME adjustment is considered.
Because the IME adjustment is a payment for patient care costs that is
made for each Medicare discharge from the areas subject to the IPPS in
a teaching hospital, ``the authorization by Congress for IME payments
relating to nonhospital services while residents are training at
nonhospital sites would be absurd if not viewed as an incentive to
transfer existing residency training from the hospital to the
nonhospital setting'' (68 FR 45436). Given the nature of IME as a
patient care payment, surely Congress would not have made IME payments
available for training in nonhospital settings to encourage movement of
didactic training from the hospital to nonhospital sites. To the
contrary, we believe Congress clearly intended to encourage hospitals
to shift only residency training that involves patient care activities
from the hospital to outpatient ambulatory settings.
Comment: One commenter alleged that, ``in a very misleading fashion
in the proposed rule, CMS does not quote the entire section of the
relevant portion of the Medicare statute, which reads in full:
``Counting Time Spent in Outpatient Settings. Such rules shall
provide that only time spent in activities relating to patient care
shall be counted and that all the time so spent by a resident under an
approved medical residency training program shall be counted toward the
determination of full-time equivalency, without regard to the setting
in which

[[Page 48084]]

the activities are performed, if the hospital incurs all, or
substantially all, of the costs for the training in that setting.''
(Emphasis added). Section 1886(h)(4)(E) of the Social Security Act.''
The commenter argued that Congress and CMS are well aware of the
language that can be used to describe care directly provided to
individual patients; that is ``direct patient care.'' The commenter
included a list of mostly regulatory (and 2 statutory) cites where the
term ``direct patient care'' is used and noted that the statutory
language regarding GME does not use the term ``direct patient care,''
but rather, uses the much broader language of ``activities relating to
patient care.'' Further, the law states that ``all the time so spent by
a resident under an approved medical residency training program shall
be counted * * * without regard to the setting in which the activities
are performed'' (emphasis added.) The commenter added that Medicare
regulations also define ``direct medical and surgical services'' of
physicians in a teaching setting as ``services to individual
beneficiaries that are either personally furnished by a physician or
furnished by a resident under the supervision of a physician in a
teaching hospital * * *'' (42 CFR 415.152), and that in all these
situations, the idea of ``direct patient care'' can be more narrowly
defined than ``activities relating to patient care.''
Response: It appears that the commenter has overlooked the
paragraph on page 24115 of the April 25, 2006 proposed rule where we
did, in fact, quote the entire section of the statutory language
pertaining to direct GME payments for nonhospital training. We also
believe the statutory language is intended to be read differently from
the way the commenter has suggested, resulting in a significantly
different policy. Specifically, the commenter quotes and emphasizes the
statute as follows: ``all the time so spent by a resident under an
approved medical residency training program shall be counted * * *
without regard to the setting in which the activities are performed * *
* '' The commenter uses this language to suggest that CMS must allow
the time spent in didactic activities in nonhospital sites. However, we
believe the correct reading of the statute in its entirety is:
``Such rules shall provide that only time spent in activities
relating to patient care shall be counted and that all the time so
spent by a resident * * * shall be counted toward the determination of
full-time equivalency, without regard to the setting in which the
activities are performed * * * '' (Sec. 1886(h)(4)(E) of the Act).
In other words, only a subset of the time that residents spend in
nonhospital settings can be counted. Specifically, only all of the time
so spent in activities relating to patient care can be counted, not
necessarily all of the time spent training in the nonhospital site.
Similarly, the IME statute states, ``all the time spent by an intern or
resident in patient care activities * * * shall be counted * * * ''
(Sec. 1886(d)(5)(B)(iv) of the Act). Furthermore, as we stated in
response to previous comments, if ``patient care'' in the phrase ``only
time spent in activities relating to patient care'' (section
1886(h)(4)(E) of the Act) is interpreted as broadly as suggested by the
commenter, there would be virtually no limit to the types of activities
that could be counted, rendering the entire phrase, and particularly
the word ``only,'' meaningless. In addition, we note that the
definition of ``direct medical and surgical services'' at Sec. 415.152
of regulations relating to physicians in a teaching setting is
consistent with our definition of the plain meaning of ``patient care
activities.'' Just as the definition of ``direct medical and surgical
services'' refers to services to individual beneficiaries that are
either personally furnished by a physician or furnished by a resident
under the supervision of a physician, our definition of ``patient care
activities'' refers to the care and treatment of particular patients,
or to services for which a physician or other practitioner may bill.
Therefore, the terms ``direct medical and surgical services'' and
``direct patient care'' are, for all intents and purposes, synonymous
with the phrase ``patient care activities.''
Comment: We received many comments expressing strong opposition to
the clarification in the proposed rule, some of which were quite
passionate and included ominous predictions of the dire consequences of
such a policy on GME programs. Generally, commenters urged that we
rescind the provision in the proposed rule, on the grounds that there
is a very close connection between the didactic activities that
residents engage in and the delivery of patient care. They argued that
with the exception of extended periods of time spent doing ``bench
research'' which is excluded from the IME count, every activity that
the residents are engaged in is integral to patient care activities.
The commenters argued that there is no distinction between patient care
and other activities in which residents participate during their
residency training. Rather, the distinction is more appropriate when
comparing undergraduate medical training and post-graduate residency
training. The commenters noted that the emphasis in medical school is
didactic education, while the focus in residency training is patient
care delivery, with continued didactic education in the context of
furnishing patient care. The commenters argued that the didactic
activities are an important part of the ACGME's required curriculum
since it is now widely recognized that physicians should be competent
in ``medical knowledge about established and evolving biomedical,
clinical, and cognate * * * sciences and the application of this
knowledge to patient care'' (ACGME Institutional Requirements,
III(E)(1)(b)). Several other commenters pointed out that the ACGME
competencies are intended to address ``exactly what the IOM has
criticized our training professions for,'' and therefore, didactic
sessions are necessary to improve the quality of residency education.
These commenters stated that their program (family medicine) currently
evaluates their residents ``in all these competencies as a continuing
quality improvement process during patient care'' (emphasis in the
original). Commenters representing osteopathic residency programs
stated that all osteopathic training programs are required to teach
certain core competencies by 2006. Another commenter stated that, in an
effort to improve the residents' skills in delivering patient care, the
teaching physician ``looks for every opportunity, in whatever physical
setting for the `teachable moment' to review a critical point or two to
hone the learner's skills.'' Commenters also asserted that most
didactic activities are relatively short, and residents often continue
to have direct patient care responsibilities during the didactic time,
and are often paged to respond to emergencies or to tend to their
assigned patients during scheduled didactic periods. They noted
generally that current patients are often used as a springboard for
discussions at lectures, and it would be extremely difficult to track
when the ``patient care'' ends and the didactic time begins. In
addition, residents are required to attend simulation programs, which
prepare them for ``real-time'' patient care experiences using advanced
technologies. A commenter urged CMS to promote and encourage investment
in such technologies and activities that are intended to improve the
quality of patient care, rather than ``create reimbursement
disincentives for institutions that may be struggling to

[[Page 48085]]

afford it.'' Many commenters indicated that if CMS finalized this rule,
teaching faculty ``will be caught up in the productivity race with no
time for'' valuable discussions with their residents, at a time when
family physicians need to be ``exceptionally well trained'' in order to
meet the needs of underserved, vulnerable patient population who need
chronic disease management. The commenters warned that CMS's proposal
``lowers the standards of care for Medicare patients'' and is
``dangerous for our current and our future patients.'' One commenter
asked that we reconsider rule changes that will ``rob Peter to pay
Paul,'' while another commenter urged that we ``please [do] not allow
anything to occur that might reduce the attractiveness'' of medical
school graduates pursuing primary care specialties. One commenter added
that with the recent loss of funding for primary care education in
Title VII of the Public Health Act, this ruling could ``literally spell
the end of primary care practice in the United States.'' Another
commenter asked if ``perhaps [CMS] could refocus [its] efforts toward
educating doctors instead of spending so much of [its] time identifying
new ways of withholding funding.'' We also received a comment that
stated that reimbursement for direct GME and IME is ``sufficiently
restricted'' by limits on increases to per resident amounts (PRAs) and
FTE resident caps, and there is no need to impose additional
``burdensome recordkeeping requirements with the sole apparent intent
of further reducing such payments.''
Response: We are sympathetic to the commenters' arguments that the
didactic activities in which the residents are required to participate
contribute to the development of more highly skilled, proficient, well-
rounded clinicians, and we are not in any way minimizing the importance
of such activities, nor are we advocating a position that would deny
all GME payments for these activities. However, we note that Medicare
GME payments were never intended to cover the total costs of medical
education, as is evidenced most obviously by the fact that direct GME
payments are based on Medicare's share of the costs of training an FTE
resident. Rather, we are merely distinguishing between activities that
concern the treatment and diagnosis of particular patients (that is,
patient care), and activities that are didactic in nature (that is, not
patient care), as this distinction is necessary to ensure that Medicare
funds for medical education are paid appropriately. Direct GME has
historically been considered to be the payment for the direct costs of
education. Accordingly, the direct educational costs incurred by a
hospital in providing didactic activities are more appropriately paid
for via the direct GME payment. We note that the methodology used to
determine hospitals' base year direct GME PRAs included the allowable
costs and FTE time of didactic activities occurring within the hospital
complex. The IME adjustment serves an entirely different purpose.
Specifically, the IME adjustment is a payment under the IPPS to
recognize the higher operating costs that teaching hospitals incur in
furnishing patient care; it is intended to pay a teaching hospital for
those additional indirect patient care costs, not the direct costs
associated with didactic learning.
Furthermore, while we do not dispute that didactic activities are
essential to and integrated with the residents' patient care
experience, this does not mean that the didactic activities are patient
care activities. In addition, the didactic activities are not an
insignificant portion of a resident's training. These activities are
required by the accrediting organizations, and are necessary for board
certification, and therefore, even though it may not be an unusual
occurrence for a resident to be called out of a conference to tend to a
patient care emergency, the resident surely must satisfy his/her
minimum requirements of didactic training over the course of the entire
academic year. A random search on the internet of individual hospitals'
program requirements revealed that many programs schedule didactic
activities for their residents of an hour or more in length every
single day. In fact, many comments we received were from commenters who
included detailed descriptions of the nonpatient care activities in
which their residents are required to participate. We are also aware of
rotations that are administrative or didactic in nature that are more
lengthy (for example, 2 weeks or 6 weeks), but are scheduled less
frequently. Such rotations are surely not patient care. Therefore, we
are not convinced by the commenters' arguments that since didactic time
is frequently integrated with patient care activities, it is patient
care and, therefore, the time should be allowed for IME purposes in the
hospital, and for direct GME and IME purposes in the nonhospital site.
Comment: One commenter noted that direct GME and IME payments are
based on allowable ``full-time equivalent'' (FTE) counts, and that the
regulations do not specify the number of hours that comprise one FTE.
Rather, the regulations for IME state that ``full-time equivalent
status is based on the total time necessary to fill a residency slot''
(Sec. 412.105(f)(1)(iii)(A)), and the direct GME regulations have a
similar requirement (42 CFR Sec. 413.78(a)).
Response: The commenter is correct that a hospital's allowable FTE
count is ``based on the total time necessary to fill a residency slot''
(Sec. 412.105(f)(1)(iii)(A). As the regulations state, the concept of
the total time necessary to fill a residency slot is used to determine
the part-time or full-time status of the resident. If it is determined
that the resident is not working the number of hours necessary to fill
a residency slot (between all the resident's hospital and nonhospital
training sites), the resident would be considered part-time, and the
proportion of total time the resident is working in all training sites
would be adjusted accordingly. For purposes of determining a hospital's
count of FTE residents, the important word in the regulatory phrase is
``based.'' That is, the starting point (denominator) for determining
the allowable FTE count is the total time necessary to fill a residency
slot. However, the hospital must then subtract (from the numerator) all
nonallowable training time, such as time spent at other providers, time
spent in IPPS-excluded distinct part units (for IME), didactic
activities (for IME), and so on. Thus, while a hospital's allowable FTE
count is certainly ``based'' on the total time necessary to fill a
resident slot, the total time is often greater than the FTE time a
particular hospital is permitted to count for IME and direct GME
payment purposes.
Comment: One commenter noted that the average resident's workweek
is 80 hours, and if CMS were to count an FTE resident for GME purposes
based on a 40 hour workweek as is done for the Medicare IPPS wage
index, the exclusion of didactic activities would not affect the
overall FTE count.
Response: The total number of hours recorded as worked by residents
for the purpose of the wage index adjustment to the IPPS represents a
compromise, and is irrelevant in the context of determining the FTE
resident count for GME payment. Historically, the actual number of
hours worked by residents (often more than 80 hours per week) was
included in the average hourly wages of hospitals used to compute the
wage index. However, teaching hospitals argued that the excessive
number of resident hours relative to the hours worked by other
employees skewed their average hourly wage

[[Page 48086]]

downward, and placed them at a disadvantage relative to non-teaching
hospitals. Therefore, CMS (then HCFA) determined that it would be
appropriate to count interns and residents for wage index purposes
based on a 40-hour workweek. Thus, the 40-hour workweek actually
benefited teaching hospitals for wage index purposes. In any case,
beginning with the FY 2000 wage index (which was based on cost
reporting periods starting on or after October 1, 1995 and ending on or
before September 30, 1996), the wages and hours of interns and
residents were phased out of the wage index, since Medicare payments
for the salaries and fringe benefits of interns and residents are made
by Medicare through the direct GME payment (based on the PRA), and not
the IPPS. (Beginning with the FY 2003 wage index (cost reporting
periods beginning on or after October 1, 1999), we removed 100 percent
of the interns' and residents' wage data from the wage index). For
purposes of determining what portion of an FTE resident a hospital may
count for a resident that is training at the hospital (after first
determining whether the resident is a part-time or full-time resident
based on the total necessary to fill the residency slot), it is
important and necessary to first determine the actual total time worked
by the resident. Accordingly, if 80 hours per week is established as
the total time necessary to fill the residency slot, and if a resident
works an 80-hour week and works 40 hours per week at each of two
hospitals, each hospital would count no more than one half of an FTE
for the resident. The FTE determination for that resident cannot be
based on 40 hours, since that would result in both hospitals counting
the same resident as a full FTE. Thus, in calculating the FTE count, it
would be inappropriate to compare the time spent in patient care
activities to a 40 hour week and not to the total time worked by the
resident.
Comment: Some commenters asserted that just as the direct GME
statute for residency training in the hospital does not include a
reference to patient care, and therefore, all training in the hospital
is countable for direct GME, the IME statute for hospital training also
does not refer to patient care, and therefore, all the training in the
hospital should be counted for IME too. One commenter asserted that the
proposed rule is ``ultra vires'' and is therefore, ``unconstitutional''
because the IME statute for training in the hospital does not exclude
time spent in nonpatient care activities, and that the IME adjustment
is only the ``best proxy'' for teaching hospitals' increased training
costs--it was not intended to measure the ``actual costs'' of training
residents. The commenter argued that the Congress did not ``intend that
CMS parse apart or exclude certain time'' from the FTE count, and doing
so is beyond the scope of the agency's authority. Another comment
stated that ``we are unaware of any Medicare directive that
distinguishes patient care activity in a hospital and nonhospital
site.'' One commenter stated that he is ``not aware that the fiscal
intermediaries made disallowances for educational activities when
calculating hospitals' PRAs in the 1984 base year.'' The commenter also
refers to the 1990 Q&As issued by CMS (then HCFA) to the CMS Regional
Offices and the fiscal intermediaries for use in computing the base
year PRAs, and argues that ``CMS makes numerous references to
educational activities as allowable costs and does not once specify
that these costs and the associated resident time were to be carved out
if the activity took place in the nonhospital setting.'' The commenter
quoted part of a response (to one of the 1990 Q&As) which stated, ``If
the hospital, rather than the related school, directly incurs the costs
associated with these educational activities, they should be recognized
as allowable graduate medical education costs and included in the per
resident amount.''
Another commenter noted that the provisions at section 2120 of the
Provider Reimbursement Manual, Part I, titled Reimbursement for Costs
of Interns and Residents, which described the cost method of
reimbursement for GME programs, do not distinguish between training
types or training location, and therefore, Medicare allowed costs of
residents when they trained in didactic activities in nonhospital
locations.
Commenters also argued that CMS's ``overly rigid'' interpretation
of ``patient care activities'' ignores CMS's longstanding definition of
``costs related to patient care,'' which is the basis for much of CMS's
analysis, because educational activities like conferences and seminars
for hospital employees have always been allowable costs under Medicare,
and therefore, should be allowed for purposes of the IME as well. [see
PRM-I, chapter 21, sections 2108.1, 2128, 2136.1, 2138.1, 2138.2,
2144.4, and 2144.6]. Another commenter contended that to exclude
didactic time from the IME calculation would be inconsistent with
Congress's purpose in instituting the IME adjustment. Congress's reason
for enacting this provision was to address factors that contribute to
the higher costs incurred by teaching hospitals, such as more acutely
ill patients, more specialized treatments, and the additional costs
associated with training residents such as the ordering of additional
tests and extra staffing demands. The commenter argued that during the
time the residents are involved in didactic activities, ``these costs
are in no way reduced,'' since the ``patients remain just as ill as
they were before, the hospital continues with its resident-related
inefficiencies, the hospital continues to provide specialized services,
and the services are just as intense. Thus, all of the costs that the
IME adjustment is intended to compensate continue unabated no matter
what the resident is doing.''
Other commenters quoted the Committee report language accompanying
the PPS legislation, which stated that purpose of the IME adjustment
was to address ``serious doubts about the ability of the DRG case
classification system to account fully for factors such as severity of
illness of patients requiring the specialized services and treatment
programs provided by teaching institutions and the additional costs
associated with the teaching of residents * * * the adjustment for
indirect medical education costs is only a proxy to account for a
number of factors which may legitimately increase costs in teaching
hospitals (emphasis added, U.S. House of Representatives, 1983).''
In light of this Committee report language, the commenter believed
that the language in the proposed rule defining the ``plain meaning''
of patient care as related to the care and treatment of a specific
patient or to services for which physicians can bill is ``patently
incorrect.''
Response: After reading the numerous comments challenging CMS'
position that only the time spent by residents in patient care
activities in the hospital may be counted for IME purposes, it has
become apparent to us that there actually has been a good deal of
confusion in the teaching hospital community regarding our longstanding
policy with respect to IME and patient care activities. Nevertheless,
we do believe that the commenters are misconstruing and confusing CMS'
position on, and the purpose for, the direct GME payments and IME
payments, respectively. By including a provision in the April 25, 2006
proposed rule clarifying our position on the time residents spend in
nonpatient care activities, we were (and still are) distinguishing
between activities that concern the treatment and diagnosis of

[[Page 48087]]

particular patients (that is, patient care), and activities that are
didactic in nature (that is not patient care), as this distinction is
necessary to ensure that Medicare funds for medical education are paid
appropriately. As stated in response to a previous comment,
historically, direct GME has been considered to be a payment for the
direct costs of education. The conference report accompanying the
original Medicare legislation (Pub. L. 89-97) stated:
``Many hospitals engage in substantial educational activities,
including the training of medical students, internship and residency
programs, the training of nurses, and the training of various
paramedical personnel. Educational activities enhance the quality of
care in an institution and it is intended, until the community
undertakes to bear such education costs in some other way, that a part
of the net cost of such activities (including stipends of trainees as
well as compensation of teachers and other costs) should be considered
as an element in the cost of patient care, to be borne to an
appropriate extent by the hospital insurance program'' (S. Rep. No.
404, 89th Cong., 1st Sess. 36 (1965); H.R. No. 213, 89th Cong., 1st
Sess. 32 (1965)).
Accordingly, educational activities of hospital employees,
particularly those in ``formally organized or planned programs of
study'' as they were described in the original regulations first
published on November 22, 1966 (31 FR 14814, and 20 CFR 405.421) (later
redesignated as 42 CFR 405.421 on September 30, 1977 and as 42 CFR
413.85 on September 30, 1986)), were recognized as Medicare-allowable
costs and implicitly included in the definition of ``costs related to
patient care'' at 42 CFR 413.9. These specific payments for medical
education activities were the basis for what later evolved into the
direct GME payments, as established by Section 9202 of the Consolidated
Omnibus Budget Reconciliation Act of 1985 (Pub. L. 99-272). That is,
direct GME (and also, payments for approved nursing and allied health
education programs under 42 CFR 413.85) is a payment for education
because it explicitly pays hospitals for the direct costs of these
formally organized programs, such as the stipends of trainees and
teachers. Additionally, as early as 1971, Chapter 4 of the Provider
Reimbursement Manual, Part I, stated that ``any costs of usual patient
care'' are excluded from the definition of approved educational
activities (Section 404.2 of the PRM-I). Clearly, the early medical
education payments, in which current direct GME payments are rooted,
were not intended to be a payment for caring for patients, but rather
were (and are still today) payments to hospitals for education costs.
Medicare made then, and still makes, payments for usual patient care as
part of the hospital's operating costs and as direct payment to
hospital-based physicians under Medicare Part B. Therefore, to the
extent that residents engage in nonpatient care didactic activities as
part of their approved programs, the costs of those didactic activities
are allowed and paid by Medicare through the direct GME payment, based
on the PRA. The commenter is indeed correct that the costs of didactic
activities were included as allowable costs by the fiscal
intermediaries when determining the base year PRAs. However, the
commenter should not conclude that didactic activities that occurred
outside of the hospital were included in the determination of the PRAs.
Under Medicare's previous reasonable cost method of payment for
approved medical education activities, any costs incurred by a hospital
for resident training that took place outside of the hospital setting
were not allowable costs to that hospital (66 FR 3371). In establishing
PRAs, fiscal intermediaries used a count of FTE residents for the 1984
base period that reflected ``the average number of FTE residents
working in the health care complex during the GME base period'' (54 FR
40299). Section 9314 of Pub. L. 99-509 changed the law to allow
resident time spent training in nonhospital settings to be counted for
the first time for purposes of direct GME payments on and after July 1,
1987. Furthermore, regarding the specific language from the 1990 Q&As
quoted by the commenter, neither that question, nor the answer provided
by CMS (then HCFA) gives any indication of where the educational
activities took place. Therefore, the fact that CMS stated that the
costs of educational activities incurred directly by a hospital are
included in the PRA does not mean that the costs incurred by a hospital
for all educational activities are allowable, regardless of the
location in which they occurred. Similarly, just because the FTE time
associated with certain costs is allowable (according to the statute)
does not mean that the costs of a particular activity are necessarily
allowable. Certainly, if the Congress had not changed the law in 1987
to allow residents training in nonhospital settings to be counted (for
direct GME purposes), then even the time spent in direct patient care
activities in nonhospital sites would not be allowed to be counted by a
hospital. The relevant point, however, is that educational costs
incurred by a hospital in providing didactic activities to residents in
approved programs are paid by Medicare via the direct GME payment,
which is a payment for costs of education.
The purpose of the IME adjustment is different from that of direct
GME in that it is designed to adjust the IPPS payment to teaching
hospitals for the higher operating costs they incur in furnishing
patient care. It is intended to pay a teaching hospital for those
additional patient care costs that are an indirect result of the
presence of the teaching program at the hospital, and not the direct
costs associated with didactic learning. Although the commenters argue
that didactic activities have long been recognized by CMS as ``related
to patient care,'' despite the fact that none of these activities
involves the ``care and treatment of individual patients'' or
``services for which a physician or other practitioner may bill,'' we
believe that because IME is a payment specifically for patient care
costs, the regulations and subregulatory guidance concerning ``costs
related to patient care'' are not sufficient for determining what
actually constitutes patient care and is therefore, an activity for
which FTE resident time in the hospital may be counted for IME. As
stated in response to a previous comment, with respect to residency
training in the hospital, our policy limiting the IME count to only
time spent in patient care activities is rooted in the creation and the
purpose of the IME adjustment. Before Congress passed the 1983 law that
included the IPPS and an IME adjustment, the Secretary submitted a
report to Congress in 1982 that (in part) explained that, ``the
indirect costs of graduate medical education are higher patient care
costs incurred by hospitals with medical education programs'' (Report
to Congress required by the Tax Equity and Fiscal Responsibility Act of
1982, December 1982, pp. 48-49, italics emphasis added). Similarly, in
passing the IPPS legislation in 1983, the House Committee on Ways and
Means acknowledged the link between higher patient care costs of
teaching hospitals, and noted that the IME adjustment was important due
to--
``* * * serious doubts about the ability of the DRG case
classification system to account fully for factors such as severity of
illness of patients requiring the specialized services and treatment
programs provided by teaching institutions and the additional costs
associated with the teaching of

[[Page 48088]]

residents * * * the adjustment for indirect medical education costs is
only a proxy to account for a number of factors which may legitimately
increase costs in teaching hospitals (U.S. House of Representatives,
1983).''
Essentially, Congress listed two reasons for the IME adjustment,
similar to those stated in the Secretary's 1982 report: (1) Teaching
hospitals typically offer more technologically advanced treatments to
their patients, and therefore, patients who are sicker and need more
sophisticated treatment are more likely to go to teaching hospitals,
and (2) the presence of inefficiencies associated with teaching
residents resulting from the additional tests or procedures ordered by
residents and the demands put on physicians who supervise, and staff
that support, the residents. That is, because teaching hospitals
attract sicker patients, they incur higher costs in caring for those
sicker patients--whether due to additional tests ordered by residents
or more intensive treatments provided in an educational setting. The
Secretary and Congress recognized that the learning process in which
the residents are engaged results in more intensive, and therefore more
costly, treatment. Thus, the purpose of the IME adjustment is clearly
limited to the unique characteristics and conditions of teaching
hospitals that directly relate to the delivery of patient care.\30\
Since the purpose of the IME adjustment is rooted in patient care,
there is a clear and compelling reason to limit the FTE resident time
that can be counted for IME to time spent by residents in patient care;
that is, in the care and the treatment of particular patients, or in
furnishing services for which a physician or practitioner may bill.
---------------------------------------------------------------------------

\30\ Similarly, to the extent that the higher costs are caused
by other factors such as a greater relative share of medically
complex or indigent patients, the IPPS includes payments in the form
of the outlier and disproportionate share hospital (DSH) adjustments
to specifically compensate for those costs. (Health Care Financing
Review, Winter 1992, Vol. 14, No. 2, p. 69, and Health Care
Financing Review, Spring 1990, Vol. 11, No. 3, pp. 31-41).Therefore,
the additional indirect medical education costs that remain after
controlling for outlier and DSH payments are the essentially the
higher patient care costs resulting from the presence and
involvement of residents in patient care.
---------------------------------------------------------------------------

Commenters argued that during the time the residents are involved
in didactic activities, higher costs incurred by teaching hospitals
``are in no way reduced,'' and emphasized the language in the Committee
report describing the purpose of the IME adjustment as addressing (in
part), ``* * * the additional costs associated with the teaching of
residents.'' To address these comments, we refer to the August 1, 2001
final rule (66 FR 39898), in which we reiterated our policy that IME is
a payment for patient care, and we also included an example from that
rule to illustrate how the FTE resident count for IME should be
determined in a manner that would properly reimburse a hospital with
residents that are engaged in non-patient care research activities.
Although the discussion in the August 1, 2001 Federal Register focused
on research, this example is useful for this discussion on nonpatient
care didactic activities. In the example (66 FR 39898), a hospital has
20 FTE residents who were furnishing patient care in the areas of the
hospital subject to the PPS, and 4 FTE residents engaged exclusively in
research. We stated that the IME payment to the hospital should reflect
the additional operating costs resulting from those 20 FTE residents
delivering patient care, and would not include the 4 FTEs engaged
exclusively in research, as those 4 FTE residents did not contribute to
the hospital's higher operating costs. While it may be that the
existence of the research activities did contribute in some marginal
way to the higher operating costs of the hospital, for instance, by
attracting more severely ill or uninsured patients to the hospital for
non-research treatment, those residents engaged exclusively in research
are not involved in and do not contribute to more intensive or
inefficient patient care, and therefore, their presence does not result
in higher allowable operating costs. We believe the same holds true for
the time residents spend in didactic activities--during this time, the
residents are not participating in or contributing to more intensive or
inefficient patient care. Moreover, we believe that it is the
combination of the factors enumerated by the Secretary and Congress as
the reasons for the IME adjustment that contribute to the higher
operating costs of teaching hospitals. We believe the Congress'
reference to ``additional costs associated with the teaching of
residents'' refers to the presence of inefficiencies associated with
teaching residents resulting from the additional tests or procedures
ordered by residents and the demands put on physicians who supervise,
and staff that support, the residents; and not to costs associated with
research or didactic activities. Since direct GME payments are made to
teaching hospitals to cover the explicit educational costs of training
residents, we do not believe Congress intended for the IME adjustment
to duplicate those educational payments. In fact, it first became
evident that an adjustment to payments for teaching hospitals was
necessary, in addition to the cost-based GME payments, after 1972 when
Congress instituted what became known as the ``section 223'' limits to
hospitals' routine operating costs. Since the agency's analyses showed
that the section 223 cost limits adversely impacted teaching hospitals,
a calculation based on a regression formula was computed to adjust the
routine operating cost limits of teaching hospitals. Consequently, the
IME adjustment was instituted to address the higher patient care costs
not sufficiently compensated under the cost limits, and later the DRG
system. In the example above, the inclusion of the four FTE residents
engaged in nonpatient care research in the resident count for IME would
vastly overcompensate the hospital for any marginal contribution to
operating costs resulting from the presence of those FTE residents.
Similarly, a resident that is participating in a seminar or a
conference is not contributing to the higher patient care costs of the
hospital. Thus, although it would be appropriate to count such
nonpatient care time in calculating direct GME payments, it would not
be appropriate to count that time for purposes of the IME adjustment.
Accordingly, we believe it is appropriate and fully consistent with
Congressional intent to apply the plain meaning of the term ``patient
care activities'' and to limit the FTE resident count to time spent in
patient care activities for IME for training in the hospital, and for
both IME and direct GME for training in nonhospital sites. That is,
only time spent in the care and treatment of particular patients, or in
providing services for which a physician or other practitioner may
bill, may be counted.
Comment: One commenter said that independent research activity
rotations were included in the allowable FTE count used to determine
hospitals' direct GME base year PRAs. The commenter said that these
research electives, which are part of the ACGME approved program, ``may
happen at the hospital's medical library'' or ``may happen at home at
the resident's study desk,'' but ``all of it has been included in the
FTEs used to calculate the PRA amount.'' The commenter suggested that,
by the clarification in the April 25, 2006 proposed rule, CMS is
adopting a ``change in accounting method,'' and that, therefore, CMS
should consider adopting a change in the PRAs for hospitals that
``exclude these newly excluded'' FTEs.
Response: We believe the commenter is confusing our policy of
including the

[[Page 48089]]

FTE time spent in research activities in the denominator of the PRA
calculation, and, in the FTE count in years subsequent to the PRA base
year, our policy of excluding the costs of research activities from the
numerator of the PRA. As we explained in the September 29, 1989 Federal
Register and again in the August 1, 2001 Federal Register (66 FR 39898
through 39899), each hospital's PRA is determined by taking the
hospital's total allowable graduate medical education costs (which do
not include costs allocated to the nursery cost center, research, and
other nonreimbursable cost centers) in a base year and dividing the
costs by the number of FTE residents working in all areas of the
hospital complex in the base year (Sec. 413.77(a)(1)(i)). In the case
of research and other nonreimbursable cost centers, costs were excluded
from the PRA calculation because they were nonreimbursable in the base
year, consistent with longstanding Medicare policy on Medicare cost
reimbursement to teaching hospitals. Ideally, residents participating
in research electives would also have been excluded from the base year
FTE count used in the PRA calculation. However, for a number of
hospitals, the FTE count for the base year did include residents
engaged in such research because the 1984 base year information
available from hospitals when the PRAs were determined in 1990 did not
consistently distinguish between residents involved in furnishing
patient care services and residents engaged in nonpatient care
research. The inclusion of such additional FTEs in the denominator of
the PRA calculation lowered the PRAs for these hospitals.
In order to avoid disadvantaging these hospitals, in making direct
GME payments for a given year, we included and continue to include
residents engaged in nonpatient care research in the direct GME FTE
count both in the base year PRA calculation and in the FTE count in
subsequent payment year calculations. This policy was adopted to
``offset'' the effects of the inclusion of such FTE residents in the
denominator of the direct GME PRA calculation (no such ``offset'' is
warranted in the context of IME). Thus, there has been no ``change in
accounting method,'' and it is not necessary to consider changing the
PRAs of hospitals that exclude independent research rotations, as the
commenter suggests. Furthermore, because the nonreimburseable costs
were excluded in calculating the PRA, the end result is that the direct
GME payment does not encompass the costs of residents engaged
exclusively in research. Therefore, as with the IME payment, Medicare
is not and has not been reimbursing teaching hospitals under direct GME
for costs the hospital incurs associated with resident time spent in
nonpatient care research.
Comment: One commenter disputed CMS' policy to exclude nonpatient
care time from the IME count on the grounds that the IME statute states
that ``the Secretary shall provide for an additional payment amount for
subsection (d) hospitals with indirect costs of medical education, in
an amount computed in the same manner as the adjustment for such costs
under regulations (in effect as of January 1, 1983) * * *'' (section
1886(d)(5)(B) of the Act). The commenter maintained that because the
regulations in effect as of January 1, 1983, did not exclude nonpatient
care activities from the IME count, the plain meaning of the statute
requires that this time continue to be included in the IME resident
count.
Response: The exclusion of time spent in nonpatient care activities
from the IME count is longstanding CMS policy, and consistent with the
rules in effect as of January 1, 1983. The statute implementing the IME
adjustment at section 1886(d)(5)(B) of the Act requires that, ``[t]he
Secretary shall provide for an additional payment amount for subsection
(d) hospitals with indirect costs of medical education in an amount
computed in the same manner as the adjustment for such costs under
regulations (in effect as of January 1, 1983) * * *'').
For the initial analysis of the operating costs of teaching
hospitals versus non-teaching hospitals that was used to develop the
IME adjustment, while analysts could distinguish between allowable and
non-allowable costs, they did not have a method to consistently and
accurately isolate all the time spent by residents in nonpatient care
activities. Therefore, no consideration was given to where the
residents were training in the hospital or what the residents were
doing (that is, patient care or other activities). Prior to the
implementation of the IPPS, under the reasonable cost system of
reimbursement, the concept of an ``FTE resident'' had little, if any,
relevance. Thus, for this analysis, an ``FTE'' simply distinguished
between a resident that was employed at the hospital on a full-time
basis and a resident that was employed at the hospital only part-time.
Accordingly, while only allowable costs were considered in the
analysis, the time spent by residents in non-reimbursable activities or
areas of the hospital was not excluded from the analysis.
The April 1, 1980 Federal Register implementing the initial IME
adjustment specified simplistic requirements for hospitals to report
FTE residents to the fiscal intermediaries for purposes of receiving
the IME adjustment to their cost limits, consistent with the relatively
crude resident counts CMS used in computing the IME adjustment (45 FR
21484). The rules in effect as of January 1, 1983 concerning
determining the resident count for IME required, in part, that only
residents in approved programs could be counted (47 FR 43310 (September
30, 1982)). Once the IPPS was effective, CMS took certain steps to
modify the rules concerning FTE resident counts for the resident-to-bed
ratio to more appropriately adapt the IME adjustment to the new
prospective payment methodology under which only inpatient operating
costs were reimbursed. (Other types of costs, such as direct GME and
outpatient hospital costs were specifically excluded from payment under
the IPPS, and continued to be paid under existing mechanisms.) A
distinction was drawn, for payment purposes, between the acute
inpatient hospital (subject to the IPPS), and distinct part units and
hospitals not paid under the IPPS. Since reasonable cost payments to
these ``IPPS excluded'' providers and units already included the
indirect costs of medical education, in order to avoid a ``double''
payment that would result from counting residents in those IPPS-
excluded settings, CMS clarified in regulations that the IPPS IME
adjustment does not apply to any hospitals or distinct part units not
paid under the PPS, and consequently, both the number of beds and the
time spent by residents in those areas could not be included in the
resident-to-bed ratio (48 FR 39844). The agency modified the rules for
counting FTE residents and hospital beds for purposes of the IME
adjustment so that the adjustment would be more closely tailored to
reflect the higher allowable patient care costs of teaching hospitals
under the prospective payment system for inpatient acute care
hospitals.
In the September 3, 1985 final rule, CMS responded to comments
regarding its proposal to exclude FTE resident time spent in outpatient
departments from the numerator of the resident-to-bed ratio. CMS had
proposed this exclusion ``because outpatient departments also are not
subject to the prospective payment system and because the additional
operating costs of outpatient departments associated with interns and
residents are already recognized through reasonable cost

[[Page 48090]]

reimbursement for hospital services furnished to outpatients'' (50 FR
35681 through 35682). The commenters stated that CMS was required to
count residents training in outpatient departments since section
1886(d)(5)(B) of the Act requires that the IME adjustment be ``computed
in the same manner'' as set forth in the regulations on January 1,
1983. The commenters further argued that in the September 1, 1983
interim final rule, CMS said that residents in outpatient departments
would be counted so as to avoid ``altering only one element of the
variable and failing to maintain comparability between the methodology
used for developing the adjustment factors and subsequently
standardizing hospital costs based on that factor'' (48 FR 39778).
In response to those comments, CMS stated that the agency believed
that in excluding residents training in the outpatient departments from
the FTE count, it was computing the adjustment ``in the same manner''
as previously, since the adjustment continued to be based on a
resident-to-bed ratio. CMS noted that, although the statute purports to
refer to regulations in effect on January 1, 1983, there were no
specific regulations in effect on that date, and, although the
September 30, 1982 Federal Register (47 FR 43310) contained a
description of the method to be used, the agency believed that
``Congress, in enacting the prospective payment system, intended that
the methodology in effect be adopted rather than the entire description
published in that notice'' (emphasis added). CMS further noted that the
agency had already made changes to the methodology for counting interns
and residents in the January 3, 1984 and August 31, 1984 final rules
(the latter in response to a provision in Pub. L. 98-369) to ``adapt
the previous system to the prospective payment system more
effectively.'' (In fact, the Agency had also made changes in the
September 1, 1983 Federal Register (48 FR 39844) to exclude FTE
training time in distinct part units that are excluded from the PPS).
We noted that, in response to the refinements the agency made in 1983
and 1984 to the rules for counting residents for purposes of the IME
adjustment, Congress could have made adjustments to the IME multiplier,
but chose not to do so even though it passed legislation (Pub. L. 98-
369) dealing specifically with indirect medical education payments. In
response to comments, the agency observed that ``the current [IME]
adjustment itself is no longer entirely consistent with the original
factor'' (50 FR 35682). We concluded that, ``if the deletion of time
furnishing services to outpatients, which decreases the count of
interns and residents, invalidates the indirect medical education
adjustment, it should follow that the expansion of programs that took
place since the current factor was developed also should have
invalidated the adjustment. However, especially since Congress did not
mandate that the factor be recalculated, we believe that if there are,
as here, overriding concerns, the revision to the method of counting
interns and residents is justified'' (50 FR 35682).
We acknowledge that soon after publication of this rule, Congress
passed the Consolidated Omnibus Budget Reconciliation Act (COBRA) (Pub.
L. 99-272) on April 7, 1986, which included a provision (section
9104(a)) that addressed the agency's regulation, and required that time
spent by residents training in outpatient departments ``will continue
to be counted for purposes of determining the indirect teaching
adjustment'' (See 51 FR 16773, May 6, 1986). We note further, however,
that although Congress addressed CMS's rule on excluding time spent in
outpatient departments, Congress could have, but did not, also address
the agency's regulations concerning the exclusion of training time in
distinct part psychiatric and rehabilitation units. Congress has
considered and taken legislative action with respect to the IME
adjustment many times since 1986, but has not found it necessary to
modify the agency's policies with respect to the counting of FTE
residents for IME purposes. We do not believe that we are obligated to
adhere rigidly to the rudimentary methodology of counting FTE residents
for IME purposes that was in effect prior to and in the early days of
the IPPS. Rather, since the IME adjustment is a payment for additional
patient care costs, we believe there is a clear and compelling reason
to limit the FTE resident time counted for IME purposes to the time
spent by residents in the care and the treatment of particular
patients, or to services for which a physician or other practitioner
may bill.
Comment: One commenter argued that CMS' position in the April 25,
2006 proposed rule that nonpatient care activities must be excluded
from the IME FTE count ``flies in the face of'' the United States
District Court's decision in Riverside Methodist Hospital v. Thompson,
Case No. C2-02-94 (S.D. Ohio 2003). In Riverside, the hospital appealed
the fiscal intermediary's disallowance of time spent in the hospital in
journal clubs and seminars from the IME FTE count. In that decision,
the Court ruled ``1) that the 2001 rule excluding nonpatient care time
from the FTE count must not apply retroactively and 2) that resident
time spent on nonpatient care activities should be included in the IME
FTE count.'' The commenter contended that CMS' position in the proposed
rule is ``an unconstitutional attempt to use the regulatory process to
overturn the decision of an Article III court.'' Another commenter
claimed that the Court in Riverside affirmed Congress' intent that the
IME adjustment should compensate teaching hospitals for more than just
the direct costs of residents' involvement in patient care because
those higher operating costs are difficult to separately identify and
measure precisely. The commenter quoted part of the ruling in the
Riverside case: ``It is precisely because the indirect costs cannot be
adequately itemized and quantified that Congress devised a formula
based on the degree of teaching intensity in a particular hospital, as
a substitution for any other method of reimbursing such costs. If
Congress had believed that the indirect medical education costs of a
teaching hospital could be separately identified and quantified, and
that higher direct patient care costs could be so determined from the
hospital's records, then Congress could easily have qualified its
formula for reimbursement to restrict the number of FTE residents to a
number based only on hours that residents spent providing `patient
care.' It obviously did not do so''.
Response: The first commenter is correct that the Court in the
Riverside case ruled to reverse the fiscal intermediary's disallowance
of time spent by the hospital's residents in nonpatient care activities
from the IME FTE count. We respect and will give full effect to that
Court's decision. However, we do not read that decision to restrict the
Secretary's discretion to promulgate regulations on the issues
litigated in that case. Although we acknowledge the Court's recognition
that the statute did not specify that the IME formula be based only on
hours spent in providing patient care, we believe, as explained above,
that such a limitation is appropriate and in accordance with the
purpose of the IME payment, as well as Congressional intent, under the
IPPS. It is also noteworthy that Congress has not acted to modify the
agency's policies with respect to counting FTE residents even though
Congress has recently enacted several provisions relating to IME and
direct GME in the MMA. We

[[Page 48091]]

would also note that the cost report at issue in the Riverside case was
from Fiscal Year 1996, which is clear evidence that the agency's policy
to disallow the time spent in nonpatient care activities from the IME
FTE count in the hospital is, indeed, longstanding.
Comment: Many commenters voiced their concern that if CMS were to
``inappropriately'' require that all didactic activities must be
excluded for IME purposes in the hospital, and for direct GME and IME
purposes in the nonhospital sites, it would result in a ``quagmire of
administrative difficulties,'' and enormously increase teaching
hospitals' documentation burdens. It would mean a ``sea change'' for
many hospitals, as rotation schedules are often weekly or monthly, and
vary widely not only from hospital to hospital, but also from program
to program. Especially for very large teaching hospitals, reporting
residents' activities in hour-long increments is ``literally not
achievable.'' One commenter alleged that CMS's ``nefarious'' separation
of patient care time from didactic activities which ``devolve[s] to
discussions of particular patients seems a capricious exercise in
futility.'' With respect to training in nonhospital settings, one
commenter warned that CMS' proposal would have a ``chilling effect'' on
training outside the hospital. The commenter believed that hospitals
will be ``forced to demand'' that nonhospital sites closely monitor the
portion of time that is spent in nonpatient care activities, which may
be difficult to distinguish from the patient care activities. The
commenter believed that physicians will refuse to supervise residents
in nonhospital sites if the documentation requirements become too
burdensome, which would ``frustrate'' Congress' intent in enacting the
IME nonhospital site payment provision. Another commenter expressed
concern that CMS' ``short-sighted'' approach ``penalizes'' hospital-
based residency programs that provide their residents with nonhospital
training experiences, ``exacerbating other recent CMS policy changes
that disadvantage training programs conducted outside the hospital.''
Response: We have carefully considered the comments, and we
recognize that providing hour-by-hour schedules for, in some cases,
more than 1,000 residents, could be a daunting task. We would point
out, however, that nowhere in the preamble discussion of the April 25,
2006 proposed rule did we explicitly require hourly rotation schedules.
We did say that ``it is important for hospitals to be able to document
the activities in which residents are engaged because there are certain
activities that are not allowable for direct GME or IME payment
purposes, even though those activities may be performed as part of an
approved residency program'' (71 FR 24114). Although we need to ensure
that Medicare payments are paid accurately, it is not our desire to
impose unreasonably complicated and time-consuming recordkeeping
requirements. It has always been the general practice of fiscal
intermediaries to use rotation schedules as the primary source of
documentation to determine whether residents' time is allowable for IME
and direct GME payment purposes. However, we are sympathetic to the
fact that up to this point, hospitals have been inconsistent in their
reporting of nonpatient care activities, either because of confusion
surrounding our FTE-counting policy, or because of differing approaches
to developing and maintaining rotation schedules. Therefore, we believe
it is appropriate from an administrative perspective to distinguish
between the treatment of cost reports for cost reporting periods
beginning prior to October 1, 2006, and cost reporting periods starting
on or after October 1, 2006, with respect to documentation
requirements. Prospectively, (for cost reporting periods beginning on
or after October 1, 2006), to ensure consistent reporting by hospitals
and auditing by fiscal intermediaries, we believe it is appropriate to
require all teaching hospitals to document residents' time at some
minimum level of detail. Specifically, for cost reporting periods
beginning on or after October 1, 2006, for training occurring either in
the hospital or in nonhospital settings, we are instituting a ``one
workday'' threshold for documentation purposes. That is, we are not
requiring that hospitals overhaul their current rotation schedules, nor
are we mandating that rotation schedules be in one-day increments.
Rather, if a resident's workday consists entirely of scheduled didactic
activities and no scheduled patient care activities (for example, no
care and treatment of individual patients, or no services which are
billable) then, for documentation purposes, that workday must not be
recorded as ``patient care'' (or, as occurring in a patient care unit
such as ICU or Pediatrics, etc.). Instead that workday must be
identified as nonpatient care and the time must be subtracted from the
allowable FTE count (for IME if the training occurred within the
hospital complex, and for both IME and direct GME if the training
occurred in a nonhospital site). In other words, as long as an entire
workday is not scheduled for didactic activities, then for
documentation purposes, that day may be recorded as spent in patient
care activities. For example, if a hospital maintains rotation
schedules in monthly blocks for each resident in a particular program,
and if a resident that is otherwise assigned to the Coronary Care Unit
(CCU) for the month of January was scheduled to attend an all day
conference on January 10 and not to participate in any planned patient
care activities on that day, then the hospital must note on the
rotation schedule that it submits to the fiscal intermediary that this
resident was not in ``patient care'' on January 10. The hospital would
subtract that time from the resident's allowable IME and/or direct GME
FTE count accordingly. We believe this ``one workday'' approach to
documentation of residents' time is an appropriate administrative
measure that will assist our fiscal intermediaries in enforcing the
policy concerning time spent in nonpatient care activities for cost
reporting periods starting on or after October 1, 2006, while not
overburdening hospitals with excessively detailed recordkeeping
requirements. However, our policy continues to be that only time spent
in patient care activities may be counted for IME purposes in the
hospital complex, and for direct GME and IME purposes in nonhospital
sites. Accordingly, we are amending Sec. 413.75(b) to add a definition
of the term ``patient care activities'' which means, ``the care and
treatment of particular patients, including services for which a
physician or other practitioner may bill.'' (We note that in the
proposed rule, we defined patient care activities as ``the care and
treatment of particular patients or services for which a physician or
other practitioner may bill'' (emphasis added). In this final rule, we
are changing the word ``or'' to ``including,'' because we did not mean
to imply that the phrase ``the care and treatment of particular
patients'' and ``services for which a physician or other practitioner
may bill'' are mutually exclusive. Rather, services that are billable
are a subset of the more general category of activities involving the
``care and treatment of particular patients,'' and are indicative of
patient care delivery). In addition, we are amending the IME
regulations at Sec. 412.105(f)(1)(iii) to add a paragraph (C) to state
that ``In order to be counted, a resident must be spending time in
patient care activities, as defined in Sec. 413.75(b).''

[[Page 48092]]

Comment: One commenter requested that if CMS decides to implement
the policy expressed in the proposed rule, CMS should clarify that
``only planned activities expressly undertaken to meet programmatic
requirements should be included as part of the approved residency
program.'' The commenter was concerned that without such a
clarification, CMS may interpret ``spontaneous'' encounters at
nonhospital settings (such as unplanned lunch meetings with a teaching
physician and a resident where they ``happen'' to discuss a medical
topic) as nonpatient care time. Another commenter listed several
residency training scenarios that he believed would need further
clarification with respect to whether the time could be counted for IME
and/or direct GME purposes, if CMS's policy is finalized. The scenarios
included the time that a resident is called out of a conference to care
for a patient, lunch time lectures, and requires courses of study or
activities that the resident may complete at home or at a faculty
member's home.
Response: As we stated in response to the previous comment, as long
as an entire workday is not scheduled for didactic activities, then for
documentation purposes, that day may be recorded as spent in patient
care activities. Of course, activities must be part of the approved
residency training program in order to be counted for IME and direct
GME payment purposes and a resident must be training within the
hospital complex or in a nonhospital site. If a hospital documents that
time was spent studying at a resident's or a teaching physician's home,
this time is not permitted to be included in the IME count because it
is not time spent in patient care, nor is it permitted to be included
in the direct GME count because it did not take place in the hospital
complex.
Comment: One commenter stated that if CMS decides to implement the
policy in the proposed rule in some form (although the commenter
believed CMS shouldn't), then the final policy would represent a change
that must be modified formally through the process of notice and
comment rulemaking, and therefore, should only apply prospectively for
rotations beginning on or after July 1, 2007.
Response: Although we recognize that there has been some
misapprehension of our policies among the teaching hospital community,
in particular with respect to the counting of FTE residents training in
the hospital for purposes of IME, the only change we are making to
current policy is the ``one workday'' approach to identifying
nonpatient care time spent by residents. We do not believe it is
necessary to wait until July 1, 2007, to implement our recordkeeping
policy. We believe that an effective date stated above, for cost
reporting periods beginning on or after October 1, 2006, provides
hospitals with sufficient time to either modify their rotation
schedules to reflect the ``one workday'' approach or to find other
comparable documentation that can be used by the fiscal intermediaries
in auditing cost reports.
Comment: A commenter said that it is unclear how CMS intends to
exclude nonpatient care time for cost reporting purposes; that is, just
from the time allowable as part of a hospital's resident count (that
is, the numerator), or from the total time worked (in all locations) by
the resident (that is, the denominator). The commenter observed that
the statute quoted by CMS in the proposed rule states that ``only time
spent in activities relating to patient care shall be counted''
(emphasis added, section 1886(h)(4)(E) of the Act). The commenter
believed that to be ``counted'', the time appears both in the allowable
time claimed by the hospital and the total time worked by the resident
in a given year, and conversely, if the activities do not relate to
patient care, then the time should not be counted either as allowable
time or as part of the total time worked. The commenter requested that
CMS specify that these activities are not to be included at all in
IRIS, either as allowable or unallowable, so as not to dilute the total
resident count that may be claimed by all of the hospitals training the
resident.
Response: The effect of the commenter's request would be to ignore
portions of training time spent by residents in approved residency
training programs with the result that, in total, less than a full-time
equivalent resident would be counted. We do not believe such a policy
would be appropriate or comport with Congressional intent. Section
1886(h)(4)(A) of the Act states that, ``The Secretary shall establish
rules consistent with this paragraph for the computation of the number
full-time equivalent residents in an approved medical residency
training program'' and the remainder of the subsection is replete with
references to ``full-time equivalent'' residents. Accordingly, the
regulations at Sec. 412.105(f)(1)(iii)(A) for IME and Sec. 413.78(b)
for direct GME indicate that, in computing the FTE count of a hospital,
for each resident, the denominator consists of the total time necessary
to fill a residency slot, which constitutes full-time equivalent
status. Full-time equivalent status, in turn, is based upon the total
amount of training time necessary to fulfill the requirements of the
approved medical residency training program in a given academic year.
Therefore, the denominator must consist of the total time worked by a
resident throughout the academic year in activities that are part of
the approved program, whether or not the time is permitted to be
counted for IME or direct GME payment purposes. As stated in response
to a previous comment, the starting point (denominator) for determining
the allowable FTE count is the total time necessary to fill a residency
slot consistent with the requirements of the approved residency
program. However, the hospital must then subtract all non-allowable
training time, such as time spent at other providers, time spent in
IPPS-excluded distinct part units, nonpatient care activities (for
example, research, didactic time), and so on, and only include the
allowable time in the numerator. Thus, while a hospital's allowable FTE
count is certainly ``based'' on the total time necessary to fill a
resident slot that total time is often greater than the FTE time a
particular hospital is permitted to count for payment purposes.
Furthermore, certainly no FTE resident time that is outside the scope
of the approved program would be included in either the numerator or
the denominator of the FTE computation.
Comment: A commenter noted that CMS uses the definition of
``hospital complex'' as explained in the September 29, 1989 Federal
Register to determine which residents may be included in a hospital's
direct GME count. Specifically, the September 29, 1989 Federal Register
(54 FR 40286) states that the hospital complex consists of the hospital
and hospital-based providers and subproviders. The commenter observed
that CMS's regulations concerning the requirements for provider-based
status are at Sec. 413.65, and stated that it is their understanding
that if a facility qualifies as provider-based under these regulations,
the facility will be considered part of the hospital complex. The
commenter requested that the connection between ``hospital complex''
and ``provider-based'' be clarified in the final rule, since the
September 29, 1989 Federal Register seems to imply that only facilities
such as SNFs and HHAs (facilities that bill Medicare and have direct
patient care activities) can qualify as provider-based. The commenter
noted that, for example, a separate building where only research is
conducted may qualify for provider-

[[Page 48093]]

based status and should be included as part of the hospital complex.
Response: The commenter is correct that the regulations that would
be used to determine if a facility is part of the hospital complex
(that is, provider-based) for direct GME purposes, are at Sec. 413.65.
As the commenter pointed out, it may be necessary to determine for
direct GME purposes if a facility in which no patient care is provided
is ``provider-based,'' even though a provider-based determination would
not otherwise be made for such a facility. The example mentioned by the
commenter of a separate building in which only research is conducted
would be an instance where it would be appropriate for the fiscal
intermediary to use the criteria at Sec. 413.65 to determine if a
facility is part of the hospital complex for direct GME purposes. Thus,
training that occurs in facilities that meet the provider-based
criteria at Sec. 413.65 is training ``in the hospital'', and training
that occurs in facilities that do not meet the provider-based criteria
is training ``in nonhospital settings,'' (and, of course, in the case
of the training in nonhospital settings, the hospital must meet certain
requirements in order to count any FTE resident training time spent in
that setting).
Comment: Some commenters urged CMS not to distinguish between
direct GME and IME payments based on hospital versus nonhospital
locations. One commenter argued that ``geography'' is irrelevant,
particularly in the era of telephone and Internet communications.
Another commenter believed that distinctions between provider-based
versus freestanding practices or medical school facilities are
``founded on legal, structural, or financial issuances.'' The commenter
stated that hospital and nonhospital locations might be ``across the
hall or on the next floor from each other'' with no difference between
the patient care and learning experiences in each place. The commenter
believed that CMS has recently distinguished between these sites for
reimbursement purposes based solely on who is bearing ``all or
substantially all'' of the costs of the residency program, which has
created ``confusion, complexity, and controversy'' in the provider
community. Further ``clarifications'' of payment based on location or
on type of activity are ``unnecessary and onerous.''
Response: We understand that it is quite common for hospitals,
especially large academic medical centers, to be located on the same
campus as a medical school, where the buildings are very closely
situated or even connected, and the facilities are often shared.
However, as the commenter indicated, hospitals, nonhospital sites, and
medical schools are structured separately for legal and financial
purposes, and are recognized independently for state licensing and
Medicare cost reporting purposes. To put it simply, a hospital is not a
medical school, and a medical school is not a hospital. As we stated in
response to the previous comment, the criteria to be used in
determining if a facility is provider-based are in the regulations at
Sec. 413.65. Facilities that meet the provider-based criteria are part
of the hospital, and facilities that do not meet the provider-based
criteria are nonhospital sites, even if they are located on the same
campus as the hospital. Additionally, while there is no requirement
that hospitals incur the costs of residents training in a hospital in
order for those residents to be counted for IME and direct GME
purposes, hospitals are required by statute (not merely by CMS
regulations, as the commenter implies) to incur ``all, or substantially
all of the costs'' of a residency training program in a nonhospital
site (such as a medical school) in order to count any of the resident
FTE training time spent in those nonhospital sites for IME and direct
GME purposes. Similarly, the statutes for IME and direct GME clearly
indicate that only training in patient care activities may be counted
in the nonhospital sites. Since the statute makes these distinctions,
we do not believe we have created ``unnecessary'' and ``confusing''
distinctions between where the residents are training, or the type of
activities in which the residents are engaged.
Comment: Many comments from members of an academy of family
medicine in a particular State indicated that they were informed that
``CMS is considering the disallowance of faculty development activity
in the calculation of IME and DME reimbursement.'' Some of the
activities they listed as being at risk included development, review,
and delivery of curriculum, scholarly activities such as written
publications and faculty development conferences, resident evaluation,
faculty training, and alumni evaluation and research. The commenters
were concerned that future physicians cannot be properly trained
``without support for the educational aspects of their experience.''
Another group of commenters, also teaching faculty for family medicine
programs, stated that they were attracted to a profession in family
medicine because ``the community recognized the value of experience and
academic inquiry to the well-being of our communities and the training
of future physicians.'' These teaching physicians stated that less than
one-third of their academic time is compensated, and if funding for
their work on program development, clinical research, writing critical
reviews, and evaluating resident performance is reduced, then they may
find it necessary to return to full time clinical practice, since the
``thought of being told by a program that [we] will need to see more
patients to pay for the time [we are] developing and delivering
curriculum will be unacceptable.'' The commenters concluded by wishing
CMS ``the best of luck'' if CMS implements this rule, and stated that
they would not continue as faculty members. Another commenter cautioned
that ``with every additional burden placed'' on residency training by
CMS or the ACGME, more valuable teaching physicians will be lost.
Response: It appears the commenters have confused the time that
residents in approved programs spend in nonpatient care activities,
with the time that teaching faculty spend in nonpatient care
activities. While the direct GME payments, through the PRAs, do
compensate teaching hospitals for the portion of the teaching
physicians'' salaries and fringe benefits attributable to GME
activities, only the FTE time of residents participating in approved
programs is included in the hospital's FTE resident count for both IME
and direct GME. Accordingly, the activities listed by the commenters in
which teaching faculty engage either on behalf of, or independent of,
the residents they supervise are not affected by the rule that only
time spent by residents in patient care activities may be counted for
IME purposes in the hospital, and for IME and direct GME purposes in
the nonhospital sites.
Comment: One commenter, a hospital system, said that their
understanding, which has been ``reaffirmed time and again by our annual
fiscal intermediary audits,'' is that, with respect to direct GME, time
spent in a nonpatient care activity, ``no matter where it took place
(on site or off), was allowed to be counted if that activity was needed
for Board certification.'' The commenter stated that it seems CMS
``largely agrees'' with this position ``If the nonpatient care
activities occur on site, but doesn't if the activity is offsite''
(emphasis included in the original). The commenter believes this is
``illogical'' considering that the hospital continues to bear the
direct costs of the resident in either case. The commenter concluded
that, although they were commenting on the implications for

[[Page 48094]]

direct GME, ``at least for IME, [CMS's] position is consistent--
nonpatient care activities are not allowed whether one is on site OR
offsite'' (emphasis included in the original).
Response: As we indicated in response to a previous comment,
although our position with respect to IME and FTE time spent in
nonpatient care activities is a longstanding policy as we explained in
greater detail above, it has become apparent to us that there actually
has been significant confusion regarding this policy in the teaching
hospital community. Our policy has been to apply the plain meaning of
the term ``patient care activities,'' which means that, even if the
nonpatient care activities that occur in nonhospital sites count toward
Board certification (that is, they are part of the approved program),
such time must not be included in the direct GME or IME count. With
respect to training in the hospital, resident time spent training in
didactic activities that are part of an approved program can be counted
for direct GME purposes, but not for IME. It makes no difference
whether the hospital is paying the residents'' salaries when the
training occurs in the hospital complex; whether a hospital incurs the
costs for the residents it trains in the hospital is irrelevant for
purposes of both IME and direct GME. The requirement to incur the costs
of the residency training program only applies in the instances where
hospitals wish to count FTE residents that are training in nonhospital
settings. In that case, the hospital must incur all or substantially
all of the costs of the training program in the nonhospital site (and
meet certain other requirements) in order to count any FTE residents
training in that site.
In summary, we are finalizing the clarification of our policy that
only time spent in patient care activities may be counted for IME
purposes in the hospital complex and for direct GME and IME purposes in
nonhospital sites. We are amending Sec. 413.75(b) to add a definition
of the term ``patient care activities'' which means, ``the care and
treatment of particular patients, including services for which a
physician or other practitioner may bill.'' In addition, we are
amending the IME regulations at Sec. 412.105(f)(1)(iii) to add a
paragraph (C) to state that ``In order to be counted, a resident must
be spending time in patient care activities, as defined in Sec.
413.75(b).'' We are also making conforming changes to the regulations
text at Sec. 412.105(f)(1)(iii)(C), and Sec. 413.78(c)(1), (d)(1),
and (e)(1) for residency training in nonhospital settings. Lastly for
cost reporting periods beginning on or after October 1, 2006, we are
implementing a ``one workday'' approach to documentation of residents'
time, where, if a resident's workday consists entirely of scheduled
nonpatient care activities, that workday must be identified as
nonpatient care time and must be subtracted from the allowable FTE
count (for IME, if the training occurred in the hospital complex, and
for both IME and direct GME, if the training occurred in a nonhospital
site).
6. Medicare GME Affiliated Groups: Technical Changes to Regulations
In the FY 2005 IPPS final rule (69 FR 49112 and 49254 through
49265), we redesignated the contents of Sec. 413.86 (which contained
the regulations governing Medicare payment for direct GME) as
Sec. Sec. 413.75 through 413.83 and made corresponding cross-reference
changes in the text of these regulations. We have discovered that under
the definition of ``Medicare GME affiliated group'' under Sec.
413.75(b), we incorrectly cited the cross-reference to the rotation
requirements for GME affiliated groups in paragraphs (1), (2), and (3),
as ``Sec. 413.79(g)(2)''. In the FY 2007 IPPS proposed rule (71 FR
24115), we proposed to correct the cross-reference for the rotation
requirements in paragraphs (2) and (3) of the definition to read
``Sec. 413.79(f)(2)''.
We did not receive any public comments on this proposed technical
change and, therefore, are adopting it as final.
In the FY 2006 IPPS final rule (70 FR 47457 and 47489), we made
additional changes to certain sections of the GME redesignated
regulations to correct cross-references to other parts of 42 CFR
Chapter IV relating to the definitions of the ``urban'' and ``rural''
location of a hospital. In one of the corrections, in paragraph (1)
under the definition of ``Medicare GME affiliated group'' under Sec.
413.75(b), we inadvertently dropped the language in that paragraph
relating to the rotational requirements for these groups, including the
incorrect cross-reference to Sec. 413.79(g)(2). In the FY 2007 IPPS
proposed rule (71 FR 24115), we proposed to correct the language of
paragraph (1) under the definition of ``Medicare GME affiliated group''
under Sec. 413.75(b) by adding the dropped language and correcting the
cross-reference to read ``Sec. 413.79(f)(2).''
We did not receive any public comments on this proposed technical
change and, therefore, are adopting it as final.
In the FY 2006 IPPS final rule (70 FR 47454 and 47489), we revised
Sec. 413.79(e)(1)(iv) to provide that a new urban teaching hospital
that qualifies for an adjustment to its FTE cap for a newly approved
program may enter into a Medicare GME affiliation agreement, but only
if the resulting adjustments to its direct GME and IME caps are
``positive adjustments.'' We specified in the preamble of that final
rule that this provision is effective for affiliation agreements
entered into on or after October 1, 2005. However, we inadvertently did
not include this effective date in the regulation text. In the FY 2007
IPPS proposed rule (71 FR 24115 and 24116), we proposed to revise Sec.
413.79(e)(1)(iv) to include the effective date as part of the text of
that section.
In addition, we proposed to correct a cross-reference in the
introductory text of paragraph (f) of Sec. 413.79 relating to Medicare
GME affiliated groups. The cross-reference to ``paragraph (e)(3)'' of
Sec. 413.79 should read ``paragraph (d)'' of that section. This
proposed change is necessary to accurately cite the reference to our
rules regarding the 3-year rolling average.
We did not receive any public comments on the proposed technical
change and cross-reference change and, therefore, are adopting them as
final.

I. Payment for the Costs of Nursing and Allied Health Education
Activities: Clarification (Sec. 413.85)

In addition to direct GME and IME payments to hospitals for the
direct and indirect costs incurred for their graduate medical education
programs in medicine, osteopathy, dentistry, and podiatry, Medicare
makes payments to hospitals for two other categories of education-
related costs for which different payment policies apply:
Approved nursing and allied health education programs
operated by the hospital. The costs of these programs are excluded from
the definition of inpatient hospital operating costs and are not
included in the calculation of the per discharge payment rates for
hospitals paid under the IPPS, or in the calculation of payments to
hospitals and hospital units excluded from the IPPS that are subject to
the rate-of-increase ceiling. These costs are separately identified and
``passed through'' (that is, paid separately, on a reasonable cost
basis).
All other costs that can be categorized as educational
programs and activities (for example, continuing education, on the job
training, or seminars). These costs are considered to be part of the
hospitals' normal operating costs and payment for these costs is
included in the per discharge payment amount for hospitals subject to
the IPPS, the IRF PPS, or the LTCH PPS

[[Page 48095]]

and the prospective per diem payment amount for facilities under the
IPF PPS. Similarly, these costs are considered to be part of the
hospitals' normal operating costs and are included as reasonable costs
that are subject to the TEFRA rate-of-increase limits applicable to
hospitals that continue to receive payments subject to those limits,
including cancer and children's hospitals.
Regulations governing payment for the costs of approved and allied
health education activities are located at 42 CFR 413.85.
In the FY 2004 IPPS final rule (68 FR 45429), we revised the
regulations at Sec. 413.85(h)(3) to further clarify the difference
between provider-operated and continuing education programs. We revised
the regulations to state that, effective October 1, 2003, programs in
which employees participate that do not lead to the ability to practice
and begin employment in a nursing or allied health specialty are also
treated as normal operating costs. We now realize that when we revised
Sec. 413.85(h)(3) to include this clarification, we inadvertently did
not specify that the provision was applicable to trainees as well as
employees. In the preamble of the FY 2004 IPPS final rule, we stated
that because Sec. 413.85(h)(3) refers to education that will not lead
to the ability to practice and begin employment, we intended the
provisions to apply not only to employees but to trainees as well.
Therefore, in the FY 2007 IPPS proposed rule (71 FF 24116), we proposed
to make a technical change to Sec. 413.85(h)(3) to make it applicable
to both employees and trainees. We proposed this technical change to
clarify that the educational activities in which employees or trainees
participate, but that do not lead to the ability to practice and begin
employment in a nursing or allied health specialty, are treated as
normal operating costs. We noted that we did not propose to expand or
make any changes to the current payment policy for nursing and allied
health education activities; rather, we merely proposed to clarify the
language of the existing regulations.
Comment: One commenter requested that, in response to CMS''
clarification of the regulations pertaining to normal operating costs,
CMS make ``* * * a regulation revision to reflect that trainees are
included in the normal operation costs to avoid confusion.''
Response: We agree with the commenter and note that as we proposed,
we are revising the regulations at Sec. 413.85(h)(3) to read:
Educational seminars, workshops, and continuing education programs in
which the employees or trainees participate that enhance the quality of
medical care or operating efficiency of the provider and, effective
October 1, 2003, do not lead to the ability to practice and begin
employment in a nursing or allied health specialty.
In this final rule, we are adopting as final, without
modifications, the proposed technical change to Sec. 413.85(h)(3) to
make it applicable to both employees and trainees.

J. Hospital Emergency Services Under EMTALA (Sec. 489.24)

1. Background
Sections 1866(a)(1)(I), 1866(a)(1)(N), and 1867 of the Act impose
specific obligations on certain Medicare-participating hospitals and
CAHs. (Throughout this section of this proposed rule, when we reference
the obligation of a ``hospital'' under these sections of the Act and in
our regulations, we mean to include CAHs as well.) These obligations
concern individuals who come to a hospital emergency department and
request examination or treatment for medical conditions, and apply to
all of these individuals, regardless of whether they are beneficiaries
of any program under the Act.
The statutory provisions cited above are frequently referred to as
the Emergency Medical Treatment and Labor Act (EMTALA), also known as
the patient antidumping statute. EMTALA was passed in 1986 as part of
the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA),
Pub. L. 99-272. Congress enacted these antidumping provisions in the
Social Security Act to ensure that individuals with emergency medical
conditions are not denied essential lifesaving services because of a
perceived inability to pay.
Under section 1866(a)(1)(I)(i) of the Act, a hospital that fails to
fulfill its EMTALA obligations under these provisions may be liable for
termination of its Medicare provider agreement, which would result in
loss of all Medicare and Medicaid payments.
Section 1867 of the Act sets forth requirements for medical
screening examinations for individuals who come to the hospital and
request examination or treatment for a medical condition. The section
further provides that if a hospital finds that such an individual has
an emergency condition, it is obligated to provide that individual with
either necessary stabilizing treatment or an appropriate transfer to
another medical facility where stabilization can occur.
The EMTALA statute also outlines the obligation of hospitals to
receive appropriate transfers from other hospitals. Section 1867(g) of
the Act states that a participating hospital that has specialized
capabilities or facilities (such as burn units, shock-trauma units,
neonatal intensive care units or (with respect to rural areas) regional
referral centers as identified by the Secretary in regulation) shall
not refuse to accept an appropriate transfer of an individual who
requires these specialized capabilities or facilities if the hospital
has the capacity to treat the individual.
The regulations implementing section 1867 of the Act are found at
42 CFR 489.24.
2. Role of the EMTALA Technical Advisory Group (TAG)
Section 945 of Pub. L. 108-173 (MMA) required the Secretary to
establish a Technical Advisory Group (TAG) to provide the Secretary
with advice concerning issues related to EMTALA regulations and
implementation. Section 945 of Pub. L. 108-173 further required that
the EMTALA TAG be composed of 19 members, including the Administrator
of CMS, the Inspector General of HHS, hospital representatives and
physicians representing various specialties, patient representatives,
and representatives of organizations involved in EMTALA enforcement.
The EMTALA TAG was first established in 2005 and held three
meetings during that year. At each of its meetings, the EMTALA TAG
heard testimony from representatives of physician groups, hospital
associations, and others regarding EMTALA issues and concerns. As
explained more fully below in sections IV.K.3. and 4. of this preamble,
in the FY 2007 IPPS proposed rule (71 FR 24116 through 24118) we
proposed to revise the EMTALA regulations at Sec. 489.24 based on the
recommendations adopted and forwarded to the Secretary by the EMTALA
TAG.
3. Definition of ``Labor''
As noted in the background portion of this section, the EMTALA
statute and regulations require that if an individual comes to a
hospital emergency department and a request is made on the individual's
behalf for examination or treatment for a medical condition, the
hospital is obligated to provide that individual with an appropriate
medical screening examination within the capability of the hospital. If
the individual is found to have an emergency medical condition, the
hospital is obligated by EMTALA to

[[Page 48096]]

provide either necessary stabilizing treatment or an appropriate
transfer to another medical facility where stabilization can occur.
Section 489.24(b) of the regulations defines the key terms used in
the section. The term ``emergency medical condition'' is defined as--
``A medical condition manifesting itself by acute symptoms of
sufficient severity (including severe pain, psychiatric disturbances
and/or symptoms of substance abuse) such that the absence of immediate
medical attention could reasonably be expected to result in placing the
health of the individual (or, with respect to a pregnant woman, the
health of the woman or her unborn child) in serious jeopardy; serious
impairment to bodily functions; or serious dysfunction of any bodily
organ or part; or with respect to a pregnant woman who is having
contractions, that there is inadequate time to effect a safe transfer
to another hospital before delivery; or that transfer may pose a threat
to the health and safety of the woman or the unborn child.''
This definition closely follows the definition of ``emergency
medical condition'' in section 1867(e)(1) of the Act with the exception
that the regulation text further expands on ``acute symptoms of
sufficient severity'' by including ``psychiatric disturbances and/or
symptoms of substance abuse'' in addition to severe pain. In
recognition of the fact that this definition gives special
consideration to women in labor, the term ``labor'' is itself defined,
in paragraph (b) of Sec. 489.24, to mean ``the process of childbirth
beginning with the latent or early phases of labor and continuing
through the delivery of the placenta.'' The definition further states:
``A woman experiencing contractions is in true labor unless a physician
certifies that, after a reasonable period of observation, the woman is
in false labor.'' A woman found to be in false labor is considered not
to have an emergency medical condition and that finding thus means that
the hospital has no further EMTALA obligation to her.
The CMS interpretative guidelines used by State surveyors in EMTALA
investigations provide that once an individual has presented to a
hospital seeking emergency care, the determination as to whether an
emergency medical condition exists is made by the examining
physician(s) or other qualified medical person(s) actually caring for
the individual at the treating facility. The guidelines further provide
that the medical screening examination must be conducted by one or more
individuals who are determined to be qualified by the hospital bylaws
or rules and regulations and who meet the hospital condition of
participation in 42 CFR 482.55 regarding emergency services personnel
and direction. (Of course, these individuals would not be expected or
permitted to perform any screening functions other than those which
they are allowed to perform under State scope of practice laws.)
However, consistent with the definition of ``labor'' at Sec.
489.24(b), the guidelines also state that if a qualified medical person
other than a physician determines that a woman is in false labor, a
physician must certify the diagnosis. The guidelines permit this
certification to be made based either on actual examination of the
patient or on a telephone consultation with the qualified medical
person who actually examined the patient. (Medicare State Operations
Manual, Appendix V--Interpretive Guidelines--Responsibility of
Participating Hospitals in Emergency Cases, TAG A-406.)
At its meeting held on June 15-17, 2005, the EMTALA TAG heard
testimony from representatives of both physician and nonphysician
professional societies regarding the competence of practitioners other
than physicians to certify false labor. In particular, a representative
of the American College of Nurse-Midwives stated that the current
requirement that allows only a physician to certify false labor is
overly restrictive and does not adequately recognize the training and
competence of certified nurse-midwives. Testimony was also presented by
the American College of Obstetricians and Gynecologists, which
recommended amending the EMTALA regulations to allow certified nurse-
midwives and other qualified medical persons to determine whether a
woman is in false labor.
After extensive consideration of the issue, the members of the
EMTALA TAG voted to recommend to the Secretary that the definition of
``labor'' at Sec. 489.24(b) be amended to permit certified nurse-
midwives and other qualified medical personnel to certify false labor.
The TAG recommended deleting the second sentence, which states that a
woman experiencing contractions is in true labor unless a physician
certifies that, after a reasonable time of observation, the woman is in
false labor.
We agree with the TAG's recommendation that other health care
practitioners besides physicians should be allowed to certify false
labor, and believe that the recommendation is consistent with CMS'
current policy regarding who may conduct medical screening
examinations. However, we do not believe such a change can be best
accomplished by simply deleting the second sentence of the current
definition of ``labor'' in the existing regulations because doing so
would also remove the explicit statement that a woman experiencing
contractions is in labor unless she has been found to be in false
labor. To achieve the principal objective of the EMTALA TAG
recommendation without compromising the protections of EMTALA for women
having contractions, in the FY 2007 IPPS proposed rule, we proposed to
modify the definition of ``labor'' in Sec. 489.24(b) by revising the
second sentence of that definition to state that a woman experiencing
contractions is in true labor unless a physician, certified nurse-
midwife, or other qualified medical person acting within his or her
scope of practice as defined in hospital medical staff bylaws and State
law, certifies that, after a reasonable time of observation, the woman
is in false labor. The effect of this change would be to have a single,
uniform policy on the personnel who are authorized to make a
determination as to whether an individual has an emergency medical
condition.
Comment: Several commenters expressed approval of the proposed
change to the regulations to allow nonphysician practitioners to
certify when a woman is in false labor, pursuant to State law and
hospital bylaws. The commenters stated that this change to the
regulations would provide hospitals greater flexibility in staffing and
help ensure access to necessary services.
Response: We appreciate the commenters' support for this change to
the regulations and have kept their remarks in mind while finalizing
this proposal.
Comment: One commenter disagreed with the proposed change to the
regulations. The commenter stated that one cause of higher rates of
premature labor and malformed and malpresented neonates in the United
States than among other industrialized nations is the use of nurses for
labor and delivery services. The commenter recommended that CMS not
only continue to require that a physician determine when a woman is in
false labor but also that such physician be specialized in obstetrics.
Response: While we understand this commenter's concerns, the
commenter has not provided evidence to support the allegation that
there is a higher rate of premature labor and malformed and
malpresented neonates in the United

[[Page 48097]]

States than other industrialized nations. Nor has the commenter
demonstrated that the problems as cited are directly linked to
nonphysician practitioners' involvement in labor and delivery services.
Therefore, we are not modifying the proposed change based on this
comment.
Comment: One commenter expressed approval of the concept of
allowing practitioners other than physicians to certify false labor,
but objected to the use of the phrase ``qualified medical person'' in
Sec. 489.24(b) to describe the kind of individual who may perform this
function. The commenter stated that use of the term ``medical'' could
suggest, incorrectly, that only a physician could certify false labor.
The commenter recommended that the term used be ``other qualified
health care professional''.
Response: The term ``qualified medical person'' is used in section
1867(c)(1)(A)(ii) of the Act and in current regulations at Sec. 489.24
(e)(1)(C). Both statutory and regulatory usages of this term make
reference to a ``qualified medical person'' as an individual other than
a physician who is authorized to sign a certificate outlining the risks
and benefits of transfer in the absence of a physician. Thus, we do not
believe the language in our proposed revision will be misleading.
However, we will keep the commenter's concern in mind as we draft
conforming revisions to the EMTALA program instructions and other
issuances, to make it clear that a qualified medical person need not be
(and in fact will not be) a physician.
After consideration of the public comments received, we are
adopting as final, without modifications, the proposed change in the
definition of ``labor'' in Sec. 489.24(b).
4. Application of EMTALA Requirements to Hospitals Without Dedicated
Emergency Departments
Section 489.24(b) of the regulations outlines when a hospital will
be considered to be a hospital with a ``dedicated emergency
department'' and makes it clear that only a hospital with a dedicated
emergency department has an EMTALA responsibility with respect to an
individual for whom no appropriate transfer is sought but who comes to
the hospital seeking examination or treatment for a medical condition.
However, it has come to CMS' attention that our policy regarding the
application of EMTALA to hospitals that have specialized capabilities
but are without dedicated emergency departments may be less well
understood as it relates to individuals for whom an appropriate
transfer is sought.
It has been CMS' longstanding policy that any Medicare-
participating hospital with a specialized capability must, in
accordance with section 1867(g) of the Act, accept, within the capacity
of the hospital, an appropriate transfer from a requesting hospital.
This policy has been applied to hospitals without regard to whether
they have dedicated emergency departments. In fact, in the past, CMS
has taken enforcement actions against hospitals with specialized
capabilities that failed to accept appropriate transfers under EMTALA
when the hospitals had the capacity to treat the transferred
individuals.
At its meeting held on October 26-28, 2005, the EMTALA TAG heard
testimony from representatives of physician groups, hospital
associations, and others regarding EMTALA compliance by specialty
hospitals that typically do not have dedicated emergency departments.
After extensive consideration and discussion of the issues raised and
views presented, the members of the EMTALA TAG voted to recommend to
the Secretary that hospitals with specialized capabilities (as defined
in Sec. 489.24(f) of the regulation) that do not have a dedicated
emergency department be bound by the same responsibility to accept an
appropriate transfer under EMTALA as hospitals with a dedicated
emergency department.
We agree with the EMTALA TAG's assessment. We believe that the
recommendation is consistent with CMS' current policy and highlights
the need to clarify CMS' policy regarding hospitals with specialized
capabilities. Therefore, in the FY 2007 IPPS proposed rule (71 FR
24118), we proposed to modify the regulations at Sec. 489.24(f) to
specifically indicate that any participating hospital with specialized
capabilities or facilities, even if it does not have a dedicated
emergency department, may not refuse to accept an appropriate transfer
if the hospital has the capacity to treat the individual. We noted that
the proposed revision does not reflect any change in current CMS
policy. We further noted that the revision would not require hospitals
without dedicated emergency departments to open dedicated emergency
departments nor would it impose any EMTALA obligations on those
hospitals with respect to individuals who come to the hospital as their
initial point of entry into the medical system seeking a medical
screening examination or treatment for a medical condition. Although
the proposed revision sought only to clarify, rather than change,
current policy, we nevertheless, solicited comments on what effect, if
any, commenters believe the proposed clarification might have on EMTALA
compliance and patient health and safety.
Comment: Several commenters expressed approval of the proposed
change to the regulations to clarify that hospitals with specialized
capabilities have an obligation under EMTALA to accept appropriate
transfers within their capabilities whether or not the hospital has a
dedicated emergency department, including all physician-owned limited
service facilities.
Response: We appreciate the commenters' support for this change to
the regulations and have kept their remarks in mind while finalizing
this proposal.
Comment: Several commenters requested that CMS provide additional
guidance on the definition of ``specialized capabilities or
facilities.''
Response: We refer these commenters to the regulations at Sec.
489.24(f) for a partial list of specialized capabilities or facilities.
These include, but are not limited to, burn units, shock-trauma units,
neonatal intensive care units, and certain referral centers. We
recognize that this list is not exhaustive and would include physician-
owned limited service facilities with special capabilities. We also
would note that the EMTALA TAG is currently considering whether the
definition of ``specialized capabilities'' should be further revised.
However, no expansion of the list of specialized facilities or
capabilities was specifically proposed in the proposed rule published
on April 25, 2006. In view of this fact and in consideration of the
fact that the EMTALA TAG may make recommendations relating to this
issue, we have decided not to make any further revision to the list of
examples noted above. However, we will consider carefully any
recommendations made by the EMTALA TAG on the issue and may propose
changes in the future.
Comment: Several commenters asked CMS to emphasize that all
physician-owned limited service facilities are required to maintain
adequate on-call panels to comply with the Medicare hospital conditions
of participation. In addition, the commenters requested that CMS
require these hospitals to have preexisting transfer agreements with
any community hospital to which it may send patients for emergency
services. Two commenters suggested that the Secretary establish the
terms of such agreements. The commenters recommended three issues to be

[[Page 48098]]

addressed in the agreements: Procedures for an appropriate transfer for
patients not covered under EMTALA; continuity of care; and support for
maintaining full-time emergency capacity at the community hospital,
including on-call coverage. The commenters also requested that CMS
require physicians who practice at such hospitals to participate in on-
call panels at the community hospitals with which their hospital has a
transfer agreement.
Response: While physician-owned limited service hospitals certainly
are required to maintain compliance with the hospital conditions of
participation, those regulations set forth in 42 CFR Part 482 do not
include an explicit on-call requirement. Thus, we are not including a
revision in this final rule to include the specific change requested by
the commenter. However, we note that the conditions of participation
relating to a hospital's governing body at Sec. 482.12(c)(3) requires
that all Medicare-participating hospitals have a doctor of medicine or
osteopathy either on duty or on call at all times. In addition, the
governing body condition of participation and the condition of
participation for medical staff found at Sec. 482.22 include various
other requirements that make the hospital governing body and medical
staff accountable for providing adequate physician services for
hospital patients. These requirements also apply to physician-owned
limited service facilities, including those that do not operate
emergency departments, on the same basis as to community and other
hospitals.
In general, we believe the comments concerning transfer agreements
are outside the scope of the proposed change to the regulations. In
addition, the terms of transfer agreements between hospitals are
decided upon by the individual hospitals party to the agreement.
However, we will refer these comments to the EMTALA TAG for further
consideration, and may propose some further change in Medicare
regulations on these topics in the future if they are warranted.
5. Clarification of Reference to ``Referral Centers''
The language of the existing regulations at Sec. 489.24(f)
duplicates the language of section 1867(g) of the Act in that it
identifies, as an example of a hospital with specialized capabilities,
``(with respect to rural areas) regional referral centers identified by
the Secretary in regulation)''. Because the term ``regional referral
centers'' is not used elsewhere in the Medicare regulations, it is
unclear whether the reference is to referral centers as defined in 42
CFR 412.96, which must be located in rural areas and meet other
criteria spelled out in that section, or to any facilities that are
located in rural areas and accept patients on referral. To maintain
consistency in the Medicare regulations and avoid confusion as to which
facilities are considered to have specialized capabilities for purposes
of EMTALA, in the FY 2007 IPPS proposed rule (71 FR 24118), we proposed
to amend Sec. 489.24 by clarifying that ``regional referral centers''
are those centers meeting the requirements of Sec. 412.96.
We did not receive any public comments on this clarification and,
therefore, are adopting, as final without modification, the amendment
to Sec. 489.24 to clarify that ``regional referral centers'' are those
centers meeting the requirements of Sec. 412.96.

K. Other Technical Changes

1. Cross-Reference Correction in Regulations on Limitations on
Beneficiary Charges (Sec. 412.42)
In the FY 2007 IPPS proposed rule (71 Fr 24118), we proposed to
amend Sec. 412.42 to correct an obsolete cross-reference. Paragraph
(d) of Sec. 412.42 contains a cross-reference to ``Sec. 405.310(k).''
This section was redesignated as Sec. 411.15(k) in 1989 (54 FR 41737,
October 11, 1989). We proposed to amend paragraph (d) of Sec. 412.42
to delete the obsolete cross-reference and insert the correct cross-
reference.
We did not receive any public comments on this proposed cross-
reference change and are, therefore, adopting it as final.
2. Cross-Reference Corrections in Regulations on Payment Denials Based
on Admissions and Quality Reviews (Sec. 412.48)
In the FY 2007 IPPS proposed rule (71 FR 24118), we proposed to
amend Sec. 412.48 to correct an obsolete cross-reference. Paragraph
(b) of Sec. 412.48 contains a cross-reference to ``Sec. Sec. 405.330
through 405.332''. Section 405.330 was redesignated as Sec. 411.400,
and Sec. 405.332 was redesignated as Sec. 411.402 in 1989 (54 FR
41746, October 11, 1989). (There was no Sec. 405.331.) We proposed to
amend paragraph (b) of Sec. 412.48 to delete the obsolete cross-
references and to insert the correct cross-references.
We did not receive any public comments on this proposed cross-
reference change and are, therefore, adopting it as final.
3. Cross-Reference Correction in Regulations on Outlier Payments (Sec.
412.84)
On June 9, 2003, we published a final rule in the Federal Register
(68 FR 34494) that amended the portion of the hospital IPPS regulations
that sets out the methodology for determining payments for
extraordinarily high-cost cases (outliers). We changed the methodology
because we concluded that, in certain cases, hospitals were
dramatically and inappropriately increasing charges, thereby inflating
CCRs, resulting in overestimation of these hospitals' costs per case, a
critical factor in determining outlier payments.
As a part of these methodology changes, we required that outlier
payments be reconciled using a hospital's settled cost report for the
cost reporting year in which the outlier discharge occurred. This
approach meant that there would be some delay in computing the final
outlier payment. To address this issue, we added Sec. 412.84(m), which
provided that reconciled outlier payments would be adjusted to account
for the time value of any underpayments or overpayments.
We inadvertently included in paragraph (m) of Sec. 412.84 a cross-
reference to paragraph (h)(3) of Sec. 412.84. The cross-reference
should be to paragraph (i)(4), which sets out the requirement for
reconciling outlier payments when the cost report for the year in which
the discharge occurred is settled. In the FY 2007 IPPS proposed rule
(71 FR 24118 and 24119), we proposed to amend paragraph (m) of Sec.
412.84 to correct the cross-reference to read ``paragraph (i)(4)'' of
Sec. 412.84.
We did not receive any public comments on this proposed cross-
reference change and are, therefore, adopting it as final.
4. Removing References to Two Paper Claims Forms
Section 1862(a)(22) of the Act generally requires electronic
submission of initial Medicare claims requesting payment for items and
services. Section 1862(h) of the Act provides for limited exceptions
when paper claims still may be used. Our existing regulations at 42 CFR
424.32 set out the requirements for submitting electronic and paper
claims for payment, as well as when the exceptions apply and paper
forms still may be used. Our existing regulations at paragraph (b) of
Sec. 424.32 list six forms that are to be used for submitting paper
claims.
We have evaluated the use of two of these forms, Form CMS-1490U
(Request for Medicare Payment by Organization)

[[Page 48099]]

and Form CMS-1491 (Request for Medicare Payment--Ambulance). We found
that these forms have limited use, we would incur expensive costs in
redesigning these forms to comply with other reporting requirements,
and that an alternate form is available to claim payments. For these
reasons, we intend to no longer use these forms. Therefore, in the FY
2007 IPPS proposed rule (71 FR 24119), we proposed to remove the
references to these forms from paragraph (b) of Sec. 424.32.
Form CMS-1490U is a paper claim form used by employers, unions,
employer-employee organizations that pay physicians and suppliers for
their services to employees, group practice prepayment plans, and
health maintenance organizations. Form CMS-1490U is used to claim
payment from carriers for bills already paid by these entities. We
concluded that this form should no longer be used for several reasons.
It is duplicative of Form CMS-1500 (Health Insurance Claim Form), which
also may be used to claim payment for these services. We have
encouraged suppliers to submit their paper claims using the Form CMS-
1500. Unlike Form CMS-1500, Form CMS-1490U cannot accommodate an
additional reporting requirement, the National Provider Identifier
(NPI), without an expensive redesign. Finally, according to our
records, relatively few suppliers currently use the form. The CMS
component that supplies blank copies of this form for users reported
that, between 2002 and 2005, only 2,550 copies of Form CMS-1490U were
ordered by carriers. A 2005 survey of Part B carriers indicated that
requests for the form are very low and that receipts of the form vary
from very few to none.
Form CMS-1491 is a paper claim form used by ambulance suppliers to
apply for payment for ambulance services. We concluded that this form
should no longer be used for several reasons. It also is duplicative of
Form CMS-1500, which also may be used to claim payment for ambulance
services. In addition, we have encouraged suppliers to submit their
paper ambulance claims using the Form CMS-1500. Unlike Form CMS-1500,
Form CMS-1491 cannot accommodate the NPI without an expensive redesign
and usage of this form is low. A recent survey of carriers, initiated
by Joint Signature Memorandum RO-2324, Request for Information
Concerning the CMS-1491, issued October 30, 2003, from the Centers for
Medicare Management, was conducted to ascertain the usage of Form CMS-
1491. The results of the survey showed that fewer than 2 percent (1.71
percent) of all suppliers of ambulance services currently use the Form
CMS-1491. CMS received approximately 240,000 ambulance claims using
Form CMS-1491 during the period from October 1, 2002, to September 30,
2003. These data were used for the most recent OMB renewal under the
Paperwork Reduction Act. Since the last OMB renewal approval in 2001,
CMS has printed a total of 1,620,000 forms at a cost of $42,890.
We did not receive any public comments on our proposal. Therefore,
we are adopting, as final without modification, the proposed removal of
the references to the identified forms from paragraph (b) of Sec.
424.32.

L. Rural Community Hospital Demonstration Program

In accordance with the requirements of section 410A(a) of Pub. L.
108-173, the Secretary has established a 5-year demonstration program
(beginning with selected hospitals' first cost reporting period
beginning on or after October 1, 2004) to test the feasibility and
advisability of establishing ``rural community hospitals'' for Medicare
payment purposes for covered inpatient hospital services furnished to
Medicare beneficiaries. A rural community hospital, as defined in
section 410A(f)(1), is a hospital that:
Is located in a rural area (as defined in section
1886(d)(2)(D) of the Act) or is treated as being located in a rural
area under section 1886(d)(8)(E) of the Act;
Has fewer than 51 beds (excluding beds in a distinct part
psychiatric or rehabilitation unit) as reported in its most recent cost
report;
Provides 24-hour emergency care services; and
Is not designated or eligible for designation as a CAH.
As we indicated in the FY 2005 IPPS final rule (69 FR 49078), in
accordance with sections 410A(a)(2) and (a)(4) of Pub. L.108-173 and
using 2002 data from the U.S. Census Bureau, we identified 10 States
with the lowest population density from which to select hospitals:
Alaska, Idaho, Montana, Nebraska, Nevada, New Mexico, North Dakota,
South Dakota, Utah, and Wyoming (Source: U.S. Census Bureau Statistical
Abstract of the United States: 2003). Nine rural community hospitals
located within these States are currently participating in the
demonstration program for FY 2007. (Of the 13 hospitals that
participated in the first 2 years of the demonstration program, 4
hospitals located in Nebraska have withdrawn from the program; they
have become CAHs.)
Under the demonstration program, participating hospitals are paid
the reasonable costs of providing covered inpatient hospital services
(other than services furnished by a psychiatric or rehabilitation unit
of a hospital that is a distinct part), applicable for discharges
occurring in the first cost reporting period beginning on or after the
October 1, 2004, implementation date of the demonstration program.
Payments to the participating hospitals will be the lesser amount of
the reasonable cost or a target amount in subsequent cost reporting
periods. The target amount in the second cost reporting period is
defined as the reasonable costs of providing covered inpatient hospital
services in the first cost reporting period, increased by the inpatient
prospective payment update factor (as defined in section 1886(b)(3)(B)
of the Act) for that particular cost reporting period. The target
amount in subsequent cost reporting periods is defined as the preceding
cost reporting period's target amount, increased by the inpatient
prospective payment update factor (as defined in section 1886(b)(3)(B)
of the Act) for that particular cost reporting period.
Covered inpatient hospital services are inpatient hospital services
(defined in section 1861(b) of the Act), and include extended care
services furnished under an agreement under section 1883 of the Act.
Section 410A of Pub. L. 108-173 requires that ``in conducting the
demonstration program under this section, the Secretary shall ensure
that the aggregate payments made by the Secretary do not exceed the
amount which the Secretary would have paid if the demonstration program
under this section was not implemented.'' Generally, when CMS
implements a demonstration program on a budget neutral basis, the
demonstration program is budget neutral in its own terms; in other
words, the aggregate payments to the participating providers do not
exceed the amount that would be paid to those same providers in the
absence of the demonstration program. This form of budget neutrality is
viable when, by changing payments or aligning incentives to improve
overall efficiency, or both, a demonstration program may reduce the use
of some services or eliminate the need for others, resulting in reduced
expenditures for the demonstration program's participants. These
reduced expenditures offset increased payments elsewhere under the
demonstration program, thus ensuring that the demonstration program as
a whole is budget neutral or

[[Page 48100]]

yields savings. However, the small scale of this demonstration program,
in conjunction with the payment methodology, makes it extremely
unlikely that this demonstration program could be viable under the
usual form of budget neutrality. Specifically, cost-based payments to
the nine participating small rural hospitals are likely to increase
Medicare outlays without producing any offsetting reduction in Medicare
expenditures elsewhere. Therefore, a rural community hospital's
participation in this demonstration program is unlikely to yield
benefits to the participant if budget neutrality were to be implemented
by reducing other payments for these providers.
In order to achieve budget neutrality for this demonstration
program for FY 2007, we are adjusting the national inpatient PPS rates
by an amount sufficient to account for the added costs of this
demonstration program. We are applying budget neutrality across the
payment system as a whole rather than merely across the participants in
this demonstration program. As we discussed in the FY 2005 and FY 2006
IPPS final rules (69 FR 49183 and 70 FR 47462), we believe that the
language of the statutory budget neutrality requirements permits the
agency to implement the budget neutrality provision in this manner. For
FY 2007, using cost report data for FY 2003, adjusted to account for
the increased estimated costs for the remaining nine participating
hospitals, we estimate that the adjusted amount would be $9,197,870.
This estimated adjusted amount reflects the estimated difference
between the participating hospitals' costs and the IPPS payment based
on data from the hospitals' cost reports. We discuss the payment rate
adjustment that will be required to ensure the budget neutrality of the
demonstration program for FY 2007 in section II.A.4. of the Addendum to
this final rule.
We did not receive any public comments on the provisions of the
demonstration program discussed in the proposed rule.

M. Health Care Information Transparency Initiative

The United States faces a dilemma in health care. Although the rate
of increase in health care spending slowed last year, costs are still
growing at an unsustainable rate. The United States spends $1.9
trillion on health care, or 16 percent of the gross domestic product
(GDP). By 2015, projections are that health care will consume 20
percent of the GDP. The Medicare program alone consumes 3.4 percent of
the GDP; by 2040, it will consume 8.1 percent of the GDP, and by 2070,
14 percent of the GDP.
Part of the reason health care costs are rising so quickly is that
most consumers of health care--the patients--are frequently not aware
of the actual cost of their care. Health insurance shields them from
the full cost of services, and they have only limited information about
the quality and costs of their care. Consequently, consumers do not
have the incentive or means to carefully shop for providers offering
the best value. Thus, providers of care are not subject to the
competitive pressures that exist in other markets for offering quality
services at the best possible price. Reducing the rate of increase in
health care prices and avoiding health services of little value could
help to stem the growth in health care spending, and potentially
translate into fewer individuals who are unable to afford health
insurance. Part of the President's health care agenda is to expand
Health Savings Accounts (HSAs), which would provide consumers with
greater financial incentives to compare providers in terms of price and
quality, and choose those that offer the best value.
In order to exercise such choices, consumers must have accessible
and useful information on price and quality of health care items and
services. Typically, health care providers do not publicly quote or
publish their prices. Moreover, list prices, or charges, generally
differ from the actual prices negotiated and paid by different health
plans. Thus, even if consumers were financially motivated to shop for
the best price, it would be very difficult at the current time for them
to access usable information.
Similarly, individuals have very little information available to
them about the quality of care that they receive. Although there are
preliminary steps underway to rectify that fact, including the hospital
quality reporting initiative in which a significant number of acute
care hospitals are participating (see sections IV.A and IV.B of this
preamble), those data are nascent and consumers lack sufficient
information on which to base a judgment about where to receive care
based on quality of care.
For these reasons, in the FY 2007 IPPS proposed rule (71 FR 24120),
we announced that the Department intends to launch a major health care
information transparency initiative in 2006. This effort will build on
steps already taken by CMS to make quality and price information
available. For example, we currently collect quality information and
publish it through the CMS Hospital Compare Web site, which we
reference in other parts of this final rule. We also make available
unprecedented information on the prices of drugs to beneficiaries in
the Medicare prescription drug plan for each pharmacy in the United
States.
In the FY 2007 IPPS proposed rule, we also stated that we intend to
take further steps to collect and publish useful information on quality
and cost. The Department intends to identify several regions in the
United States where health care costs are high, and where there is
significant interest in reducing health care costs and improving health
care quality. The Department will use its leadership role in health
care policy to help lead change in those areas.
The Secretary also has significant regulatory authority as well. In
the FY 2007 IPPS proposed rule, we solicited comments on several
proposals that the Secretary might adopt to increase the transparency
of quality and pricing information, and how this can be used to
attenuate the growth in health care costs. In addition, we solicited
comments from the public on additional ways that we could use our
regulatory authority to enhance transparency of quality and pricing
information.
In the FY 2007 IPPS proposed rule, we addressed several
possibilities that we believe exist. First, we could publish a list of
hospital charges either for every region of the country or for selected
regions of the country. In addition, we could publish the rates that
Medicare actually pays to a particular hospital for every DRG or for
selected DRGs that could be adjusted to take into account the
hospital's labor market area, teaching hospital status, and DSH status.
Some might argue that publishing these payment rates does not provide
meaningful information to consumers because Medicare payment rates are
not set by the market, but rather by a statutory payment formula. In
addition, providing information on hospital payments only does not
disclose the true cost of an episode of care because it would not take
into account the cost of physician services, laboratory tests, and
other procedures that go along with hospital charges. On the other
hand, Medicare payment rates may provide a helpful benchmark,
especially for uninsured individuals, to determine whether the charges
they see on a hospital bill bear any relationship to what third-party
fee-for-service payors pay to the hospital.
A second option would be for the Secretary to use his authority to
establish conditions of participation for

[[Page 48101]]

hospitals to propose a rule that relates to charges for uninsured
patients. For example, the conditions of participation could include a
requirement that hospitals post their prices and/or post their policies
regarding discounts or other assistance for uninsured patients.
Yet another alternative to posting Medicare DRG payment rates would
be to make publicly available the total Medicare payments for an
episode of care. For example, one of the most common inpatient hospital
procedures under the Medicare program (based on total dollars spent) is
hip replacement surgery. Under this proposal, we could make publicly
available the expected total payment for an episode of care for hip
replacement surgery, including the inpatient hospital stay, physician
payments (including the surgeon and the anesthesiologist), and payments
for post-acute care services such as services provided in an IRF, SNF,
or LTCH. In the proposed rule, we indicated that we are currently
assessing methods for making such information available and were
seeking comments on how to do so as quickly and effectively as
possible.
We solicited comment on any ways in which the Department can
encourage transparency in health care quality and pricing whether
through its leadership on voluntary initiatives or through regulatory
requirements. We also sought comment on the Department's statutory
authority to impose such requirements. We indicated that discussion of
particular options in the proposed rule should not be taken as an
indication that the Department will adopt any of these proposals.
Rather, the proposals were included to foster comment on possible
options to promote the aims of transparency of quality and pricing
information and the Department's authority and ability potentially to
implement these options. We indicated that the Department is anxious to
receive comments on any of these proposals, or on other options that
may be available that the Department could adopt either through
voluntary initiatives or through its regulatory authority.
Thirty-eight commenters made more than a hundred specific comments
on the transparency discussion in the FY 2007 IPPS proposed rule. We
received comments from providers, practitioners, and their
representatives or associations, including hospital associations,
physician associations, and organizations representing other health
care professionals, as well as the medical device industry. We also
received comments from organizations that promote quality measures in
health care, from employers, and from health care-related companies. We
found these comments to be extremely helpful and constructive as we
seek to promote transparency in the health care system.
Listed below are the eight issue areas related to transparency that
we identified in the comments and which generated the greatest number
of comments:
Features of transparency;
Types of pricing information;
Leadership/stakeholder participation;
Medicare Conditions of Participation;
Limited effectiveness of transparency efforts to address
uninsured and safety net providers;
Physician-identifiable Medicare claims data;
Concerns regarding the June 1, 2006 posting of payment
information on the 30 common elective procedures by DRG; and
The link between value-based purchasing and making the
health care system more transparent.
Comment: The majority of commenters provided comments on what types
of transparency features would be important to consumers with the end
goal of providing consumers with meaningful, easily accessible
information for health care decision-making. Many commenters suggested
conducting research on what information consumers would want. For
example, ease of use and ease of access to posted price information
(which may include a web-based tool), common definitions and language
to describe pricing information, and offering explanations of the
potential sources of variation in price are features that numerous
commenters identified. They also noted that the integration of price
and quality information is critical and that price should only be one
consideration in consumers' decision-making process. Several commenters
highlighted the importance of a feasible approach to implementation,
specifically highlighting the complexity of hospital pricing. One
commenter noted that physician ownership in specialty hospitals should
be transparent to the public. One commenter suggested that transparency
should promote the continuum of care. Finally, several commenters noted
that promoting the use of health information technology as well as
further developing quality measurements are important factors in
advancing transparency.
Response: We agree that it is important to understand what
information beneficiaries want, how they use the information, whom
beneficiaries consult in making decisions, and the needs of different
types of users of information. Particularly with regard to Medicare
beneficiaries--many of whom face challenges in accessing and
understanding information--CMS has strived to provide information on
quality in a way that is accessible and meaningful to beneficiaries and
to those who assist beneficiaries in making health care decisions. CMS
and AHRQ have sponsored research in this area and will continue to
examine these issues. We will continue to improve the web-based tools
currently in use (such as Hospital Compare and Nursing Home Compare),
and will continue to explore other means of improving our ability to
disseminate information and means of encouraging the use of available
information.
We recognize the complexities involved in attempting to present
pricing information in an accurate and useful manner that is accessible
for the intended users. We agree that in making health care decisions,
consumers must have access to both cost and quality information and
that information must be available across the continuum of care.
Consumers also must have access to other types of information that may
be considered relevant when they are making decisions about their
health care. While CMS has recently begun releasing information on
Medicare payments to hospitals by procedure, and we plan to make
pricing information available for other types of providers and
practitioners, we recognize that an education effort is required to
enable the best use of pricing information. Similarly, from the
provider and practitioner point of view, there are many complexities
involved in the reporting of information on price and quality. We agree
that standardizing terminology and greater use of health information
technology would support transparency by reducing reporting burdens.
The ideal is to design a system that is feasible and accomplishes its
intended goals in the most efficient manner possible.
Comment: We received a significant number of comments on what types
of pricing information should be made publicly available based on
reliable claims data. Many commenters recommended making both hospital
charges and out-of-pocket costs available, and several commenters
recommended this as a Federal requirement. However, some commenters
cautioned against using hospital charges since they do not reflect
consumers' expected costs. Commenters noted that it is important to
help consumers understand that there

[[Page 48102]]

are price variations that reflect factors such as additional payments
to fund teaching and research missions, caring for the under- and
uninsured, and other costs. Several commenters noted the importance of
measuring costs and quality across settings and over appropriate
timeframes using evidence-based protocols. One commenter recommended
displaying CCRs. Another commenter recommended reporting national
average charges for certain common procedures. One commenter noted that
the cost of nursing care is not shown as a separate cost to patients.
One commenter noted that costs of supplies and services should be
transparent as well. With regard to possible studies of costs in areas
of the country where there are relatively high health care costs, one
commenter recommended that a studied region be homogenous, but
heterogeneous outside of the study area.
Response: As mentioned previously, we recognize the complexities
involved in attempting to present pricing information in an accurate
and useful manner that is accessible for the intended users. As also
noted above, we agree that in making health care decisions, consumers
must have access to both cost and quality information, as well as other
information that may be considered relevant when consumers are making
decisions about their health care. As noted above, while CMS has
recently begun to release information on Medicare payments to hospitals
by procedure as well as the number of procedures performed by the
hospital, and we plan to make pricing information available for other
types of providers and practitioners, we recognize that an education
effort is required to enable the best use of pricing information.
Consumers must take into account the many factors noted by commenters
which are components of the prices that consumers (or insurers) will
pay for care. For example, consumers may want to know the costs of all
the services they received in an episode-of-care when determining the
total costs for a course of treatment. Similarly, with an episode-of-
care approach, consumers also may want information about the quality of
care at each point in the continuum of care when multiple providers and
practitioners are involved.
With regard to beneficiary out-of-pocket costs, the current pricing
tools available to Medicare beneficiaries--the Medicare Personal Plan
Finder and the tools beneficiaries use in evaluating Part D drug
plans--are intended to give beneficiaries important, accurate
information about their expected out-of-pocket costs when faced with
various choices. At the same time, we believe it is desirable for
consumers to know how much their insurer--or the Medicare program (and
therefore taxpayers)--is paying for a person's care. The cost of care
to the primary payer should be a factor when a person is attempting to
make judicious decisions about his or her health care.
Comment: A considerable number of commenters addressed the
importance of leadership and stakeholder participation in efforts to
bring greater transparency to the health care system. Many commenters
noted the success of existing public-private partnerships and
recommended that CMS continue to build on these partnerships. Many
commenters recommended that the further expansion of hospital quality
information should be accomplished through the Hospital Quality
Alliance. Also, commenters noted that the AHRQ is best suited to
conduct research on what consumers want in helping them with health
care purchasing decisions. Several commenters suggested collaborative
efforts though workshops. Several commenters recommended a hospital-led
effort to create consumer-friendly pricing language. One commenter
suggested that insurance companies are best positioned to be advisors
to patients and to provide information on the expected costs for an
entire episode of care. One commenter supported a hospital-led effort
in making transparent information available to consumers, rather than a
government-led initiative.
Response: The views of many of the commenters are consistent with
CMS' current practices in the development and dissemination of quality
measures for Medicare beneficiaries, and are consistent with our future
direction with respect to transparency in providing price and quality
information. Many of the tools and measures that CMS currently uses in
providing information on quality have been developed through public-
private collaborations. CMS has used a collaborative approach for many
years, and CMS actively participates in efforts such as the Hospital
Quality Alliance, the Ambulatory Care Quality Alliance, the National
Committee on Quality Assurance, the National Quality Forum, and
numerous other organizations whose mission is to improve the quality of
health care by making valid, reliable information available to
providers and consumers. In particular, CMS is supporting pilot
programs in Boston, Indianapolis, Minneapolis-St. Paul, Wisconsin,
Phoenix, and California, in conjunction with the Hospital Quality
Alliance and Ambulatory Care Quality Alliance, to identify and
implement effective ways of providing better information on quality and
improving quality. As the commenters noted, the AHRQ is a leader in
this arena, and CMS will continue to work with AHRQ to ensure that
there is continuing progress in providing information on quality. A
broad, collaborative approach to the development and dissemination of
information also promotes improvement in the usefulness of the
information and improvement in the mechanisms of dissemination.
As noted above, we agree that it is important to understand the
information needs of Medicare beneficiaries, and we will continue to
examine that issue as it pertains to beneficiaries. As more information
on quality continues to be made available, and as pricing information
becomes more commonly available, we need to understand whether the new
information and the manner in which it is disseminated is effectively
serving the needs of beneficiaries and the needs of other individuals
and entities that assist beneficiaries in their decisionmaking
processes.
Comment: Several commenters opposed the option which suggested that
we modify the Medicare conditions of participation to require hospitals
to post price information on assistance programs for the uninsured.
Commenters noted that hospitals provide community financial assistance
to the uninsured in their service areas based on local patient
demographics and the local poverty level. They believe that as patient
demographics and poverty levels vary from community to community, so
must charity care policies. One commenter noted that without
Congressional action, CMS does not have the authority to require
hospitals to produce price information unrelated to Federal program
beneficiaries. This commenter also advocated that CMS allow the current
hospital pricing marketplace, that includes the provision of charity
care to the uninsured, to continue to operate without Federal
interference.
Response: Although we are not adopting our proposal to amend the
Medicare conditions of participation to require hospitals to post price
information, including information on assistance programs for the
uninsured at this time, we have not abandoned the idea and may consider
it in the future. As noted in the FY 2007 IPPS proposed rule, we are
considering several options to achieve greater transparency in the
health care system. We agree that any transparency policy must take
into

[[Page 48103]]

consideration the current programs operated by hospitals across the
country to provide financial assistance to the uninsured and the
variances in the patient demographics that are addressed by these
programs. However, we believe that providing true cost transparency in
the health care system will require making available price information
across populations through public-private collaboratives, such as the
AQA pilots. We appreciate the current efforts of the hospital and
insurance industries to work with CMS towards greater transparency in
the health care system.
Comment: Two commenters suggested that pricing transparency will
not address the problem of the uninsured and will have a marginal
impact on costs. Specifically, the commenters argued that the
complexity of, and variances in, hospital charge structures make price
comparisons among hospitals nearly impossible; and therefore posting
hospital-specific charges will not accomplish CMS' transparency goals.
Rather the commenters stated that CMS should work with Congress to
expand Medicaid and other safety net programs. Alternatively, the
commenters supported the expansion of CMS' current efforts to report
national average charges for certain common procedures, as this
information would allow patients to encourage their local hospitals to
align their charges with national averages. The commenters also noted
that for the privately insured, the relevant financial information is
the amount that is the patient's responsibility.
Response: We believe by increasing the transparency of health care
costs and providing cost and quality information to consumers to make
better-informed health care choices, overall costs to the health care
system should decrease and the quality of care will improve. Greater
health care efficiency is critical for the long-term sustainability of
the health care system, including the ability to deliver care to the
uninsured population. As we continue to develop policies to support
transparency in the health care system, CMS is committed to ensuring
that the needs of the uninsured population and the safety net providers
that serve them are addressed.
Comment: Three commenters recommended the release of physician-
identifiable Medicare claims data (fully protecting patient privacy),
to allow for better quality and efficiency performance reporting.
Response: Those making this comment suggest that releasing
physician-identifiable Medicare claims data to the public would
increase the scope and breadth of performance measures. CMS is firmly
committed to increasing the scope and breadth of performance measures
in all settings of care in which Medicare patients receive care.
Specifically, in this regulation, CMS is requiring hospitals to report
on a broader set of quality measures to receive the full payment
update. We agree that physician-identifiable claims are an important
source of information and are evaluating the potential to use
physician-identifiable Medicare claims in this initiative.
Comment: One commenter noted that the June 1, 2006 CMS posting of
payment information on the 30 common elective procedures by diagnosis-
related group (DRG) does not include information on the quality of care
delivered within each specific DRG.
Response: We agree that both quality and cost information must be
used to assess the value of health care. We disagree with the
commenter's view that CMS is not releasing information for
beneficiaries on both quality and cost on the same conditions. Many of
the patients who would receive care for the high-utilization condition
for which payment information has been posted would be the same
patients whose care would be assessed for Hospital Compare quality
measures. Further, the HQA surgical measures would apply to some of the
surgical procedures for which payment information was posted. Many
quality measures, such as the Hospital Consumer Assessment of
Healthcare Providers and Systems Survey[supreg] (HCAHPS[supreg]), are
not specific to certain procedures and may be just as important to
beneficiaries and other consumers as condition-specific clinical
measures. Other information included in the posting, such as how many
patients a hospital treats for a certain condition, also adds to the
information that people can use to make better decisions on their care.
Comment: Several commenters supported the link between value-based
purchasing and making the health care system more transparent.
Response: We agree that financial incentives can be a powerful tool
to encourage quality improvement. Almost all hospitals chose to report
and improve on certain quality measures when Congress determined that
reporting them should be a condition of receiving the full payment
update for inpatient care. Further, the initial results from the
Premier Hospital Quality Incentive Demonstration show that
participating hospitals, on average, improved on the quality measures
upon which they were assessed for purposes of receiving a payment
bonus. In addition to these efforts, CMS has embarked on a variety of
initiatives that use public reporting to provide useful information to
beneficiaries and to improve the quality and value of care. Payers,
beneficiaries, and providers share a common interest in having
consumers make informed health care decisions. Providers who deliver
high quality services at a lower cost than others should be given the
opportunity to be publicly acknowledged for their efforts.

V. Changes to the PPS for Capital-Related Costs

A. Background

Section 1886(g) of the Act requires the Secretary to pay for the
capital-related costs of inpatient acute hospital services ``in
accordance with a PPS established by the Secretary.'' Under the
statute, the Secretary has broad authority in establishing and
implementing the PPS for hospital inpatient capital-related costs. We
initially implemented the PPS for capital-related costs in the August
30, 1991 IPPS final rule (56 FR 43358), in which we established a 10-
year transition period to change the payment methodology for Medicare
hospital inpatient capital-related costs from a reasonable cost-based
methodology to a prospective methodology (based fully on the Federal
rate).
Federal fiscal year (FFY) 2001 was the last year of the 10-year
transition period established to phase in the PPS for hospital
inpatient capital-related costs. For cost reporting periods beginning
in FY 2002, capital PPS payments are based solely on the Federal rate
for most acute care hospitals (other than certain new hospitals and
hospitals receiving certain exception payments). The basic methodology
for determining capital prospective payments using the Federal rate is
set forth in Sec. 412.312. For the purpose of calculating payments for
each discharge, the standard Federal rate is adjusted as follows:
(Standard Federal Rate) x (DRG Weight) x (Geographic Adjustment
Factor (GAF)) x (Large Urban Add-on, if applicable) x (COLA for
hospitals located in Alaska and Hawaii) x (1 + Capital DSH Adjustment
Factor + Capital IME Adjustment Factor, if applicable).
Hospitals also may receive outlier payments for those cases that
qualify under the threshold established for each fiscal year as
specified in Sec. 412.312(c) of the regulations.
The regulations at Sec. 412.348(f) provide that a hospital may
request an additional payment if the hospital

[[Page 48104]]

incurs unanticipated capital expenditures in excess of $5 million due
to extraordinary circumstances beyond the hospital's control. This
policy was originally established for hospitals during the 10-year
transition period, but as we discussed in the August 1, 2002 IPPS final
rule (67 FR 50102), we revised the regulations at Sec. 412.312 to
specify that payments for extraordinary circumstances are also made for
cost reporting periods after the transition period (that is, cost
reporting periods beginning on or after October 1, 2001). Additional
information on the exception payment for extraordinary circumstances in
Sec. 412.348(f) can be found in the FY 2005 IPPS final rule (69 FR
49185 and 49186).
During the transition period, under Sec. Sec. 412.348(b) through
(e), eligible hospitals could receive regular exception payments. These
exception payments guaranteed a hospital a minimum payment percentage
of its Medicare allowable capital-related costs depending on the class
of hospital (Sec. 412.348(c)), but were available only during the 10-
year transition period. After the end of the transition period,
eligible hospitals can no longer receive this exception payment.
However, even after the transition period, eligible hospitals receive
additional payments under the special exceptions provisions at Sec.
412.348(g), which guarantees all eligible hospitals a minimum payment
of 70 percent of its Medicare allowable capital-related costs provided
that special exceptions payments do not exceed 10 percent of total
capital IPPS payments. Special exceptions payments may be made only for
the 10 years from the cost reporting year in which the hospital
completes its qualifying project, and the hospital must have completed
the project no later than the hospital's cost reporting period
beginning before October 1, 2001. Thus, an eligible hospital may
receive special exceptions payments for up to 10 years beyond the end
of the capital PPS transition period. Hospitals eligible for special
exceptions payments were required to submit documentation to the
intermediary indicating the completion date of their project. (For more
detailed information regarding the special exceptions policy under
Sec. 412.348(g), refer to the August 1, 2001 IPPS final rule (66 FR
39911 through 39914) and the August 1, 2002 IPPS final rule (67 FR
50102).)
Under the PPS for capital-related costs, Sec. 412.300(b) of the
regulations defines a new hospital as a hospital that has operated
(under current or previous ownership) for less than 2 years. (For more
detailed information, see the August 30, 1991 final rule (56 FR
43418).) During the 10-year transition period, a new hospital was
exempt from the capital PPS for its first 2 years of operation and was
paid 85 percent of its reasonable costs during that period. Originally,
this provision was effective only through the transition period and,
therefore, ended with cost reporting periods beginning in FY 2002.
Because we believe that special protection to new hospitals is also
appropriate even after the transition period, as discussed in the
August 1, 2002 IPPS final rule (67 FR 50101), we revised the
regulations at Sec. 412.304(c)(2) to provide that, for cost reporting
periods beginning on or after October 1, 2002, a new hospital (defined
under Sec. 412.300(b)) is paid 85 percent of its Medicare allowable
capital-related costs through its first 2 years of operation, unless
the new hospital elects to receive fully prospective payment based on
100 percent of the Federal rate. (Refer to the August 1, 2001 IPPS
final rule (66 FR 39910) for a detailed discussion of the statutory
basis for the system, the development and evolution of the system, the
methodology used to determine capital-related payments to hospitals
both during and after the transition period, and the policy for
providing exception payments.)
Section 412.374 provides for the use of a blended payment amount
for prospective payments for capital-related costs to hospitals located
in Puerto Rico. Accordingly, under the capital PPS, we compute a
separate payment rate specific to Puerto Rico hospitals using the same
methodology used to compute the national Federal rate for capital-
related costs. In general, hospitals located in Puerto Rico are paid a
blend of the applicable capital PPS Puerto Rico rate and the applicable
capital PPS Federal rate.
Prior to FY 1998, hospitals in Puerto Rico were paid a blended
capital PPS rate that consisted of 75 percent of the capital PPS Puerto
Rico specific rate and 25 percent of the capital PPS Federal rate.
However, effective October 1, 1997 (FY 1998), in conjunction with the
change to the operating PPS blend percentage for Puerto Rico hospitals
required by section 4406 of Pub. L. 105-33, we revised the methodology
for computing capital PPS payments to hospitals in Puerto Rico to be
based on a blend of 50 percent of the capital PPS Puerto Rico rate and
50 percent of the capital PPS Federal rate. Similarly, in conjunction
with the change in operating PPS payments to hospitals in Puerto Rico
for FY 2005 required by section 504 of Pub. L. 108-173, we again
revised the methodology for computing capital PPS payments to hospitals
in Puerto Rico to be based on a blend of 25 percent of the capital PPS
Puerto Rico rate and 75 percent of the capital PPS Federal rate
effective for discharges occurring on or after October 1, 2004.

B. Treatment of Certain Urban Hospitals Reclassified as Rural Hospitals
Under Sec. 412.103

In the FY 2007 IPPS proposed rule (71 FR 24122), we proposed
technical changes to Sec. Sec. 412.316(b) and 412.320(a)(1) to clarify
that hospitals reclassified as rural under Sec. 412.103 are not
eligible for the large urban add-on payment or for the capital DSH
adjustment. These changes were proposed to reflect our historic policy
that hospitals reclassified as rural under Sec. 412.103 also are
considered rural under the capital PPS. Since the genesis of the
capital PPS in FY 1992, the same geographic classifications used under
the operating PPS also have been used under the capital PPS.
These changes and clarifications are necessary because we
inadvertently made an error when we updated our capital PPS regulations
to incorporate OMB's new CBSA definitions for IPPS hospital labor
market areas beginning in FY 2005. In the FY 2005 IPPS final rule (69
FR 49187 through 49188), in order to incorporate the new CBSA
designations and the provisions of the newly established Sec. 412.64,
which incorporated the CBSA-based geographic classifications, we
revised Sec. 412.316(b) and Sec. 412.320 to specify that, effective
for discharges occurring on or after October 1, 2004, the capital PPS
payment adjustments are based on the geographic classifications under
Sec. 412.64. However, Sec. 412.64 does not reference the provisions
of Sec. 412.103 regarding the urban-to-rural reclassifications, as was
previously found in Sec. 412.63(b)(1).
We believe that this error must be corrected in order to maintain
our historic policy for treating urban-to-rural hospital
reclassifications under the operating PPS the same for purposes of the
capital PPS. Therefore, we proposed to specify under Sec. Sec.
412.316(b)(2) and (b)(3) and 412.320(a)(1)(ii) and (a)(1)(iii) that,
for discharges on or after October 1, 2006, hospitals that are
reclassified from urban to rural under Sec. 412.103 would be
considered rural.
We did not receive any public comments on our proposal. Therefore,
we are adopting as final, without modification, the proposed changes to
Sec. Sec. 412.316(b)(2) and (b)(3) and 412.320(a)(1)(ii) and
(a)(1)(iii) which specify that, for discharges on or after October 1,
2006, hospitals that are

[[Page 48105]]

reclassified from urban to rural under Sec. 412.103 would be
considered rural.

C. Other Technical Corrections Relating to the Capital PPS Geographic
Adjustment Factors

In the FY 2007 IPPS proposed rule (71 FR 24122) we proposed to make
technical corrections to the regulations under paragraphs (a) and (c)
of Sec. 412.316. Specifically, we proposed to make a technical change
under Sec. 412.316(a) to correct the cross-reference to ``Sec.
412.63(k)'' to clarify that the same wage index that applies to
hospitals under the operating PPS is used to determine the geographic
adjustment factor (GAF) under the capital PPS. We proposed to cross-
refer instead to subpart D of Part 412 to capture the applicable
requirements in their entirety.
We did not receive any public comments on our proposal. Therefore,
we are adopting as final without modification the proposed technical
change under Sec. 412.316(a) to correct the cross-reference to ``Sec.
412.63(k)'' to clarify that the same wage index that applies to
hospitals under the operating PPS is used to determine the geographic
adjustment factor (GAF) under the capital PPS. We cross-refer instead
to subpart D of Part 412 to capture the applicable requirements in
their entirety. This technical correction does not change any current
payment policies because the regulation, as written, makes clear that
the GAF adjustment for local cost variation under the capital PPS is
based on a hospital's operating PPS wage index value. Thus, the same
payment policies that are in effect prior to FY 2007 (that is, the GAF
is based on a hospital's operating PPS wage index value) will continue
in effect for FY 2007 and beyond; the only change in the regulation is
a correction of the erroneous cross-reference.
In addition, we proposed to make a technical correction under Sec.
412.316(c) to correct the cross-reference to ``Sec. 412.115'' to
clarify that, for hospitals located in Alaska and Hawaii, the same COLA
factor that applies to these hospitals under the operating PPS is used
to determine the COLA factor under the capital PPS. The existing
regulation erroneously references the COLA factor used to determine
payment under Sec. 412.115, which is not related to the operating PPS
COLA factor or any other payment factors. Again, we proposed to cross-
refer instead to subpart D of Part 412 to capture the applicable
requirements in their entirety.
We did not receive any public comments on this proposal. Therefore,
we are adopting as final, without modification, the proposed technical
correction. This technical correction does not change any current
payment policy; rather it makes clear that the capital PPS COLA factor
is based on the hospital's COLA factor under the operating PPS. This
technical correction reflects our historic policy that the COLA factor
under the capital PPS is based on the hospital's operating PPS COLA
factor, which is how the capital PPS COLA factor has been determined
since the implementation of the capital PPS in FY 1992. Thus, the same
payment policy that has been in effect prior to FY 2007 (that is, the
use of the operating PPS COLA factor as shown in the table in section
II.B.2 of the Addendum of this final rule in determining a hospital's
capital PPS COLA factor) will continue to be in effect for FY 2007 and
beyond; the only change in the regulation is a correction of the
erroneous cross-reference.

VI. Changes for Hospitals and Hospital Units Excluded From the IPPS

A. Payments to Excluded Hospitals and Hospital Units (Sec. 413.40)

1. Payments to Existing and New Excluded Hospitals and Hospital Units
Historically, hospitals and hospital units excluded from the
prospective payment system received payment for inpatient hospital
services they furnished on the basis of reasonable costs, subject to a
rate-of-increase ceiling. An annual per discharge limit (the target
amount as defined in Sec. 413.40(a)) was set for each hospital or
hospital unit based on the hospital's own cost experience in its base
year. The target amount was multiplied by the Medicare discharges and
applied as an aggregate upper limit (the ceiling as defined in Sec.
413.40(a)) on total inpatient operating costs for a hospital's cost
reporting period. Prior to October 1, 1997, these payment provisions
applied consistently to all categories of excluded providers
(rehabilitation hospitals and units (now referred to as IRFs),
psychiatric hospitals and units (now referred to as IPFs), LTCHs,
children's hospitals, and cancer hospitals).
Payment for children's hospitals and cancer hospitals that are
excluded from the IPPS continues to be subject to the rate-of-increase
ceiling based on the hospital's own historical cost experience. (We
note that, in accordance with Sec. 403.752(a) of the regulations,
RNHCIs are also subject to the rate-of-increase limits established
under Sec. 413.40 of the regulations.) For IRFs, IPFs, and LTCHs,
reasonable cost payment provisions changed significantly for cost
reporting periods beginning on or after October 1, 1997.
Section 1886(b)(3)(H) of the Act established caps on the target
amounts for cost reporting periods beginning on or after October 1,
1997, through September 30, 2002, for certain existing hospitals and
hospital units excluded from the IPPS. Section 413.40(c)(4)(iii) of the
implementing regulations states that ``In the case of a psychiatric
hospital or unit, rehabilitation hospital or unit, or long-term care
hospital, the target amount is the lower of amounts specified in
paragraph (c)(4)(iii)(A) or (c)(4)(iii)(B) of this section.''
Accordingly, in general, for ``existing'' IPFs, IRFs, or LTCHs for the
applicable 5-year period, the target amount is the lower of: The
hospital-specific target amount (Sec. 413.40(c)(4)(iii)(A)) or the
75th percentile cap (Sec. 413.40(c)(4)(iii)(B)).
For cost reporting periods beginning on or after October 1, 2002,
all IRFs are paid 100 percent of the adjusted Federal rate under the
IRF PPS. Therefore, an IRF, considered ``existing'' under section
1886(b)(3)(H) of the Act would have no portion of its payment subject
to Sec. 413.40(c)(4)(ii) of the regulations for cost reporting periods
beginning on or after October 1, 2002.
For cost reporting periods beginning on or after October 1, 2002,
to the extent an IPF or LTCH has all or a portion of its payment
determined under reasonable cost principles, the target amounts for the
reasonable cost-based portion of the payment are determined in
accordance with section 1886(b)(3)(A)(ii) of the Act and the
regulations at Sec. 413.40(c)(4)(ii). Section 413.40(c)(4)(ii) states,
``Subject to the provisions of [Sec. 413.40] paragraph (c)(4)(iii) of
this section, for subsequent cost reporting periods, the target amount
equals the hospital's target amount for the previous cost reporting
period increased by the update factor for the subject cost reporting
period unless the provisions of [Sec. 413.40] paragraph (c)(5)(ii) of
this section apply.'' Thus, because Sec. 413.40(c)(4)(ii) indicates
that the provisions of that paragraph are subject to the provisions of
Sec. 413.40(c)(4)(iii), which are applicable only for cost reporting
periods beginning on or after October 1, 1997, through September 30,
2002, the target amount for FY 2003 was determined by updating the
target amount for FY 2002 by the applicable update factor. For example,
if a provider was paid the cap amount in FY 2002, the target amount for
FY 2003 would be the amount paid in FY 2002, updated to FY 2003 (that
is, the target amount from the previous year increased by the
applicable update

[[Page 48106]]

factor). As discussed below, IRFs, IPFs, and LTCHs are now paid under
separate PPSs, although some are subject to transition payment
provisions.
In addition, a new method of determining the payment amount for
``new'' excluded providers for cost reporting periods beginning on or
after October 1, 1997. Section 413.40(f)(2)(ii) of the implementing
regulations states that, ``* * * the amount of payment for a new
psychiatric hospital or unit, a new rehabilitation hospital or unit, or
a new long term care hospital that was not paid and excluded prior to
October 1, 1997, is the lower of the hospital's net inpatient operating
cost per case or 110 percent of the nation median of the target amounts
for the class of excluded hospitals and units (psychiatric,
rehabilitation, long-term care) as adjusted for the difference in wage
levels and updated to the first cost reporting period in which the
hospital receives payment. The second cost reporting period is subject
to the same target amount as the first cost reporting period.'' For the
third cost reporting period, the target amount determined for the
preceding cost reporting period is updated to the third cost reporting
period. (See Sec. 413.40(c)(4)(v).)
The 110 percent of the national median payment limits for new
providers under TEFRA (Sec. 413.40(f)(2)(ii)) do not apply to those
IPFs or LTCHs, whose first cost reporting period begins on or after the
date the particular class of hospitals implemented their respective PPS
because they are paid 100 percent of their Federal PPS rate. IRFs are
paid 100 percent of the Federal rate under the IRF PPS for cost
reporting periods beginning on or after October 1, 2002. Therefore, the
110 percent of the median payment limitations are not applicable to
IRFs for cost reporting periods beginning on or after that date.
2. Separate PPS for IRFs
Section 1886(j) of the Act, as added by section 4421(a) of Pub. L.
105-33, provided for a phase-in of a case-mix adjusted PPS for
inpatient hospital services furnished by IRFs for cost reporting
periods beginning on or after October 1, 2000, and before October 1,
2002, with payments based entirely on the adjusted Federal prospective
payment for cost reporting periods beginning on or after October 1,
2002. Section 1886(j) of the Act was amended by section 125 of Pub. L.
106-113 to require the Secretary to use a discharge as the payment unit
under the PPS for inpatient hospital services furnished by IRFs and to
establish classes of patient discharges by functional-related groups.
Section 305 of Pub. L. 106-554 further amended section 1886(j) of the
Act to allow IRFs, subject to the blend methodology, to elect to be
paid the full Federal prospective payment rather than the transitional
period payments specified in the Act.
On August 7, 2001, we issued a final rule in the Federal Register
(66 FR 41316) establishing the PPS for IRFs, effective for cost
reporting periods beginning on or after January 1, 2002. There was a
transition period for cost reporting periods beginning on or after
January 1, 2002, and ending before October 1, 2002. For cost reporting
periods beginning on or after October 1, 2002, payments are based
entirely on the adjusted Federal prospective payment rate determined
under the IRF PPS.
3. Separate PPS for LTCHs
In accordance with the requirements of section 123 of Pub. L. 106-
113, as modified by section 307(b) of Pub. L. 106-554, we established a
per discharge, DRG-based PPS for LTCHs as described in section
1886(d)(1)(B)(iv) of the Act for cost reporting periods beginning on or
after October 1, 2002, in a final rule issued on August 30, 2002 (67 FR
55954). The LTCH PPS uses information from LTCH hospital patient
records to classify patients into distinct LTC-DRGs based on clinical
characteristics and expected resource needs. Separate payments are
calculated for each LTC-DRG with additional adjustments applied.
On May 7, 2004, we issued in the Federal Register a final rule (69
FR 25673) that updated the payment rates for the LTCH PPS and made
policy changes effective for a new LTCH PPS rate year of July l, 2004
through June 30, 2005. For the LTCH PPS rate year of July 1, 2005
through June 30, 2006, we issued in the Federal Register a final rule
(70 FR 24168) that further updated the payment rates and made policy
changes. For the LTCH PPS rate year of July 1, 2006 through June 30,
2007, we issued in the Federal Register a final rule (71 FR 27798) that
further updated the payment rates, discussed the LTC-DRG
classifications and relative weights which remain linked to the
inpatient DRG system, and made several policy changes. The 5-year
period for LTCHs to transition from a PPS payment consisting of a blend
of reasonable cost-based reimbursement and the adjusted Federal
prospective payment rate to a payment based on 100 percent of the
Federal prospective rate ends with cost reporting periods beginning on
or after October 1, 2005, and before October 1, 2006. LTCHs with cost
reporting periods beginning on or after October 1, 2006, are paid
entirely on the adjusted Federal prospective payment rate.
4. Separate PPS for IPFs
In accordance with section 124 of the BBRA and section 405(g)(2) of
Pub. L. 108-173, we established a PPS for inpatient hospital services
furnished in IPFs. On November 15, 2004, we issued in the Federal
Register a final rule (69 FR 66922) that established the IPF PPS,
effective for IPF cost reporting periods beginning on or after January
1, 2005. Under the final rule, we compute a Federal per diem base rate
to be paid to all IPFs for inpatient psychiatric services based on the
sum of the average routine operating, ancillary, and capital costs for
each patient day of psychiatric care in an IPF, adjusted for budget
neutrality. The Federal per diem base rate is adjusted to reflect
certain patient characteristics, including age, specified DRGs,
selected high-cost comorbidities, days of the stay, and certain
facility characteristics, including a wage index adjustment, rural
location, indirect teaching costs, the presence of a full-service
emergency department, and COLAs for IPFs located in Alaska and Hawaii.
We have established a 3-year transition period during which IPFs whose
first cost reporting periods began before January 1, 2005, will be paid
based on a blend of reasonable cost-based payment and IPF PPS payments.
For cost reporting periods beginning on or after January 1, 2008, all
IPFs will be paid 100 percent of the Federal per diem payment amount.
5. Grandfathering of Hospitals-Within-Hospitals (HwHs) and Satellite
Facilities
Existing regulations at 42 CFR 412.22(e) define a hospital-within-
a-hospital (HwH) as a hospital that occupies space in a building also
used by another hospital, or in one or more separate buildings located
on the same campus as buildings used by another hospital. In order to
be paid as an excluded hospital, an HwH is required to demonstrate
compliance with requirements at Sec. 412.22(e)(1) through (e)(3), as
applicable, which were established to create operational and
organizational separateness between the HwH and the host hospital with
which it is co-located.
The existing regulations at Sec. 412.22(h), relating to satellite
facilities of hospitals excluded from the IPPS, define a satellite
facility as a part of a hospital that provides inpatient services in a
building also used by another hospital, or in one or more entire
buildings located on the same campus as buildings used by another
hospital.

[[Page 48107]]

Section 412.25(e), relating to satellite facilities of excluded
hospital units, defines a satellite facility as a part of a hospital
unit that provides inpatient services in a building also used by
another hospital, or in one or more entire buildings located on the
same campus as buildings used by another hospital.
There are significant similarities between the definition of a
satellite facility and the definition of an HwH as it relates to their
co-location with other Medicare hospital-level providers (hosts). There
are also similarities in our policy concerns with the potential for
patient-shifting (and its consequences for the Medicare program)
between the co-located entities and their hosts. Regarding HwHs and
satellite facilities, particularly LTCH HwHs and satellite facilities
of LTCHs, which were the original entities that we regulated beginning
with FY 1995, we have repeatedly expressed our concerns (for example,
in the FY 2005 IPPS final rule (69 FR 49191)) that an HwH's or a
satellite facility's ``configuration could result in patient admission,
treatment, and discharge patterns that are guided more by attempts to
maximize Medicare payments than by patient welfare.'' (69 FR 48916 and
49191). We further believe that ``the unregulated linking of an IPPS
hospital and a hospital excluded from the IPPS could lead to two
Medicare payments for what was essentially one episode of patient
care.'' (69 FR 48916 and 49191). Therefore, we established
``separateness and control'' criteria to govern these relationships
with host hospitals, at Sec. 412.22(e) for HwHs, and at Sec. Sec.
412.22(h) and 412.25(e) for satellite facilities of excluded hospitals
and satellite facilities of hospital units, respectively. Moreover, for
HwHs and satellite facilities, we provided for the ``grandfathering''
of existing facilities, thereby exempting those that were in existence
prior to the establishment of the ``separateness and control''
requirements from compliance with the criteria. At Sec. 412.22(f), we
provided for the grandfathering of HwHs that were in existence on or
before September 30, 1995, as long as the hospital continues to operate
under the same terms and conditions. We also provided for
grandfathering HwHs that changed the terms and conditions under which
they operated between September 30, 1995 and before October 1, 2003,
but subsequently continued to operate under the terms and conditions in
effect on September 30, 2003. At Sec. 412.22(h)(3) and (h)(4) we
grandfathered satellite facilities that were part of a hospital, that
were in existence on September 30, 1999, and that met certain other
conditions. Further, at Sec. 412.25(e)(3) and (e)(4), we grandfathered
satellite facilities that were part of a hospital unit, were in
existence on September 30, 1999, and that met certain other conditions.
The purpose of our grandfathering certain existing HwHs and satellites
was to reflect reliance interests and settled expectations that existed
on the part of these facilities at the time the separateness and
control requirements were created.
The regulations addressing ``separateness and control'' policies
for each of the above types of entities are presently not entirely
uniform. This situation has arisen, in part, because the policies were
implemented at different times and also because there are differences
among the types of entities. (For example, in the FY 2003 IPPS final
rule (67 FR 49982 and 50105), we included a detailed discussion of the
``performance of basic functions'' test utilized for HwHs and how this
test was not applicable to satellite facilities.) There are also
differences between specific features of the grandfathering provisions
for HwHs and satellite facilities, despite the fact that, as noted
above, the intent of each of the grandfathering provisions was the same
(for HwHs at Sec. 412.22(f), for satellite facilities of hospitals at
Sec. 412.22(h)(3)(i) and (h)(4), and for satellite facilities of
hospital units at Sec. 412.25(e)(3) and (e)(4)). The regulations
exempt certain HwHs and satellite facilities from compliance with the
``separateness and control'' criteria governing the relationships with
their host hospitals as long as they continue to operate under the same
``terms and conditions,'' including the number of beds and square
footage considered to be part of the hospital or satellite facility as
of the date that they were grandfathered.
This particular policy was adopted because we believed that those
entities that were designated as grandfathered, versus those that were
required to meet the ``separateness and control'' requirements, should
not be permitted to alter their operations from the ``snapshot in
time'' taken when they were grandfathered and thus benefit even more
from this status. In other words, we believed that grandfathered
facilities received a benefit not enjoyed by nongrandfathered
facilities--namely, they were free from compliance with the
``separateness and control'' regulations and we did not want to allow
these entities to realize additional economic advantages by expansion
that would increase their Medicare payments by virtue of their
grandfathered status. Furthermore, it has been our policy that if a
grandfathered HwH or satellite facility of the HwH chooses not to
operate under the same terms and conditions in effect as of its
grandfathering, it could still be paid under the applicable excluded
hospital payment system if it changed its relationship with its host to
the extent that it has come into compliance with the applicable
``separateness and control'' requirements. In addition, our rationale
for the separateness and control requirements (and limiting the
grandfathering provision) was to prevent abusive gaming of the Medicare
payment system by co-located hospitals.
Because the underlying rationale for the grandfathering policies
for both HwHs and satellite facilities of HwHs is the same, upon review
of these various provisions, we believe that, where appropriate, the
grandfathering provisions should be consistent. Under the authority of
section 1871(a)(1) of the Act, which authorizes the Secretary to
prescribe such regulations as may be necessary to carry out the
administration of the Medicare program, in the FY 2007 IPPS proposed
rule (71 FR 24124) we proposed the following revisions to make the
policies consistent. We proposed to revise the HwH provision at Sec.
412.22(f) to include an exception to the requirement that a
grandfathered HwH be operated under the terms and conditions in effect
on October 1, 2003, that corresponds to the existing exceptions for
satellite facilities of hospitals and for satellite facilities of
hospital units at Sec. 412.22(h)(4) and 412.25(e)(4), respectively.
(As provided in Sec. 412.22(f), the original September 30, 1995,
``snapshot in time'' date for grandfathered HwHs was extended to
hospitals that changed the terms and conditions under which they
operated between September 30, 1995, and before October 1, 2003, in the
FY 2004 IPPS final rule (68 FR 45462).) Specifically, we proposed a
corresponding change to the HwH grandfathering provision at Sec.
412.22(f)(3) that would allow for increases or decreases in square
footage, or decreases in the number of beds of the HwH that are needed
for specific circumstances beyond the control of the facility. We
proposed to specify that increases or decreases in square footage or
decreases in the number of beds that are required because of the
relocation of a facility to permit construction or renovation necessary
for compliance with Federal, State, or local law affecting the physical
facility or because of catastrophic events such as fires, floods,
earthquakes, or tornadoes. (64 FR 14535) We also proposed to add a

[[Page 48108]]

provision for grandfathered hospital satellites and satellites of units
at Sec. 412.22(h)(5) and Sec. 412.25(e)(5) respectively, allowing a
decrease in square footage or numbers of beds for consistency with the
proposed regulations for grandfathered HwHs at Sec. 412.22(f)(3)(i)
and we proposed to amend Sec. 412.22(h)(4)(i) to mirror to the
language in Sec. 412.25(e)(4)(i).
The comments we received on our proposals, and our responses, are
set forth below.
Comment: All of the commenters, including commenters representing
grandfathered HwHs, including grandfathered LTCHs, children's
hospitals, a cancer hospital, and an IRF, hospital associations,
legislators, and industry consultants, endorsed our reexamination of
the existing restrictions on grandfathered HwHs changing the ``terms
and conditions'' under which they operate. A number of commenters
questioned whether or not HwHs would lose their grandfathered status if
they were required by Federal, State, or local law, or catastrophic
events to increase or decrease their square footage or to decrease
their number of beds in ways that did not involve relocations of the
facilities. Two commenters described hypothetical situations that could
result in a need for an increase in square footage for the
grandfathered HwH such as the following: Making necessary repairs to
the existing physical plant that are now governed by building standards
established by the American Institute of Architects (AIA) or the
Americans with Disabilities Act (ADA) since the facility was
established (and now required by law); compliance with privacy and
security requirements of the Health Insurance Portability and
Accountability Act of 1996 (HIPAA); or meeting fire or safety codes
that were not in existence when the facility was built. The commenters
requested that CMS clarify its grandfathering policies in light of such
scenarios.
Response: We thank the commenters for their support for our
proposals. After reviewing the comments, we agree that there are indeed
situations not related to the relocation of a facility that could make
it necessary to add or reduce square footage, or decrease the number of
beds in a grandfathered facility. Moreover, after consideration of this
concern and of the comments we received on our proposals, and for the
reasons summarized below, and in accordance with our authority in
section 1871(a)(1) of the Act we have decided to revise our regulations
on grandfathering of HwHs, satellites of IPPS-excluded hospitals, and
satellites of IPPS-excluded hospital units to allow these facilities
more flexibility to adjust their square footage upward or downward or
to decrease their number of beds. Specifically, in this final rule, for
cost reporting periods beginning on or after October 1, 2006, we are
revising the regulations in Sec. Sec. 412.22(f)(3)(applicable to
HwHs), 412.22(h)(4)(applicable to satellites of IPPS-excluded
hospitals), and 412.25(e)(4)(applicable to satellites of IPPS-excluded
units) to allow these facilities to increase or decrease the square
footage of the facility or to decrease the number of beds in the
facility without affecting the facility's grandfathered status. Under
the final rule, such changes could be undertaken for any reason and
would not be limited to situations involving changes in Federal, State,
or local laws or catastrophic events. Such changes also would not be
limited to cases in which a facility must be relocated. Therefore, we
have not finalized our proposed provisions that specified such
exceptions for HwHs, and in the case of satellites hospitals, we have
restored the existing terminology of Sec. 412.22(h)(4) for cost
reporting periods beginning before October 1, 2006. This is the case
because under our finalized policy, which is effective for cost periods
beginning on or after October 1, 2006, as discussed in detail below, we
are not restricting grandfathered HwHs at Sec. 412.22(h)(3) and
grandfathered satellites at 412.22(h)(5) from increasing or decreasing
their square footage or decreasing their number of beds. As discussed
elsewhere in these responses, even though grandfathered satellite units
will also be permitted to increase or decrease their square footage or
decrease their number of beds at Sec. 412.25(e), such facilities are
subject to the existing regulations regarding changes in size of
excluded units unless the change in size is necessitated by relocation
of the unit to permit construction or renovation necessary for
compliance with a law affecting the physical facility or because of
catastrophic event.
As noted above, in establishing grandfathering provisions
generally, we intended to protect certain existing hospitals and
satellite facilities from ``the potentially adverse impact of recent,
more specific regulations that we now believe to be essential to the
goals of the Medicare program'' (68 FR 45463). However, they were not
intended to establish a separate class of providers. Moreover, it was
our intention that our ``snapshot in time'' policy prevented
grandfathered entities that were advantaged more than their
nongrandfathered peer facilities as a result of their protected status
from realizing additional benefits by changing their ``terms and
conditions'' in ways that could increase their Medicare reimbursement.
It also helps prevent the program abuse associated with co-located
facilities that may result from patient shifting whereby Medicare makes
two separate payments for what is essentially a single episode of care.
Recently, several grandfathered LTCH HwHs and satellite facilities
questioned whether a decrease in their square footage or their number
of beds would result in negating their grandfathered status, because
compliance with each of the above cited grandfathering provisions
requires that they continue to operate under the same terms and
conditions, including the number of beds and square footage considered
to be part of the hospital, the satellite facility, or the hospital
unit in effect on the day that the grandfathering policy was
implemented. We also have been urged to modify our policies to allow
these grandfathered entities to increase in square footage and number
of beds without requiring compliance with the ``separateness and
control''policies discussed above. Clearly, under existing regulations,
an increase or a decrease in square footage or number of beds would
result in a loss of status as a grandfathered HwH or hospital satellite
facility (unless Sec. 412.22(h)(4) or Sec. 412.25(b)(3) applies)
because the existing regulations prohibit any change in the terms and
conditions of operation, as described above.
As stated above, under our broad authority in section 1871(a)(1) of
the Act, we have now decided to revise the regulations in Sec. Sec.
412.22(f) (applicable to HwHs), 412.22(h)(4) and (h)(5) (applicable to
satellites of IPPS-excluded hospitals) and 412.25(e)(4) and (e)(5)
(applicable to satellites of IPPS-excluded units) to allow these
facilities for cost reporting periods beginning on or after October 1,
2006, to increase or decrease the square footage of the facility or to
decrease the number of beds in the facility at any time without
affecting the facility's grandfathered status.
We made this decision following a review of public comments on our
proposed rule, as summarized below. In reaching this decision, we
recognize that allowing increases in the square footage of those
grandfathered facilities could, in some cases, increase their
reimbursement under Federal health insurance programs administered by
CMS. For example, any increase in the square footage of a grandfathered
facility

[[Page 48109]]

could result in increased operating costs. Therefore, an increase in
square footage in a grandfathered HwH that is paid for services to
Medicare beneficiaries under the TEFRA system could lead to an increase
in Medicare payments. We recognize that this result is not fully
consistent with our objective of not allowing a grandfathered facility
to make changes that would lead to increased costs to the Medicare
program. However, we believe it is necessary to weigh the importance of
this objective against the need, described by many of those whose
comments are summarized below, for hospitals and other grandfathered
facilities to have the flexibility to upgrade their facilities and
services to incorporate new technology or additional services to meet
patient needs or to comply with applicable new laws. After considering
these two competing objectives in relation to one another, we concluded
that allowing increases in square footage is justified even though in a
very limited number of cases (as explained below), it may result in
some additional cost to the Medicare program.
We note that with the exception of children's and cancer hospitals,
the only IPPS-excluded facilities are IRFs, IPFs, and LTCHs. The
payment methodologies applicable to IRFs, IPFs, and LTCHs use
prospectively determined rates, so that payments to an individual
facility are not affected by increases in the square footage of that
facility. Children's and cancer hospitals are paid through the use of a
TEFRA system under which increases in the square footage of a facility
would increase the facility's Medicare payments. However, there is only
one grandfathered cancer HwH and only three grandfathered children's
HwHs. For this reason, we believe that the total Medicare cost
increases, if any, will be very small.
Comment: Several commenters requested that we establish a policy
that would enable them to maintain their grandfathered status while
also being permitted to increase square footage to accommodate
advancements in patient care, and improvements in medical technology
that have evolved since they were grandfathered, and that would also
permit expansion for administrative or nonpatient related care
activities. The comments focused on each facility's need for additional
space (square footage) which would allow them the ability to expand to
accommodate dialysis, rehabilitation, telemetry, and hyperbaric
services, isolation areas, and additional diagnostic equipment which
are essential in order to maintain high quality patient services. A
number of commenters also noted that their needs for additional space
for administrative activities, professional instruction, and computer
hardware had grown since they were grandfathered. These commenters
argued that such expansions of square footage are essential in order to
efficiently deliver the highest quality care to Medicare beneficiaries
and, furthermore, would not result in any increased costs to the
Medicare program.
Several of the commenters asserted that the legislative intent of
section 4417(a) of the BBA of 1997, which established grandfathering
for those LTCH HwHs that were certified to participate in the Medicare
program on or before September 30, 1995, and that were co-located with
another hospital, was to protect these hospitals and not limit their
functioning. These commenters maintained that Congress did not intend
for a grandfathered HwH to lose the ability to participate in the
Medicare program as a hospital excluded from the IPPS if they added
beds or increased square footage in order to better serve Medicare
beneficiaries. Another commenter stated that the issue of how Medicaid
payments might be impacted by grandfathering of certain LTCHs was not
contemplated by the grandfathering provision in the BBA of 1997, and
asks CMS to clarify the application of the HwH rules to an excluded
hospital's participation in the Medicaid program.
Response: When we established the basic grandfathering requirements
for HwHs, we had two objectives. As we have noted above, we believed
the grandfathering provision enacted by Congress reflected a legitimate
interest in protecting certain existing hospitals that were co-located
with other hospitals from ``the potentially adverse impact of recent,
more specific regulations that we now believe to be essential to the
goals of the Medicare program'' (68 FR 45463). The grandfathering
provisions are an exception to the separateness and control
requirements that reflect reliance interests and settled expectations
that existed at the time the rule was set into place. Grandfathering
provisions for these facilities allowed existing HwHs to continue to be
paid outside of the IPPS, despite the fact that, among other factors,
they did not demonstrate operational or organizational separateness
between these grandfathered entities and their host hospitals. However,
the second objective was to ensure that these entities would not make
changes that would lead to increased costs to the Medicare program or
that could encourage inappropriate patient shifting by co-located
hospitals. This particular policy was adopted because we believed that
those entities that were designated as grandfathered should not be
permitted to alter their operations from the ``snapshot in time'' taken
when they were grandfathered and thus benefit even more from this
status than those facilities that were required to meet the
``separateness and control'' requirements. As noted above, an HwH could
change its terms and conditions under which it operates after September
39, 1995 but before October 1, 2003, after which time its terms and
conditions may not further change. (See FY 2004 IPPS final rule (68 FR
45462).) In other words, we believed that grandfathered facilities
received a benefit not enjoyed by nongrandfathered facilities--namely,
they were free from compliance with the ``separateness and control''
regulations and we did not want to allow these entities to realize
additional economic advantages by expansion that could increase
Medicare payments by virtue of their grandfathered status.
With respect to section 4417(a) of the BBA, we believe its purpose
was to protect LTCH HwHs that existed prior to September 30, 1995, from
losing their IPPS excluded status because they failed to meet the
separateness and control requirements recently promulgated by the
Secretary. We do not believe that it is reasonable to assume that by
creating a limited exception for these hospitals, Congress was
immunizing these facilities from any further regulation by the
Secretary as to their growth and financial impact on the Medicare
program. We do not believe Congress was establishing a separate class
of providers. Furthermore, contrary to commenter's assertions,
grandfathered facilities continue to remain free to add beds or square
footage at any time, as long as they meet the separation and control
requirements outlined in these regulations. Consequently, it is
inaccurate to suggest that a grandfathered HwH would lose its ability
to participate in the Medicare program as an excluded hospital if it
increases the number of beds or square footage since complying with the
separateness and control requirements remains an option for these
facilities.
In response to the comments stating that the issue of Medicaid
payments is not contemplated by the grandfathering provision in the BBA
of 1997 and asking us to clarify the application of the HwH rules to an
excluded hospital's participation in the Medicaid program, we note that
the grandfathering rules'

[[Page 48110]]

impact on the Medicaid payments to a hospital, to the extent there is
an impact, will depend on the particular payment methodology adopted by
the State in its State Medicaid plan. In general, if a State pays
grandfathered HwHs under a predetermined prospective rate which is
unaffected by changes in square footage, then individual hospitals
would not be directly affected by increases or decreases in their
square footage. By contrast, if the State were to pay grandfathered
HwHs under the TEFRA system used by Medicare or under another cost-
based system, payment could be directly affected by changes in square
footage. With respect to changes in the numbers of beds, to the extent
a hospital seeks to increase its number of beds because it is already
operating at or near its State licensed and Medicare-certified bed
capacity, increasing the number of beds would lead to a proportionate
increase in utilization and payment. We believe that it is appropriate
to consider the impact of revisions in Medicare policy on the Medicaid
payment system.
We continue to believe that it is entirely reasonable and
appropriate for to us regulate the growth of HwHs that have been
otherwise favored by exemptions from the more rigorous ``separateness
and control'' provisions that we have implemented for non-grandfathered
co-located providers. We also note that the issue here, namely our
reexamination of our grandfathering policies, is an exception to a
general rule to permit reliance on expectations that existed at the
time the rule was put in place. However, we do understand that, in
order to provide the highest level of patient care, any hospital will
have to respond to advancements in patient care, some of which may
involve the introduction of new technology requiring an increased need
for space, such as new imaging equipment or the installation of a
hyperbaric chamber. We also understand that a hospital may also have
reasonable need to create additional administrative space for a number
of reasons, among which are instructional space, updated computer
hardware, and record storage.
We believe that these commenters have presented cogent arguments
for our reconsideration of the preclusion against a grandfathered HwH
expanding square footage. We have evaluated the impact on the Medicare
program of allowing an increase in square footage for grandfathered
HwHs and have determined that we believe that such a policy change will
not result in additional Medicare payments to those grandfathered HwHs
that are paid under the excluded hospital PPSs (LTCH, IRF, and IPF).
For those grandfathered HwHs that are still reimbursed under the TEFRA
payment system (that is, certain cancer and children's hospitals)
square footage is used to allocate certain costs, so there may be a
corresponding increase in Medicare payment for those costs. However, we
believe (as we discuss in greater detail below) that because there is
only one grandfathered cancer HwH and three grandfathered children's
HwHs, the increased costs will be ``de minimus'' and we see no reason,
therefore, to distinguish them from other grandfathered HwHs in a way
that might discourage them from making necessary and appropriate
changes to their facilities that would result in increases in their
square footage. Therefore, we believe the de minimus costs to the
Medicare program associated with increases in square footage are
outweighed by the benefits associated with advancements in technology
and other patient care enhancements that may be achieved through
changes to hospital facilities that concurrently increase the square
footage of the facilities. Even though it is likely that any increase
in the square footage of a hospital or satellite paid under the TEFRA
system will increase the costs upon which Medicare payment is based,
certain improvements, such as the adoption of new technology or
modernization of a physical facility, may also result in reduced
operating costs that partially or entirely offset any cost increases.
Therefore, in this final rule, we are revising the policy that we
proposed at Sec. 412.22(f)(3) to specify that a grandfathered HwH may
increase or decrease its square footage or decrease its number of beds,
or both, without affecting its exception from the ``separateness and
control'' requirements for HwHs at Sec. 412.22(e). However, as
explained below, we continue to believe that an increase in the number
of beds, which could have a much more significant impact on the level
of payments to the facility under the Medicare programs, is a change to
the facility that should be a basis for terminating its grandfathered
status. This policy will be effective for cost reporting periods
beginning on or after October 1, 2006. Although we considered allowing
increases in square footage to situations involving new technology or
new laws affecting hospitals' physical facilities, we concluded that
such a policy would be overly prescriptive and that its enforcement
would not be cost effective in light of the limited increases in
Medicare spending we expect to result from this change. Thus, we have
not included any provision restricting the reasons for which such
changes may be made.
In the interest of consistent treatment of HwHs, hospital satellite
facilities (as defined in Sec. 412.22(h)), and satellite facilities of
units (as defined in section 412.25(e)(1)), and because similar
considerations underlie our policies with respect to each type of
grandfathered facility, we are also applying this policy to satellites,
effective for cost reporting periods beginning on or after October 1,
2006. To accomplish these changes, we are revising Sec. Sec.
412.22(f), 412.22(h), and 412.25(e) as set forth below.
In the case of facilities that are satellites of IPPS-excluded
units, we note that there are existing rules in Sec. 412.25(b)(1) and
(2) which govern changes in the square footage and number of beds in an
IPPS-excluded unit and where applicable, the regulations that we are
finalizing for the increase or decrease in square footage of the
decrease in number or beds of a grandfathered satellite unit will be
subject to these rules. Section 412.25(b)(1) permits increases in the
square footage or number of beds of a unit to be made only at the start
of a cost reporting period. However, as we have discussed previously,
in these finalized revisions of our grandfathering policy, while we are
allowing for an increase in square footage of grandfathered satellite
units, we are not allowing these facilities to increase their number of
beds. Therefore, we specify in Sec. 412.25(e)(5)(i), a grandfathered
unit structured as a satellite facility may only increase in square
footage at the beginning of a cost reporting period. Further, existing
regulations for excluded hospitals at Sec. 412.25(b)(2) permit
reductions in the square footage or number of beds of a unit to be made
only with 30 days' advance written notice to the fiscal intermediary
and CMS, requires maintenance of sufficient information to accurately
determine costs, and specifies that reductions in the number of beds or
square footage considered to be part of an excluded unit made during a
cost reporting period must remain in effect for the remainder of that
period. Since our finalized policy at Sec. 412.25(e)(5)(i) allows for
both reductions in square footage or bed number for grandfathered
satellite units, under circumstance other than those specified at Sec.
412.25(e)(4) we are requiring that any such decreases by these
facilities be subject to existing regulations for units of excluded
hospitals at 412.25(b)(2). We believe

[[Page 48111]]

that these requirements are reasonable and necessary because changes in
the square footage or a decrease in the number of beds in a satellite
of a unit may affect the bed size or square footage of the facility of
which it is a part. We believe this requirement is needed to avoid
confusion and provide for equitable and consistent treatment of all
excluded units.
However, under existing regulations at 412.25(e)(4), a
grandfathered satellite of a unit would be able to increase or decrease
its square footage or decrease its number of beds at any time, for
purposes of relocation of the facility to permit construction or
renovation necessary for compliance with changes in the law affecting
the physical facility, or because of catastrophic events.
Comment: Several commenters stated that if the proposed revisions
allowing for a decrease in square footage, but not an increase, were
finalized, their grandfathered HwHs would face the very onerous choice
of either not making necessary operational or clinical improvements to
their facilities or of having to disrupt longstanding favorable
relationships with the administration of their host hospital.
Response: As we have stated above, under the policy in this final
rule, we are not attempting to prescribe the reasons for which changes
in the square footage of grandfathered HwHs and satellites may be made.
We believe this approach will give the hospitals and satellites the
flexibility they need to increase or decrease square footage in
response to technological innovation, changes in hospital practice
patterns, shifts in the types of services required by the hospital's or
satellite's patients, and other factors relevant to the operation of
the facilities, without having to alter their historic relationship
with their host hospital.
Comment: One commenter stated that our proposed regulations
indicated a new flexibility to our implementation of grandfathering
rules for HwHs but found no logic in why we would allow certain changes
in ``terms and conditions'' but not others.
Response: Although we are making significant changes to the
proposed revisions of our grandfathering policy for HwHs and satellite
facilities in this final rule, as noted throughout these responses, we
believe that the rationale underlying our determinations is quite
apparent. We are permitting grandfathered HwHs and satellite facilities
an increase in square footage because we believe that there have been
significant clinical advances, some of which are detailed elsewhere in
these responses, reasonably requiring a hospital to increase its
physical space in order to accommodate new equipment or treatment
modalities so that it could continue it to offer the highest level of
medical care to its patients. We could also envision circumstances
under which changing administrative or otherwise nonclinical needs
could require additional space, and we have noted that we understand
that an increase in square footage by those HwHs and satellite
facilities paid under the TEFRA system may result in a de minimus
increase in Medicare costs. However, we do not believe that any of
these changes require the establishment of additional beds. Because the
number of beds is directly related to hospital capacity, adding bed
capacity will significantly increase costs to the Medicare program
across all excluded providers. This case is unlike that of an increase
in square footage because square footage increases would increase
Medicare spending only for services of those hospitals paid under the
TEFRA system. By contrast, increasing the bed capacity of a
grandfathered HwH or unit would allow increased utilization not only in
TEFRA facilities but in HwHs and satellites paid under the prospective
payment systems applicable to IRFs, IPFs, and LTCHs. To the extent that
any of these systems provides a higher level of payment for certain
services than the IPPS, allowing bed size increases by grandfathered
facilities might lead to the shifting of utilization from less
expensive to more expensive settings, thereby inappropriately
increasing Medicare spending.
Furthermore, a significant increase in the number of beds could
dramatically alter the size and character of the facility, thereby
defeating one of the primary purposes of grandfathering which was, as
noted above, to capture the ``snapshot in time'' for the grandfathered
facility. By allowing existing co-located facilities (HwHs or satellite
facilities) to continue to function as they had been, we were enabling
these facilities to continue to function as they were, without having
to make the organizational and operating changes necessary for
compliance with our separateness and control policies. Therefore, in
answer to the commenter, we believe that our rationale for the changes
that we are finalizing to the grandfathering regulations is apparent.
We are permitting changes that relate directly to the quality of
patient care and services and we are not allowing changes that we
believe could substantially and inappropriately increase costs to the
Medicare program. In addition, we note that we have never adopted a
policy that would preclude one of these facilities from changing other
terms and conditions under which it operates, including its bed size.
We would only require that such a facility begin to comply with the
separateness and control requirements.
Comment: Several hospitals requested that we allow them to increase
their bed numbers. One commenter, a children's hospital, noted that it
wanted to establish mental health beds for children and adolescents.
Another commenter suggested alternatives to our preclusion of increase
in bed size for grandfathered HwHs: that CMS allow a ``modest''
increase in beds equivalent to those permitted during the 18-month
moratorium established by Congress in section 507 of Pub. L. 108-173
for physician-owned specialty hospitals or if the grandfathered HwH
admitted a ``de minimus'' percentage (for example, 10 percent or less)
of patients from its host. This commenter and one other commenter, a
grandfathered LTCH co-located with an IRF from which the commenter
stated that the LTCH receives a minimum of admissions, suggested that
CMS establish another exemption from the bed size increase preclusion
of the grandfathering regulations if the inpatient facility with which
the grandfathered HwH is co-located is not an acute care hospital, but
rather is an IRF or an IPF or if the HwH is located on a campus of the
host acute care hospital but is not physically co-located with an acute
care hospital. The commenters believed that this particular exemption
is reasonable because, in the view of the commenter, our most
significant concern regarding HwHs is inappropriate shifting of
patients from a host acute care hospital to a LTCH HwH.
Response: In considering these comments, we believe it is important
to recall that grandfathered HwHs, as well as satellite facilities, are
organized and operated in ways that make them unable to meet the
minimal tests of separateness and control applicable to
nongrandfathered facilities, so that they effectively function as units
of their host facilities. Because of this, we continue to believe that,
in grandfathering HwHs and satellites facilities, we have conferred a
significant advantage on them as compared to like facilities that are
required to meet our ``separateness and control'' requirements and are
closely monitored. Therefore, although we are finalizing regulations
that will allow grandfathered HwHs and satellite facilities the ability
to increase their square footage, we are not allowing grandfathered
facilities an increase in the number of beds because such an

[[Page 48112]]

increase would result in unjustifiable additional payments to the
grandfathered HwH and inappropriate additional costs to the Medicare
program.
With respect to the childrens' hospital that indicated that it
wanted to be able to add additional beds to its hospital in order to
establish mental health beds for children and adolescents, we note the
following. First, grandfathered HwHs are not precluded from increasing
the number of beds, and in fact, they may do so at any time, so long as
they comply with the separateness and control requirements. In
addition, the fiscal intermediary for the grandfathered childrens' HwHs
that commented on this issue has indicated that based upon the
hospital's average inpatient census figures, there appear to be
sufficient beds available at the hospital to establish inpatient mental
health services for children and adolescents without adding additional
beds.
In response to the commenter's suggestions of either allowing a
``modest'' increase in bed numbers equivalent to that permitted for
physician-owned specialty hospitals under Pub. L. 108-173 or of 10
percent, or allowing an increase in bed numbers if the grandfathered
HwH was only admitting a ``de minimus'' percentage of patients from its
host, we do not believe that allowing any increase in the number of
beds for a grandfathered HwH is either necessary or appropriate. We
also do not believe that it is appropriate to establish a distinction
between grandfathered HwHs depending upon the hospital category of the
host, as did the commenters referring to a LTCH HwH that is co-located
with an IRF. Nor do we believe that it would be appropriate to broaden
this commenter's suggested exemption to grandfathered HwHs that are on
the campus of an acute care hospital but are physically co-located with
IRFs or IPFs. Our intent in establishing the grandfathering provisions
for HwHs and satellite facilities was never to establish separate
classes of grandfathered providers. Rather, it was to protect settled
expectations that existed at the time that the grandfathering rules
were put in place. In addition, in each of these configurations, an
increase in bed size could result in a significant increase in Medicare
utilization and payment and given the close integration between a
grandfathered HwH or satellite and its host hospital, we believe the
potential for inappropriate Medicare spending increases exists.
As discussed above, although the original ``separateness and
control'' regulations focused on the particular configuration of an
acute care host being paid under the IPPS and a LTCH being paid under
the TEFRA system (59 FR 45389 through 45393), the regulations were
extended for FY 1998 (62 FR 46014) to include all hospitals excluded
from the IPPS and not just those that were co-located with an acute
care hospital. (In the FY 1999 IPPS final rule, among other rules, we
established ``separateness and control'' requirements for satellites
(65 FR 41532 through 41535)). Thus, contrary to the commenter's
assertion, our concern with HwHs is not limited to an acute care
hospital co-located with a LTCH HwH.). Despite the fact that the LTCH
HwH commenter received very few patients from its host IRF, we do not
believe that the behavior of one grandfathered HwH can be generalized
to indicate the behavior of an entire LTCH industry or the behavior of
all grandfathered facilities. Although we endorse the behavior that the
commenter describes, we do not believe that it is necessary or
appropriate to establish an additional exemption that would allow a
grandfathered HwH that is already advantaged by not having to comply
with ``separateness and control'' regulations to expand its number of
beds solely because it is not ``gaming'' the system but rather it is
functioning within accepted Medicare policies and procedures.
Comment: One commenter asked us to clarify whether CMS would permit
a grandfathered HwH that reduced its size and bed number from the
number that it had at the time at which it had been grandfathered to
return to that original size and bed number at a future time without
threatening its grandfathered status. A number of commenters asked CMS
to specify that grandfathered HwHs would be able to add or discontinue
direct patient care services in the same manner as any other hospital
and whether the scope and amount of those services would be limited to
those that were in place when the HwH was grandfathered. Specifically,
commenters asked whether a grandfathered HwH could provide outpatient
services or establish provider based services.
Response: After considering the question raised by the first
commenter, we have decided to adopt a policy under which a
grandfathered HwH that reduced its bed number from the point at which
it had been grandfathered would be permitted to return at a future time
to the number of Medicare-certified beds that existed at the time it
was grandfathered, as governed either by Sec. 412.22(f)(1) or (f)(2),
without threatening its grandfathered status. Specifically, we are
revising Sec. 412.22(f)(3) to provide that if a hospital decreases its
number of beds below the number of beds considered to be part of the
hospital on September 30, 1995, it may subsequently increase the number
of beds at any time as long as the resulting total number of beds
considered to be part of the hospital does not exceed the number in
effect on September 30, 1995 (for hospitals that continue to operate
under the same terms and conditions in effect on that date, as
described in Sec. 412.22(f)(1)) or the number in effect on September
30, 2003, as described in Sec. 412.22(f)(1) (for hospitals that
changed the terms and conditions under which they operated after
September 30, 1995 but before October 1, 2003), as described in Sec.
412.22(f)(2). We are including similar changes in Sec. 412.22(h)(4)
(applicable to satellites of IPPS-excluded hospitals) and Sec.
412.25(h)(4) (applicable to satellites of IPPS-excluded units). We
believe this policy is consistent with our stated intent to allow
hospitals that were in existence prior to the implementation of the HwH
or the satellite rules to continue to operate under the same terms and
conditions they had operated under at the time those provisions were
implemented. Allowing a hospital that had decreased its number of beds
below the number it had as of the date of the implementation of the HwH
and satellite provisions to increase its number of beds up to the level
it had on the implementation date, allows the hospital to maintain its
original ``terms and conditions''. These changes, like the rest of our
revisions to sections 412.22 and 412.25, will be effective for cost
reporting periods beginning on or after October 1, 2006.
In response to the question as to whether a grandfathered HwH could
provide outpatient services or establish provider-based services, we
wish to note that the statutory provisions of section 1886(d)(1)(B) of
the Act govern Medicare payment for inpatient hospital services of
hospitals and units that are excluded from the IPPS. Our HwH
regulations at Sec. 412.22 address the relationship between an
inpatient acute care hospital payable under the IPPS and an inpatient
hospital that is excluded from the IPPS that are co-located. For this
reason, our HwH regulations, including the exemption for grandfathered
facilities, only address space used for inpatient services and this
would also be true for satellite facilities. As has always been the
case, an HwH or satellite facility would be able to discontinue or to
initiate noninpatient services, including onsite

[[Page 48113]]

or offsite outpatient hospital services without compromising its
grandfathered status. Such changes in scope of outpatient services or
the establishment of provider-based departments would of course have to
be done in compliance with other applicable regulations, such as 42 CFR
413.65 governing provider-based status for facilities or organizations.
Comment: Several commenters urged CMS to make an exception for
grandfathered children's hospitals and allow them to expand square
footage and also bed numbers without any deleterious impact on their
status as hospitals certified by Medicare as exempt from the IPPS. The
commenters noted that there are only three grandfathered children's
hospitals. One commenter emphasized that, as opposed to other excluded
HwHs, children's hospitals do not serve a Medicare population, because
very few beneficiaries are children. Therefore, any expansion that CMS
allows for the three grandfathered facilities would not lead to
increased Medicare costs. Although these HwHs do not treat a
significant number of Medicare beneficiaries, however, the commenters
emphasize that loss of the Medicare exclusion from the IPPS would have
a significant and negative impact on their Medicaid reimbursements as
well as on their ability to receive funds to train residents under the
Federal CHGME. The commenters believed that, despite the fact that each
of the children's hospitals are major Medicaid providers, the number of
beds in a facility has no bearing on whether or not a patient is deemed
Medicaid eligible. Furthermore, they added, since Federal funding for
State Medicaid disproportionate share hospital payments is capped, if
these hospitals are allowed to grow, such growth would not cause the
Federal portion of Medicaid to exceed the caps. The commenters claimed
that there is no benefit to Medicare from applying the prohibition
against growth or increase in bed numbers to children's hospitals;
rather, they believe that there would be significant harm to these
hospitals and to their community if they had to choose one of the three
alternatives open to them: not expanding to serve their communities;
losing their Medicare IPPS-exempt status; or altering their
administrative and medical governance with regard to their co-located
hospital, which would pose significant legal, operational, and
financial barriers.
This commenter further asserted that the three reasons why CMS has
established special regulations for grandfathered HwHs are not germane
for children's hospitals, that is, ``to prevent proliferation of LTCHs
that function as units of host acute care hospitals; to prevent the
avoidance of TEFRA target rates; and to avoid two Medicare payments for
one episode of care.'' The commenter also asserted the following
points: there is no proliferation of children's hospitals; children are
admitted directly to their facilities and do not spend time in the
acute care hospital, so there are no issues about two hospital payments
for one spell of illness; and the three grandfathered children's HwHs
have not reorganized since they were established at least 30 years ago,
long before this category was recognized for payment purposes by CMS.
Some commenters stated that CMS has established a precedent of
treating children's hospitals differently from other excluded hospital
types in establishing our regulations at Sec. 412.22(i), which
exempted children's hospitals from the general policy that disallowed
excluded hospitals with satellite facilities that were in existence
prior to October 1, 1997, from expanding their total bed numbers (the
sum of the beds in the hospital and the satellite) beyond the number
that they had on October 1, 1997. These commenters further maintained
that CMS has stated that it believes that the grandfathering
regulations for satellite regulations and grandfathering regulations
for HwHs should be consistent and that, specifically, the satellite
regulations at Sec. 412.22(h)(2)(i) exempt children's hospitals from
the limitation on bed number expansion to which other excluded hospital
satellites are subject. Therefore, the commenter requested that CMS
provide the same exception for grandfathered children's HwH and allow
expansion in the number of beds without compromising their
grandfathered status.
Response: The commenters have urged us to establish a policy that
would distinguish grandfathered children's HwHs from the other
categories of grandfathered HwHs and allow them to expand both in
square footage and in number of beds. We understand the commenters'
statements that, although the facilities do not serve a significant
Medicare population and hence there would be little or no additional
costs to the Medicare program should they be permitted to expand, their
continued status as hospitals excluded from the IPPS under Medicare is
important to them because it might enhance their ability to obtain
higher Medicaid payment or more for CHGME.
As we have noted above, we are finalizing a policy for all
grandfathered excluded HwHs that would allow them to increase or
decrease their square footage without compromising their status of
IPPS-excluded hospitals or their grandfathered status and this policy
would also be applicable to the three grandfathered children's HwHs. We
are making this change because we believe that the commenters have
presented cogent arguments regarding their facility's need to
physically expand in order to accommodate new medical equipment and
services as well as to meet new administrative needs in order to
continue to deliver high quality medical care. However, we have stated
that we are not allowing grandfathered HwHs to increase their number of
beds without compromising their grandfathered status. The commenters
claimed that children's HwHs treat few Medicare beneficiaries, and
therefore there would be no significant additional costs to the
Medicare system should they be allowed to increase their bed numbers.
Because a change allowing children's HwHs to keep grandfathered status
while increasing their number of beds would not significantly increase
Medicare spending but would increase Medicaid payments to the
hospitals, these hospitals recommend that such a change be made.
We considered this comment carefully but do not find it persuasive.
As stated above, a key objective of revising our HwH and satellite
grandfathering regulations is to provide a high degree of uniformity
and consistency for all grandfathered IPPS-excluded facilities. We do
not believe it would be consistent with this objective if we were to
single out a particular type of excluded facility for special, more
favorable treatment simply because the patient population treated by
the hospital typically includes very few Medicare patients. (In
addition, even though Medicare payment amounts might not increase in
this circumstance, we find it important to maintain a high level of
credibility in the Medicare system because it is typically used as a
reference for Medicaid payments.) We also do not believe the absence of
adverse Medicare cost impact is a sufficient reason for making a change
to national Medicare policy solely in order to increase Medicaid
payments to a select class of hospitals. In this context, we note under
Medicaid, the States are not bound to follow Medicare payment rules for
children's hospitals, but instead have considerable flexibility to
modify their individual State plans to provide the level of payments
for services that will best meet the needs of Medicaid recipients in
the particular

[[Page 48114]]

State. To the extent additional payment under Medicaid is appropriate
in a State, we believe provision for it should be made through the
State Medicaid plan rather than by a national Medicare change affecting
all States. Moreover, as we have noted, our data reveal that the there
presently is no shortage of bed capacity for the three grandfathered
children's HwHs, but that, on the contrary, all three are operating
below the licensed bed capacity under State law. Thus, it appears that
the current number of beds in these hospitals is adequate. Further, we
wish to emphasize that grandfathered facilities remain free at any time
to increase their number of beds so long as the applicable separateness
and control regulations are met.
In regard to the comment that CMS should allow grandfathered
children's HwHs to increase their bed size without losing their
grandfathered status because CMS has established a precedent for
special treatment of children's hospitals through the regulations at
Sec. 412.22(h)(2)(i), which exempt children's hospitals from the
satellite restrictions applicable to certain other types of IPPS-
excluded hospitals, we believe this comment reflects a misunderstanding
of the scope and purpose of Sec. 412.22(h)(2)(i).
To respond fully to this comment, it will be necessary to review
the background of Sec. 412.22(h)(2)(i). Under the BBA of 1997, certain
types of hospitals and hospital units which were first excluded from
the IPPS for a cost reporting period beginning on or after October 1,
1997 were paid under lower TEFRA ceilings than hospitals and units that
were excluded from the IPPS for a cost reporting period beginning
before that date (64 FR 41533). Following enactment of this provision,
CMS became aware of some interest by existing hospitals in establishing
satellite units in new locations that would function in much the same
way as new hospitals, but would qualify for payment under the higher
TEFRA ceilings applicable to previously-excluded hospitals. To prevent
satellite facilities of this type from being used to circumvent the BBA
provision, we added new regulatory requirements, in Sec.
412.22(h)(2)(i). Under those requirements, an IPPS-excluded hospital's
number of beds, including both beds at the main campus and beds at any
satellite locations, could not exceed the hospital's number of beds on
the last day of its last cost reporting period beginning before October
1, 1997. As noted earlier, the lower TEFRA ceilings imposed by the BBA
applied only to certain types of hospitals, specifically long-term
care, psychiatric, and rehabilitation hospitals. They did not apply to
children's hospitals. In determining the scope of section
412.22(h)(2)(i), therefore, we decided not to impose the satellite
restrictions on children's hospitals because those new children's
hospitals were not subject to the new, lower TEFRA ceilings and
therefore would have no incentive to attempt to evade them.
In other words, the inapplicability of Sec. 412.22(h)(2)(i) to
children's hospitals does not reflect any decision by CMS to provide
special, favorable treatment for children's hospitals by excluding them
from a restriction that would otherwise apply to them. On the contrary,
it simply reflects a policy decision by CMS that a regulation designed
to prevent a particular abusive practice should not be applied to those
hospitals that would not have an incentive to engage in that practice.
(Although not raised by any commenter, a question might arise as to
why CMS did not exempt cancer hospitals from the bed size restriction
since they, like children's hospitals, were not subject to the lower
TEFRA ceilings imposed by the BBA. The legislative provision under
which cancer hospitals are excluded from the IPPS at section
1886(d)(1)(B)(v)(I), (II) and (III)] limits cancer hospital status to
those specified hospitals. These provisions effectively prevent the
recognition of new cancer hospitals. We were concerned that this
provision might create an incentive for the opening of new satellites
in an attempt to circumvent the restriction inherent in the legislative
provision, which would be an abusive practice of the same type as using
satellites to evade the BBA provisions. To counter the incentive that
might exist for such a practice, cancer hospitals have not been
excluded from the scope of Sec. 412.22(h)(2)(i).)
We also would address the commenter's specific assertions that
children's hospitals should not be subject to general restrictions on
growth that we have established for grandfathered HwHs and satellite
facilities because of the following reasons: there is no proliferation
of children's hospitals; children are admitted directly to their
facilities and do not spend time in acute care hospitals; the three
grandfathered children's HwHs have not reorganized since they were
established at least 30 years ago, long before this category was
established for payment purposes by CMS. Although these assertions may
be accurate, we do not believe that they are germane to the issue of
the revisions of the regulations for grandfathered HwHs and satellite.
In this final rule, we are finalizing policies that revise the
preclusion on changing ``terms and conditions'' and will allow
grandfathered HwHs and satellite facilities to decrease their square
footage or bed numbers and also to increase their square footage. As
discussed above, expansion in square footage of the three grandfathered
children's HwHs, could result in increased costs to the Medicare
program, since children's hospitals are paid for under the TEFRA
system. We have determined, however, that the increased costs will be
``de minimus'' and we believe that such costs to the Medicare program
associated with increases in square footage are outweighed by the
benefits associated with advancements in technology and other patient
care enhancements that may be achieved through changes to hospital
facilities that concurrently increase the square footage of the
facilities.
Comment: One commenter representing a cancer hospital, which the
commenter identifies as the only grandfathered hospital in this
provider category, stated that limiting the growth of this cancer
hospital is inequitable and punitive since it is the only cancer
hospital being affected. The commenter stated that the regulatory
criteria have ensured that there will be no future hospitals in this
category developed and, therefore, our concerns about the negative
impact of HwH growth on the Medicare system has no policy rationale in
this case. The commenter urged CMS to exempt this cancer hospital from
the growth restrictions for grandfathered HwHs.
Response: We do not agree that the grandfathering provision for
HwHs in existence before September 30, 1995, is ``inequitable or
punitive.'' Although we understand that the specific statutory
provision at section 1886(d)(1)(B)(v) of the Act and the regulatory
criteria at Sec. 412.23(f) make it unlikely that there will be
additional cancer HwHs established, we reiterate that our
grandfathering policy for HwHs was not established in order to limit
HwH growth. Our goal, as noted above, was to enable hospitals excluded
from the IPPS that were co-located prior to the recognition of HwHs as
an entity to continue in their present arrangement with their ``host''
hospital without having to comply with the regulatory framework that we
were establishing for HwHs. Because we were giving these hospitals a
significant advantage, we believe that it was reasonable and equitable
to put restrictions on their

[[Page 48115]]

growth unless they elected to comply with the HwH regulations at Sec.
412.22(e). As we have indicated previously, grandfathered facilities
remain free at any time to increase their beds so long as they comply
with separateness and control requirements.
Based on our reconsideration of our proposed policy, at this time
we are finalizing regulations at Sec. 412.22(f)(3) that allow
grandfathered HwHs to increase in square footage because we believe
that there have been significant clinical advances, some of which are
detailed elsewhere in these responses, reasonably requiring a hospital
to physically expand in order to accommodate new equipment or treatment
modalities that would enable it to continue to offer the highest level
medical care to its patients. We could also envision that circumstances
under which changing administrative or otherwise non-clinical needs
could require additional space. However, we emphasize that we do not
believe that any of these changes require the establishment of
additional beds. Therefore, although the commenter's hospital will be
permitted to increase its square footage, we are not establishing an
exemption for a grandfathered cancer HwH from the limitation on
increasing the number of beds.
After consideration of the public comments received, we are
revising Sec. 412.22(f)(3) and (h)(5) and Sec. 412.25(c)(4) of the
regulations to state that grandfathered HwHs and satellites will be
permitted to decrease their square footage or number of beds, or both
or increase their square footage without compromising their
grandfathered status. This policy is effective for cost reporting
periods beginning on or after October 1, 2006.
Because grandfathered HwHs or grandfathered satellite facilities
may be co-located with an acute care hospital or may be co-located with
another excluded hospital (69 FR 49198), we want to emphasize that
under our policy revisions described above, where the HwH or satellite
facility decreases its number of beds or square footage, there could be
an impact on the host hospital if the hospital is also a PPS-exempt
hospital and is also exempted because of grandfathering from compliance
with the ``separateness and control'' requirements. (Because excluded
hospitals are prohibited from having excluded hospital units under
Sec. 412.25(a)(1)(ii), this discussion is limited to HwHs and
satellite facilities of hospitals.) For example, if grandfathered HwH
``A'' is co-located with another hospital excluded from the IPPS,
hospital ``B'' (which is a rehabilitation hospital), a decrease in the
number of beds in hospital ``A'' could impact the grandfathered status
of hospital ``B'' if hospital ``B'' absorbed the extra beds. In such a
case, if the determination were made that hospital ``B'' would expand,
in order to maintain status as an excluded hospital, hospital ``B''
would then have to meet the applicable ``separateness and control''
requirements at Sec. 412.22(e).
6. Changes to the Methodology for Determining LTCH Cost-to-Charge
Ratios (CCRs) and the Reconciliation of High-Cost and Short-Stay
Outlier Payments under the LTCH PPS
a. Background
In the June 9, 2003 IPPS high-cost outlier final rule (68 FR
34498), we made revisions to our policies concerning the determination
of LTCHs' CCRs and the reconciliation of high-cost and short-stay
outlier payments under the LTCH PPS. As we stated in that final rule,
(68 FR 34507), because the LTCH PPS high-cost outlier and short-stay
outlier policies are modeled after the IPPS outlier policy, we believe
they are susceptible to the same payment vulnerabilities and,
therefore, merited revision.
We revised our regulations to specify that fiscal intermediaries
will use either the most recent settled cost report or the most recent
tentative settled cost report, whichever is from the later cost
reporting period, because we believe that a hospital has the ability to
inappropriately increase its outlier payments during the time lag
between the current charges and the CCR from the settled cost report,
through dramatic charge increases. Using either the most recent settled
cost report or the most recent tentative settled cost report, whichever
is from the later cost reporting period, in many cases, reduces the
time lag for updating CCRs by a year or more.
We also revised the regulations to specify that, in the event more
recent charge data indicate that an alternative CCR would be more
appropriate, CMS has the authority to direct the fiscal intermediary to
change the LTCH's CCR to reflect the change evidenced by the more
recent data. We made this change because even the later (that is, most
recent) CCRs calculated from the tentatively settled cost reports would
overestimate costs for hospitals that have continued to increase
charges much faster than costs during the time between the tentatively
settled cost report and the time when the claim is processed. In
addition, we further revised the regulations to allow a hospital to
contact its fiscal intermediary to request that its otherwise
applicable CCR be changed if the LTCH presents substantial evidence
that its CCR is inaccurate (68 FR 34497 and 34506 through 34508).
Also in the June 9, 2003 final rule (68 FR 34499 through 34500 and
34506 through 34507), we revised the regulations to specify that a
fiscal intermediary may use a statewide average CCR if it is unable to
determine an accurate CCR in one of three circumstances discussed in
greater detail below. We made this revision because we noted that as
hospitals raise their charges faster than their costs increase, over
time their CCRs will decline. If hospitals continue to increase charges
at a faster rate than their costs increase over a long period of time,
or if they increase charges at extreme rates, their CCRs may fall below
the range considered reasonable and, under our former policy, fiscal
intermediaries would, in most cases, assign a statewide average CCR.
These statewide averages are generally considerably higher than the
threshold. Therefore, prior to the change in the regulations, these
hospitals benefited from an artificially high ratio being applied to
their already high charges. Furthermore, hospitals could continue to
increase charges faster than costs, without any further downward
adjustment to their CCR.
In addition, in the June 9, 2003 final rule (68 FR 34500 through
34502 and 34506 through 34508), we added a provision to our regulations
to provide that outlier payments would become subject to reconciliation
when hospitals' cost reports are settled. We noted that we had become
increasingly aware that some hospitals had taken advantage of the
former outlier policy by increasing their charges at extremely high
rates, knowing that there would be a time lag before their CCRs would
be adjusted to reflect the higher charges. We believed that even the
revisions to the regulations described above would not completely
eliminate all such opportunity. We explained that we believed that a
hospital would still be able to dramatically increase its charges by
far above the rate-of-increase in costs during any given year.
In the RY 2007 LTCH PPS proposed rule (71 FR 4648, 4674 through
4676, and 4690 through 4692), we discussed our current methodology for
determining hospitals' CCRs under the LTCH PPS high-cost and short-stay
outlier policies, and we presented proposals to refine our methodology
for determining the annual CCR ceiling and statewide average CCRs. In
that same proposed rule, we also discussed our

[[Page 48116]]

existing policy for the reconciliation of LTCH PPS high-cost and short-
stay outlier payments, along with our proposal to codify in Subpart O
of 42 CFR Part 412 those policies, including proposed modifications and
editorial clarifications to those existing policies.
In that RY 2007 LTCH PPS proposed rule, we proposed that the
proposed revisions to the policies governing the determination of
LTCHs' CCRs and the reconciliation of high-cost and short-stay outlier
payments would be effective October 1, 2006, noting that historically,
annual updates to LTCH CCR ceiling and statewide average CCRs have been
effective on October 1. In addition, our proposal stated that the LTCH
CCR ceiling and statewide average CCRs that would be effective October
1, 2006, would be presented in the annual IPPS proposed and final
rules.
As we stated in both the RY 2007 LTCH PPS final rule (71 FR 27832
through 27833 and 27871) and the FY 2007 IPPS proposed rule (71 FR
24127), we received a few specific comments on this portion of the RY
2007 LTCH PPS proposed rule concerning the proposed changes to the
policies governing the determination of LTCHs' CCRs. As mentioned
below, one commenter in this final rule supported our proposal. Several
other commenters referenced one of the specific comments raised by
another commenter on the proposed changes to the methodology for
determining LTCH CCRs in their own comments on the RY 2007 LTCH PPS
proposed rule. In addition, a commenter on the RY 2007 LTCH PPS
proposed rule included a synopsis of our proposed changes concerning
the determination of LTCHs' CCRs. Based on the commenter's synopsis of
the proposed changes, we believe that the commenters clearly understood
the nature and purpose of the proposed changes. However, the commenter
pointed out that, in the RY 2007 LTCH PPS proposed rule, we did not
provide an analysis of the effect of this proposed change, nor did we
provide an example of the new CCR values under this proposed
methodology. Another commenter did not ``object in concept to the
proposed combination of [IPPS] operating and capital cost-to-charge
ratios'' (to compute a ``total'' CCR for each IPPS hospital by adding
together each hospital's operating CCR and its capital CCR) from which
to compute the LTCH CCR ceiling and applicable statewide average CCRs.
However, the commenter also pointed out that we did not provide any
impact data and requested that we defer adoption of that proposed
change until such data are provided for comment.
Therefore, in light of the comments referenced above, we proposed
in the FY 2007 IPPS proposed rule (71 FR 24126 through 24135) the same
changes to the policies governing the determination of LTCHs' CCRs and
the reconciliation of high-cost and short-stay outlier payments that we
proposed in the RY 2007 LTCH PPS proposed rule. We included in the FY
2007 IPPS proposed rule the values of the proposed LTCH CCR ceiling and
the proposed statewide average LTCH CCRs that would be effective
October 1, 2006, based on our proposed policy changes, along with the
values of the proposed LTCH CCRs that would be determined under our
current methodology. We also indicated that we would respond further to
any comments received on the proposed changes to the policies governing
the determination of LTCHs' CCRs and the reconciliation of LTCH PPS
high-cost outlier and short-stay payments presented in the FY 2007 IPPS
proposed rule in the FY 2007 IPPS final rule that will be published
this summer. We received two public comments concerning the proposed
changes to the policies governing the determination of LTCHs' CCRs and
the reconciliation of LTCH high-cost outlier and short-stay payments
presented in the FY 2007 IPPS proposed rule (71 FR 24125 through
24136). As discussed in greater detail below in this section, in this
final rule, we are finalizing the proposed changes to the policies
governing the determination of LTCHs' CCRs and the reconciliation of
LTCH high-cost outlier and short-stay payments as proposed. In the RY
2007 LTCH PPS final rule (71 FR 27871), we revised the short-stay
outlier payment formula based on the existing regulatory language at
Sec. 412.529(c) concerning the determination of LTCH CCRs and the
reconciliation of short-stay outlier payments since we did not finalize
any changes to our policy regarding the determination of LTCHs' CCRs
and the reconciliation of LTCH PPS short-stay outlier payments in that
LTCH PPS final rule.
In that same final rule, we noted that, to the extent the policy
changes we proposed in the FY 2007 IPPS proposed rule regarding the
determination of LTCHs' CCRs and the reconciliation of short-stay
outlier payments are implemented, we may need to make conforming
changes to the regulatory language in Sec. 412.529 in the FY 2007 IPPS
final rule to ensure that any such changes are consistent with (and do
not contradict) the changes we made to Sec. 412.529 in the RY 2007
LTCH PPS final rule. Accordingly, in adopting the proposed changes to
the regulations regarding the determination of LTCHs' CCRs and the
reconciliation of outlier payments in this final rule, we are making
conforming changes to the regulatory language in Sec. 412.529 as
necessary based on the changes to the short-stay outlier policy at
Sec. 412.529 established in the RY 2007 LTCH PPS proposed rule (71 FR
27899 through 27900).
Comment: One commenter supported our proposed changes to the
methodology for determining LTCH CCRs and LTCH PPS outlier
reconciliation. The commenter was particularly appreciative of the
impact analysis presented in the FY 2007 IPPS proposed rule.
Response: We appreciate the commenter's support and are pleased
that our impact analysis was able to assist in the understanding of our
proposal.
b. High-Cost Outliers
Under the broad authority conferred upon the Secretary by section
123 of the BBRA as amended by section 307(b) of BIPA, when we
implemented the LTCH PPS, we established an adjustment for additional
payments for outlier cases that have extraordinarily high-costs
relative to the costs of most discharges at Sec. 412.525(a). Providing
additional payments for outliers strongly improves the accuracy of the
LTCH PPS in determining resource costs at the patient level and
hospital level. Specifically, under Sec. 412.525(a), we make outlier
payments for any discharge if the estimated cost of the case exceeds
the adjusted LTCH PPS payment for the LTC-DRG plus a fixed-loss amount.
Under the LTCH PPS high-cost outlier policy, the LTCH's loss is limited
to the fixed-loss amount and a fixed percentage of costs above the
marginal cost factor. We calculate the estimated cost of a case by
multiplying the overall hospital CCR by the Medicare allowable covered
charge. In accordance with Sec. 412.525(a)(3), we pay outlier cases 80
percent of the difference between the estimated cost of the patient
case and the outlier threshold (the sum of the adjusted Federal
prospective payment for the LTC-DRG and the fixed-loss amount).
c. Short-Stay Outliers
When we implemented the LTCH PPS, under Sec. 412.529, we
established a special payment policy for short-stay outlier cases, that
is, LTCH PPS cases with a length of stay that is less than or equal to
five-sixths of the geometric average length of stay for each LTC-DRG.
Generally, LTCHs are defined by

[[Page 48117]]

statute as having an average length of stay of greater than 25 days. We
believe that a short-stay outlier payment adjustment results in more
appropriate payments, because these cases most likely would not receive
a full course of a LTCH-level of treatment in such a short period of
time and a full LTC-DRG payment may not always be appropriate. A short-
stay outlier is defined at Sec. 412.529(a) as a LTCH discharge with a
length of stay of up to and including five-sixths the geometric average
length of stay for the LTC-DRG. Under the short-stay outlier policy at
Sec. 412.529(c)(1), for LTCH PPS discharges occurring before July 1,
2006, in general, we adjust the per discharge payment under the LTCH
PPS by the least of 120 percent of the estimated cost of the case, 120
percent of the LTC-DRG specific per diem amount, or the full LTC-DRG
payment. Under the short-stay outlier policy at Sec. 412.529(c)(2),
for LTCH PPS discharges occurring on or after July 1, 2006, in general,
we adjust the per discharge payment under the LTCH PPS by the least of
100 percent of the estimated cost of the case, 120 percent of the LTC-
DRG specific per diem amount, the full LTC-DRG payment, or a blend of
an amount comparable to the IPPS per diem amount (capped at the full
IPPS comparable amount) and the 120 percent of the LTC-DRG specific
amount (71 FR 27899). Consistent with the LTCH PPS high-cost outlier
policy, we calculate the estimated cost of a case by multiplying the
overall hospital CCR by the Medicare allowable covered charges.
d. CCR Ceiling
Under the LTCH PPS, a single prospective payment per discharge is
made for both inpatient operating and capital-related costs. Therefore,
we compute a single ``overall'' LTCH-specific CCR based on the sum of
LTCH operating and capital-related costs (as described in Chapter 3,
section 150.24, of the Medicare Claims Processing Manual (CMS Pub. 100-
4)) as compared to total charges. A LTCH's CCR is calculated by
dividing its total Medicare costs (that is, the sum of its operating
and capital inpatient routine and ancillary costs) by its total
Medicare charges (that is, the sum of its operating and capital
inpatient routine and ancillary charges). (Instructions regarding the
changes established in the June 9, 2003 IPPS high-cost outlier final
rule for both LTCHs and IPPS hospitals can be found in Program
Transmittal A-03-058 (Change Request 2785; July 3, 2003).)
Under our current policy, a LTCH is assigned the applicable
statewide average CCR instead of using its CCR computed from data in
its most recent (settled or tentatively settled) cost report if, among
other things, the LTCH's CCR is found to be in excess of the applicable
maximum CCR threshold. The applicable maximum CCR threshold is the
combined IPPS operating and capital CCR ceiling. For instance, for FY
2006, under the current policy, the IPPS operating CCR ceiling is 1.254
and the IPPS capital CCR ceiling is 0.169 (70 FR 47496). Therefore,
under our current policy, the combined operating and capital CCR
ceiling is 1.423 (1.254 + 0.169 = 1.423) as specified in Program
Transmittal 692 (Change Request 4046, September 30, 2005).
These ceilings represent 3.0 standard deviations from the mean of
the log distribution of operating and capital cost-to-charge ratios for
all IPPS hospitals. As we explained in the June 9, 2003 final rule (68
FR 34507), LTCH CCRs above this threshold are most likely due to faulty
data reporting or entry, and, therefore, these CCRs should not be used
to identify and make payments for outlier cases. Such data are clearly
errors and should not be relied upon. (There are also other
circumstances, discussed below, when we use a statewide CCR instead of
a LTCH-specific CCR.)
Under the current methodology, we determine a ``combined''
statewide average CCR for LTCHs located in rural areas of a State that
accounts for operating and capital costs and charges and a ``combined''
statewide average CCR for LTCHs located in urban areas of a State that
accounts for operating and capital-related costs and charges. In order
to calculate a combined statewide average CCR under our current
methodology, we first calculate separate statewide average operating
CCRs and capital CCRs. Under the IPPS, two statewide average operating
CCRs are computed for each State: a statewide average CCR for rural
areas and a statewide average CCR for urban areas. One statewide
average capital CCR is computed for each State (applicable to both
urban and rural areas). We use the same capital CCR for urban and rural
areas because capital costs are the same regardless of geographic
location. (Below we discuss our proposed revisions to this methodology,
which we are adopting as final in this final rule.)
As we explained in the RY 2006 LTCH PPS final rule (70 FR 24192),
we believe it is appropriate to use the combined IPPS operating and
capital CCR ceiling and the applicable combined IPPS statewide average
urban and rural CCRs in determining LTCHs' CCRs because LTCHs' cost and
charge structures are similar to that of IPPS acute care hospitals. For
instance, LTCHs are certified as acute care hospitals, as set forth in
section 1861(e) of the Act, to participate as a hospital in the
Medicare program, and these hospitals, in general, are paid as LTCHs
only because their Medicare average length of stay is greater than 25
days (Sec. 412.23(e)). Furthermore, as also explained in that same
final rule, prior to qualifying as a LTCH under Sec. 412.23(e)(2)(i),
a hospital generally is paid as an acute care hospital under the IPPS
during the period in which it demonstrates that it has an average
length of stay of greater than 25 days. In addition, because there are
less than 400 LTCHs, and they are unevenly geographically distributed
throughout the United States, there may not be sufficient LTCH CCR data
to determine an appropriate LTCH PPS CCR ceiling using LTCH data.
Because LTCHs have a single ``total'' CCR (rather than separate
operating and capital CCRs), under the broad authority of section 123
of the BBRA and section 307(b)(1) of BIPA, in the FY 2007 IPPS proposed
rule (71 FR 24128 through 24129 and 24132 through 24133), we proposed
to revise our regulations for high-cost outliers and short-stay
outliers (Sec. Sec. 412.525(a)(4) and 412.529(c)(5), respectively) to
specify that, for discharges occurring on or after October 1, 2006, if
a LTCH's CCR is in excess of the LTCH CCR ceiling (which would be
calculated as 3 standard deviations above the corresponding national
geometric mean total CCR (established and published annually by CMS)),
the fiscal intermediary may use a statewide average CCR (also
established annually by CMS and discussed in more detail below). (We
also proposed a change in our methodology for calculating the
applicable statewide average CCRs under the LTCH PPS, which we are
finalizing in this final rule, as discussed in greater detail below.)
Specifically, for purposes of determining a LTCH's CCR under the
LTCH PPS high-cost and short-stay outlier policies at Sec. Sec.
412.525(a)(4) and 412.529 respectively, for discharges occurring on or
after October 1, 2006, we proposed that we would determine the single
``total'' CCR ceiling, based on IPPS CCR data, by first calculating the
total (that is, operating and capital) IPPS CCR for each hospital and
then determining the average total CCR for all IPPS hospitals. For
example, if an IPPS hospital's operating CCR is 0.432 and its capital
CCR is 0.027, its total CCR would be 0.459 (0.432 + 0.027 = 0.459).

[[Page 48118]]

This calculation would be repeated for all IPPS hospitals in order to
determine a total CCR for all IPPS hospitals. Next, the total IPPS CCR
would be used to determine the average total IPPS CCR and standard
deviation across all IPPS hospitals. The LTCH CCR ceiling would then be
established at 3 standard deviations from the national geometric mean
total IPPS CCR, rather than determining the LTCH total CCR ceiling as
we do under our current policy by adding the separate IPPS operating
CCR and capital CCR ceilings, which are each separately determined at 3
standard deviations from the average operating IPPS CCR and average
capital IPPS CCR, respectively.
Under this proposed policy, we would use the same IPPS CCR data
that we currently use to annually determine the separate IPPS operating
CCR and capital CCR ceilings (that we add together under our current
policy to determine the annual CCR ceiling for LTCHs) to compute IPPS
hospital-specific total CCRs that would be used to determine the single
LTCH total CCR ceiling. We believe that determining a LTCH CCR ceiling
based on IPPS total (operating and capital-related) Medicare costs and
charges rather than adding the separate IPPS CCR ceilings determined
from operating CCRs and capital CCRs, respectively, would be more
consistent with the LTCH PPS single payment, which does not
differentiate payments between operating and capital-related costs. We
noted that we still believe that it is appropriate to continue to use
IPPS data to determine the annual LTCH CCR ceiling.
We also explained in both the RY 2007 LTCH PPS proposed rule (71 FR
4675) and the FY 2007 IPPS proposed rule (71 FR 24129), that these
proposed revisions to our policy concerning the determination of the
annual LTCH CCR ceiling would be effective for discharges occurring on
or after October 1, 2006, rather than July 1, 2006. We proposed this
approach because we proposed to continue to use the same IPPS data used
to determine the individual IPPS operating and capital CCR ceilings
established and published annually in the IPPS proposed and final
rules. Because both the separate IPPS operating and capital CCRs
ceilings and the new LTCH ``total'' CCR ceiling would be determined
using the same data, we believe it would be administratively expedient
to continue to establish the LTCH CCR ceiling to be effective for
discharges occurring on or after October 1 of each year. (As stated
previously, this is consistent with our current policy, where the LTCH
CCR ceiling is updated annually on October 1.) Therefore, under this
proposal, the public would continue to consult the annual IPPS proposed
and final rules for changes to the LTCH CCR ceiling that would be
effective for discharges occurring on or after October 1. Under this
proposal, the current LTCH CCR ceiling established for discharges
occurring on or after October 1, 2005, in the FY 2006 IPPS final rule
would remain in effect for discharges occurring on or before September
30, 2006.
Comment: One commenter questioned why CMS' proposal concerning LTCH
CCRs did not utilize a floor for applying the statewide average similar
to using a ceiling. The commenter explained that even though a hospital
could increase payment by increasing its charges, if a hospital has a
historically low CCR, then it should be assigned the statewide average.
Response: As discussed in the June 9, 2003 outlier final rule (68
FR 34494 and 34507), we no longer assign the statewide average when a
hospital's CCR falls below a minimum CCR threshold or ``floor,'' as we
believe a LTCH could arbitrarily increase its charges in order to
maximize outlier payments. Even though this increase in charges should
result in a lower CCR in the future (due to the time lag in cost report
settlement), a floor would result in a LTCH being assigned the
statewide average CCR. This would result in inappropriately higher
outlier payments because in order to avoid making excessive outlier
payments, under both our current policy and the proposed LTCH CCR
policy, we apply the LTCH's actual CCR no matter how low the hospital's
CCR falls. This policy for LTCHs is consistent with the policy we have
adopted under the IPPS.
Under both our current policy and the proposed LTCH CCR policy, we
apply a CCR maximum threshold or ``ceiling'' for those hospitals beyond
three standard deviations of the national mean CCR to address what we
believe is questionable data. As we explained in the FY 2007 IPPS
proposed rule (71 FR 24127), CCRs above this threshold are most likely
due to faulty data reporting or entry, and, therefore, these CCRs
should not be used to identify and make payments for outlier cases.
Such data are likely errors and should not be relied upon, and
therefore, we assign the hospital the statewide average CCR. We note
that, if a hospital has a historically low CCR, then a consistent
pattern of a low CCR suggests that this CCR is reflective of their
actual ratio of costs to charges as opposed to an instance of the data
being aberrant. Therefore, we believe application of the statewide
average CCR is not necessary. While it is possible that this low CCR
may be based on questionable data, under both our current policy and
the proposed LTCH CCR policy, a hospital may request its fiscal
intermediary to use a different (higher or lower) CCR based on
substantial evidence presented by the hospital.
We did not remove the ceiling similar to removing the floor, as the
vulnerability of a hospital gaming the outlier payment system applies
to hospitals raising their charges, thus lowering their CCR and then
receiving the statewide average (if a floor was in place). Hospitals
with high CCRs reflect costs that are high or exceed their charges,
which is uncommon. Therefore, as stated above, we believe if a hospital
does cross the ceiling, it is likely due to an error and we assign the
statewide average. However, as noted above, a hospital may request its
fiscal intermediary to use a different (higher or lower) CCR based on
substantial evidence presented by the hospital even if a hospital's CCR
is above the ceiling. Therefore, consistent with our current CCR
policy, the applicable statewide average CCR will only be assigned when
a LTCH's CCR exceeds the maximum CCR threshold (ceiling) determined as
three standard deviations of the national mean total CCR (as described
above), and not when it falls below the minimum threshold (floor).
We received no other comments and after consideration of the public
comments received, we are adopting as final, without modification, the
policy proposed in the proposed rule. Accordingly, in this final rule,
under the broad authority of section 123 of the BBRA and section
307(b)(1) of BIPA, we are establishing under the LTCH PPS high-cost
outlier policy at Sec. 412.525(a)(4)(iv)(C)(2) and the LTCH PPS short-
stay outlier policy at Sec. 412.529(c)(3)(iv)(C)(2), that the fiscal
intermediary may use a statewide CCR if it is unable to determine an
accurate CCR for a LTCH if, amoung other things, a LTCHs' CCR is in
excess of 3 standard deviations above the corresponding national
geometric mean cost-to-charge ratio. Furthermore, Sec. Sec.
412.525(a)(4)(iv)(C)(2) and 412.529(c)(3)(iv)(C)(2) specify that CMS
will establish and publish this mean annually. As discussed above, as
proposed, for discharges occurring on or after October 1, 2006, the
LTCH total CCR ceiling will be calculated as three standard deviations
above the corresponding national geometric mean total CCR, which will
be determined based on IPPS CCR data, by first calculating the total
(that is, operating and capital) IPPS CCR for each hospital

[[Page 48119]]

and then determining the average total IPPS CCR for all hospitals. As
noted in the FY 2007 IPPS proposed rule (71 FR 24129) and reiterated
above, consistent with our current policy, the LTCH total CCR ceiling
will be updated annually and will be effective for discharges occurring
on or after October 1 of each year. Therefore, the public should
continue to consult the annual IPPS proposed and final rules for
changes to the LTCH CCR ceiling that would be effective for discharges
occurring on or after October 1.
In the FY 2007 IPPS proposed rule, based on IPPS total CCR data
from the December 2005 update to the Provider-Specific File, we
proposed a total CCR ceiling of 1.313 under the LTCH PPS that would be
effective October 1, 2006. Furthermore, in the FY 2007 IPPS proposed
rule, we proposed that, if more recent data are available, we would use
those data to determine the final total CCR ceiling under the LTCH PPS
for FY 2007 using the proposed methodology described above. Based on
the latest available data (data from the March 2006 update to the
Provider-Specific File), for this final rule, the CCR ceiling under our
proposed methodology would be 1.321.
The LTCH CCR ceiling determined under our current ``combined''
methodology using the most recent data would result in a slightly
higher LTCH CCR ceiling (that is, 1.26 + 0.154 = 1.414) for FY 2007
compared to the ``total'' CCR ceiling of 1.321 for FY 2007 calculated
using our new methodology. However, based on CCRs from the March 2006
update of the Provider-Specific File, there are no LTCHs that have a
CCR that is greater than the ceiling of 1.321 (the highest LTCH CCR in
the current database of 392 LTCHs is 1.27).
e. Statewide Average CCRs
In addition to being authorized to assign the applicable statewide
average CCR to a LTCH whose CCR is above the ceiling, the fiscal
intermediary may use the applicable statewide average CCR in other
circumstances. In the June 9, 2003 IPPS high-cost outlier final rule,
we also established our current policy that the fiscal intermediary may
use the applicable statewide average CCR for LTCHs for whom data with
which to calculate a CCR are not available (for example, missing or
faulty data) or for new LTCHs that have not yet submitted their first
Medicare cost report. For this purpose, a ``new'' LTCH is defined as an
entity that has not accepted assignment of an existing hospital's
provider agreement in accordance with Sec. 489.18.
We note that, consistent with our current policy, either CMS or the
LTCH may request the use of a different (higher or lower) CCR based on
substantial evidence that such a CCR more accurately reflects the
LTCH's actual costs and charges. This applies to new LTCHs (as defined
above) as well. For instance, CMS may determine that the applicable
statewide average CCR should not be applied to hospitals that convert
from acute care IPPS hospitals to LTCHs and receive new LTCH provider
numbers. Rather, the cost and charge data from the IPPS hospitals' cost
reports (even if they are for more or less than a 12-month cost
reporting period) would be used to determine the LTCH's CCR.
In addition to proposing to revise our methodology for determining
the annual CCR ceiling under the LTCH PPS for discharges occurring on
or after October 1, 2006, under the broad authority of section 123 of
the BBRA and section 307(b)(1) of BIPA, in the FY 2007 proposed rule
(71 FR 24131 through 24134), we proposed to revise our regulations for
high-cost outliers and short-stay outliers (Sec. Sec. 412.525(a)(4)
and 412.529(c)(5), respectively) for discharges occurring on or after
October 1, 2006, to codify in Subpart O of 42 CFR Part 412 the
remaining LTCH PPS outlier policy changes that were established in the
June 9, 2003 IPPS high-cost outlier final rule (68 FR 34506 through
34513), including proposed modifications and editorial clarifications
to those existing policies established in that final rule, which are
discussed in greater detail below in this section. We proposed these
additional revisions to Sec. Sec. 412.525(a)(4) and 412.529(c)(5)
because we believe that making these revisions would more precisely
describe the application of those policies as they relate to the
determination of LTCH CCRs and because these proposed changes would be
consistent with the proposed changes to the calculation of the LTCH CCR
ceiling discussed above in this section.
Specifically, we proposed to specify under the LTCH PPS high-cost
outlier policy at Sec. 412.525(a)(4) and the LTCH PPS short-stay
outlier policy at Sec. 412.529 that the fiscal intermediary may use a
statewide average CCR, which would be established annually by CMS, if
it is unable to determine an accurate CCR for a LTCH in one of the
following three circumstances: (1) new LTCHs that have not yet
submitted their first Medicare cost report (for this purpose,
consistent with current policy, a new LTCH would be defined as an
entity that has not accepted assignment of an existing hospital's
provider agreement in accordance with Sec. 489.18); (2) LTCHs whose
CCR is in excess of the LTCH CCR ceiling; and (3) other LTCHs for whom
data with which to calculate a CCR are not available (for example,
missing or faulty data). (Other sources of data that the fiscal
intermediary may consider in determining a LTCH's CCR included data
from a different cost reporting period for the LTCH, data from the cost
reporting period preceding the period in which the hospital began to be
paid as a LTCH (that is, the period of at least 6 months that it was
paid as a short-term acute care hospital), or data from other
comparable LTCHs, such as LTCHs in the same chain or in the same
region.)
We did not receive any public comments on our proposal. Therefore,
in this final rule, we are adopting as final, without modification, our
proposed policy. Accordingly, under the broad authority of section 123
of the BBRA and section 307(b)(1) of BIPA, in this final rule, we are
establishing Sec. Sec. 412.525(a)(4)(iv)(C)(1) through (3) and
412.529(c)(3)(iv)(C)(1) through (3), which specify that the fiscal
intermediary may use a statewide average CCR if it is unable to
determine an accurate CCR for a LTCH in one of the following three
circumstances: (1) new LTCHs that have not yet submitted their first
Medicare cost report (for this purpose, consistent with current policy,
a new LTCH would be defined as an entity that has not accepted
assignment of an existing hospital's provider agreement in accordance
with Sec. 489.18; (2) LTCHs whose CCR is in excess of the LTCH CCR
ceiling; and (3) other LTCHs for whom data with which to calculate a
CCR are not available (for example, missing or faulty data). (Other
sources of data that the fiscal intermediary may consider in
determining a LTCH's CCR included data from a different cost reporting
period for the LTCH, data from the cost reporting period preceding the
period in which the hospital began to be paid as a LTCH (that is, the
period of at least 6 months that it was paid as a short-term acute care
hospital), or data from other comparable LTCHs, such as LTCHs in the
same chain or in the same region.) These regulations further specify
that the statewide average CCRs used under the LTCH PPS, as described
in greater detail below, will be established annually by CMS.
Also, in the FY 2007 IPPS proposed rule (71 FR 24130 through 24131
and 24133 through 24134) we described our existing methodology for
calculating the combined statewide average CCR for rural and urban
LTCHs. Under the proposed LTCH PPS high-cost outlier policy at Sec.
412.525(a)(4) and the

[[Page 48120]]

proposed LTCH PPS short-stay outlier policy at Sec. 412.529 for
discharges occurring on or after October 1, 2006, we proposed to
compute statewide average CCRs for use under the LTCH PPS in a manner
similar to the way we proposed to compute LTCH PPS CCR ceilings.
Specifically, under this proposed policy, we would use the same IPPS
CCR data that we currently use to annually establish the separate IPPS
operating and capital statewide CCRs to compute statewide average total
CCRs. Below we outline our proposed methodology for calculating the
total statewide average CCR for a rural LTCH:
Step 1: Calculate the total CCR for each rural IPPS hospital by
adding together its operating CCR and its capital CCR.
Step 2: Calculate the weighted average total CCR for all rural IPPS
hospitals in the State (as shown in the third column of Table 8C of the
Addendum to the FY 2007 IPPS proposed rule). This same proposed
methodology would be applied when determining the ``total'' statewide
average CCR for LTCHs located in urban areas, except that we would
replace ``rural IPPS hospitals'' with ``urban IPPS hospitals'' in Steps
1 and 2. Under this proposal, the underlying data, that is, the IPPS
CCRs, would remain the same. (We note that the weighted average total
CCR for all urban IPPS hospitals in the State is shown in the second
column of Table 8C of the Addendum to this final rule and the weighted
average total CCR for all rural IPPS hospitals in the State is shown in
the third column of Table 8C of the Addendum to this final rule, based
on the policies finalized in this final rule as discussed below.)
We also proposed that these statewide average ``total'' (operating
and capital) CCRs that would be used under the LTCH PPS would continue
to be published annually in the IPPS proposed and final rules, and,
therefore, the public would continue to consult the annual IPPS
proposed and final rules for changes to the applicable statewide
average total CCRs that would be effective for discharges occurring on
or after October 1. Under this proposal, the current applicable
statewide average operating and capital CCRs, established for
discharges occurring on or after October 1, 2005, would remain in
effect for discharges occurring on or before September 30, 2006. Our
rationale for proposing to establish statewide average ``total'' CCRs
(as described above in this section) based on IPPS data under the
proposed revisions to the high-cost outlier policy at Sec.
412.525(a)(4) and short-stay outlier policy at Sec. 412.529 is the
same as the one stated above for proposing to use IPPS data to
determine a ``total'' LTCH CCR ceiling.
We did not receive any public comments on our proposed changes.
Therefore, we are adopting them as final without modification.
Accordingly, under the broad authority of section 123 of the BBRA and
section 307(b)(1) of BIPA, in this final rule, under Sec. Sec.
412.525(a)(4)(iv)(C) and 412.529(c)(3)(iv)(C), as proposed and as
described above, for discharges occurring on or after October 1, 2006,
the applicable LTCH statewide average total CCRs will be determined
based on IPPS CCR data in a manner similar to the way we will be
computing the LTCH PPS CCR ceiling, as discussed above. As also noted
in the FY 2007 IPPS proposed rule (71 FR 24129 and 24134) and
reiterated above, consistent with our policy, the LTCH PPS statewide
average total CCRs will be updated annually and will be effective for
discharges occurring on or after October 1 of each year. Therefore, the
public should continue to consult the annual IPPS proposed and final
rules for changes to the LTCH PPS statewide average total CCRs that
would be effective for discharges occurring on or after October 1.
We also proposed to determine the urban and rural statewide average
total CCRs for Maryland LTCHs paid under the LTCH PPS using, as a
proxy, the national average total CCR for urban IPPS hospitals and the
national average total CCR for rural IPPS hospitals, respectively (71
FR 24130 through 24131 and 24134). As we explained in the FY 2007 IPPS
proposed rule, we proposed this proxy because we believe that the CCR
data on the Provider-Specific File for Maryland hospitals may not be
accurate. This is because acute care hospitals in Maryland are
operating under a waiver of Medicare's ratesetting methodologies for
inpatient and outpatient services under the authorities of sections
1814(b)(3) and 1833(a)(2) of the Act. The State's Health Services Cost
Review Commission (HSCRC) is the regulatory body that establishes
hospital-specific rates for all hospital services in Maryland.
Because all Maryland short-term acute care hospitals are paid based
on the hospital-specific rates set by the HSCRC rather than under the
IPPS, CCRs are not required to determine their Medicare payments (as
they are for other acute care hospitals that are not governed under the
waiver at sections 1814(b)(3) and 1833(a)(2) of the Act, and who are
reimbursed for their treatment of Medicare patients under the IPPS).
Therefore, CCRs in the Provider-Specific File for Maryland acute care
hospitals, for the most part, are missing (because they are not used
for payment). Those CCRs that are inputted into the Provider-Specific
File for Maryland acute care hospitals by the fiscal intermediary are
most likely unaudited because they are not used for making payments.
For all these reasons, we are concerned that CCRs for Medicare acute
care hospitals located in Maryland that are in the Provider-Specific
File may not be reliable. Therefore, we believe that they should not be
used as proxies for setting the statewide average total CCRs for
Maryland LTCHs.
As we discussed in the FY 2007 IPPS proposed rule (71 FR 24130 and
24134), we believe it would be more appropriate to establish statewide
average total CCRs for Maryland LTCHs based on national average total
CCRs of IPPS hospitals that were audited by fiscal intermediaries.
Therefore, we proposed to establish statewide average total CCRs for
Maryland LTCHs based on the national average total CCRs of all IPPS
hospitals because we believe that the average of the CCRs of all the
IPPS hospitals across the country that were audited by fiscal
intermediaries would be based on sufficient rigorous complete data that
would be a representative proxy for the ratio of costs-to-charges of
LTCHs in Maryland that are subject to LTCH PPS. (We note that, under
our proposal, the fiscal intermediary may assign the statewide average
CCR in one of three circumstances (that is, ``new'' LTCHs, as defined
above; LTCHs with a CCR that is in excess of the LTCH ceiling; and
LTCHs with unavailable data, as discussed above).) We solicited
comments or suggestions for an alternative proxy statewide average CCR
to use for LTCHs that are located in Maryland and are paid under the
LTCH PPS in the FY 2007 IPPS proposed rule. We did not receive any
public comments on our proposal or any alternative proxy statewide
average CCR to use for LTCHs that are located in Maryland and are paid
under the LTCH PPS. Therefore, under the broad authority of section 123
of the BBRA and section 307(b)(1) of BIPA, we are adopting our proposed
methodology for determining the statewide average CCR for Maryland
under the LTCH PPS as final without modification.
In the FY 2007 IPPS proposed rule (71 FR 24130 and 24134) we stated
that, if more recent data are available for the final rule, we would
use those data to determine the final LTCH PPS statewide average CCRs
for FY 2007 using the proposed methodology describe above that we are
adopting as final in this final rule. Therefore, in this final rule,
based on the most recent complete IPPS total

[[Page 48121]]

CCR data from the March 2006 update of the Provider-Specific File, the
final LTCH PPS statewide average total CCRs for urban and rural
hospitals that will be effective October 1, 2006, are presented in
Table 8C of the Addendum to this final rule. (As was proposed, we note
that for this final rule, as is the case under the IPPS, all areas in
the District of Columbia, New Jersey, Puerto Rico, and Rhode Island are
classified as urban, and therefore there are no rural statewide average
total CCRs listed for those jurisdictions in Table 8C of the Addendum
to this final rule. As was proposed, we also note that for this final
rule, as is the case under the IPPS, although Massachusetts has areas
that are designated as rural, there are no short-term acute care IPPS
hospitals or LTCHs located in those areas as of March 2006, and
therefore there are no rural statewide average total CCR listed for
rural Massachusetts in Table 8C of the Addendum of this final rule.)
Comparing the statewide average ``total'' CCRs in Table 8C of the
Addendum to this final rule to the ``combined'' statewide average CCRs
that would have been calculated using our existing methodology shows
that the changes to our methodology for determining LTCH statewide
average CCRs results in only minor changes in the average CCR for each
State. In particular, the largest decrease in a statewide average CCR
(with the exception of Maryland, as discussed above) will be in urban
Wyoming (-0.7 percent). However, there is currently only 1 LTCH located
in Wyoming. The largest increase in a statewide average CCR will be in
urban District of Columbia (0.7 percent), and there are currently only
2 LTCHs located in the District of Columbia.
f. Data Used to Determine a CCR
Similar to our current policy, in the FY 2007 IPPS proposed rule
(71 FR 24131 and 24134), we also proposed to specify under our proposed
revision to the LTCH PPS high-cost outlier policy at Sec.
412.525(a)(4) and the LTCH PPS short-stay outlier policy at Sec.
412.529 that, for discharges occurring on or after October 1, 2006, the
CCR applied at the time a claim is processed would be based on either
the most recently settled cost report or the most recent tentatively
settled cost report, whichever is from the latest cost reporting
period. Furthermore, in the same proposed rule, we proposed under the
LTCH PPS high-cost outlier policy at Sec. 412.525(a)(4) and the LTCH
PPS short-stay outlier policy at Sec. 412.529 to state that CMS may
specify an alternative to the CCR computed from the most recently
settled cost report or the most recent tentatively settled cost report,
whichever is later (under proposed Sec. Sec. 412.525(a)(4)(iv)(B) and
412.529(c)(3)(iv)(B)), or a hospital may also request that the fiscal
intermediary use a different (higher or lower) CCR based on substantial
evidence presented by the hospital. These proposed revisions to our
policy for determining a LTCH's CCR for discharges occurring on or
after October 1, 2006, under the proposed revisions to the LTCH PPS
high-cost and short-stay outlier policies, described above, are similar
to our existing policy established in the June 9, 2003 IPPS high-cost
outlier final rule (68 FR 34506 through 34513). In addition, we
proposed a technical correction to existing Sec. 412.525(a)(3) to
change the plural reference from cost-to-charge ``ratios'' to the
singular reference to a cost-to-charge ``ratio'' because, under the
LTCH PPS, a single (total) CCR is computed for LTCHs.
We did not receive any comment on our proposal. Therefore, we are
adopting as final without modification the proposed policy changes.
Accordingly, under the broad authority of section 123 of the BBRA and
section 307(b)(1) of BIPA, in this final rule, we are establishing
under Sec. Sec. 412.525(a)(4)(iv)(B) and 412.529(c)(3)(iv) that, for
discharges occurring on or after October 1, 2006, the CCR applied at
the time a claim is processed will be based on either the most recently
settled cost report or the most recent tentatively settled cost report,
whichever is from the latest cost reporting period. Under the broad
authority of section 123 of the BBRA and section 307(b)(1) of BIPA, we
are also establishing at Sec. Sec. 412.525(a)(4)(iv)(A) and
412.529(c)(3)(iv)(A) that, for discharges occurring on or after October
1, 2006, CMS may specify an alternative to the CCR computed under new
Sec. Sec. 412.525(a)(4)(iv)(B) and 412.529(c)(3)(iv)(B) (that is,
computed from the most recently settled cost report or the most recent
tentatively settled cost report, whichever is later), or a hospital may
also request that the fiscal intermediary use a different (higher or
lower) CCR based on substantial evidence presented by the hospital. In
addition, as proposed, under the broad authority of section 123 of the
BBRA and section 307(b)(1) of BIPA, we are revising Sec. 412.525(a)(3)
to change the plural reference from cost-to-charge ``ratios'' to the
singular reference to a cost-to-charge ``ratio'' in this final rule.
g. Reconciliation of Outlier Payments Upon Cost Report Settlement
In the June 9, 2003 IPPS high-cost outlier final rule (68 FR 34508
through 34512), we established our policy for LTCHs that effective with
LTCH PPS discharges occurring on or after August 8, 2003, any
reconciliation of outlier payments will be based upon the actual CCR
computed from the costs and charges incurred in the period during which
the discharge occurs. In that same final rule, we also established our
current policy that for discharges occurring on or after August 8,
2003, at the time of any reconciliation, outlier payments may be
adjusted to account for the time value of any underpayments or
overpayments based upon a widely available index to be established in
advance by the Secretary and will be applied from the midpoint of the
cost reporting period to the date of reconciliation. Additional
information on the administration of the reconciliation process under
the IPPS is provided in Program Transmittal 707 (Change Request 3966,
October 12, 2005). We note that, in addition to the changes to the
high-cost outlier and short-stay outlier policies presented in this
final rule, we are currently developing additional instructions on the
administration of the existing reconciliation process under the LTCH
PPS that would be similar to the IPPS reconciliation process.
In the FY 2007 IPPS proposed rule (71 FR 24131 and 24134), for
discharges occurring on or after October 1, 2006, we proposed to codify
into the LTCH PPS section of the regulations (Subpart O of 42 CFR Part
412) the provisions governing the determination of LTCHs'' CCRs,
including proposed modifications and editorial clarifications to our
existing methodology for determining the annual LTCH CCR ceiling and
applicable statewide average CCRs under the LTCH PPS. In addition, in
that same proposed rule, under the broad authority of section 123 of
the BBRA and section 307(b)(1) of BIPA, we proposed to revise
Sec. Sec. 412.525(a)(4), and 412.529(c)(3) for discharges occurring on
or after October 1, 2006, to codify in Subpart O of 42 CFR Part 412 the
provisions discussed above concerning the reconciliation of LTCH PPS
outlier payments, including proposed editorial clarifications discussed
in greater detail below in this section, that would more precisely
describe the application of those policies. We proposed the additional
revisions to Sec. Sec. 412.525(a)(4) and 412.529(c)(3) concerning the
reconciliation of outlier payments, which are discussed in greater
detail

[[Page 48122]]

below in this section, because these proposed changes would be
consistent with the proposed changes to the calculation of the LTCH CCR
ceiling discussed above.
Specifically, we proposed under the LTCH PPS high-cost outlier
policy at Sec. 412.525(a)(4) and the LTCH PPS short-stay outlier
policy at Sec. 412.529, similar to our current policy, to specify
that, for discharges occurring on or after October 1, 2006, any
reconciliation of outlier payments would be based on the CCR calculated
based on a ratio of costs to charges computed from the relevant cost
report and charge data determined at the time the cost report
coinciding with the discharge is settled. In addition, we proposed
under the LTCH PPS high-cost outlier policy at Sec. 412.525(a)(4)and
the LTCH PPS short-stay outlier policy at Sec. 412.529, similar to our
current policy, to specify that, for discharges occurring on or after
October 1, 2006, at the time of any reconciliation, outlier payments
may be adjusted to account for the time value of any underpayments or
overpayments. Consistent with our current policy, we also proposed that
such an adjustment would be based upon a widely available index to be
established in advance by the Secretary and would be applied from the
midpoint of the cost reporting period to the date of reconciliation. As
we discussed in the FY 2007 IPPS proposed rule (71 FR 24131 and 24134),
we proposed to make these additions to Sec. Sec. 412.525(a)(4) and
412.529 because we believe that such proposed changes reinforce the
concept that the LTCH PPS has a single payment rate for inpatient
operating and capital-related costs (as discussed in greater detail
previously), and because we believe it would be more appropriate and
administratively simpler to include all of the regulatory provisions
concerning the determination of LTCH PPS (high-cost and short-stay)
outlier payments applicable under the LTCH PPS regulations in Subpart O
of 42 CFR Part 412.
We did not receive any public comments on the proposed changes
regarding the reconciliation of LTCH PPS outlier payments upon cost
report settlement. Therefore, under the broad authority of section 123
of the BBRA and section 307(b)(1) of BIPA, we are adopting as final,
without modification, the proposed changes to the regulations at Sec.
412.525(a)(4)(iv)(D) through (E) for LTCH PPS high-cost outliers and
Sec. 412.529(c)(3)(iv)(D) through (E) for LTCH PPS short-stay outliers
regarding the methodology for determining LTCH CCRs and LTCH PPS
outlier reconciliation.
7. Technical Corrections Relating to LTCHs
In the FY 2007 IPPS proposed rule (71 FR 24135), we proposed to
make the following technical changes to various sections of the
regulations relating to LTCHs to update or correct cross-references or
to include inadvertently omitted provisions: a. In the following
sections, we proposed to correct several incorrect cross-references in
the existing regulations:
In Sec. 412.505(b)(1), we proposed to change the cross-
reference ``Sec. 412.22(e) and (h)(5)'' to the phrase ``Sec.
412.22(e)(3) and (h)(6), if applicable''.
In Sec. 412.508(c)(3), we proposed to change the cross-
reference ``Sec. 1001.301'' to ``Sec. 1001.201.''
In Sec. 412.541(b)(2)(i), we proposed to change the
cross-reference ``Sec. 412.533(b)'' to ``Sec. 412.533(a)(5) and Sec.
412.533(c)'' to correctly refer to the provisions on the determination
of the LTCH PPS rates.
b. We proposed to revise Sec. 412.511 to change the cross-
reference ``Sec. 412.22(e) and (h)(5)'' to the phrase ``Sec.
412.22(e)(3) and (h)(6)'' and to clarify the requirement that LTCHs
must meet under Sec. Sec. 412.22(e)(3) and (h)(6) to report co-
location status as part of its overall reporting requirements.
c. We proposed to revise Sec. 412.525(d) by adding new paragraphs
(d)(3) and (d)(4) to specify two additional payment adjustments to the
per discharge payments under the LTCH PPS that were inadvertently
omitted; that is, the special payment under the onsite transfer and
readmission policy at Sec. 412.532 and the special payment provisions
for LTCH HwHs and satellites of LTCHs at Sec. 412.534.
d. We proposed to revise Sec. 412.532(a)(2) to correct the cross-
reference to the definition of a satellite facility by changing ``Sec.
412.22(f)'' to ``Sec. 412.22(h)''. In addition, we proposed to revise
paragraph (b) of Sec. 412.532 to include satellite facilities and SNFs
as part of the definition of entities that may be ``co-located'' or
``onsite'' with a hospital. In existing Sec. 412.532(a)(2) and (a)(3),
we include satellite facilities and SNFs, respectively, within the
onsite provider payment policy as entities that may be co-located with
a LTCH, but omitted to mention them in Sec. 412.532(b) as being
included when we defined ``co-located or onsite'' facilities. We
proposed to conform Sec. 412.532(b) to include their mention.
We did not receive any public comments on these technical changes
and, therefore, are adopting them as final without modification.
8. Cross-Reference Correction in Authority Citations for 42 CFR Parts
412 and 413
As stated earlier, on November 15, 2004, we published in the
Federal Register the final rule establishing a PPS for IPFs (69 FR
66922). As a part of that rule, we amended the authority citations for
42 CFR Parts 412 and 413 to include references to section 124 of Pub.
L. 106-113. Section 124 directed us to take various actions regarding a
per diem PPS for IPFs. We included incorrect cross-references to the
United States Statutes at Large citation for this provision. We
proposed to amend the authority citations for Parts 412 and 413 by
removing the incorrect cross-reference to ``113 Stat. 1515'' and
inserting the correct cross-reference ``113 Stat. 1501A-332''.
We did not receive any public comments on the proposed cross-
reference correction and, therefore, are adopting it as final without
modification.
9. Report of Adjustment (Exceptions) Payments
Section 4419(b) of Pub. L. 105-33 requires the Secretary to publish
annually in the Federal Register a report describing the total amount
of adjustment payments made to excluded hospitals and units, by reason
of section 1886(b)(4) of the Act, during the previous fiscal year.
The process of requesting, adjudicating, and awarding an adjustment
payment is likely to occur over a 2-year period or longer. First, an
excluded hospital or excluded unit of a hospital must file its cost
report for a fiscal year with its fiscal intermediary within 5 months
after the close of its cost reporting period in accordance with Sec.
413.24(f)(2). The fiscal intermediary then reviews the cost report and
issues a Notice of Program Reimbursement (NPR) within approximately 2
months after the filing of the cost report. If the hospital's operating
costs are in excess of the ceiling, the hospital may file a request for
an adjustment payment within 180 days from the date of the NPR. The
fiscal intermediary, or CMS, depending on the type of adjustment
requested, then reviews the request and determines if an adjustment
payment is warranted. This determination is often not made until more
than 6 months after the date the request is filed. However, in an
attempt to provide interested parties with data on the most recent
adjustments for which we do have data, we are publishing data on
adjustment payments that were processed by the

[[Page 48123]]

fiscal intermediary or CMS during FY 2005.
The table below includes the most recent data available from the
fiscal intermediaries and CMS on adjustment payments that were
adjudicated during FY 2005. As indicated above, the adjustments made
during FY 2005 only pertain to cost reporting periods ending in years
prior to FY 2004. Total adjustment payments awarded to excluded
hospitals and units during FY 2005 are $21,362,945. The table depicts
for each class of hospitals, in the aggregate, the number of adjustment
requests adjudicated, the excess operating cost over ceiling, and the
amount of the adjustment payments.

----------------------------------------------------------------------------------------------------------------
Excess cost Adjustment
Class of hospital Number over ceiling payments
----------------------------------------------------------------------------------------------------------------
Rehabilitation.................................................. 12 $ 4,753,618 $1,352,043
Psychiatric..................................................... 34 27,408,956 18,362,262
Long-Term Care.................................................. 2 2,147,623 1,485,380
Children's...................................................... -- -- --
Cancer.......................................................... -- -- --
Religious Nonmedical............................................
Health Care Institution......................................... 3 383,951 163,260
----------------------------------------------------------------------------------------------------------------

B. Critical Access Hospitals (CAHs)

1. Background
Section 1820 of the Act 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 participation under 42 CFR Part 485, Subpart F, will be certified as
CAHs by CMS. Regulations governing payments to CAHs for services to
Medicare beneficiaries are located in 42 CFR Part 413.
2. Sunset of Designation of CAHs as Necessary Providers: Technical
Correction
Under section 1820(c)(2)(B)(i) of the Act, a CAH is required to be
located more than a 35-mile drive (or in the case of mountainous
terrain or only secondary roads, a 15-mile drive) from a hospital or
another CAH, unless the CAH is certified by the State as a necessary
provider of health care services to residents in the area. Section
405(h) of Pub. L. 108-173 amended section 1820(c)(2)(B)(i)(II) of the
Act by adding language that terminated a State's authority to waive the
location requirement for a CAH by designating the CAH as a necessary
provider, effective January 1, 2006. As a result of this amendment, as
of January 1, 2006, States are no longer able to designate CAH status
based upon a determination that an entity is a necessary provider of
health care. However, section 405(h) of Pub. L. 108-173 also included a
grandfathering provision for CAHs that are certified as necessary
providers prior to January 1, 2006. Under this provision, a CAH that is
designated as a necessary provider in its State's rural health plan
prior to January 1, 2006, is permitted to maintain its necessary
provider designation.
The regulations that specify the location requirements for CAHs
described above are set forth at 42 CFR 485.610(c). To implement the
amendment made by section 405(h) of Pub. L. 108-173, we published a
final rule in the Federal Register on August 11, 2004 (69 FR 49271) to
revise the regulations under paragraph (c) of Sec. 485.610. In that
revision, we inadvertently included an erroneous date: In the second
sentence of paragraph (c), we stated that a CAH that is designated as a
necessary provider as of October 1, 2006, will maintain its necessary
provider designation after October 1, 2006. Although a correction
notice was published in the Federal Register on October 7, 2004 (69 FR
60252), the notice corrected only the second citation of the date in
that paragraph. As a result, the second sentence of Sec. 485.610(c)
continues to state, incorrectly, that a CAH that is designated as a
necessary provider as of October 1, 2006, will maintain its necessary
provider designation as of January 1, 2006.
To avoid further confusion, and to ensure that the regulations
implementing the CAH location requirement under section
1820(c)(2)(B)(i)(II) of the Act specify that requirement accurately, we
proposed to revise the second sentence of Sec. 485.610(c) to state
that a CAH that was designated as a necessary provider on or before
December 31, 2005, will maintain its necessary provider designation as
of January 1, 2006. We note that this change would merely correct the
previous error and does not reflect any change in our policy as to how
the statutory provision is implemented.
Comment: A number of commenters raised issues concerning the
interpretative guidelines that we issued relating to implementation of
the CAH necessary provider provision.
Response: These interpretative guidelines were developed after the
FY 2005 IPPS final rule was published. We consider the comments that we
received to be outside the scope of the May 12, 2006 proposed rule and,
therefore, are not responding to them in this final rule. However, we
are considering these comments as part of our ongoing policy review
efforts and will take appropriate action if warranted.
In this final rule, we are adopting as final, without modification,
the revision to the second sentence of Sec. 412.610(c) described
above.

VII. Payment for Services Furnished Outside the United States

A. Background

Section 1862(a)(4) of the Act generally prohibits payment under
Medicare for items and services furnished outside the United States.
Under sections 1861(x) and 210(i) of the Act, ``United States'' is
defined to include the 50 States, the District of Columbia, Puerto
Rico, the Virgin Islands, Guam, and America Samoa. Furthermore, under
Pub. L. 94-241, ``those laws which provide Federal services and
financial assistance programs'' apply to the Northern Mariana Islands
to the same extent as they do to Guam. In addition, we have interpreted
the term ``United States'' as including U.S. territorial waters. We
consider shipboard services furnished in a port of the United States or
within 6 hours before arrival at, or departure from, a port of the
United States to be furnished in the United States territorial waters
(54 FR 41723). Therefore, in our regulations at Sec. 411.9(a), we
define the United States to include the 50 States, the District of
Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, the
Northern Mariana Islands, and for purposes of services furnished on
board ship, the territorial waters

[[Page 48124]]

adjoining the land areas of the United States. This general prohibition
has exceptions, under which payment may be made for inpatient hospital
services, emergency inpatient hospital services, and for physician and
ambulance services associated with these hospital services that are
furnished outside the United States.
Payment may be made for inpatient hospital services if a Medicare
beneficiary who is a United States resident received these services at
a hospital located outside of the United States that either was closer
to, or was substantially more accessible from, the beneficiary's
residence than the nearest United States hospital that was adequately
equipped and available to treat the beneficiary. Payment may be made
for emergency inpatient hospital services if a beneficiary was in the
United States (or in Canada while traveling between Alaska and another
State without unreasonable delay and by the most direct route) when the
emergency arose, and the hospital located outside the United States was
closer to, or substantially more accessible from, the place where the
emergency arose than the nearest available adequately equipped hospital
within the United States. Payment may be made for physician and
ambulance services furnished in connection with these inpatient and
emergency inpatient hospital services. Our existing regulations that
implement these statutory provisions are located at 42 CFR 409.3,
409.5, 410.14, 410.66, 411.9, 413.74 and Subparts G and H of Part 424.

B. Proposed Clarification of Regulations

Services that fall under these exceptions typically are furnished
in Canada or Mexico. However, in accordance with section 1814(f) of the
Act and the definition of the term ``United States'' (42 CFR 411.9(a)),
it is permissible for Medicare to pay for services furnished in foreign
countries other than Canada and Mexico. For example, if a Medicare
beneficiary who is in Guam needed emergency inpatient hospital services
and the nearest available hospital adequately equipped to treat that
beneficiary was located in the Philippines, Medicare payment would be
permitted for the services.
Several of our existing regulations (Sec. Sec. 409.3, 409.5,
410.66, and 413.74) specifically refer to services furnished in Canada
and Mexico and do not indicate that it is permissible for Medicare
payment to be made for services furnished in other foreign countries.
The references in these sections also are more limited than the
provisions of 42 CFR Part 424, Subpart H, the portion of our
regulations that addresses treatment furnished in a foreign country.
Therefore, in the FY 2007 IPPS proposed rule (71 FR 24136), we proposed
to amend those regulations that refer to Canada and Mexico in order to
conform them to the Act and to our other regulations addressing these
situations.
Comment: Commenters indicated that they believed additional
clarification of the proposed revisions on payment for services outside
the United States may be necessary to avoid confusion. Specifically,
they noted that the example cited in the preamble states: if a Medicare
beneficiary who is in Guam needed emergency inpatient hospital services
and the nearest available hospital adequately equipped was located in
the Philippines, Medicare payment would be permitted for the services.
The commenters indicated that this statement and the proposed
accompanying changes to the regulations raise several questions. First,
does it matter that the beneficiary happens to be in Guam, or is there
an expectation that the beneficiary resides in Guam? Second, does it
matter if the beneficiary is in a United States Territory (that is,
Guam), or would payment be permitted for services furnished to a
beneficiary who was in another foreign country? Finally, what is the
applicability of these provisions to a beneficiary who maintains
residence outside the 50 States, the District of Columbia, Puerto Rico,
the Virgin Islands, Guam, or American Samoa?
Further, the commenters believed that CMS should evaluate the
safety concerns of beneficiaries living outside the United States, but
in close proximity to hospitals accredited by Joint Commission on
Accreditation of Healthcare Organizations (JCAHO) in foreign countries.
They stated that these beneficiaries are forced to travel great
distances to reach hospitals in the U.S., sometimes at great risk to
their health, while adequately equipped, accredited hospitals are
immediately available to meet their health care needs.
Response: If a Medicare beneficiary is in Guam (or any other U.S.
Territory) and an emergency arises that results in the beneficiary
receiving emergency inpatient services from a foreign hospital,
Medicare may pay for such services irrespective of whether the
beneficiary is a resident of Guam (or any other U.S. Territory). That
is, section 1814(f)(2) of the Act and 42 CFR 424.122 do not require
that a beneficiary be a resident of Guam (or any other U.S. Territory
where an emergency occurs) in order for Medicare to pay for those
services. Because section 1814(f)(2) of the Act and our regulations at
Sec. 424.122 already directly address when Medicare payment may be
made for emergency inpatient services furnished in foreign hospitals,
it is unnecessary to outline those provisions again in 42 CFR 409.3,
409.5, 410.66, and 413.74 of the regulations.
With respect to the question concerning Medicare beneficiaries who
maintain their residence outside the 50 States, the District of
Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, or the
Northern Mariana Islands as we noted above, section 1814(f)(2) of the
Act and Sec. 424.122 of the regulations do not require that a
beneficiary be a resident of Guam (or any other U.S. Territory where an
emergency occurs) in order for Medicare to pay for emergency inpatient
services that a Medicare beneficiary receives from a foreign hospital.
However, section 1814(f)(1) of the Act and Sec. 424.123 of the
regulations require that, in order for payment to be made for
nonemergency inpatient hospital services that a Medicare beneficiary
receives at a hospital located outside the United States, the
beneficiary must be a U.S. resident who received these nonemergency
services at a hospital located outside of the United States that either
was closer to, or was substantially more accessible from, the
beneficiary's residence than the nearest U.S. hospital that was
adequately equipped and available to treat the beneficiary.
With respect to beneficiaries who are forced to travel great
distances to reach hospitals in the United States, although we are
concerned about the health and safety of Medicare beneficiaries, CMS
does not have the legal authority to expand upon the foreign services
for which Medicare may make payment, because Medicare law prohibits
payment for items and services furnished outside the United States,
except for certain limited services (see sections 1814(f) and
1862(a)(4) of the Act).
After consideration of the public comments received, we are
adopting as final, without modification, the amendments to our existing
regulations regarding services furnished outside the United States
described above.
In the FY 2007 IPPS proposed rule, we also proposed to make some
related technical changes. In Sec. Sec. 409.3(e) and 424.123(c)(2), we
proposed to change the references from the Joint Commission on
Accreditation of Hospitals (JCAH) to the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO), the

[[Page 48125]]

current name of that organization. In Sec. 424.121(c), we proposed to
change the obsolete cross-reference from Sec. 405.313 to the correct
cross-reference, Sec. 411.9.
We did not receive any public comments on these technical changes.
Therefore, we are adopting as final, without modification, the
technical changes to Sec. Sec. 409.3(e), 424.123(c)(2), and 424.121(c)
described above.

VIII. Payment for Blood Clotting Factor Administered to Inpatients With
Hemophilia

Section 1886(a)(4) of the Act excludes the costs of administering
blood clotting factors to inpatients with hemophilia from the
definition of ``operating costs of inpatient hospital services.''
Section 6011(b) of Pub. L. 101-239 states that the Secretary of Health
and Human Services shall determine the payment amount made to hospitals
under Medicare Part A for the costs of administering blood clotting
factors to individuals with hemophilia by multiplying a predetermined
price per unit of blood clotting factor by the number of units provided
to the individual. The regulations governing payment for blood clotting
factors furnished to hospital inpatients and for payment for the
furnishing fee are located in Sec. Sec. 412.2(f)(8) and 412.115(b).
In FY 2005, we made payments for blood clotting factors furnished
to inpatients at 95 percent of average wholesale price (AWP),
consistent with the rates then paid under section 1842(o) of the Act
for Medicare Part B drugs (including blood clotting factor furnished to
beneficiaries who are not inpatients).
Section 303 of Pub. L. 108-173 added section 1847A to the Act.
Effective January 1, 2005, this section 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), while section 1842(o)(5)
of the Act provides for a Medicare Part B payment of a furnishing fee
for blood clotting factor. On November 15, 2004, we published
regulations in the Federal Register (69 FR 66310 through 66319) that
implemented the provisions of section 1847A of the Act. These
regulations are codified at Subpart K of Part 414 and Sec. 410.63,
respectively.
The furnishing fee is updated each calendar year as specified by
section 1842(o)(5) of the Act. The furnishing fee for clotting factor
for years after CY 2005 is equal to the fee for the previous year
increased by the percentage increase in the consumer price index (CPI)
for medical care for the 12-month period ending with June of the
previous year. This requirement is set forth in our regulations at
Sec. 410.63.
In the FY 2006 IPPS final rule (70 FR 47473), we amended our
regulations at Sec. Sec. 412.2(f)(8) and 412.115(b) to state that, for
discharges occurring on or after October 1, 2005, we make payment for
blood clotting factor administered to hospital inpatients using the
Medicare Part B payment amounts for blood clotting factor as determined
under Subpart K of 42 CFR Part 414 and for the furnishing fee as
determined under Sec. 410.63.
On November 21, 2005, we issued regulations in the Federal Register
(70 FR 70225) updating the furnishing fee payment amount for CY 2006.
We announced that the increase in the CPI for medical care for the 12
months ending June 30, 2005 was 4.2 percent. Consequently, the
furnishing fee for CY 2006, initially established effective January 1,
2005, at $0.14 per unit of clotting factor, for CY 2006 was set at
$0.146 per individual unit (I.U.) for blood clotting factor. We
indicated in the preamble to that rule that while ``the furnishing fee
payment rate is calculated at 3 digits, the actual amount paid to
providers and suppliers is rounded to 2 digits.''
The fiscal intermediaries continue to use the Medicare Part B Drug
Pricing File to make payments for blood clotting factor. The furnishing
fee is included in the ASP price per unit sent with the Medicare Part B
Drug Pricing File that is updated annually. By using the Medicare Part
B Drug Pricing File, Medicare will be making consistent payments for
blood clotting factor provided to inpatients and outpatients. For
further updates on pricing, we refer readers to the Medicare Part B
drug pricing regulations.
Comment: Two commenters addressed the blood clotting policy in
response to the proposed rule. One commenter supported CMS in its quest
for a uniform approach for drug payment. Both commenters recommended
that CMS continue to provide the additional payment for blood clotting
factor administered to hemophiliac inpatients in the future even if
severity-adjusted DRGs are implemented.
Response: We appreciate the commenters' support. The blood clotting
factor policy will remain unchanged even if there are changes to the
DRG system. CMS will continue to provide the additional payment for
blood clotting factor administered to hemophilia inpatients. As we
stated in our proposed rule (79 FR 24136) and restated in this final
rule, by fiscal intermediaries utilizing the Medicare Part B Drug
Pricing File, Medicare will be making consistent payments for blood
clotting factor provided to inpatients and outpatients. For further
updates on pricing, readers should refer to the Medicare Part B drug
pricing regulations.

IX. Limitation on Payments to Skilled Nursing Facilities for Bad Debt

A. Background

Under section 1861(v)(1) of the Act and Sec. 413.89 of our
existing regulations, Medicare may pay some or all of the uncollectible
deductible and coinsurance amounts to those entities paid under a
reasonable cost payment methodology that are eligible to receive
payment for bad debt. Under our existing regulations, Medicare
generally pays 100 percent of allowable bad debt amounts to most
entities eligible to receive bad debt payment, including SNFs, CAHs,
rural health clinics, federally qualified health clinics, community
mental health clinics, health maintenance organizations reimbursed on a
cost basis, competitive medical plans, and health care prepayment
plans. To determine if bad debt amounts are allowable, the requirements
at Sec. 413.89 and the Provider Reimbursement Manual (PRM) (CMS Pub.
15 Part 1, Chapter 3) must be met.
However, under section 1861(v)(1)(T)(iv) of the Act and our
existing regulations, Medicare payments for allowable bad debt amounts
for hospitals are reduced by 30 percent. Moreover, under our existing
regulations, Medicare does not pay for bad debt amounts arising from
anesthetists' services paid under a fee schedule (Sec. 413.89(i)). In
addition, although Medicare pays end-stage renal disease (ESRD)
facilities 100 percent of allowable bad debt claims, these payments are
capped at facilities' unrecovered cost (Sec. 413.178 of the
regulations).

B. Changes Made by Section 5004 of Pub. L. 109-171

Section 5004 of Pub. L. 109-171 (DRA of 2005) amended section
1861(v)(1) of the Act to mandate that, for cost reporting periods
beginning on or after October 1, 2005, Medicare payments to SNFs for
certain allowable bad debt amounts be reduced. Specifically, for
Medicare beneficiaries who are not dual eligible individuals (as
defined in section 1935(c)(6)(A)(ii) of the Act), allowable bad debt
amounts attributable to the coinsurance amounts under the Medicare
program are reduced by 30 percent (deductibles are not applicable to
patients in SNFs). Allowable bad debt

[[Page 48126]]

amounts for Medicare beneficiaries who are dual eligible individuals
(as defined in section 1935(c)(6)(A)(ii) of the Act) will continue to
be paid at 100 percent.

C. Proposed Regulation Changes

In the FY 2007 IPPS proposed rule (71 FR 24137), we proposed to
conform the Medicare regulations under Sec. 413.89 to the provisions
of section 5004 of Pub. L. 109-171. Specifically, we proposed to revise
paragraph (h) by redesignating the existing contents as paragraph
(h)(1) and add a new paragraph (h)(2) to reflect this payment
limitation. We proposed to include in paragraph (h)(2) a cross-
reference to the definition of ``full-benefit dual eligible
individual'' found at Sec. 423.772 of our regulations. In addition, we
proposed to revise Sec. 413.89(a) to add a cross-reference to the
existing limitations on payments to hospitals and the proposed new
limitations on payments to SNFs found in paragraph (h), and to correct
the cross-reference to the exception for payments for bad debts arising
from anesthetists' services paid under a fee schedule from ``paragraph
(h)'' to ``paragraph (i).''
Comment: One commenter expressed concern that under the proposed
definition of a ``full benefit dual eligible individual'' found at
Sec. 423.772 of our regulations, SNFs will not only have to document
that the patient is eligible for both Medicare and Medicaid services
but also will now have to document that the patient has coverage under
a prescription drug plan under Part D of Title XVIII of the Act or
under an MA-PD plan under Part C of Title XVIII of the Act. The
commenter stated that the additional documentation will increase the
burden on SNFs to provide documentation.
Response: After reviewing the legislative background associated
with section 5004 of Pub. L. 109-171, we determined that it was not the
Congress' intent to reduce bad debt payments to SNFs for individuals
who are eligible for both Medicare and Medicaid, also known as dual
eligible individuals. Section 5004 defines ``dual eligible
individuals'' as individuals who are entitled to benefits under Part A
of Medicare and are described in section 1935(c)(6)(A)(ii) of the Act.
The definition of a ``full-benefit dual eligible individual'' at
section 1935(c)(6)(A) of the Act is codified at Sec. 423.772 of the
regulations. Specifically, section 1935(c)(6)(A) of the Act defines a
``full-benefit dual eligible individual'' in terms of both clause (i)
and (ii). Section 1935(c)(6)(A)(i) of the Act (and paragraph (1) under
the definition of ``full-benefit dual eligible individual'' at Sec.
423.772) states that the individual must have coverage for the month
for covered Part D drugs under a prescription drug plan under Part D of
Title XVUIII of the Act or under an MA-PD plan under Part C of title
XVIII of the Act. Section 1935(c)(6)(A)(ii) of the Act (and paragraph
(2) under the definition of ``full-benefit dual eligible individual''
at Sec. 423.772) states the individual must be determined eligible by
the State for medical assistance for full benefits under Title XIX of
the Act under section 1902(a)(10)(A) or section 1902(a)(10)(C), by
reason of section 1902(f) of the Act, or under any other category of
eligibility for medical assistance for full benefits under Title XIX of
the Act. Clearly, the Congress did not include the criterion at section
1935(c)(6)(A)(i) of the Act (and, thus, paragraph (1) under the
definition of ``full-benefit dual eligible individual'' at Sec.
423.772) for defining dual eligible individuals to determine the
applicability of the reduction of bad debt payments under section 5004
of Pub. L. 109-171.
Accordingly, for this final rule, we are revising the proposed
regulation text at new Sec. 413.89(h)(2) to better conform with the
language of the statute by defining a dual eligible individual as an
individual who is entitled to benefits under Part A of Medicare and is
determined eligible by the State for medical assistance under title XIX
as described under paragraph (2) of the definition of a full-benefit
dual eligible individual at Sec. 423.772. We believe that this
revision addresses the concerns expressed by the commenter.
Comment: One commenter stated that, in April 2006, CMS issued
revisions to the freestanding SNF Medicare cost reporting Form 2540-96
and instructions to implement the provisions of section 5004 of Pub. L.
109-171 but has not issued similar revisions to the hospital-based
(distinct part) SNF Medicare cost reporting Form 2552-96. The commenter
requested that CMS clarify whether the provisions of section 5004 will
or will not apply to both freestanding and hospital-based SNFs.
Response: Section 5004 of Pub. L. 109-171 applies to both
freestanding and hospital-based SNFs. We are currently preparing
revisions to the hospital-based SNF Medicare cost reporting Form 2552-
96 and instructions to implement the provisions of section 5004. We
anticipate that the revisions will be issued in a Transmittal to the
Provider Reimbursement Manual--Part 2 (Pub. 15-2) prior to the
publication of this final rule.
After consideration of the public comments received, we are
adopting as final, with one modification, the amendments needed to
conform our regulations to the provisions of section 5004 of Pub. L.
109-171, and to add and correct the cross-references, as described
above.

X. MedPAC Recommendations

We are required by section 1886(e)(4)(B) of the Act to respond to
MedPAC's IPPS recommendations in our annual proposed IPPS rule. We have
reviewed MedPAC's March 2006 ``Report to the Congress: Medicare Payment
Policy'' and have given it careful consideration in conjunction with
the proposed policies set forth in this document. MedPAC's
Recommendation 2A states that ``The Congress should increase payment
rates for the acute inpatient and outpatient prospective payment
systems in 2007 by the projected increase in the hospital market basket
index less half of the Commission's expectation for productivity
growth.'' This recommendation is discussed in Appendix B to this final
rule.
In section II.C. of the preamble of this final rule, we further
address MedPAC's 2005 recommendations included in Recommendation 1 in
the March 2005 Report to Congress on Physician-Owned Specialty
Hospitals as well as Recommendation 3, which recommended that the
Secretary implement MedPAC's recommended policies over a transition
period. The recommendations in Recommendation 1 relate to refining the
DRGs used under the IPPS to more fully capture differences in severity
of illness among patients; basing the DRG relative weights on the
estimated cost of providing care rather than on charges; and basing the
weights on the national average of hospitals'' relative values in each
DRG. In section II.E. of the preamble to this final rule, we also
further address Recommendation 2 of the March 2005 Report on Physician-
Owned Specialty Hospitals, which recommended adjusting the DRG relative
weights to account for differences in the prevalence of high-cost
outlier cases.
For further information relating specifically to the MedPAC reports
or to obtain a copy of the reports, contact MedPAC at (202) 653-7220,
or visit MedPAC's Web site at: www.medpac.gov.

[[Page 48127]]

XI. Health Care Infrastructure Improvement Program: Selection Criteria
for Loan Program for Qualifying Hospitals Engaged in Cancer-Related
Health Care and Forgiveness of Indebtedness

A. Background

Section 1016 of the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (MMA) (Pub. L. 108-173) amended the Act to
add section 1897, which establishes the Health Care Infrastructure
Improvement Program. Section 1897 of the Act authorizes the Secretary
to establish a loan program that provides loans to qualifying hospitals
for payment of the capital costs of eligible projects. Section 1897(d)
of the Act specifies that an eligible project is a project of a
qualifying hospital that is designed to improve the health care
infrastructure of the hospital, including construction, renovation, or
other capital improvements. Section 1897(b) of the Act requires the
Secretary to establish the application process, the terms and
conditions, and other requirements for the loan program. The statute
was subsequently amended by section 6045 of the Emergency Supplemental
Appropriations Act for Defense, the Global War on Terror, and Tsunami
Relief, 2005 (the Tsunami Relief Act of 2005) (Pub. L. 109-13) to also
provide that any determination made by the Secretary under section 1897
of the Act is not subject to any administrative or judicial review.
Section 1897(c)(2) of the Act defines a ``qualifying hospital'' as
a hospital or entity that is engaged in research in the causes,
prevention, and treatment of cancer; and is designated as a cancer
center by the National Cancer Institute (NCI) or is designated by the
State legislature as the official cancer institute of the State and
such designation by the State legislature occurred prior to December 8,
2003. Section 1897(c)(3) of the Act, as added by Pub. L. 109-13,
specifies that an ``entity'' has the same meaning as specified in
section 501(c)(3) of the Internal Revenue Code of 1986 and is exempt
from tax under section 501(a) of the Code; has at least one existing
memorandum of understanding or affiliation agreement with a hospital
located in the State in which the entity is located; and retains
clinical outpatient treatment for cancer on site as well as laboratory
research and education and outreach for cancer in the same facility.
Section 1897(c)(3) of the Act is effective as if included in the
enactment of Pub. L. 108-173.
Section 1897(f) of the Act provides that the Secretary may forgive
a loan provided to a qualifying hospital, under terms and conditions
that are analogous to the loan forgiveness provision for student loans
under part D of title IV of the Higher Education Act of 1965 (20
U.S.C.1087a et seq.). However, the Secretary must condition such
forgiveness on the establishment by the hospital of (1) an outreach
program for cancer prevention, early diagnosis, and treatment that
provides services to a substantial majority of the residents of the
State or region, including residents of rural areas; (2) an outreach
program for cancer prevention, early diagnosis, and treatment that
provides services to multiple Indian tribes; and (3) unique research
resources (such as population databases), or an affiliation with an
entity that has unique research resources.
In addition, section 1897(h) of the Act requires the Secretary to
submit to Congress within 4 years after enactment of Pub. L. 108-173 a
report on the projects for which loans are provided under section 1897
of the Act and a recommendation as to whether the Congress should
authorize the Secretary to continue loans under this section beyond FY
2008.
Prior to the enactment of Pub. L. 109-13, section 1897(g) (1) of
the Act provided for the appropriation of $200,000,000 to carry out the
loan program. The funds allocated for the loan program are to remain
available during the period beginning on July 1, 2004, and ending on
September 30, 2008. However, the Congress rescinded $58,000,000,
through Pub. L. 109-13, leaving $142,000,000 available for the loan
program. Section 1897(g) of the Act also states that, of the
$142,000,000, not more than $2,000,000 can be used for the
administration of the loan program for each fiscal year from FY 2004
through FY 2008). (We note that no administrative funding was used in
FY 2004.)

B. Issuance of an Interim Final Rule With Comment Period and a Proposed
Regulation

On September 30, 2005, we published two rules in the Federal
Register (an interim final rule with comment period (70 FR 57368) and a
proposed rule (70 FR 57376)) to establish the loan program to improve
certain hospital infrastructure, including capital improvement, as
provided for under the Health Care Infrastructure Improvement Program
established under section 1897 of the Act. In the September 30, 2005
interim final rule with comment period, we set forth, under a new 42
CFR Chapter IV, Subchapter H, Part 505, the Federal regulations
established by the Secretary governing requirements for qualifying
hospitals or entities, the application process, and the criteria and
conditions for selecting eligible projects under the loan program. In
the September 30, 2005 proposed rule, we proposed to establish the loan
forgiveness criteria for qualifying hospitals that receive loans under
the Health Care Infrastructure Improvement Program.

C. Provisions of the Interim Final Rule With Comment Period

1. Loan Qualifying Criteria (Sec. Sec. 505.3, 505.5(a), and 505.11)
In order to receive a loan under the Health Care Infrastructure
Improvement Program, an applicant must meet the statutory definition of
a qualifying hospital as defined in sections 1897(c)(2) and (c)(3) of
the Act. We incorporated these definitions in the regulations at Sec.
505.3.
We specified in the regulations at Sec. 505.11 that a qualifying
hospital must submit an application to CMS by a specified date to
request a loan for the capital costs of an eligible project. We
specified the requirements and procedures for submittal of the
application.
In Sec. 505.5(a), we provided that the capital costs for which a
qualifying hospital may obtain a loan are limited to the reasonable
costs incurred by the hospital, and capitalized on the Medicare cost
report, for any facility or item of equipment that it has acquired the
possession or use of at the time the loan funding is awarded.
2. Selection Criteria (Sec. 505.5(b) and (c))
We established the criteria under which qualifying hospitals are
prioritized for the loan program. We specified that we prioritize
applicants that meet the following conditions:
(a) The hospital is located in a State that, based on population
density, is defined as a rural State.
(2) The hospital is located in a State with multiple Indian tribes.
We indicated that CMS will send written notice to qualifying
hospitals that have been selected to participate in the loan program.
3. Terms of the Loan (Sec. Sec. 505.7 and 505.9)
Under the terms of the loan program, we specified that we require
an authorized official of each qualifying hospital to execute a
promissory note, loan agreement, or any other approved form that we may
designate, to ensure compliance with the terms of the loan program. In
the interim final rule, we

[[Page 48128]]

indicated that each loan recipient receives a lump sum distribution for
which payment of principal and interest is deferred for 60 months
beginning with the day of official notification to the qualifying
hospital of loan award. The loan repayment period is 20 years.
(However, as discussed in section XI.B. of this preamble, in the
September 30, 2005 proposed rule, we further proposed forgiveness
criteria for loans, as directed by the statute.)
In accordance with the loan criteria, the loan recipient must agree
to make payments every month for 20 years until the loan, including
interest, is repaid. A loan recipient may make full prepayment or
partial prepayment without paying any prepayment charge. When a
prepayment is made, the qualifying hospital must provide CMS with
written notice.
Furthermore, the loan recipient must agree that the provisions of a
loan under section 1897 of the Act does not--
Relieve the hospital of any obligation to obtain any
required State or local permit or approval with respect to the project;
Limit the right of any unit of State or local government
to approve or regulate any rate of return on private equity invested in
the project; or
Otherwise supersede any State or local law (including any
regulation) applicable to the construction or operation of the project.
4. Public Comments Received on the Interim Final Rule With Comment
Period
We received seven public comments on the September 30, 2005 interim
final rule.
Comment: In general, commenters expressed concern that many
qualifying hospitals providing cancer care to rural areas and Native
populations throughout the country may not qualify to participate in
the loan program since the regulatory criteria require that qualifying
hospitals be located in one of the ten states listed. Moreover, one
commenter was concerned that CMS may have misconstrued Congressional
intent in establishing the selection criteria based on the statutory
terms for loan forgiveness. The commenter noted that the proposed
selection criteria relied on location and population rather than the
merits of the application in order to award loans. Some commenters
expressed concern that the selection criteria were too restrictive
because preference was conferred to the 10 least populated states with
the greatest numbers of Indian tribes in the country. Some commenters
suggested that CMS expand the selection criteria to allow all
qualifying hospitals that serve rural and Indian tribe populations to
be considered for loan funds. In addition, one commenter suggested that
in order to maximize the benefit to a greater number of applicants, CMS
limit the amount of available loan funds to $10 million per State.
Response: The statute instructs the Secretary to establish criteria
for selecting among qualifying hospitals that apply for a loan under
this section. The criteria are to consider the extent to which the
project for which the loan is sought is nationally or regionally
significant, in terms of expanding or improving the healthcare
infrastructure of the United States or the region or in terms of the
medical benefit that the project will have. Section 1897 of the Act
also provides for loan forgiveness and, in setting conditions for loan
forgiveness, requires that qualifying hospitals establish certain
outreach programs that include rural areas and Indian tribe
populations. Therefore, we continue to believe it is appropriate to
prioritize qualifying hospitals for purposes of making loans to
qualifying hospitals based on rural and Indian tribe criteria as
previously discussed in the interim final rule. We stated in the
interim final rule that, ``Since the statute outlines specific criteria
in which to forgive loans, we believe that it is consistent with the
Congressional intent to give priority to qualifying hospitals that meet
at least some of the statutory conditions for loan forgiveness when
selecting qualifying hospitals for the loan program'' (70 FR 57369). We
note that there are many outstanding hospitals providing cancer care in
the country and we believe the selection criteria will allow us to
select from applicants that both demonstrate merit and meet the
priorities that are indicated in the statutory language for this loan
program.
In response to the comment regarding State limits on available loan
funds, we disagree that a $10 million limit per State would be in the
best interests of qualifying hospitals. Section 1897(d) of the Act
directs that loan funds are to be used for qualifying projects, defined
in statute as ``designed to improve the healthcare infrastructure of
the hospital, including construction, renovation, or other capital
improvements.'' We note that construction, renovation, or other capital
improvement projects for qualifying hospitals providing cancer care are
likely to be costly and require large expenditures. We believe limiting
the loan amount to a total of $10 million for all applicants within a
State could inadvertently cause some qualifying hospitals to receive
insufficient funding for their eligible project. Insufficient funding
may also hinder a qualifying hospital's ability to establish the
outreach programs and unique research resources that are required for
loan forgiveness and intended to benefit the community through the
qualifying hospital's participation in this loan program.
Comment: One commenter noted that the statutory language did not
limit qualifying hospitals to entities that file cost reports and
suggested that the regulations be modified to allow a state university/
cancer research center that is not an entity described at section
501(c)(3) of the Internal Revenue Code of 1986, but that meets all
other requirements, to be considered a qualifying hospital under this
loan program. In addition, the commenter asked why CMS proposed that a
qualifying hospital that had not acquired the possession and use of
assets which it intends as a qualifying project under this loan program
must have entered into a contractual obligation for those projects
before December 8, 2003, the date of enactment of Pub. L. 108-173.
Response: We are not requiring that qualifying hospitals be
entities that file cost reports. Since CMS is administering the
program, we believe that it is appropriate to apply our reasonable cost
methodology to determine the capital costs of an eligible project where
applicable. We note that it is the statute that defines qualifying
hospitals to include an entity described at section 501(c)(3) of the
Internal Revenue Code of 1986 and not a definition established through
regulations. Finally, we believe it is appropriate to specify a
deadline for which qualifying hospitals must have had a written
commitment of assets intended as eligible projects. A deadline allows
CMS to make a determination that the requested loan amount is
reasonable and appropriate for the eligible project. Without a deadline
we would not be able to determine the parameters of the eligible
project. We chose December 8, 2003, because that was the date Pub. L.
108-173 was enacted.
5. Provisions of This Final Rule
This final rule finalizes the provisions set forth in the September
30, 2005 interim final rule with comment, without modification.

D. Proposed Rule on Forgiveness of Indebtedness

In the September 30, 2005 proposed rule, we proposed to establish
the loan forgiveness criteria for qualifying hospitals that are
selected to participate

[[Page 48129]]

in the loan program under the Health Care Infrastructure Improvement
Program.
1. Conditions for Loan Forgiveness (Sec. 505.13)
As specified in section 1897(f) of the Act, we proposed to forgive
a loan provided to a qualifying hospital under terms and conditions
that are analogous to the loan forgiveness provision for student loans
under part D of title IV of the Higher Education Act of 1965 (20 U.S.C.
1087a et seq.). The student loan program specifies that in order to be
eligible for loan forgiveness, borrowers are required to satisfy
certain conditions, such as completing a service obligation that
satisfies certain terms and conditions as determined by the Secretary.
Therefore, we proposed that, to fulfill the service obligation,
borrowers must meet the loan forgiveness conditions based on the
provisions of section 1897(f) of the Act. Section 1897(f) of the Act
provides that the Secretary shall condition such forgiveness on the
establishment by the hospital of (1) an outreach program for cancer
prevention, early diagnosis, and treatment that provides services to a
substantial majority of the residents of a State or region, including
residents of rural areas; (2) an outreach program for cancer
prevention, early diagnosis, and treatment that provides services to
multiple Indian tribes; and (3) unique research resources (such as
population databases), or an affiliation with an entity that has unique
research resources.
In addition, we proposed that the qualifying hospital must submit a
written request for loan forgiveness to CMS by the effective date of
the final rule (that is, October 1, 2006).
2. Plan Criteria for Meeting the Conditions for Loan Forgiveness (Sec.
505.15)
In the September 30, 2005 proposed rule, we proposed to specify the
loan forgiveness criteria under three domains, as outlined in section
XI.C.1 of this preamble, that are consistent with the sections
1897(f)(A), (f)(B), and (f)(C) of the Act: (a) Domain 1--Outreach
program for cancer prevention, early diagnosis, and treatment that
provides services to a substantial majority of the residents of a State
or region, including residents of rural areas; (b) Domain 2--Outreach
program for cancer prevention, early diagnosis, and treatment that
provides services to multiple Indian tribes; and (c) Domain 3--Unique
research resources (such as population databases), or an affiliation
with an entity that has unique research resources.
Specifically, we proposed to add Sec. Sec. 505.13, 505.15, and
505.17 to provide that the qualifying hospital must designate in its
plan to CMS--
The population(s) for which it would target its outreach
programs.
Sufficient detail to clearly describe how it would
designate its targeted populations and that the populations designated
should be in accordance with the provisions of the statute.
A detailed description of how it would identify the cancer
types that it is targeting.
A detailed description of the approaches it would be
conducting or implementing, including the reasons why the intervention
approaches were selected and why they may make a difference in
improving cancer care for the targeted population.
Improvement goals for the prevention, early diagnosis, and
treatment, for each cancer type identified in its outreach programs.
At least one measure (for example, either an outcome
measure or a process measure) used to track its progress in achieving
the goals it has established for each area of prevention, early
diagnosis, and treatment, for each cancer type identified in its plan.
A description of how it would establish or maintain
existing unique research resources or how it would establish or
maintain existing unique research resources or an affiliation with
another entity that has unique research resources.
We proposed at Sec. 505.13(c) that the qualifying hospital must
submit to CMS by the timeframe specified by the Secretary the
following: (1) A written request for loan forgiveness; (2) a plan
describing how the qualifying hospital would establish, implement or
maintain existing outreach programs for its targeted populations; and
(3) how it would establish or maintain existing unique research
resources or an affiliation with an entity that has unique research
resources over the loan deferment period. We proposed to make that
timeframe 60 days after the publication of the final rule.
In proposed Sec. 505.3, we proposed to define ``outreach
programs'' as formal cancer programs for teaching, diagnostic
screening, therapy or treatment, prevention, or interventions to
enhance the health and knowledge of their designated population(s).
Likewise, we proposed to define ``unique research resources'' as
resources that are used for the purpose of discovering or testing
options related to the causes, prevention, and treatment of cancer.
We invited specific public comments on the type of information that
must be included in the plan and the timeframe for a qualifying
hospital to submit its plan to CMS. We also solicited comments on
whether we should provide more specific criteria for the qualifying
hospital to use in defining its targeted populations.
We believed that 60 days after the final rule publication date is
reasonable time for qualifying hospitals intending to apply for loan
forgiveness to prepare and submit their initial plan, since the loan
deferment period is up to 60 months after notification of acceptance in
the program and the qualifying hospital would be assessed on its
performance during the loan deferment period.
Furthermore, we believed that requiring the qualifying hospitals to
submit a plan in which they would determine the targeted population,
the types of cancers (that is, the cancer types to be considered),
goals for improving prevention, diagnosis, and treatment, and the
measures to track their progress in reaching the goals provides
flexibility to the qualifying hospitals as they develop, implement, or
maintain their outreach programs.
We also believed that it is appropriate to request this level of
detail from the qualifying hospitals because section 1897(h) of the Act
requires the Secretary to submit a report to the Congress before fiscal
year 2008. The report must indicate the projects for which loans are
provided under this section and recommend whether the Congress should
authorize the Secretary to continue loans under this section beyond
fiscal year 2008. Receiving this information from the qualifying
hospitals is necessary for the Secretary to make a fully informed
recommendation to the Congress.
Under Sec. 505.17, we proposed that the qualifying hospital must
submit annual progress reports to CMS describing its progress in
achieving its plan or any changes to the initial plan and a final
annual report at least 6 months before the end of the 60-month loan
deferment period.
Further, we proposed under Sec. 505.19 that, if a qualifying
hospital meets the conditions, plan criteria, and reporting
requirements for loan forgiveness specified in Sec. 505.13, Sec.
505.15, and Sec. 505.17, the loan would be forgiven. We proposed that
if the loan is forgiven, we would send written notification for the
loan forgiveness approval to the loan recipient at least 90 days before
the end of the loan deferment period. If the loan recipient does not
meet the conditions, plan criteria, or reporting requirements

[[Page 48130]]

for the loan forgiveness specified in Sec. 505.13, Sec. 505.15, and
Sec. 505.17, we proposed that we would send written notification for
the denial of the loan forgiveness.
3. Public Comments Received on the Proposed Rule and Our Responses
We received one public comment on the September 30, 2005 proposed
rule.
Comment: One commenter suggested that the proposed loan deferment
period of 60 months, during which the qualifying hospital is to
establish outreach programs and unique research resources in accordance
with the statutory conditions for loan forgiveness, is unnecessarily
and excessively protracted. The commenter noted that the statute does
not dictate the duration of the loan deferment period and that the
statutory conditions for loan forgiveness can and should be
accomplished with appropriate speed. The commenter urged CMS to shorten
the deferment period, suggesting that 36 months is sufficient time for
qualifying hospitals to satisfy the statutory conditions for loan
forgiveness. In fact, the commenter believed that the most meaningful
steps toward satisfaction of the conditions for loan forgiveness should
be accomplished within the first twelve months of the program. The
commenter noted that the shortened time period would spur qualifying
hospitals to establish the outreach programs and unique research
resources more quickly thereby maximizing the benefit to the community
and making the most out of the funding.
Response: The proposed loan deferment period of 60 months was
intended to ensure that qualifying hospitals had sufficient time to
establish the outreach programs and unique research resources to
achieve loan forgiveness. In the proposed rule, we specifically
requested comments from the public regarding the timeframe in order to
assess whether the proposed period was appropriate. We appreciate the
commenter's input that it is possible to establish the outreach
programs and unique research resources as specified in the proposed
rule within 36 months and possibly as early as 12 months, the shortest
timeframe for which the commenter suggested the most meaningful steps
could be accomplished. While the commenter suggested that 36 months is
sufficient time for qualifying hospitals to satisfy the statutory
conditions for loan forgiveness, we find that the commenter's
additional argument that delaying loan forgiveness could inadvertently
and unnecessarily delay providing intended benefits to the public to be
compelling. Therefore, considering that a qualifying hospital may be
well on the way to satisfying the conditions for loan forgiveness
within 12 months, and in order to motivate loan recipients intending to
strive for loan forgiveness to provide this benefit to the public as
soon as feasible, we are changing the time period in which a qualifying
hospital may be assessed and approved for loan forgiveness to as early
as 12 months from the date that CMS notifies the qualifying hospital of
the award of the loan. We note that, while 60 months was likely an
overestimate of the time needed to satisfy the terms for loan
forgiveness, we are reluctant to limit all qualifying hospitals to 12
months to accomplish the initiatives required for loan forgiveness
based on the submission of one comment. Therefore, we believe it is
more appropriate to provide for consideration of loan forgiveness as
early as 12 months from the date CMS notifies the qualifying hospital
of the awarding of the loan and require that all evaluations for loan
forgiveness must conclude no later than 60 months from the date CMS
notifies the qualifying hospital of the awarding of the loan.
4. Provisions of the Final Rule
We are adopting as final the proposed changes to Sec. 505.3 and
the addition of Sec. Sec. 505.13 and 505.15, with only minor editorial
changes. To accommodate the option in which qualifying hospitals may
establish the outreach programs and unique research resources to
achieve loan forgiveness as early as 12 months after loan notification,
we are modifying Sec. 505.17(b) as proposed to specify that CMS will
use the annual report to assess the qualifying hospital's loan
forgiveness status and if the annual report shows that the qualifying
hospital has fulfilled the conditions, plan criteria, and reporting
requirements for loan forgiveness specified in Sec. Sec. 505.13,
505.15, and Sec. 505.17, CMS will notify the qualifying hospital in
writing that the loan is forgiven. We note that at Sec. 505.17(c), we
specify that the qualifying hospital's final annual report is due to
CMS at least 6 months before the end of the loan deferment period
specified in Sec. 505.7(b). We are also modifying Sec. 505.19 to
specify that CMS will send a written notification of approval for loan
forgiveness to the qualifying hospital by the earlier of (1) 30 days
from the date of receipt of the annual report that shows the qualifying
hospital has satisfied the requirements for loan forgiveness; or (2) 90
days before the end of the loan deferment period defined in Sec.
505.7(b).

E. Statutory Requirements for Issuance of Regulations

Section 902 of Pub. L. 108-173 (MMA) 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 the MMA 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 finalizes provisions set forth in the September 30,
2005 interim final rule with comment (70 FR 57368) and the September
30, 2005 proposed rule (70 FR 57376). In addition, this final rule is
being published within the 3-year time limit imposed by section 902 of
the MMA. Therefore, we believe that the final rule is in accordance
with the Congress' intent to ensure timely publication of final
regulations.

XII. Exclusion of Vendor Purchases Made Under the Competitive
Acquisition Program (CAP) for Outpatient Drugs and Biologicals Under
Part B for the Purpose of Calculating the Average Sales Price (ASP)

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

A. Background

1. Average Sales Price (ASP)
Section 303(c) of Pub. L. 108-173 (the MMA) revised the drug
payment methodology by creating a new pricing system based on the ASP
of a drug or biological. Effective January 2005, Medicare pays for the
vast majority of Part B covered drugs and biologicals using a drug
payment methodology based on the ASP. (Please note that information on
covered outpatient drugs and biologicals can be found at: http://www.cms.hhs.gov/McrPartBDrugAvgSalesPrice/.) In accordance with
sections 1847A and 1927(b)(3)(A) of the Act, manufacturers submit the
ASP data for their products to us on a quarterly basis, at the 11-digit
National Drug Code (NDC) level.
These data include each manufacturer's total sales (in dollars) and
number of units of a drug to all purchasers in the United States in a
calendar quarter (excluding certain sales exempted by statute), with
limited

[[Page 48131]]

exceptions, and other data elements pertaining to the NDC. The sales
price is net of discounts such as volume discounts, prompt pay
discounts, cash discounts, free goods that are contingent on any
purchase requirement, chargebacks, and rebates (other than rebates
under section 1927 of the Act). The Medicare payment rate is based on
106 percent of the ASP, less applicable deductible and coinsurance
amounts, and is updated quarterly.
2. Competitive Acquisition Program (CAP)
Section 303(d) of Pub. L. 108-173 added a new section 1847B to the
Act. This section provides for an alternative payment methodology to
the ASP for certain Part B covered drugs and biologicals that are not
paid on a cost or prospective payment basis by establishing a CAP for
the acquisition of and payment for competitively-biddable Part B
covered drugs and biologicals. This program began on July 1, 2006.
Physicians now have a choice between--(1) obtaining these drugs from
approved CAP vendors; and (2) acquiring and billing for Part B covered
drugs under the ASP system. In the March 4, 2005 Federal Register (70
FR 10746), we proposed regulations to establish provisions for
acquiring and billing for drugs and biologicals through the CAP .
(Please note that information on the CAP can be found at: http://www.cms.hhs.gov/CompetitiveAcquisforBios/.)
3. Regulatory History
In response to the March 4, 2005 proposed rule, many commenters
requested clarification about whether the prices determined under the
CAP are taken into account in computing the ASP under section 1847A of
the Act. Most commenters recommended that purchases made under the CAP
be excluded from the ASP calculation. However, one commenter suggested
that, because the CAP was not included in the list of sales that are
exempt from the ASP calculation set forth in section 1847A(c)(2) of the
Act, prices under the CAP could not be excluded. In our July 6, 2005
interim final rule with comment period (70 FR 39022), we responded that
because the CAP was not included in the section 1847A(c)(2) of the Act
list of sales that are exempt from the ASP calculation, we believed
that sales to vendors made under the CAP must be included in the ASP.
Commenters on the July 6, 2005 interim final rule with comment
period reiterated their objections to including purchases made by
vendors under the CAP in the ASP calculations. These commenters
requested that we change our interpretation of our statutory authority.
Several commenters provided detailed legal arguments supporting the
exclusion of purchases by vendors made under the CAP from the
calculation of ASP.
Some commenters stated that we could use our demonstration
authority to exclude CAP prices from ASP. Other commenters took the
position that we could use our authority to establish CAP drug
categories to establish a category of drugs and biologicals that would
be excluded from the ASP calculation. Several commenters stated that
sales to approved CAP vendors should be considered excluded from the
determination of ``best price'' under section 1927(c)(1)(C) of the Act.
These commenters maintained that by virtue of this exclusion, prices of
CAP drugs and biologicals could be excluded from the calculation of
ASP. One commenter contended that sales to CAP vendors are excluded
from best price because CAP vendors do not fit squarely into the list
of entities contained in the definition of ``best price'' in section
1927(c)(1)(C)(i) of the Act. Another commenter suggested that approved
CAP vendors, as Medicare contractors, should be considered Federal
purchasers exempt from the determination of best price under sections
1927(c)(1)(C)(i)(I) through (II) of the Act.
Finally, several commenters stated that the intent of Congress was
to create two different and separate structures, with separate pricing,
in order to provide physicians with a choice of programs. These
commenters referenced the language contained in sections 1847A(a)(2)
and 1847B(a)(1)(A) of the Act in support of their contentions. Section
1847A(a)(2) of the Act states that section 1847A ``shall not apply in
the case of a physician who elects under subsection (a)(1)(A)(ii) of
section 1847B for that section to apply instead of this section for the
payment for drugs and biologicals.'' Section 1847B(a)(1)(A) of the Act
states that ``this section shall not apply in the case of a physician
who elects section 1847A to apply.'' These commenters stated that this
language, which is contained in both the ASP and CAP statutory
provisions, clearly indicates that Congress intended the two programs
to operate independently. These commenters asserted that as independent
programs, the pricing methodologies under ASP and the CAP should not be
linked. These commenters further believed that including CAP prices in
the calculation of ASP would undermine the CAP program by virtually
eliminating any incentive that a manufacturer might have to offer
discounts to CAP vendors.
In response to the comments that we received on this issue, we
revisited our analysis of our statutory authority. In the November 21,
2005 Federal Register (70 FR 70477), we published an interim final rule
with comment in which we stated that we did not find entirely
persuasive the commenters' arguments regarding demonstration authority,
best price, or the definition of categories as a legal basis for
revising our interpretation. However, we recognized the commenters'
concerns about the effect of including CAP prices in the calculation of
ASP and agreed that the best outcome for both the ASP methodology and
the CAP programs would be one in which prices under CAP did not affect
payment amounts under the ASP methodology. In addition, we found
compelling the commenters' statements about the separation of the ASP
and CAP programs and that the two programs are intended to be
alternatives to each other. We acknowledged the possibility that
Congress intended the programs to be completely independent of each
other.
Therefore, as a result of our reassessment, and in accordance with
our statutory authority, including our authority under section
1847A(b)(2)(B) of the Act to establish methods for counting units, we
decided to exclude, for the initial 3-year contract period under the
CAP, units of CAP drugs that are administered to beneficiaries by
participating CAP physicians. We revised Sec. 414.802 (definition of
unit) to reflect the exclusion of units of CAP drugs administered to
beneficiaries by participating CAP physicians. We further stated that
we intend to examine the effect of this exclusion and, if necessary,
revisit our decision at the end of the initial 3-year period of the
CAP. We also clarified that manufacturers must exclude rebates and
lagged price concessions attributable to units of CAP drugs
administered to a beneficiary by a participating CAP physician when
using the estimation methodology specified in Sec. 414.804.
On April 21, 2006, we announced the selection of the approved CAP
vendor for the initial phase of the CAP. The approved CAP vendor is
required to provide manufacturers, upon request, with information
necessary to determine which sales to the approved CAP vendor are sales
of CAP drugs that are excluded from the ASP calculation.
We did not receive any timely comments on the November 21, 2005
interim final rule with comment period. In a March 3, 2006 Federal
Register

[[Page 48132]]

notice (71 FR 10975), we published a PRA notice soliciting comment on
our proposed modification of the OMB-approved ASP information
collection requirements, regarding the collection of the number of CAP
units excluded from the ASP calculation. In response to this notice, a
commenter stated that, in certifying the accuracy of the submitted ASP
data, manufacturers must rely on approved CAP vendors to provide the
number of units of CAP drugs that are administered to beneficiaries by
participating CAP physicians. The commenter noted that CAP vendors are
the only entities with direct information on CAP units sold. Because of
this circumstance, the commenter believed that the requirement to
exclude units of CAP drugs administered to beneficiaries by
participating CAP physicians places the manufacturer in the untenable
position of reporting ASP and certifying reports of ASP based on
second-hand information. Further, the commenter noted that
manufacturers may not have timely access to this information and they
cannot independently confirm its accuracy. The commenter suggested that
we consider an alternative approach.

B. Regulation Change

Existing Sec. 414.802 requires that, during the first 3 years of
the CAP, the method for counting units excludes units of CAP drugs (as
defined in Sec. 414.902) administered to a beneficiary by a
participating CAP physician (as defined in Sec. 414.902). As a result
of comments received on our March 3, 2006 PRA notice and our ongoing
work with manufacturers, we learned that manufacturers were concerned
that they would have difficulty obtaining the information necessary to
accurately exclude CAP units (as currently defined in Sec. 414.802)
from the ASP calculation. We have reexamined our current definition of
unit based on the manufacturers concerns.
After reexamination of the issues, we have determined that we did
not fully consider that the current definition of unit may have
unintended results. For example, an unintended result occurs when, as
permitted by the statute in certain emergency situations under the CAP,
the participating CAP physician administers a drug from his or her
stock and orders a replacement from the approved CAP vendor. Our
existing regulations specify a unit qualifies as a CAP unit when it is
administered to a beneficiary by a participating CAP physician.
However, in this instance, the drug that was administered was obtained
outside the CAP, and the drug supplied by the approved CAP vendor was
not administered to the beneficiary. Therefore, under our current
definition of ``unit,'' under the CAP, the manufacturer could not
exclude the units of CAP drugs that participating CAP physicians obtain
from approved CAP vendors in accordance with the resupply provisions of
Sec. 414.906(e).
This result would have the effect of inappropriately including the
sales of units of CAP drugs in the ASP calculation. Moreover, this
result is inconsistent with our intended policy. In addition, requiring
manufacturers to track administration of units of CAP drugs that
approved CAP vendors supply to participating CAP physicians to resupply
the physician's stock (in order to determine whether such drugs are
ever administered to a Medicare beneficiary for purposes of excluding
them from the calculation of ASP) would be burdensome for manufacturers
and participating CAP physicians. These burdens are caused by the fact
that manufacturers would have to rely on data from the participating
CAP physicians to identify such units. However, our regulations and CAP
participation agreement do not require participating CAP physicians to
track the administration of drugs from their private stock.
Our decision to exclude CAP units from the ASP was based on our
concerns about the effect of including CAP prices in the calculation of
ASP. The decision also was based on our belief that the best outcome
for both the ASP methodology and the CAP programs would be one in which
prices under CAP did not affect payment amounts under the ASP
methodology. To remedy this unintended result and to better effectuate
our intent in excluding CAP units, we are revising the definition of
``unit'' at Sec. 414.802 for ASP purposes during the first 3 years of
the CAP. We are persuaded by the commenters and by our review of the
current regulation that: (1) the current definition of unit does not
achieve the policy goal of establishing methods of counting units so
that the payment amounts under the ASP methodology are not affected by
the CAP; and (2) an alternative definition of unit will be
significantly less burdensome on manufacturer, CAP vendors, and
participating CAP physicians.
Therefore, as a result of our reexamination, and in accordance with
our authority under section 1847A(b)(2)(B) of the Act to establish
methods for counting units, we have decided to revise our definition of
``unit'' in our regulations to exclude, for the initial 3-year contract
period under the CAP, units of CAP drugs sold to an approved CAP vendor
for use under the CAP. We note that the revised definition is
consistent with suggestions made by commenters in response to the March
4, 2005 proposed rule. Many commenters suggested that ``sales to'' or
``purchases by'' approved CAP vendors be excluded from the calculation
of ASP. However, we are clarifying, that only those units of CAP drugs
sold to an approved CAP vendor for use under the CAP are excluded from
the calculation of ASP.
In implementing this revised definition of unit, it is our intent
to facilitate the start up of the CAP and reduce complexities and
burdens associated with identifying units of CAP drugs excluded from
the calculation of ASP. We believe the revised definition of unit
establishes a method for counting units so that the payment amounts
under the ASP methodology are not affected by the CAP. Further, we
believe that manufacturers can more readily verify excluded units of
CAP drugs in accordance with the revised definition.
Manufacturers must continue to exclude rebates and lagged price
concessions attributable to units of CAP drugs sold to approved CAP
vendors for use under the CAP.
We welcome comments on the exclusion of CAP drug units from the
calculation of the ASP. We also seek comments on accounting for this
exclusion when estimating lagged price concessions. We will address
comments received in a subsequent Federal Register document.
After the initial 3-year period of the CAP, we will evaluate the
impact on approved CAP vendors, manufacturers, and others of excluding
units sold to approved CAP vendors for use under the CAP from the
calculation of ASP. If there appears to be a reason not to continue to
exclude units of CAP drugs sold to approved CAP vendors for use under
the CAP from the calculation of ASP, we will undertake rulemaking to
describe our findings and conclusions and to seek public comment.

XIII. Other Required Information

A. Requests for Data From the Public

In order to respond promptly to public requests for data related to
the prospective payment system, we have established a process under
which commenters can gain access to raw data on an expedited basis.
Generally, the data are available in computer tape or cartridge format;
however, some files are available on diskette as well as on the
Internet at: http://www.cms.hhs.gov/providers/hipps. In the FY 2007
IPPS proposed rule (71 FR 24137 through 24139), we published a list of
data files

[[Page 48133]]

that are available for purchase from CMS or that may be downloaded from
the Internet without charge.

B. Collection of Information Requirements

Under the Paperwork Reduction Act of 1995 (PRA), we are required to
provide 60-day notice in the Federal Register and solicit public
comment before a collection of information requirement is submitted to
the Office of Management and Budget (OMB) for review and approval. In
order to fairly evaluate whether an information collection should be
approved by OMB, section 3506(c)(2)(A) of the PRA requires that we
solicit comment on the following issues:
The need for the information collection and its usefulness
in carrying out the proper functions of our agency.
The accuracy of our estimate of the information collection
burden.
The quality, utility, and clarity of the information to be
collected.
Recommendations to minimize the information collection
burden on the affected public, including automated collection
techniques.
The following information collection requirements are included in
this final rule and their associated burdens are subject to the PRA:
Section 412.64 Federal Rates for Inpatient Operating Costs for Federal
Fiscal Year 2005 and Subsequent Fiscal Years (Reporting of Hospital
Quality Data for Annual Hospital Payment Update)
In the FY 2007 IPPS proposed rule (71 FR 23996), we outlined the
requirements for this section and we are restating those requirements
and burden estimates as part of this final rule. Section 412.64(d)(2)
requires hospitals, in order to qualify for the full annual market
basket update, to submit quality data on a quarterly basis to CMS, as
specified by CMS.
As discussed in the section IV.A. of this preamble, section 5001(a)
of Pub. L. 109-171 sets forth new requirements for the Reporting of
Hospital Quality Data for Annual Payment Update (RHQDAPU) program. New
sections 1886(b)(3)(B)(viii)(III) and (IV) of the Act require that we
expand the ``starter'' set of 10 measures that we currently use. In
accordance with section 238(b) of Pub. L. 108-173, effective for all
payments beginning with FY 2007, the set of measures will expand from
10 to 21 measures, as we adopt the baseline set of performance measures
set forth in a 2005 report issued by the Institute of Medicine (IOM) of
the National Academy of Sciences.
The burden estimate has been updated based on increased number of
collected measures and the anticipated levels of participation by
hospitals. We estimate that there will be approximately 3,700
respondents per year. Of this number, approximately 3,100 hospitals are
JCAHO accredited and are currently collected measures and submitting
data to the JCAHO on a quarterly basis. Of the JCAHO accredited
hospitals, approximately 1,080 are collecting the same measures CMS
will be collecting for public reporting and there is no additional
burden for these hospitals. Approximately 1,940 of the JCAHO-accredited
hospitals will need to collect SCIP in addition to the data already
collected for maintaining JCAHO accreditation. Approximately 60
accredited hospitals do not submit for the three starter set topics and
must begin collecting and submitting data on all four topics. In
addition, there are approximately 600 hospitals that do not participate
in the JCAHO accreditation process. These non-JCAHO hospitals will have
the additional burden of collecting data on all four topics.
For JCAHO hospitals, we estimate it will take 25 hours per quarter
per topic for collection. We expect the burden for hospitals to total
238,560 hours per year, including time allotted for overhead. For non-
JCAHO accredited hospitals, we estimate the burden to be 246,000 hours
per year including overhead. The total number of burden hours for all
hospitals is 485,560 hours. The number of respondents will vary
according to the level of voluntary participation. One hundred percent
of the data may be collected electronically. There will be no
additional burden placed on hospitals that submit this data in response
to section 5001(b) of Pub. L. 109-171.
We are revising this collection to include the burden associated
with the collection of the additional quality measures. However, the
burden associated with the requirements under Sec. 412.64(d) is
currently approved under OMB Number 0938-0918, with an expiration date
of December 31, 2008.
Section 412.92 Special Treatment: Sole Community Hospitals
In the FY 2007 proposed rule (71 FR 23996), we outlined the
requirements for Sec. 412.92. We are restating those requirements and
burden estimates as part of this final rule. Section 412.92(b)(3)
requires an approved sole community hospital (SCH) to notify the
appropriate fiscal intermediary of any change which would affect its
classification as an SCH.
The burden associated with this requirement is the time and effort
it would take for the SCH to provide such notification to the fiscal
intermediary. We estimate that on an annual basis it would take an SCH
1 hour to provide notification. While this requirement is subject to
the PRA, we believe the requirement is exempt because it impacts less
than 10 SCHs.
Section 412.108 Special Treatment: Medicare-Dependent, Small Rural
Hospitals
In the FY 2007 IPPS proposed rule (71 FR 23996), we outlined the
requirements for this section. We are restating those requirements and
burden estimates as part of this final rule. Section 412.108(b)(4)
requires an approved MDH to notify the appropriate fiscal intermediary
of any change which would affect its status as an MDH.
The burden associated with this requirement is the time and effort
it would take for the MDH to provide such notification to the fiscal
intermediary. We estimate that on an annual basis it would take an MDH
1 hour to provide notification. While this requirement is subject to
the PRA, we believe the requirement is exempt because it impacts less
than 10 MDHs.
Section 412.525 Adjustments to the Federal Prospective Payment
In the RY 2007 LTCH PPS proposed rule (71 FR 4648), we outlined the
collection of information requirements associated with Sec. 412.525
and we are restating those requirements and burden estimates as part of
this final rule. Section 412.525(a)(4)(iv)(A) states that CMS may
specify an alternative to the cost-to-charge ratio otherwise applicable
under paragraph (a)(4)(iv)(B) of this section. In addition, a hospital
may also request that its fiscal intermediary use a different (higher
or lower) CCR based on substantial evidence provided by the hospital.
The burden associated with this requirement is the time and effort
necessary for a hospital to gather, process, and submit the necessary
documentation to its fiscal intermediary to substantiate its request
for the use of a different CCR by its fiscal intermediary. For example,
necessary documentation, as stipulated by CMS and the fiscal
intermediary, may include but not be limited to financial records
documenting the hospital's cost and charges.
The estimated burden for this requirement is 8 hours per hospital.
Therefore, we estimate that it would require 80 annual hours (8 hours x
10

[[Page 48134]]

facilities), to comply with this requirement.
We initiated the OMB approval process by publishing a 60-day
Federal Register notice on July 21, 2006 (71 FR 41448).
Section 412.529 Special Payment Provision for Short-Stay Outliers
In the RY 2007 LTCH PPS proposed rule (71 FR 4648), we also
outlined the collection of information requirements associated with
Sec. 412.529 and we are restating these requirements and burden
estimates as part of this final rule. Section 412.529(c)(4)(iv)(A)
states that CMS may specify an alternative to the CCR otherwise
applicable under paragraph (c)(4)(iv)(B) of this section. In addition,
a hospital may also request that its FI use a different (higher or
lower) CCR based on substantial evidence provided by the hospital.
The burden associated with this requirement is the time and effort
necessary for a hospital to gather, process, and submit the necessary
documentation to its fiscal intermediary to substantiate its request
for the use of a different CCR by its fiscal intermediary. For example,
necessary documentation, as stipulated by CMS and the fiscal
itnermediary, may include but not be limited to financial records
documenting the hospital's cost and charges.
The estimated burden for this requirement is 8 hours per hospital.
Therefore, we estimate that it would require 80 annual hours (8 hours x
10 facilities), to comply with this requirement.
We initiated the OMB approval process by publishing a 60-day
Federal Register notice on July 21, 2006 (71 FR 41448).
Section 505.13 Conditions for Loan Forgiveness
In the September 30, 2005 Federal Register (70 FR 57376), we
published a proposed rule that outlined the requirements for Sec.
505.13 and we are restating those requirements and evaluation of the
burden as part of this final rule. Section 505.13(d) requires a
hospital seeking loan forgiveness to submit to CMS, within the
timeframe specified by the Secretary, a written request for loan
forgiveness and a loan forgiveness plan that meets the criteria
specified in Sec. 505.15.
The burden associated with this requirement is the time and effort
needed to draft and submit the written request of forgiveness and the
time and effort to develop and submit a loan forgiveness plan. While
these requirements are subject to the PRA, we believe they are exempt
as defined in 5 CFR 1320.3(c)(4). These requirements will impact less
than 10 hospitals.
This final rule imposes collection of information requirements as
outlined in the regulation text and specified above. However, this
final rule also makes reference to several associated information
collections that are not discussed in the regulation text. The
following is a discussion of these collections, which have received the
Office of Management and Budget's (OMB) approval:

Occupational Mix Adjustment to the FY 2007 Index (Hospital Wage Index
Occupational Mix Survey)

As stated in section III.C. and III.G. of this preamble, for FY
2007 in order to comply with the Bellevue decision, CMS will base the
occupational mix adjustment on data collected from the 2006 survey. CMS
submitted a revised information collection request to the Office of
Management and Budget (OMB) that contained the existing burden and the
additional burden associated with collecting new occupational mix data
from hospitals to determine the occupational mix adjustment by
September 30, 2006.
The burden associated with this information collection request is
the time and effort required to collect and submit the data in the
Hospital Wage Index Occupational Mix Survey to CMS. While this burden
is subject to the PRA, it is already approved under OMB control number
0938-0907, with an expiration date of May 31, 2009.

Revisions to the Wage Index Based on Hospital Redesignations (Medicare
Geographic Classification Review Board)

As noted in section III.H of this preamble, section 1886(d)(10) of
the Act established the MGCRB, an entity that has the authority to
accept IPPS hospital applications requesting geographic
reclassification for wage index or standardized payment amounts and to
issue decisions on these requests. It is important for CMS to ensure
the accuracy of the MGCRB decisions and remain apprised of potential
payment impacts. Our regulations at Sec. 412.256 require a hospital to
submit a copy of its MGCRB application to CMS.
The burden associated with this requirement is the time and effort
associated with a hospital compiling and submitting a copy of its MGCRB
application to CMS. While this requirement is subject to the PRA, it is
currently approved under OMB control number 0938-0573, with an
expiration date of November 30, 2008.

Exclusion of Vendor Purchases Made Under the Competitive Acquisition
Program (CAP) for Outpatient Drugs and Biologicals Under Part B for the
Purpose of Calculating the Average Sales Price (ASP)

Section XII.A.1 of this preamble provides background information
pertaining to the use of the average sales price (ASP) as the basis for
our drug payment methodology. In accordance with section 1847A of the
Act, most Medicare Part B covered drugs and biologicals not paid on a
cost or prospective payment basis are paid based on the average sales
price of the drug or biological, beginning in CY 2005. The ASP data
reporting requirements are specified in Section 1927 of the Act. The
reported ASP data are used to establish the Medicare payment amounts.
Section XII.A.2 and XII.A.3 of this preamble discuss the ASP
payment methodology, the CAP for certain Part B covered drugs, and the
regulatory history of ASP and CAP. The CAP program began on July 1,
2006. The program provides physicians with a choice between obtaining
Part B covered drugs from approved CAP vendors, or acquiring and
billing for Part B drugs under the ASP system.
As discussed in a November 21, 2005 (70 FR 70478) interim final
rule with comment period and a March 3, 2006 (71 FR 10975) 30-day PRA
Federal Register notice, the collection of ASP data imposes information
collection requirements on the public. The burden associated with ASP
information collection requirements is the time and effort required by
manufacturers of Medicare Part B drugs and biologicals to prepare and
submit the required data to CMS. While these requirements are subject
to the PRA, they are currently approved under OMB control number 0938-
0921, with an expiration date of May 31, 2009.
As required by section 3504(h) of the Paperwork Reduction Act of
1995, we have submitted a copy of this document to the Office of
Management and Budget (OMB) for its review of these information
collection requirements.

C. Waiver of Proposed Rulemaking and Delay in the Effective Date

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

[[Page 48135]]

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.
We find good cause to waive the requirement for publication of a
notice of proposed rulemaking and public comment for the provisions of
section XII. of this preamble on the grounds that it is necessary to
implement this change immediately in order to ensure that a more
accurate, and less burdensome, implementation of our policy is in place
in time for it to be effective for the next ASP reporting period. We
believe that revising the definition of ``unit'' as described in this
rule will best ensure that the payment amounts under the ASP
methodology are not affected by the CAP, consistent with our stated
policy. Without an immediate revision to the definition of ``unit,''
the regulation requires a level of complexity in determining how to
exclude CAP prices that we did not intend and places unintended burdens
on participating CAP physicians. Further, unless the revised definition
of ``unit'' is implemented immediately, it would not be effective in
time for manufacturers to accurately exclude units of CAP drugs sold to
approved CAP vendors for use under the CAP during the third calendar
quarter of 2006 and certify their reports.
We also ordinarily provide a 60-day delay in the effective date of
the provisions of a rule in accordance with the Administrative
Procedure Act, which normally requires a 30-day delay in the effective
date of a final rule, and the Congressional Review Act, which requires
a 60-day delay in the effective date of a major rule. However, we can
waive the delay in effective date if the Secretary finds, for good
cause, that the delay is impracticable, unnecessary or contrary to the
public interest, and incorporates a statement of the finding and the
reasons in the rule issued (5 U.S.C. 553(d)(3); 5 U.S.C. 808(2)).
We find that good cause exists to waive the 60-day delay in
effectiveness for the provisions of section XII. of this preamble and
Sec. 414.802 so that these portions of this rule take effect
immediately upon publication in the Federal Register. Unless the
revised definition of ``unit'' is implemented immediately, it would not
be effective in time for manufacturers to accurately exclude units of
CAP drugs sold to approved CAP vendors for use under the CAP during the
third calendar quarter of 2006. As noted above, a delay in
implementation of this refinement would impose costs burdens on
manufacturers and participating CAP physicians that we did not intend.
Further, without this refinement, manufacturers may be unable to
certify the accuracy of their ASPs. Because manufactures must certify
their ASPs, this refinement must be in place before the beginning of
the next ASP reporting period. For these reasons, we find good cause to
waive the 60-day delay in the effective date and these regulations will
be effective on August 18, 2006.
Moreover, in section II.c.iv. of the Addendum to this final rule,
we discuss a technical correction that we are making to remove the
second sentence from Sec. 412.116(e) of our regulations. We find it
unnecessary to undertake notice-and-comment rulemaking with respect to
removing this sentence because this correction merely removes a
sentence that previously was struck from our regulations, but was
inadvertently reinstated. We note that this change to the regulations
underwent notice-and-comment rulemaking when it was initially removed
from the regulations (68 FR 34515). Thus, because the public already
had opportunity to comment on this policy, additional comment would be
unnecessary.

D. Response to Comments

Because of the large number of comments we normally receive on
Federal Register documents, we are not able to acknowledge or respond
to them individually. We will consider all comments on the CAP ASP
provisions we receive by the date and time specified in the ``DATES''
section of this preamble, and, when we proceed with a subsequent
document, we will respond to the comments in the preamble to that
document.

List of Subjects

42 CFR Part 409

Health Facilities, Medicare.

42 CFR Part 410

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

42 CFR Part 412

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

42 CFR Part 413

Health facilities, Kidney diseases, Medicare, Puerto Rico,
Reporting and recordkeeping requirements.

42 CFR Part 414

Administrative practice and procedure, Health facilities, Health
professions, Kidney diseases, Medicare, Reporting and recordkeeping
requirements.

42 CFR Part 424

Emergency medical services, Health facilities, Health professions,
Medicare.

42 CFR Part 485

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

42 CFR Part 489

Health facilities, Medicare, Reporting and recordkeeping
requirements.

42 CFR Part 505

Administrative practice and procedure, Health facilities, Loan
programs, Infrastructure improvement program, Reporting and
recordkeeping, and Rural areas.

0
For the reasons stated in the preamble of this final rule, the Centers
for Medicare & Medicaid Services is amending 42 CFR Chapter IV as
follows:

PART 409--HOSPITAL INSURANCE BENEFITS

0
1. The authority citation for part 409 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 409.3 is amended by revising paragraph (e) under the
definition of ``Qualified hospital'' to read as follows:

Sec. 409.3 Definitions.

* * * * *
Qualified hospital means a facility that--* * *
(e) If it is a foreign hospital, is licensed, or approved as
meeting the standard for licensing, by the appropriate foreign
licensing agency, and for purposes of furnishing nonemergency services
to U.S. residents, is accredited by the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO), or by a foreign
program under standards that CMS finds to be equivalent to those of
JCAHO.

0
3. Section 409.5 is revised to read as follows:

Sec. 409.5 General description of benefits.

Hospital insurance (Part A of Medicare) helps pay for inpatient
hospital or inpatient CAH services and posthospital SNF care. It also
pays for

[[Page 48136]]

home health services and hospice care. There are limitations on the
number of days of care that Medicare can pay for and there are
deductible and coinsurance amounts for which the beneficiary is
responsible. For each type of service, certain conditions must be met
as specified in the pertinent sections of this subpart and in part 418
of this chapter regarding hospice care. Conditions for payment of
emergency inpatient services furnished by a nonparticipating U.S.
hospital and for services furnished in a foreign country are set forth
in subparts G and H of part 424 of this chapter.

PART 410--SUPPLEMENTARY MEDICAL INSURANCE (SMI) BENEFITS

0
4. The authority citation for part 410 continues to read as follows:

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

0
5. Section 410.66 is revised to read as follows:

Sec. 410.66 Emergency outpatient services furnished by a
nonparticipating hospital and services furnished in a foreign country.

Conditions for payment of emergency inpatient services furnished by
a nonparticipating U.S. hospital and for services furnished in a
foreign country are set forth in subparts G and H of part 424 of this
chapter.

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL
SERVICES

0
6. The authority citation for part 412 is revised to read as follows:

Authority: Secs. 1102 and 1871 of the Social Security Act (42
U.S.C. 1302 and 1395hh), and sec. 124 of Pub. L. 106-113 (113 Stat.
1501A-332).

0
7. Section 412.8 is amended by--
0
a. Revising paragraph (b)(2).
0
b. Adding a new paragraph (c).
The revision and addition read as follows:

Sec. 412.8 Publication of schedules for determining prospective
payment rates.

* * * * *
(b) * * *
(2) Except as provided in paragraph (c) of this section, CMS
publishes a Federal Register document setting forth final methods,
amounts, and factors for determining inpatient prospective payment
rates not later than the August 1 before the Federal fiscal year in
which the rates would apply.
(c) Publication schedule for FY 2007. For FY 2007, not later than
August 1, 2006, CMS publishes a Federal Register document setting forth
a description of the methodology and data used in computing the
inpatient prospective payment rates for that year.

0
8. Section 412.22 is amended by--
0
a. Revising the introductory text of paragraph (f).
0
b. Adding a new paragraph (f)(3).
0
c. Revising paragraph (h)(1).
0
d. In paragraph (h)(2), removing the phrase ``(h)(3), (h)(6), and
(h)(7) of this section'' and adding the phrase ``(h)(3), (h)(4),
(h)(5), (h)(7), and (h)(8) of this section'' in its place.
0
e. Redesignating paragraphs (h)(5), (h)(6), and (h)(7) as paragraphs
(h)(6), (h)(7), and (h)(8), respectively.
0
f. Revising paragraph (h)(3).
0
g. Revising paragraph (h)(4).
0
h. Adding a new paragraph (h)(5).
0
i. In newly redesignated paragraph (h)(6), removing the phrase ``(h)(1)
through (h)(4) of this section'' and adding the phrase ``(h)(1) through
(h)(5) of this section'' in its place.
The revisions and addition read as follows:

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

* * * * *
(f) Application for certain hospitals. Except as provided in
paragraph (f)(3) of this section, if a hospital was excluded from the
prospective payment systems under the provisions of this section on or
before September 30, 1995, and at that time occupied space in a
building also used by another hospital, or in one or more buildings
located on the same campus as buildings used by another hospital, the
criteria in paragraph (e) of this section do not apply to the hospital
as long as the hospital--
* * * * *
(3) For cost reporting periods beginning on or after October 1,
2006, in applying the provisions of paragraph (f)(1) or (f)(2) of this
section, any hospital that was excluded from the prospective payment
systems under the provisions of this section on or before September 30,
1995, and at that time occupied space in a building also used by
another hospital, or in one or more buildings located on the same
campus as buildings used by another hospital may increase or decrease
the square footage or decrease the number of beds considered to be part
of the hospital at any time without affecting the provisions of
paragraph (f)(1) or (f)(2) of this section.
(i) If a hospital to which the provisions of paragraph (f)(1) of
this section applies decreases its number of beds below the number of
beds considered to be part of the hospital on September 30, 1995, it
may subsequently increase the number of beds at any time as long as the
resulting total number of beds considered to be part of the hospital
does not exceed the number of beds at the hospital on September 30,
1995.
(ii) If a hospital to which the provisions of paragraph (f)(2) of
this section applies decreases its number of beds below the number of
beds considered to be part of the hospital on September 30, 2003, it
may subsequently increase the number of beds at any time as long as the
resulting total number of beds considered to be part of the hospital
does not exceed the number of beds at the hospital on September 30,
2003.
* * * * *
(h) Satellite facilities. (1) For purposes of paragraphs (h)(2)
through (h)(5) of this section, a satellite facility is a part of a
hospital that provides inpatient services in a building also used by
another hospital, or in one or more entire buildings located on the
same campus as buildings used by another hospital.
* * * * *
(3) Except as provided in paragraphs (h)(4) and (h)(5) of this
section, the provisions of paragraph (h)(2) of this section do not
apply to--
* * * * *
(4) For cost reporting periods beginning before October 1, 2006, in
applying the provisions of paragraph (h)(3) of this section, any
hospital structured as a satellite facility on September 30, 1999, may
increase or decrease the square footage of the satellite facility or
may decrease the number of beds in the satellite facility if these
changes are made necessary by relocation of a facility--
(i) To permit construction or renovation necessary for compliance
with changes in Federal, State, or local law; or
(ii) Because of catastrophic events such as fires, floods,
earthquakes, or tornadoes.
(5) For cost reporting periods beginning on or after October 1,
2006, in applying the provisions of paragraph (h)(3) of this section--
(i) Any hospital structured as a satellite facility on September
30, 1999, may increase or decrease the square footage or decrease the
number of beds considered to be part of the satellite facility at any
time without affecting the provisions of paragraph (h)(3) of this
section; and
(ii) If the satellite facility decreases its number of beds below
the number of beds considered to be part of the satellite facility on
September 30, 1999,

[[Page 48137]]

it may subsequently increase the number of beds at any time as long as
the resulting total number of beds considered to be part of the
satellite facility does not exceed the number of beds at the satellite
facility on September 30, 1999.
* * * * *

0
9. Section 412.25 is amended by--
0
a. In paragraph (e) introductory text, remove the cross-reference
``paragraph (e)(2) and (e)(4)'' and add the cross-reference ``paragraph
(e)(2) and (e)(5)'' in its place.
0
b. In paragraph (e)(2) introductory text, remove the cross-reference
``paragraph (e)(3) and (e)(5)'' and add the cross-reference ``paragraph
(e)(3) and (e)(6)'' in its place.
0
c. Revising paragraph (e)(3).
0
d. Revising paragraph (e)(4) introductory text.
0
e. Redesignating paragraph (e)(5) as (e)(6).
0
f. Adding a new paragraph (e)(5).
The revisions and addition read as follows:

Sec. 412.25 Excluded hospital units: Common requirements.

* * * * *
(e) * * *
(3) Except as specified in paragraphs (e)(4) and (e)(5) of this
section, the provisions of paragraph (e)(2) of this section do not
apply to any unit structured as a satellite facility on September 30,
1999, and excluded from the prospective payment systems on that date,
to the extent the unit continues operating under the same terms and
conditions, including the number of beds and square footage considered
to be part of the unit at the satellite facility on September 30, 1999.
(4) In applying the provisions of paragraph (e)(3) of this section,
any unit structured as a satellite facility on September 30, 1999, may
increase or decrease the square footage of the satellite facility or
may decrease the number of beds in the satellite facility considered to
be part of the satellite facility at any time, if these changes are
made by the relocation of a facility--
* * * * *
(5) For cost reporting periods beginning on or after October 1,
2006, in applying the provisions of paragraph (e)(3) of this section--
(i) Any unit structured as a satellite facility on September 30,
1999, may increase the square footage of the unit only at the beginning
of a cost reporting period or decrease the square footage or number of
beds considered to be part of the satellite facility subject to the
provisions of paragraph (b)(2) of this section, without affecting the
provisions of paragraph (e)(3) of this section; and
(ii) If the unit structured as a satellite facility decreases its
number of beds below the number of beds considered to be part of the
satellite facility on September 30, 1999, subject to the provisions of
paragraph (b)(2) of this section, it may subsequently increase the
number of beds at the beginning or a cost reporting period as long as
the resulting total number of beds considered to be part of the
satellite facility does not exceed the number of beds at the satellite
facility on September 30, 1999.
* * * * *

Sec. 412.42 [Amended]

0
10. In paragraph (d) of Sec. 412.42, the cross-reference ``Sec.
405.310(k)'' is removed, and the cross-reference ``Sec. 411.15(k)'' is
added in its place.

Sec. 412.48 [Amended]

0
11. In paragraph (b) of Sec. 412.48, the cross-reference ``Sec. Sec.
405.330 through 405.332'' is removed and the cross-reference ``Sec.
411.400 and Sec. 411.402'' is added in its place.

0
12. Section 412.64 is amended by--
0
a. Revising paragraph (d)(2).
0
b. Adding a new paragraph (h)(6).
The revision and addition read as follows:

Sec. 412.64 Federal rates for inpatient operating costs for Federal
fiscal year 2005 and subsequent fiscal years.

* * * * *
(d) * * *
(2)(i) In the case of a ``subsection (d) hospital,'' as defined
under section 1886(d)(1)(B) of the Act, that does not submit quality
data on a quarterly basis to CMS, in the form and manner specified by
CMS, the applicable percentage change specified in paragraph (d)(1) of
this section is reduced--
(A) For fiscal years 2005 and 2006, by 0.4 percentage points; and
(B) For fiscal year 2007 and subsequent fiscal years, by 2.0
percentage points.
(ii) Any reduction of the percentage change will apply only to the
fiscal year involved and will not be taken into account in computing
the applicable percentage change for a subsequent fiscal year.
* * * * *
(h) * * *
(6) If a new rural hospital that is subject to the hospital
inpatient prospective payment system opens in a State that has an
imputed rural floor and has rural areas, CMS uses the imputed floor as
the hospital's wage index until the hospital's first cost report as an
inpatient prospective payment system provider is contemporaneous with
the cost reporting period being used to develop a given fiscal year's
wage index.
* * * * *

0
13. A new Sec. 412.79 is added to Subpart E to read as follows:

Sec. 412.79 Determination of the hospital-specific rate for inpatient
operating costs for Medicare-dependent, small rural hospitals based on
a Federal fiscal year 2002 base period.

(a) Base-period costs--(1) General rule. Except as provided in
paragraph (a)(2) of this section, for each MDH, the intermediary
determines the MDH's Medicare Part A allowable inpatient operating
costs, as described in Sec. 412.2(c), for the 12-month or longer cost
reporting period beginning on or after October 1, 2001, and before
October 1, 2002.
(2) Exceptions. (i) If the MDH's last cost reporting period
beginning before October 1, 2002, is for less than 12 months, the base
period is the MDH's most recent 12-month or longer cost reporting
period beginning before that short cost reporting period.
(ii) If the MDH does not have a cost reporting period beginning on
or after October 1, 2001, and before October 1, 2002, and does have a
cost reporting period beginning on or after October 1, 2000, and before
October 1, 2001, that cost reporting period is the base period unless
the cost reporting is for less than 12 months. In that case, the base
period is the MDH's most recent 12-month or longer cost reporting
period beginning before that short cost reporting period.
(b) Costs on a per discharge basis. The intermediary determines the
MDH's average base-period operating cost per discharge by dividing the
total operating costs by the number of discharges in the base period.
For purposes of this section, a transfer as described in Sec. 412.4(b)
is considered to be a discharge.
(c) Case-mix adjustment. The intermediary divides the average base-
period cost per discharge by the MDH's case-mix index for the base
period.
(d) Updating base period costs. For purposes of determining the
updated base-period costs for cost reporting periods beginning in
Federal fiscal year 2002, the update factor is determined using the
methodology set forth in Sec. 412.73(c)(14) and (c)(15).
(e) DRG adjustment. The applicable hospital-specific cost per
discharge is multiplied by the appropriate DRG weighting factor to
determine the hospital-specific base payment amount

[[Page 48138]]

(target amount) for a particular covered discharge.
(f) Notice of hospital-specific rate. The intermediary furnishes
the MDH a notice of its hospital-specific rate which contains a
statement of the hospital's Medicare Part A allowable inpatient
operating costs, number of Medicare discharges, and case-mix index
adjustment factor used to determine the hospital's cost per discharge
for the Federal fiscal year 2002 base period.
(g) Right to administrative and judicial review. An intermediary's
determination of the hospital-specific rate for a hospital is subject
to administrative and judicial review. Review is available to an MDH
upon receipt of the notice of the hospital-specific rate. The notice is
treated as a final intermediary determination of the amount of program
reimbursement for purposes of subpart R of Part 405 of this chapter,
governing provider reimbursement determinations and appeals.
(h) Modification of hospital-specific rate. (1) The intermediary
recalculates the hospital-specific rate to reflect the following:
(i) Any modifications that are determined as a result of
administrative or judicial review of the hospital-specific rate
determinations; or
(ii) Any additional costs that are recognized as allowable costs
for the MDH's base period as a result of administrative or judicial
review of the base-period notice of amount of program reimbursement.
(2) With respect to either the hospital-specific rate determination
or the amount of program reimbursement determination, the actions taken
on administrative or judicial review that provide a basis for
recalculations of the hospital-specific rate include the following:
(i) A reopening and revision of the MDH's base-period notice of
amount of program reimbursement under Sec. Sec. 405.1885 through
405.1889 of this chapter.
(ii) A prehearing order or finding issued during the provider
payment appeals process by the appropriate reviewing authority under
Sec. 405.1821 or Sec. 405.1853 of this chapter that resolved a matter
at issue in the MDH's base-period notice of amount of program
reimbursement.
(iii) An affirmation, modification, or reversal of a Provider
Reimbursement Review Board decision by the Administrator of CMS under
Sec. 405.1875 of this chapter that resolved a matter at issue in the
hospital's base-period notice of amount of program reimbursement.
(iv) An administrative or judicial review decision under Sec. Sec.
405.1831, 405.1871, or 405.1877 of this chapter that is final and no
longer subject to review under applicable law or regulations by a
higher reviewing authority, and that resolved a matter at issue in the
hospital's base-period notice of amount of program reimbursement.
(v) A final, nonappealable court judgment relating to the base-
period costs.
(3) The adjustments to the hospital-specific rate made under
paragraphs (h)(1) and (2) of this section are effective retroactively
to the time of the intermediary's initial determination of the rate.
(i) Maintaining budget neutrality. CMS makes an adjustment to the
hospital-specific rate to ensure that changes to the DRG
classifications and recalibrations of the DRG relative weights are made
in a manner so that aggregate payments to section 1886(d) hospitals are
not affected.

Sec. 412.84 [Amended]

0
14. In paragraph (m) of Sec. 412.84, the cross-reference ``paragraph
(h)(3)'' is removed and the cross-reference ``paragraph (i)(4)'' is
added in its place.

0
15. Section 412.90 is amended by revising paragraph (j) to read as
follows:

Sec. 412.90 General rules.

* * * * *
(j) Medicare-dependent, small rural hospitals. For cost reporting
periods beginning on or after April 1, 1990, and before October 1,
1994, and for discharges occurring on or after October 1, 1997, and
before October 1, 2011, CMS adjusts the prospective payment rates for
inpatient operating costs determined under subparts D and E of this
part if a hospital is classified as a Medicare-dependent, small rural
hospital.
* * * * *

0
16. Section 412.92 is amended by--
0
a. In paragraph (b)(2)(iv) of Sec. 412.92, the word ``djustment'' is
removed and the word ``adjustment'' is added in its place.
0
b. Revising paragraph (b)(3) to read as follows:

Sec. 412.92 Special treatment: Sole community hospitals.

* * * * *
(b) * * *
(3) Duration of classification.
(i) An approved classification as a sole community hospital remains
in effect without need for reapproval unless there is a change in the
circumstances under which the classification was approved. An approved
sole community hospital must notify the fiscal intermediary if any
change that is specified in paragraph (b)(3)(ii) of this section
occurs. If CMS determines that a sole community hospital failed to
comply with this requirement, CMS will cancel the hospital's
classification as a sole community hospital effective with the date
that the hospital no longer met the criteria for such classification,
consistent with the provisions of Sec. 405.1885 of this chapter.
(ii) A sole community hospital must report the following to the
fiscal intermediary within 30 days of the event:
(A) The opening of a new hospital in its service area.
(B) The opening of a new road between itself and a like provider
within 35 miles.
(C) An increase in the number of beds to more than 50 if the
hospital qualifies as a sole community hospital under paragraph
(a)(1)(ii) of this section.
(D) Its geographic classification changes.
(E) Any changes to the driving conditions that result in a decrease
in the amount of travel time between itself and a like provider if the
hospital qualifies as a sole community hospital under paragraph (a)(3)
of this section.
(iii) A sole community hospital must report to the fiscal
intermediary if it becomes aware of any change that would affect its
classification as a sole community hospital beyond the events listed in
paragraph (b)(3)(ii) of this section within 30 days of the event. If
CMS determines that a sole community hospital has failed to comply with
this requirement, CMS will cancel the hospital's classification as a
sole community hospital effective with the date the hospital became
aware of the event that resulted in the sole community hospital no
longer meeting the criteria for such classification, consistent with
the provisions of Sec. 405.1885 of this chapter.
* * * * *
0
17. Section 412.96 is amended by--
0
a. Revising paragraph (c)(2)(i) introductory text.
0
b. Revising paragraph (c)(2)(ii).
0
c. Revising paragraph (i)(3).
The revisions read as follows:

Sec. 412.96 Special Treatment: Referral centers.

* * * * *
(c) * * *
(2) Number of discharges. (i) CMS sets forth the national and
regional number of discharges in each year's annual notice of
prospective payment rates

[[Page 48139]]

published under Sec. 412.8(b). The methodology CMS uses to calculate
these criteria is described in paragraph (i) of this section. Except as
provided in paragraph (c)(2)(ii) of this section for an osteopathic
hospital, for the hospital's cost reporting period that began during
the same fiscal year as the cost reporting periods used to compute the
regional median discharges under paragraph (i) of this section, its
number of discharges (not including discharges from units excluded from
the prospective payments system under subpart B of this part or from
newborn units) is at least equal to--
* * * * *
(ii) For cost reporting periods beginning on or after January 1,
1986, an osteopathic hospital, recognized by the American Osteopathic
Healthcare Association (or any successor organization), that is located
in a rural area must have at least 3,000 discharges during its cost
reporting period that began during the same fiscal year as the cost
reporting periods used to compute the regional median discharges under
paragraph (i) of this section to meet the number of discharges
criterion.
* * * * *
(i) * * *
(3) Annual notice. CMS sets forth the national and regional
criteria in the annual notice of prospective payment rates published
under Sec. 412.8(b). These criteria are compared to an applying
hospital's number of discharges for the same cost reporting period used
to develop the regional criteria in this section in determining if the
hospital qualifies for referral center status for cost reporting
periods beginning on or after October 1 of the Federal fiscal year to
which the notice applies.

0
18. Section 412.105 is amended by--
0
a. Revising paragraph (f)(1)(ii)(C).
0
b. Adding a new paragraph (f)(1)(iii)(C).
The addition reads as follows:

Sec. 412.105 Special treatment: Hospitals that incur indirect costs
for graduate medical education programs.

* * * * *
(f) * * *
(1) * * *
(ii) * * *
(C) Effective for discharges occurring on or after October 1, 1997,
the time spent by a resident in a nonhospital setting in patient care
activities, as defined in Sec. 413.75(b) of this subchapter, under an
approved medical residency training program is counted towards the
determination of full-time equivalency if the criteria set forth in
Sec. 413.78(c), Sec. 413.78(d), or Sec. 413.78(e) of this
subchapter, as applicable, are met.
(iii) * * *
(C) In order to be counted, a resident must be spending time in
patient care activities, as defined in Sec. 413.75(b) of this
subchapter.
* * * * *

0
19. Section 412.106 is amended by--
0
a. Revising paragraph (a)(1)(iii).
0
b. Republishing the introductory text of paragraph (d)(2)(iv).
0
c. Revising paragraph (d)(2)(iv)(C)(3).
0
d. Adding a new paragraph (d)(2)(iv)(D).
0
e. Adding a new paragraph (d)(2)(v).
The revision and additions read as follows:

Sec. 412.106 Special treatment: Hospitals that serve a
disproportionate share of low-income patients.

(a) * * *
(1) * * *
(iii) The hospital's location, in an urban or rural area, is
determined in accordance with the definitions in Sec. 412.64, except
that a reclassification that results from an urban hospital
reclassified as rural as set forth in Sec. 412.103 is classified as
rural.
* * * * *
(d) * * *
(2) * * *
(iv) If the hospital meets the criteria of paragraph (c)(1)(iv) of
this section--
* * * * *
(C) * * *
(3) Except as provided in paragraph (d)(2)(iv)(D) of this section,
the maximum payment adjustment factor is 12 percent.
(D) Effective for discharges occurring on or after October 1, 2006,
for a hospital that is classified as a Medicare-dependent, small rural
hospital under Sec. 412.108, the payment adjustment factor limitation
specified in paragraph (d)(2)(iv)(C)(3) does not apply.
(v) If the hospital meets the criteria of paragraph (c)(2) of this
section, the payment adjustment factor is as follows:
(A) 30 percent for discharges occurring on or after April 1, 1990,
and before October 1, 1991.
(B) 35 percent for discharges occurring on or after October 1,
1991.
* * * * *

0
20. Section 412.108 is amended by--
0
a. Revising paragraph (a)(1) introductory text.
0
b. Revising paragraph (b)(4).
0
c. Adding a new paragraph (c)(2)(iii).
The revisions and addition read as follows:

Sec. 412.108 Special Treatment: Medicare-dependent, small rural
hospitals.

(a) Criteria for classification as a Medicare-dependent, small
rural hospital. (1) General considerations. For cost reporting periods
beginning on or after April 1, 1990, and ending before October 1, 1994,
or for discharges occurring on or after October 1, 1997, and before
October 1, 2011, a hospital is classified as a Medicare-dependent,
small rural hospital if it is located in a rural area (as defined in
subpart D of this part) and meets all of the following conditions:
* * * * *
(b) * * *
(4) A determination of MDH status made by the fiscal intermediary
is effective 30 days after the date the fiscal intermediary provides
written notification to the hospital. An approved MDH status
determination remains in effect unless there is a change in the
circumstances under which the status was approved.
(i) An approved MDH must notify the fiscal intermediary if any
change occurs that is specified in paragraph (b)(4)(ii) of this section
occurs. If CMS determines that an MDH failed to comply with this
requirement, CMS will cancel the hospital's classification as an MDH
effective with the date that the hospital no longer met the criteria
for such status, consistent with the provisions of Sec. 405.1885 of
this chapter.
(ii) An MDH must report the following to the fiscal intermediary
within 30 days of the event:
(A) The number of beds increases to more than 100.
(B) Its geographic classification changes.
(iii) An MDH must report to the fiscal intermediary if it becomes
aware of any change that would affect its classification as an MDH
beyond the events listed in paragraph (b)(4)(ii) of this section within
30 days of the event. If CMS determines that an MDH has failed to
comply with this requirement, CMS will cancel the hospital's
classification as an MDH effective with the date the hospital became
aware of the event that resulted in the MDH no longer meeting the
criteria for such classification, consistent with the provisions of
Sec. 405.1885 of this chapter.
* * * * *
(c) * * *
(2) * * *
(iii) For discharges occurring during cost reporting periods (or
portions thereof) beginning on or after October 1, 2006, and before
October 1, 2011, 75 percent of the amount that the Federal rate
determined under paragraph (c)(1) of this section is exceeded by the
highest of the following:
(A) The hospital-specific rate as determined under Sec. 412.73.

[[Page 48140]]

(B) The hospital-specific rate as determined under Sec. 412.75.
(C) The hospital-specific rate as determined under Sec. 412.79.
* * * * *

Sec. 412.116 [Amended]

0
21. In Sec. 412.116(e), the second sentence is removed.
0
22. Section 412.234 is amended by--

0
a. In paragraph (a)(3)(ii), removing the term ``fiscal year'' and
adding the term ``Federal fiscal year'' in its place.
0
b. Revising paragraph (a)(3)(iii).
0
c. Adding a new paragraph (a)(3)(iv).
The revisions and addition read as follows:

Sec. 412.234 Criteria for all hospitals in an urban county seeking
redesignation to another urban area.

(a) * * *
(3) * * *
(iii) For Federal fiscal year 2007, hospitals located in counties
that are in the same Combined Statistical Area (CSA) (under the MSA
definitions announced by the OMB on June 6, 2003) as the urban area to
which they seek redesignation qualify as meeting the proximity
requirement for reclassification to the urban area to which they seek
redesignation.
(iv) For Federal fiscal year 2008 and thereafter, hospitals located
in counties that are in the same Combined Statistical Area (CSA) or
Core-Based Statistical Area (CBSA) (under the MSA definitions announced
by the OMB on June 6, 2003) as the urban area to which they seek
redesignation qualify as meeting the proximity requirements for
reclassification to the urban area to which they seek redesignation.
* * * * *

0
23. Section 412.316 is amended by--
0
a. Revising paragraph (a).
0
b. Revising paragraph (b)(2).
0
c. Adding a new paragraph (b)(3).
0
d. Revising paragraph (c).
The revisions and addition read as follows:

Sec. 412.316 Geographic adjustment factors.

(a) Local cost variation. CMS adjusts for local cost variation
based on the hospital wage index value that is applicable to the
hospital under subpart D of this part. The adjustment factor equals the
hospital wage index value applicable to the hospital raised to the
.6848 power and is applied to 100 percent of the Federal rate.
(b) * * *
(2) For discharges occurring on or after October 1, 2004, the
definition of large urban area under Sec. 412.63(c)(6) continues to be
in effect for purposes of the payment adjustment under this section,
based on the geographic classification under Sec. 412.64, except as
provided for in paragraph (b)(3) of this section.
(3) For purposes of this section, the geographic classifications
specified under Sec. 412.64 apply, except that, effective for
discharges occurring on or after October 1, 2006, for an urban hospital
that is reclassified as rural as set forth in Sec. 412.103, the
geographic classification is rural.
(c) Cost-of-living adjustment. CMS provides an additional payment
to a hospital located in Alaska and Hawaii equal to [0.3152 x (the
cost-of-living adjustment factor used to determine payments under
subpart D of this part--1)] percent.
24. Section 412.320 is amended by--

0
a. Revising paragraph (a)(1)(ii).
0
b. Adding a new paragraph (a)(1)(iii).
The revision and addition read as follows:

Sec. 412.320 Disproportionate share adjustment factor.

(a) * * *
(1) * * *
(ii) For discharges occurring on or after October 1, 2004, the
payment adjustment under this section is based on the geographic
classifications specified under Sec. 412.64, except as provided for in
paragraph (a)(1)(iii) of this section.
(iii) For purposes of this section, the geographic classifications
specified under Sec. 412.64 apply, except that, effective for
discharges occurring on or after October 1, 2006, for an urban hospital
that is reclassified as rural as set forth in Sec. 412.103, the
geographic classification is rural.
* * * * *

0
25. Section 412.505 is amended by revising paragraph (b)(1) to read as
follows:

Sec. 412.505 Conditions for payment under the prospective payment
system for long-term care hospitals.

* * * * *
(b) General requirements. (1) Effective for cost reporting periods
beginning on or after October 1, 2002, a long-term care hospital must
meet the conditions for payment of this section, Sec. 412.22(e)(3) and
(h)(6), if applicable, and Sec. 412.507 through Sec. 412.511 to
receive payment under the prospective payment system described in this
subpart for inpatient hospital services furnished to Medicare
beneficiaries.
* * * * *

Sec. 412.508 [Amended]

0
26. In paragraph (c)(3) of Sec. 412.508, the cross-reference ``Sec.
1001.301'' is removed and the cross-reference ``1001.201'' is added in
its place.

0
27. Section 412.511 is revised to read as follows:

Sec. 412.511 Reporting and recordkeeping requirements.

A long-term care hospital participating in the prospective payment
system under this subpart must meet the requirement of Sec. Sec.
412.22(e)(3) and 412.22(h)(6) to report co-located status, if
applicable, and the recordkeeping and cost reporting requirements of
Sec. Sec. 413.20 and 413.24 of this subchapter.

0
28. Section 412.525 is amended by--
0
a. Revising paragraph (a)(3).
0
b. Revising paragraph (a)(4)(ii).
0
c. Revising paragraph (a)(4)(iii).
0
d. Adding a new paragraph (a)(4)(iv).
0
e. Adding a new paragraph (d)(3).
0
f. Adding a new paragraph (d)(4).
The revisions and additions read as follows:

Sec. 412.525 Adjustments to the Federal prospective payment.

(a) * * *
(3) The additional payment equals 80 percent of the difference
between the estimated cost of the patient's care (determined by
multiplying the hospital-specific cost-to-charge ratio by the Medicare
allowable covered charge) and the sum of the adjusted LTCH PPS Federal
prospective payment and the fixed-loss amount.
(4) * * *
(ii) For discharges occurring on or after August 8, 2003, and
before October 1, 2006, high-cost outlier payments are subject to the
provisions of Sec. 412.84(i)(1), (i)(3), and (i)(4) and (m) for
adjustments of cost-to-charge ratios.
(iii) For discharges occurring on or after October 1, 2003, and
before October 1, 2006, high-cost outlier payments are subject to the
provisions of Sec. 412.84(i)(2) for adjustments to cost-to-charge
ratios.
(iv) For discharges occurring on or after October 1, 2006, high-
cost outlier payments are subject to the following provisions:
(A) CMS may specify an alternative to the cost-to-charge ratio
otherwise applicable under paragraph (a)(4)(iv)(B) of this section. A
hospital may also request that its fiscal intermediary use a different
(higher or lower) cost-to-charge ratio based on substantial evidence
presented by the hospital. A request must be approved by the CMS
Regional Office.
(B) The cost-to-charge ratio applied at the time a claim is
processed is based

[[Page 48141]]

on either the most recent settled cost report or the most recent
tentatively settled cost report, whichever is from the latest cost
reporting period.
(C) The fiscal intermediary may use a statewide average cost-to-
charge ratio, which CMS establishes annually, if it is unable to
determine an accurate cost-to-charge ratio for a hospital in one of the
following circumstances:
(1) A new hospital that has not yet submitted its first Medicare
cost report. (For this purpose, a new hospital is defined as an entity
that has not accepted assignment of an existing hospital's provider
agreement in accordance with Sec. 489.18 of this chapter.)
(2) A hospital whose cost-to-charge ratio is in excess of 3
standard deviations above the corresponding national geometric mean
cost-to-charge ratio. CMS establishes and publishes this mean annually.
(3) Any other hospital for which data to calculate a cost-to-charge
ratio are not available.
(D) Any reconciliation of outlier payments is based on the cost-to-
charge ratio calculated based on a ratio of costs to charges computed
from the relevant cost report and charge data determined at the time
the cost report coinciding with the discharge is settled.
(E) At the time of any reconciliation under paragraph (a)(4)(iv)(D)
of this section, outlier payments may be adjusted to account for the
time value of any underpayments or overpayments. Any adjustment is
based upon a widely available index to be established in advance by the
Secretary, and is applied from the midpoint of the cost reporting
period to the date of reconciliation.
* * * * *
(d) * * *
(3) Patients who are transferred to onsite providers and readmitted
to a long-term care hospital, as provided for in Sec. 412.532.
(4) Long-term care hospitals-within-hospitals and satellites of
long-term care hospitals as provided in Sec. 412.534.

0
29. Section 412.529 is amended by revising paragraph (c)(3) to read as
follows:

Sec. 412.529 Special payment provision for short-stay outliers.

* * * * *
(c) * * *
(3)(i) For discharges occurring on or after October 1, 2002, and
before August 8, 2003, no reconciliations are made to short-stay
outlier payments upon cost report settlement to account for differences
between cost-to-charge ratio and the actual cost-to-charge ratio of the
case.
(ii) For discharges occurring on or after August 8, 2003, and
before October 1, 2006, short-stay outlier payments are subject to the
provisions of Sec. 412.84(i)(1), (i)(3), and (i)(4) and (m) for
adjustments of cost-to-charge ratios.
(iii) For discharges occurring on or after October 1, 2003, and
before October 1, 2006, short-stay outlier payments are subject to the
provisions of Sec. 412.84(i)(2) for adjustments to cost-to-charge
ratios.
(iv) For discharges occurring on or after October 1, 2006, short-
stay outlier payments are subject to the following provisions:
(A) CMS may specify an alternative to the cost-to-charge ratio
otherwise applicable under paragraph (c)(3)(iv)(B) of this section. A
hospital may also request that its fiscal intermediary use a different
(higher or lower) cost-to-charge ratio based on substantial evidence
presented by the hospital. This request must be approved by the CMS
Regional Office.
(B) The cost-to-charge ratio applied at the time a claim is
processed is based on either the most recent settled cost report or the
most recent tentatively settled cost report, whichever is from the
latest cost reporting period.
(C) The fiscal intermediary may use a statewide average cost-to-
charge ratio, which CMS establishes annually, if it is unable to
determine an accurate cost-to-charge ratio for a hospital in one of the
following circumstances:
(1) A new hospital that has not yet submitted its first Medicare
cost report. (For this purpose, a new hospital is defined as an entity
that has not accepted assignment of an existing hospital's provider
agreement in accordance with Sec. 489.18 of this chapter.)
(2) A hospital whose cost-to-charge ratio is in excess of 3
standard deviations above the corresponding national geometric mean.
CMS establishes and publishes this mean annually.
(3) Any other hospital for which data to calculate a cost-to-charge
ratio are not available.
(D) Any reconciliation of outlier payments is based on the cost-to-
charge ratio calculated based on a ratio of costs to charges computed
from the relevant cost report and charge data determined at the time
the cost report coinciding with the discharge is settled.
(E) At the time of any reconciliation under paragraph (c)(3)(iv)(D)
of this section, outlier payments may be adjusted to account for the
time value of any underpayments or overpayments. Any adjustment is
based upon a widely available index to be established in advance by the
Secretary, and is applied from the midpoint of the cost reporting
period to the date of reconciliation.

0
30. Section 412.532 is amended by--
0
a. Revising paragraph (a)(2).
0
b. Revising paragraph (b).
The revisions read as follows:

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

(a) * * *
(2) A satellite facility, as defined in Sec. 412.22(h), that is
co-located with the long-term care hospital.
* * * * *
(b) As used in this section, ``co-located'' or ``onsite'' facility
means a hospital, satellite facility, unit, or SNF that occupies space
in a building also used by another hospital or unit or in one or more
buildings on the same campus, as defined in Sec. 413.65(a)(2) of this
subchapter, as buildings used by another hospital or unit.
* * * * *

Sec. 412.541 [Amended]

0
31. In Sec. 412.541, paragraph (b)(2)(i), remove the cross-reference
``Sec. 412.533(b)'' and add in its place ``Sec. 412.533(a)(5) and
Sec. 412.533(c)''.

PART 413--PRINCIPLES OF REASONABLE COST REIMBURSEMENT; PAYMENT FOR
END-STAGE RENAL DISEASE SERVICES; PROSPECTIVELY DETERMINED PAYMENT
RATES FOR SKILLED NURSING FACILITIES

0
32. The authority citation for part 413 is revised to read as follows:

Authority: Secs. 1102, 1812(d), 1814(b), 1815, 1833(a), (i), and
(n), 1861(v), 1871, 1881, 1883, and 1886 of the Social Security Act
(42 U.S.C. 1302, 1395d(d), 1395f(b), 1395g, 1395l(a), (i), and (n),
1395x(v), 1395hh, 1395rr, 1395tt, and 1395ww); and sec. 124 of Pub.
L. 106-133 (113 Stat. 1501A-332).

0
33. Section 413.74 is amended by revising paragraph (a) to read as
follows:

Sec. 413.74 Payment to a foreign hospital.

(a) Principle. Section 1814(f) of the Act provides for the payment
of emergency and nonemergency inpatient hospitals services furnished by
foreign hospitals to Medicare beneficiaries. Subpart H of part 424 of
this chapter, together with this section, specifies the conditions for
payment.
* * * * *

0
34. Section 413.75 is amended by--
0
a. In paragraph (b), revising paragraph (1) under the definition of
``Medicare GME affiliated group''.

[[Page 48142]]

0
b. In paragraph (b), removing the cross-reference ``Sec.
413.79(g)(2)'' under paragraph (2) of the definition of ``Medicare GME
affiliated group'' and adding the cross-reference ``Sec.
413.79(f)(2)'' in its place.
0
c. In paragraph (b), removing the cross-reference ``Sec.
413.79(g)(2)'' under paragraph (3) of the definition of ``Medicare GME
affiliated group'' and adding the cross-reference ``Sec.
413.79(f)(2)'' in its place.
0
d. In paragraph (b), adding in alphabetical order the definition of
``Patient care activities''.
The addition and revision read as follows:

Sec. 413.75 Direct GME payments: General requirements.

* * * * *
(b) * * *
Medicare GME affiliated group means--
(1) Two or more hospitals that are located in the same urban or
rural area (as those terms are defined in subpart D of Part 412 of this
subchapter) or in a contiguous area and meet the rotation requirements
in Sec. 413.79(f)(2).
* * * * *
Patient care activities means the care and treatment of particular
patients, including services for which a physician or other
practitioner may bill.
* * * * *

0
35. Section 413.77 is amended by--
0
a. Revising paragraph (e)(1) introductory text.
0
b. Revising paragraph (e)(1)(i).
0
c. Adding a new paragraph (h).
The revisions and addition read as follows:

Sec. 413.77 Direct GME payments: Determination of per resident
amounts.

* * * * *
(e) Exceptions--(1) Base period for certain hospitals. If a
hospital did not have any approved medical residency training programs
or did not participate in Medicare during the base period, but either
condition changes in a cost reporting period beginning on or after July
1, 1985, the fiscal intermediary establishes a per resident amount for
the hospital using the information from the first cost reporting period
during which the hospital participates in Medicare and the residents
are on duty during the first month of that period. Effective for cost
reporting periods beginning on or after October 1, 2006, if a hospital
did not have any approved medical residency training programs or did
not participate in Medicare during the base period, but either
condition changes in a cost reporting period beginning on or after
October 1, 2006, and the residents are not on duty during the first
month of that period, the fiscal intermediary establishes a per
resident amount for the hospital using the information from the first
cost reporting period immediately following the cost reporting period
during which the hospital participates in Medicare and residents began
training at the hospital. The per resident amount is based on the lower
of the amount specified in paragraph (e)(1)(i) or paragraph (e)(1)(ii)
of this section, subject to the provisions of paragraph (e)(1)(iii) of
this section. Any GME costs incurred by the hospital during the cost
reporting period prior to the base period used for calculating the PRA
are reimbursed on a reasonable cost basis.
(i) The hospital's actual cost per resident incurred in connection
with the GME program(s) based on the cost and resident data from the
hospital's base year cost reporting period as established in paragraph
(e)(1) of this section.
* * * * *
(h) Hospital mergers. Effective for cost reporting periods
beginning on or after October 1, 2006, when multiple hospitals merge, a
primary care and obstetrics and gynecology weighted average per
resident amount and a nonprimary care weighted average per resident
amount is calculated, if applicable, for the surviving hospital, using
FTE resident data and per resident amount data from the most recently
settled cost reports of the respective hospitals prior to the merger.

0
36. Section 413.78 is amended by--
0
a. Revising paragraph (c)(1).
0
b. Revising paragraph (d)(1).
0
c. Revising paragraph (e)(1).
The revisions read as follows:

Sec. 413.78 Direct GME payments: Determinations of the total number
of FTE residents.

* * * * *
(c) * * *
(1) The resident spends his or her time in patient care activities,
as defined in Sec. 413.75(b).
* * * * *
(d) * * *
(1) The resident spends his or her time in patient care activities,
as defined in Sec. 413.75(b).
(e) * * *
(1) The resident spends his or her time in patient care activities,
as defined in Sec. 413.75(b).
* * * * *

0
37. Section 413.79 is amended by--
0
a. Revising paragraph (e)(1)(iv).
0
b. In the introductory text of paragraph (f), removing the cross-
reference ``paragraph (e)(3) of this section'' and adding the cross-
reference ``paragraph (d) of this section'' in its place.
The revision reads as follows:

Sec. 413.79 Direct GME payments: Determination of the weighted number
of FTE residents.

* * * * *
(e) * * *
(1) * * *
(iv) Effective for affiliation agreements entered into on or after
October 1, 2005, an urban hospital that qualifies for an adjustment to
its FTE cap under paragraph (e)(1) of this section is permitted to be
part of a Medicare GME affiliated group for purposes of establishing an
aggregate FTE cap only if the adjustment that results from the
affiliation is an increase to the urban hospital's FTE cap.
* * * * *

0
38. Section 413.85 is amended by revising paragraph (h)(3) to read as
follows:

Sec. 413.85 Costs of approved nursing and allied health education
activities.

* * * * *
(h) * * *
(3) Educational seminars, workshops, and continuing education
programs in which the employees or trainees participate that enhance
the quality of medical care or operating efficiency of the provider
and, effective October 1, 2003, do not lead to the ability to practice
and begin employment in a nursing or allied health specialty.
* * * * *

0
39. Section 413.89 is amended by--
0
a. Revising paragraph (a).
0
b. Revising paragraph (h).
The revisions read as follows:

Sec. 413.89 Bad debts, charity, and courtesy allowances.

(a) Principle. Bad debts, charity, and courtesy allowances are
deductions from revenue and are not to be included in allowable cost.
However, subject to the limitations described under paragraph (h) of
this section and the exception for anesthetists' services described
under paragraph (i) of this section, bad debts attributable to the
deductibles and coinsurance amounts are reimbursable under the program.
* * * * *
(h) Limitations on bad debts. (1) Hospitals. In determining
reasonable costs for hospitals, the amount of bad debt otherwise
treated as allowable costs (as defined in paragraph (e) of this
section) is reduced--
(i) For cost reporting periods beginning during fiscal year 1998,
by 25 percent;

[[Page 48143]]

(ii) For cost reporting periods beginning during fiscal year 1999,
by 40 percent;
(iii) For cost reporting periods beginning during fiscal year 2000,
by 45 percent; and
(iv) For cost reporting periods beginning during a subsequent
fiscal year, by 30 percent.
(2) Skilled nursing facilities. For cost reporting periods
beginning during fiscal year 2006 or during a subsequent fiscal year,
the amount of skilled nursing facility bad debts for coinsurance
otherwise treated as allowable costs (as defined in paragraph (e) of
this section) for services furnished to a patient who is not a dual
eligible individual is reduced by 30 percent. A dual eligible
individual is defined for this section as an individual that is
entitled to benefits under Part A of Medicare and is determined
eligible by the State for medical assistance under Title XIX of the Act
as described under paragraph (2) of the definition of a ``full-benefit
dual eligible individual'' at Sec. 423.772 of this chapter.
* * * * *

PART 414--PAYMENT FOR PART B MEDICAL AND OTHER HEALTH SERVICES

0
40. The authority citation for part 414 continues to read as follows:

Authority: Secs. 1102, 1871, and 1881(b)(1) of the Social
Security Act (42 U.S.C. 1302, 1395hh, and 1395rr(b)(1)).

0
41. Section 414.802 is amended by revising the definition of ``unit''
to read as follows:

Sec. 414.802 Definitions.

* * * * *
Unit means the product represented by the 11-digit National Drug
Code. During the first 3 years of the CAP (as defined in Sec.
414.902), the method of counting units excludes units of CAP drugs (as
defined in Sec. 414.902) sold to an approved CAP vendor (as defined in
Sec. 414.902) for use under the CAP (as defined in Sec. 414.902).

PART 424--CONDITIONS FOR MEDICARE PAYMENT

0
42. The authority citation for part 424 continues to read as follows:

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

Sec. 424.32 [Amended]

0
43. In Sec. 424.32, in paragraph (b), the phrase ``CMS-1490U--Request
for Medicare Payment by Organization. (For use by an organization
requesting payment for medical services.)'' is removed and the phrase
``CMS-1491--Request for Medicare Payment--Ambulance. (For use by an
organization requesting payment for ambulance services.)'' is removed.

Sec. 424.121 [Amended]

0
44. In Sec. 424.121, paragraph (c) is amended by removing the cross-
reference ``Sec. 405.313'' and adding the cross-reference ``Sec.
411.9'' in its place.

0
45. Section 424.123 is amended by revising paragraph (c)(2) to read as
follows:

Sec. 424.123 Conditions for payment for nonemergency inpatient
hospital services furnished by a hospital closer to the individual's
residence.

* * * * *
(c) * * *
(2) Accredited by the Joint Commission on Accreditation of
Healthcare Organizations (JCAHO) or accredited or approved by a program
of the country where it is located under standards the CMS finds to be
essentially equivalent to those of the JCAHO.
* * * * *

PART 485--CONDITIONS OF PARTICIPATION: SPECIALIZED PROVIDERS

0
46. 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).

Sec. 485.610 [Amended]

0
47. In paragraph (c) of Sec. 485.610, the phrase ``as of October 1,
2006'' is removed and the phrase ``on or before December 31, 2005'' is
added in its place.

PART 489--PROVIDER AGREEMENTS AND SUPPLIER APPROVAL

0
48. The authority citation for part 489 continues to read as follows:

Authority: Secs. 1102, 1819, 1861, 1864(m), 1866, 1869, and 1871
of the Social Security Act (42 U.S.C. 1302, 1395i-3, 1395x,
1395aa(m), 1395cc, 1395ff, and 1395hh).

0
49. Section 489.24 is amended by--
0
a. Revising the definition of ``Labor'' under paragraph (b).
0
b. Revising paragraph (f).
The revisions read as follows:

Sec. 489.24 Special responsibilities of Medicare hospitals in
emergency cases.

* * * * *
(b) * * *
Labor means the process of childbirth beginning with the latent or
early phase of labor and continuing through the delivery of the
placenta. A woman experiencing contractions is in true labor unless a
physician, certified nurse-midwife, or other qualified medical person
acting within his or her scope of practice as defined in hospital
medical staff bylaws and State law, certifies that, after a reasonable
time of observation, the woman is in false labor.
* * * * *
(f) Recipient hospital responsibilities. A participating hospital
that has specialized capabilities or facilities (including, but not
limited to, facilities such as burn units, shock-trauma units, neonatal
intensive care units, or (with respect to rural areas) regional
referral centers, which, for purposes of this subpart, means hospitals
meeting the requirements of referral centers found at Sec. 412.96 of
this chapter) may not refuse to accept from a referring hospital within
the boundaries of the United States an appropriate transfer of an
individual who requires such specialized capabilities or facilities if
the receiving hospital has the capacity to treat the individual. This
requirement applies to any participating hospital with specialized
capabilities, regardless of whether the hospital has a dedicated
emergency department.
* * * * *

SUBCHAPTER H--HEALTH CARE INFRASTRUCTURE IMPROVEMENT PROGRAM

PART 505--ESTABLISHMENT OF THE HEALTH CARE INFRASTRUCTURE
IMPROVEMENT PROGRAM

0
50. The authority citation for part 505 continues to read as follows:

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

0
51. In Sec. 505.3, the introductory text is republished and
definitions of ``Outreach programs'' and ``Unique research resources''
are added in alphabetical order to read as follows:

Sec. 505.3 Definitions.

For purposes of this subpart, the following definitions apply:
* * * * *
Outreach programs mean formal cancer programs for teaching,
diagnostic screening, therapy or treatment, prevention, or
interventions to enhance the health and knowledge of their designated
population(s).
* * * * *
Unique research resources means resources that are used for the
purpose of discovering or testing options related

[[Page 48144]]

to the causes, prevention, and treatment of cancer.

0
52. A new Subpart B, containing Sec. Sec. 505.13, 505.15, 505.17, and
505.19, is added to Part 505 to read as follows:
Subpart B--Forgiveness of Indebtedness
Secs.
505.13 Conditions for loan forgiveness.
505.15 Plan criteria for meeting the conditions for loan
forgiveness.
505.17 Reporting requirements for meeting the conditions for loan
forgiveness.
505.19 Approval or denial of loan forgiveness.

Subpart B--Forgiveness of Indebtedness

Sec. 505.13 Conditions for loan forgiveness.

The Secretary may forgive a loan provided under this part if the
qualifying hospital--
(a) Has been selected to participate in the loan program specified
in Sec. 505.5(c).
(b) Has established the following in accordance with a plan that
meets the criteria specified in Sec. 505.15:
(1) An outreach program for cancer prevention, early diagnosis, and
treatment that provides services to a substantial majority of the
residents of a State or region, including residents of rural areas;
(2) An outreach program for cancer prevention, early diagnosis, and
treatment that provides services to multiple Indian tribes; and
(3) Unique research resources (such as population databases) or an
affiliation with an entity that has unique research resources.
(c) Submits to CMS, within the timeframe specified by the
Secretary, a--
(1) Written request for loan forgiveness; and
(2) Loan forgiveness plan that meets the criteria specified in
Sec. 505.15 of this subpart.

Sec. 505.15 Plan criteria for meeting the conditions for loan
forgiveness.

The qualifying hospital requesting loan forgiveness must submit to
CMS a plan specifying how it will develop, implement, or maintain an
existing outreach program for cancer prevention, early diagnosis, and
treatment for a substantial majority of the residents of a State or
region, including residents of rural areas and for multiple Indian
tribes and specifying how the qualifying hospital will establish or
maintain existing unique research resources or an affiliation with an
entity that has unique research resources.
(a) Outreach programs. The initial plan must specify how the
hospital will establish or develop, implement, or maintain existing
outreach programs. The plan must--
(1) Address cancer prevention for cancers that are prevalent in the
designated populations or cancers that are targeted by the qualifying
hospital, interventions, and goals for decreasing the targeted cancer
rates during the loan deferment program; and
(2) Address early diagnosis of cancers that are prevalent in the
designated populations or cancers that are targeted by the qualifying
hospital, interventions, and goals for improving early diagnosis rates
for the targeted cancer(s) during the loan deferment period;
(3) Address cancer treatment for cancers that are prevalent in the
designated populations or cancers that are targeted by the qualifying
hospital, interventions, and goals for improving cancer treatment rates
for the targeted cancer(s) during the loan deferment; and
(4) Identify the measures that will be used to determine the
qualifying hospital's annual progress in meeting the initial goals
specified in paragraphs (a)(1) through (a)(3) of this section.
(b) Unique research resources. The plan must specify how the
qualifying hospital will establish or maintain existing unique research
resources or an affiliation with an entity that has unique research
resources.

Sec. 505.17 Reporting requirements for meeting the conditions for
loan forgiveness.

(a) Annual reporting requirements. On an annual basis, beginning
one year from the date that CMS notified the qualifying hospital of the
loan award, the qualifying hospital must submit a report to CMS that
updates the plan specified in Sec. 505.15 by--
(1) Describing the qualifying hospital's progress in meeting its
initial plan goals;
(2) Describing any changes to the qualifying hospital's initial
plan goals; and
(3) Including at least one measure used to track the qualifying
hospital's progress in meeting its plan goals.
(b) Review of annual reports. CMS will review each qualifying
hospital's annual report to provide the hospital with feedback
regarding its loan forgiveness status. If CMS determines that the
annual report shows that the qualifying hospital has fulfilled the
conditions, plan criteria, and reporting requirements for loan
forgiveness specified in Sec. Sec. 505.13, 505.15, and Sec. 505.17,
CMS will notify the qualifying hospital in writing that the loan is
forgiven.
(c) Final annual reporting requirements. A qualifying hospital must
submit its final report to CMS at least 6 months before the end of the
loan deferment period specified in Sec. 505.7(b).

Sec. 505.19 Approval or denial of loan forgiveness.

(a) Approval of loan forgiveness. If CMS determines that a
qualifying hospital has met the conditions, plan criteria, and
reporting requirements for loan forgiveness specified in Sec. 505.13,
Sec. 505.15, and Sec. 505.17, CMS will send a written notification of
approval for loan forgiveness to the qualifying hospital by the earlier
of--
(1) 30 days from the date of receipt of the annual report that
shows the qualifying hospital has satisfied the requirements for loan
forgiveness; or
(2) 90 days before the end of the loan deferment period defined in
Sec. 505.7(b).
(b) Denial of loan forgiveness. If CMS determines that a qualifying
hospital has not met the conditions, plan criteria, or reporting
requirements for loan forgiveness specified in Sec. 505.13, Sec.
505.15, or Sec. 505.17 of this part, CMS will send a written
notification of denial of loan forgiveness to the qualifying hospital
at least 30 days before the end of the loan deferment period defined in
Sec. 505.7(b).

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

Dated: July 27, 2006.
Mark B. McClellan,
Administrator, Centers for Medicare & Medicaid Services.
Dated: July 31, 2006.
Michael O. Leavitt,
Secretary.

[Editorial Note: The following Addendum and appendixes will not
appear in the Code of Federal Regulations.]

Addendum--Schedule of Tentative Standardized Amounts, Tentative Update
Factors and Rate-of-Increase Percentages Effective With Cost Reporting
Periods Beginning On or After October 1, 2006

I. Summary and Background

Due to the unusual circumstances imposed by the order of the Court
of Appeals for the Second Circuit in the decision in Bellevue Hospital
Center v. Leavitt, discussed in detail in section III.C. of the
preamble of this final rule, we are not able to provide the final FY
2007 occupational mix adjusted wage index tables, payment rates, or
impacts in this final rule. Because the wage data affect the
calculation of the outlier threshold as well as the outlier offset and
budget neutrality factors that are

[[Page 48145]]

applied to the standardized amounts, we are only able to provide
tentative figures at this time. These tentative amounts will be revised
once the occupational mix adjusted wage index is finalized. Subsequent
to this final rule, we will publish a Federal Register document listing
the final standardized amounts, outlier offsets, and budget neutrality
factors that are effective October 1, 2006 for FY 2007. The final data
also will be published on the CMS Web site.
In this Addendum, we are setting forth a final description of the
methods and data we are using to determine the prospective payment
rates for Medicare hospital inpatient operating costs and Medicare
hospital inpatient capital-related costs. We are also setting forth the
final rate-of-increase percentages for updating the target amounts for
hospitals and hospital units excluded from the IPPS. We note that,
because hospitals excluded from the IPPS are paid on a cost basis (and
not by the IPPS), these hospitals are not affected by the tentative
figures for standardized amounts, offsets, and budget neutrality
factors. Therefore, in this final rule, we are finalizing the rate-of-
increase percentages for updating the target amounts for hospitals and
hospital units excluded from the IPPS that are effective October 1,
2006.
In general, except for SCHs, MDHs, and hospitals located in Puerto
Rico, each hospital's payment per discharge under the IPPS is based on
100 percent of the Federal national rate, which is based on the
national adjusted standardized amount. This amount reflects the
national average hospital cost per case from a base year, updated for
inflation.
SCHs are paid based on whichever of the following rates yields the
greatest aggregate payment: the Federal national rate; the updated
hospital-specific rate based on FY 1982 costs per discharge; the
updated hospital-specific rate based on FY 1987 costs per discharge; or
the updated hospital-specific rate based on FY 1996 costs per
discharge.
Under section 1886(d)(5)(G) of the Act, MDHs historically have been
paid based on the Federal national rate or, if higher, the Federal
national rate plus 50 percent of the difference between the Federal
national rate and the updated hospital-specific rate based on FY 1982
or FY 1987 costs per discharge, whichever is higher. (MDHs did not have
the option to use their FY 1996 hospital-specific rate.) Section
5003(a)(1) of Pub. L. 109-171 extended and modified the MDH special
payment provision which was previously set to expire on October 1,
2006, to discharges occurring on or after October 1, 2006, but before
October 1, 2011. Under section 5003(b) of Pub. L. 109-171, if the
change results in an increase to its target amount, an MDH must rebase
its hospital-specific rates to its FY 2002 cost report. In addition,
under section 5003(c) of Pub. L. 109-171, MDHs will now be paid based
on the Federal national rate or, if higher, the Federal national rate
plus 75 percent of the difference between the Federal national rate and
the updated hospital-specific rate. Further, based upon section 5003(d)
of Pub. L. 109-171, MDHs will no longer be subject to the 12-percent
cap on their DSH payment adjustment factor.
For hospitals in Puerto Rico, the payment per discharge is based on
the sum of 25 percent of a Puerto Rico rate that reflects base year
average costs per case of Puerto Rico hospitals and 75 percent of the
Federal national rate. (See section II.D.3. of this Addendum for a
complete description.)
As discussed below in section II. of this Addendum, we are making
changes in the determination of the prospective payment rates for
Medicare inpatient operating costs for FY 2007. In section III. of this
Addendum, we discuss our changes for determining the prospective
payment rates for Medicare inpatient capital-related costs for FY 2007.
Section IV. of this Addendum sets forth our final changes for
determining the rate-of-increase limits for hospitals excluded from the
IPPS for FY 2007. Section V. of this Addendum sets forth policies on
payment for blood clotting factors administered to hemophilia
inpatients. The tables to which we refer in the preamble of this final
rule are presented in section VI. of this Addendum of this final rule.
Some of these tables are based upon tentative data, and the final
tables will be presented in a separate document that will be published
on the CMS Web site, as well as in the Federal Register after
publication of this final rule but prior to October 1, 2006.

II. Changes To Prospective Payment Rates for Hospital Inpatient
Operating Costs

The basic methodology for determining prospective payment rates for
hospital inpatient operating costs for FY 2005 and subsequent fiscal
years is set forth at Sec. 412.64. The basic methodology for
determining the prospective payment rates for hospital inpatient
operating costs for hospitals located in Puerto Rico for FY 2005 and
subsequent fiscal years is set forth at Sec. Sec. 412.211 and 412.212.
Below we discuss the factors used for determining the prospective
payment rates.
In summary, the tentative standardized amounts set forth in Tables
1A, 1B, 1C, and 1D of section VI. of this Addendum reflect--
Equalization of the standardized amounts for urban and
other areas at the level computed for large urban hospitals during FY
2004 and onward, as provided for under section 1886(d)(3)(A)(iv) of the
Act, updated by the applicable percentage increase required under
sections 1886(b)(3)(B)(i)(XX) and 1886(b)(3)(B)(viii) of the Act.
The labor-related share that is applied to the tentative
standardized amounts and tentative Puerto Rico-specific standardized
amounts to give the hospital the highest payment, as provided for under
sections 1886(d)(3)(E), and 1886(d)(9)(C)(iv) of the Act.
Final updates of 3.4 percent for all areas (that is, the
full market basket percentage increase of 3.4 percent), as required by
section 1886(b)(3)(B)(i)(XX) of the Act, as amended by section
5001(a)(1) of Pub. L. 109-171, and reflecting the requirements of
section 1886(b)(3)(B)(viii) of the Act, as added by section 5001(a)(3)
of Pub. L. 109-171, to reduce the applicable percentage increase by 2.0
percentage points for a hospital that fails to submit data, in a form
and manner specified by the Secretary, relating to the quality of
inpatient care furnished by the hospital.
An adjustment to ensure the DRG recalibration, as provided
for under section 1886(d)(4)(C)(iii) of the Act, by applying a final
budget neutrality adjustment factor to the standardized amount.
An adjustment to ensure the wage index update and changes
are budget neutral, as provided for under section 1886(d)(3)(E) of the
Act.
An adjustment to ensure the effects of the special
transition measures adopted in relation to the implementation of new
labor market areas are budget neutral.
An adjustment to ensure the effects of geographic
reclassification are budget neutral, as provided for in section
1886(d)(8)(D) of the Act, by removing the FY 2006 budget neutrality
factor and applying a revised factor.
An adjustment to remove the FY 2006 outlier offset and
apply an offset for FY 2007.
An adjustment to ensure the effects of the rural community
hospital demonstration required under section 410A of Pub. L. 108-173
are budget neutral, as required under section 410A(c)(2) of Pub. L.
108-173.

[[Page 48146]]

A. Calculation of the Tentative Adjusted Standardized Amount

1. Standardization of Base-Year Costs or Target Amounts
In general, the national standardized amount is based on per
discharge averages of adjusted hospital costs from a base period
(section 1886(d)(2)(A) of the Act) or, for Puerto Rico, adjusted target
amounts from a base period (section 1886(d)(9)(B)(i) of the Act),
updated and otherwise adjusted in accordance with the provisions of
section 1886(d) of the Act. The September 1, 1983 interim final rule
(48 FR 39763) contained a detailed explanation of how base-year cost
data (from cost reporting periods ending during FY 1981) were
established in the initial development of standardized amounts for the
IPPS. The September 1, 1987 final rule (52 FR 33043 and 33066) contains
a detailed explanation of how the target amounts were determined, and
how they are used in computing the Puerto Rico rates.
Sections 1886(d)(2)(B) and (d)(2)(C) of the Act require us to
update base-year per discharge costs for FY 1984 and then standardize
the cost data in order to remove the effects of certain sources of cost
variations among hospitals. These effects include case-mix, differences
in area wage levels, cost-of-living adjustments for Alaska and Hawaii,
indirect medical education costs, and costs to hospitals serving a
disproportionate share of low-income patients.
In accordance with section 1886(d)(3)(E) of the Act, the Secretary
estimates, from time-to-time, the proportion of hospitals' costs that
are attributable to wages and wage-related costs. In general, the
standardized amount is divided into labor-related and nonlabor-related
amounts; only the proportion considered the labor-related amount is
adjusted by the wage index. Section 1886(d)(3)(E) of the Act requires
that 62 percent of the standardized amount be adjusted by the wage
index, unless doing so would result in lower payments to a hospital
than would otherwise be made. (Section 1886(d)(9)(C)(iv)(II) of the Act
extends this provision to the labor-related share for hospitals located
in Puerto Rico.)
For FY 2007, we are not changing the national and Puerto Rico-
specific labor-related and nonlabor-related shares from the percentages
established for FY 2006. Therefore, the labor-related share will
continue to be 69.7 percent for the national standardized amounts and
58.7 percent for the Puerto Rico specific standardized amount.
Consistent with section 1886(d)(3)(E) of the Act, we are applying the
wage index to a labor-related share of 62 percent for all non-Puerto
Rico hospitals whose wage indexes are less than or equal to 1.0000. For
all non-Puerto Rico hospitals whose wage indices are greater than
1.0000, we are applying the wage index to a labor share of 69.7 percent
of the national standardized amount. For a Puerto Rico hospital, we
will apply a labor share of 58.7 percent if its Puerto Rico-specific
wage index is less than or equal to 1.0000. For Puerto Rico hospitals
whose Puerto Rico-specific wage index values are greater than 1.0000,
we will apply a labor share of 62 percent.
The tentative standardized amounts appear in Table 1A, 1B, and 1C
of the Addendum to this final rule.
Comment: Several commenters recommended that CMS raise the labor
share from 69.7 percent to the previous level of 71.1 percent for
hospitals with a wage index greater than one. The commenters explained
that a reduced labor share has a negative impact and severe financial
strain on their hospitals.
Response: We thank the commenters for their comments. We refer the
commenters to the FY 2006 final rule (70 FR 47392-47396) where a full
discussion (including comments and responses) on the labor share
percentage can be found. As we indicated, our analysis in last year's
rule showed that the labor-related share should equal 69.7 percent
nationally based on the latest available data.
2. Computing the Tentative Average Standardized Amount
Section 1886(d)(3)(A)(iv) of the Act requires that, beginning with
FY 2004 and thereafter, an equal standardized amount is to be computed
for all hospitals at the level computed for large urban hospitals
during FY 2003, updated by the applicable percentage update. Section
1886(d)(9)(A) of the Act equalizes the Puerto Rico-specific urban and
rural area rates. Accordingly, we will calculate FY 2007 national and
Puerto Rico standardized amounts, irrespective of whether a hospital is
located in an urban or rural location.
3. Updating the Tentative Average Standardized Amount
In accordance with section 1886(d)(3)(A)(iv)(II) of the Act, we are
updating the equalized standardized amount for FY 2007 by the full
estimated market basket percentage increase for hospitals in all areas,
as specified in section 1886(b)(3)(B)(i)(XX) of the Act, as amended by
section 5001(a)(1) of Pub. L. 109-171. The percentage change in the
market basket reflects the average change in the price of goods and
services purchased by hospitals to furnish inpatient care. The most
recent forecast of the hospital market basket increase for FY 2007 is
3.4 percent. Thus, for FY 2007, the update to the average standardized
amount is 3.4 percent for hospitals in all areas.
Section 1886(b)(3)(B) of the Act specifies the mechanism used to
update the standardized amount for payment for inpatient hospital
operating costs. Section 1886(b)(3)(B)(viii) of the Act, as added by
section 5001(a)(3) of Pub. L. 109-171, provides for a reduction of 2.0
percentage points to the update percentage increase (also known as the
market basket update) for FY 2007 and each subsequent fiscal year for
any ``subsection (d) hospital'' that does not submit quality data as
discussed in section IV.A. of the preamble of this final rule. The
tentative standardized amounts in Tables 1A through 1C of section VI.
of this Addendum reflect these differential amounts.
Although the update factors for FY 2007 are set by law, we are
required by section 1886(e)(4) of the Act to recommend, taking into
account MedPAC's recommendations, appropriate update factors for FY
2007 for both IPPS hospitals and hospitals and hospital units excluded
from the IPPS. Our recommendation on the update factors (which is
required by sections 1886(e)(4)(A) and (e)(5)(A) of the Act) is set
forth in Appendix B of this final rule.
We note that the occupational mix wage index data will have no
affect on the market basket increase factor of 3.4 percent. Therefore,
the update factors of 3.4 and 1.4 percent are final and not tentative.
These update factors (3.4 and 1.4 percent) are one element that will be
used to determine the FY 2007 standardized amounts. Other factors, such
as the outlier offset and budget neutrality adjustments for wage index
and reclassification that are applied to the standardized amounts, are
yet to be determined pending the calculation of the occupational mix
adjustment. The market basket increase of 3.4 percent is based on the
second quarter forecast of the hospital market basket increase by the
Office of the Actuary (as discussed in Appendix B of this final rule).
4. Other Adjustments to the Average Standardized Amount
As in the past, we are adjusting the FY 2007 standardized amount to
remove the effects of the FY 2006 geographic reclassifications and
outlier payments before applying the FY 2007 updates. We then apply
budget neutrality offsets

[[Page 48147]]

for outliers and geographic reclassifications to the standardized
amount based on FY 2007 payment policies.
We do not remove the prior year's budget neutrality adjustments for
reclassification and recalibration of the DRG weights and for updated
wage data because, in accordance with sections 1886(d)(4)(C)(iii) and
1886(d)(3)(E) of the Act, estimated aggregate payments after the
changes in the DRG relative weights and wage index should equal
estimated aggregate payments prior to the changes. If we removed the
prior year adjustment, we would not satisfy these conditions.
Budget neutrality is determined by comparing aggregate IPPS
payments before and after making the changes that are required to be
budget neutral (for example, reclassifying and recalibrating the DRGs,
updating the wage data, and geographic reclassifications). We include
outlier payments in the simulations because they may be affected by
changes in these parameters.
We are also adjusting the standardized amount this year by an
estimated amount to ensure that aggregate IPPS payments do not exceed
the amount of payments that would have been made in the absence of the
rural community hospital demonstration required under section 410A of
Pub. L. 108-173. This demonstration is required to be budget neutral
under section 410A(c)(2) of Pub. L. 108-173.
a. Recalibration of DRG Weights and Updated Wage Index--Budget
Neutrality Adjustment
Section 1886(d)(4)(C)(iii) of the Act specifies that, beginning in
FY 1991, the annual DRG reclassification and recalibration of the
relative weights must be made in a manner that ensures that aggregate
payments to hospitals are not affected. As discussed in section II. of
the preamble of this final rule, we normalized the recalibrated DRG
weights by an adjustment factor, so that the average case weight after
recalibration is equal to the average case weight prior to
recalibration. However, equating the average case weight after
recalibration to the average case weight before recalibration does not
necessarily achieve budget neutrality with respect to aggregate
payments to hospitals because payments to hospitals are affected by
factors other than average case weight. Therefore, as we have done in
past years, we are making a budget neutrality adjustment to ensure that
the requirement of section 1886(d)(4)(C)(iii) of the Act is met.
As noted above, due to the decision of the Bellevue court, we are
unable to finalize the wage data used in establishing the FY 2007 IPPS
payment factors at this time. We use the wage data to standardize the
charges when recalibrating the DRG weights, and therefore, we will
recalculate the final DRG weights when the occupational mix adjusted
wage data become available. Since the DRG relative weights are not yet
final, at this time we are only able to provide the tentative DRG
reclassification and recalibration budget neutrality adjustment.
Subsequent to this final rule and prior to October 1, 2006, the
recalculated DRG weights and the final DRG reclassification and
recalibration budget neutrality adjustment will be published in a
Federal Register notice.
Section 1886(d)(3)(E) of the Act requires us to update the hospital
wage index on an annual basis beginning October 1, 1993. This provision
also requires us to make any updates or adjustments to the wage index
in a manner that ensures that aggregate payments to hospitals are not
affected by the change in the wage index. For FY 2007, we are adjusting
100 percent of the wage index factor for occupational mix. We describe
the occupational mix adjustment in section III.C. of the preamble to
this final rule. However, the data to compute the 100 percent
occupational mix adjustment are not available to us at this time.
Although section 1886(d)(3)(E) of the Act requires us to update the
wage index on a budget neutral basis, we cannot include the effects of
the occupational mix adjustment on the wage index in our budget
neutrality calculations at this time. Therefore, the budget neutrality
adjustment to the standardized amounts that we calculated below is
tentative pending the calculation of the occupational mix adjusted wage
indices that will be provided on the CMS Web site and in a Federal
Register notice prior to October 1.
In FY 2005, those urban hospitals that became rural under the new
labor market area definitions were assigned the wage index of the urban
area in which they were located under the previous labor market
definitions for a 3-year period of FY 2005, FY 2006, and FY 2007.
Because we are in the third year of this 3-year transition, we are
adjusting the standardized amounts for FY 2007 to ensure budget
neutrality for this policy. We discuss this adjustment in section
III.B. of the preamble to this final rule. Again, the adjustment for
this factor will be affected by the occupational mix adjusted wage
indices that will be recalculated prior to October 1. For this reason,
the adjustment for previously urban hospitals that become rural under
the new labor market area definitions is tentative pending final
calculation of the occupational mix adjusted wage indices.
Section 4410 of Pub. L. 105-33 provides that, for discharges on or
after October 1, 1997, the area wage index applicable to any hospital
that is not located in a rural area may not be less than the area wage
index applicable to hospitals located in rural areas in that State.
This provision is required by section 4410(b) of Pub. L. 105-33 to be
budget neutral. Therefore, we include the effects of this provision in
our calculation of the wage update budget neutrality factor. As
discussed in the FY 2006 IPPS final rule (70 FR 47493), FY 2007 is the
third and final year of the 3-year provision that uses an imputed wage
index floor for States that have no rural areas and States that have
geographic rural areas, but that have no hospitals actually classified
as rural. We are also adjusting for the effects of this provision in
our calculation of the wage update budget neutrality factor. This
figure will also be updated pending calculation of the occupational mix
adjusted wage indices.
To comply with the requirement that DRG reclassification and
recalibration of the relative weights and the updated wage index be
budget neutral, we used FY 2005 discharge data to simulate payments and
compared aggregate payments using the FY 2006 relative weights and wage
indexes to aggregate payments using the FY 2007 relative weights and
wage indexes. The same methodology was used for the FY 2006 budget
neutrality adjustment.
Based on this comparison, we computed a tentative budget neutrality
adjustment factor equal to 0.997030. We also are adjusting the Puerto
Rico-specific standardized amount for the effect of DRG
reclassification and recalibration. We computed a tentative budget
neutrality adjustment factor for the Puerto Rico-specific standardized
amount equal to 0.997968. These budget neutrality adjustment factors
are applied to the standardized amounts without removing the effects of
the FY 2006 budget neutrality adjustments. In addition, as discussed in
section IV.E. of the preamble to this final rule, we are applying the
same tentative DRG reclassification and recalibration budget neutrality
factor of 0.997968 to the hospital-specific rates that are to be
effective for cost reporting periods beginning on or after October 1,
2006.
Using the same data, we calculated a tentative transition budget
neutrality

[[Page 48148]]

adjustment to account for the ``hold harmless'' policy under which
urban hospitals that became rural under the new labor market area
definitions were assigned the wage index of the urban area in which
they were located under the previous labor market area definitions for
a 3-year period of FY 2005, FY 2006, and FY 2007. Using the pre-
reclassified wage index, we simulated payments under the new labor
market area definitions and compared them to simulated payments under
the ``hold harmless'' policy. Based on this comparison, we computed a
tentative transition budget neutrality adjustment of 0.999605.
Comment: Several commenters addressed CMS'' policy of excluding
data from CAHs when computing the wage index. The commenters believed
that the artificial increase in the national average hourly wage has
lowered the budget neutrality adjustment by an estimated $1.52 billion
over 5 years (2003 through 2007). The commenters stated that CMS should
apply a one-time positive budget neutrality adjustment in FY 2007 to
compensate for the prior underpayments. They did not believe similar
future adjustments would be necessary since very few hospitals are
expected ``to convert to CAH status now that the necessary provider
designation is no longer an option.''
Response: We do not believe that the elimination of these data has
resulted in an overstated national average hourly wage, nor has the
budget neutrality adjustment been inappropriately reduced. Section
1886(d)(3)(E) of the Act requires that wage index adjustments be made
in a manner that assures that aggregate payments in a fiscal year are
not greater or less than those that would have been made without the
wage index adjustment. We calculate the budget neutrality adjustment
for the wage index by comparing simulated payments under our current
wage index adjustment policies with simulated payments with no wage
index adjustment. Our current policy is to exclude CAH data from our
calculation of the IPPS wage index, so we believe this policy should be
taken into account when we calculate the budget neutrality adjustment
for the wage index. Consequently, we will not apply a one-time positive
budget neutrality adjustment in FY 2007. We note that a full discussion
on the wage index can be found in section III. of the preamble to this
final rule.
b. Reclassified Hospitals--Tentative Budget Neutrality Adjustment
Section 1886(d)(8)(B) of the Act provides that, effective with
discharges occurring on or after October 1, 1988, certain rural
hospitals are deemed urban. In addition, section 1886(d)(10) of the Act
provides for the reclassification of hospitals based on determinations
by the MGCRB. Under section 1886(d)(10) of the Act, a hospital may be
reclassified for purposes of the wage index.
Under section 1886(d)(8)(D) of the Act, the Secretary is required
to adjust the standardized amount to ensure that aggregate payments
under the IPPS after implementation of the provisions of sections
1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal to the
aggregate prospective payments that would have been made absent these
provisions. We note that neither the wage index reclassifications
provided under section 508 of Pub. L. 108-173 nor the wage index
adjustments provided under section 1886(d)(13) of the Act are budget
neutral. Section 508(b) of Pub. L. 108-173 provides that the wage index
reclassifications approved under section 508(a) of Pub. L. 108-173
``shall not be effected in a budget neutral manner.'' Section
1886(d)(13)(H) of the Act similarly provides that any increase in a
wage index under section 1886(d)(13) shall not be taken into account
``in applying any budget neutrality adjustment with respect to such
index'' under section 1886(d)(8)(D) of the Act. To calculate the
tentative budget neutrality factor, we used FY 2005 discharge data to
simulate payments, and compared total IPPS payments prior to any
reclassifications under sections 1886(d)(8)(B) and (C) and 1886(d)(10)
of the Act to total IPPS payments after such reclassifications. Based
on these simulations, we calculated a tentative adjustment factor of
0.991850 to ensure that the effects of this reclassification are budget
neutral.
The tentative adjustment factor is applied to the standardized
amount after removing the effects of the FY 2006 budget neutrality
adjustment factor. We note that the FY 2007 tentative adjustment
reflects FY 2007 wage index reclassifications approved by the MGCRB or
the Administrator, and the effects of MGCRB reclassifications approved
in FY 2005 and FY 2006 (section 1886(d)(10)(D)(v) of the Act makes wage
index reclassifications effective for 3 years). As we note earlier in
this final rule, CMS will make a FY 2007 reclassification determination
for a hospital based on what we believe will be most advantageous to
the hospital using the fully occupational mix adjusted wage index. We
will calculate the final budget neutrality adjustments for geographic
reclassification subsequent to this final rule, but prior to October 1,
and will make this information available with the occupational mix
adjusted wage indices and final IPPS rates.
c. Outliers
Section 1886(d)(5)(A) of the Act provides for payments in addition
to the basic prospective payments for ``outlier'' cases involving
extraordinarily high costs. To qualify for outlier payments, a case
must have costs greater than the sum of the prospective payment rate
for the DRG, any IME and DSH payments, any new technology add-on
payments, and the ``outlier threshold'' or ``fixed loss'' amount (a
dollar amount by which the costs of a case must exceed payments in
order to qualify for an outlier payment). We refer to the sum of the
prospective payment rate for the DRG, any IME and DSH payments, any new
technology add-on payments, and the outlier threshold as the outlier
``fixed-loss cost threshold.'' To determine whether the costs of a case
exceed the fixed-loss cost threshold, a hospital's CCR is applied to
the total covered charges for the case to convert the charges to costs.
Payments for eligible cases are then made based on a marginal cost
factor, which is a percentage of the costs above the fixed-loss cost
threshold. The marginal cost factor for FY 2007 is 80 percent, the same
marginal cost factor we have used since FY 1995 (59 FR 45367).
In accordance with section 1886(d)(5)(A)(iv) of the Act, outlier
payments for any year are projected to be not less than 5 percent nor
more than 6 percent of total operating DRG payments plus outlier
payments. Section 1886(d)(3)(B) of the Act requires the Secretary to
reduce the average standardized amount by a factor to account for the
estimated proportion of total DRG payments made to outlier cases.
Similarly, section 1886(d)(9)(B)(iv) of the Act requires the Secretary
to reduce the average standardized amount applicable to hospitals in
Puerto Rico to account for the estimated proportion of total DRG
payments made to outlier cases. More information on outlier payments
may be found on the CMS Web site at http://www.cms.hhs.gov/AcuteInpatientPPS/04_outlier.asp#TopOfPage.
i. FY 2007 tentative outlier fixed-loss cost threshold.
As stated above, the wage index tables, rates, and impacts will not
be final in this final rule because we are yet

[[Page 48149]]

to determine occupational mix adjusted wage indices. Therefore, we are
only able to provide tentative standardized amounts, relative weights,
offsets, and budget neutrality factors in this final rule. Once we have
the final occupational mix data, we will recalculate these amounts to
reflect the final occupational mix adjusted wage indices. The same
circumstances apply to the outlier threshold. Without final wage index
data, final standardized amounts, final offsets and final budget
neutrality factors, we are only able to provide a tentative fixed loss
outlier threshold in this final rule. Subsequent to this final rule, we
will publish a final fixed loss outlier threshold that will be
effective for discharges on and after October 1, 2006 for FY 2007.
However, in this final rule, we are adopting as final the methodology
we will use to calculate the final outlier fixed-loss cost threshold.
For FY 2007, we proposed to use the same methodology used for FY
2006 (70 FR 47493) to calculate the outlier threshold. As we have done
in the past, to calculate the proposed FY 2007 outlier threshold, we
simulated payments by applying FY 2007 rates and policies using cases
from the FY 2005 MedPAR files. Therefore, in order to determine the FY
2007 outlier threshold, we inflate the charges on the MedPAR claims by
2 years, from FY 2005 to FY 2007.
In certain years in the past, we have inflated MedPAR claims by
calculating a 2-year average annual rate-of-change in charges-per-case
using the charge data for the two most recent years for which we had
relatively complete MedPAR data. As discussed in the FY 2006 IPPS final
rule (70 FR 47494), however, we believe that charge data from FY 2003
may be distorted due to the atypically high rate of hospital charge
inflation during FY 2003. Therefore, we are not inflating charges using
a 2-year average annual rate-of-change from FY 2003 to FY 2004 and FY
2004 to FY 2005.
Instead, we proposed to continue using a refined methodology that
takes into account the lower inflation in hospital charges that is
occurring as a result of the outlier final rule (68 FR 34494), which
changed our methodology for determining outlier payments by
implementing the use of more current and accurate CCRs. Our refined
methodology uses more recent data that reflects the rate-of-change in
hospital charges under the new outlier policy. Specifically, we
proposed to establish the FY 2007 outlier threshold as follows: Using
the latest data available, we would calculate the 1-year average
annualized rate-of-change in charges-per-case from the last quarter of
FY 2004 in combination with the first quarter of FY 2005 (July 1, 2004
through December 31, 2004) to the last quarter of FY 2005 in
combination with the first quarter of FY 2006 (July 1, 2005 through
December 31, 2005). This rate of change was 7.57 percent (1.0757) or
15.15 percent (1.1515) over 2 years.
As we have done in the past, we proposed to establish the FY 2007
outlier threshold using hospital CCRs from the March 2006 update to the
Provider-Specific File--the most recent available at the time of this
final rule. This file includes CCRs that reflect implementation of the
changes to the policy for determining the applicable CCRs that became
effective August 8, 2003 (68 FR 34494).
Using this methodology, we proposed to establish an outlier fixed-
loss cost threshold for FY 2007 equal to the prospective payment rate
for the DRG, plus any IME and DSH payments, and any add-on payments for
new technology, plus $25,530.
We noted that the case-weighted national average CCR declined by
approximately 1 percent from the March 2005 to the March 2006 update of
the Provider-Specific File. Hospital charges continue to increase at a
steady rate of growth between 7 and 8 percent over each of the last 2
years, resulting in a decline to the CCRs that are used to compute the
outlier threshold. Using lower CCRs from the March 2006 Provider-
Specific File, in combination with the FY 2005 MedPAR claims and
inflated charges, contributes to a higher outlier threshold for FY 2007
compared to FY 2006.
As we did in establishing the FY 2006 outlier threshold (70 FR
47494), in our projection of FY 2007 outlier payments, we proposed not
to make an adjustment for the possibility that hospitals' CCRs and
outlier payments may be reconciled upon cost report settlement. We
stated that we continue to believe that, due to the policy implemented
in the June 9, 2003 outlier final rule, CCRs will no longer fluctuate
significantly and, therefore, few hospitals will actually have these
ratios reconciled upon cost report settlement. In addition, it is
difficult to predict which specific hospitals will have CCRs and
outlier payments reconciled in their cost reports in any given year. We
also noted that reconciliation occurs because hospitals' actual CCRs
for the cost reporting period are different than the interim CCRs used
to calculate outlier payments when a bill is processed. Our simulations
assume that CCRs accurately measure hospital costs and, therefore, are
more indicative of post-reconciliation than pre-reconciliation outlier
payments. As a result, we proposed to continue to omit any assumptions
about the effects of reconciliation from the outlier threshold
calculation.
Comment: Many commenters, including two major hospital
associations, were concerned that the proposed outlier threshold for FY
2007 remains too high and CMS will have removed over $300 million from
the IPPS rates that were not paid back as outliers. The commenters
noted that total estimated outlier payments in FY 2004 and FY 2005 were
well under the 5.1 percent target. As a result, the commenters
recommended further refining the outlier methodology so that, in their
view, it will be more likely that CMS projects a threshold that meets
the 5.1 target. The commenters explained that aside from inflating the
claim charges, CMS should also use an adjustment factor to project
CCRs. The commenters believed that the use of more than one indicator
will make the threshold calculation more reliable and accurate.
The commenters used data from the March 31, 2006 HCRIS update to
determine hospitals' CCRs (instead of using CCRs from the PSF per CMS's
methodology). The commenters accounted for a nine month time lag from
the end of a cost reporting period until the fiscal intermediary is
able to update the CCR to project the CCRs expected to be used for
outlier calculations in FY 2007. The commenters then calculated a cost
inflation factor of 5.69 percent by determining the 2002-2004 aggregate
annual rate of increase in cost per discharge. The commenters used this
cost inflation factor along with CMS' charge inflation factor of 7.57
percent to project CCRs. These projected CCRs were applied to projected
FY 2007 charges to simulate the determination of costs for FY 2007
outlier payments. Using this methodology, the commenters determined and
recommended an outlier threshold of $24,000 that they assert would
result in 5.1 percent outlier payments. The commenters also indicated
that CMS would have paid 5.1 percent of total IPPS payments as outliers
in FY 2006 using a threshold of $21,275 instead of $23,600. In
addition, the commenters asserted that CMS removed a total of $3
billion more from the IPPS rates than it spent on outlier payments over
FY 2004, 2005, and 2006. Therefore, the commenters urged CMS to adopt a
better methodology of projecting the

[[Page 48150]]

CCRs, regardless of the DRG refinements being adopted for FY 2007.
One commenter argued that using CMS' previous methodology with
costs instead of charges resulted in an outlier threshold of $23,055
for FY 2007 that would be more likely to result in 5.1 percent of total
IPPS payments being paid as outliers. Using a methodology with costs
and data from HCRIS (to determine hospital CCRs), the commenter
computed a threshold of $22,645. The commenter asserted that
projections using a cost threshold for FY 2004-2006 would have been
much closer to the ultimate threshold needed to achieve the 5.1 percent
target. Because the commenter believed there is now 3 years of data
demonstrating that a cost methodology is a better predictor of the
threshold, the commenter recommended that CMS adopt a threshold of
$22,645.
MedPAC also commented that CMS should adjust the outlier
methodology and apply an adjustment to project CCRs. MedPAC explained
that using CCRs that are too high will overstate costs resulting in a
fixed loss threshold that is too high. Therefore, MedPAC recommended
that CMS project the average costs and charge per case to project
hospitals' CCRs using the charge inflation factor already determined by
CMS and the cost inflation factor using the market basket when
projecting the CCRs.
Another commenter stated that it is inappropriate to use a
methodology that ignores cost inflation. The commenter argued that the
threshold is a ``cost outlier threshold'' and therefore an adjustment
for cost should be incorporated into the outlier threshold methodology.
One commenter asked CMS to strongly reconsider the increase to the
outlier threshold and implement a reduction that is consistent with the
trends for FY 2005 and FY 2006 in outlier payments. Another commenter
recommended that CMS calculate what the outlier threshold would need to
be for the current fiscal year (2006) to enable outlier payments to
meet the 5.1 percent target and apply that threshold for FY 2007.
Response: As the commenters noted, the outlier thresholds we have
projected in the last several years have resulted in payments below the
5.1 percent target. However, we have been hesitant to change our model
because, in the early years of this decade, outlier payments were
significantly higher than the 5.1 percent target we projected because
the charging practices of some hospitals resulted in overestimation of
hospitals' cost-per-case. However, now that data for later years in
which charging practices were stabilized are available, after careful
consideration, we agree that a refinement to the proposed methodology
to account for the rate of change in the relationship between costs and
charges would likely increase the precision of our model and we believe
this would be an appropriate refinement to adopt in determining the FY
2007 outlier threshold.
For FY 2007, we are using the same methodology we proposed, except
that we are using more recent data to determine the charge inflation
factor (as explained below). In addition, we are applying an adjustment
factor to the CCRs to account for cost and charge inflation (as
explained below). As we proposed, for this final rule, we simulated
payments by applying FY 2007 rates and policies using cases from the FY
2005 MedPAR files. Therefore, as stated above, in order to determine
the FY 2007 outlier threshold, we inflated the charges on the MedPAR
claims by 2 years, from FY 2005 to FY 2007.
As noted above, the commenters supported our charge inflation
methodology. Therefore, using the most recent data available (updated
from the proposed rule), we calculated the 1-year average annualized
rate-of-change in charges-per-case from the first quarter of FY 2005 in
combination with the second quarter of FY 2005 (October 1, 2004 through
March 31, 2005) to the first quarter of FY 2006 in combination with the
second quarter of FY 2006 (October 1, 2005 through March 31, 2006).
This rate of change was 7.9 percent (1.079) or 16.42 percent (1.1642)
over 2 years.
As we have done in the past, we are establishing the FY 2007
outlier threshold using hospital CCRs from the March 2006 update to the
Provider-Specific File--the most recent data available at the time of
this final rule.
However, as noted above, many commenters believe an adjustment to
the CCRs would be appropriate in projecting a threshold that meets the
5.1 percent target. The commenters referenced above used cost report
data from HCRIS and applied a cost inflation factor based on the annual
rate of increase in the cost per discharge from 2002 through 2004.
However, we still believe the best source of hospital's operating and
capital CCRs are those that come from the Provider-Specific File. As
noted in the FY 2006 final rule (70 FR 47495), fiscal intermediaries
will determine actual outlier payment amounts using some of the same
CCRs that are in the March 2006 PSF. Fiscal intermediaries will begin
using an updated CCR to calculate the outlier payments for a hospital
only after a more recent cost report of the hospital has been
tentatively settled. Nevertheless, we now agree with the commenters
that it is appropriate to apply an adjustment factor to the CCRs so
that the CCRs we are using in our simulation more closely reflect the
CCRs that will be used in FY 2007.
We worked with our actuarial office in deriving the methodology
described below to develop the CCR adjustment factor. Specifically, we
used the operating cost per discharge increase in combination with the
final updated market basket increase determined by Global Insight,
Inc., as well as the charge inflation factor described above to
estimate the adjustment to the CCRs. By using the market basket rate-
of-increase and the increase in the average cost per discharge from
hospital cost reports, we are using two different measures of cost
inflation. For FY 2007, we determined the adjustment by taking the
percentage increase in the operating costs per discharge from FY 2003
to FY 2004 (1.0645) from the cost report and dividing it by the final
market basket increase from FY 2004 (1.039) We repeated this
calculation for 2 prior years to determine the 3-year average of the
rate of adjusted change in costs between the market basket rate-of-
increase and the increase in cost per case from the cost report (FY
2001 to FY 2002 percentage increase of operating costs per discharge of
1.0836 divided by FY 2002 final market basket increase of 1.04, FY 2002
to FY 2003 percentage increase of operating costs per discharge of
1.0698 divided by FY 2003 final market basket increase of 1.04). For FY
2007, we averaged the differentials calculated for FY 2002, FY 2003,
and FY 2004 which resulted in a mean ratio of 1.0327. We multiplied the
3-year average of 1.0327 by the 2005 market basket percentage increase
of 1.0420, which resulted in an operating cost inflation factor of 7.61
percent or 1.0761. We then divided the operating cost inflation factor
by the 1-year average change in charges (1.079) and applied an
adjustment factor of 0.9973 to the operating CCRs from the Provider-
Specific File.
We believe it is appropriate to apply only a one year adjustment
factor to the CCRs. On average, it takes approximately 9 months for
fiscal intermediaries to tentatively settle a cost report from the
fiscal year end of a hospital's cost reporting period. The average
``age'' of hospitals' CCRs from the time the fiscal intermediary
inserts the CCR in the PSF until the beginning of FY 2007 is
approximately 1 year. Therefore, as stated above, we believe a

[[Page 48151]]

one year adjustment to the CCRs is appropriate.
We used the same methodology for the capital CCRs and applied an
adjustment factor of 0.9574 (cost inflation factor of 1.0303 divided by
a charge inflation factor of 1.0761) to the capital CCRs. We are using
the same charge inflation factor for the capital CCRs that was used for
the operating CCRs. The charge inflation factor is based on the overall
billed charges and therefore we believe it is appropriate to apply the
charge factor to both the operating and capital CCRs.
We believe this calculation of an adjustment to the CCRs is more
accurate and stable than the commenters' methodology because it takes
into account the costs per discharge and the market basket percentage
increase when determining a cost adjustment factor.
Using this methodology, we are establishing a tentative outlier
fixed-loss cost threshold for FY 2007 equal to the prospective payment
rate for the DRG, plus any IME and DSH payments, and any add-on
payments for new technology, plus $24,475. The tentative outlier
threshold that we calculated for this final rule is $1,055 lower than
the $25,530 threshold from the proposed rule. We anticipate that a
threshold based on the methodology above will reach the target of 5.1
percent. We note that, in this final rule, we are adopting this
methodology to compute the final outlier fixed-loss cost threshold for
FY 2007, although the final dollar amount of the outlier threshold will
be published in a subsequent Federal Register document.
We also note, that the case-weighted national average CCR declined
by approximately an additional 1 percent from the December 2005 to the
March 2006 update of the Provider-Specific File. We further reduced the
CCRs by applying an adjustment to reflect the differential increase
between costs and charges. As noted above, using lower CCRs from the
March 2006 Provider-Specific File, in combination with the FY 2005
MedPAR claims and inflated charges, contributes to a lower outlier
threshold for FY 2007 in this final rule compared to the proposed rule.
Finally, charges are a key influence over outlier payments.
Therefore, we continue to believe it is appropriate to use a
methodology based on charges instead of costs. Please refer to our
response to a similar comment in the FY 2006 final rule (70 FR 47495)
for a more detailed discussion of this issue.
Comment: One commenter suggested that CMS consider making mid-year
adjustments to the outlier threshold if it appears that outlier
payments are going to be significantly above or below the 5.1 percent
target. The commenter believed that a mid-year adjustment would aid CMS
in reaching the 5.1 percent target irrespective of the methodology CMS
uses to determine the threshold. However, the commenter did note that a
mid-year correction will be of less need if CMS were to adopt a
methodology based on cost or the CMS model that projects CCRs. Another
commenter recommended that CMS evaluate the practicality and effects of
a correction error similar to the update forecast error adjustment used
in recommending an update for the market basket rate of increase.
One commenter urged CMS to publicly account for the amount of
unspent outlier payments over the last 3 years and to establish a
policy whereby the unspent money is returned to the base rate for
inpatient spending.
Response: We appreciate the commenters suggestions for improving
payment accuracy for outliers. However, we have already responded to
similar comments in the FY 2006 final rule (70 FR 47495).
Furthermore, we believe that a policy whereby the standardized
amounts would be adjusted to reflect differences between the 5.1
percent removed from the rates and the amounts actually paid as
outliers would be inconsistent with the purpose of the statute relating
to outlier payments and the prospective payment system. Section
1886(d)(3)(B) of the Act requires that we reduce the standardized
amounts by a factor equal to the proportion of outlier payments ``as
estimated by the Secretary.'' Therefore, we believe that the statute
does not contemplate adjustments to the standardized amounts in an
upcoming year because actual outlier payments in past years were more
or less than we had estimated.
Comment: One commenter was concerned that CMS has not met the 5.1
percent target in previous years and suggested that CMS project the
outlier threshold at 5.5 percent of total payments to ensure it meets
the 5.1 percent target.
Another commenter was concerned about the impact that the DRG
refinement will have on outlier payments. The commenter recommended
that CMS maintain the threshold at $23,600 for FY 2007 while hospitals
adjust to the other PPS payment changes that will occur.
One commenter supported eliminating outlier payments in its
entirety and recommended a more equitable approach by simply increasing
the standardized amounts by 5.1 percent. The commenter explained that
this method would remove the ability to game the system and would be
more desirable to deserving providers that do not abuse the system.
Response: As noted above, section 1886(d)(5)(A)(iv) of the Act
requires outlier payments to be not less than 5 percent nor more than 6
percent of total estimated or projected payments. Therefore, we cannot
eliminate outlier payments as suggested by one commenter or set a
threshold that is based on the current fiscal year for the coming
fiscal year. Although we are refining the DRGs, the statute requires us
to set an outlier threshold so that estimated total outlier payments
are between 5 and 6 percent of total IPPS payments. If we failed to
project a new outlier threshold for FY 2007, but rather simply
continued to use the outlier threshold for FY 2006, we would not meet
the mandate of the statute.
We also note that we project outlier payments at 5.1 percent to
ensure that we offset the minimum amount necessary from the
standardized amounts to meet our statutory obligation. Although CMS
could legally project an outlier threshold so that 5.5 percent of total
IPPS payments are paid as outliers, the law would also require us to
remove 5.5 percent from the standardized amounts to finance the outlier
pool, which would reduce funds available for typical cases. As a
result, we believe setting the outlier threshold so that 5.1 percent of
total IPPS payments are paid as outliers is more equitable to all
hospitals, as less money is withdrawn from the standardized amounts due
to the outlier offset and it allows proportionally greater payment for
typical cases. Therefore, we are adopting as final our proposal to set
the outlier threshold so that 5.1 percent of estimated total IPPS
payments are paid as outliers.
ii. Other changes concerning outliers.
As stated in the FY 1994 IPPS final rule (58 FR 46348, September 1,
1993), we establish outlier thresholds that are applicable to both
hospital inpatient operating costs and hospital inpatient capital-
related costs. When we modeled the combined operating and capital
outlier payments, we found that using a common set of thresholds
resulted in a lower percentage of outlier payments for capital-related
costs than for operating costs. We project that the thresholds for FY
2007 will result in outlier payments equal to 5.1 percent of operating
DRG payments and 4.87 percent of capital payments based on the Federal
rate.
In accordance with section 1886(d)(3)(B) of the Act, we are
reducing the FY 2007 standardized amount by the same percentage to

[[Page 48152]]

account for the projected proportion of payments paid to outliers.
The tentative outlier adjustment factors that will be applied to
the standardized amount for FY 2007 are as follows:

------------------------------------------------------------------------
Operating
standardized Capital
amounts federal rate
------------------------------------------------------------------------
National................................ 0.948966 0.956763
Puerto Rico............................. 0.967415 0.967670
------------------------------------------------------------------------

We are applying the tentative outlier adjustment factors to the
tentative FY 2007 rates after removing the effects of the FY 2006
outlier adjustment factors on the standardized amount.
To determine whether a case qualifies for outlier payments, we
apply hospital-specific CCRs to the total covered charges for the case.
Operating and capital costs for the case are calculated separately by
applying separate operating and capital CCRs. These costs are then
combined and compared with the outlier fixed-loss cost threshold.
The outlier final rule (68 FR 34494) eliminated the application of
the statewide average CCRs for hospitals whose CCRs fall below 3
standard deviations from the national mean CCR. However, for those
hospitals for which the fiscal intermediary computes operating CCRs
greater than 1.26 or capital CCRs greater than 0.154, or hospitals for
whom the fiscal intermediary is unable to calculate a CCR (as described
at Sec. 412.84(i)(3) of our regulations), we are still using statewide
average CCRs to determine whether a hospital qualifies for outlier
payments.\31\ Table 8A in section VI. of this Addendum contains the
statewide average operating CCRs for urban hospitals and for rural
hospitals for which the fiscal intermediary is unable to compute a
hospital-specific CCR within the above range. Effective for discharges
occurring on or after October 1, 2006, these statewide average ratios
will replace the ratios published in the IPPS final rule for FY 2006
(70 FR 47672). Table 8B in section VI. of this Addendum contains the
comparable statewide average capital CCRs. Again, the CCRs in Tables 8A
and 8B will be used during FY 2007 when hospital-specific CCRs based on
the latest settled cost report are either not available or are outside
the range noted above. For an explanation of Table 8C, please see
section VI. of this Addendum.
---------------------------------------------------------------------------

\31\ These figures represent 3.0 standard deviations from the
mean of the log distribution of CCRs for all hospitals.
---------------------------------------------------------------------------

We finally note that we published a manual update (Change Request
3966) to outliers on October 12, 2005. The manual update covered an
array of topics, including CCRs, reconciliation, and the time value of
money. To download and view the manual update, please visit http://www.cms.hhs.gov/transmittals/downloads/R707CP.pdf.
iii. FY 2005 and FY 2006 outlier payments.
In the FY 2006 IPPS final rule (70 FR 47496), we stated that, based
on available data, we estimated that actual FY 2005 outlier payments
would be approximately 4.1 percent of actual total DRG payments. This
estimate was computed based on simulations using the FY 2004 MedPAR
file (discharge data for FY 2004 bills). That is, the estimate of
actual outlier payments did not reflect actual FY 2005 bills, but
instead reflected the application of FY 2005 rates and policies to
available FY 2004 bills.
Our current estimate, using available FY 2005 bills, is that actual
outlier payments for FY 2005 were approximately 3.96 percent of actual
total DRG payments. Thus, the data indicate that, for FY 2005, the
percentage of actual outlier payments relative to actual total payments
is lower than we projected before FY 2005 (and, thus, is less than the
percentage by which we reduced the standardized amounts for FY 2005).
We note that, for FY 2006, the outlier threshold was lowered to $23,600
compared to $25,800 for FY 2005. The outlier threshold was lower in FY
2006 than FY 2005 as a result of slower growth in hospital charge
inflation following implementation of the outlier final rule that went
into effect on August 9, 2003. Nevertheless, consistent with the policy
and statutory interpretation we have maintained since the inception of
the IPPS, we do not plan to make retroactive adjustments to outlier
payments to ensure that total outlier payments for FY 2005 are equal to
5.1 percent of total DRG payments.
We currently estimate that actual outlier payments for FY 2006 will
be approximately 4.62 percent of actual total DRG payments, 0.48
percentage points lower than the 5.1 percent we projected in setting
the outlier policies for FY 2006. This estimate is based on simulations
using the FY 2005 MedPAR file (discharge data for FY 2005 bills). We
used these data to calculate an estimate of the actual outlier
percentage for FY 2006 by applying FY 2006 rates and policies,
including an outlier threshold of $23,600 to available FY 2005 bills.
Even though we are estimating payments below the 5.1 percent threshold
for FY 2006, our simulations using FY 2005 Medicare data show
consistent levels of charge inflation and a need to increase the
threshold for FY 2007 to ensure that 5.1 percent of total IPPS payments
are paid as outliers.
iv. Technical changes.
Subpart F of Part 412 of the existing regulations discusses payment
for outlier cases and special payment for new technology. We have
become aware of an inadvertent mistake in Sec. 412.84(m). Currently,
Sec. 412.84(m) discusses the application of the time value of money
when a hospital's outlier payments are reconciled. When referencing
reconciliation, the section mistakenly references paragraph (h)(3)
instead of paragraph (i)(4). We received no comments on this change and
therefore are finalizing our proposal to revise Sec. 412.84(m) to
reference the current policy under paragraph (i)(4).
In addition, in the June 9, 2003 outlier final rule, we amended
Sec. 412.116(e) to remove the second sentence, which stated that
payments for outliers ``are made based on submitted bills and represent
final payment.'' It was necessary to remove this sentence, as we added
a provision to the regulations that provides that outlier payments are
subject to reconciliation when hospitals' cost reports are settled. In
the FY 2004 IPPS final rule (68 FR 45393), we again amended Sec.
412.116(e) to provide that new technology add-on payments are made on a
case-by-case basis, rather than on an interim basis. However, it has
come to our attention that, in the FY 2004 IPPS final rule, we
inadvertently reinserted the sentence that we had struck in the June 9,
2003 outlier final rule. We never intended to reinsert this sentence,
and our policy since the implementation of the outlier final rule has
always been the same (that outlier payments are subject to
reconciliation when hospitals' cost reports are settled). Therefore, in
order to correct the regulations to reflect our current policy, we are
removing the second sentence from Sec. 412.116(e). Although we did not
propose this technical correction, as further discussed in section
XIII.C. of this final rule, we find it unnecessary to undertake notice
and comment rulemaking with respect to this technical correction.
d. Tentative Rural Community Hospital Demonstration Program Adjustment
(Section 410A of Pub. L. 108-173)
Section 410A of Pub. L. 108-173 requires the Secretary to establish
a demonstration that will modify reimbursement for inpatient services
for up to 15 small rural hospitals. Section 410A(c)(2) of Pub. L. 108-
173 requires that ``in conducting the demonstration

[[Page 48153]]

program under this section, the Secretary shall ensure that the
aggregate payments made by the Secretary do not exceed the amount which
the Secretary would have paid if the demonstration program under this
section was not implemented.'' As discussed in section IV.M. of the
preamble to this final rule, we are satisfying this requirement by
adjusting national IPPS rates by a factor that is sufficient to account
for the added costs of this demonstration. We estimate that the average
additional annual payment that will be made to each participating
hospital under the demonstration will be approximately $1,021,985. We
based this estimate on the recent historical experience of the
difference between inpatient cost and payment for hospitals that are
participating in the demonstration. For 9 participating hospitals, the
total annual impact of the demonstration program is estimated to be
$9,197,870. The required tentative adjustment to the Federal rate used
in calculating Medicare inpatient prospective payments as a result of
the demonstration is 0.999905.
In order to achieve budget neutrality, we are adjusting the
tentative national IPPS rates by a tentative amount sufficient to
account for the added costs of this demonstration. In other words, we
are applying budget neutrality across the payment system as a whole
rather than merely across the participants of this demonstration. We
believe that the language of the statutory budget neutrality
requirement permits the agency to implement the budget neutrality
provision in this manner. The statutory language requires that
``aggregate payments made by the Secretary do not exceed the amount
which the Secretary would have paid if the demonstration * * * was not
implemented,'' but does not identify the range across which aggregate
payments must be held equal.
5. Tentative FY 2007 Standardized Amount
The tentative adjusted standardized amount is divided into labor-
related and nonlabor-related portions. Tables 1A and 1B in section VI.
of this Addendum contain the tentative national standardized amount
that we are applying to all hospitals, except hospitals in Puerto Rico.
The tentative Puerto Rico-specific amounts are shown in Table 1C. The
tentative amounts shown in Tables 1A and 1B differ only in that the
labor-related share applied to the tentative standardized amounts in
Table 1A is 69.7 percent, and the labor-related share applied to the
tentative standardized amounts in Table 1B is 62 percent. In accordance
with sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act, we are
applying the labor-related share of 62 percent, unless the application
of that percentage would result in lower payments to a hospital than
would otherwise be made. The effect of this application is that the
labor-related share of the tentative standardized amount is 62 percent
for all hospitals (other than those in Puerto Rico) whose wage indexes
are less than or equal to 1.0000.
In addition, Tables 1A and 1B include tentative standardized
amounts reflecting the full 3.4 percent update for FY 2007, and
tentative standardized amounts reflecting the 2.0 percentage point
reduction to the update (a 1.4 percent update) applicable for hospitals
that fail to submit quality data consistent with section
1886(b)(3)(B)(viii) of the Act.
We note that in this final rule we are not supplying a table that
illustrates the changes from the FY 2006 national average standardized
amount. Because we are only setting the standardized amounts
tentatively, we do not believe it is appropriate to include this table
in this final rule. However, we will publish a table in the subsequent
notice to this final rule that details the calculation of the final
standardized amounts.
Under section 1886(d)(9)(A)(ii) of the Act, the Federal portion of
the Puerto Rico payment rate is based on the discharge-weighted average
of the national large urban standardized amount (this tentative amount
is set forth in Table 1A). The tentative labor-related and nonlabor-
related portions of the national average standardized amounts for
Puerto Rico hospitals for FY 2007 are set forth in Table 1C of section
VI. of this Addendum. This table also includes the tentative Puerto
Rico standardized amounts. The labor-related share applied to the
tentative Puerto Rico specific standardized amount is 58.7 percent, or
62 percent, depending on which is more advantageous to the hospital.
(Section 1886(d)(9)(C)(iv) of the Act, as amended by section 403(b) of
Pub. L. 108-173, provides that the labor-related share for hospitals in
Puerto Rico will be 62 percent, unless the application of that
percentage would result in lower payments to the hospital.)

B. Tentative Adjustments for Area Wage Levels and Cost-of-Living

Tables 1A through 1C, as set forth in section VI. of this Addendum,
contain the tentative labor-related and tentative nonlabor-related
shares of the standardized amount that we are using to calculate the
prospective payment rates for hospitals located in the 50 States, the
District of Columbia, and Puerto Rico for FY 2007. This section
addresses two types of adjustments to the tentative standardized
amounts that are made in determining the prospective payment rates as
described in this Addendum.
1. Tentative Adjustment for Area Wage Levels
Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require
that we make an adjustment to the labor-related portion of the national
and Puerto Rico prospective payment rates, respectively, to account for
area differences in hospital wage levels. This adjustment is made by
multiplying the labor-related portion of the adjusted standardized
amounts by the appropriate wage index for the area in which the
hospital is located. In section III. of the preamble to this final
rule, we discuss the data and methodology for the FY 2007 wage index.
We note that because the occupational mix adjusted wage index data will
not be finalized until after this final rule, we will not be publishing
Tables 4A-1, 4A-2, 4B, 4C-1, 4C-2, and 4F in this final rule. However,
we will publish these tables in the Federal Register and on the CMS Web
site once all the data is finalized and prior to October 1, 2006.
2. Final Adjustment for Cost-of-Living in Alaska and Hawaii
Section 1886(d)(5)(H) of the Act authorizes an adjustment to take
into account the unique circumstances of hospitals in Alaska and
Hawaii. Higher labor-related costs for these two States are taken into
account in the adjustment for area wages described above. For FY 2007,
we are adjusting the payments for hospitals in Alaska and Hawaii by
multiplying the nonlabor-related portion of the standardized amount by
the appropriate adjustment factor contained in the table below.

Table of Cost-of-Living Adjustment Factors: Alaska and Hawaii Hospitals
------------------------------------------------------------------------
Cost of living
Area adjustment
factor
------------------------------------------------------------------------
Alaska--All areas....................................... 1.25
Hawaii:
County of Honolulu.................................... 1.25
County of Hawaii...................................... 1.165
County of Kauai....................................... 1.2325
County of Maui........................................ 1.2375
County of Kalawao..................................... 1.2375
------------------------------------------------------------------------
(The above factors are based on data obtained from the U.S. Office of
Personnel Management.)

[[Page 48154]]

C. DRG Relative Weights

As discussed in section II. of the preamble of this final rule, we
have developed a classification system for all hospital discharges,
assigning them into DRGs, and have developed relative weights for each
DRG that reflect the resource utilization of cases in each DRG relative
to Medicare cases in other DRGs. Table 5 of section VI. of this
Addendum contains the relative weights that we are using for discharges
occurring in FY 2007. These factors have been recalibrated as explained
in section II. of the preamble of this final rule.

D. Calculation of the Prospective Payment Rates

General Formula for Calculation of Prospective Payment Rates for FY
2007
In general, the operating prospective payment rate for all
hospitals paid under the IPPS located outside of Puerto Rico, except
SCHs and MDHs, for FY 2007 equals the Federal rate.
The prospective payment rate for SCHs for FY 2007 equals the higher
of the applicable Federal rate or the hospital-specific rate as
described below. The prospective payment rate for MDHs for FY 2007
equals the higher of the Federal rate, or the Federal rate plus 75
percent of the difference between the Federal rate and the hospital-
specific rate as described below. The prospective payment rate for
Puerto Rico for FY 2007 equals 25 percent of the Puerto Rico rate plus
75 percent of the applicable national rate.
As noted above, we are not able to provide the final FY 2007
occupational mix adjusted wage index tables. Although Tables 4A-1, 4A-
2, 4B, 4C-1, and 4C-2 will be published on the CMS Web site and in a
subsequent Federal Register document to this final rule, any reference
to these tables below refers to these future tables.
1. Federal Rate
The Federal rate is determined as follows:
Step 1--Select the appropriate average standardized amount
considering the applicable wage index and whether the hospital has
submitted qualifying quality data (full update for qualifying
hospitals, update minus 2.0 percentage points for nonqualifying
hospitals).
Step 2--Multiply the labor-related portion of the standardized
amount by the applicable wage index for the geographic area in which
the hospital is located or the area to which the hospital is
reclassified.
Step 3--For hospitals in Alaska and Hawaii, multiply the nonlabor-
related portion of the standardized amount by the appropriate cost-of-
living adjustment factor.
Step 4--Add the amount from Step 2 and the nonlabor-related portion
of the standardized amount (adjusted, if appropriate, under Step 3).
Step 5--Multiply the final amount from Step 4 by the relative
weight corresponding to the appropriate DRG (see Table 5 of section VI.
of this Addendum).
The Federal rate as determined in Step 5 may then be further
adjusted if the hospital qualifies for either the IME or DSH
adjustment. In addition, for hospitals that qualify for a low-volume
payment adjustment under section 1886(d)(12) of the Act, the payment in
Step 5 would be increased by 25 percent.
2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs)
a. Calculation of Hospital-Specific Rate
Section 1886(b)(3)(C) of the Act provides that SCHs are paid based
on whichever of the following rates yields the greatest aggregate
payment: the Federal rate; the updated hospital-specific rate based on
FY 1982 costs per discharge; the updated hospital-specific rate based
on FY 1987 costs per discharge; or the updated hospital-specific rate
based on FY 1996 costs per discharge.
As discussed previously, MDHs are required to rebase their
hospital-specific rates to their FY 2002 cost reports if doing so
results in higher payments. In addition, effective for discharges
occurring on or after October 1, 2006, MDHs are to be paid based on the
Federal national rate or, if higher, the Federal national rate plus 75
percent (changed from 50 percent) of the difference between the Federal
national rate and the greater of the updated hospital-specific rates
based on either FY 1982, FY 1987 or FY 2002 costs per discharge.
Further, MDHs will no longer be subject to the 12-percent cap on their
DSH payment adjustment factor.
Hospital-specific rates have been determined for each of these
hospitals based on the FY 1982 costs per discharge, the FY 1987 costs
per discharge, or, for SCHs, the FY 1996 costs per discharge and for
MDHs, the FY 2002 cost per discharge. For a more detailed discussion of
the calculation of the hospital-specific rates, we refer the reader to
the FY 1984 IPPS interim final rule (48 FR 39772); the April 20, 1990
final rule with comment (55 FR 15150); the FY 1991 IPPS final rule (55
FR 35994); and the FY 2001 IPPS final rule (65 FR 47082). In addition,
for both SCHs and MDHs, the hospital-specific rate is adjusted by the
budget neutrality adjustment factor as discussed in section IV.C. of
the preamble to this final rule. The resulting rate will be used in
determining the payment rate an SCH or MDH will receive for its
discharges beginning on or after October 1, 2006.
b. Updating the FY 1982, FY 1987, FY 1996, and FY 2002 Hospital-
Specific Rates for FY 2007
We are increasing the hospital-specific rates by 3.4 percent (the
hospital market basket percentage increase) for SCHs and MDHs for FY
2007. Section 1886(b)(3)(C)(iv) of the Act provides that the update
factor applicable to the hospital-specific rates for SCHs is equal to
the update factor provided under section 1886(b)(3)(B)(iv) of the Act,
which, for SCHs in FY 2007, is the market basket rate-of-increase.
Section 1886(b)(3)(D) of the Act provides that the update factor
applicable to the hospital-specific rates for MDHs also equals the
update factor provided under section 1886(b)(3)(B)(iv) of the Act,
which, for FY 2007, is the market basket rate-of-increase.
3. General Formula for Calculation of Prospective Payment Rates for
Hospitals Located in Puerto Rico Beginning On or After October 1, 2006,
and Before October 1, 2007
Section 1886(d)(9)(E)(iv) of the Act provides that, effective for
discharges occurring on or after October 1, 2004, hospitals located in
Puerto Rico are paid based on a blend of 75 percent of the national
prospective payment rate and 25 percent of the Puerto Rico-specific
rate.
a. Puerto Rico Rate
The Puerto Rico prospective payment rate is determined as follows:
Step 1--Select the appropriate average standardized amount
considering the applicable wage index (see Table 1C).
Step 2--Multiply the labor-related portion of the standardized
amount by the appropriate Puerto Rico-specific wage index.
Step 3--Add the amount from Step 2 and the nonlabor-related portion
of the standardized amount.
Step 4--Multiply the amount from Step 3 by the appropriate DRG
relative weight (see Table 5 of section IV. of the Addendum).
Step 5--Multiply the result in Step 4 by 25 percent.

[[Page 48155]]

b. National Rate
The national prospective payment rate is determined as follows:
Step 1--Select the appropriate average standardized amount
considering the applicable wage index.
Step 2--Multiply the labor-related portion of the standardized
amount by the applicable wage index for the geographic area in which
the hospital is located or the area to which the hospital is
reclassified.
Step 3--Add the amount from Step 2 and the nonlabor-related portion
of the national average standardized amount.
Step 4--Multiply the amount from Step 3 by the appropriate DRG
relative weight (see Table 5 of section VI. of the Addendum).
Step 5--Multiply the result in Step 4 by 75 percent.
The sum of the Puerto Rico rate and the national rate computed
above equals the prospective payment for a given discharge for a
hospital located in Puerto Rico. This rate may then be further adjusted
if the hospital qualifies for either the IME or DSH adjustment.

III. Changes to Payment Rates for Acute Care Hospital Inpatient
Capital-Related Costs for FY 2007

The PPS for acute care hospital inpatient capital-related costs was
implemented for cost reporting periods beginning on or after October 1,
1991. Effective with that cost reporting period, hospitals were paid
during a 10-year transition period (which extended through FY 2001) to
change the payment methodology for Medicare acute care hospital
inpatient capital-related costs from a reasonable cost-based
methodology to a prospective methodology (based fully on the Federal
rate).
The basic methodology for determining Federal capital prospective
rates is set forth in regulations at Sec. Sec. 412.308 through
412.352. Below we discuss the factors that we are using to determine
the tentative capital Federal rate for FY 2007, which will be effective
for discharges occurring on or after October 1, 2006. As discussed in
section I. of the Addendum of this final rule, we are not able to
provide the final FY 2007 capital Federal prospective rates in this
rule due to requirements imposed by the Second Circuit Court's order
regarding wage index information as collected for the inpatient Federal
rates. This affects the Federal capital payment rates, as well, because
wage index information is used to determine the GAF/DRG budget
neutrality factor, the GAF, and outlier adjustment factor that are used
in arriving at the capital Federal rates. We are providing tentative
amounts, where applicable, as proxies for these rates and factors until
the occupational mix adjusted wage index is finalized. Subsequent to
this final rule, we will publish in a Federal Register document a
listing the capital Federal rates, offsets and budget neutrality
factors that are effective October 1, 2006 for FY 2007.
The 10-year transition period ended with hospital cost reporting
periods beginning on or after October 1, 2001 (FY 2002). Therefore, for
cost reporting periods beginning in FY 2002, all hospitals (except
``new'' hospitals under Sec. 412.304(c)(2)) are paid based on 100
percent of the capital Federal rate. For FY 1992, we computed the
standard Federal payment rate for capital-related costs under the IPPS
by updating the FY 1989 Medicare inpatient capital cost per case by an
actuarial estimate of the increase in Medicare inpatient capital costs
per case. Each year after FY 1992, we update the capital standard
Federal rate, as provided at Sec. 412.308(c)(1), to account for
capital input price increases and other factors. The regulations at
Sec. 412.308(c)(2) provide that the capital Federal rate is adjusted
annually by a factor equal to the estimated proportion of outlier
payments under the capital Federal rate to total capital payments under
the capital Federal rate. In addition, Sec. 412.308(c)(3) requires
that the capital Federal rate be reduced by an adjustment factor equal
to the estimated proportion of payments for (regular and special)
exceptions under Sec. 412.348. Section 412.308(c)(4)(ii) requires that
the capital standard Federal rate be adjusted so that the effects of
the annual DRG reclassification and the recalibration of DRG weights
and changes in the geographic adjustment factor are budget neutral.
For FYs 1992 through 1995, Sec. 412.352 required that the capital
Federal rate also be adjusted by a budget neutrality factor so that
aggregate payments for inpatient hospital capital costs were projected
to equal 90 percent of the payments that would have been made for
capital-related costs on a reasonable cost basis during the fiscal
year. That provision expired in FY 1996. Section 412.308(b)(2)
describes the 7.4 percent reduction to the capital rate that was made
in FY 1994, and Sec. 412.308(b)(3) describes the 0.28 percent
reduction to the capital rate made in FY 1996 as a result of the
revised policy of paying for transfers. In FY 1998, we implemented
section 4402 of Pub. L. 105-33, which required that, for discharges
occurring on or after October 1, 1997, and before October 1, 2002, the
unadjusted capital standard Federal rate is reduced by 17.78 percent.
As we discussed in the FY 2003 IPPS final rule (67 FR 50102) and
implemented in Sec. 412.308(b)(6), a small part of that reduction was
restored effective October 1, 2002.
To determine the appropriate budget neutrality adjustment factor
and the regular exceptions payment adjustment during the 10-year
transition period, we developed a dynamic model of Medicare inpatient
capital-related costs; that is, a model that projected changes in
Medicare inpatient capital-related costs over time. With the expiration
of the budget neutrality provision, the capital cost model was only
used to estimate the regular exceptions payment adjustment and other
factors during the transition period. As we explained in the FY 2002
IPPS final rule (66 FR 39911), beginning in FY 2002, an adjustment for
regular exception payments is no longer necessary because regular
exception payments were only made for cost reporting periods beginning
on or after October 1, 1991, and before October 1, 2001 (see Sec.
412.348(b)). Because payments are no longer being made under the
regular exception policy effective with cost reporting periods
beginning in FY 2002, we no longer use the capital cost model. The
capital cost model and its application during the transition period are
described in Appendix B of the FY 2002 IPPS final rule (66 FR 40099).
Section 412.374 provides for the use of a blended payment system
for payments to Puerto Rico hospitals under the PPS for acute care
hospital inpatient capital-related costs. Accordingly, under the
capital PPS, we compute a separate payment rate specific to Puerto Rico
hospitals using the same methodology used to compute the national
Federal rate for capital-related costs. In accordance with section
1886(d)(9)(A) of the Act, under the PPS for acute care hospital
operating costs, hospitals located in Puerto Rico are paid for
operating costs under a special payment formula. Prior to FY 1998,
hospitals in Puerto Rico were paid a blended operating rate that
consisted of 75 percent of the applicable standardized amount specific
to Puerto Rico hospitals and 25 percent of the applicable national
average standardized amount. Similarly, prior to FY 1998, hospitals in
Puerto Rico were paid a blended capital rate that consisted of 75
percent of the applicable capital Puerto Rico-specific rate and 25
percent of the applicable capital Federal rate. However, effective
October 1, 1997, in accordance with section 4406 of Pub. L. 105-33,
operating payments to hospitals in Puerto Rico were revised to be based
on a blend of 50 percent of the applicable standardized amount specific
to Puerto

[[Page 48156]]

Rico hospitals and 50 percent of the applicable national average
standardized amount. In conjunction with this change to the operating
blend percentage, effective with discharges occurring on or after
October 1, 1997, we also revised the methodology for computing capital
payments to hospitals in Puerto Rico to be based on a blend of 50
percent of the Puerto Rico capital rate and 50 percent of the capital
Federal rate.
As we discussed in the FY 2005 IPPS final rule (69 FR 49185),
section 504 of Pub. L. 108-173 increased the national portion of the
operating IPPS payments for Puerto Rico hospitals from 50 percent to
62.5 percent and decreased the Puerto Rico portion of the operating
IPPS payments from 50 percent to 37.5 percent for discharges occurring
on or after April 1, 2004 through September 30, 2004 (see the March 26,
2004 One-Time Notification (Change Request 3158)). In addition, section
504 of Pub. L. 108-173 provided that the national portion of operating
IPPS payments for Puerto Rico hospitals is equal to 75 percent and the
Puerto Rico portion of operating IPPS payments is equal to 25 percent
for discharges occurring on or after October 1, 2004. Consistent with
that change in operating IPPS payments to hospitals in Puerto Rico, for
FY 2005 (as we discussed in the FY 2005 IPPS final rule), we revised
the methodology for computing capital payments to hospitals located in
Puerto Rico to be based on a blend of 25 percent of the Puerto Rico
capital rate and 75 percent of the capital Federal rate for discharges
occurring on or after October 1, 2004.

A. Determination of Federal Hospital Inpatient Capital-Related
Prospective Payment Rate Update

In the FY 2006 IPPS final rule (70 FR 47503), we established a
capital Federal rate of $420.65 for FY 2006. In the discussion that
follows, we explain the factors that we are using to determine the
tentative FY 2007 capital Federal rate. In particular, we explain why
the tentative FY 2007 capital Federal rate will increase approximately
1.60 percent compared to the FY 2006 capital Federal rate. However, we
estimate aggregate capital payments will decrease by 0.2 percent during
this same period. This decrease is due to a decrease in the estimated
total number of Medicare fee-for-service discharges for FY 2007 as
compared to the estimated total number of Medicare fee-for-service
discharges in FY 2006. We are estimating a decrease in Medicare fee-
for-service discharges in FY 2007 as compared to FY 2006, in part
because we are projecting an increase in beneficiary Medicare managed
care enrollment as a result of the implementation of several provisions
of Pub. L. 108-173. Therefore, although we are projecting that capital
PPS payments per discharge will increase slightly from FY 2006 to FY
2007, we project that aggregate capital PPS payments will decrease for
the same period.
Total payments to hospitals under the IPPS are relatively
unaffected by changes in the capital prospective payments. Because
capital payments constitute about 10 percent of hospital payments, a 1-
percent change in the capital Federal rate yields only about 0.1
percent change in actual payments to hospitals. As noted above,
aggregate payments under the capital IPPS are estimated to decrease
slightly in FY 2007 compared to FY 2006.
1. Projected Capital Standard Federal Rate Update
a. Description of the Update Framework
Under Sec. 412.308(c)(1), the capital standard Federal rate is
updated on the basis of an analytical framework that takes into account
changes in a capital input price index (CIPI) and several other policy
adjustment factors. Specifically, we have adjusted the projected CIPI
rate-of-increase as appropriate each year for case-mix index-related
changes, for intensity, and for errors in previous CIPI forecasts. The
update factor for FY 2007 under that framework is 1.10 percent based on
the best data available at this time. The update factor is based on a
projected 1.1 percent increase in the CIPI, a 0.0 percent adjustment
for intensity, a 0.0 percent adjustment for case-mix, a 0.0 percent
adjustment for the FY 2005 DRG reclassification and recalibration, and
a forecast error correction of 0.0 percent. As discussed below in
section III.C. of this Addendum, we believe that the CIPI is the most
appropriate input price index for capital costs to measure capital
price changes in a given year. We also explain the basis for the FY
2007 CIPI projection in that same section of this Addendum. Below we
describe the policy adjustments that have been applied.
The case-mix index is the measure of the average DRG weight for
cases paid under the IPPS. Because the DRG weight determines the
prospective payment for each case, any percentage increase in the case-
mix index corresponds to an equal percentage increase in hospital
payments.
The case-mix index can change for any of several reasons:
The average resource use of Medicare patients changes
(``real'' case-mix change);
Changes in hospital coding of patient records result in
higher weight DRG assignments (``coding effects''); and
The annual DRG reclassification and recalibration changes
may not be budget neutral (``reclassification effect'').
We define real case-mix change as actual changes in the mix (and
resource requirements) of Medicare patients as opposed to changes in
coding behavior that result in assignment of cases to higher weighted
DRGs but do not reflect higher resource requirements. The capital
update framework includes the same case-mix index adjustment used in
the former operating IPPS update framework (as discussed in the May 18,
2005 IPPS proposed rule for FY 2005 (69 FR 28816)). (We are no longer
using an update framework in making a recommendation for updating the
operating IPPS standardized amounts as discussed in section II, of
Appendix B in the FY 2006 IPPS final rule (70 FR 47707)).
For FY 2007, we are projecting a 1.0 percent total increase in the
case-mix index. We estimate that the real case-mix increase will also
equal 1.0 percent in FY 2007. The net adjustment for change in case-mix
is the difference between the projected increase in case-mix and the
projected total increase in case-mix. Therefore, the net adjustment for
case-mix change in FY 2007 is 0.0 percentage points.
The capital update framework also contains an adjustment for the
effects of DRG reclassification and recalibration. This adjustment is
intended to remove the effect on total payments of prior year changes
to the DRG classifications and relative weights, in order to retain
budget neutrality for all case-mix index-related changes other than
those due to patient severity. Due to the lag time in the availability
of data, there is a 2-year lag in data used to determine the adjustment
for the effects of DRG reclassification and recalibration. For example,
we are adjusting for the effects of the FY 2005 DRG reclassification
and recalibration as part of our update for FY 2007. We estimate that
FY 2005 DRG reclassification and recalibration will result in a 0.0
percent change in the case-mix when compared with the case-mix index
that would have resulted if we had not made the reclassification and
recalibration changes to the DRGs. Therefore, we are making a 0.0
percent adjustment for DRG reclassification and recalibration in the
update for FY 2007 to maintain budget neutrality.

[[Page 48157]]

The capital update framework also contains an adjustment for
forecast error. The input price index forecast is based on historical
trends and relationships ascertainable at the time the update factor is
established for the upcoming year. In any given year, there may be
unanticipated price fluctuations that may result in differences between
the actual increase in prices and the forecast used in calculating the
update factors. In setting a prospective payment rate under the
framework, we make an adjustment for forecast error only if our
estimate of the change in the capital input price index for any year is
off by 0.25 percentage points or more. There is a 2-year lag between
the forecast and the measurement of the forecast error. A forecast
error of 0.1 percentage point was calculated for the FY 2005 update.
That is, current historical data indicate that the forecasted FY 2005
CIPI used in calculating the FY 2005 update factor (0.7 percent)
slightly understated the actual realized price increases (0.8 percent)
by 0.1 percentage point. This slight underprediction was mostly due to
the incorporation of newly available source data for fixed asset prices
into the market basket. However, because this estimation of the change
in the CIPI is less than 0.25 percentage points, it is not reflected in
the update recommended under this framework. Therefore, we are making a
0.0 percent adjustment for forecast error in the update for FY 2007.
Under the capital IPPS update framework, we also make an adjustment
for changes in intensity. We calculate this adjustment using the same
methodology and data that were used in the framework used in the past
under the operating IPPS. The intensity factor for the operating update
framework reflects how hospital services are utilized to produce the
final product, that is, the discharge. This component accounts for
changes in the use of quality-enhancing services, for changes in
within-DRG severity, and for expected modification of practice patterns
to remove noncost-effective services.
We calculate case-mix constant intensity as the change in total
charges per admission, adjusted for price level changes (the CPI for
hospital and related services) and changes in real case-mix. The use of
total charges in the calculation of the intensity factor makes it a
total intensity factor; that is, charges for capital services are
already built into the calculation of the factor. Therefore, we have
incorporated the intensity adjustment from the operating update
framework into the capital update framework. Without reliable estimates
of the proportions of the overall annual intensity increases that are
due, respectively, to ineffective practice patterns and to the
combination of quality-enhancing new technologies and within-DRG
complexity, we assume, as in the operating update framework, that one-
half of the annual increase is due to each of these factors. The
capital update framework thus provides an add-on to the input price
index rate of increase of one-half of the estimated annual increase in
intensity, to allow for within-DRG severity increases and the adoption
of quality-enhancing technology.
We have developed a Medicare-specific intensity measure based on a
5-year average. Past studies of case-mix change by the RAND Corporation
(Has DRG Creep Crept Up? Decomposing the Case Mix Index Change Between
1987 and 1988'' by G. M. Carter, J. P. Newhouse, and D. A. Relles, R-
4098-HCFA/ProPAC (1991)) suggest that real case-mix change was not
dependent on total change, but was usually a fairly steady 1.0 to 1.4
percent per year. We use 1.4 percent as the upper bound because the
RAND study did not take into account that hospitals may have induced
doctors to document medical records more completely in order to improve
payment.
We calculate case-mix constant intensity as the change in total
charges per admission, adjusted for price level changes (the CPI for
hospital and related services), and changes in real case-mix. As we
noted above, in accordance with Sec. 412.308(c)(1)(ii), we began
updating the capital standard Federal rate in FY 1996 using an update
framework that takes into account, among other things, allowable
changes in the intensity of hospital services. For FYs 1996 through
2001, we found that case-mix constant intensity was declining and we
established a 0.0 percent adjustment for intensity in each of those
years. For FYs 2002 and 2003, we found that case-mix constant intensity
was increasing and we established a 0.3 percent adjustment and 1.0
percent adjustment for intensity, respectively. For FYs 2004 and 2005,
we found that the charge data appeared to be skewed (as discussed in
greater detail below) and we established a 0.0 percent adjustment in
each of those years. Furthermore, we stated that we would continue to
apply a 0.0 percent adjustment for intensity until any increase in
charges can be tied to intensity rather than attempts to maximize
outlier payments.
As noted above, our intensity measure is based on a 5-year average,
and therefore, the intensity adjustment for FY 2007 is based on data
from the 5-year period FY 2001 through FY 2005. We found a dramatic
increase in hospital charges for each of those 5 years without a
corresponding increase in the hospital case-mix index. These findings
are similar to the considerable increase in hospitals' charges, which
we found when we were determining the intensity factor in the FY 2004,
FY 2005 and FY 2006 update recommendations as discussed in the FY 2004
IPPS final rule (68 FR 45482), the FY 2005 IPPS final rule (69 FR
49285) and the FY 2006 IPPS final rule (70 FR 47500), respectively. If
hospitals were treating new or different types of cases, which would
result in an appropriate increase in charges per discharge, then we
would expect hospitals' case-mix to increase proportionally.
As we discussed in the FY 2006 IPPS final rule (70 FR 47500),
because our intensity calculation relies heavily upon charge data and
we believe that these charge data may be inappropriately skewed, we
established a 0.0 percent adjustment for intensity for FY 2006.
On June 9, 2003, we published revisions to our outlier policy for
determining the additional payment for extraordinarily high-cost cases
(68 FR 34494 through 34515). These revised policies were effective on
August 8, 2003, and October 1, 2003. While it does appear that a
response to these policy changes is beginning to occur, that is, the
change in charges for FYs 2004 and 2005 are somewhat less than the
previous 4 years, they still show a significant annual increase in
charges without a corresponding increase in hospital case-mix. The
increase in charges in FY 2004, for example, is approximately 12
percent, which, while less than the increase in the previous 3 years,
is still much higher than increases in years prior to FY 2001. In
addition, this approximate 12-percent increase in charges for FY 2004
significantly exceeds the case-mix increase for the same period. Based
on the approximate 12-percent increase in charges for FY 2004, we
believe residual effects of hospitals' charge practices prior to the
implementation of the outlier policy revisions established in the June
9, 2003 final rule continue to appear in the data because hospitals may
not have had enough time to adopt changes in their behavior in response
to the new outlier policy. Thus, we believe that the FY 2004 and FY
2005 charge data may still be skewed. Because the intensity adjustment
is based on a 5-year average, and although the new outlier policy was
generally effective in FY 2004, we believe it still will be several
years before all the effects of hospitals attempting to maximize
outlier

[[Page 48158]]

payments are removed from the intensity calculation. Therefore, as
proposed, we are making a 0.0 percent adjustment for intensity for FY
2007. In the past (FYs 1996 through 2001) when we found intensity to be
declining, we believed a zero (rather than negative) intensity
adjustment was appropriate. Similarly, we believe that it is
appropriate to apply a zero intensity adjustment for FY 2007 until any
increase in charges can be tied to intensity rather than to attempts to
maximize outlier payments.
Above, we described the basis of the components used to develop the
1.1 percent capital update factor for FY 2007 as shown in the table
below.

CMS FY 2007 Update Factor to the Capital Federal Rate
------------------------------------------------------------------------

------------------------------------------------------------------------
Capital Input Price Index...................................... 1.1
Intensity...................................................... 0.0
Case-Mix Adjustment Factors:
Real Across DRG Change....................................... 1.0
Projected Case-Mix Change.................................... -1.0
--------
Subtotal................................................... 0.0
========
Effect of FY 2005 Reclassification and Recalibration........... 0.0
Forecast Error Correction...................................... 0.0
--------
Total Update............................................... 1.1
------------------------------------------------------------------------

b. Comparison of CMS and MedPAC Update Recommendation
In the past, MedPAC has included update recommendations for capital
PPS in a Report to Congress. In its March 2006 Report to Congress,
MedPAC did not make an update recommendation for capital PPS payments
for FY 2007. However, in that same report, MedPAC made an update
recommendation for hospital inpatient and outpatient services (page
46). MedPAC reviews inpatient and outpatient services together because
they are so closely interrelated. For FY 2007, MedPAC recommended an
increase in the payment rate for the operating IPPS by the projected
increase in the hospital market basket index, less half of MedPAC's
expectation for productivity growth (or 0.45 percent, based on its
assessment of beneficiaries' access to care and changes in hospital
capacity, volume of services, access to capital, quality of care, and
the relationship of Medicare payments and hospitals' costs.) In
addition, MedPAC recommended combining the annual rate update with an
incentive payment policy for quality. (MedPAC's Report to the Congress:
Medicare Payment Policy, March 2006, Section 2A.)
2. Outlier Payment Adjustment Factor
Section 412.312(c) establishes a unified outlier methodology for
inpatient operating and inpatient capital-related costs. A single set
of thresholds is used to identify outlier cases for both inpatient
operating and inpatient capital-related payments. Section 412.308(c)(2)
provides that the standard Federal rate for inpatient capital-related
costs be reduced by an adjustment factor equal to the estimated
proportion of capital-related outlier payments to total inpatient
capital-related PPS payments. The outlier thresholds are set so that
operating outlier payments are projected to be 5.1 percent of total
operating DRG payments.
In the FY 2006 IPPS final rule (70 FR 47501), we estimated that
outlier payments for capital would equal 4.85 percent of inpatient
capital-related payments based on the capital Federal rate in FY 2006.
Based on the tentative thresholds as set forth in section II.A.4.c. of
this Addendum, we estimate that tentative outlier payments for capital-
related costs would equal 4.32 percent for inpatient capital-related
payments based on the tentative Federal rate in FY 2007. Therefore, we
are applying a tentative outlier adjustment factor of 0.9568 to the
tentative capital Federal rate. Thus, we estimate that the percentage
of capital outlier payments to total capital standard payments for FY
2007 will be slightly lower than the percentages for FY 2006.
The outlier reduction factors are not built permanently into the
capital rates; that is, they are not applied cumulatively in
determining the capital Federal rate. The tentative FY 2007 outlier
adjustment of 0.9568 is a 0.56 percent change from the FY 2006 outlier
adjustment of 0.9515. Therefore, the net change in the tentative
outlier adjustment to the tentative capital Federal rate for FY 2007 is
1.0056 (0.9568/0.9915). Thus, the outlier adjustment increases the
tentative FY 2007 capital Federal rate by 0.56 percent compared with
the FY 2006 outlier adjustment.
3. Budget Neutrality Adjustment Factor for Changes in DRG
Classifications and Weights and the GAF
Section 412.308(c)(4)(ii) requires that the capital Federal rate be
adjusted so that aggregate payments for the fiscal year based on the
capital Federal rate after any changes resulting from the annual DRG
reclassification and recalibration and changes in the GAF are projected
to equal aggregate payments that would have been made on the basis of
the capital Federal rate without such changes. Because we implemented a
separate GAF for Puerto Rico, we apply separate budget neutrality
adjustments for the national GAF and the Puerto Rico GAF. We apply the
same budget neutrality factor for DRG reclassifications and
recalibration nationally and for Puerto Rico. Separate adjustments were
unnecessary for FY 1998 and earlier because the GAF for Puerto Rico was
implemented in FY 1998.
In the past, we used the actuarial capital cost model (described in
Appendix B of the FY 2002 IPPS final rule (66 FR 40099)) to estimate
the aggregate payments that would have been made on the basis of the
capital Federal rate with and without changes in the DRG
classifications and weights and in the GAF to compute the adjustment
required to maintain budget neutrality for changes in DRG weights and
in the GAF. During the transition period, the capital cost model was
also used to estimate the regular exception payment adjustment factor.
As we explain in section III.A.4. of this Addendum, beginning in FY
2002, an adjustment for regular exception payments is no longer
necessary. Therefore, we are no longer using the capital cost model.
Instead, we are using historical data based on hospitals' actual cost
experiences to determine the exceptions payment adjustment factor for
special exceptions payments.
To determine the tentative factors for FY 2007, we compared
(separately for the national capital rate and the Puerto Rico capital
rate) estimated aggregate capital Federal rate payments based on the FY
2006 DRG relative weights and the FY 2006 GAF to estimated aggregate
capital Federal rate payments based on the FY 2007 relative weights and
the tentative FY 2007 GAF. As we established in the FY 2006 IPPS final
rule (70 FR 47503), the budget neutrality factors were 0.9920 for the
national capital rate and 0.9959 for the Puerto Rico capital rate. In
making the comparison, we set the exceptions reduction factor to 1.00.
To achieve budget neutrality for the changes in the national GAF, based
on calculations using updated data, we are applying a tentative
incremental budget neutrality adjustment of 1.0003 for FY 2007 to the
previous cumulative FY 2006 adjustments of 0.9920, yielding a tentative
adjustment of 0.9923, through FY 2007 (calculations done on unrounded
numbers). For the Puerto Rico GAF, we are applying a tentative
incremental budget neutrality

[[Page 48159]]

adjustment of 1.0021 for FY 2007 to the previous cumulative FY 2006
adjustment of 0.9959, yielding a tentative cumulative adjustment of
0.9980 through FY 2007.
We then compared estimated aggregate capital Federal rate payments
based on the FY 2006 DRG relative weights and the FY 2006 GAF to
estimated aggregate capital Federal rate payments based on the FY 2007
DRG relative weights and the tentative FY 2007 GAF. The incremental
adjustment for DRG classifications and changes in relative weights is
0.9992 both nationally and for Puerto Rico. The cumulative adjustments
for DRG classifications and changes in relative weights and for changes
in the tentative GAF through FY 2007 are 0.9914 nationally and 0.9972
for Puerto Rico. The following table summarizes the adjustment factors
for each fiscal year:

[[Page 48160]]

Budget Neutrality Adjustment for DRG Reclassifications and Recalibration and the Geographic Adjustment Factors
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
National Puerto Rico
------------------------------------------------ ------------------------------------------------
Incremental adjustment Incremental adjustment
Fiscal year ------------------------------------------------ Cumulative ------------------------------------------------ Cumulative
Geographic DRG reclassi- Geographic DRG reclassi-
adjustment fications and Combined adjustment fications and Combined
factor recalibration factor recalibration
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1992............................................................ .............. .............. .............. 1.00000 .............. .............. .............. ..............
1993............................................................ .............. .............. 0.99800 0.99800 .............. .............. .............. ..............
1994............................................................ .............. .............. 1.00531 1.00330 .............. .............. .............. ..............
1995............................................................ .............. .............. 0.99980 1.00310 .............. .............. .............. ..............
1996............................................................ .............. .............. 0.99940 1.00250 .............. .............. .............. ..............
1997............................................................ .............. .............. 0.99873 1.00123 .............. .............. .............. ..............
1998............................................................ .............. .............. 0.99892 1.00015 .............. .............. .............. 1.00000
1999............................................................ 0.99944 1.00335 1.00279 1.00294 0.99898 1.00335 1.00233 1.00233
2000............................................................ 0.99857 0.99991 0.99848 1.00142 0.99910 0.99991 0.99901 1.00134
2001\1\........................................................ 0.99782 1.00009 0.99791 0.99933 1.00365 1.00009 1.00374 1.00508
2001 \2\........................................................ \3\ 0.99771 \3\ 1.00009 \3\ 0.99780 0.99922 \3\ 1.00365 \3\ 1.00009 \3\ 1.00374 1.00508
2002............................................................ \4\ 0.99666 \4\ 0.99668 \4\ 0.99335 0.99268 \4\ 0.98991 \4\ 0.99668 \4\ 0.99662 0.99164
2003 \5\........................................................ 0.99915 0.99662 0.99577 0.98848 1.00809 0.99662 1.00468 0.99628
2003 \6\........................................................ \7\ 0.99896 \7\ 0.99662 \7\ 0.99558 0.98830 1.00809 0.99662 1.00468 0.99628
2004 \8\........................................................ \9\ 1.00175 \9\ 1.00081 \9\ 1.00256 0.99083 1.00028 1.00081 1.00109 0.99736
2004 \10\....................................................... \9\ 1.00164 \9\ 1.00081 \9\ 1.00245 0.99072 1.00028 1.00081 1.00109 0.99736
2005 \11\....................................................... \12\ 0.99967 1.00094 \12\ 1.00061 0.99137 0.99115 1.00094 0.99208 0.98946
2005 \13\....................................................... \12\ 0.99946 1.00094 \12\ 1.00040 0.99117 0.99115 1.00094 0.99208 0.98946
2006............................................................ \14\ 1.00185 0.99892 \14\ 1.00076 0.99198 1.00762 0.99892 1.00653 0.99592
2007............................................................ \15\ 1.00029 0.999\15\ \15\ 0.99943 \15\ 0.99142 \15\ 1.00213 0.99915 \15\ 1.00128 \15\ 0.99719
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Factors effective for the first half of FY 2001 (October 2000 through March 2001).
\2\ Factors effective for the second half of FY 2001 (April 2001 through September 2001).
\3\ Incremental factors are applied to FY 2000 cumulative factors.
\4\ Incremental factors are applied to the cumulative factors for the first half of FY 2001.
\5\ Factors effective for the first half of FY 2003 (October 2002 through March 2003).
\6\ Factors effective for the second half of FY 2003 (April 2003 through September 2003).
\7\ Incremental factors are applied to FY 2002 cumulative factors.
\8\ Factors effective for the first half of FY 2004 (October 2003 through March 2004).
\9\ Incremental factors are applied to the cumulative factors for the second half of FY 2003.
\10\ Factors effective for the second half of FY 2004 (April 2004 through September 2004).
\11\ Factors effective for the first quarter of FY 2005 (September 2004 through December 2004).
\12\ Incremental factors are applied to average of the cumulative factors for the first half (October 1, 2003 through March 31, 2004) and second half (April 1, 2004 through September 30, 2004)
of FY 2004.
\13\ Factors effective for the last three quarters of FY 2005 (January 2005 through September 2005).
\14\ Incremental factors are applied to average of the cumulative factors for 2005.
\15\ Tentative factors for FY 2007, as discussed above in section III. of this Addendum.

[[Page 48161]]

The methodology used to determine the recalibration and geographic
(DRG/GAF) budget neutrality adjustment factor is similar to that used
in establishing budget neutrality adjustments under the PPS for
operating costs. One difference is that, under the operating PPS, the
budget neutrality adjustments for the effect of geographic
reclassifications are determined separately from the effects of other
changes in the hospital wage index and the DRG relative weights. Under
the capital PPS, there is a single DRG/GAF budget neutrality adjustment
factor (the national capital rate and the Puerto Rico capital rate are
determined separately) for changes in the GAF (including geographic
reclassification) and the DRG relative weights. In addition, there is
no adjustment for the effects that geographic reclassification has on
the other payment parameters, such as the payments for serving low-
income patients, indirect medical education payments, or the large
urban add-on payments.
In the FY 2006 IPPS final rule (70 FR 47503), we calculated a GAF/
DRG budget neutrality factor of 1.0008 for FY 2006. For FY 2007, we are
establishing a tentative GAF/DRG budget neutrality factor of 0.9994.
The GAF/DRG budget neutrality factors are built permanently into the
capital rates; that is, they are applied cumulatively in determining
the capital Federal rate. This follows from the requirement that
estimated aggregate payments each year be no more or less than they
would have been in the absence of the annual DRG reclassification and
recalibration and changes in the GAF. The tentative incremental change
in the adjustment from FY 2006 to FY 2007 is 0.9994. The tentative
cumulative change in the capital Federal rate due to this adjustment is
0.9914 (the product of the incremental factors for FYs 1993 though 2006
and the tentative incremental factor of 0.9994 for FY 2007). (We note
that averages of the incremental factors that were in effect during FYs
2005 and 2006, respectively, were used in the calculation of the
tentative cumulative adjustment of 0.9994 for FY 2007.)
This factor accounts for DRG reclassifications and recalibration
and for changes in the GAF. It also incorporates the effects on the
tentative GAF of FY 2007 geographic reclassification decisions made by
the MGCRB compared to FY 2006 decisions. However, it does not account
for changes in payments due to changes in the DSH and IME adjustment
factors or in the large urban add-on.
4. Exceptions Payment Adjustment Factor
Section 412.308(c)(3) requires that the capital standard Federal
rate be reduced by an adjustment factor equal to the estimated
proportion of additional payments for both regular exceptions and
special exceptions under Sec. 412.348 relative to total capital PPS
payments. In estimating the proportion of regular exception payments to
total capital PPS payments during the transition period, we used the
actuarial capital cost model originally developed for determining
budget neutrality (described in Appendix B of the FY 2002 IPPS final
rule (66 FR 40099)) to determine the exceptions payment adjustment
factor, which was applied to both the Federal and hospital-specific
capital rates.
An adjustment for regular exception payments is no longer necessary
in determining the FY 2007 capital Federal rate because, in accordance
with Sec. 412.348(b), regular exception payments were only made for
cost reporting periods beginning on or after October 1, 1991 and before
October 1, 2001. Accordingly, as we explained in the FY 2002 IPPS final
rule (66 FR 39949), in FY 2002 and subsequent fiscal years, no payments
will be made under the regular exceptions provision. However, in
accordance with Sec. 412.308(c), we still need to compute a budget
neutrality adjustment for special exception payments under Sec.
412.348(g). We describe our methodology for determining the exceptions
adjustment used in calculating the FY 2007 capital Federal rate below.
Under the special exceptions provision specified at Sec.
412.348(g)(1), eligible hospitals include SCHs, urban hospitals with at
least 100 beds that have a disproportionate share percentage of at
least 20.2 percent or qualify for DSH payments under Sec.
412.106(c)(2), and hospitals with a combined Medicare and Medicaid
inpatient utilization of at least 70 percent. An eligible hospital may
receive special exceptions payments if it meets: (1) A project need
requirement as described at Sec. 412.348(g)(2), which, in the case of
certain urban hospitals, includes an excess capacity test as described
at Sec. 412.348(g)(4); (2) an age of assets test as described at Sec.
412.348(g)(3); and (3) a project size requirement as described at Sec.
412.348(g)(5).
Based on information compiled from our fiscal intermediaries, six
hospitals have qualified for special exceptions payments under Sec.
412.348(g). Because we have cost reports ending in FY 2005 for all of
these hospitals, we calculated the adjustment based on actual cost
experience. Using data from cost reports ending in FY 2005 from the
December 2005 update of the HCRIS data, we divided the capital special
exceptions payment amounts for the six hospitals that qualified for
special exceptions by the total capital PPS payment amounts (including
special exception payments) for all hospitals. Based on the data from
cost reports ending in FY 2005, this ratio is rounded to 0.0003.
Because we have not received all cost reports ending in FY 2005, we
also divided the FY 2005 special exceptions payments by the total
capital PPS payment amounts for all hospitals with cost reports ending
in FY 2004. This ratio also rounds to 0.0003. Because special
exceptions are budget neutral, we are offsetting the tentative capital
Federal rate by 0.03 percent for special exceptions payments for FY
2007. Therefore, the exceptions adjustment factor is equal to 0.9997
(1--0.0003) to account for special exceptions payments in FY 2007.
In the FY 2006 IPPS final rule (70 FR 47503), we estimated that
total (special) exceptions payments for FY 2006 would equal 0.03
percent of aggregate payments based on the capital Federal rate.
Therefore, we applied an exceptions adjustment factor of 0.9997 (1--
0.0003) in determining the FY 2006 capital Federal rate. As we stated
above, we estimate that exceptions payments in FY 2007 will equal 0.03
percent of aggregate payments based on the tentative FY 2007 capital
Federal rate. Therefore, we are applying an exceptions payment
adjustment factor of 0.9997 to the capital Federal rate for FY 2007.
The exceptions adjustment factor for FY 2007 is the same as the factor
used in determining the FY 2006 capital Federal rate in the FY 2006
IPPS final rule (70 FR 47503). The exceptions reduction factors are not
built permanently into the capital rates; that is, the factors are not
applied cumulatively in determining the capital Federal rate.
Therefore, the net change in the exceptions adjustment factor used in
determining the tentative FY 2007 capital Federal rate is 1.0000
(0.9997/0.9997).
5. Capital Standard Federal Rate for FY 2007
In the FY 2006 IPPS final rule (70 FR 47503), we established a
capital Federal rate of $420.65 for FY 2006. In this final rule, we are
establishing a tentative capital Federal rate of $427.38 for FY 2007.
The tentative capital Federal rate for FY 2007 was calculated as
follows:
The FY 2007 update factor is 1.0110; that is, the update
is 1.1 percent.

[[Page 48162]]

The tentative FY 2007 budget neutrality adjustment factor
that is applied to the capital standard Federal payment rate for
changes in the DRG relative weights and in the GAF is 0.9994.
The tentative FY 2007 outlier adjustment factor is 0.9568.
The FY 2007 (special) exceptions payment adjustment factor
is 0.9997.
Because the tentative capital Federal rate has already been
adjusted for differences in case-mix, wages, cost-of-living, indirect
medical education costs, and payments to hospitals serving a
disproportionate share of low-income patients, we are not making
additional adjustments in the capital standard Federal rate for these
factors, other than the tentative budget neutrality factor for changes
in the DRG relative weights and the GAF.
We are providing a chart that shows how each of the factors and
adjustments for FY 2007 affected the computation of the tentative FY
2007 capital Federal rate in comparison to the average FY 2006 capital
Federal rate. The FY 2007 update factor has the effect of increasing
the tentative capital Federal rate by 1.1 percent compared to the
average FY 2006 Federal rate. The tentative GAF/DRG budget neutrality
factor has the effect of decreasing the tentative capital Federal rate
by 0.06 percent. The tentative FY 2007 outlier adjustment factor has
the effect of increasing the tentative capital Federal rate by 0.56
percent compared to the average FY 2006 capital Federal rate. The FY
2007 exceptions payment adjustment factor remains unchanged from the FY
2006 exceptions payment adjustment factor, and therefore, has a 0.0
percent net effect on the tentative FY 2007 capital Federal rate. The
combined effect of all the changes is to tentatively increase the
capital Federal rate by 1.6 percent compared to the average FY 2006
capital Federal rate.

Comparison of Factors and Adjustments: FY 2006 Capital Federal Rate and FY 2007 Capital Federal Rate
----------------------------------------------------------------------------------------------------------------
FY 2006 FY 2007 Change Percent change
----------------------------------------------------------------------------------------------------------------
Update Factor \1\............................... 1.0080 1.0110 1.0110 1.10
GAF/DRG Adjustment Factor \1\................... 1.0008 \3\ 0.9994 0.9994 -0.06
Outlier Adjustment Factor \2\................... 0.9515 \3\ 0.9568 1.0056 0.56
Exceptions Adjustment Factor \2\................ 0.9997 0.9997 0.0000 0.00
Capital Federal Rate............................ $420.65 \3\ $427.38 1.0160 1.60
----------------------------------------------------------------------------------------------------------------
\1\ The update factor and the GAF/DRG budget neutrality factors are built permanently into the capital rates.
Thus, for example, the incremental change from FY 2006 to FY 2007 resulting from the application of the
tentative 0.9994 GAF/DRG budget neutrality factor for FY 2007 is 0.9994.
\2\ The outlier reduction factor and the exceptions adjustment factor are not built permanently into the capital
rates; that is, these factors are not applied cumulatively in determining the capital rates. Thus, for
example, the net change resulting from the application of the tentative FY 2007 outlier adjustment factor
would be 0.9568/0.9515, or 1.0056.
\3\ Tentative factors for FY 2007, as discussed above in section III. of this Addendum.

We are also providing a chart that shows how the tentative final FY
2007 capital Federal rate differs from the proposed FY 2007 capital
Federal rate presented in the FY 2007 IPPS proposed rule (71 FR 24158-
24159).

Comparison of Factors and Adjustments: Proposed FY 2007 Capital Federal Rate and Tentative Final FY 2007 Capital
Federal Rate
----------------------------------------------------------------------------------------------------------------
Proposed FY Percent
2007 Final FY 2007 Change change
----------------------------------------------------------------------------------------------------------------
Update factor................................... 1.0080 1.0110 1.0030 0.30
GAF/DRG Adjustment Factor....................... 1.0012 *0.9994 0.9982 -0.18
Outlier Adjustment Factor....................... 0.9513 *0.9568 1.0058 0.58
Exceptions Adjustment Factor.................... 0.9997 0.9997 0.0000 0.00
Capital Federal Rate............................ $424.42 *$427.38 1.0070 0.70
----------------------------------------------------------------------------------------------------------------
* Tentative factors for FY 2007, as discussed above in section III. of this Addendum.

6. Special Capital Rate for Puerto Rico Hospitals
Section 412.374 provides for the use of a blended payment system
for payments to Puerto Rico hospitals under the PPS for acute care
hospital inpatient capital-related costs. Accordingly, under the
capital PPS, we compute a separate payment rate specific to Puerto Rico
hospitals using the same methodology used to compute the national
Federal rate for capital-related costs. Under the broad authority of
section 1886(g) of the Act, as discussed in section VI. of the preamble
of this final rule, beginning with discharges occurring on or after
October 1, 2004, capital payments to hospitals in Puerto Rico are based
on a blend of 25 percent of the Puerto Rico capital rate and 75 percent
of the capital Federal rate. The Puerto Rico capital rate is derived
from the costs of Puerto Rico hospitals only, while the capital Federal
rate is derived from the costs of all acute care hospitals
participating in the IPPS (including Puerto Rico).
To adjust hospitals' capital payments for geographic variations in
capital costs, we apply a GAF to both portions of the blended capital
rate. The GAF is calculated using the operating IPPS wage index and
varies, depending on the labor market area or rural area in which the
hospital is located. We use the Puerto Rico wage index to determine the
GAF for the Puerto Rico part of the capital-blended rate and the
national wage index to determine the GAF for the national part of the
blended capital rate.
Because we implemented a separate GAF for Puerto Rico in FY 1998,
we also apply separate budget neutrality adjustments for the national
GAF and for the Puerto Rico GAF. However, we apply the same budget
neutrality factor for DRG reclassifications and recalibration
nationally and for Puerto Rico. As we stated above in section III.A.4.
of this Addendum, for Puerto Rico, the tentative GAF budget neutrality
factor is 1.0021, while the DRG adjustment is 0.9992, for a

[[Page 48163]]

combined tentative cumulative adjustment of 0.9972.
In computing the payment for a particular Puerto Rico hospital, the
Puerto Rico portion of the capital rate (25 percent) is multiplied by
the Puerto Rico-specific GAF for the labor market area in which the
hospital is located, and the national portion of the capital rate (75
percent) is multiplied by the national GAF for the labor market area in
which the hospital is located (which is computed from national data for
all hospitals in the United States and Puerto Rico). In FY 1998, we
implemented a 17.78 percent reduction to the Puerto Rico capital rate
as a result of Pub. L. 105-33. In FY 2003, a small part of that
reduction was restored.
For FY 2006, before application of the GAF, the special capital
rate for Puerto Rico hospitals was $201.93 for discharges occurring on
or after October 1, 2005 through September 30, 2006. With the changes
we are making to the factors used to determine the capital rate, the
tentative FY 2007 special capital rate for Puerto Rico is $203.13.

B. Calculation of the Inpatient Capital-Related Prospective Payments
for FY 2007

Because the 10-year capital PPS transition period ended in FY 2001,
all hospitals (except ``new'' hospitals under Sec. 412.324(b) and
under Sec. 412.304(c)(2)) are paid based on 100 percent of the capital
Federal rate in FY 2006. The applicable capital Federal rate was
determined by making adjustments as follows:
For outliers, by dividing the capital standard Federal
rate by the outlier reduction factor for that fiscal year; and
For the payment adjustments applicable to the hospital, by
multiplying the hospital's GAF, disproportionate share adjustment
factor, and IME adjustment factor, when appropriate.
For purposes of calculating payments for each discharge during FY
2007, the capital standard Federal rate is adjusted as follows:
(Standard Federal Rate) x (DRG weight) x (GAF) x (Large Urban Add-on,
if applicable) x (COLA for hospitals located in Alaska and Hawaii) x (1
+ Disproportionate Share Adjustment Factor + IME Adjustment Factor, if
applicable). The result is the adjusted capital Federal rate.
Hospitals also may receive outlier payments for those cases that
qualify under the thresholds established for each fiscal year. Section
412.312(c) provides for a single set of thresholds to identify outlier
cases for both inpatient operating and inpatient capital-related
payments. The tentative outlier thresholds for FY 2007 are in section
II.A.4.c. of this Addendum. For FY 2007, a case qualifies as a cost
outlier if the cost for the case plus the IME and DSH payments is
greater than the prospective payment rate for the DRG plus the
tentative fixed-loss amount of $24,475.
An eligible hospital may also qualify for a special exceptions
payment under Sec. 412.348(g) for up through the 10th year beyond the
end of the capital transition period if it meets: (1) A project need
requirement described at Sec. 412.348(g)(2), which in the case of
certain urban hospitals includes an excess capacity test as described
at Sec. 412.348(g)(4); and (2) a project size requirement as described
at Sec. 412.348(g)(5). Eligible hospitals include SCHs, urban
hospitals with at least 100 beds that have a DSH patient percentage of
at least 20.2 percent or qualify for DSH payments under Sec.
412.106(c)(2), and hospitals that have a combined Medicare and Medicaid
inpatient utilization of at least 70 percent. Under Sec.
412.348(g)(8), the amount of a special exceptions payment is determined
by comparing the cumulative payments made to the hospital under the
capital PPS to the cumulative minimum payment level. This amount is
offset by: (1) Any amount by which a hospital's cumulative capital
payments exceed its cumulative minimum payment levels applicable under
the regular exceptions process for cost reporting periods beginning
during which the hospital has been subject to the capital PPS; and (2)
any amount by which a hospital's current year operating and capital
payments (excluding 75 percent of operating DSH payments) exceed its
operating and capital costs. Under Sec. 412.348(g)(6), the minimum
payment level is 70 percent for all eligible hospitals.
During the transition period, new hospitals (as defined under Sec.
412.300) were exempt from the capital PPS for their first 2 years of
operation and were paid 85 percent of their reasonable costs during
that period. Effective with the third year of operation through the
remainder of the transition period, under Sec. 412.324(b), we paid the
hospitals under the appropriate transition methodology (if the hold-
harmless methodology were applicable, the hold-harmless payment for
assets in use during the base period would extend for 8 years, even if
the hold-harmless payments extend beyond the normal transition period).
Under Sec. 412.304(c)(2), for cost reporting periods beginning on
or after October 1, 2002, we pay a new hospital 85 percent of its
reasonable costs during the first 2 years of operation unless it elects
to receive payment based on 100 percent of the capital Federal rate.
Effective with the third year of operation, we pay the hospital based
on 100 percent of the capital Federal rate (that is, the same
methodology used to pay all other hospitals subject to the capital
PPS).

C. Capital Input Price Index

1. Background
Like the operating input price index, the capital input price index
(CIPI) is a fixed-weight price index that measures the price changes
associated with capital costs during a given year. The CIPI differs
from the operating input price index in one important aspect--the CIPI
reflects the vintage nature of capital, which is the acquisition and
use of capital over time. Capital expenses in any given year are
determined by the stock of capital in that year (that is, capital that
remains on hand from all current and prior capital acquisitions). An
index measuring capital price changes needs to reflect this vintage
nature of capital. Therefore, the CIPI was developed to capture the
vintage nature of capital by using a weighted-average of past capital
purchase prices up to and including the current year.
We periodically update the base year for the operating and capital
input prices to reflect the changing composition of inputs for
operating and capital expenses. The CIPI was last rebased to FY 2002 in
the FY 2006 IPPS final rule (70 FR 47387).
2. Forecast of the CIPI for FY 2007
Based on the latest forecast by Global Insight, Inc. (second
quarter of 2006), we are forecasting the CIPI to increase 1.1 percent
in FY 2007. This reflects a projected 1.7 percent increase in vintage-
weighted depreciation prices (building and fixed equipment, and movable
equipment) and a 3.1 percent increase in other capital expense prices
in FY 2007, partially offset by a 2.1 percent decline in vintage-
weighted interest expenses in FY 2007. The weighted average of these
three factors produces the 1.1 percent increase for the CIPI as a whole
in FY 2007.
The CIPI forecast of 1.1 percent is higher than the CIPI forecast
of 0.8 percent that appeared in the proposed rule. This is mainly due
to a change in the forecast of vintage-weighted depreciation prices
from a 1.4 percent to a 1.7 percent increase and a change in vintage-
weighted interest expenses from a 2.3 to a 2.1 percent decline. The
change in the forecast for depreciation

[[Page 48164]]

prices reflects the incorporation of newly available source data for
fixed asset prices into the market basket, while the change in the
forecast for interest expenses reflects the incorporation of recent
increases in interest rates.

IV. Payment Rates for Excluded Hospitals and Hospital Units: Rate-of-
Increase Percentages

A. Payments to Existing Excluded Hospitals and Units

As discussed in section VI. of the preamble of this final rule, the
inpatient operating costs of children's hospitals and cancer hospitals
that are excluded from the IPPS are paid on the basis of reasonable
cost subject to the rate-of-increase ceiling established under the
authority of sections 1886(b)(3)(A)(i) and (ii) of the Act and Sec.
413.40 of the regulations. The ceiling is based on a target amount per
discharge under TEFRA. In addition, in accordance with Sec. 403.752(a)
of the regulations, RNHCIs also are paid under Sec. 413.40 which uses
section 1886(b)(3)(B)(ii) of the Act to update the percentage increase
in the rate of increase limits. The most recent projected forecast of
the market basket percentage increase for FY 2007 for children's
hospitals, cancer hospitals, and RNHCIs using the IPPS market basket
(70 FR 47396 through 47405) is 3.4 percent (the same as we proposed).
LTCHs, rehabilitation hospitals and units, and psychiatric
hospitals and units, historically, were excluded from the IPPS and
subject to the rate-of-increase limits under Sec. 413.40, as well.
However, prospective payment systems have been developed for each of
the three types of hospitals, and each kind of hospital is currently
paid under its own PPS, either at 100 percent of the Federal rate or
according to a transition period methodology, if applicable. (For more
detailed discussion of these payment methodologies, see 69 FR 49190; 69
FR 66922; 68 FR 45674; and 67 FR 55954.)
For cost reporting periods beginning on or after October 1, 2002,
to the extent a LTCH or a psychiatric hospital or unit has all or a
portion of its payment determined under reasonable cost principles, the
target amounts for the reasonable cost-based portion of the blended
payment are determined in accordance with sections 1886(b)(3)(A)(i) and
1886(b)(3)(B)(ii) of the Act and the regulations at Sec.
413.40(c)(4)(ii). Section 413.40(c)(4)(ii) states, ``Subject to the
provisions of [Sec. 413.40], paragraph (c)(4)(iii) of this section,
for subsequent cost reporting periods, the target amount equals the
hospital's target amount for the previous cost reporting period
increased by the update factor for the subject cost reporting period,
unless the provisions of [Sec. 413.40] paragraph (c)(5)(ii) of this
section apply.'' Thus, because Sec. 413.40(c)(4)(ii) indicates that
the provisions of that paragraph are subject to the provisions of Sec.
413.40(c)(4)(iii), which are applicable only for cost reporting periods
beginning on or after October 1, 1997 through September 30, 2002, the
target amount for FY 2003 is determined by updating the target amount
for FY 2002 by the applicable update factor. For example, if a provider
was paid the cap amount for FY 2002 (Sec. 413.40(c)(4)(iii)), the
target amount for FY 2003 would be the amount paid in FY 2002, updated
to FY 2003 (that is, the target amount from the previous year increased
by the applicable update factor).
Effective for cost reporting periods beginning on or after October
1, 2002, IRFs are paid 100 percent of the adjusted Federal prospective
payment rate under the IRP PPS.
Effective for cost reporting periods beginning on or after October
1, 2002, LTCHs also are no longer paid on a reasonable cost basis, but
are paid under a LTCH DRG-based PPS. In implementing the LTCH PPS, an
existing LTCH (that is, not defined as new under Sec. 412.23(e)(4))
could have elected to be paid based on 100 percent of the standard
Federal prospective payment rate during the transition period. However,
we also established a 5-year transition period from reasonable cost-
based payments (subject to the TEFRA limit) to fully Federal
prospective payment amounts during which an existing LTCH could receive
a PPS-blended payment consisting of two payment components--one based
on reasonable cost under the TEFRA payment system, and the other based
on the standard Federal prospective payment rate.
Effective for cost reporting periods that will begin on or after
October 1, 2006, the LTCHs that receive payment based on a blended
payment amount will no longer receive a portion of their payment that
is based, in part, on reasonable cost subject to the rate-of-increase
ceiling under Sec. 413.40. This is because, in accordance with Sec.
412.533, LTCHs are paid 100 percent of the adjusted Federal prospective
payment amount and zero percent of the amount calculated under
reasonable cost principles for cost reporting periods beginning on or
after October 1, 2006.
As part of the PPS for existing IPFs, we have established a 3-year
transition period during which existing IPFs will be paid based on a
blend of reasonable cost-based payment (subject to the TEFRA limit) and
the prospective per diem payment rate. IPFs that are paid under a
blended methodology will have the reasonable cost-based portion of
their payment subject to a hospital target amount. The most recent
projected forecast of the market basket percentage increase for FY 2007
for the reasonable cost-based portion of an IPF's payment using the
excluded hospital market basket (70 FR 47396 through 47405) is 3.4
percent. For cost reporting periods beginning on or after January 1,
2008, IPFs will be paid 100 percent of the Federal prospective per diem
amount.
The market basket percentage increases for FY 2007 are made by CMS'
Office of the Actuary and reflect the average change in the price of
goods and services purchased by hospitals to furnish inpatient hospital
care. They are based on the best available data. As discussed in
section III.L. of the preamble of this FY 2006 IPPS final rule, we use
the IPPS market basket for children's hospitals, cancer hospitals, and
RNHCIs, and the excluded hospital market basket for LTCHs, and IPFs for
the reasonable cost portion of its payment to the extent a portion of
its PPS payment is based on reasonable costs. We did not propose any
changes to our method of calculating the hospital market basket for
IPPS or for excluded hospitals for FY 2007. Consistent with our current
methodology of calculating the hospital market basket for IPPS and
excluded hospitals, we use updated data for our final rule to the
extent it is available. As we indicated above, based on updated data,
the projected IPPS market basket increase is 3.4 percent (the same as
we proposed) and the projected excluded hospital market basket increase
is 3.4 percent (as opposed to 3.6 percent in the proposed rule) for FY
2007.

B. New Excluded Hospitals and Units

Section 1886(b)(7) of the Act established a payment methodology for
new (cost reporting periods beginning on or after October 1, 1997)
rehabilitation hospitals and units, psychiatric hospitals and units,
and LTCHs. For the first two 12-month cost reporting periods, payment
was based on the lower of the hospital's net inpatient operating costs
or 110 percent of the national median of target amounts for the
particular class of hospital for FY 1996, updated to the applicable
cost reporting period, and adjusted for differences in area wage
levels. Consequently, beginning with the FY 1998 IPPS final rule, we
published

[[Page 48165]]

annually in the Federal Register, the updated 110 percent median of the
wage-neutral national target amounts, divided into the labor and
nonlabor-related share, for each of the three classes of providers
affected by the payment limitation. As explained in the FY 2006 IPPS
final rule (70 FR 47466 through 47467), the charts containing the
updated 110 percent median payment amount information are no longer
needed and are discontinued.

V. Payment for Blood Clotting Factor Administered to Inpatient With
Hemophilia

As discussed in section VIII. of the preamble to this final rule,
in the FY 2006 IPPS final rule (70 FR 47473), we amended our
regulations at Sec. Sec. 412.2(f)(8) and 412.115(b) to state that, for
discharges occurring on or after October 1, 2005, we make payment for
blood clotting factor administered to hospital inpatients using the
Medicare Part B payment amounts for blood clotting factor as determined
under Subpart K of 48 CFR Part 414 and for the furnished fee as
determined under Sec. 410.63.
In accordance with Sec. 410.63(c)(2) and our November 21, 2005
regulations (70 FR 70225), the furnishing fee for blood clotting factor
for CY 2006 was determined to be $0.146 per individual unit (I.U.).
Although the furnishing fee payment rate is calculated at 3 digits, the
actual amount paid to providers and suppliers is rounded to 2 digits.
In section VIII of the preamble to this final rule, we are providing
that fiscal intermediaries continue to make payment amounts for blood
clotting factor administered to hemophilia inpatients using the
Medicare Part B payment amounts determined under Subpart K of 42 CFR
Part 414 and that payment amounts for the furnishing fee for the blood
clotting factor be calculated at 3 digits, currently at $0.146 per I.U.
of blood clotting factor.
The fiscal intermediaries continue to use the Medicare Part B Drug
Pricing File to make payments for blood clotting factors. The
furnishing fee is included in the ASP price per unit sent with the
Medicare Part B Drug Pricing File that is updated quarterly. By using
the Medicare Part B Drug Pricing File, Medicare will be making
consistent payments for blood clotting factor provided to inpatients
and outpatients. For further updates on pricing, we refer reader to the
Medicare Part B drug pricing regulations.

VI. Tables

This section includes a majority of the tables referred to
throughout the preamble to this final rule and in this Addendum.
The following tables, which contain data relating to the FY 2007
wage indices and the hospital reclassifications and payment amounts for
operating and capital-related costs that are affected by the new
occupational mix survey data discussed in section III.C. of this final
rule, will be published on the CMS Web site and in a subsequent Federal
Register notice between August 1 and October 1, 2006.

Table 2--Hospital Case-Mix Indexes for Discharges Occurring in
Federal Fiscal Year 2005; Hospital Wage Indexes for Federal Fiscal
Year 2007; Hospital Average Hourly Wage for Federal Fiscal Years
2005 (2001 Wage Data), 2006 (2002 Wage Data), and 2007 (2003 Wage
Data); Wage Indexes and 3-Year Average of Hospital Average Hourly
Wages
Table 3A--FY 2007 and 3-Year Average Hourly Wage for Urban Areas by
CBSA
Table 3B--FY 2007 and 3-Year Average Hourly Wage for Rural Areas by
CBSA
Table 4A-1--Wage Index and Capital Geographic Adjustment Factor
(GAF) for Urban Areas by CBSA--FY 2007
Table 4A-2--Wage Index and Capital Geographic Adjustment Factor
(GAF) for Certain Urban Areas by CBSA for the Period April 1 through
September 30, 2007
Table 4B--Wage Index and Capital Geographic Adjustment Factor (GAF)
for Rural Areas by CBSA--FY 2007
Table 4C-1--Wage Index and Capital Geographic Adjustment Factor
(GAF) for Hospitals That Are Reclassified by CBSA--FY 2007
Table 4C-2--Wage Index and Capital Geographic Adjustment Factor
(GAF) for Certain Hospitals That Are Reclassified by CBSA for the
Period April 1 through September 30, 2007
Table 4F--Puerto Rico Wage Index and Capital Geographic Adjustment
Factor (GAF) by CBSA--FY 2007

The following tables are included in this final rule as tentative
tables and do not reflect decisions that are yet to be made by CMS
pending the final calculation of the occupational mix adjusted wage
index. Additional information appears with each table. Revised tables
reflecting CMS' decisions on behalf of hospitals using occupational mix
adjusted wage indices will be published on the CMS Web site, as well as
in a subsequent Federal Register notice between August 1 and October 1,
2006.

Table 1A--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor (69.7 Percent Labor Share/30.3 Percent Nonlabor Share if
Wage Index Is Greater Than 1)
Table 1B--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share if Wage
Index Is Less Than or Equal To 1)
Table 1C--Adjusted Operating Standardized Amounts for Puerto Rico,
Labor/Nonlabor
Table 1D--Capital Standard Federal Payment Rate
Table 4J--Out-Migration Adjustment--FY 2007
Table 5--List of Diagnosis-Related Groups (DRGs), Relative Weighting
Factors, and Geometric and Arithmetic Mean Length of Stay (LOS)
Table 9A--Hospital Reclassifications and Redesignations by
Individual Hospitals and CBSA for FY 2007
Table 9B--Hospital Reclassifications and Redesignations by
Individual Hospital Under Section 508 of Pub. L. 108-173 for FY 2007
Table 9C--Hospitals Redesignated as Rural under Section
1886(d)(8)(E) of the Act for FY 2007
Table 10--Tentative Geometric Mean Plus the Lesser of .75 of the
National Adjusted Operating Standardized Payment Amount (Increased
to Reflect the Difference Between Costs and Charges) or .75 of One
Standard Deviation of Mean Charges by Diagnosis-Related Group
(DRG)--July 2006

The following tables are final and not subject to revision based on
the final calculation of the occupational mix adjusted wage index.

Table 6A--New Diagnosis Codes
Table 6B--New Procedure Codes
Table 6C--Invalid Diagnosis Codes
Table 6D--Invalid Procedure Codes
Table 6E--Revised Diagnosis Code Titles
Table 6F--Revised Procedure Code Titles
Table 6G--Additions to the CC Exclusions List
Table 6H--Deletions from the CC Exclusions List
Table 7A--Medicare Prospective Payment System Selected Percentile
Lengths of Stay: FY 2005 MedPAR Update March 2006 GROUPER V23.0
Table 7B--Medicare Prospective Payment System Selected Percentile
Lengths of Stay: FY 2005 MedPAR Update March 2006 GROUPER V24.0
Table 8A--Statewide Average Operating Cost-to-Charge Ratios--July
2006
Table 8B--Statewide Average Capital Cost-to-Charge Ratios--July 2006
Table 8C--Statewide Average Total Cost-to-Charge Ratios for LTCHs--
July 2006
Table 11--FY 2007 LTC-DRGs, Relative Weights, Geometric Average
Length of Stay, and 5/6ths of the Geometric Average Length of Stay

[[Page 48166]]

Table 1A.--National Adjusted Operating Standardized Amounts, 69.7
Percent Labor Share/30.3 Percent Nonlabor Share if Wage Index Greater
Than 1
------------------------------------------------------------------------

------------------------------------------------------------------------
Full Update (3.4 percent).............. *Note: Subsequent to this final
rule, we will publish the
final standardized amounts
based on the final
occupational mix adjustment.
Tentative Labor Related Share:
$3,400.13*
Tentative Nonlabor Related Share:
$1,478.10*
Reduced Update (1.4 percent)........... *Note: Subsequent to this final
rule, we will publish the
final standardized amounts
based on the final
occupational mix adjustment.
Tentative Labor Related Share:
$3,334.36*
Tentative Nonlabor Related Share:
$1,449.51*
------------------------------------------------------------------------

Table 1B.--National Adjusted Operating Standardized Amounts, 62 Percent
Labor Share/38 Percent Nonlabor Share if Wage Index Less Than or Equal
to 1
------------------------------------------------------------------------

------------------------------------------------------------------------
Full Update (3.4 percent).............. *Note: Subsequent to this final
rule, we will publish the
final standardized amounts
based on the final
occupational mix adjustment.
Tentative Labor Related Share:
$3,024.51*
Tentative Nonlabor Related Share:
$1,853.72*
Reduced Update (1.4 percent)........... *Note: Subsequent to this final
rule, we will publish the
final standardized amounts
based on the final
occupational mix adjustment.
Tentative Labor Related Share:
$2,966.00*
Tentative Nonlabor Related Share:
$1,817.87*
------------------------------------------------------------------------

Table 1C.--Adjusted Operating Standardized Amounts for Puerto Rico,
Labor/Nonlabor
------------------------------------------------------------------------

------------------------------------------------------------------------
Rates if wage index greater than one *Note: Subsequent to this final
(National). rule, we will publish the
final standardized amounts
based on the final
occupational mix adjustment.
Tentative Labor Related Share:
$3,400.13*
Tentative Nonlabor Related Share:
$1,478.10*
Rates if wage index greater than one *Note: Subsequent to this final
(Puerto Rico). rule, we will publish the
final standardized amounts
based on the final
occupational mix adjustment.
Tentative Labor Related Share:
$1,436.25*
Tentative Nonlabor Related Share:
$880.28*
Rates if wage index less than one *Note: Subsequent to this final
(National). rule, we will publish the
final standardized amounts
based on the final
occupational mix adjustment.
Tentative Labor Related Share:
$3,024.51*
Tentative Nonlabor Related Share:
$1,853.72*
Rates if wage index less than one *Note: Subsequent to this final
(Puerto Rico). rule, we will publish the
final standardized amounts
based on the final
occupational mix adjustment.
Tentative Labor Related Share:
$1,359.80*
Tentative Nonlabor Related Share:
$956.72*
------------------------------------------------------------------------

Table 1D.--Capital Standard Federal Payment Rate
------------------------------------------------------------------------

------------------------------------------------------------------------
National............................... *Note: Subsequent to this final
rule, we will publish the
final standardized amounts
based on the final
occupational mix adjustment.
Tentative Capital Payment Rate:
$427.38*
Puerto Rico............................ *Note: Subsequent to this final
rule, we will publish the
final standardized amounts
based on the final
occupational mix adjustment.
Tentative Capital Payment Rate:
$203.13*
------------------------------------------------------------------------

BILLING CODE 4120-01-P

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Note: The following Table 5 is a tentative table. The final
Table 5 will be published in a subsequent Federal Register notice.

BILLING CODE 4120-01-P

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[[Page 48226]]

[GRAPHIC] [TIFF OMITTED] TR18AU06.074

BILLING CODE 4120-01-C

[[Page 48227]]

[CCs that are added to the list are in this Table 6G--Additions to the
CC Exclusions List. Each of the principal diagnoses is shown with an
asterisk, and the revisions to the CC Exclusions List are provided in
an indented column immediately following the affected principal
diagnosis.]

Table 6G.--Additions to the CC Exclusions List

*0519
0522
*0522
0520
0521
0522
0527
0528
0529
05314
05474
*0527
0522
*0528
0522
*0529
0522
*0530
05314
*05310
05314
*05311
05314
*05312
05314
*05313
05314
*05314
0522
0530
05310
05311
05312
05313
05314
05319
05379
0538
05474
5319
05314
*05379
05314
*0538
05314
*0539
05314
*05472
05314
*05474
0522
0530
05310
05311
05312
05313
05314
05319
05379
0538
0543
0545
05471
05472
05474
05479
0548
*05479
05314
05474
*0548
05314
05474
*0549
05314
05474
*07888
0522
05314
05474
*07889
0522
05314
05474
*07981
0522
05314
05474
*07988
0522
05314
05474
*07989
0522
05314
05474
*07998
0522
05314
05474
*07999
0522
05314
05474
*1398
0522
05314
05474
*28401
2800
2814
2818
28241
28242
28249
28260
28261
28262
28263
28264
28268
28269
2830
28310
28311
28319
2832
2839
2848
2849
2850
2851
*28409
2800
2814
2818
28241
28242
28249
28260
28261
28262
28263
28264
28268
28269
2830
28310
28311
28319
2832
2839
2848
2849
2850
2851
*2841
2800
2814
2818
28241
28242
28249
28260
28261
28262
28263
28264
28268
28269
2830
28310
28311
28319
2832
2839
2848
2849
2850
2851
*2842
2800
2814
2818
28241
28242
28249
28260
28261
28262
28263
28264
28268
28269
2830
28310
28311
28319
2832
2839
2848
2849
2850
2851
*28800
2881
28981
28982
*28801

[[Page 48228]]

2881
28981
28982
*28802
2881
28981
28982
*28803
2881
28981
28982
*28804
2881
28981
28982
*28809
2881
28981
28982
*2884
2881
28981
28982
*28850
2881
28981
28982
*28851
2881
28981
28982
*28859
2881
28981
28982
*28860
2881
28981
28982
*28861
2881
28981
28982
*28862
2881
28981
28982
*28863
2881
28981
28982
*28864
2881
28981
28982
*28865
2881
28981
28982
*28869
2881
28981
28982
*28953
2881
28981
28982
*28983
2800
2814
2818
28241
28242
28249
28260
28261
28262
28263
28264
28268
28269
2830
28310
28311
28319
2832
2839
2848
2849
2850
2851
2860
2861
2862
2863
2864
2865
2866
2867
2869
2870
2871
2872
28730
28731
28732
28733
28739
2874
2875
2878
2879
2881
28981
28982
*32301
0522
05314
05474
34982
*32302
0522
05314
05474
34982
*32341
0522
05314
05474
34982
*32342
0522
05314
05474
34982
*32351
0522
05314
05474
34982
*32352
0522
05314
05474
34982
*32361
0522
05314
05474
34982
*32362
0522
05314
05474
34982
*32363
0522
05314
05474
34982
*32371
0522
05314
05474
34982
*32372
0522
05314
05474
34982
*32381
0522
05314
05474
34982
*32382
0522
05314
05474
34982
*33183
3314
*33371
7817
*33372
7817
*33379
7817
*33385
7817
*3380
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*33811
04082
44024

[[Page 48229]]

78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*33812
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*33818
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*33819
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*33821
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*33822
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*33828
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*33829
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*3383
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552

[[Page 48230]]

78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*3384
04082
44024
78001
78003
7801
78031
78032
78039
7817
7854
78550
78551
78552
78559
7863
78820
78829
7895
7907
7911
7913
79901
79902
7991
7994
*34120
0522
05314
05474
34982
*34121
0522
05314
05474
34982
*34122
0522
05314
05474
34982
*34500
78032
*34501
78032
*34510
78032
*34511
78032
*3452
78032
*3453
78032
*34540
78032
*34541
78032
*34550
78032
*34551
78032
*34560
78032
*34561
78032
*34570
78032
*34571
78032
*34580
78032
*34581
78032
*34590
78032
*34591
78032
*3488
78032
*3489
78032
*34989
78032
*3499
78032
*37960
37700
37701
37702
*37961
37700
37701
37702
*37962
37700
37701
37702
*37963
37700
37701
37702
*5187
5187
9973
*51911
51900
51901
51902
51909
*51919
51900
51901
51902
51909
*52800
5283
*52801
5283
*52802
5283
*52809
5283
*538
5273
5274
53021
53100
53101
53110
53111
53120
53121
53131
53140
53141
53150
53151
53160
53161
53171
53191
53200
53201
53210
53211
53220
53221
53231
53240
53241
53250
53251
53260
53261
53271
53291
53300
53301
53310
53311
53320
53321
53331
53340
53341
53350
53351
53360
53361
53371
53391
53400
53401
53410
53411
53420
53421
53431
53440
53441
53450
53451
53460
53461
53471
53491
5400
5401
5409
55000
55001
55002
55003
55010
55011
55012
55013
55100
55101
55102
55103
5511
55120
55121
55129
5518
5519

[[Page 48231]]

55200
55201
55202
55203
*61681
6140
6143
6145
6150
6163
6164
*61689
6140
6143
6145
6150
6163
6164
*62929
6140
6143
6145
6150
6163
6164
6207
*62981
6140
6143
6145
6150
6163
6164
6207
*62989
6140
6143
6145
6150
6163
6164
6207
*64900
63400
63401
63402
63410
63411
63412
63420
63421
63422
63430
63431
63432
63440
63441
63442
63450
63451
63452
63460
63461
63462
63470
63471
63472
63480
63481
63482
63490
63491
63492
6390
6391
6392
6393
6394
6395
6396
6398
6399
64000
64001
64003
64080
64081
64083
64090
64091
64093
64100
64101
64103
64110
64111
64113
64130
64131
64133
64180
64181
64183
64190
64191
64193
64240
64241
64242
64243
64244
64250
64251
64252
64253
64254
64260
64261
64262
64263
64264
64270
64271
64272
64273
64274
64400
64403
64410
64413
64660
64661
64662
64663
64664
64670
64671
64673
64730
64731
64732
64733
64734
64740
64741
64742
64743
64744
64800
64801
64802
64803
64804
64820
64821
64822
64823
64824
64830
64831
64832
64833
64834
64850
64851
64852
64853
64854
64860
64861
64862
64863
64864
65930
65931
65933
66500
66501
66503
66510
66511
66632
66634
66800
66801
66802
66803
66804
66810
66811
66812
66813
66814
66820
66821
66822
66823
66824
66880
66881
66882
66883
66884
66890
66891
66892
66893
66894
66910
66911
66912
66913
66914
66930
66932
66934
67000
67002
67004

[[Page 48232]]

67120
67121
67122
67123
67124
67130
67131
67133
67140
67142
67144
67300
67301
67302
67303
67304
67310
67311
67312
67313
67314
67320
67321
67322
67323
67324
67330
67331
67332
67333
67334
67380
67381
67382
67383
67384
67400
67401
67402
67403
67404
67410
67412
67420
67422
67424
67450
67451
67452
67453
67454
67510
67511
67512
*64901
63400
63401
63402
63410
63411
63412
63420
63421
63422
63430
63431
63432
63440
63441
63442
63450
63451
63452
63460
63461
63462
63470
63471
63472
63480
63481
63482
63490
63491
63492
6390
6391
6392
6393
6394
6395
6396
6398
6399
64000
64001
64003
64080
64081
64083
64090
64091
64093
64100
64101
64103
64110
64111
64113
64130
64131
64133
64180
64181
64183
64190
64191
64193
64240
64241
64242
64243
64244
64250
64251
64252
64253
64254
64260
64261
64262
64263
64264
64270
64271
64272
64273
64274
64400
64403
64410
64413
64660
64661
64662
64663
64664
64670
64671
64673
64730
64731
64732
64733
64734
64740
64741
64742
64743
64744
64800
64801
64802
64803
64804
64820
64821
64822
64823
64824
64830
64831
64832
64833
64834
64850
64851
64852
64853
64854
64860
64861
64862
64863
64864
65930
65931
65933
66500
66501
66503
66510
66511
66632
66634
66800
66801
66802
66803
66804
66810
66811
66812
66813
66814
66820
66821
66822
66823
66824
66880
66881
66882
66883
66884
66890
66891
66892
66893

[[Page 48233]]

66894
66910
66911
66912
66913
66914
66930
66932
66934
67000
67002
67004
67120
67121
67122
67123
67124
67130
67131
67133
67140
67142
67144
67300
67301
67302
67303
67304
67310
67311
67312
67313
67314
67320
67321
67322
67323
67324
67330
67331
67332
67333
67334
67380
67381
67382
67383
67384
67400
67401
67402
67403
67404
67410
67412
67420
67422
67424
67450
67451
67452
67453
67454
67510
67511
67512
*64902
63400
63401
63402
63410
63411
63412
63420
63421
63422
63430
63431
63432
63440
63441
63442
63450
63451
63452
63460
63461
63462
63470
63471
63472
63480
63481
63482
63490
63491
63492
6390
6391
6392
6393
6394
6395
6396
6398
6399
64000
64001
64003
64080
64081
64083
64090
64091
64093
64100
64101
64103
64110
64111
64113
64130
64131
64133
64180
64181
64183
64190
64191
64193
64240
64241
64242
64243
64244
64250
64251
64252
64253
64254
64260
64261
64262
64263
64264
64270
64271
64272
64273
64274
64400
64403
64410
64413
64660
64661
64662
64663
64664
64670
64671
64673
64730
64731
64732
64733
64734
64740
64741
64742
64743
64744
64800
64801
64802
64803
64804
64820
64821
64822
64823
64824
64830
64831
64832
64833
64834
64850
64851
64852
64853
64854
64860
64861
64862
64863
64864
65930
65931
65933
66500
66501
66503
66510
66511
66632
66634
66800
66801
66802
66803
66804
66810
66811
66812
66813
66814
66820
66821

[[Page 48234]]

66822
66823
66824
66880
66881
66882
66883
66884
66890
66891
66892
66893
66894
66910
66911
66912
66913
66914
66930
66932
66934
67000
67002
67004
67120
67121
67122
67123
67124
67130
67131
67133
67140
67142
67144
67300
67301
67302
67303
67304
67310
67311
67312
67313
67314
67320
67321
67322
67323
67324
67330
67331
67332
67333
67334
67380
67381
67382
67383
67384
67400
67401
67402
67403
67404
67410
67412
67420
67422
67424
67450
67451
67452
67453
67454
67510
67511
67512
*64903
63400
63401
63402
63410
63411
63412
63420
63421
63422
63430
63431
63432
63440
63441
63442
63450
63451
63452
63460
63461
63462
63470
63471
63472
63480
63481
63482
63490
63491
63492
6390
6391
6392
6393
6394
6395
6396
6398
6399
64000
64001
64003
64080
64081
64083
64090
64091
64093
64100
64101
64103
64110
64111
64113
64130
64131
64133
64180
64181
64183
64190
64191
64193
64240
64241
64242
64243
64244
64250
64251
64252
64253
64254
64260
64261
64262
64263
64264
64270
64271
64272
64273
64274
64400
64403
64410
64413
64660
64661
64662
64663
64664
64670
64671
64673
64730
64731
64732
64733
64734
64740
64741
64742
64743
64744
64800
64801
64802
64803
64804
64820
64821
64822
64823
64824
64830
64831
64832
64833
64834
64850
64851
64852
64853
64854
64860
64861
64862
64863
64864
65930
65931
65933
66500
66501
66503
66510
66511
66632
66634

[[Page 48235]]

66800
66801
66802
66803
66804
66810
66811
66812
66813
66814
66820
66821
66822
66823
66824
66880
66881
66882
66883
66884
66890
66891
66892
66893
66894
66910
66911
66912
66913
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[[Page 48236]]

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[[Page 48237]]

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[[Page 48238]]

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[[Page 48239]]

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[[Page 48240]]

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[[Page 48242]]

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[[Page 48243]]

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[[Page 48244]]

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[[Page 48247]]

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[[Page 48248]]

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[[Page 48249]]

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[[Page 48260]]

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[[Page 48261]]

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[[Page 48262]]

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[[Page 48266]]

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[[Page 48267]]

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[[Page 48271]]

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[[Page 48272]]

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[[Page 48273]]

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[[Page 48274]]

86812
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*95892
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[[Page 48275]]

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[[Page 48276]]

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[[Page 48277]]

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[[Page 48278]]

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*95893
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[[Page 48279]]

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[[Page 48280]]

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83908
83910
83911
83912
83913

[[Page 48281]]

83914
83915
83916
83917
83918
8500
85011
85012
8502
8503
8504
8505
8509
85100
85101
85102
85103
85104
85105
85106
85109
85110
85111
85112
85113
85114
85115
85116
85119
85120
85121
85122
85123
85124
85125
85126
85129
85130
85131
85132
85133
85134
85135
85136
85139
85140
85141
85142
85143
85144
85145
85146
85149
85150
85151
85152
85153
85154
85155
85156
85159
85160
85161
85162
85163
85164
85165
85166
85169
85170
85171
85172
85173
85174
85175
85176
85179
85180
85181
85182
85183
85184
85185
85186
85189
85190
85191
85192
85193
85194
85195
85196
85199
85200
85201
85202
85203
85204
85205
85206
85209
85210
85211
85212
85213
85214
85215
85216
85219
85220
85221
85222
85223
85224
85225
85226
85229
85230
85231
85232
85233
85234
85235
85236
85239
85240
85241
85242
85243
85244
85245
85246
85249
85250
85251
85252
85253
85254
85255
85256
85259
85300
85301
85302
85303
85304
85305
85306
85309
85310
85311
85312
85313
85314
85315
85316
85319
85400
85401
85402
85403
85404
85405
85406
85409
85410
85411
85412
85413
85414
85415
85416
85419
8600
8601
8602
8603
8604
8605
86101
86102
86103
86110
86111
86112
86113
86122
86130
86131
86132
8621
86221
86222
86229
86231
86232
86239
8629
8631
86330
86331
86339
86350
86351
86352
86353
86354
86355
86356
86359
86390
86391
86392
86393
86394
86395
86399
86400
86401

[[Page 48282]]

86402
86403
86404
86405
86409
86410
86411
86412
86413
86414
86415
86419
86500
86501
86502
86503
86504
86509
86510
86511
86512
86513
86514
86519
86600
86601
86602
86603
86610
86611
86612
86613
8670
8671
8672
8673
8674
8675
8676
8677
8678
8679
86800
86801
86802
86803
86804
86809
86810
86811
86812
86813
86814
86819
8690
8691
8703
8704
8708
8709
8710
8711
8712
8713
8714
8719
87272
87273
87274
87333
8739
87400
87401
87402
87410
87411
87412
8743
8745
8750
8751
8870
8871
8872
8873
8874
8875
8876
8877
8960
8961
8962
8963
8970
8971
8972
8973
8974
8975
8976
8977
90000
90001
90002
90003
9001
90081
90082
90089
9009
9010
9011
9012
9013
90141
90142
90183
9020
90210
90211
90219
90220
90222
90223
90224
90225
90226
90227
90229
90231
90232
90233
90234
90239
90240
90241
90242
90249
90250
90251
90252
90253
90254
90259
90287
9251
9252
9290
95200
95201
95202
95203
95204
95205
95206
95207
95208
95209
95210
95211
95212
95213
95214
95215
95216
95217
95218
95219
9522
9523
9524
9528
9529
9530
9531
9532
9533
9534
9535
9538
9539
9580
9581
9582
9583
9584
9585
9587
*95899
80000
80001
80002
80003
80004
80005
80006
80009
80010
80011
80012
80013
80014
80015
80016
80019
80020
80021
80022
80023
80024
80025
80026
80029
80030
80031
80032
80033
80034
80035

[[Page 48283]]

80036
80039
80040
80041
80042
80043
80044
80045
80046
80049
80050
80051
80052
80053
80054
80055
80056
80059
80060
80061
80062
80063
80064
80065
80066
80069
80070
80071
80072
80073
80074
80075
80076
80079
80080
80081
80082
80083
80084
80085
80086
80089
80090
80091
80092
80093
80094
80095
80096
80099
80100
80101
80102
80103
80104
80105
80106
80109
80110
80111
80112
80113
80114
80115
80116
80119
80120
80121
80122
80123
80124
80125
80126
80129
80130
80131
80132
80133
80134
80135
80136
80139
80140
80141
80142
80143
80144
80145
80146
80149
80150
80151
80152
80153
80154
80155
80156
80159
80160
80161
80162
80163
80164
80165
80166
80169
80170
80171
80172
80173
80174
80175
80176
80179
80180
80181
80182
80183
80184
80185
80186
80189
80190
80191
80192
80193
80194
80195
80196
80199
8021
80220
80221
80222
80223
80224
80225
80226
80227
80228
80229
80230
80231
80232
80233
80234
80235
80236
80237
80238
80239
8024
8025
8026
8027
8028
8029
80300
80301
80302
80303
80304
80305
80306
80309
80310
80311
80312
80313
80314
80315
80316
80319
80320
80321
80322
80323
80324
80325
80326
80329
80330
80331
80332
80333
80334
80335
80336
80339
80340
80341
80342
80343
80344
80345
80346
80349
80350
80351
80352
80353
80354
80355
80356
80359
80360
80361
80362
80363
80364
80365
80366
80369
80370
80371
80372
80373
80374
80375

[[Page 48284]]

80376
80379
80380
80381
80382
80383
80384
80385
80386
80389
80390
80391
80392
80393
80394
80395
80396
80399
80400
80401
80402
80403
80404
80405
80406
80409
80410
80411
80412
80413
80414
80415
80416
80419
80420
80421
80422
80423
80424
80425
80426
80429
80430
80431
80432
80433
80434
80435
80436
80439
80440
80441
80442
80443
80444
80445
80446
80449
80450
80451
80452
80453
80454
80455
80456
80459
80460
80461
80462
80463
80464
80465
80466
80469
80470
80471
80472
80473
80474
80475
80476
80479
80480
80481
80482
80483
80484
80485
80486
80489
80490
80491
80492
80493
80494
80495
80496
80499
80500
80501
80502
80503
80504
80505
80506
80507
80508
80510
80511
80512
80513
80514
80515
80516
80517
80518
8052
8053
8054
8055
8056
8057
8058
8059
80600
80601
80602
80603
80604
80605
80606
80607
80608
80609
80610
80611
80612
80613
80614
80615
80616
80617
80618
80619
80620
80621
80622
80623
80624
80625
80626
80627
80628
80629
80630
80631
80632
80633
80634
80635
80636
80637
80638
80639
8064
8065
80660
80661
80662
80669
80670
80671
80672
80679
8068
8069
80704
80705
80706
80707
80708
80709
80710
80711
80712
80713
80714
80715
80716
80717
80718
80719
8072
8073
8074
8075
8076
8080
8081
8082
8083
80843
80849
80851
80852
80853
80859
8088
8089
82000
82001
82002
82003
82009
82010
82011
82012
82013
82019

[[Page 48285]]

82020
82021
82022
82030
82031
82032
8208
8209
82100
82101
82110
82111
83900
83901
83902
83903
83904
83905
83906
83907
83908
83910
83911
83912
83913
83914
83915
83916
83917
83918
8500
85011
85012
8502
8503
8504
8505
8509
85100
85101
85102
85103
85104
85105
85106
85109
85110
85111
85112
85113
85114
85115
85116
85119
85120
85121
85122
85123
85124
85125
85126
85129
85130
85131
85132
85133
85134
85135
85136
85139
85140
85141
85142
85143
85144
85145
85146
85149
85150
85151
85152
85153
85154
85155
85156
85159
85160
85161
85162
85163
85164
85165
85166
85169
85170
85171
85172
85173
85174
85175
85176
85179
85180
85181
85182
85183
85184
85185
85186
85189
85190
85191
85192
85193
85194
85195
85196
85199
85200
85201
85202
85203
85204
85205
85206
85209
85210
85211
85212
85213
85214
85215
85216
85219
85220
85221
85222
85223
85224
85225
85226
85229
85230
85231
85232
85233
85234
85235
85236
85239
85240
85241
85242
85243
85244
85245
85246
85249
85250
85251
85252
85253
85254
85255
85256
85259
85300
85301
85302
85303
85304
85305
85306
85309
85310
85311
85312
85313
85314
85315
85316
85319
85400
85401
85402
85403
85404
85405
85406
85409
85410
85411
85412
85413
85414
85415
85416
85419
8600
8601
8602
8603
8604
8605
86101
86102
86103
86110
86111
86112
86113
86122
86130
86131
86132
8621
86221
86222
86229

[[Page 48286]]

86231
86232
86239
8629
8631
86330
86331
86339
86350
86351
86352
86353
86354
86355
86356
86359
86390
86391
86392
86393
86394
86395
86399
86400
86401
86402
86403
86404
86405
86409
86410
86411
86412
86413
86414
86415
86419
86500
86501
86502
86503
86504
86509
86510
86511
86512
86513
86514
86519
86600
86601
86602
86603
86610
86611
86612
86613
8670
8671
8672
8673
8674
8675
8676
8677
8678
8679
86800
86801
86802
86803
86804
86809
86810
86811
86812
86813
86814
86819
8690
8691
8703
8704
8708
8709
8710
8711
8712
8713
8714
8719
87272
87273
87274
87333
8739
87400
87401
87402
87410
87411
87412
8743
8745
8750
8751
8870
8871
8872
8873
8874
8875
8876
8877
8960
8961
8962
8963
8970
8971
8972
8973
8974
8975
8976
8977
90000
90001
90002
90003
9001
90081
90082
90089
9009
9010
9011
9012
9013
90141
90142
90183
9020
90210
90211
90219
90220
90222
90223
90224
90225
90226
90227
90229
90231
90232
90233
90234
90239
90240
90241
90242
90249
90250
90251
90252
90253
90254
90259
90287
9251
9252
9290
95200
95201
95202
95203
95204
95205
95206
95207
95208
95209
95210
95211
95212
95213
95214
95215
95216
95217
95218
95219
9522
9523
9524
9528
9529
9530
9531
9532
9533
9534
9535
9538
9539
9580
9581
9582
9583
9584
9585
9587
*9973
5187
*99791
5187
*99799
5187

[[Page 48287]]

*99881
5187
*99883
5187
*99889
5187
*9989
5187

Table 6H.--Deletions From the CC Exclusions List
[CCs that are deleted from the list are in this Table 6H--Deletions to
the CC Exclusions List. Each of the principal diagnoses is shown with an
asterisk, and the revisions to the CC Exclusions List are provided in an
indented column immediately following the affected principal diagnosis.]

*2800
2840
*2801
2840
*2808
2840
*2809
2840
*2810
2840
*2811
2840
*2812
2840
*2813
2840
*2814
2840
*2818
2840
*2819
2840
*2820
2840
*2821
2840
*2822
2840
*2823
2840
*28241
2840
*28242
2840
*28249
2840
*2825
2840
*28260
2840
*28261
2840
*28262
2840
*28263
2840
*28264
2840
*28268
2840
*28269
2840
*2827
2840
*2828
2840
*2829
2840
*2830
2840
*28310
2840
*28311
2840
*28319
2840
*2832
2840
*2839
2840
*2840
2800
2814
2818
28241
28242
28249
28260
28261
28262
28263
28264
28268
28269
2830
28310
28311
28319
2832
2839
2840
2848
2849
2850
2851
*2848
2840
*2849
2840
*2850
2840
*2851
2840
*28521
2840
*28522
2840
*28529
2840
*2858
2840
*2859
2840
*2880
2880
2881
28981
28982
*2881
2880
*2882
2880
*2883
2880
*2888
2880
*2889
2880
*28981
2840
2880
*28982
2840
2880
*28989
2840
2880
*2899
2840
2880
*3230
34982
*3234
34982
*3235
34982
*3236
34982
*3237
34982
*3238
34982
*3337
7817
*5173
2840
*5191
51900
51901
51902
51909
*5280
5283
*6168
6140
6143
6145
6150
6163
6164
*6298
6140
6143
6145
6150
6163
6164
6207
*7758
00841
00842
00843
00844
00845
00846
00847

[[Page 48288]]

00849
7751
7752
7753
7754
7755
7756
7757

Table 7A.--Medicare Prospective Payment System Selected Percentile Lengths of Stay FY 2005 MedPAR Update March 2006 Grouper V23.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number Arithmetic 10th 25th 50th 75th 90th
DRG discharge mean LOS percentile percentile percentile percentile percentile
--------------------------------------------------------------------------------------------------------------------------------------------------------
1............................................................ 24,464 9.6076 2 4 7 12 19
2............................................................ 10,338 4.3927 1 2 3 6 8
3............................................................ 3 11.0000 4 4 8 21 21
6............................................................ 288 3.0833 1 1 2 3 7
7............................................................ 15,034 9.2559 2 4 7 12 19
8............................................................ 3,441 2.7629 1 1 2 3 6
9............................................................ 1,775 6.0248 1 3 4 7 11
10........................................................... 19,639 5.9172 2 3 4 7 11
11........................................................... 3,074 3.5501 1 2 3 5 7
12........................................................... 56,196 5.3631 2 3 4 6 10
13........................................................... 7,529 4.8515 2 3 4 6 8
14........................................................... 278,864 5.3705 2 3 4 7 10
15........................................................... 20,004 4.0156 1 2 3 5 7
16........................................................... 17,310 6.3008 2 3 5 8 12
17........................................................... 2,967 3.0334 1 1 2 4 6
18........................................................... 33,512 5.1525 2 3 4 6 9
19........................................................... 8,422 3.3749 1 2 3 4 6
20........................................................... 6,409 9.8313 3 5 8 12 18
21........................................................... 2,220 6.1752 2 3 5 8 12
22........................................................... 3,169 5.0104 2 2 4 6 10
23........................................................... 10,671 3.8995 1 2 3 5 7
24........................................................... 63,246 4.6433 1 2 3 6 9
25........................................................... 27,218 3.1280 1 2 2 4 6
26........................................................... 25 3.8000 1 1 2 5 9
27........................................................... 5,974 4.7370 1 1 3 6 10
28........................................................... 19,919 5.5701 1 2 4 7 11
29........................................................... 6,517 3.2118 1 1 3 4 6
31........................................................... 5,043 3.9038 1 2 3 5 7
32........................................................... 1,900 2.2716 1 1 2 3 4
34........................................................... 27,478 4.7063 1 2 4 6 9
35........................................................... 7,843 3.0360 1 1 3 4 5
36........................................................... 1,045 1.7962 1 1 1 1 1
37........................................................... 1,219 4.1132 1 1 3 5 8
38........................................................... 50 2.8000 1 1 2 3 6
39........................................................... 328 2.1220 1 1 1 2 3
40........................................................... 1,188 4.2315 1 1 3 4 6
42........................................................... 901 3.0844 1 1 2 3 5
43........................................................... 125 2.9600 1 1 2 4 5
44........................................................... 1,291 4.7506 2 3 4 6 8
45........................................................... 2,771 3.0278 1 2 2 4 6
46........................................................... 3,930 4.1913 1 2 3 5 8
47........................................................... 1,308 3.0145 1 1 2 4 6
49........................................................... 2,416 4.5219 1 2 3 5 9
50........................................................... 2,026 1.8638 1 1 1 2 3
51........................................................... 193 2.6684 1 1 1 3 5
52........................................................... 316 1.6962 1 1 1 2 3
53........................................................... 2,147 4.0051 1 1 2 5 9
55........................................................... 1,370 2.8832 1 1 1 3 6
56........................................................... 451 2.6785 1 1 2 3 5
57........................................................... 888 3.1543 1 1 2 3 7
59........................................................... 126 2.3730 1 1 2 3 5
60........................................................... 3 1.6667 1 1 1 3 3
61........................................................... 222 6.0541 1 1 4 8 13
62........................................................... 4 1.5000 1 1 1 1 3
63........................................................... 2,827 4.5313 1 1 3 6 10
64........................................................... 3,234 6.2004 1 2 4 8 13

[[Page 48289]]

65........................................................... 40,495 2.7634 1 1 2 3 5
66........................................................... 8,197 3.1080 1 1 2 4 6
67........................................................... 379 3.6834 1 2 3 5 8
68........................................................... 18,963 3.8500 1 2 3 5 7
69........................................................... 5,104 2.9414 1 2 2 4 5
70........................................................... 25 2.4000 1 1 2 3 4
71........................................................... 70 4.3429 1 2 3 5 7
72........................................................... 1,326 3.3205 1 2 3 4 6
73........................................................... 9,961 4.2979 1 2 3 5 8
74........................................................... 3 3.3333 3 3 3 4 4
75........................................................... 46,867 9.5747 3 5 7 12 19
76........................................................... 48,182 10.4832 3 5 8 13 20
77........................................................... 2,096 4.4938 1 2 4 6 9
78........................................................... 49,708 6.0925 2 4 5 7 10
79........................................................... 160,452 8.0513 3 4 7 10 15
80........................................................... 7,128 5.2173 2 3 4 6 9
81........................................................... 6 6.1667 2 3 5 8 8
82........................................................... 63,222 6.6658 2 3 5 9 13
83........................................................... 7,154 5.1918 2 3 4 6 10
84........................................................... 1,402 3.1284 1 2 3 4 5
85........................................................... 22,231 6.1082 2 3 5 8 12
86........................................................... 1,714 3.4568 1 2 3 4 7
87........................................................... 96,725 6.3706 2 3 5 8 12
88........................................................... 427,153 4.8563 2 3 4 6 9
89........................................................... 554,440 5.5245 2 3 5 7 10
90........................................................... 43,208 3.7030 1 2 3 5 6
91........................................................... 53 3.4151 1 1 2 4 6
92........................................................... 16,523 5.9402 2 3 5 7 11
93........................................................... 1,436 3.7632 1 2 3 5 7
94........................................................... 13,657 5.9022 2 3 5 8 12
95........................................................... 1,576 3.3839 1 2 3 4 6
96........................................................... 59,742 4.2995 2 2 4 5 7
97........................................................... 26,592 3.3652 1 2 3 4 6
98........................................................... 13 3.0769 2 2 2 4 6
99........................................................... 21,402 3.0982 1 1 2 4 6
100.......................................................... 6,406 2.1071 1 1 2 3 4
101.......................................................... 23,399 4.1820 1 2 3 5 8
102.......................................................... 4,907 2.5345 1 1 2 3 5
103.......................................................... 884 35.1640 8 11 22 46 78
104.......................................................... 20,125 14.6458 6 8 12 18 26
105.......................................................... 32,635 9.9310 4 6 8 11 18
106.......................................................... 3,440 10.9392 5 7 9 13 18
108.......................................................... 8,759 10.7132 4 6 9 13 19
110.......................................................... 57,721 8.0026 1 3 6 10 16
111.......................................................... 10,783 3.1055 1 1 2 4 6
113.......................................................... 34,750 12.5640 4 6 10 15 24
114.......................................................... 7,960 8.3485 2 4 7 11 16
117.......................................................... 5,350 4.2781 1 1 2 5 9
118.......................................................... 7,634 3.0183 1 1 2 4 7
119.......................................................... 963 5.3998 1 1 3 7 13
120.......................................................... 33,561 8.9647 1 3 6 12 19
121.......................................................... 150,085 6.1981 2 3 5 8 11
122.......................................................... 54,555 3.2992 1 1 3 4 6
123.......................................................... 29,576 4.7318 1 1 3 6 11
124.......................................................... 120,562 4.3876 1 2 3 6 9
125.......................................................... 92,475 2.7008 1 1 2 3 5
126.......................................................... 5,424 10.6875 3 6 9 13 19
127.......................................................... 667,522 5.0851 2 3 4 6 9
128.......................................................... 4,213 5.1899 2 3 5 6 9
129.......................................................... 3,527 2.5373 1 1 1 2 5
130.......................................................... 87,554 5.3511 1 3 4 7 10
131.......................................................... 22,885 3.6965 1 2 3 5 6
132.......................................................... 101,433 2.8006 1 1 2 3 5
133.......................................................... 5,845 2.1384 1 1 2 3 4
134.......................................................... 39,838 3.1001 1 2 2 4 6
135.......................................................... 7,171 4.2924 1 2 3 5 8
136.......................................................... 939 2.6944 1 1 2 3 5
138.......................................................... 206,296 3.8764 1 2 3 5 7
139.......................................................... 73,965 2.4267 1 1 2 3 4
140.......................................................... 31,123 2.4049 1 1 2 3 4

[[Page 48290]]

141.......................................................... 123,214 3.4307 1 2 3 4 6
142.......................................................... 49,069 2.4897 1 1 2 3 4
143.......................................................... 237,871 2.0978 1 1 2 3 4
144.......................................................... 104,970 5.8254 1 2 4 7 11
145.......................................................... 5,698 2.5470 1 1 2 3 5
146.......................................................... 10,278 9.7685 4 6 8 11 17
147.......................................................... 2,613 5.5427 2 4 5 7 8
148.......................................................... 133,146 11.9344 5 6 9 15 22
149.......................................................... 19,525 5.6364 3 4 5 7 8
150.......................................................... 22,987 10.7225 4 6 9 13 19
151.......................................................... 5,401 5.0224 1 2 4 7 9
152.......................................................... 5,016 7.9314 3 5 7 9 14
153.......................................................... 1,953 4.8669 2 3 5 6 7
154.......................................................... 27,071 12.9678 3 6 10 16 25
155.......................................................... 6,015 3.9583 1 2 3 6 8
156.......................................................... 4 9.2500 7 7 8 8 14
157.......................................................... 8,329 5.6899 1 2 4 7 11
158.......................................................... 3,716 2.6453 1 1 2 3 5
159.......................................................... 19,241 5.0838 1 2 4 6 10
160.......................................................... 11,945 2.6548 1 1 2 3 5
161.......................................................... 10,158 4.5026 1 2 3 6 9
162.......................................................... 4,952 2.0889 1 1 1 3 4
163.......................................................... 5 2.4000 1 1 2 3 5
164.......................................................... 6,003 7.6838 3 4 7 9 13
165.......................................................... 2,457 3.9935 2 2 4 5 7
166.......................................................... 5,157 4.3198 1 2 3 5 8
167.......................................................... 4,922 2.1260 1 1 2 3 4
168.......................................................... 1,538 4.8563 1 2 3 6 10
169.......................................................... 774 2.7661 1 1 2 3 5
170.......................................................... 17,939 10.6904 2 5 8 13 21
171.......................................................... 1,404 4.1660 1 2 3 5 8
172.......................................................... 33,099 6.7836 2 3 5 8 13
173.......................................................... 2,192 3.4995 1 1 3 4 7
174.......................................................... 261,557 4.6848 2 3 4 6 8
175.......................................................... 29,879 2.8529 1 2 2 4 5
176.......................................................... 14,653 5.0912 2 3 4 6 9
177.......................................................... 7,659 4.4332 2 2 4 5 8
178.......................................................... 2,559 3.0770 1 2 3 4 5
179.......................................................... 14,734 5.7800 2 3 4 7 11
180.......................................................... 91,464 5.2570 2 3 4 6 10
181.......................................................... 25,262 3.3086 1 2 3 4 6
182.......................................................... 297,116 4.4864 1 2 3 5 8
183.......................................................... 81,577 2.8984 1 1 2 4 5
184.......................................................... 79 4.2911 1 2 3 4 8
185.......................................................... 6,254 4.4915 1 2 3 6 9
186.......................................................... 7 3.1429 1 2 2 3 5
187.......................................................... 647 4.1468 1 2 3 6 8
188.......................................................... 93,711 5.4548 1 2 4 7 10
189.......................................................... 13,047 3.0530 1 1 2 4 6
190.......................................................... 65 4.8000 1 2 3 6 8
191.......................................................... 10,595 12.3655 3 6 9 15 25
192.......................................................... 1,380 5.5087 1 3 5 7 9
193.......................................................... 4,044 12.5321 5 7 10 15 23
194.......................................................... 461 6.2603 2 4 6 8 11
195.......................................................... 2,846 10.5569 4 6 9 13 19
196.......................................................... 595 5.3345 2 3 5 7 9
197.......................................................... 16,435 9.0254 3 5 7 11 16
198.......................................................... 4,114 4.2859 2 3 4 5 7
199.......................................................... 1,484 8.9892 2 4 7 12 19
200.......................................................... 1,017 10.3520 1 3 7 13 21
201.......................................................... 2,717 13.5628 3 6 10 17 27
202.......................................................... 27,516 6.1264 2 3 5 7 12
203.......................................................... 32,434 6.4368 2 3 5 8 12
204.......................................................... 69,460 5.3914 2 3 4 6 10
205.......................................................... 32,822 5.8530 2 3 4 7 11
206.......................................................... 2,051 3.8035 1 2 3 5 7
207.......................................................... 38,329 5.2350 1 2 4 7 10
208.......................................................... 9,427 2.9434 1 1 2 4 5
210.......................................................... 126,884 6.6228 3 4 5 8 11
211.......................................................... 25,813 4.5833 3 3 4 5 7

[[Page 48291]]

212.......................................................... 10 2.5000 1 2 2 4 4
213.......................................................... 9,511 8.9931 2 4 7 11 18
216.......................................................... 19,925 5.3298 1 1 3 7 12
217.......................................................... 15,693 12.1157 3 5 8 15 24
218.......................................................... 30,213 5.3787 2 3 4 7 10
219.......................................................... 21,194 3.1641 1 2 3 4 5
220.......................................................... 2 4.0000 1 1 7 7 7
223.......................................................... 12,689 3.2720 1 1 2 4 6
224.......................................................... 9,927 1.9411 1 1 1 2 3
225.......................................................... 6,275 5.2709 1 2 4 7 11
226.......................................................... 6,776 6.3719 1 3 4 8 13
227.......................................................... 4,855 2.6360 1 1 2 3 5
228.......................................................... 2,683 4.2046 1 1 3 5 9
229.......................................................... 1,117 2.5004 1 1 2 3 5
230.......................................................... 2,474 5.4321 1 2 4 7 11
232.......................................................... 572 2.7395 1 1 2 3 6
233.......................................................... 18,500 6.3363 1 2 5 8 13
234.......................................................... 9,052 2.6740 1 1 1 3 6
235.......................................................... 4,763 4.6431 1 2 4 6 8
236.......................................................... 41,789 4.4010 1 3 4 5 8
237.......................................................... 1,925 3.7844 1 2 3 5 7
238.......................................................... 9,693 7.9706 2 4 6 9 14
239.......................................................... 40,343 6.0356 2 3 5 7 11
240.......................................................... 12,933 6.4411 2 3 5 8 12
241.......................................................... 2,818 3.6427 1 2 3 4 6
242.......................................................... 2,725 6.4499 2 3 5 8 12
243.......................................................... 100,998 4.4968 1 2 4 6 8
244.......................................................... 16,946 4.4343 1 2 4 5 8
245.......................................................... 5,798 3.0942 1 1 3 4 5
246.......................................................... 1,393 3.5635 1 2 3 4 6
247.......................................................... 21,356 3.2905 1 2 3 4 6
248.......................................................... 16,406 4.8154 2 3 4 6 8
249.......................................................... 13,490 3.9493 1 1 3 5 8
250.......................................................... 4,165 3.8363 1 2 3 5 7
251.......................................................... 2,059 2.7936 1 1 3 3 5
252.......................................................... 1 1.0000 1 1 1 1 1
253.......................................................... 24,816 4.5259 2 3 4 5 8
254.......................................................... 10,019 3.0639 1 2 3 4 5
255.......................................................... 1 1.0000 1 1 1 1 1
256.......................................................... 7,606 4.9471 1 2 4 6 9
257.......................................................... 13,128 2.5517 1 1 2 3 5
258.......................................................... 11,400 1.6964 1 1 1 2 3
259.......................................................... 2,660 2.8173 1 1 1 3 7
260.......................................................... 2,431 1.4048 1 1 1 1 2
261.......................................................... 1,571 2.2037 1 1 1 2 4
262.......................................................... 602 4.6561 1 2 3 6 9
263.......................................................... 22,544 10.4724 3 5 7 13 20
264.......................................................... 3,912 6.2150 2 3 5 7 11
265.......................................................... 4,036 6.5347 1 2 4 8 14
266.......................................................... 2,230 3.0296 1 1 2 4 6
267.......................................................... 276 4.2428 1 1 3 5 8
268.......................................................... 1,007 3.6495 1 1 2 4 7
269.......................................................... 11,070 7.9865 2 3 6 10 15
270.......................................................... 2,573 3.5876 1 1 3 5 7
271.......................................................... 21,579 6.7917 2 3 5 8 12
272.......................................................... 6,079 5.8195 2 3 4 7 11
273.......................................................... 1,256 3.7070 1 2 3 5 7
274.......................................................... 2,222 6.1787 1 3 5 7 11
275.......................................................... 173 3.2081 1 1 2 4 6
276.......................................................... 1,611 4.6096 1 2 4 6 8
277.......................................................... 119,184 5.4238 2 3 4 7 9
278.......................................................... 33,737 3.9926 2 2 3 5 7
279.......................................................... 6 4.1667 1 2 3 5 5
280.......................................................... 19,335 3.9854 1 2 3 5 7
281.......................................................... 6,583 2.7961 1 1 2 3 5
283.......................................................... 6,770 4.5786 1 2 3 6 8
284.......................................................... 1,845 2.9176 1 1 2 4 5
285.......................................................... 8,079 9.8267 3 5 8 12 18
286.......................................................... 2,869 5.1921 2 2 4 6 10
287.......................................................... 5,462 9.5002 3 5 7 11 18

[[Page 48292]]

288.......................................................... 11,463 3.7000 1 2 3 4 6
289.......................................................... 6,352 2.3909 1 1 1 2 5
290.......................................................... 11,894 2.0268 1 1 1 2 3
291.......................................................... 60 1.4833 1 1 1 1 2
292.......................................................... 7,592 9.9870 2 4 8 12 19
293.......................................................... 317 4.7192 1 2 3 6 8
294.......................................................... 96,836 4.2502 1 2 3 5 8
295.......................................................... 4,384 3.7003 1 2 3 4 7
296.......................................................... 247,467 4.6444 1 2 4 6 9
297.......................................................... 42,523 3.0312 1 2 3 4 5
298.......................................................... 111 3.5405 1 1 2 4 6
299.......................................................... 1,529 5.0680 1 2 4 6 9
300.......................................................... 21,700 5.8032 2 3 5 7 11
301.......................................................... 3,909 3.3592 1 2 3 4 6
302.......................................................... 10,499 7.9355 4 5 6 9 13
303.......................................................... 24,646 7.2778 3 4 6 8 14
304.......................................................... 14,090 8.3271 2 3 6 10 17
305.......................................................... 3,012 3.1016 1 2 3 4 6
306.......................................................... 5,818 5.5734 1 2 3 8 13
307.......................................................... 1,950 2.0292 1 1 2 2 3
308.......................................................... 6,684 6.1339 1 2 4 8 14
309.......................................................... 3,266 1.9801 1 1 1 2 4
310.......................................................... 25,386 4.4935 1 2 3 6 10
311.......................................................... 5,890 1.8514 1 1 1 2 3
312.......................................................... 1,328 4.9315 1 2 3 6 10
313.......................................................... 505 2.3921 1 1 2 3 5
314.......................................................... 2 89.0000 5 5 173 173 173
315.......................................................... 34,911 6.7495 1 1 4 9 16
316.......................................................... 204,550 6.1591 2 3 5 8 12
317.......................................................... 2,716 3.5044 1 1 2 4 7
318.......................................................... 5,914 5.9731 1 3 4 7 12
319.......................................................... 384 2.5651 1 1 2 3 5
320.......................................................... 225,069 4.9879 2 3 4 6 9
321.......................................................... 31,860 3.5371 1 2 3 4 6
322.......................................................... 67 3.5821 2 2 3 4 6
323.......................................................... 20,427 3.1029 1 1 2 4 6
324.......................................................... 4,637 1.8462 1 1 1 2 3
325.......................................................... 9,930 3.7407 1 2 3 5 7
326.......................................................... 2,586 2.5607 1 1 2 3 5
327.......................................................... 11 2.0000 1 1 2 2 3
328.......................................................... 574 3.4146 1 1 3 4 6
329.......................................................... 54 1.6852 1 1 1 2 3
331.......................................................... 57,039 5.4034 1 2 4 7 10
332.......................................................... 4,145 3.0625 1 1 2 4 6
333.......................................................... 247 5.3320 1 2 4 6 9
334.......................................................... 9,532 4.0415 1 2 3 5 7
335.......................................................... 12,203 2.4946 1 2 2 3 4
336.......................................................... 28,202 3.2201 1 1 2 4 7
337.......................................................... 21,501 1.8442 1 1 2 2 3
338.......................................................... 674 5.7953 1 2 4 8 13
339.......................................................... 1,237 5.1924 1 2 3 7 12
340.......................................................... 1 2.0000 2 2 2 2 2
341.......................................................... 3,131 3.2031 1 1 1 3 7
342.......................................................... 457 3.0394 1 1 2 3 6
344.......................................................... 2,343 2.7222 1 1 1 3 7
345.......................................................... 1,390 5.4324 1 2 3 7 12
346.......................................................... 3,963 5.9066 2 3 4 7 11
347.......................................................... 234 2.7094 1 1 2 3 5
348.......................................................... 4,262 4.0082 1 2 3 5 7
349.......................................................... 554 2.6408 1 1 2 3 5
350.......................................................... 7,281 4.5187 2 2 4 5 8
352.......................................................... 1,177 4.1623 1 2 3 5 9
353.......................................................... 3,092 6.0155 2 3 4 7 11
354.......................................................... 7,572 5.5539 2 3 4 6 10
355.......................................................... 5,006 3.0224 2 2 3 3 4
356.......................................................... 22,278 1.8696 1 1 2 2 3
357.......................................................... 5,543 8.0319 3 4 6 10 15
358.......................................................... 20,961 3.8545 2 2 3 4 7
359.......................................................... 28,665 2.3497 1 2 2 3 3
360.......................................................... 14,282 2.5518 1 1 2 3 4

[[Page 48293]]

361.......................................................... 287 2.9303 1 1 2 3 6
362.......................................................... 2 1.0000 1 1 1 1 1
363.......................................................... 1,981 4.0848 1 2 2 4 9
364.......................................................... 1,380 4.1754 1 2 3 5 8
365.......................................................... 1,617 7.8411 2 3 5 10 16
366.......................................................... 4,654 6.2426 1 3 5 8 12
367.......................................................... 438 2.9612 1 1 2 3 5
368.......................................................... 4,145 6.4068 2 3 5 8 12
369.......................................................... 3,727 3.2659 1 1 2 4 6
370.......................................................... 2,251 4.9964 2 3 4 5 7
371.......................................................... 2,715 3.3908 2 3 3 4 4
372.......................................................... 1,377 3.4415 2 2 2 3 5
373.......................................................... 5,284 2.2470 1 2 2 3 3
374.......................................................... 153 2.9739 2 2 2 3 4
375.......................................................... 12 6.5000 1 2 3 6 8
376.......................................................... 476 3.2815 1 2 2 4 7
377.......................................................... 109 4.4954 1 2 3 6 8
378.......................................................... 202 2.1782 1 1 2 3 4
379.......................................................... 500 3.2960 1 1 2 3 6
380.......................................................... 111 2.0180 1 1 1 2 4
381.......................................................... 170 2.4647 1 1 1 2 4
382.......................................................... 48 1.4792 1 1 1 1 2
383.......................................................... 2,806 3.6433 1 1 2 4 7
384.......................................................... 151 2.5960 1 1 1 3 4
387.......................................................... 1 9.0000 9 9 9 9 9
389.......................................................... 3 8.6667 1 1 2 3 3
392.......................................................... 2,140 8.8757 2 4 6 11 19
394.......................................................... 2,761 7.3032 1 2 5 9 16
395.......................................................... 115,607 4.2768 1 2 3 5 8
396.......................................................... 20 2.9500 1 2 3 3 4
397.......................................................... 16,443 5.1098 1 2 4 6 10
398.......................................................... 18,696 5.7191 2 3 4 7 11
399.......................................................... 1,643 3.3603 1 2 3 4 6
401.......................................................... 6,462 11.0371 2 5 8 14 22
402.......................................................... 1,348 3.8858 1 1 3 5 9
403.......................................................... 31,551 7.8595 2 3 6 10 16
404.......................................................... 3,624 3.9914 1 2 3 5 8
406.......................................................... 2,304 9.3859 2 4 7 12 20
407.......................................................... 616 3.4935 1 2 3 5 7
408.......................................................... 1,949 8.2104 1 2 5 10 19
409.......................................................... 1,750 6.0383 2 3 4 6 12
410.......................................................... 29,067 3.7654 1 2 3 4 6
411.......................................................... 5 2.0000 1 1 1 3 4
412.......................................................... 9 1.5556 1 1 2 2 2
413.......................................................... 5,748 6.7189 2 3 5 9 13
414.......................................................... 481 4.0146 1 2 3 5 7
415.......................................................... 55,992 14.0950 4 6 11 17 27
416.......................................................... 288,502 7.4508 2 3 6 9 14
417.......................................................... 33 6.5455 2 3 5 8 12
418.......................................................... 29,991 6.0675 2 3 5 7 11
419.......................................................... 17,719 4.3438 1 2 3 5 8
420.......................................................... 3,023 3.1667 1 2 3 4 5
421.......................................................... 13,262 4.0156 1 2 3 5 7
422.......................................................... 79 3.6456 1 2 2 4 7
423.......................................................... 8,970 8.0750 2 3 6 10 15
424.......................................................... 1,041 11.5053 2 4 8 14 23
425.......................................................... 13,101 3.4571 1 1 3 4 6
426.......................................................... 4,237 4.3099 1 2 3 5 8
427.......................................................... 1,579 4.6390 1 2 3 5 9
428.......................................................... 845 7.2769 1 2 4 8 14
429.......................................................... 23,941 5.4509 2 3 4 6 10
430.......................................................... 75,545 7.7573 2 3 6 9 15
431.......................................................... 333 6.6667 1 2 4 7 11
432.......................................................... 402 4.0199 1 1 3 4 8
433.......................................................... 4,472 2.8233 1 1 2 3 4
439.......................................................... 1,759 8.3337 1 3 5 9 17
440.......................................................... 5,216 8.1532 2 3 5 9 16
441.......................................................... 686 3.4125 1 1 2 4 6
442.......................................................... 18,608 8.6730 2 3 6 10 17
443.......................................................... 3,590 3.5279 1 1 3 5 7

[[Page 48294]]

444.......................................................... 6,014 4.0328 1 2 3 5 7
445.......................................................... 2,243 2.8270 1 1 2 3 5
447.......................................................... 6,324 2.5745 1 1 2 3 5
449.......................................................... 40,869 3.6910 1 1 3 4 7
450.......................................................... 7,453 1.9804 1 1 1 2 4
451.......................................................... 2 10.5000 8 8 13 13 13
452.......................................................... 28,831 4.9369 1 2 3 6 10
453.......................................................... 5,388 2.7572 1 1 2 3 5
454.......................................................... 4,741 4.1080 1 2 3 5 8
455.......................................................... 885 2.2802 1 1 2 3 4
461.......................................................... 2,290 5.5782 1 1 3 7 12
462.......................................................... 7,891 9.5516 4 5 7 10 13
463.......................................................... 32,925 3.8763 1 2 3 5 7
464.......................................................... 7,635 2.8998 1 1 2 4 5
465.......................................................... 163 3.4724 1 1 2 4 6
466.......................................................... 1,204 4.9086 1 1 2 4 7
467.......................................................... 1,028 2.6722 1 1 2 3 5
468.......................................................... 52,062 12.5395 3 6 10 16 24
471.......................................................... 16,780 4.8545 3 3 4 5 8
473.......................................................... 8,582 12.4204 2 3 7 17 32
475.......................................................... 119,965 10.6382 2 5 9 14 20
476.......................................................... 2,851 9.9056 1 4 8 14 20
477.......................................................... 28,211 8.5081 1 3 7 11 17
479.......................................................... 27,660 2.5490 1 1 2 3 5
480.......................................................... 908 19.1013 6 8 13 23 39
481.......................................................... 1,199 22.0025 12 16 20 24 33
482.......................................................... 5,084 11.1810 4 6 9 13 20
484.......................................................... 472 12.7564 2 5 10 17 26
485.......................................................... 3,714 9.4715 4 5 7 11 18
486.......................................................... 2,712 12.1962 2 5 10 16 24
487.......................................................... 5,017 6.8405 1 3 5 9 14
488.......................................................... 828 17.6437 4 7 12 21 33
489.......................................................... 13,555 8.1669 2 3 6 10 15
490.......................................................... 5,255 5.3115 1 2 4 6 9
491.......................................................... 22,688 3.0224 1 2 2 3 5
492.......................................................... 3,924 13.8081 3 5 6 23 32
493.......................................................... 61,129 6.0304 2 3 5 8 11
494.......................................................... 24,558 2.6900 1 1 2 4 5
495.......................................................... 342 17.3421 8 10 13 20 33
496.......................................................... 3,727 8.7631 3 4 6 10 17
497.......................................................... 31,236 5.6849 3 3 5 6 9
498.......................................................... 21,296 3.6794 2 3 3 4 5
499.......................................................... 35,261 4.1633 1 2 3 5 8
500.......................................................... 46,497 2.1981 1 1 2 3 4
501.......................................................... 3,203 9.8392 4 5 8 12 18
502.......................................................... 762 5.6995 2 3 5 7 10
503.......................................................... 5,916 3.9238 1 2 3 5 7
504.......................................................... 192 28.0260 8 13 24 36 51
505.......................................................... 180 6.8889 1 1 2 6 13
506.......................................................... 964 15.1432 3 7 12 20 30
507.......................................................... 322 7.7112 1 3 6 10 14
508.......................................................... 655 7.3542 1 3 5 9 14
509.......................................................... 155 5.2323 1 2 3 6 11
510.......................................................... 1,783 6.0432 1 2 4 7 12
511.......................................................... 627 3.6364 1 1 2 4 7
512.......................................................... 550 13.6200 6 8 10 14 25
513.......................................................... 216 10.7407 5 7 8 11 17
515.......................................................... 58,668 3.8406 1 1 1 5 9
518.......................................................... 23,803 2.4598 1 1 1 3 5
519.......................................................... 12,597 4.6702 1 1 3 6 11
520.......................................................... 16,544 1.9403 1 1 1 2 3
521.......................................................... 29,404 5.2599 1 2 4 6 8
522.......................................................... 3,423 10.2875 3 4 5 7 8
523.......................................................... 14,428 3.7573 1 2 3 4 5
524.......................................................... 109,116 3.1429 1 2 3 4 6
525.......................................................... 206 14.2718 1 3 7 17 35
528.......................................................... 1,845 16.3252 6 9 14 21 29
529.......................................................... 5,115 7.2502 1 2 4 9 16
530.......................................................... 3,391 2.9451 1 1 2 3 6
531.......................................................... 4,910 8.9709 2 4 7 11 18

[[Page 48295]]

532.......................................................... 2,849 3.6413 1 1 3 5 7
533.......................................................... 46,773 3.6548 1 1 2 4 8
534.......................................................... 42,812 1.7223 1 1 1 2 3
535.......................................................... 8,822 9.2409 2 4 8 12 18
536.......................................................... 8,260 7.2738 2 3 6 9 14
537.......................................................... 8,986 6.5032 1 3 5 8 13
538.......................................................... 5,461 2.9145 1 1 2 4 6
539.......................................................... 4,978 10.5552 2 4 7 14 23
540.......................................................... 1,501 3.5097 1 1 3 4 7
541.......................................................... 25,114 41.6431 16 23 34 50 72
542.......................................................... 23,126 30.3529 11 17 25 37 52
543.......................................................... 5,507 11.7066 2 5 9 16 23
544.......................................................... 446,467 4.3995 3 3 4 5 7
545.......................................................... 43,772 5.0362 3 3 4 6 8
546.......................................................... 2,364 8.7657 3 4 7 10 16
547.......................................................... 32,723 12.1254 6 8 10 14 20
548.......................................................... 32,268 8.7755 5 6 8 10 13
549.......................................................... 13,145 10.0860 5 6 8 12 18
550.......................................................... 34,583 6.7752 4 5 6 8 10
551.......................................................... 53,960 6.0685 1 2 5 8 12
552.......................................................... 82,137 3.4766 1 1 2 5 7
553.......................................................... 39,301 9.0530 1 3 7 12 19
554.......................................................... 77,365 5.5722 1 2 4 7 12
555.......................................................... 37,404 4.8144 1 2 3 6 10
556.......................................................... 19,008 2.0085 1 1 1 2 4
557.......................................................... 124,278 4.1023 1 2 3 5 8
558.......................................................... 193,170 1.8108 1 1 1 2 4
559.......................................................... 2,895 6.8370 2 3 5 8 13
-------------
12,150,46
--------------------------------------------------------------------------------------------------------------------------------------------------------

Table 7A.--Medicare Prospective Payment System Selected Percentile Lengths of Stay FY 2005 MedPAR Update March 2006 Grouper V24.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number Arithmetic 10th 25th 50th 75th 90th
DRG discharge mean LOS percentile percentile percentile percentile percentile
--------------------------------------------------------------------------------------------------------------------------------------------------------
1............................................................ 24,403 9.6172 2 4 7 12 19
2............................................................ 10,188 4.4271 1 2 4 6 8
3............................................................ 3 11.0000 4 4 8 21 21
6............................................................ 288 3.0833 1 1 2 3 7
7............................................................ 15,033 9.2561 2 4 7 12 19
8............................................................ 3,442 2.7638 1 1 2 3 6
9............................................................ 1,775 6.0248 1 3 4 7 11
10........................................................... 19,628 5.9178 2 3 4 7 11
11........................................................... 3,085 3.5546 1 2 3 5 7
12........................................................... 55,972 5.3686 2 3 4 6 10
13........................................................... 7,529 4.8515 2 3 4 6 8
14........................................................... 278,864 5.3705 2 3 4 7 10
15........................................................... 20,004 4.0156 1 2 3 5 7
16........................................................... 17,302 6.3015 2 3 5 8 12
17........................................................... 2,975 3.0376 1 1 2 4 6
18........................................................... 33,467 5.1537 2 3 4 6 9
19........................................................... 8,467 3.3795 1 2 3 4 6
21........................................................... 2,220 6.1752 2 3 5 8 12
22........................................................... 3,169 5.0104 2 2 4 6 10
23........................................................... 10,671 3.8995 1 2 3 5 7
26........................................................... 25 3.8000 1 1 2 5 9
27........................................................... 5,974 4.7370 1 1 3 6 10
28........................................................... 19,912 5.5699 1 2 4 7 11
29........................................................... 6,524 3.2149 1 1 3 4 6
31........................................................... 5,039 3.9036 1 2 3 5 7
32........................................................... 1,904 2.2757 1 1 2 3 4
34........................................................... 27,632 4.7034 1 2 4 6 9
35........................................................... 7,913 3.0404 1 1 3 4 5
36........................................................... 308 1.9156 1 1 1 1 2
37........................................................... 1,219 4.1132 1 1 3 5 8
38........................................................... 50 2.8000 1 1 2 3 6
39........................................................... 328 2.1220 1 1 1 2 3

[[Page 48296]]

40........................................................... 1,188 4.2315 1 1 3 4 6
42........................................................... 1,638 2.4823 1 1 1 2 3
43........................................................... 125 2.9600 1 1 2 4 5
44........................................................... 1,291 4.7506 2 3 4 6 8
45........................................................... 2,771 3.0278 1 2 2 4 6
46........................................................... 3,929 4.1917 1 2 3 5 8
47........................................................... 1,309 3.0145 1 1 2 4 6
49........................................................... 2,416 4.5219 1 2 3 5 9
50........................................................... 2,026 1.8638 1 1 1 2 3
51........................................................... 193 2.6684 1 1 1 3 5
52........................................................... 235 1.5149 1 1 1 2 2
53........................................................... 2,147 4.0051 1 1 2 5 9
55........................................................... 1,370 2.8832 1 1 1 3 6
56........................................................... 451 2.6785 1 1 2 3 5
57........................................................... 742 3.2520 1 1 2 3 7
59........................................................... 126 2.3730 1 1 2 3 5
60........................................................... 3 1.6667 1 1 1 3 3
61........................................................... 222 6.0541 1 1 4 8 13
62........................................................... 4 1.5000 1 1 1 1 3
63........................................................... 2,827 4.5313 1 1 3 6 10
64........................................................... 3,234 6.2004 1 2 4 8 13
65........................................................... 40,495 2.7634 1 1 2 3 5
66........................................................... 8,197 3.1080 1 1 2 4 6
67........................................................... 379 3.6834 1 2 3 5 8
68........................................................... 18,918 3.8500 1 2 3 5 7
69........................................................... 5,149 2.9493 1 2 2 4 5
70........................................................... 25 2.4000 1 1 2 3 4
71........................................................... 70 4.3429 1 2 3 5 7
72........................................................... 1,326 3.3205 1 2 3 4 6
73........................................................... 9,961 4.2979 1 2 3 5 8
74........................................................... 3 3.3333 3 3 3 4 4
75........................................................... 46,867 9.5747 3 5 7 12 19
76........................................................... 48,166 10.4844 3 5 8 13 20
77........................................................... 2,112 4.5123 1 2 4 6 9
78........................................................... 49,708 6.0925 2 4 5 7 10
79........................................................... 160,420 8.0517 3 4 7 10 15
80........................................................... 7,160 5.2197 2 3 4 6 9
81........................................................... 6 6.1667 2 3 5 8 8
82........................................................... 63,222 6.6658 2 3 5 9 13
83........................................................... 7,153 5.1922 2 3 4 6 10
84........................................................... 1,403 3.1276 1 2 3 4 5
85........................................................... 22,228 6.1087 2 3 5 8 12
86........................................................... 1,717 3.4549 1 2 3 4 6
87........................................................... 96,725 6.3706 2 3 5 8 12
88........................................................... 427,153 4.8563 2 3 4 6 9
89........................................................... 554,136 5.5251 2 3 5 7 10
90........................................................... 43,512 3.7080 2 2 3 5 6
91........................................................... 53 3.4151 1 1 2 4 6
92........................................................... 16,519 5.9408 2 3 5 7 11
93........................................................... 1,440 3.7625 1 2 3 5 7
94........................................................... 13,656 5.9023 2 3 5 8 12
95........................................................... 1,577 3.3843 1 2 3 4 6
96........................................................... 59,631 4.3002 2 2 4 5 7
97........................................................... 26,703 3.3674 1 2 3 4 6
98........................................................... 13 3.0769 2 2 2 4 6
99........................................................... 21,392 3.0989 1 1 2 4 6
100.......................................................... 6,416 2.1061 1 1 2 3 4
101.......................................................... 23,370 4.1822 1 2 3 5 8
102.......................................................... 4,936 2.5432 1 1 2 3 5
103.......................................................... 886 35.2641 8 11 22 46 78
104.......................................................... 20,125 14.6458 6 8 12 18 26
105.......................................................... 32,635 9.9310 4 6 8 11 18
106.......................................................... 3,440 10.9392 5 7 9 13 18
108.......................................................... 8,758 10.7099 4 6 9 13 19
110.......................................................... 57,710 8.0024 1 3 6 10 16
111.......................................................... 10,785 3.1058 1 1 2 4 6
113.......................................................... 34,750 12.5640 4 6 10 15 24
114.......................................................... 7,959 8.3465 2 4 7 11 16
117.......................................................... 5,350 4.2781 1 1 2 5 9
118.......................................................... 7,634 3.0183 1 1 2 4 7

[[Page 48297]]

119.......................................................... 963 5.3998 1 1 3 7 13
120.......................................................... 33,561 8.9647 1 3 6 12 19
121.......................................................... 150,085 6.1981 2 3 5 8 11
122.......................................................... 54,555 3.2992 1 1 3 4 6
123.......................................................... 29,576 4.7318 1 1 3 6 11
124.......................................................... 120,562 4.3876 1 2 3 6 9
125.......................................................... 92,475 2.7008 1 1 2 3 5
126.......................................................... 5,424 10.6875 3 6 9 13 19
127.......................................................... 667,522 5.0851 2 3 4 6 9
128.......................................................... 4,213 5.1899 2 3 5 6 9
129.......................................................... 3,527 2.5373 1 1 1 2 5
130.......................................................... 87,480 5.3514 1 3 4 7 10
131.......................................................... 22,959 3.7009 1 2 3 5 6
132.......................................................... 101,418 2.8006 1 1 2 3 5
133.......................................................... 5,860 2.1410 1 1 2 3 4
134.......................................................... 39,838 3.1001 1 2 2 4 6
135.......................................................... 7,167 4.2931 1 2 3 5 8
136.......................................................... 943 2.6957 1 1 2 3 5
138.......................................................... 206,188 3.8769 1 2 3 5 7
139.......................................................... 74,073 2.4274 1 1 2 3 4
140.......................................................... 31,123 2.4049 1 1 2 3 4
141.......................................................... 123,116 3.4312 1 2 3 4 6
142.......................................................... 49,167 2.4904 1 1 2 3 4
143.......................................................... 237,871 2.0978 1 1 2 3 4
144.......................................................... 104,925 5.8262 1 2 4 7 11
145.......................................................... 5,743 2.5581 1 1 2 3 5
146.......................................................... 10,276 9.7688 4 6 8 11 17
147.......................................................... 2,615 5.5449 2 4 5 7 8
149.......................................................... 19,545 5.6387 3 4 5 7 8
150.......................................................... 22,981 10.7232 4 6 9 13 19
151.......................................................... 5,407 5.0255 1 2 4 7 9
152.......................................................... 5,016 7.9314 3 5 7 9 14
153.......................................................... 1,953 4.8669 2 3 5 6 7
155.......................................................... 6,019 3.9621 1 2 3 6 8
156.......................................................... 4 9.2500 7 7 8 8 14
157.......................................................... 8,321 5.6913 1 2 4 7 11
158.......................................................... 3,724 2.6488 1 1 2 3 5
159.......................................................... 19,233 5.0843 1 2 4 6 10
160.......................................................... 11,953 2.6555 1 1 2 3 5
161.......................................................... 10,152 4.5036 1 2 3 6 9
162.......................................................... 4,958 2.0896 1 1 1 3 4
163.......................................................... 5 2.4000 1 1 2 3 5
164.......................................................... 5,999 7.6861 3 4 7 9 13
165.......................................................... 2,461 3.9939 2 2 4 5 7
166.......................................................... 5,156 4.3200 1 2 3 5 8
167.......................................................... 4,923 2.1261 1 1 2 3 4
168.......................................................... 1,640 4.7726 1 2 3 6 10
169.......................................................... 899 2.6151 1 1 2 3 4
170.......................................................... 17,935 10.6919 2 5 8 13 21
171.......................................................... 1,408 4.1648 1 2 3 5 8
172.......................................................... 33,065 6.7846 2 3 5 8 13
173.......................................................... 2,226 3.5341 1 1 3 4 7
174.......................................................... 253,265 4.6853 2 3 4 6 8
175.......................................................... 29,252 2.8605 1 2 2 4 5
176.......................................................... 14,653 5.0912 2 3 4 6 9
177.......................................................... 7,656 4.4327 2 2 4 5 8
178.......................................................... 2,562 3.0800 1 2 3 4 5
179.......................................................... 14,734 5.7800 2 3 4 7 11
180.......................................................... 91,370 5.2580 2 3 4 6 10
181.......................................................... 25,356 3.3125 1 2 3 4 6
182.......................................................... 255,772 4.0692 1 2 3 5 7
183.......................................................... 79,046 2.8475 1 1 2 4 5
184.......................................................... 72 3.7361 1 1 2 4 7
185.......................................................... 6,254 4.4915 1 2 3 6 9
186.......................................................... 7 3.1429 1 2 2 3 5
187.......................................................... 647 4.1468 1 2 3 6 8
188.......................................................... 87,040 5.3291 1 2 4 6 10
189.......................................................... 12,406 2.9703 1 1 2 4 5
190.......................................................... 10 3.0000 1 1 2 6 6
191.......................................................... 10,592 12.3671 3 6 9 15 25

[[Page 48298]]

192.......................................................... 1,380 5.5087 1 3 5 7 9
193.......................................................... 4,042 12.5339 5 7 10 15 23
194.......................................................... 463 6.2721 2 4 6 8 11
195.......................................................... 2,846 10.5569 4 6 9 13 19
196.......................................................... 595 5.3345 2 3 5 7 9
197.......................................................... 16,432 9.0256 3 5 7 11 16
198.......................................................... 4,117 4.2888 2 3 4 5 7
199.......................................................... 1,484 8.9892 2 4 7 12 19
200.......................................................... 1,017 10.3520 1 3 7 13 21
201.......................................................... 2,717 13.5628 3 6 10 17 27
202.......................................................... 27,516 6.1264 2 3 5 7 12
203.......................................................... 32,434 6.4368 2 3 5 8 12
204.......................................................... 69,460 5.3914 2 3 4 6 10
205.......................................................... 32,803 5.8542 2 3 4 7 11
206.......................................................... 2,070 3.8024 1 2 3 5 7
207.......................................................... 38,305 5.2356 1 2 4 7 10
208.......................................................... 9,451 2.9471 1 1 2 4 5
210.......................................................... 126,867 6.6230 3 4 5 8 11
211.......................................................... 25,830 4.5839 3 3 4 5 7
212.......................................................... 10 2.5000 1 2 2 4 4
213.......................................................... 9,553 9.0206 2 4 7 11 18
216.......................................................... 19,883 5.3088 1 1 3 7 12
217.......................................................... 15,724 12.1410 3 5 8 15 24
218.......................................................... 30,210 5.3789 2 3 4 7 10
219.......................................................... 21,197 3.1642 1 2 3 4 5
220.......................................................... 2 4.0000 1 1 7 7 7
223.......................................................... 12,688 3.2719 1 1 2 4 6
224.......................................................... 9,928 1.9413 1 1 1 2 3
225.......................................................... 6,275 5.2709 1 2 4 7 11
226.......................................................... 6,771 6.3738 1 3 4 8 13
227.......................................................... 4,860 2.6372 1 1 2 3 5
228.......................................................... 2,679 4.2027 1 1 3 5 9
229.......................................................... 1,121 2.5112 1 1 2 3 5
230.......................................................... 2,474 5.4321 1 2 4 7 11
232.......................................................... 572 2.7395 1 1 2 3 6
233.......................................................... 18,493 6.3374 1 2 5 8 13
234.......................................................... 9,059 2.6746 1 1 1 3 6
235.......................................................... 4,763 4.6431 1 2 4 6 8
236.......................................................... 41,789 4.4010 1 3 4 5 8
237.......................................................... 1,925 3.7844 1 2 3 5 7
238.......................................................... 9,693 7.9706 2 4 6 9 14
239.......................................................... 40,343 6.0356 2 3 5 7 11
240.......................................................... 12,896 6.4472 2 3 5 8 12
241.......................................................... 2,855 3.6515 1 2 3 4 6
242.......................................................... 2,725 6.4499 2 3 5 8 12
243.......................................................... 100,998 4.4968 1 2 4 6 8
244.......................................................... 16,933 4.4351 1 2 4 5 8
245.......................................................... 5,811 3.0950 1 1 3 4 5
246.......................................................... 1,393 3.5635 1 2 3 4 6
247.......................................................... 21,356 3.2905 1 2 3 4 6
248.......................................................... 16,406 4.8154 2 3 4 6 8
249.......................................................... 13,490 3.9493 1 1 3 5 8
250.......................................................... 4,164 3.8365 1 2 3 5 7
251.......................................................... 2,060 2.7937 1 1 3 3 5
252.......................................................... 1 1.0000 1 1 1 1 1
253.......................................................... 24,805 4.5258 2 3 4 5 8
254.......................................................... 10,030 3.0656 1 2 3 4 5
255.......................................................... 1 1.0000 1 1 1 1 1
256.......................................................... 7,606 4.9471 1 2 4 6 9
257.......................................................... 13,126 2.5519 1 1 2 3 5
258.......................................................... 11,402 1.6964 1 1 1 2 3
259.......................................................... 2,660 2.8173 1 1 1 3 7
260.......................................................... 2,431 1.4048 1 1 1 1 2
261.......................................................... 1,571 2.2037 1 1 1 2 4
262.......................................................... 602 4.6561 1 2 3 6 9
263.......................................................... 22,532 10.4725 3 5 7 13 20
264.......................................................... 3,924 6.2273 2 3 5 7 11
265.......................................................... 4,036 6.5347 1 2 4 8 14
266.......................................................... 2,230 3.0296 1 1 2 4 6
267.......................................................... 276 4.2428 1 1 3 5 8

[[Page 48299]]

268.......................................................... 1,007 3.6495 1 1 2 4 7
269.......................................................... 11,061 7.9889 2 3 6 10 15
270.......................................................... 2,582 3.5930 1 1 3 5 7
271.......................................................... 21,579 6.7917 2 3 5 8 12
272.......................................................... 6,067 5.8218 2 3 4 7 11
273.......................................................... 1,268 3.7161 1 2 3 5 7
274.......................................................... 2,214 6.1847 1 3 5 7 11
275.......................................................... 181 3.2652 1 1 2 4 6
276.......................................................... 1,611 4.6096 1 2 4 6 8
277.......................................................... 119,041 5.4248 2 3 4 7 9
278.......................................................... 33,880 3.9954 2 2 3 5 7
279.......................................................... 6 4.1667 1 2 3 5 5
280.......................................................... 19,329 3.9844 1 2 3 5 7
281.......................................................... 6,589 2.8001 1 1 2 3 5
283.......................................................... 6,755 4.5760 1 2 3 6 8
284.......................................................... 1,860 2.9403 1 1 2 4 5
285.......................................................... 8,082 9.8285 3 5 8 12 18
286.......................................................... 2,869 5.1921 2 2 4 6 10
287.......................................................... 5,462 9.5002 3 5 7 11 18
288.......................................................... 11,460 3.6971 1 2 3 4 6
289.......................................................... 6,352 2.3909 1 1 1 2 5
290.......................................................... 11,894 2.0268 1 1 1 2 3
291.......................................................... 60 1.4833 1 1 1 1 2
292.......................................................... 7,590 9.9858 2 4 8 12 19
293.......................................................... 318 4.7673 1 2 3 6 8
294.......................................................... 96,836 4.2502 1 2 3 5 8
295.......................................................... 4,384 3.7003 1 2 3 4 7
296.......................................................... 247,119 4.6457 1 2 4 6 9
297.......................................................... 42,871 3.0365 1 2 3 4 5
298.......................................................... 111 3.5405 1 1 2 4 6
299.......................................................... 1,529 5.0680 1 2 4 6 9
300.......................................................... 21,678 5.8044 2 3 5 7 11
301.......................................................... 3,931 3.3666 1 2 3 4 6
302.......................................................... 10,496 7.9354 4 5 6 9 13
303.......................................................... 19,984 6.3149 2 3 5 7 12
304.......................................................... 13,649 8.1660 2 3 6 10 17
305.......................................................... 2,690 3.0331 1 2 2 4 5
306.......................................................... 5,818 5.5734 1 2 3 8 13
307.......................................................... 1,950 2.0292 1 1 2 2 3
308.......................................................... 5,454 5.2913 1 2 3 7 12
309.......................................................... 2,964 1.7190 1 1 1 2 3
310.......................................................... 25,380 4.4933 1 2 3 6 10
311.......................................................... 5,896 1.8552 1 1 1 2 3
312.......................................................... 1,328 4.9315 1 2 3 6 10
313.......................................................... 505 2.3921 1 1 2 3 5
314.......................................................... 2 89.0000 5 5 173 173 173
315.......................................................... 34,913 6.7494 1 1 4 9 16
316.......................................................... 205,633 6.1505 2 3 5 8 12
317.......................................................... 2,716 3.5044 1 1 2 4 7
318.......................................................... 5,912 5.9738 1 3 4 7 12
319.......................................................... 386 2.5725 1 1 2 3 5
320.......................................................... 224,944 4.9886 2 3 4 6 9
321.......................................................... 31,985 3.5383 1 2 3 4 6
322.......................................................... 67 3.5821 2 2 3 4 6
323.......................................................... 20,425 3.1030 1 1 2 4 6
324.......................................................... 4,639 1.8463 1 1 1 2 3
325.......................................................... 9,924 3.7401 1 2 3 5 7
326.......................................................... 2,592 2.5656 1 1 2 3 5
327.......................................................... 11 2.0000 1 1 2 2 3
328.......................................................... 574 3.4146 1 1 3 4 6
329.......................................................... 54 1.6852 1 1 1 2 3
331.......................................................... 56,139 5.4124 1 2 4 7 10
332.......................................................... 3,963 3.0636 1 1 2 4 6
333.......................................................... 244 5.3648 1 2 4 6 10
334.......................................................... 9,529 4.0421 1 2 3 5 7
335.......................................................... 12,206 2.4946 1 2 2 3 4
336.......................................................... 28,193 3.2206 1 1 2 4 7
337.......................................................... 21,510 1.8441 1 1 2 2 3
338.......................................................... 674 5.7953 1 2 4 8 13
339.......................................................... 1,237 5.1924 1 2 3 7 12

[[Page 48300]]

340.......................................................... 1 2.0000 2 2 2 2 2
341.......................................................... 3,131 3.2031 1 1 1 3 7
342.......................................................... 457 3.0394 1 1 2 3 6
344.......................................................... 2,343 2.7222 1 1 1 3 7
345.......................................................... 1,390 5.4324 1 2 3 7 12
346.......................................................... 3,962 5.9079 2 3 4 7 11
347.......................................................... 235 2.7021 1 1 2 3 5
348.......................................................... 4,262 4.0082 1 2 3 5 7
349.......................................................... 554 2.6408 1 1 2 3 5
350.......................................................... 7,281 4.5187 2 2 4 5 8
352.......................................................... 1,177 4.1623 1 2 3 5 9
353.......................................................... 3,092 6.0155 2 3 4 7 11
354.......................................................... 7,572 5.5539 2 3 4 6 10
355.......................................................... 5,006 3.0224 2 2 3 3 4
356.......................................................... 22,085 1.8693 1 1 2 2 3
357.......................................................... 5,543 8.0319 3 4 6 10 15
358.......................................................... 20,947 3.8543 2 2 3 4 7
359.......................................................... 28,679 2.3506 1 2 2 3 3
360.......................................................... 13,879 2.5012 1 1 2 3 4
361.......................................................... 287 2.9303 1 1 2 3 6
362.......................................................... 2 1.0000 1 1 1 1 1
363.......................................................... 2,157 4.2165 1 2 3 5 9
364.......................................................... 1,800 3.8100 1 1 3 5 8
365.......................................................... 1,617 7.8411 2 3 5 10 16
366.......................................................... 4,645 6.2474 1 3 5 8 12
367.......................................................... 447 2.9776 1 1 2 4 5
368.......................................................... 4,145 6.4068 2 3 5 8 12
369.......................................................... 3,727 3.2659 1 1 2 4 6
370.......................................................... 2,251 4.9964 2 3 4 5 7
371.......................................................... 2,715 3.3908 2 3 3 4 4
372.......................................................... 1,377 3.4415 2 2 2 3 5
373.......................................................... 5,284 2.2470 1 2 2 3 3
374.......................................................... 153 2.9739 2 2 2 3 4
375.......................................................... 12 6.5000 1 2 3 6 8
376.......................................................... 476 3.2815 1 2 2 4 7
377.......................................................... 109 4.4954 1 2 3 6 8
378.......................................................... 202 2.1782 1 1 2 3 4
379.......................................................... 500 3.2960 1 1 2 3 6
380.......................................................... 111 2.0180 1 1 1 2 4
381.......................................................... 170 2.4647 1 1 1 2 4
382.......................................................... 48 1.4792 1 1 1 1 2
383.......................................................... 2,806 3.6433 1 1 2 4 7
384.......................................................... 151 2.5960 1 1 1 3 4
387.......................................................... 1 9.0000 9 9 9 9 9
389.......................................................... 3 8.6667 1 1 2 3 3
392.......................................................... 2,140 8.8757 2 4 6 11 19
394.......................................................... 2,761 7.3032 1 2 5 9 16
395.......................................................... 101,519 4.0933 1 2 3 5 8
396.......................................................... 18 3.0556 1 2 3 3 4
397.......................................................... 16,443 5.1098 1 2 4 6 10
398.......................................................... 6,708 5.4499 1 2 4 7 10
399.......................................................... 1,084 3.2260 1 1 3 4 6
401.......................................................... 6,451 11.0460 2 5 8 14 22
402.......................................................... 1,359 3.9014 1 1 3 5 9
403.......................................................... 31,351 7.8732 2 3 6 10 16
404.......................................................... 3,824 4.0811 1 2 3 5 8
406.......................................................... 2,304 9.3859 2 4 7 12 20
407.......................................................... 616 3.4935 1 2 3 5 7
408.......................................................... 1,949 8.2104 1 2 5 10 19
409.......................................................... 1,750 6.0383 2 3 4 6 12
410.......................................................... 29,067 3.7654 1 2 3 4 6
411.......................................................... 5 2.0000 1 1 1 3 4
412.......................................................... 9 1.5556 1 1 2 2 2
413.......................................................... 5,742 6.7180 2 3 5 9 13
414.......................................................... 487 4.0575 1 2 3 5 7
417.......................................................... 33 6.5455 2 3 5 8 12
418.......................................................... 29,991 6.0675 2 3 5 7 11
419.......................................................... 17,640 4.3459 1 2 3 5 8
420.......................................................... 3,102 3.1847 1 2 3 4 6
421.......................................................... 13,262 4.0156 1 2 3 5 7

[[Page 48301]]

422.......................................................... 79 3.6456 1 2 2 4 7
423.......................................................... 8,970 8.0750 2 3 6 10 15
424.......................................................... 1,041 11.5053 2 4 8 14 23
425.......................................................... 13,101 3.4571 1 1 3 4 6
426.......................................................... 4,237 4.3099 1 2 3 5 8
427.......................................................... 1,579 4.6390 1 2 3 5 9
428.......................................................... 845 7.2769 1 2 4 8 14
429.......................................................... 23,941 5.4509 2 3 4 6 10
430.......................................................... 75,545 7.7573 2 3 6 9 15
431.......................................................... 333 6.6667 1 2 4 7 11
432.......................................................... 402 4.0199 1 1 3 4 8
433.......................................................... 4,472 2.8233 1 1 2 3 4
439.......................................................... 1,759 8.3337 1 3 5 9 17
440.......................................................... 5,216 8.1532 2 3 5 9 16
441.......................................................... 686 3.4125 1 1 2 4 6
442.......................................................... 18,606 8.6736 2 3 6 10 17
443.......................................................... 3,592 3.5276 1 1 3 5 7
444.......................................................... 6,013 4.0331 1 2 3 5 7
445.......................................................... 2,244 2.8266 1 1 2 3 5
447.......................................................... 6,324 2.5745 1 1 2 3 5
449.......................................................... 40,859 3.6912 1 1 3 4 7
450.......................................................... 7,463 1.9812 1 1 1 2 4
451.......................................................... 2 10.5000 8 8 13 13 13
452.......................................................... 28,822 4.9372 1 2 3 6 10
453.......................................................... 5,397 2.7589 1 1 2 3 5
454.......................................................... 4,739 4.1087 1 2 3 5 8
455.......................................................... 887 2.2807 1 1 2 3 4
461.......................................................... 2,290 5.5782 1 1 3 7 12
462.......................................................... 7,891 9.5516 4 5 7 10 13
463.......................................................... 32,894 3.8764 1 2 3 5 7
464.......................................................... 7,666 2.9032 1 1 2 4 5
465.......................................................... 163 3.4724 1 1 2 4 6
466.......................................................... 1,204 4.9086 1 1 2 4 7
467.......................................................... 1,028 2.6722 1 1 2 3 5
468.......................................................... 52,050 12.5411 3 6 10 16 24
471.......................................................... 15,677 4.5470 3 3 4 5 7
473.......................................................... 8,582 12.4204 2 3 7 17 32
476.......................................................... 2,851 9.9056 1 4 8 14 20
477.......................................................... 28,205 8.5083 1 3 7 11 17
479.......................................................... 27,673 2.5493 1 1 2 3 5
480.......................................................... 908 19.1013 6 8 13 23 39
481.......................................................... 1,199 22.0025 12 16 20 24 33
482.......................................................... 5,084 11.1810 4 6 9 13 20
484.......................................................... 472 12.7564 2 5 10 17 26
485.......................................................... 3,714 9.4715 4 5 7 11 18
486.......................................................... 2,712 12.1962 2 5 10 16 24
487.......................................................... 5,017 6.8405 1 3 5 9 14
488.......................................................... 828 17.6437 4 7 12 21 33
489.......................................................... 13,555 8.1669 2 3 6 10 15
490.......................................................... 5,255 5.3115 1 2 4 6 9
491.......................................................... 22,688 3.0224 1 2 2 3 5
492.......................................................... 3,924 13.8081 3 5 6 23 32
493.......................................................... 61,105 6.0306 2 3 5 8 11
494.......................................................... 24,582 2.6927 1 1 2 4 5
495.......................................................... 342 17.3421 8 10 13 20 33
496.......................................................... 3,727 8.7631 3 4 6 10 17
497.......................................................... 31,227 5.6855 3 3 5 6 9
498.......................................................... 21,305 3.6795 2 3 3 4 5
499.......................................................... 35,251 4.1635 1 2 3 5 8
500.......................................................... 46,507 2.1984 1 1 2 3 4
501.......................................................... 3,201 9.8416 4 5 8 12 18
502.......................................................... 764 5.7003 2 3 5 7 10
503.......................................................... 5,916 3.9238 1 2 3 5 7
504.......................................................... 192 28.0260 8 13 24 36 51
505.......................................................... 180 6.8889 1 1 2 6 13
506.......................................................... 963 15.1547 3 7 12 20 30
507.......................................................... 323 7.6997 1 3 6 10 14
508.......................................................... 655 7.3542 1 3 5 9 14
509.......................................................... 155 5.2323 1 2 3 6 11
510.......................................................... 1,783 6.0432 1 2 4 7 12

[[Page 48302]]

511.......................................................... 627 3.6364 1 1 2 4 7
512.......................................................... 550 13.6200 6 8 10 14 25
513.......................................................... 226 10.6327 5 7 8 11 17
515.......................................................... 58,749 3.8459 1 1 2 5 9
518.......................................................... 23,803 2.4598 1 1 1 3 5
519.......................................................... 12,589 4.6711 1 1 3 6 11
520.......................................................... 16,552 1.9409 1 1 1 2 3
521.......................................................... 29,368 5.2609 1 2 4 6 8
522.......................................................... 3,425 10.2908 3 4 5 7 8
523.......................................................... 14,462 3.7574 1 2 3 4 5
524.......................................................... 109,116 3.1429 1 2 3 4 6
525.......................................................... 205 13.7366 1 3 7 17 35
528.......................................................... 1,845 16.3252 6 9 14 21 29
529.......................................................... 5,027 7.1317 1 2 4 9 16
530.......................................................... 3,362 2.9140 1 1 2 3 5
531.......................................................... 4,994 9.0631 2 4 7 12 18
532.......................................................... 2,882 3.6724 1 1 3 5 7
533.......................................................... 43,722 3.6996 1 1 2 4 9
534.......................................................... 40,255 1.7365 1 1 1 2 3
535.......................................................... 8,831 9.2481 2 4 8 12 18
536.......................................................... 8,262 7.2781 2 3 6 9 14
537.......................................................... 8,985 6.5037 1 3 5 8 13
538.......................................................... 5,462 2.9143 1 1 2 4 6
539.......................................................... 4,974 10.5589 2 4 7 14 23
540.......................................................... 1,505 3.5163 1 1 3 4 7
541.......................................................... 25,113 41.6433 16 23 34 50 72
542.......................................................... 23,126 30.3529 11 17 25 37 52
543.......................................................... 5,718 11.3902 2 4 9 16 23
544.......................................................... 446,467 4.3995 3 3 4 5 7
545.......................................................... 44,844 5.1255 3 3 4 6 9
546.......................................................... 2,364 8.7657 3 4 7 10 16
547.......................................................... 32,721 12.1244 6 8 10 14 20
548.......................................................... 32,268 8.7755 5 6 8 10 13
549.......................................................... 13,144 10.0859 5 6 8 12 18
550.......................................................... 34,583 6.7752 4 5 6 8 10
551.......................................................... 53,881 6.0660 1 2 5 8 12
552.......................................................... 82,137 3.4766 1 1 2 5 7
553.......................................................... 39,303 9.0525 1 3 7 12 19
554.......................................................... 77,366 5.5730 1 2 4 7 12
555.......................................................... 37,404 4.8144 1 2 3 6 10
556.......................................................... 19,008 2.0085 1 1 1 2 4
557.......................................................... 124,278 4.1023 1 2 3 5 8
558.......................................................... 193,170 1.8108 1 1 1 2 4
559.......................................................... 2,895 6.8370 2 3 5 8 13
560.......................................................... 3,457 10.2242 3 5 8 13 19
561.......................................................... 2,952 9.3713 2 5 8 12 18
562.......................................................... 52,973 4.8176 1 2 4 6 9
563.......................................................... 21,161 3.1806 1 2 3 4 6
564.......................................................... 16,330 3.4475 1 2 3 4 6
565.......................................................... 46,864 15.3640 6 9 13 19 26
566.......................................................... 73,101 7.6086 1 3 6 10 15
567.......................................................... 10,369 15.6256 6 8 12 19 29
568.......................................................... 16,698 11.3181 2 5 9 14 22
569.......................................................... 60,835 14.2697 6 8 12 17 26
570.......................................................... 72,291 9.9702 4 6 8 12 18
571.......................................................... 11,162 4.7775 2 2 4 6 9
572.......................................................... 49,006 6.9624 2 3 5 8 13
573.......................................................... 6,687 10.9047 5 6 8 12 19
574.......................................................... 26,637 5.6791 2 3 4 7 11
575.......................................................... 10,982 15.6028 6 8 13 19 27
576.......................................................... 277,520 7.1282 2 3 6 9 14
577.......................................................... 5,608 2.3229 1 1 1 2 5
578.......................................................... 35,320 15.9644 5 8 13 20 30
579.......................................................... 20,672 10.9008 3 5 8 13 22
-------------
12,150,466
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 48303]]

Table 8A.-- Statewide Average Operating Cost-to-Charge Ratios--July 2006
------------------------------------------------------------------------
State Urban Rural
------------------------------------------------------------------------
Alabama.......................................... 0.263 0.336
Alaska............................................ 0.407 0.7
Arizona........................................... 0.284 0.36
Arkansas.......................................... 0.336 0.356
California........................................ 0.238 0.342
Colorado.......................................... 0.308 0.508
Connecticut....................................... 0.427 0.501
Delaware.......................................... 0.496 0.462
District of Columbia.............................. 0.357 .........
Florida........................................... 0.251 0.295
Georgia........................................... 0.351 0.403
Hawaii............................................ 0.366 0.447
Idaho............................................. 0.474 0.541
Illinois.......................................... 0.327 0.417
Indiana........................................... 0.417 0.453
Iowa.............................................. 0.376 0.458
Kansas............................................ 0.299 0.443
Kentucky.......................................... 0.381 0.386
Louisiana......................................... 0.301 0.361
Maine............................................. 0.496 0.457
Maryland.......................................... 0.763 0.882
Massachusetts..................................... 0.476 .........
Michigan.......................................... 0.373 0.47
Minnesota......................................... 0.39 0.523
Mississippi....................................... 0.327 0.376
Missouri.......................................... 0.329 0.381
Montana........................................... 0.427 0.497
Nebraska.......................................... 0.365 0.477
Nevada............................................ 0.229 0.455
New Hampshire..................................... 0.455 0.448
New Jersey........................................ 0.181 .........
New Mexico........................................ 0.382 0.384
New York.......................................... 0.362 0.526
North Carolina.................................... 0.441 0.43
North Dakota...................................... 0.438 0.456
Ohio.............................................. 0.372 0.543
Oklahoma.......................................... 0.317 0.402
Oregon............................................ 0.472 0.43
Pennsylvania...................................... 0.277 0.436
Puerto Rico....................................... 0.457 .........
Rhode Island...................................... 0.409 .........
South Carolina.................................... 0.291 0.298
South Dakota...................................... 0.354 0.447
Tennessee......................................... 0.317 0.383
Texas............................................. 0.278 0.353
Utah.............................................. 0.423 0.588
Vermont........................................... 0.556 0.627
Virginia.......................................... 0.363 0.377
Washington........................................ 0.424 0.469
West Virginia..................................... 0.484 0.466
Wisconsin......................................... 0.431 0.48
Wyoming.......................................... 0.4 0.562
------------------------------------------------------------------------

Table 8B.-- Statewide Average Capital Cost-to-Charge Ratios-- July 2006
------------------------------------------------------------------------
State Ratio
------------------------------------------------------------------------
Alabama...................................................... 0.025
Alaska....................................................... 0.04
Arizona...................................................... 0.025
Arkansas..................................................... 0.026
California................................................... 0.016
Colorado..................................................... 0.029
Connecticut.................................................. 0.031
Delaware..................................................... 0.037
District of Columbia......................................... 0.024
Florida...................................................... 0.023
Georgia...................................................... 0.03
Hawaii....................................................... 0.032
Idaho........................................................ 0.036
Illinois..................................................... 0.026
Indiana...................................................... 0.037
Iowa......................................................... 0.028
Kansas....................................................... 0.032
Kentucky..................................................... 0.03
Louisiana.................................................... 0.029
Maine........................................................ 0.035
Maryland..................................................... 0.013
Massachusetts................................................ 0.034
Michigan..................................................... 0.031
Minnesota.................................................... 0.029
Mississippi.................................................. 0.029
Missouri..................................................... 0.028
Montana...................................................... 0.036
Nebraska..................................................... 0.039
Nevada....................................................... 0.022
New Hampshire................................................ 0.036
New Jersey................................................... 0.013
New Mexico................................................... 0.033
New York..................................................... 0.03
North Carolina............................................... 0.037
North Dakota................................................. 0.041
Ohio......................................................... 0.03
Oklahoma..................................................... 0.03
Oregon....................................................... 0.032
Pennsylvania................................................. 0.023
Puerto Rico.................................................. 0.034
Rhode Island................................................. 0.023
South Carolina............................................... 0.026
South Dakota................................................. 0.033
Tennessee.................................................... 0.032
Texas........................................................ 0.027
Utah......................................................... 0.038
Vermont...................................................... 0.043
Virginia..................................................... 0.037
Washington................................................... 0.034
West Virginia................................................ 0.034
Wisconsin.................................................... 0.039
Wyoming...................................................... 0.047
------------------------------------------------------------------------

Table 8C.--Statewide Average Total Cost-to-Charge Ratios For LTCHS--July
2006
------------------------------------------------------------------------
State Urban Rural
------------------------------------------------------------------------
Alabama.......................................... 0.287 0.366
Alaska........................................... 0.441 0.764
Arizona.......................................... 0.308 0.394
Arkansas......................................... 0.367 0.389
California....................................... 0.252 0.363
Colorado......................................... 0.332 0.573
Connecticut...................................... 0.458 0.540
Delaware......................................... 0.532 0.505
District of Columbia*............................ 0.388 .........
Florida.......................................... 0.272 0.336
Georgia.......................................... 0.380 0.437
Hawaii........................................... 0.397 0.484
Idaho............................................ 0.510 0.582
Illinois......................................... 0.351 0.456
Indiana.......................................... 0.454 0.499
Iowa............................................. 0.397 0.497
Kansas........................................... 0.326 0.486
Kentucky......................................... 0.411 0.418
Louisiana........................................ 0.331 0.392
Maine............................................ 0.533 0.473
Maryland**....................................... 0.450 0.360
Massachusetts*................................... 0.505 .........
Michigan......................................... 0.406 0.506
Minnesota........................................ 0.418 0.552
Mississippi...................................... 0.356 0.400
Missouri......................................... 0.355 0.415
Montana.......................................... 0.459 0.543
Nebraska......................................... 0.400 0.526
Nevada........................................... 0.250 0.525
New Hampshire.................................... 0.492 0.481
New Jersey*...................................... 0.194 .........
New Mexico....................................... 0.415 0.417
New York......................................... 0.390 0.561
North Carolina................................... 0.482 0.471
North Dakota..................................... 0.476 0.503
Ohio............................................. 0.398 0.587
Oklahoma......................................... 0.345 0.439
Oregon........................................... 0.504 0.454
Pennsylvania..................................... 0.296 0.469
Puerto Rico*..................................... 0.489 .........
Rhode Island*.................................... 0.432 .........
South Carolina................................... 0.315 0.326
South Dakota..................................... 0.384 0.487
Tennessee........................................ 0.348 0.417
Texas............................................ 0.303 0.384
Utah............................................. 0.459 0.650
Vermont.......................................... 0.601 0.667
Virginia......................................... 0.398 0.415
Washington....................................... 0.459 0.516
West Virginia.................................... 0.517 0.499
Wisconsin........................................ 0.473 0.519
Wyoming.......................................... 0.440 0.615
------------------------------------------------------------------------
* All counties in the State or Territory are classified as urban, with
the exception of Massachusetts, which has areas designated as rural.
However, no short-term acute care IPPS hospitals or LTCHs are located
in those areas as of July 2006.
** National average IPPS total cost-to-charge ratios, as discussed in
section II.E. of this final rule.

Note: The following Table 9A is a tentative table and does not
reflect decisions that are yet to be made by CMS pending the final
calculation of the occupationa l mix adjusted wage index. The
information about reclassifie d CBSAs reflects the latest information
available to CMS regarding MGCRB and Administrat or reclassific ation
decisions for FY 2007. A revised Table 9A reflecting CMS' decisions on
behalf of hospitals using occupationa l mix adjusted wage indices will
be published in a subsequent Federal Register notice between August 1
and October 1, 2006, as well as on CMS' Web site. Hospitals will then
have 30 days from the date the data appears on the CMS Web site to
revise a decision made by CMS on their behalf. (See section III.H. of
the preamble (Revisions to the Wage Index Based on Hospital
Redesignations).)

[[Page 48304]]

Table 9A.--Hospital Reclassifications and Redesignations By Individual Hospitals and CBSA--FY 2007
----------------------------------------------------------------------------------------------------------------
Reclassified Reclassified
Geographic CBSA 10/1/ CBSA 4/1/2007-
Provider No. CBSA 2006- 3/31/ 9/30/2007 LUGAR
2007
----------------------------------------------------------------------------------------------------------------
010005.................................. 01 13820 13820
010008.................................. 01 33860 33860
010009.................................. 19460 26620 26620
010012.................................. 01 16860 16860
010022.................................. 01 40660 40660 LUGAR
010025.................................. 01 17980 17980
010029.................................. 12220 17980 17980
010035.................................. 01 13820 13820
010044.................................. 01 13820 13820
010045.................................. 01 13820 13820
010054.................................. 19460 26620 26620
010059.................................. 19460 26620 26620
010065.................................. 01 33860 33860
010072.................................. 01 11500 11500 LUGAR
010083.................................. 01 37860 37860
010085.................................. 19460 26620 26620
010100.................................. 01 37860 37860
010101.................................. 01 11500 11500 LUGAR
010118.................................. 01 46220 46220
010126.................................. 01 33860 33860
010143.................................. 01 13820 13820
010150.................................. 01 33860 33860
010158.................................. 01 19460 19460
010164.................................. 01 11500 11500 LUGAR
020008.................................. 02 11260 11260
030007.................................. 03 22380 22380
030033.................................. 03 22380 22380
040014.................................. 04 30780 30780
040017.................................. 04 22220 22220
040019.................................. 04 32820 32820
040020.................................. 27860 32820 32820
040027.................................. 04 44180 44180
040039.................................. 04 26 26
040041.................................. 04 30780 30780
040047.................................. 04 26 26
040069.................................. 04 32820 32820
040071.................................. 38220 30780 30780
040076.................................. 04 30780 30780
040078.................................. 26300 30780 30780
040080.................................. 04 27860 27860
040088.................................. 04 43340 43340
040091.................................. 04 45500 45500
040100.................................. 04 30780 30780
040119.................................. 04 30780 30780
050006.................................. 05 39820 39820
050009.................................. 34900 46700 46700
050013.................................. 34900 46700 46700
050014.................................. 05 40900 40900
050022.................................. 40140 42044 42044
050042.................................. 05 39820 39820
050046.................................. 37100 .............. 31084
050054.................................. 40140 42044 42044
050065.................................. 42044 31084 31084
050069.................................. 42044 31084 31084
050071.................................. 41940 36084 36084
050073.................................. 46700 36084 36084
050076.................................. 41884 36084 36084
050082.................................. 37100 .............. 31084
050089.................................. 40140 31084 31084
050090.................................. 42220 41884 41884
050099.................................. 40140 31084 31084
050101.................................. 46700 36084 36084
050102.................................. 40140 42044 42044
050118.................................. 44700 33700 33700
050129.................................. 40140 31084 31084
050136.................................. 42220 41884 41884
050140.................................. 40140 31084 31084
050150.................................. 05 40900 40900
050159.................................. 37100 .............. 31084

[[Page 48305]]

050168.................................. 42044 31084 31084
050173.................................. 42044 31084 31084
050174.................................. 42220 41884 41884
050193.................................. 42044 31084 31084
050197.................................. 41884 36084 36084
050224.................................. 42044 31084 31084
050226.................................. 42044 31084 31084
050228.................................. 41884 36084 36084
050230.................................. 42044 31084 31084
050236.................................. 37100 .............. 31084
050243.................................. 40140 42044 42044
050245.................................. 40140 31084 31084
050251.................................. 05 39900 39900
050272.................................. 40140 31084 31084
050279.................................. 40140 31084 31084
050291.................................. 42220 41884 41884
050292.................................. 40140 42044 42044
050298.................................. 40140 31084 31084
050300.................................. 40140 31084 31084
050327.................................. 40140 31084 31084
050329.................................. 40140 42044 42044
050348.................................. 42044 31084 31084
050367.................................. 46700 36084 36084
050385.................................. 42220 41884 41884
050390.................................. 40140 42044 42044
050394.................................. 37100 .............. 31084
050423.................................. 40140 42044 42044
050426.................................. 42044 31084 31084
050430.................................. 05 39900 39900
050510.................................. 41884 36084 36084
050517.................................. 40140 31084 31084
050526.................................. 42044 31084 31084
050534.................................. 40140 42044 42044
050535.................................. 42044 31084 31084
050541.................................. 41884 36084 36084
050543.................................. 42044 31084 31084
050547.................................. 42220 41884 41884
050548.................................. 42044 31084 31084
050549.................................. 37100 .............. 31084
050550.................................. 42044 31084 31084
050551.................................. 42044 31084 31084
050567.................................. 42044 31084 31084
050569.................................. 05 42220 42220
050570.................................. 42044 31084 31084
050573.................................. 40140 42044 42044
050580.................................. 42044 31084 31084
050584.................................. 40140 31084 31084
050585.................................. 42044 31084 31084
050586.................................. 40140 31084 31084
050589.................................. 42044 31084 31084
050592.................................. 42044 31084 31084
050594.................................. 42044 31084 31084
050603.................................. 42044 31084 31084
050609.................................. 42044 31084 31084
050616.................................. 37100 .............. 31084
050667.................................. 34900 46700 46700
050678.................................. 42044 31084 31084
050680.................................. 46700 36084 36084
050684.................................. 40140 42044 42044
050686.................................. 40140 42044 42044
050690.................................. 42220 41884 41884
050693.................................. 42044 31084 31084
050694.................................. 40140 42044 42044
050701.................................. 40140 42044 42044
050709.................................. 40140 31084 31084
050718.................................. 40140 42044 42044
050720.................................. 42044 31084 31084
050728.................................. 42220 41884 41884

[[Page 48306]]

050749.................................. 37100 .............. 31084
060001.................................. 24540 19740 19740
060003.................................. 14500 19740 19740
060023.................................. 24300 19740 19740
060027.................................. 14500 19740 19740
060044.................................. 06 19740 19740
060049.................................. 06 22660 22660
060075.................................. 06 24300 24300
060096.................................. 06 19740 19740
060103.................................. 14500 19740 19740
070001.................................. 35300 .............. 35004
070003.................................. 07 25540 25540 LUGAR
070005.................................. 35300 .............. 35004
070006.................................. 14860 .............. 35644
070010.................................. 14860 .............. 35644
070016.................................. 35300 .............. 35004
070017.................................. 35300 .............. 35004
070018.................................. 14860 .............. 35644
070019.................................. 35300 .............. 35004
070021.................................. 07 25540 25540 LUGAR
070022.................................. 35300 .............. 35004
070028.................................. 14860 .............. 35644
070031.................................. 35300 .............. 35004
070033.................................. 14860 35644 35644
070034.................................. 14860 .............. 35644
070036.................................. 25540 35300 35300
070038.................................. 35300 .............. 35004
070039.................................. 35300 .............. 35004
080004.................................. 20100 48864 48864
080006.................................. 08 20100 20100
080007.................................. 08 36140 36140
090001.................................. 47894 13644 13644
100022.................................. 33124 22744 22744
100023.................................. 10 36740 36740
100024.................................. 10 33124 33124
100045.................................. 19660 36740 36740
100049.................................. 10 29460 29460
100081.................................. 10 23020 23020 LUGAR
100109.................................. 10 36740 36740
100118.................................. 10 27260 27260
100139.................................. 10 23540 23540 LUGAR
100150.................................. 10 33124 33124
100157.................................. 29460 45300 45300
100176.................................. 48424 38940 38940
100217.................................. 42680 38940 38940
100232.................................. 10 27260 27260
100239.................................. 45300 42260 42260
100249.................................. 10 45300 45300
100252.................................. 10 38940 38940
100258.................................. 48424 22744 22744
100292.................................. 10 23020 23020 LUGAR
110001.................................. 19140 12060 12060
110002.................................. 11 12060 12060
110003.................................. 11 27260 27260
110023.................................. 11 12060 12060
110025.................................. 15260 27260 27260
110029.................................. 23580 12060 12060
110038.................................. 11 46660 46660
110040.................................. 11 12060 12060 LUGAR
110041.................................. 11 12020 12020
110052.................................. 11 16860 16860 LUGAR
110054.................................. 40660 12060 12060
110069.................................. 47580 31420 31420
110075.................................. 11 42340 42340
110088.................................. 11 12060 12060 LUGAR
110095.................................. 11 46660 46660
110117.................................. 11 12060 12060 LUGAR
110122.................................. 46660 45220 45220

[[Page 48307]]

110125.................................. 11 31420 31420
110128.................................. 11 42340 42340
110150.................................. 11 12060 12060
110153.................................. 47580 31420 31420
110168.................................. 40660 12060 12060
110187.................................. 11 12060 12060 LUGAR
110189.................................. 11 12060 12060
110205.................................. 11 12060 12060
120028.................................. 12 26180 26180
130002.................................. 13 29 29
130003.................................. 30300 28420 28420
130018.................................. 13 38540 38540
130049.................................. 17660 44060 44060
130067.................................. 13 26820 26820 LUGAR
140012.................................. 14 16974 16974
140015.................................. 14 41180 41180
140032.................................. 14 41180 41180
140033.................................. 29404 16974 16974
140034.................................. 14 41180 41180
140040.................................. 14 37900 37900
140043.................................. 14 40420 40420
140046.................................. 14 41180 41180
140058.................................. 14 41180 41180
140064.................................. 14 37900 37900
140084.................................. 29404 16974 16974
140093.................................. 19180 16580 16580
140100.................................. 29404 16974 16974
140110.................................. 14 16974 16974
140130.................................. 29404 16974 16974
140143.................................. 14 37900 37900
140160.................................. 14 40420 40420
140161.................................. 14 16974 16974
140164.................................. 14 41180 41180
140189.................................. 14 16580 16580
140202.................................. 29404 16974 16974
140233.................................. 40420 16974 16974
140234.................................. 14 37900 37900
140236.................................. 14 28100 28100 LUGAR
140291.................................. 29404 16974 16974
150002.................................. 23844 16974 16974
150004.................................. 23844 16974 16974
150006.................................. 33140 43780 43780
150008.................................. 23844 16974 16974
150011.................................. 15 26900 26900
150015.................................. 33140 16974 16974
150030.................................. 15 26900 26900 LUGAR
150034.................................. 23844 16974 16974
150048.................................. 15 17140 17140
150051.................................. 14020 26900 26900
150065.................................. 15 26900 26900
150069.................................. 15 17140 17140
150076.................................. 15 43780 43780
150088.................................. 11300 26900 26900
150090.................................. 23844 16974 16974
150102.................................. 15 23844 23844 LUGAR
150112.................................. 18020 26900 26900
150113.................................. 11300 26900 26900
150122.................................. 15 26900 26900
150125.................................. 23844 16974 16974
150126.................................. 23844 16974 16974
150133.................................. 15 23060 23060
150146.................................. 15 23060 23060
150147.................................. 23844 16974 16974
160001.................................. 16 19780 19780
160016.................................. 16 19780 19780
160057.................................. 16 26980 26980
160064.................................. 16 24 24
160080.................................. 16 19340 19340

[[Page 48308]]

160089.................................. 16 19780 19780
160147.................................. 16 19780 19780
170006.................................. 17 27900 27900
170010.................................. 17 46140 46140
170012.................................. 17 48620 48620
170013.................................. 17 48620 48620
170020.................................. 17 48620 48620
170023.................................. 17 48620 48620
170033.................................. 17 48620 48620
170058.................................. 17 28140 28140
170068.................................. 17 11100 11100
170120.................................. 17 27900 27900
170142.................................. 17 45820 45820
170175.................................. 17 48620 48620
170190.................................. 17 45820 45820
170193.................................. 17 48620 48620
180005.................................. 18 26580 26580
180011.................................. 18 30460 30460
180012.................................. 21060 31140 31140
180013.................................. 14540 34980 34980
180017.................................. 18 21060 21060
180018.................................. 18 30460 30460
180019.................................. 18 17140 17140
180024.................................. 18 31140 31140
180027.................................. 18 17300 17300
180029.................................. 18 28700 28700
180044.................................. 18 26580 26580
180048.................................. 18 31140 31140
180066.................................. 18 34980 34980
180069.................................. 18 26580 26580
180075.................................. 18 14540 14540 LUGAR
180078.................................. 18 26580 26580
180080.................................. 18 28940 28940
180093.................................. 18 21780 21780
180102.................................. 18 17300 17300
180104.................................. 18 17300 17300
180116.................................. 18 14 14
180124.................................. 14540 34980 34980
180127.................................. 18 31140 31140
180132.................................. 18 30460 30460
180139.................................. 18 30460 30460
190001.................................. 19 35380 35380
190003.................................. 19 29180 29180
190015.................................. 19 35380 35380
190086.................................. 19 33740 33740
190099.................................. 19 12940 12940
190106.................................. 19 10780 10780
190131.................................. 12940 35380 35380
190155.................................. 19 12940 12940 LUGAR
190164.................................. 19 10780 10780
190191.................................. 19 12940 12940
190208.................................. 19 4 4
190218.................................. 19 43340 43340
190223.................................. 19 12940 12940 LUGAR
200020.................................. 38860 40484 40484
200024.................................. 30340 38860 38860
200034.................................. 30340 38860 38860
200039.................................. 20 38860 38860
200050.................................. 20 12620 12620
200063.................................. 20 38860 38860
220001.................................. 49340 14484 14484
220002.................................. 15764 14484 14484
220008.................................. 39300 14484 14484
220010.................................. 21604 14484 14484
220011.................................. 15764 14484 14484
220019.................................. 49340 14484 14484
220020.................................. 38860 40484 40484
220025.................................. 49340 14484 14484

[[Page 48309]]

220028.................................. 49340 14484 14484
220029.................................. 21604 14484 14484
220033.................................. 21604 14484 14484
220035.................................. 21604 14484 14484
220049.................................. 15764 14484 14484
220058.................................. 49340 14484 14484
220060.................................. 14484 12700 12700
220062.................................. 49340 14484 14484
220063.................................. 15764 14484 14484
220070.................................. 15764 14484 14484
220073.................................. 39300 14484 14484
220077.................................. 44140 25540 25540
220080.................................. 21604 14484 14484
220082.................................. 15764 14484 14484
220084.................................. 15764 14484 14484
220090.................................. 49340 14484 14484
220095.................................. 49340 14484 14484
220098.................................. 15764 14484 14484
220101.................................. 15764 14484 14484
220105.................................. 15764 14484 14484
220133.................................. 15764 14484 14484
220163.................................. 49340 14484 14484
220171.................................. 15764 14484 14484
220174.................................. 21604 14484 14484
230002.................................. 19804 .............. 11460
230003.................................. 26100 .............. 34740
230013.................................. 47644 .............. 19804
230019.................................. 47644 .............. 19804
230020.................................. 19804 .............. 11460
230022.................................. 23 29620 29620
230024.................................. 19804 .............. 11460
230029.................................. 47644 .............. 19804
230030.................................. 23 40980 40980
230035.................................. 23 24340 24340 LUGAR
230036.................................. 23 13020 13020
230037.................................. 23 11460 11460
230047.................................. 47644 19804 19804
230053.................................. 19804 .............. 11460
230054.................................. 23 24580 24580
230065.................................. 19804 .............. 11460
230069.................................. 47644 11460 11460
230071.................................. 47644 .............. 19804
230072.................................. 26100 .............. 34740
230077.................................. 40980 22420 22420
230080.................................. 23 40980 40980
230089.................................. 19804 .............. 11460
230092.................................. 27100 29620 29620
230093.................................. 23 24340 24340
230096.................................. 23 28020 28020
230097.................................. 23 24340 24340
230099.................................. 33780 11460 11460
230104.................................. 19804 .............. 11460
230105.................................. 23 13020 13020
230119.................................. 19804 .............. 11460
230121.................................. 23 29620 29620 LUGAR
230130.................................. 47644 .............. 19804
230134.................................. 23 26100 26100 LUGAR
230135.................................. 19804 .............. 11460
230142.................................. 19804 .............. 11460
230146.................................. 19804 .............. 11460
230151.................................. 47644 .............. 19804
230165.................................. 19804 .............. 11460
230174.................................. 26100 .............. 34740
230176.................................. 19804 .............. 11460
230195.................................. 47644 19804 19804
230204.................................. 47644 19804 19804
230207.................................. 47644 .............. 19804
230208.................................. 23 24340 24340 LUGAR

[[Page 48310]]

230217.................................. 12980 29620 29620
230223.................................. 47644 .............. 19804
230227.................................. 47644 19804 19804
230244.................................. 19804 .............. 11460
230254.................................. 47644 .............. 19804
230257.................................. 47644 19804 19804
230264.................................. 47644 19804 19804
230269.................................. 47644 .............. 19804
230270.................................. 19804 .............. 11460
230273.................................. 19804 .............. 11460
230277.................................. 47644 .............. 19804
230279.................................. 47644 11460 11460
230293.................................. 19804 .............. 11460
230295.................................. 23 26100 26100 LUGAR
240018.................................. 24 33460 33460
240030.................................. 24 41060 41060
240036.................................. 41060 33460 33460
240064.................................. 24 20260 20260
240069.................................. 24 40340 40340
240071.................................. 24 40340 40340
240075.................................. 24 41060 41060
240088.................................. 24 41060 41060
240093.................................. 24 33460 33460
240105.................................. 24 40340 40340 LUGAR
240150.................................. 24 40340 40340 LUGAR
240187.................................. 24 33460 33460
240211.................................. 24 33460 33460
250002.................................. 25 22520 22520
250004.................................. 25 32820 32820
250006.................................. 25 32820 32820
250009.................................. 25 27180 27180
250023.................................. 25 25060 25060 LUGAR
250031.................................. 25 27140 27140
250034.................................. 25 32820 32820
250040.................................. 37700 25060 25060
250042.................................. 25 32820 32820
250044.................................. 25 22520 22520
250069.................................. 25 46220 46220
250079.................................. 25 27140 27140
250081.................................. 25 46220 46220
250082.................................. 25 38220 38220
250094.................................. 25620 25060 25060
250097.................................. 25 12940 12940
250099.................................. 25 27140 27140
250100.................................. 25 46220 46220
250104.................................. 25 27140 27140
250117.................................. 25 25060 25060 LUGAR
260009.................................. 26 28140 28140
260011.................................. 27620 17860 17860
260015.................................. 26 27860 27860
260017.................................. 26 41180 41180
260022.................................. 26 16 16
260025.................................. 26 41180 41180
260049.................................. 26 44180 44180 LUGAR
260050.................................. 26 41140 41140
260064.................................. 26 17860 17860
260074.................................. 26 17860 17860
260094.................................. 26 44180 44180
260110.................................. 26 41180 41180
260113.................................. 26 14 14
260116.................................. 26 14 14
260119.................................. 26 27860 27860
260175.................................. 26 28140 28140
260183.................................. 26 41180 41180
260186.................................. 26 17860 17860
270003.................................. 27 24500 24500
270011.................................. 27 24500 24500
270017.................................. 27 33540 33540

[[Page 48311]]

270051.................................. 27 33540 33540
280009.................................. 28 30700 30700
280023.................................. 28 30700 30700
280032.................................. 28 30700 30700
280061.................................. 28 53 53
280065.................................. 28 24540 24540
280077.................................. 28 36540 36540
280125.................................. 28 43580 43580
290002.................................. 29 16180 16180 LUGAR
290006.................................. 29 39900 39900
290008.................................. 29 41620 41620
290019.................................. 16180 39900 39900
300005.................................. 30 31700 31700
300011.................................. 31700 15764 15764
300012.................................. 31700 15764 15764
300014.................................. 40484 31700 31700
300017.................................. 40484 21604 21604
300018.................................. 40484 31700 31700
300019.................................. 30 49340 49340
300020.................................. 31700 15764 15764
300023.................................. 40484 21604 21604
300029.................................. 40484 21604 21604
300034.................................. 31700 15764 15764
310002.................................. 35084 35644 35644
310009.................................. 35084 35644 35644
310013.................................. 35084 35644 35644
310014.................................. 15804 37964 37964
310015.................................. 35084 35644 35644
310017.................................. 35084 35644 35644
310018.................................. 35084 35644 35644
310021.................................. 45940 35084 35084
310031.................................. 15804 20764 20764
310038.................................. 20764 35644 35644
310039.................................. 20764 35644 35644
310048.................................. 20764 35084 35084
310050.................................. 35084 35644 35644
310054.................................. 35084 35644 35644
310070.................................. 20764 35644 35644
310076.................................. 35084 35644 35644
310078.................................. 35084 35644 35644
310081.................................. 15804 37964 37964
310083.................................. 35084 35644 35644
310093.................................. 35084 35644 35644
310096.................................. 35084 35644 35644
310108.................................. 20764 35644 35644
310119.................................. 35084 35644 35644
320005.................................. 22140 10740 10740
320006.................................. 32 42140 42140
320013.................................. 32 42140 42140
320014.................................. 32 29740 29740
320033.................................. 32 42140 42140 LUGAR
320063.................................. 32 36220 36220
320065.................................. 32 36220 36220
330004.................................. 28740 39100 39100
330008.................................. 33 15380 15380 LUGAR
330027.................................. 35004 35644 35644
330038.................................. 33 40380 40380 LUGAR
330073.................................. 33 40380 40380 LUGAR
330079.................................. 33 47 47
330085.................................. 33 45060 45060
330094.................................. 33 28740 28740
330103.................................. 33 39 39
330106.................................. 35004 .............. 35644
330136.................................. 33 45060 45060
330157.................................. 33 45060 45060
330167.................................. 35004 .............. 35644
330181.................................. 35004 .............. 35644
330182.................................. 35004 35644 35644

[[Page 48312]]

330191.................................. 24020 10580 10580
330198.................................. 35004 .............. 35644
330224.................................. 28740 39100 39100
330225.................................. 35004 .............. 35644
330229.................................. 27460 21500 21500
330235.................................. 33 45060 45060 LUGAR
330239.................................. 27460 21500 21500
330250.................................. 33 15540 15540
330259.................................. 35004 35644
330277.................................. 33 27060 27060
330331.................................. 35004 .............. 35644
330332.................................. 35004 .............. 35644
330359.................................. 33 39100 39100 LUGAR
330372.................................. 35004 .............. 35644
330386.................................. 33 39100 39100
340004.................................. 24660 49180 49180
340008.................................. 34 16740 16740
340010.................................. 24140 39580 39580
340013.................................. 34 24860 24860
340014.................................. 49180 24660 24660
340021.................................. 34 16740 16740
340023.................................. 11700 24860 24860
340027.................................. 34 24780 24780
340039.................................. 34 16740 16740
340047.................................. 49180 24660 24660
340050.................................. 34 22180 22180
340051.................................. 34 25860 25860
340068.................................. 34 48900 48900
340069.................................. 39580 20500 20500
340070.................................. 15500 24660 24660
340071.................................. 34 39580 39580 LUGAR
340073.................................. 39580 20500 20500
340091.................................. 24660 49180 49180
340109.................................. 34 47260 47260
340114.................................. 39580 20500 20500
340115.................................. 34 20500 20500
340124.................................. 34 39580 39580 LUGAR
340126.................................. 34 39580 39580
340127.................................. 34 20500 20500
340129.................................. 34 16740 16740
340131.................................. 34 24780 24780
340136.................................. 34 20500 20500 LUGAR
340138.................................. 39580 20500 20500
340144.................................. 34 16740 16740
340145.................................. 34 16740 16740 LUGAR
340147.................................. 40580 39580 39580
340148.................................. 49180 24660 24660
340173.................................. 39580 20500 20500
350003.................................. 35 13900 13900
350006.................................. 35 13900 13900
350009.................................. 35 22020 22020
360008.................................. 36 26580 26580
360010.................................. 36 10420 10420
360011.................................. 36 18140 18140
360013.................................. 36 30620 30620
360014.................................. 36 18140 18140
360019.................................. 10420 17460 17460
360020.................................. 10420 17460 17460
360025.................................. 41780 17460 17460
360027.................................. 10420 17460 17460
360036.................................. 36 17460 17460
360039.................................. 36 18140 18140
360054.................................. 36 26580 26580
360065.................................. 36 17460 17460
360078.................................. 10420 17460 17460
360079.................................. 19380 17140 17140
360084.................................. 15940 10420 10420
360086.................................. 44220 19380 19380

[[Page 48313]]

360095.................................. 36 45780 45780
360096.................................. 36 49660 49660 LUGAR
360107.................................. 36 45780 45780
360121.................................. 36 11460 11460
360150.................................. 10420 17460 17460
360159.................................. 36 18140 18140
360175.................................. 36 18140 18140
360185.................................. 36 49660 49660 LUGAR
360187.................................. 44220 19380 19380
360197.................................. 36 18140 18140
360211.................................. 48260 38300 38300
360238.................................. 36 49660 49660 LUGAR
360241.................................. 10420 17460 17460
360245.................................. 36 17460 17460 LUGAR
360253.................................. 19380 17140 17140
370004.................................. 37 27900 27900
370006.................................. 37 17 17
370014.................................. 37 43300 43300
370015.................................. 37 46140 46140
370016.................................. 37 36420 36420
370018.................................. 37 46140 46140
370022.................................. 37 30020 30020
370025.................................. 37 46140 46140
370026.................................. 37 36420 36420
370034.................................. 37 22900 22900
370047.................................. 37 43300 43300
370049.................................. 37 36420 36420
370099.................................. 37 46140 46140
370103.................................. 37 45 45
370113.................................. 37 22220 22220
380001.................................. 38 38900 38900
380022.................................. 38 18700 18700 LUGAR
380027.................................. 38 21660 21660
380050.................................. 38 32780 32780
380090.................................. 38 21660 21660
390006.................................. 39 25420 25420
390013.................................. 39 25420 25420
390030.................................. 39 10900 10900
390031.................................. 39 39740 39740 LUGAR
390046.................................. 49620 29540 29540
390048.................................. 39 25420 25420
390052.................................. 39 11020 11020
390065.................................. 39 47894 47894
390066.................................. 30140 25420 25420
390071.................................. 39 48700 48700 LUGAR
390079.................................. 39 13780 13780
390081.................................. 37964 48864 48864
390086.................................. 39 44300 44300
390091.................................. 39 38300 38300
390093.................................. 39 38300 38300
390110.................................. 27780 38300 38300
390113.................................. 39 36 36
390133.................................. 10900 37964 37964
390138.................................. 39 47894 47894
390150.................................. 39 38300 38300 LUGAR
390151.................................. 39 13644 13644
390156.................................. 37964 48864 48864
390180.................................. 37964 48864 48864
390222.................................. 37964 48864 48864
390246.................................. 39 48700 48700
400048.................................. 25020 41980 41980
410010.................................. 39300 14484 14484
410012.................................. 39300 14484 14484
410013.................................. 39300 35980 35980
420007.................................. 43900 24860 24860
420009.................................. 42 24860 24860 LUGAR
420020.................................. 42 16700 16700
420027.................................. 11340 24860 24860

[[Page 48314]]

420028.................................. 42 44940 44940 LUGAR
420030.................................. 42 16700 16700
420036.................................. 42 16740 16740
420039.................................. 42 43900 43900 LUGAR
420067.................................. 42 42340 42340
420068.................................. 42 12260 12260
420069.................................. 42 44940 44940 LUGAR
420070.................................. 44940 17900 17900
420071.................................. 42 24860 24860
420080.................................. 42 42340 42340
420083.................................. 43900 24860 24860
420085.................................. 34820 48900 48900
430012.................................. 43 43620 43620
430014.................................. 43 22020 22020
430094.................................. 43 53 53
440002.................................. 27180 32820 32820
440008.................................. 44 27180 27180
440020.................................. 44 26620 26620
440024.................................. 17420 16860 16860
440025.................................. 44 34 34
440035.................................. 17300 34980 34980
440050.................................. 44 11700 11700
440056.................................. 34100 28940 28940
440058.................................. 44 16860 16860
440059.................................. 44 34980 34980
440060.................................. 44 27180 27180
440067.................................. 34100 28940 28940
440068.................................. 44 16860 16860
440072.................................. 44 32820 32820
440073.................................. 44 34980 34980
440148.................................. 44 34980 34980
440151.................................. 44 34980 34980
440175.................................. 44 34980 34980
440180.................................. 44 28940 28940
440185.................................. 17420 16860 16860
440192.................................. 44 34980 34980
450007.................................. 45 41700 41700
450032.................................. 45 43340 43340
450039.................................. 23104 19124 19124
450059.................................. 41700 12420 12420
450064.................................. 23104 19124 19124
450073.................................. 45 10180 10180
450080.................................. 45 30980 30980
450087.................................. 23104 19124 19124
450099.................................. 45 11100 11100
450121.................................. 23104 19124 19124
450135.................................. 23104 19124 19124
450137.................................. 23104 19124 19124
450144.................................. 45 36220 36220
450148.................................. 23104 19124 19124
450187.................................. 45 26420 26420
450192.................................. 45 19124 19124
450194.................................. 45 19124 19124
450196.................................. 45 19124 19124
450211.................................. 45 26420 26420
450214.................................. 45 26420 26420
450224.................................. 45 46340 46340
450283.................................. 45 19124 19124 LUGAR
450286.................................. 45 17780 17780 LUGAR
450324.................................. 43300 19124 19124
450347.................................. 45 26420 26420
450351.................................. 45 23104 23104
450389.................................. 45 19124 19124 LUGAR
450393.................................. 43300 19124 19124
450395.................................. 45 26420 26420
450400.................................. 45 47380 47380
450419.................................. 23104 19124 19124
450438.................................. 45 26420 26420

[[Page 48315]]

450447.................................. 45 19124 19124
450451.................................. 45 23104 23104
450469.................................. 43300 19124 19124
450484.................................. 45 30980 30980
450508.................................. 45 46340 46340
450547.................................. 45 19124 19124
450563.................................. 23104 19124 19124
450639.................................. 23104 19124 19124
450653.................................. 45 33260 33260
450656.................................. 45 46340 46340
450672.................................. 23104 19124 19124
450675.................................. 23104 19124 19124
450677.................................. 23104 19124 19124
450694.................................. 45 26420 26420
450747.................................. 45 19124 19124
450755.................................. 45 31180 31180
450770.................................. 45 12420 12420 LUGAR
450779.................................. 23104 19124 19124
450813.................................. 45 41700 41700
450830.................................. 45 36220 36220
450839.................................. 45 43340 43340
450858.................................. 23104 19124 19124
450872.................................. 23104 19124 19124
450880.................................. 23104 19124 19124
460004.................................. 36260 41620 41620
460005.................................. 36260 41620 41620
460007.................................. 46 41100 41100
460011.................................. 46 39340 39340
460021.................................. 41100 29820 29820
460039.................................. 46 36260 36260
460041.................................. 36260 41620 41620
460042.................................. 36260 41620 41620
470001.................................. 47 30 30
470011.................................. 47 15764 15764
470012.................................. 47 38340 38340
490004.................................. 25500 16820 16820
490005.................................. 49020 47894 47894
490013.................................. 49 31340 31340
490018.................................. 49 16820 16820
490042.................................. 13980 40220 40220
490048.................................. 40220 31340 31340
490079.................................. 49 24660 24660
490092.................................. 49 40060 40060
490105.................................. 49 28700 28700
490106.................................. 49 16820 16820
490109.................................. 47260 40060 40060
500002.................................. 50 28420 28420
500003.................................. 34580 42644 42644
500016.................................. 48300 42644 42644
500021.................................. 45104 42644 42644
500024.................................. 36500 45104 45104
500039.................................. 14740 42644 42644
500041.................................. 31020 38900 38900
500072.................................. 50 42644 42644
500079.................................. 45104 42644 42644
500108.................................. 45104 42644 42644
500129.................................. 45104 42644 42644
500139.................................. 36500 45104 45104
500143.................................. 36500 45104 45104
510001.................................. 34060 38300 38300
510002.................................. 51 40220 40220
510006.................................. 51 38300 38300
510018.................................. 51 16620 16620 LUGAR
510024.................................. 34060 38300 38300
510030.................................. 51 34060 34060
510046.................................. 51 16620 16620
510047.................................. 51 38300 38300
510062.................................. 51 16620 16620

[[Page 48316]]

510070.................................. 51 16620 16620
510071.................................. 51 16620 16620
510077.................................. 51 26580 26580
520002.................................. 52 48140 48140
520021.................................. 29404 16974 16974
520028.................................. 52 31540 31540
520037.................................. 52 48140 48140
520059.................................. 39540 29404 29404
520060.................................. 52 22540 22540 LUGAR
520066.................................. 27500 31540 31540
520071.................................. 52 33340 33340 LUGAR
520076.................................. 52 31540 31540
520088.................................. 22540 33340 33340
520094.................................. 39540 33340 33340
520095.................................. 52 31540 31540
520096.................................. 39540 33340 33340
520102.................................. 52 33340 33340 LUGAR
520107.................................. 52 24580 24580
520113.................................. 52 24580 24580
520116.................................. 52 33340 33340 LUGAR
520173.................................. 52 20260 20260
520189.................................. 29404 16974 16974
530015.................................. 53 26820 26820
530025.................................. 53 22660 22660
----------------------------------------------------------------------------------------------------------------

Note: The following Table 9B is a tentative table and does not
reflect decisions that are yet to be made by CMS pending the final
calculation of the occupational mix adjusted wage index. The
information about reclassified CBSAs reflects the latest information
available to CMS regarding MGCRB and Administrator reclassification
decisions for FY 2007. A revised Table 9B reflecting CMS' decisions on
behalf of hospitals using occupational mix adjusted wage indices will
be published in a subsequent Federal Register notice between August 1
and October 1, 2006, as well as on CMS' Web site. Hospitals will then
have 30 days from the date the data appears on the CMS Web site to
revise a decision made by CMS on their behalf. (See section III.H. of
the preamble (Revisions to the Wage Index Based on Hospital
Redesignations)).

Table 9B.--Hospital Reclassifications and Redesignations by Individual Hospital Under Section 508 of Pub. L. 108-173--FY 2007
--------------------------------------------------------------------------------------------------------------------------------------------------------
Wage index Wage Index
Provider No. Note Geograraphic CBSA-- 10/1/06- CBSA-- 4/1/07- Own wage index-- 10/1/06-3/31/07
CBSA 3/31/07 9/30/07*
--------------------------------------------------------------------------------------------------------------------------------------------------------
050494................................. .......................... 05 42220
050549................................. .......................... 37100 42220
070001................................. .......................... 35300 35004
070005................................. .......................... 35300 35004
070006................................. * 14860 35644
070010................................. .......................... 14860 35644
070016................................. .......................... 35300 35004
070017................................. .......................... 35300 35004
070018................................. * 14860 35644
070019................................. .......................... 35300 35004
070022................................. .......................... 35300 35004
070028................................. .......................... 14860 35644
070031................................. .......................... 35300 35004
070034................................. * 14860 35644
070039................................. .......................... 35300 35004
140155................................. * 28100 16974 16974
140186................................. * 28100 16974 16974
160040................................. .......................... 47940 16300
160067................................. .......................... 47940 16300
160110................................. .......................... 47940 16300
220046................................. .......................... 38340 14484
230003................................. .......................... 26100 28020
230004................................. .......................... 34740 28020

[[Page 48317]]

230013................................. .......................... 47644 22420
230019................................. .......................... 47644 22420
230020................................. .......................... 19804 11460
230024................................. .......................... 19804 11460
230029................................. .......................... 47644 22420
230038................................. .......................... 24340 28020
230053................................. .......................... 19804 11460
230059................................. .......................... 24340 28020
230066................................. .......................... 34740 28020
230071................................. .......................... 47644 22420
230072................................. .......................... 26100 28020
230089................................. .......................... 19804 11460
230104................................. .......................... 19804 11460
230106................................. .......................... 24340 28020
230119................................. .......................... 19804 11460
230130................................. .......................... 47644 22420
230135................................. .......................... 19804 11460
230146................................. .......................... 19804 11460
230151................................. .......................... 47644 22420
230165................................. .......................... 19804 11460
230174................................. .......................... 26100 28020
230176................................. .......................... 19804 11460
230207................................. .......................... 47644 22420
230223................................. .......................... 47644 22420
230236................................. .......................... 24340 28020
230254................................. .......................... 47644 22420
230269................................. .......................... 47644 22420
230270................................. .......................... 19804 11460
230273................................. .......................... 19804 11460
230277................................. .......................... 47644 22420
250078................................. * 25620 25060 25060
250122................................. .......................... 25 25060
270002................................. * 27 33540 33540
270012................................. * 24500 33540 33540
270023................................. .......................... 33540 13740
270032................................. .......................... 27 13740
270057................................. .......................... 27 13740
310028................................. .......................... 35084 35644
310051................................. .......................... 35084 35644
310060................................. .......................... 10900 35644
310115................................. .......................... 10900 35644
310120................................. .......................... 35084 35644
330023................................. * 39100 35644 35644
330049................................. .......................... 39100 35644
330067................................. * 39100 35644 35644
330106................................. .......................... 35004 .............. .............. To be determined
330126................................. .......................... 39100 35644
330135................................. .......................... 39100 35644
330205................................. .......................... 39100 35644
330209................................. .......................... 39100 35004
330264................................. .......................... 39100 35004
340002................................. .......................... 11700 16740
350002................................. .......................... 13900 22020
350010................................. .......................... 35 22020
350014................................. .......................... 35 22020
350015................................. .......................... 13900 22020
350017................................. .......................... 35 22020
350019................................. * 24220 22020 22020
350030................................. .......................... 35 22020
390001................................. .......................... 42540 10900
390003................................. .......................... 39 10900
390044................................. *** 39 37964 37964
390045................................. ** 39 10900
390096................................. *** 39 37964 37964
390054................................. .......................... 42540 29540
390072................................. .......................... 39 10900
390095................................. .......................... 42540 10900
390119................................. .......................... 42540 10900

[[Page 48318]]

390137................................. .......................... 42540 10900
390169................................. .......................... 42540 10900
390185................................. .......................... 42540 29540
390192................................. .......................... 42540 10900
390237................................. .......................... 42540 10900
390270................................. .......................... 42540 29540
430005................................. .......................... 43 39660
430008................................. * 43 43620 43620
430013................................. * 43 43620 43620
430015................................. .......................... 43 43620
430048................................. .......................... 43 43620
430060................................. .......................... 43 43620
430064................................. .......................... 43 43620
430077................................. .......................... 39660 43620
430091................................. .......................... 39660 43620
450010................................. .......................... 48660 32580
450072................................. .......................... 26420 26420
450591................................. .......................... 26420 26420
470003................................. .......................... 15540 14484
490001................................. .......................... 49 31340
490024................................. .......................... 40220 19260
530008................................. * 53 16220 16220
530010................................. * 53 16220 16220
--------------------------------------------------------------------------------------------------------------------------------------------------------
* These hospitals are assigned a wage index value under a special exceptions policy (see the FY 2005 IPPS final rule, 69 FR 49105).
** This hospital has been assigned a wage index for the 1st half of FY 2007 under a special exceptions policy. (See section IV.G.6. of the preamble).
*** These hospitals are receiving the same wage index for FY 2007 as hospitals reclassified to the wage index CBSA under a special exceptions policy.
(See section IV.G.7. of the preamble). NOTE: The following Table 9C is a tentative table. The final Table 9C will be published in a subsequent Federal
Register notice.

Table 9C.--Hospitals Redesignated as Rural Under Section 1886(D)(8)(e)
of the Act--FY 2007
------------------------------------------------------------------------
Geographic Redesignated
Provider No. CBSA rural area
------------------------------------------------------------------------
050192.................................. 23420 05
050469.................................. 40140 05
050528.................................. 32900 05
050618.................................. 40140 05
070004.................................. 25540 07
100048.................................. 37860 10
100134.................................. 27260 10
140167.................................. 14 14
170137.................................. 29940 17
230078.................................. 35660 23
250126.................................. 32820 25
260006.................................. 41140 26
260047.................................. 27620 26
260195.................................. 44180 26
330044.................................. 46540 33
330245.................................. 46540 33
330268.................................. 10580 33
360125.................................. 36 36
370054.................................. 36420 37
380040.................................. 13460 38
390181.................................. 39 39
390183.................................. 39 39
390201.................................. 39 39
440135.................................. 34980 44
440144.................................. 44 44
450052.................................. 45 45
450078.................................. 10180 45
450243.................................. 10180 45
450348.................................. 45 45
500148.................................. 48300 50
520060.................................. 52 52
------------------------------------------------------------------------

Table 10.--*Tentative Geometric Mean Plus the Lesser of .75 of the
National Adjusted Operating Standardized Payment Amount (Increased to
Reflect the Difference Between Costs and Charges) or .75 of One Standard
Deviation of Mean Charges by Diagnosis-Related Group (DRG) July 2006\1\
------------------------------------------------------------------------
Number of
DRG cases Threshold
------------------------------------------------------------------------
1....................................... 24,393 $53,859
2....................................... 10,183 $37,071
3....................................... 3 $58,210
6....................................... 288 $16,764
7....................................... 15,032 $41,272
8....................................... 3,441 $31,202
9....................................... 1,775 $25,427
10..................................... 19,625 $25,060
11...................................... 3,083 $18,954
12...................................... 55,941 $18,864
13...................................... 7,525 $17,686
14...................................... 278,664 $24,952
15...................................... 19,988 $20,852
16...................................... 17,297 $26,470
17...................................... 2,973 $15,671
18...................................... 33,442 $21,265
19...................................... 8,461 $15,788
21...................................... 2,220 $26,884
22...................................... 3,168 $23,889
23...................................... 10,670 $17,034
26...................................... 25 $20,742
27...................................... 5,971 $25,126
28...................................... 19,909 $25,472
29...................................... 6,522 $15,804
31...................................... 5,039 $21,114
32...................................... 1,903 $14,176
34...................................... 27,626 $21,155
35...................................... 7,908 $14,353
36...................................... 307 $17,756

[[Page 48319]]

37...................................... 1,219 $24,755
38...................................... 50 $12,318
39...................................... 328 $14,729
40...................................... 1,187 $22,468
42...................................... 1,636 $17,058
43...................................... 125 $12,886
44...................................... 1,290 $14,781
45...................................... 2,770 $16,499
46...................................... 3,929 $16,766
47...................................... 1,309 $12,103
49...................................... 2,415 $31,272
50...................................... 2,024 $19,196
51...................................... 193 $19,075
52...................................... 234 $14,080
53...................................... 2,145 $26,675
55...................................... 1,368 $20,084
56...................................... 451 $19,390
57...................................... 742 $20,308
59...................................... 126 $14,929
60...................................... 3 $18,786
61...................................... 222 $28,823
62...................................... 4 $7,163
63...................................... 2,827 $26,792
64...................................... 3,234 $23,219
65...................................... 40,485 $13,493
66...................................... 8,195 $12,916
67...................................... 379 $17,186
68...................................... 18,914 $14,138
69...................................... 5,147 $10,697
70...................................... 25 $7,437
71...................................... 70 $15,616
72...................................... 1,326 $16,659
73...................................... 9,957 $18,043
74...................................... 3 $8,024
75...................................... 46,851 $48,022
76...................................... 48,157 $43,553
77...................................... 2,111 $25,956
78...................................... 49,690 $26,233
79...................................... 160,369 $29,354
80...................................... 7,158 $18,880
81...................................... 6 $25,916
82...................................... 63,189 $26,608
83...................................... 7,153 $21,595
84...................................... 1,403 $12,778
85...................................... 22,221 $25,180
86...................................... 1,717 $15,470
87...................................... 96,689 $26,951
88...................................... 427,043 $19,077
89...................................... 553,984 $21,998
90...................................... 43,488 $13,140
91...................................... 53 $11,541
92...................................... 16,513 $24,878
93...................................... 1,440 $16,320
94...................................... 13,655 $23,750
95...................................... 1,577 $12,584
96...................................... 59,616 $15,882
97...................................... 26,688 $11,788
98...................................... 13 $12,310
99...................................... 21,386 $15,711
100..................................... 6,410 $12,191
101..................................... 23,368 $18,513
102..................................... 4,930 $12,459
103..................................... 886 $234,602
104..................................... 20,120 $123,729
105..................................... 32,625 $93,408
106..................................... 3,440 $110,994
108..................................... 8,757 $89,200
110..................................... 57,708 $59,122
111..................................... 10,783 $45,058
113..................................... 34,727 $45,309
114..................................... 7,959 $30,170
117..................................... 5,349 $25,612
118..................................... 7,618 $33,293
119..................................... 963 $25,956
120..................................... 33,555 $36,437
121..................................... 150,046 $29,682
122..................................... 54,522 $20,932
123..................................... 29,562 $25,715
124..................................... 120,510 $29,669
125..................................... 92,404 $23,736
126..................................... 5,422 $40,901
127..................................... 667,290 $21,942
128..................................... 4,210 $15,608
129..................................... 3,521 $21,829
130..................................... 87,465 $20,048
131..................................... 22,952 $12,056
132..................................... 101,372 $13,633
133..................................... 5,853 $12,293
134..................................... 39,815 $13,564
135..................................... 7,164 $19,603
136..................................... 943 $14,059
138..................................... 206,126 $17,760
139..................................... 74,038 $11,503
140..................................... 31,103 $11,146
141..................................... 123,082 $16,534
142..................................... 49,143 $13,230
143..................................... 237,807 $12,604
144..................................... 104,877 $24,605
145..................................... 5,742 $12,881
146..................................... 10,269 $45,041
147..................................... 2,614 $31,225
149..................................... 19,523 $30,188
150..................................... 22,971 $44,974
151..................................... 5,403 $27,702
152..................................... 5,011 $33,350
153..................................... 1,951 $23,250
155..................................... 6,015 $27,694
156..................................... 4 $42,508
157..................................... 8,316 $25,981
158..................................... 3,718 $14,389
159..................................... 19,221 $28,296
160..................................... 11,939 $18,822
161..................................... 10,145 $25,544
162..................................... 4,950 $15,299
163..................................... 5 $14,048
164..................................... 5,996 $38,818
165..................................... 2,457 $25,554
166..................................... 5,154 $29,280
167..................................... 4,909 $19,591
168..................................... 1,640 $25,296
169..................................... 895 $16,736
170..................................... 17,929 $44,476
171..................................... 1,408 $26,705
172..................................... 33,047 $26,380
173..................................... 2,225 $17,045
174..................................... 253,126 $21,911
175..................................... 29,235 $12,602
176..................................... 14,648 $23,944
177..................................... 7,654 $20,572
178..................................... 2,557 $15,461
179..................................... 14,727 $22,980
180..................................... 91,335 $20,871
181..................................... 25,350 $12,528
182..................................... 255,693 $17,100
183..................................... 79,005 $13,059
184..................................... 72 $12,775
185..................................... 6,251 $18,862
186..................................... 7 $5,729
187..................................... 646 $18,324
188..................................... 87,004 $22,789
189..................................... 12,389 $12,993
190..................................... 10 $13,793
191..................................... 10,586 $54,694
192..................................... 1,379 $32,567
193..................................... 4,040 $51,607
194..................................... 461 $32,138
195..................................... 2,846 $50,174
196..................................... 594 $32,425
197..................................... 16,420 $41,918
198..................................... 4,109 $26,021
199..................................... 1,481 $37,144
200..................................... 1,017 $39,787
201..................................... 2,717 $52,741
202..................................... 27,495 $25,140
203..................................... 32,423 $26,174
204..................................... 69,425 $23,010
205..................................... 32,781 $23,351
206..................................... 2,069 $16,166
207..................................... 38,288 $24,720
208..................................... 9,444 $15,527
210..................................... 126,728 $36,053
211..................................... 25,766 $26,659
212..................................... 10 $18,683
213..................................... 9,549 $33,765
216..................................... 19,882 $35,362
217..................................... 15,719 $41,753
218..................................... 30,181 $32,729
219..................................... 21,168 $23,440
220..................................... 2 $23,903
223..................................... 12,681 $25,312
224..................................... 9,900 $18,601
225..................................... 6,275 $26,110
226..................................... 6,770 $29,333
227..................................... 4,857 $18,593
228..................................... 2,678 $24,524
229..................................... 1,121 $15,634
230..................................... 2,473 $26,447

[[Page 48320]]

232..................................... 570 $20,883
233..................................... 18,488 $34,629
234..................................... 9,054 $27,553
235..................................... 4,763 $16,190
236..................................... 41,769 $15,355
237..................................... 1,924 $13,823
238..................................... 9,693 $26,230
239..................................... 40,335 $23,007
240..................................... 12,890 $24,447
241..................................... 2,848 $14,324
242..................................... 2,722 $22,524
243..................................... 100,967 $16,980
244..................................... 16,921 $15,376
245..................................... 5,808 $10,439
246..................................... 1,393 $13,417
247..................................... 21,347 $12,715
248..................................... 16,397 $18,868
249..................................... 13,487 $15,452
250..................................... 4,164 $15,019
251..................................... 2,060 $10,708
253..................................... 24,800 $16,458
254..................................... 10,027 $10,209
256..................................... 7,605 $17,958
257..................................... 13,112 $19,571
258..................................... 11,381 $15,394
259..................................... 2,660 $21,525
260..................................... 2,419 $15,097
261..................................... 1,569 $20,644
262..................................... 602 $20,936
263..................................... 22,523 $32,381
264..................................... 3,924 $22,357
265..................................... 4,035 $28,309
266..................................... 2,229 $19,597
267..................................... 276 $20,106
268..................................... 1,007 $25,612
269..................................... 11,061 $30,462
270..................................... 2,581 $17,761
271..................................... 21,573 $21,481
272..................................... 6,062 $20,880
273..................................... 1,268 $12,695
274..................................... 2,214 $22,743
275..................................... 181 $13,374
276..................................... 1,611 $15,518
277..................................... 118,989 $18,380
278..................................... 33,858 $11,743
279..................................... 6 $9,028
280..................................... 19,325 $16,053
281..................................... 6,587 $11,088
283..................................... 6,751 $15,599
284..................................... 1,860 $9,705
285..................................... 8,075 $35,308
286..................................... 2,868 $34,849
287..................................... 5,460 $31,315
288..................................... 11,449 $36,434
289..................................... 6,342 $19,683
290..................................... 11,870 $18,835
291..................................... 60 $12,847
292..................................... 7,589 $41,562
293..................................... 318 $27,393
294..................................... 96,811 $16,300
295..................................... 4,383 $16,230
296..................................... 247,069 $17,299
297..................................... 42,864 $10,800
298..................................... 111 $11,190
299..................................... 1,529 $21,390
300..................................... 21,669 $23,232
301..................................... 3,928 $13,530
302..................................... 10,492 $53,266
303..................................... 19,976 $35,819
304..................................... 13,647 $37,422
305..................................... 2,957 $25,305
306..................................... 5,818 $25,921
307..................................... 1,947 $13,760
308..................................... 5,453 $27,129
309..................................... 2,964 $19,731
310..................................... 25,376 $25,322
311..................................... 5,889 $14,252
312..................................... 1,328 $24,325
313..................................... 505 $16,679
314..................................... 2 $63,693
315..................................... 34,913 $34,732
316..................................... 205,567 $24,393
317..................................... 2,713 $17,231
318..................................... 5,910 $24,031
319..................................... 386 $13,806
320..................................... 224,861 $18,200
321..................................... 31,967 $12,268
322..................................... 67 $13,265
323..................................... 20,412 $18,194
324..................................... 4,635 $11,389
325..................................... 9,919 $14,495
326..................................... 2,592 $9,794
327..................................... 11 $4,294
328..................................... 574 $15,404
329..................................... 54 $11,795
331..................................... 56,121 $22,457
332..................................... 3,962 $13,793
333..................................... 244 $18,788
334..................................... 9,525 $29,865
335..................................... 12,194 $23,947
336..................................... 28,187 $18,026
337..................................... 21,481 $12,476
338..................................... 674 $26,938
339..................................... 1,237 $24,409
341..................................... 3,131 $26,307
342..................................... 457 $16,760
344..................................... 2,341 $26,248
345..................................... 1,390 $24,261
346..................................... 3,961 $22,447
347..................................... 235 $12,285
348..................................... 4,262 $15,649
349..................................... 554 $10,003
350..................................... 7,277 $16,400
352..................................... 1,177 $16,558
353..................................... 3,089 $31,178
354..................................... 7,566 $29,684
355..................................... 4,987 $19,221
356..................................... 22,033 $16,309
357..................................... 5,537 $37,740
358..................................... 20,928 $24,238
359..................................... 28,580 $17,269
360..................................... 13,854 $18,919
361..................................... 287 $23,680
362..................................... 2 $6,876
363..................................... 2,155 $23,016
364..................................... 1,799 $19,187
365..................................... 1,617 $32,690
366..................................... 4,645 $23,871
367..................................... 446 $12,997
368..................................... 4,145 $23,493
369..................................... 3,723 $14,329
370..................................... 2,249 $17,536
371..................................... 2,705 $12,708
372..................................... 1,376 $10,820
373..................................... 5,273 $7,551
374..................................... 153 $13,095
375..................................... 12 $22,605
376..................................... 476 $12,906
377..................................... 109 $24,239
378..................................... 201 $16,324
379..................................... 499 $8,220
380..................................... 111 $9,315
381..................................... 169 $15,169
382..................................... 48 $3,953
383..................................... 2,806 $10,556
384..................................... 151 $7,391
389..................................... 3 $46,615
392..................................... 2,139 $45,751
394..................................... 2,759 $31,094
395..................................... 101,471 $16,872
396..................................... 18 $13,668
397..................................... 16,393 $23,048
398..................................... 6,706 $23,192
399..................................... 1,080 $14,880
401..................................... 6,450 $43,894
402..................................... 1,356 $25,221
403..................................... 31,326 $29,940
404..................................... 3,820 $20,305
406..................................... 2,303 $42,371
407..................................... 615 $24,760
408..................................... 1,948 $33,871
409..................................... 1,748 $25,028
410..................................... 29,054 $23,858
411..................................... 5 $9,758
412..................................... 9 $9,301
413..................................... 5,741 $25,510
414..................................... 487 $16,429
417..................................... 33 $28,208
418..................................... 29,977 $22,175
419..................................... 17,634 $18,485
420..................................... 3,099 $12,971
421..................................... 13,255 $16,146
422..................................... 79 $11,674
423..................................... 8,963 $28,718
424..................................... 1,041 $36,310
425..................................... 13,096 $13,576
426..................................... 4,235 $10,358

[[Page 48321]]

427..................................... 1,579 $11,150
428..................................... 845 $13,754
429..................................... 23,937 $16,826
430..................................... 75,524 $13,556
431..................................... 333 $12,627
432..................................... 402 $13,998
433..................................... 4,471 $6,847
439..................................... 1,759 $29,659
440..................................... 5,216 $29,541
441..................................... 686 $20,435
442..................................... 18,596 $37,577
443..................................... 3,589 $22,629
444..................................... 6,012 $16,302
445..................................... 2,242 $11,469
447..................................... 6,323 $11,513
449..................................... 40,846 $18,238
450..................................... 7,446 $9,442
451..................................... 2 $19,193
452..................................... 28,815 $21,741
453..................................... 5,394 $11,421
454..................................... 4,738 $17,849
455..................................... 887 $10,666
461..................................... 2,290 $27,945
462..................................... 7,872 $17,133
463..................................... 32,884 $15,084
464..................................... 7,661 $11,312
465..................................... 163 $12,726
466..................................... 1,204 $14,603
467..................................... 1,026 $10,034
468..................................... 52,034 $57,083
470..................................... 128 $25,336
471..................................... 15,629 $55,462
473..................................... 8,578 $38,317
476..................................... 2,850 $35,279
477..................................... 28,196 $34,210
479..................................... 27,646 $30,664
480..................................... 908 $128,168
481..................................... 1,198 $88,802
482..................................... 5,081 $49,179
484..................................... 472 $75,098
485..................................... 3,713 $51,983
486..................................... 2,712 $69,277
487..................................... 5,016 $32,011
488..................................... 828 $63,276
489..................................... 13,547 $28,578
490..................................... 5,252 $21,783
491..................................... 22,663 $35,757
492..................................... 3,924 $44,444
493..................................... 61,082 $34,552
494..................................... 24,547 $22,715
495..................................... 342 $121,068
496..................................... 3,726 $96,376
497..................................... 31,199 $62,663
498..................................... 21,280 $52,014
499..................................... 35,237 $28,340
500..................................... 46,422 $19,794
501..................................... 3,200 $42,436
502..................................... 764 $29,393
503..................................... 5,910 $26,641
504..................................... 192 $146,326
505..................................... 180 $28,322
506..................................... 963 $50,293
507..................................... 323 $31,953
508..................................... 654 $23,720
509..................................... 155 $16,128
510..................................... 1,782 $21,239
511..................................... 627 $13,459
512..................................... 550 $90,167
513..................................... 226 $67,279
515..................................... 58,660 $86,655
518..................................... 23,763 $34,494
519..................................... 12,586 $44,219
520..................................... 16,525 $35,867
521..................................... 29,364 $15,459
522..................................... 3,423 $12,513
523..................................... 14,462 $8,492
524..................................... 109,013 $16,146
525..................................... 205 $156,053
528..................................... 1,845 $107,773
529..................................... 5,026 $36,123
530..................................... 3,360 $25,556
531..................................... 4,993 $45,570
532..................................... 2,882 $28,122
533..................................... 43,711 $29,882
534..................................... 40,198 $21,414
535..................................... 8,826 $119,398
536..................................... 8,259 $108,963
537..................................... 8,983 $32,586
538..................................... 5,459 $22,310
539..................................... 4,973 $44,568
540..................................... 1,504 $25,469
541..................................... 25,104 $250,678
542..................................... 23,115 $151,096
543..................................... 5,718 $64,315
544..................................... 445,785 $39,430
545..................................... 44,802 $44,809
546..................................... 2,360 $83,370
547..................................... 32,709 $97,710
548..................................... 32,245 $79,387
549..................................... 13,141 $80,448
550..................................... 34,565 $63,344
551..................................... 53,869 $51,334
552..................................... 82,060 $40,475
553..................................... 39,292 $46,776
554..................................... 77,351 $36,869
555..................................... 37,378 $42,650
556..................................... 18,974 $37,645
557..................................... 124,154 $51,129
558..................................... 192,632 $42,278
559..................................... 2,894 $40,715
560..................................... 3,457 $44,371
561..................................... 2,952 $35,689
562..................................... 52,955 $22,123
563..................................... 21,145 $13,990
564..................................... 16,327 $15,294
565..................................... 46,822 $78,211
566..................................... 73,082 $39,116
567..................................... 10,363 $72,688
568..................................... 16,695 $48,792
569..................................... 60,815 $63,221
570..................................... 72,246 $44,142
571..................................... 11,153 $23,679
572..................................... 48,982 $25,169
573..................................... 6,682 $51,652
574..................................... 26,619 $24,475
575..................................... 10,977 $85,769
576..................................... 277,472 $28,296
577..................................... 5,596 $35,303
578..................................... 35,311 $64,885
579..................................... 20,665 $39,571
------------------------------------------------------------------------
* As noted in section II.G.5 of the preamble to this final rule, the
final national adjusted operating standardized amounts as well as the
final version of this table will be published in a subsequent Federal
Register notice between August 1 and October 1, 2006.
\1\ Cases taken from the FY 2005 MedPAR file; DRGs are from GROUPER
Version 24.0.

Table 11.--FY 2007 LTC-DRGs, Relative Weights, Geometric Average Length of Stay, and \5/6\ths of the Geometric
Average Length of Stay
----------------------------------------------------------------------------------------------------------------
\5/6\ths of
Relative Geometric the geometric
LTC-DRG Description weight average length average length
of stay of stay
----------------------------------------------------------------------------------------------------------------
1............................. \5\ CRANIOTOMY AGE >17 W CC..... 1.6835 37.1 30.9
2............................. \6\ CRANIOTOMY AGE >17 W/O CC... 1.6835 37.1 30.9
3............................. \6\ CRANIOTOMY AGE 0-17......... 1.6835 37.1 30.9

[[Page 48322]]

6............................. \6\ CARPAL TUNNEL RELEASE....... 0.4175 17.0 14.2
7............................. PERIPH & CRANIAL NERVE & OTHER 1.2052 36.1 30.1
NERV SYST PROC W CC.
8............................. \2\ PERIPH & CRANIAL NERVE & 0.5594 21.0 17.5
OTHER NERV SYST PROC W/O CC.
9............................. SPINAL DISORDERS & INJURIES..... 1.0424 34.0 28.3
10............................ NERVOUS SYSTEM NEOPLASMS W CC... 0.6971 22.1 18.4
11............................ \2\ NERVOUS SYSTEM NEOPLASMS W/O 0.5594 21.0 17.5
CC.
12............................ DEGENERATIVE NERVOUS SYSTEM 0.6788 25.1 20.9
DISORDERS.
13............................ MULTIPLE SCLEROSIS & CEREBELLAR 0.6003 23.1 19.3
ATAXIA.
14............................ INTRACRANIAL HEMORRHAGE OR 0.6772 24.9 20.8
CEREBRAL INFARCTION.
15............................ NONSPECIFIC CVA & PRECEREBRAL 0.7705 26.1 21.8
OCCLUSION W/O INFARCT.
16............................ NONSPECIFIC CEREBROVASCULAR 0.6978 23.1 19.3
DISORDERS W CC.
17............................ \2\ NONSPECIFIC CEREBROVASCULAR 0.5594 21.0 17.5
DISORDERS W/O CC.
18............................ CRANIAL & PERIPHERAL 0.7503 25.4 21.2
NERVEDISORDERS W CC.
19............................ CRANIAL & PERIPHERAL 0.4512 19.5 16.3
NERVEDISORDERS W/O CC.
21............................ \3\ VIRAL MENINGITIS............ 0.7819 23.9 19.9
22............................ \3\ HYPERTENSIVE ENCEPHALOPATHY. 0.7819 23.9 19.9
23............................ NONTRAUMATIC STUPOR & COMA...... 1.0118 29.4 24.5
26............................ \6\ SEIZURE & HEADACHE AGE 0-17. 0.5594 21.0 17.5
27............................ TRAUMATIC STUPOR & COMA, COMA >1 0.9978 30.6 25.5
HR.
28............................ TRAUMATIC STUPOR & COMA, COMA <1 0.7983 25.8 21.5
HR AGE >17 W CC.
29............................ \1\ TRAUMATIC STUPOR & COMA, 0.4175 17.0 14.2
COMA <1 HR AGE >17 W/O CC.
30............................ \6\ TRAUMATIC STUPOR & COMA, 0.4175 17.0 14.2
COMA <1 HR AGE 0-17.
31............................ \1\ CONCUSSION AGE >17 W CC..... 0.4175 17.0 14.2
32............................ \6\ CONCUSSION AGE >17 W/O CC... 0.4175 17.0 14.2
33............................ \6\ CONCUSSION AGE 0-17......... 0.4175 17.0 14.2
34............................ OTHER DISORDERS OF NERVOUS 0.7029 23.4 19.5
SYSTEM W CC.
35............................ OTHER DISORDERS OF NERVOUS 0.5080 21.1 17.6
SYSTEMW/O CC.
36............................ \6\ RETINAL PROCEDURES.......... 0.5594 21.0 17.5
37............................ \6\ ORBITAL PROCEDURES.......... 0.5594 21.0 17.5
38............................ \6\ PRIMARY IRIS PROCEDURES..... 0.5594 21.0 17.5
39............................ \6\ LENS PROCEDURES WITH OR 0.5594 21.0 17.5
WITHOUT VITRECTOMY.
40............................ \6\ EXTRAOCULAR PROCEDURES 0.5594 21.0 17.5
EXCEPT ORBIT AGE >17.
41............................ \6\ EXTRAOCULAR PROCEDURES 0.5594 21.0 17.5
EXCEPT ORBIT AGE 0-17.
42............................ \6\ INTRAOCULAR PROCEDURES 0.5594 21.0 17.5
EXCEPT RETINA, IRIS & LENS.
43............................ \6\ HYPHEMA..................... 0.4175 17.0 14.2
44............................ \3\ ACUTE MAJOR EYE INFECTIONS.. 0.7819 23.9 19.9
45............................ \1\ NEUROLOGICAL EYE DISORDERS.. 0.4175 17.0 14.2
46............................ \2\ OTHER DISORDERS OF THE EYE 0.5594 21.0 17.5
AGE >17 W CC.
47............................ \6\ OTHER DISORDERS OF THE EYE 0.4175 17.0 14.2
AGE >17 W/O CC.
48............................ \6\ OTHER DISORDERS OF THE EYE 0.4175 17.0 14.2
AGE 0-17.
49............................ \6\ MAJOR HEAD & NECK PROCEDURES 1.1625 29.5 24.6
50............................ \6\ SIALOADENECTOMY............. 1.1625 29.5 24.6
51............................ \6\ SALIVARY GLAND PROCEDURES 1.1625 29.5 24.6
EXCEPT SIALOADENECTOMY.
52............................ \6\ CLEFT LIP & PALATE REPAIR... 1.1625 29.5 24.6
53............................ \6\ SINUS & MASTOID PROCEDURES 1.1625 29.5 24.6
AGE >17.
54............................ \6\ SINUS & MASTOID PROCEDURES 1.1625 29.5 24.6
AGE 0-17.
55............................ \4\ MISCELLANEOUS EAR, NOSE, 1.1625 29.5 24.6
MOUTH & THROAT PROCEDURES.
56............................ \6\ RHINOPLASTY................. 1.1625 29.5 24.6
57............................ \6\ T&A PROC, EXCEPT 0.4175 17.0 14.2
TONSILLECTOMY &/OR
ADENOIDECTOMY ONLY, AGE >17.
58............................ \6\ T&A PROC, EXCEPT 0.4175 17.0 14.2
TONSILLECTOMY &/OR
ADENOIDECTOMY ONLY, AGE 0-17.
59............................ \6\ TONSILLECTOMY &/OR 0.4175 17.0 14.2
ADENOIDECTOMY ONLY, AGE >17.
60............................ \6\ TONSILLECTOMY &/OR 0.4175 17.0 14.2
ADENOIDECTOMYONLY, AGE 0-17.
61............................ \6\ MYRINGOTOMY W TUBE INSERTION 0.4175 17.0 14.2
AGE >17.
62............................ \6\ MYRINGOTOMY W TUBE INSERTION 0.4175 17.0 14.2
AGE 0-17.
63............................ \4\ OTHER EAR, NOSE, MOUTH & 1.1625 29.5 24.6
THROATO.R. PROCEDURES.
64............................ EAR, NOSE, MOUTH & THROAT 1.1797 26.2 21.8
MALIGNANCY.
65............................ \1\ DYSEQUILIBRIUM.............. 0.4175 17.0 14.2
66............................ \6\ EPISTAXIS................... 0.4175 17.0 14.2
67............................ \3\ EPIGLOTTITIS................ 0.7819 23.9 19.9
68............................ OTITIS MEDIA & URI AGE >17 W CC. 0.6211 20.3 16.9
69............................ \1\ OTITIS MEDIA & URI AGE >17 W/ 0.4175 17.0 14.2
O CC.
70............................ \6\ OTITIS MEDIA & URI AGE 0-17. 0.4175 17.0 14.2
71............................ \6\ LARYNGOTRACHEITIS........... 0.5594 21.0 17.5
72............................ \3\ NASAL TRAUMA & DEFORMITY.... 0.7819 23.9 19.9
73............................ OTHER EAR, NOSE, MOUTH & THROAT 0.7745 22.9 19.1
DIAGNOSES AGE >17.
74............................ \6\ OTHER EAR, NOSE, MOUTH & 0.4175 17.0 14.2
THROAT DIAGNOSES AGE 0-17.

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75............................ MAJOR CHEST PROCEDURES.......... 1.9944 33.5 27.9
76............................ OTHER RESP SYSTEM O.R. 2.3982 42.5 35.4
PROCEDURES W CC.
77............................ \2\ OTHER RESP SYSTEM O.R. 0.5594 21.0 17.5
PROCEDURES W/O CC.
78............................ PULMONARY EMBOLISM.............. 0.6746 22.6 18.8
79............................ RESPIRATORY INFECTIONS & 0.8182 22.8 19.0
INFLAMMATIONS AGE >17 W CC.
80............................ RESPIRATORY INFECTIONS & 0.6485 20.9 17.4
INFLAMMATIONS AGE >17 W/O CC.
81............................ \6\ RESPIRATORY INFECTIONS & 0.4175 17.0 14.2
INFLAMMATIONS AGE 0-17.
82............................ RESPIRATORY NEOPLASMS........... 0.8242 21.4 17.8
83............................ \1\ MAJOR CHEST TRAUMA W CC..... 0.4175 17.0 14.2
84............................ \6\ MAJOR CHEST TRAUMA W/O CC... 0.4175 17.0 14.2
85............................ PLEURAL EFFUSION W CC........... 0.6956 21.4 17.8
86............................ \6\ PLEURAL EFFUSION W/O CC..... 0.4175 17.0 14.2
87............................ PULMONARY EDEMA & RESPIRATORY 1.0295 24.8 20.7
FAILURE.
88............................ CHRONIC OBSTRUCTIVE PULMONARY 0.6411 19.3 16.1
DISEASE.
89............................ SIMPLE PNEUMONIA & PLEURISY AGE 0.6802 20.6 17.2
>17 W CC.
90............................ SIMPLE PNEUMONIA & PLEURISY AGE 0.4958 17.8 14.8
>17 W/O CC.
91............................ \6\ SIMPLE PNEUMONIA & PLEURISY 0.5594 21.0 17.5
AGE 0-17.
92............................ INTERSTITIAL LUNG DISEASE W CC.. 0.6638 19.6 16.3
93............................ \1\ INTERSTITIAL LUNG DISEASE W/ 0.4175 17.0 14.2
O CC.
94............................ PNEUMOTHORAX W CC............... 0.6785 21.3 17.8
95............................ \8\ PNEUMOTHORAX W/O CC......... 0.6785 21.3 17.8
96............................ BRONCHITIS & ASTHMA AGE >17 W CC 0.6230 18.9 15.8
97............................ \8\ BRONCHITIS & ASTHMA AGE >17 0.6230 18.9 15.8
W/O CC.
98............................ \6\ BRONCHITIS & ASTHMA AGE 0-17 0.5594 21.0 17.5
99............................ RESPIRATORY SIGNS & SYMPTOMS W 0.9381 24.6 20.5
CC.
100........................... \3\ RESPIRATORY SIGNS & SYMPTOMS 0.7819 23.9 19.9
W/O CC.
101........................... OTHER RESPIRATORY SYSTEM 0.8147 22.2 18.5
DIAGNOSES W CC.
102........................... \1\ OTHER RESPIRATORY SYSTEM 0.4175 17.0 14.2
DIAGNOSES W/O CC.
103........................... \7\ HEART TRANSPLANT OR IMPLANT 0.0000 0.0 0.0
OF HEART ASSIST SYSTEM.
104........................... \6\ CARDIAC VALVE & OTHER MAJOR 1.1625 29.5 24.6
CARDIOTHORACIC PROC W CARDIAC
CATH.
105........................... \6\ CARDIAC VALVE & OTHER MAJOR 1.1625 29.5 24.6
CARDIOTHORACIC PROC W/O CARDIAC
CATH.
106........................... \6\ CORONARY BYPASS W PTCA...... 1.1625 29.5 24.6
108........................... \6\ OTHER CARDIOTHORACIC 1.1625 29.5 24.6
PROCEDURES.
110........................... \4\ MAJOR CARDIOVASCULAR 1.1625 29.5 24.6
PROCEDURES W CC.
111........................... \6\ MAJOR CARDIOVASCULAR 1.1625 29.5 24.6
PROCEDURES W/O CC.
113........................... AMPUTATION FOR CIRC SYSTEM 1.3942 36.1 30.1
DISORDERS EXCEPT UPPER LIMB &
TOE.
114........................... UPPER LIMB & TOE AMPUTATION FOR 1.2425 33.0 27.5
CIRC SYSTEM DISORDERS.
117........................... \2\ CARDIAC PACEMAKER REVISION 0.5594 21.0 17.5
EXCEPT DEVICE REPLACEMENT.
118........................... \3\ CARDIAC PACEMAKER DEVICE 0.7819 23.9 19.9
REPLACEMENT.
119........................... \3\ VEIN LIGATION & STRIPPING... 0.7819 23.9 19.9
120........................... OTHER CIRCULATORY SYSTEM O.R. 1.0893 31.4 26.2
PROCEDURES.
121........................... CIRCULATORY DISORDERS W AMI & 0.7451 22.4 18.7
MAJOR COMP, DISCHARGED ALIVE.
122........................... \2\ CIRCULATORY DISORDERS W AMI 0.5594 21.0 17.5
W/O MAJOR COMP, DISCHARGED
ALIVE.
123........................... CIRCULATORY DISORDERS W AMI, 0.7858 17.0 14.2
EXPIRED.
124........................... \4\ CIRCULATORY DISORDERS EXCEPT 1.1625 29.5 24.6
AMI, W CARD CATH & COMPLEX DIAG.
125........................... \1\ CIRCULATORY DISORDERS EXCEPT 0.4175 17.0 14.2
AMI, W CARD CATH W/O COMPLEX
DIAG.
126........................... ACUTE & SUBACUTE ENDOCARDITIS... 0.8867 26.3 21.9
127........................... HEART FAILURE & SHOCK........... 0.6832 21.2 17.7
128........................... \2\ DEEP VEIN THROMBOPHLEBITIS.. 0.5594 21.0 17.5
129........................... \1\ CARDIAC ARREST, UNEXPLAINED. 0.4175 17.0 14.2
130........................... PERIPHERAL VASCULAR DISORDERS W 0.6484 22.8 19.0
CC.
131........................... PERIPHERAL VASCULAR DISORDERS W/ 0.5267 21.0 17.5
O CC.
132........................... ATHEROSCLEROSIS W CC............ 0.6621 20.7 17.3
133........................... \2\ ATHEROSCLEROSIS W/O CC...... 0.5594 21.0 17.5
134........................... HYPERTENSION.................... 0.4909 21.7 18.1
135........................... CARDIAC CONGENITAL & VALVULAR 0.8014 23.8 19.8
DISORDERS AGE >17 W CC.
136........................... \1\ CARDIAC CONGENITAL & 0.4175 17.0 14.2
VALVULAR DISORDERS AGE >17 W/O
CC.
137........................... \6\ CARDIAC CONGENITAL & 0.4175 17.0 14.2
VALVULAR DISORDERS AGE 0-17.
138........................... CARDIAC ARRHYTHMIA & CONDUCTION 0.6618 21.9 18.3
DISORDERS W CC.
139........................... \2\ CARDIAC ARRHYTHMIA & 0.5594 21.0 17.5
CONDUCTION DISORDERS W/O CC.
140........................... \1\ ANGINA PECTORIS............. 0.4175 17.0 14.2
141........................... SYNCOPE & COLLAPSE W CC......... 0.5891 22.1 18.4

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142........................... \8\ SYNCOPE & COLLAPSE W/O CC... 0.5891 22.1 18.4
143........................... \1\ CHEST PAIN.................. 0.4175 17.0 14.2
144........................... OTHER CIRCULATORY SYSTEM 0.7715 22.1 18.4
DIAGNOSESW CC.
145........................... OTHER CIRCULATORY SYSTEM 0.4292 17.0 14.2
DIAGNOSES W/O CC.
146........................... \5\ RECTAL RESECTION W CC....... 1.6835 37.1 30.9
147........................... \6\ RECTAL RESECTION W/O CC..... 0.7819 23.9 19.9
149........................... \6\ MAJOR SMALL & LARGE BOWEL 0.7819 23.9 19.9
PROCEDURES W/O CC.
150........................... \5\ PERITONEAL ADHESIOLYSIS W CC 1.6835 37.1 30.9
151........................... \6\ PERITONEAL ADHESIOLYSIS W/O 0.4175 17.0 14.2
CC.
152........................... \5\ MINOR SMALL & LARGE BOWEL 1.6835 37.1 30.9
PROCEDURES W CC.
153........................... \6\ MINOR SMALL & LARGE BOWEL 1.6835 37.1 30.9
PROCEDURES W/O CC.
155........................... \6\ STOMACH, ESOPHAGEAL & 1.6835 37.1 30.9
DUODENAL PROCEDURES AGE >17 W/O
CC.
156........................... \6\ STOMACH, ESOPHAGEAL & 1.6835 37.1 30.9
DUODENAL PROCEDURES AGE 0-17.
157........................... \3\ ANAL & STOMAL PROCEDURES W 0.7819 23.9 19.9
CC.
158........................... \6\ ANAL & STOMAL PROCEDURES W/O 0.7819 23.9 19.9
CC.
159........................... \5\ HERNIA PROCEDURES EXCEPT 1.6835 37.1 30.9
INGUINAL & FEMORAL AGE >17 W CC.
160........................... \1\ HERNIA PROCEDURES EXCEPT 0.4175 17.0 14.2
INGUINAL& FEMORAL AGE >17 W/O
CC.
161........................... \6\ INGUINAL & FEMORAL HERNIA 0.4175 17.0 14.2
PROCEDURES AGE >17 W CC.
162........................... \6\ INGUINAL & FEMORAL HERNIA 0.4175 17.0 14.2
PROCEDURES AGE >17 W/O CC.
163........................... \6\ HERNIA PROCEDURES AGE 0-17.. 0.4175 17.0 14.2
164........................... \6\ APPENDECTOMY W COMPLICATED 0.7819 23.9 19.9
PRINCIPAL DIAG W CC.
165........................... \6\ APPENDECTOMY W COMPLICATED 0.7819 23.9 19.9
PRINCIPAL DIAG W/O CC.
166........................... \6\ APPENDECTOMY W/O COMPLICATED 0.7819 23.9 19.9
PRINCIPAL DIAG W CC.
167........................... \6\ APPENDECTOMY W/O COMPLICATED 0.7819 23.9 19.9
PRINCIPAL DIAG W/O CC.
168........................... \5\ MOUTH PROCEDURES W CC....... 1.6835 37.1 30.9
169........................... \6\ MOUTH PROCEDURES W/O CC..... 0.5594 21.0 17.5
170........................... OTHER DIGESTIVE SYSTEM 1.6163 35.8 29.8
O.R.PROCEDURES W CC.
171........................... \3\ OTHER DIGESTIVE SYSTEM O.R. 0.7819 23.9 19.9
PROCEDURES W/O CC.
172........................... DIGESTIVE MALIGNANCY W CC....... 0.8497 21.8 18.2
173........................... \2\ DIGESTIVE MALIGNANCY W/O CC. 0.5594 21.0 17.5
174........................... G.I. HEMORRHAGE W CC............ 0.7149 22.9 19.1
175........................... \2\ G.I. HEMORRHAGE W/O CC...... 0.5594 21.0 17.5
176........................... COMPLICATED PEPTIC ULCER........ 0.9514 24.8 20.7
177........................... \2\ UNCOMPLICATED PEPTIC ULCER W 0.5594 21.0 17.5
CC.
178........................... \6\ UNCOMPLICATED PEPTIC ULCER W/ 0.4175 17.0 14.2
O CC.
179........................... INFLAMMATORY BOWEL DISEASE...... 0.8157 23.3 19.4
180........................... G.I. OBSTRUCTION W CC........... 0.9126 22.8 19.0
181........................... \1\ G.I. OBSTRUCTION W/O CC..... 0.4175 17.0 14.2
182........................... ESOPHAGITIS, GASTROENT & MISC 0.7866 21.8 18.2
DIGEST DISORDERS AGE >17 W CC.
183........................... \1\ ESOPHAGITIS, GASTROENT & 0.4175 17.0 14.2
MISC DIGEST DISORDERS AGE >17 W/
O CC.
184........................... \6\ ESOPHAGITIS, GASTROENT & 0.4175 17.0 14.2
MISC DIGEST DISORDERS AGE 0-17.
185........................... DENTAL & ORAL DIS EXCEPT 0.6634 23.2 19.3
EXTRACTIONS & RESTORATIONS, AGE
>17.
186........................... \6\ DENTAL & ORAL DIS EXCEPT 0.5594 21.0 17.5
EXTRACTIONS & RESTORATIONS, AGE
0-17.
187........................... \6\ DENTAL EXTRACTIONS & 0.5594 21.0 17.5
RESTORATIONS.
188........................... OTHER DIGESTIVE SYSTEM DIAGNOSES 0.9596 24.4 20.3
AGE >17 W CC.
189........................... \2\ OTHER DIGESTIVE SYSTEM 0.5594 21.0 17.5
DIAGNOSES AGE >17 W/O CC.
190........................... \6\ OTHER DIGESTIVE SYSTEM 0.5594 21.0 17.5
DIAGNOSESAGE 0-17.
191........................... \5\ PANCREAS, LIVER & SHUNT 1.6835 37.1 30.9
PROCEDURES W CC.
192........................... \6\ PANCREAS, LIVER & SHUNT 1.6835 37.1 30.9
PROCEDURES W/O CC.
193........................... \4\ BILIARY TRACT PROC EXCEPT 1.1625 29.5 24.6
ONLY CHOLECYST W OR W/O C.D.E.
W CC.
194........................... \6\ BILIARY TRACT PROC EXCEPT 1.1625 29.5 24.6
ONLY CHOLECYST W OR W/O C.D.E.
W/O CC.
195........................... \5\ CHOLECYSTECTOMY W C.D.E. W 1.6835 37.1 30.9
CC.
196........................... \6\ CHOLECYSTECTOMY W C.D.E. W/O 1.1625 29.5 24.6
CC.
197........................... \4\ CHOLECYSTECTOMY EXCEPT BY 1.1625 29.5 24.6
LAPAROSCOPE W/O C.D.E. W CC.
198........................... \6\ CHOLECYSTECTOMY EXCEPT BY 1.1625 29.5 24.6
LAPAROSCOPE W/O C.D.E. W/O CC.
199........................... \3\ HEPATOBILIARY DIAGNOSTIC 0.7819 23.9 19.9
PROCEDURE FOR MALIGNANCY.
200........................... \5\ HEPATOBILIARY DIAGNOSTIC 1.6835 37.1 30.9
PROCEDURE FOR NON-MALIGNANCY.
201........................... OTHER HEPATOBILIARY OR PANCREAS 1.5802 28.8 24.0
O.R. PROCEDURES.
202........................... CIRRHOSIS & ALCOHOLIC HEPATITIS. 0.6011 20.2 16.8
203........................... MALIGNANCY OF HEPATOBILIARY 0.7466 19.6 16.3
SYSTEM OR PANCREAS.
204........................... DISORDERS OF PANCREAS EXCEPT 0.8853 22.1 18.4
MALIGNANCY.
205........................... DISORDERS OF LIVER EXCEPT 0.6933 23.1 19.3
MALIG,CIRR,ALC HEPA W CC.

[[Page 48325]]

206........................... \8\ DISORDERS OF LIVER EXCEPT 0.6933 23.1 19.3
MALIG, CIRR, ALC HEPA W/O CC.
207........................... DISORDERS OF THE BILIARY TRACT W 0.7295 21.5 17.9
CC.
208........................... \1\ DISORDERS OF THE BILIARY 0.4175 17.0 14.2
TRACT W/O CC.
210........................... HIP & FEMUR PROCEDURES EXCEPT 1.4826 41.9 34.9
MAJOR JOINT AGE >17 W CC.
211........................... \6\ HIP & FEMUR PROCEDURES 1.6835 37.1 30.9
EXCEPT MAJOR JOINT AGE >17 W/O
CC.
212........................... \6\ HIP & FEMUR PROCEDURES 1.6835 37.1 30.9
EXCEPT MAJOR JOINT AGE 0-17.
213........................... AMPUTATION FOR MUSCULOSKELETAL 1.1871 33.5 27.9
SYSTEM & CONN TISSUE DISORDERS.
216........................... BIOPSIES OF MUSCULOSKELETAL 1.2147 37.6 31.3
SYSTEM& CONNECTIVE TISSUE.
217........................... WND DEBRID & SKN GRFT EXCEPT 1.2414 36.5 30.4
HAND, FOR MUSCSKELET & CONN
TISS DIS.
218........................... \5\ LOWER EXTREM & HUMER PROC 1.6835 37.1 30.9
EXCEPT HIP, FOOT, FEMUR AGE >17
W CC.
219........................... \6\ LOWER EXTREM & HUMER PROC 1.6835 37.1 30.9
EXCEPT HIP, FOOT, FEMUR AGE >17
W/O CC.
220........................... \6\ LOWER EXTREM & HUMER PROC 1.6835 37.1 30.9
EXCEPT HIP, FOOT, FEMUR AGE 0-
17.
223........................... \4\ MAJOR SHOULDER/ELBOW PROC, 1.1625 29.5 24.6
OR OTHER UPPER EXTREMITY PROC W
CC.
224........................... \1\ SHOULDER, ELBOW OR FOREARM 0.4175 17.0 14.2
PROC, EXC MAJOR JOINT PROC, W/O
CC.
225........................... FOOT PROCEDURES................. 0.9550 30.6 25.5
226........................... SOFT TISSUE PROCEDURES W CC..... 1.0626 34.3 28.6
227........................... \3\ SOFT TISSUE PROCEDURES W/O 0.7819 23.9 19.9
CC.
228........................... \3\ MAJOR THUMB OR JOINT PROC, 0.7819 23.9 19.9
OR OTH HAND OR WRIST PROC W CC.
229........................... \6\ HAND OR WRIST PROC, EXCEPT 0.4175 17.0 14.2
MAJOR JOINT PROC, W/O CC.
230........................... \5\ LOCAL EXCISION & REMOVAL OF 1.6835 37.1 30.9
INT FIX DEVICES OF HIP & FEMUR.
232........................... \5\ ARTHROSCOPY................. 1.6835 37.1 30.9
233........................... OTHER MUSCULOSKELET SYS & CONN 1.1724 32.4 27.0
TISS O.R. PROC W CC.
234........................... \6\ OTHER MUSCULOSKELET SYS & 0.4175 17.0 14.2
CONN TISS O.R. PROC W/O CC.
235........................... \3\ FRACTURES OF FEMUR.......... 0.7819 23.9 19.9
236........................... FRACTURES OF HIP & PELVIS....... 0.6802 28.9 24.1
237........................... \1\ SPRAINS, STRAINS, & 0.4175 17.0 14.2
DISLOCATIONS OF HIP, PELVIS &
THIGH.
238........................... OSTEOMYELITIS................... 0.8589 28.4 23.7
239........................... PATHOLOGICAL FRACTURES & 0.6031 20.6 17.2
MUSCULOSKELETAL & CONN TISS
MALIGNANCY.
240........................... CONNECTIVE TISSUE DISORDERS W CC 0.7134 22.4 18.7
241........................... \1\ CONNECTIVE TISSUE DISORDERS 0.4175 17.0 14.2
W/O CC.
242........................... SEPTIC ARTHRITIS................ 0.7700 26.2 21.8
243........................... MEDICAL BACK PROBLEMS........... 0.6028 22.3 18.6
244........................... BONE DISEASES & 0.5516 22.0 18.3
SPECIFICARTHROPATHIES W CC.
245........................... BONE DISEASES & SPECIFIC 0.4463 19.4 16.2
ARTHROPATHIES W/O CC.
246........................... \2\ NON-SPECIFIC ARTHROPATHIES.. 0.5594 21.0 17.5
247........................... SIGNS & SYMPTOMS OF 0.4582 17.6 14.7
MUSCULOSKELETAL SYSTEM & CONN
TISSUE.
248........................... TENDONITIS, MYOSITIS & BURSITIS. 0.7328 23.2 19.3
249........................... AFTERCARE, MUSCULOSKELETAL 0.6370 24.0 20.0
SYSTEM & CONNECTIVE TISSUE.
250........................... \1\ FX, SPRN, STRN & DISL OF 0.4175 17.0 14.2
FOREARM, HAND, FOOT AGE >17 W
CC.
251........................... \6\ FX, SPRN, STRN & DISL OF 0.4175 17.0 14.2
FOREARM, HAND, FOOT AGE >17 W/O
CC.
252........................... \6\ FX, SPRN, STRN & DISL OF 0.5594 21.0 17.5
FOREARM, HAND, FOOT AGE 0-17.
253........................... FX, SPRN, STRN & DISL OF UPARM, 0.5609 24.0 20.0
LOWLEG EX FOOT AGE >17 W CC.
254........................... \1\ FX, SPRN, STRN & DISL OF 0.4175 17.0 14.2
UPARM, LOWLEG EX FOOT AGE >17 W/
O CC.
255........................... \6\ FX, SPRN, STRN & DISL OF 0.5594 21.0 17.5
UPARM, LOWLEG EX FOOT AGE 0-17.
256........................... OTHER MUSCULOSKELETAL SYSTEM & 0.7132 23.6 19.7
CONNECTIVE TISSUE DIAGNOSES.
257........................... \5\ TOTAL MASTECTOMY FOR 1.6835 37.1 30.9
MALIGNANCY W CC.
258........................... \6\ TOTAL MASTECTOMY FOR 0.7819 23.9 19.9
MALIGNANCY W/O CC.
259........................... \3\ SUBTOTAL MASTECTOMY FOR 0.7819 23.9 19.9
MALIGNANCY W CC.
260........................... \6\ SUBTOTAL MASTECTOMY FOR 0.7819 23.9 19.9
MALIGNANCY W/O CC.
261........................... \2\ BREAST PROC FOR NON- 0.5594 21.0 17.5
MALIGNANCY EXCEPT BIOPSY &
LOCAL EXCISION.
262........................... \4\ BREAST BIOPSY & LOCAL 1.1625 29.5 24.6
EXCISION FOR NON-MALIGNANCY.
263........................... SKIN GRAFT &/OR DEBRID FOR SKN 1.2748 38.0 31.7
ULCER OR CELLULITIS W CC.
264........................... SKIN GRAFT &/OR DEBRID FOR SKN 0.8507 29.9 24.9
ULCER OR CELLULITIS W/O CC.
265........................... SKIN GRAFT &/OR DEBRID EXCEPT 1.1019 30.2 25.2
FORSKIN ULCER OR CELLULITIS W
CC.
266........................... \3\ SKIN GRAFT &/OR DEBRID 0.7819 23.9 19.9
EXCEPT FOR SKIN ULCER OR
CELLULITIS W/O CC.

[[Page 48326]]

267........................... \6\ PERIANAL & PILONIDAL 0.7819 23.9 19.9
PROCEDURES.
268........................... \4\ SKIN, SUBCUTANEOUS TISSUE 1.1625 29.5 24.6
&BREAST PLASTIC PROCEDURES.
269........................... OTHER SKIN, SUBCUT TISS & BREAST 1.2075 34.7 28.9
PROC W CC.
270........................... \3\ OTHER SKIN, SUBCUT TISS & 0.7819 23.9 19.9
BREASTPROC W/O CC.
271........................... SKIN ULCERS..................... 0.8269 26.9 22.4
272........................... MAJOR SKIN DISORDERS W CC....... 0.6584 23.0 19.2
273........................... \1\ MAJOR SKIN DISORDERS W/O CC. 0.4175 17.0 14.2
274........................... MALIGNANT BREAST DISORDERS W CC. 0.7231 21.8 18.2
275........................... \6\ MALIGNANT BREAST DISORDERS W/ 0.7819 23.9 19.9
O CC.
276........................... \2\ NON-MALIGNANT BREAST 0.5594 21.0 17.5
DISORDERS.
277........................... CELLULITIS AGE >17 W CC......... 0.6089 20.9 17.4
278........................... CELLULITIS AGE >17 W/O CC....... 0.4254 18.0 15.0
279........................... \6\ CELLULITIS AGE 0-17......... 0.4175 17.0 14.2
280........................... TRAUMA TO THE SKIN, SUBCUT TISS 0.7148 24.1 20.1
& BREAST AGE >17 W CC.
281........................... \2\ TRAUMA TO THE SKIN, SUBCUT 0.5594 21.0 17.5
TISS & BREAST AGE >17 W/O CC.
282........................... \6\ TRAUMA TO THE SKIN, SUBCUT 0.5594 21.0 17.5
TISS & BREAST AGE 0-17.
283........................... MINOR SKIN DISORDERS W CC....... 0.6876 23.1 19.3
284........................... \2\ MINOR SKIN DISORDERS W/O CC. 0.5594 21.0 17.5
285........................... AMPUTAT OF LOWER LIMB FOR 1.2418 31.6 26.3
ENDOCRINE,NUTRIT,& METABOL
DISORDERS.
286........................... \6\ ADRENAL & PITUITARY 1.1625 29.5 24.6
PROCEDURES.
287........................... SKIN GRAFTS & WOUND DEBRID FOR 1.0402 33.0 27.5
ENDOC, NUTRIT & METAB DISORDERS.
288........................... \4\ O.R. PROCEDURES FOR OBESITY. 1.1625 29.5 24.6
289........................... \6\ PARATHYROID PROCEDURES...... 1.1625 29.5 24.6
290........................... \6\ THYROID PROCEDURES.......... 1.1625 29.5 24.6
291........................... \6\ THYROGLOSSAL PROCEDURES..... 1.1625 29.5 24.6
292........................... OTHER ENDOCRINE, NUTRIT & METAB 1.1549 32.0 26.7
O.R. PROC W CC.
293........................... \8\ OTHER ENDOCRINE, NUTRIT & 1.1549 32.0 26.7
METAB O.R. PROC W/O CC.
294........................... DIABETES AGE >35................ 0.6958 23.9 19.9
295........................... \2\ DIABETES AGE 0-35........... 0.5594 21.0 17.5
296........................... NUTRITIONAL & MISC METABOLIC 0.7092 22.3 18.6
DISORDERS AGE >17 W CC.
297........................... NUTRITIONAL & MISC METABOLIC 0.4596 19.3 16.1
DISORDERS AGE >17 W/O CC.
298........................... \6\ NUTRITIONAL & MISC METABOLIC 0.4175 17.0 14.2
DISORDERS AGE 0-17.
299........................... \3\ INBORN ERRORS OF METABOLISM. 0.7819 23.9 19.9
300........................... ENDOCRINE DISORDERS W CC........ 0.7004 23.7 19.8
301........................... \2\ ENDOCRINE DISORDERS W/O CC.. 0.5594 21.0 17.5
302........................... \7\ KIDNEY TRANSPLANT........... 0.0000 0.0 0.0
303........................... \6\ KIDNEY AND URETER PROCEDURES 0.7819 23.9 19.9
FOR NEOPLASM.
304........................... \4\ KIDNEY AND URETER PROCEDURES 1.1625 29.5 24.6
FOR NON-NEOPLASM W CC.
305........................... \6\ KIDNEY AND URETER PROCEDURES 0.7819 23.9 19.9
FOR NON-NEOPLASM W/O CC.
306........................... \4\ PROSTATECTOMY W CC.......... 1.1625 29.5 24.6
307........................... \6\ PROSTATECTOMY W/O CC........ 1.1625 29.5 24.6
308........................... \4\ MINOR BLADDER PROCEDURES W 1.1625 29.5 24.6
CC.
309........................... \6\ MINOR BLADDER PROCEDURES W/O 1.1625 29.5 24.6
CC.
310........................... \4\ TRANSURETHRAL PROCEDURES W 1.1625 29.5 24.6
CC.
311........................... \6\ TRANSURETHRAL PROCEDURES W/O 1.1625 29.5 24.6
CC.
312........................... \3\ URETHRAL PROCEDURES, AGE >17 0.7819 23.9 19.9
W CC.
313........................... \6\ URETHRAL PROCEDURES, AGE >17 0.7819 23.9 19.9
W/O CC.
314........................... \6\ URETHRAL PROCEDURES, AGE 0- 0.7819 23.9 19.9
17.
315........................... OTHER KIDNEY & URINARY TRACT 1.4016 33.9 28.3
PROCEDURES.
316........................... RENAL FAILURE................... 0.8321 22.9 19.1
317........................... ADMIT FOR RENAL DIALYSIS........ 0.9102 24.4 20.3
318........................... KIDNEY & URINARY TRACT NEOPLASMS 0.7565 21.0 17.5
WCC.
319........................... \6\ KIDNEY & URINARY TRACT 0.7819 23.9 19.9
NEOPLASMSW/O CC.
320........................... KIDNEY & URINARY TRACT 0.6200 21.7 18.1
INFECTIONS AGE >17 W CC.
321........................... KIDNEY & URINARY TRACT 0.4450 18.5 15.4
INFECTIONS AGE >17 W/O CC.
322........................... \6\ KIDNEY & URINARY TRACT 0.4175 17.0 14.2
INFECTIONS AGE 0-17.
323........................... \1\ URINARY STONES W CC, &/OR 0.4175 17.0 14.2
ESW LITHOTRIPSY.
324........................... \1\ URINARY STONES W/O CC....... 0.4175 17.0 14.2
325........................... \2\ KIDNEY & URINARY TRACT SIGNS 0.5594 21.0 17.5
& SYMPTOMS AGE >17 W CC.
326........................... \6\ KIDNEY & URINARY TRACT SIGNS 0.4175 17.0 14.2
& SYMPTOMS AGE >17 W/O CC.
327........................... \6\ KIDNEY & URINARY TRACT SIGNS 0.4175 17.0 14.2
& SYMPTOMS AGE 0-17.
328........................... \6\ URETHRAL STRICTURE AGE >17 W 0.5594 21.0 17.5
CC.
329........................... \6\ URETHRAL STRICTURE AGE >17 W/ 0.5594 21.0 17.5
O CC.
330........................... \6\ URETHRAL STRICTURE AGE 0-17. 0.5594 21.0 17.5
331........................... OTHER KIDNEY & URINARY TRACT 0.7773 22.5 18.8
DIAGNOSES AGE >17 W CC.
332........................... \1\ OTHER KIDNEY & URINARY TRACT 0.4175 17.0 14.2
DIAGNOSES AGE >17 W/O CC.

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333........................... \6\ OTHER KIDNEY & URINARY TRACT 0.4175 17.0 14.2
DIAGNOSES AGE 0-17.
334........................... \6\ MAJOR MALE PELVIC PROCEDURES 0.4175 17.0 14.2
W CC.
335........................... \1\ MAJOR MALE PELVIC PROCEDURES 0.4175 17.0 14.2
W/OCC.
336........................... \4\ TRANSURETHRAL PROSTATECTOMY 1.1625 29.5 24.6
W CC.
337........................... \6\ TRANSURETHRAL PROSTATECTOMY 1.1625 29.5 24.6
W/O CC.
338........................... \3\ TESTES PROCEDURES, FOR 0.7819 23.9 19.9
MALIGNANCY.
339........................... \3\ TESTES PROCEDURES, NON- 0.7819 23.9 19.9
MALIGNANCY AGE >17.
340........................... \6\ TESTES PROCEDURES, NON- 0.7819 23.9 19.9
MALIGNANCY AGE 0-17.
341........................... \5\ PENIS PROCEDURES............ 1.6835 37.1 30.9
342........................... \6\ CIRCUMCISION AGE >17........ 0.7819 23.9 19.9
343........................... \6\ CIRCUMCISION AGE 0-17....... 0.7819 23.9 19.9
344........................... \3\ OTHER MALE REPRODUCTIVE 0.7819 23.9 19.9
SYSTEM O.R. PROCEDURES FOR
MALIGNANCY.
345........................... \4\ OTHER MALE REPRODUCTIVE 1.1625 29.5 24.6
SYSTEM O.R. PROC EXCEPT FOR
MALIGNANCY.
346........................... \3\ MALIGNANCY, MALE 0.7819 23.9 19.9
REPRODUCTIVE SYSTEM, W CC.
347........................... \1\ MALIGNANCY, MALE 0.4175 17.0 14.2
REPRODUCTIVE SYSTEM, W/O CC.
348........................... \2\ BENIGN PROSTATIC HYPERTROPHY 0.5594 21.0 17.5
W CC.
349........................... \6\ BENIGN PROSTATIC HYPERTROPHY 0.7819 23.9 19.9
W/O CC.
350........................... INFLAMMATION OF THE MALE 0.5606 21.0 17.5
REPRODUCTIVE SYSTEM.
351........................... \6\ STERILIZATION, MALE......... 0.7819 23.9 19.9
352........................... OTHER MALE REPRODUCTIVE SYSTEM 0.8209 27.5 22.9
DIAGNOSES.
353........................... \6\ PELVIC EVISCERATION, RADICAL 1.1625 29.5 24.6
HYSTERECTOMY & RADICAL
VULVECTOMY.
354........................... \6\ UTERINE,ADNEXA PROC FOR NON- 1.1625 29.5 24.6
OVARIAN/ADNEXAL MALIG W CC.
355........................... \6\ UTERINE,ADNEXA PROC FOR NON- 1.1625 29.5 24.6
OVARIAN/ADNEXAL MALIG W/O CC.
356........................... \6\ FEMALE REPRODUCTIVE SYSTEM 1.1625 29.5 24.6
RECONSTRUCTIVE PROCEDURES.
357........................... \6\ UTERINE & ADNEXA PROC FOR 1.1625 29.5 24.6
OVARIAN OR ADNEXAL MALIGNANCY.
358........................... \6\ UTERINE & ADNEXA PROC FOR 1.1625 29.5 24.6
NON-MALIGNANCY W CC.
359........................... \6\ UTERINE & ADNEXA PROC FOR 1.1625 29.5 24.6
NONMALIGNANCY W/O CC-.
360........................... \6\ VAGINA, CERVIX & VULVA 1.1625 29.5 24.6
PROCEDURES.
361........................... \6\ LAPAROSCOPY & INCISIONAL 0.4175 17.0 14.2
TUBAL INTERRUPTION.
362........................... \6\ ENDOSCOPIC TUBAL 0.4175 17.0 14.2
INTERRUPTION.
363........................... \6\ D&C, CONIZATION & RADIO- 0.4175 17.0 14.2
IMPLANT, FOR MALIGNANCY.
364........................... \6\ D&C, CONIZATION EXCEPT FOR 0.4175 17.0 14.2
MALIGNANCY.
365........................... \4\ OTHER FEMALE REPRODUCTIVE 1.1625 29.5 24.6
SYSTEM O.R. PROCEDURES.
366........................... MALIGNANCY, FEMALE REPRODUCTIVE 0.9106 21.6 18.0
SYSTEM W CC.
367........................... \1\ MALIGNANCY, FEMALE 0.4175 17.0 14.2
REPRODUCTIVE SYSTEM W/O CC.
368........................... INFECTIONS, FEMALE REPRODUCTIVE 0.7846 21.3 17.8
SYSTEM.
369........................... \3\ MENSTRUAL & OTHER FEMALE 0.7819 23.9 19.9
REPRODUCTIVE SYSTEM DISORDERS.
370........................... \6\ CESAREAN SECTION W CC....... 0.4175 17.0 14.2
371........................... \6\ CESAREAN SECTION W/O CC..... 0.4175 17.0 14.2
372........................... \6\ VAGINAL DELIVERY W 0.4175 17.0 14.2
COMPLICATING DIAGNOSES.
373........................... \6\ VAGINAL DELIVERY W/O 0.4175 17.0 14.2
COMPLICATING DIAGNOSES.
374........................... \6\ VAGINAL DELIVERY W 0.4175 17.0 14.2
STERILIZATION &/OR D&C.
375........................... \6\ VAGINAL DELIVERY W O.R. PROC 0.4175 17.0 14.2
EXCEPT STERIL &/OR D&C.
376........................... \4\ POSTPARTUM & POST ABORTION 1.1625 29.5 24.6
DIAGNOSES W/O O.R. PROCEDURE.
377........................... \6\ POSTPARTUM & POST ABORTION 0.4175 17.0 14.2
DIAGNOSES W O.R. PROCEDURE.
378........................... \6\ ECTOPIC PREGNANCY........... 0.4175 17.0 14.2
379........................... \6\ THREATENED ABORTION......... 0.4175 17.0 14.2
380........................... \6\ ABORTION W/O D&C............ 0.4175 17.0 14.2
381........................... \6\ ABORTION W D&C, ASPIRATION 0.4175 17.0 14.2
CURETTAGE OR HYSTEROTOMY.
382........................... \6\ FALSE LABOR................. 0.4175 17.0 14.2
383........................... \1\ OTHER ANTEPARTUM DIAGNOSES W 0.4175 17.0 14.2
MEDICAL COMPLICATIONS.
384........................... \6\ OTHER ANTEPARTUM DIAGNOSES W/ 0.4175 17.0 14.2
O MEDICAL COMPLICATIONS.
385........................... \6\ NEONATES, DIED OR 0.4175 17.0 14.2
TRANSFERRED TO ANOTHER ACUTE
CARE FACILITY.
386........................... \6\ EXTREME IMMATURITY OR 0.4175 17.0 14.2
RESPIRATORY DISTRESS SYNDROME,
NEONATE.
387........................... \6\ PREMATURITY W MAJOR PROBLEMS 0.4175 17.0 14.2
388........................... \6\ PREMATURITY W/O MAJOR 0.4175 17.0 14.2
PROBLEMS.
389........................... \6\ FULL TERM NEONATE W MAJOR 0.4175 17.0 14.2
PROBLEMS.
390........................... \6\ NEONATE W OTHER SIGNIFICANT 0.4175 17.0 14.2
PROBLEMS.
391........................... \6\ NORMAL NEWBORN.............. 0.4175 17.0 14.2
392........................... \6\ SPLENECTOMY AGE >17......... 1.1625 29.5 24.6
393........................... \6\ SPLENECTOMY AGE 0-17........ 1.1625 29.5 24.6
394........................... \4\ OTHER O.R. PROCEDURES OF THE 1.1625 29.5 24.6
BLOOD AND BLOOD FORMING ORGANS.

[[Page 48328]]

395........................... RED BLOOD CELL DISORDERS AGE >17 0.6651 21.9 18.3
396........................... \6\ RED BLOOD CELL DISORDERS AGE 0.4175 17.0 14.2
0-17.
397........................... COAGULATION DISORDERS........... 0.8276 20.4 17.0
398........................... RETICULOENDOTHELIAL & IMMUNITY 0.6278 20.8 17.3
DISORDERS W CC.
399........................... \1\ RETICULOENDOTHELIAL & 0.4175 17.0 14.2
IMMUNITY DISORDERS W/O CC.
401........................... \4\ LYMPHOMA & NON-ACUTE 1.1625 29.5 24.6
LEUKEMIA WOTHER O.R. PROC W CC.
402........................... \6\ LYMPHOMA & NON-ACUTE 0.5594 21.0 17.5
LEUKEMIA W OTHER O.R. PROC W/O
CC.
403........................... LYMPHOMA & NON-ACUTE LEUKEMIA W 0.8846 23.9 19.9
CC.
404........................... \3\ LYMPHOMA & NON-ACUTE 0.7819 23.9 19.9
LEUKEMIA W/OCC.
405........................... \6\ ACUTE LEUKEMIA W/O MAJOR 0.7819 23.9 19.9
O.R. PROCEDURE AGE 0-17.
406........................... \5\ MYELOPROLIF DISORD OR POORLY 1.6835 37.1 30.9
DIFF NEOPL W MAJ O.R.PROC W CC.
407........................... \6\ MYELOPROLIF DISORD OR POORLY 1.1625 29.5 24.6
DIFF NEOPL W MAJ O.R.PROC W/O
CC.
408........................... \4\ MYELOPROLIF DISORD OR POORLY 1.1625 29.5 24.6
DIFF NEOPL W OTHER O.R.PROC.
409........................... RADIOTHERAPY.................... 0.8416 23.2 19.3
410........................... CHEMOTHERAPY W/O ACUTE LEUKEMIA 1.2527 28.7 23.9
ASSECONDARY DIAGNOSIS.
411........................... \6\ HISTORY OF MALIGNANCY W/O 0.5594 21.0 17.5
ENDOSCOPY.
412........................... \6\ HISTORY OF MALIGNANCY W 0.5594 21.0 17.5
ENDOSCOPY.
413........................... OTHER MYELOPROLIF DIS OR POORLY 0.8429 21.4 17.8
DIFF NEOPL DIAG W CC.
414........................... \3\ OTHER MYELOPROLIF DIS OR 0.7819 23.9 19.9
POORLY DIFF NEOPL DIAG W/O CC.
417........................... \6\ SEPTICEMIA AGE 0-17......... 0.7819 23.9 19.9
418........................... POSTOPERATIVE & POST-TRAUMATIC 0.7961 24.1 20.1
INFECTIONS.
419........................... \2\ FEVER OF UNKNOWN ORIGIN AGE 0.5594 21.0 17.5
>17 W CC.
420........................... \2\ FEVER OF UNKNOWN ORIGIN AGE 0.5594 21.0 17.5
>17 W/O CC.
421........................... VIRAL ILLNESS AGE >17........... 0.7065 20.4 17.0
422........................... \6\ VIRAL ILLNESS & FEVER OF 0.4175 17.0 14.2
UNKNOWN ORIGIN AGE 0-17.
423........................... OTHER INFECTIOUS & PARASITIC 1.0426 23.2 19.3
DISEASES DIAGNOSES.
424........................... \5\ O.R. PROCEDURE W PRINCIPAL 1.6835 37.1 30.9
DIAGNOSES OF MENTAL ILLNESS.
425........................... \1\ ACUTE ADJUSTMENT REACTION & 0.4175 17.0 14.2
PSYCHOSOCIAL DYSFUNCTION.
426........................... DEPRESSIVE NEUROSES............. 0.4038 22.5 18.8
427........................... \2\ NEUROSES EXCEPT DEPRESSIVE.. 0.5594 21.0 17.5
428........................... DISORDERS OF PERSONALITY & 0.5183 24.5 20.4
IMPULSE CONTROL.
429........................... ORGANIC DISTURBANCES & MENTAL 0.5326 24.0 20.0
RETARDATION.
430........................... PSYCHOSES....................... 0.4024 23.1 19.3
431........................... \2\ CHILDHOOD MENTAL DISORDERS.. 0.5594 21.0 17.5
432........................... \1\ OTHER MENTAL DISORDER 0.4175 17.0 14.2
DIAGNOSES.
433........................... \6\ ALCOHOL/DRUG ABUSE OR 0.4175 17.0 14.2
DEPENDENCE, LEFT AMA.
439........................... SKIN GRAFTS FOR INJURIES........ 1.2203 36.0 30.0
440........................... WOUND DEBRIDEMENTS FOR INJURIES. 1.2248 34.4 28.7
441........................... \2\ HAND PROCEDURES FOR INJURIES 0.5594 21.0 17.5
442........................... OTHER O.R. PROCEDURES FOR 1.3670 34.9 29.1
INJURIES W CC.
443........................... \6\ OTHER O.R. PROCEDURES FOR 0.5594 21.0 17.5
INJURIES W/O CC.
444........................... TRAUMATIC INJURY AGE >17 W CC... 0.6598 23.2 19.3
445........................... \2\ TRAUMATIC INJURY AGE >17 W/O 0.5594 21.0 17.5
CC.
446........................... \6\ TRAUMATIC INJURY AGE 0-17... 0.5594 21.0 17.5
447........................... \2\ ALLERGIC REACTIONS AGE >17.. 0.5594 21.0 17.5
448........................... \6\ ALLERGIC REACTIONS AGE 0-17. 0.5594 21.0 17.5
449........................... \3\ POISONING & TOXIC EFFECTS OF 0.7819 23.9 19.9
DRUGS AGE >17 W CC.
450........................... \2\ POISONING & TOXIC EFFECTS OF 0.5594 21.0 17.5
DRUGS AGE >17 W/O CC.
451........................... \6\ POISONING & TOXIC EFFECTS OF 0.7819 23.9 19.9
DRUGS AGE 0-17.
452........................... COMPLICATIONS OF TREATMENT W CC. 0.9275 25.7 21.4
453........................... COMPLICATIONS OF TREATMENT W/O 0.5790 21.6 18.0
CC.
454........................... \3\ OTHER INJURY, POISONING & 0.7819 23.9 19.9
TOXIC EFFECT DIAG W CC.
455........................... \6\ OTHER INJURY, POISONING & 0.7819 23.9 19.9
TOXIC EFFECT DIAG W/O CC.
461........................... O.R. PROC W DIAGNOSES OF OTHER 1.1466 32.7 27.3
CONTACT W HEALTH SERVICES.
462........................... REHABILITATION.................. 0.5823 22.1 18.4
463........................... SIGNS & SYMPTOMS W CC........... 0.6082 22.9 19.1
464........................... SIGNS & SYMPTOMS W/O CC......... 0.5831 24.3 20.3
465........................... AFTERCARE W HISTORY OF 0.6877 21.2 17.7
MALIGNANCY AS SECONDARY
DIAGNOSIS.
466........................... AFTERCARE W/O HISTORY OF 0.6700 21.7 18.1
MALIGNANCY AS SECONDARY
DIAGNOSIS.
467........................... \3\ OTHER FACTORS INFLUENCING 0.7819 23.9 19.9
HEALTHSTATUS.
468........................... EXTENSIVE O.R. PROCEDURE 2.1478 40.5 33.8
UNRELATED TO PRINCIPAL
DIAGNOSIS.
469........................... \7\ PRINCIPAL DIAGNOSIS INVALID 0.0000 0.0 0.0
AS DISCHARGE DIAGNOSIS.
470........................... \7\ UNGROUPABLE................. 0.0000 0.0 0.0
471........................... \5\ BILATERAL OR MULTIPLE MAJOR 1.6835 37.1 30.9
JOINT PROCS OF LOWER EXTREMITY.

[[Page 48329]]

473........................... ACUTE LEUKEMIA W/O MAJOR O.R. 0.9917 25.3 21.1
PROCEDURE AGE >17.
476........................... \5\ PROSTATIC O.R. PROCEDURE 1.6835 37.1 30.9
UNRELATED TO PRINCIPAL
DIAGNOSIS.
477........................... NON-EXTENSIVE O.R. PROCEDURE 1.5119 35.9 29.9
UNRELATED TO PRINCIPAL
DIAGNOSIS.
479........................... \2\ OTHER VASCULAR PROCEDURES W/ 0.5594 21.0 17.5
O CC.
480........................... \7\ LIVER TRANSPLANT AND/ 0.0000 0.0 0.0
ORINTESTINAL TRANSPLANT.
481........................... \6\ BONE MARROW TRANSPLANT...... 1.1625 29.5 24.6
482........................... \5\ TRACHEOSTOMY FOR FACE, MOUTH 1.6835 37.1 30.9
& NECK DIAGNOSES;.
484........................... \6\ CRANIOTOMY FOR MULTIPLE 1.6835 37.1 30.9
SIGNIFICANT TRAUMA.
485........................... \6\ LIMB REATTACHMENT, HIP & 1.1625 29.5 24.6
FEMUR PROC FOR MULTIPLE
SIGNIFICANTTRAUMA.
486........................... \3\ OTHER O.R. PROCEDURES FOR 0.7819 23.9 19.9
MULTIPLE SIGNIFICANT TRAUMA.
487........................... \4\ OTHER MULTIPLE SIGNIFICANT 1.1625 29.5 24.6
TRAUMA.
488........................... \4\ HIV W EXTENSIVE O.R. 1.1625 29.5 24.6
PROCEDURE.
489........................... HIV W MAJOR RELATED CONDITION... 0.9436 22.1 18.4
490........................... HIV W OR W/O OTHER RELATED 0.6456 20.3 16.9
CONDITION.
491........................... \5\ MAJOR JOINT & LIMB 1.6835 37.1 30.9
REATTACHMENT PROCEDURES OF
UPPER EXTREMITY.
492........................... \2\ CHEMO W ACUTE LEUKEMIA AS 0.5594 21.0 17.5
SDX OR W USE OF HIGH DOSE CHEMO
AGENT.
493........................... \4\ LAPAROSCOPIC CHOLECYSTECTOMY 1.1625 29.5 24.6
W/O C.D.E. W CC.
494........................... \6\ LAPAROSCOPIC CHOLECYSTECTOMY 1.1625 29.5 24.6
W/O C.D.E. W/O CC.
495........................... \7\ LUNG TRANSPLANT............. 0.0000 0.0 0.0
496........................... \4\ COMBINED ANTERIOR/POSTERIOR 1.1625 29.5 24.6
SPINAL FUSION.
497........................... \5\ SPINAL FUSION EXCEPT 1.6835 37.1 30.9
CERVICAL WCC.
498........................... \6\ SPINAL FUSION EXCEPT 1.6835 37.1 30.9
CERVICAL W/O CC.
499........................... \5\ BACK & NECK PROCEDURES 1.6835 37.1 30.9
EXCEPT SPINAL FUSION W CC.
500........................... \4\ BACK & NECK PROCEDURES 1.1625 29.5 24.6
EXCEPT SPINAL FUSION W/O CC.
501........................... KNEE PROCEDURES W PDX OF 1.2164 33.3 27.8
INFECTION W CC.
502........................... \3\ KNEE PROCEDURES W PDX OF 0.7819 23.9 19.9
INFECTION W/O CC.
503........................... \4\ KNEE PROCEDURES W/O PDX 1.1625 29.5 24.6
OFINFECTION.
504........................... \5\ EXTENSIVE BURNS OR FULL 1.6835 37.1 30.9
THICKNESS BURNS W MV 96+ HRS W
SKIN GRAFT.
505........................... \5\ EXTENSIVE BURNS OR FULL 1.6835 37.1 30.9
THICKNESS BURNS W MV 96+ HRS W/
O SKIN GRAFT.
506........................... \4\ FULL THICKNESS BURN W SKIN 1.1625 29.5 24.6
GRAFTOR INHAL INJ W CC OR SIG
TRAUMA.
507........................... \6\ FULL THICKNESS BURN W SKIN 0.4175 17.0 14.2
GRFT OR INHAL INJ W/O CC OR SIG
TRAUMA.
508........................... FULL THICKNESS BURN W/O SKIN 0.7588 25.6 21.3
GRFT OR INHAL INJ W CC OR SIG
TRAUMA.
509........................... \1\ FULL THICKNESS BURN W/O SKIN 0.4175 17.0 14.2
GRFTOR INH INJ W/O CC OR SIG
TRAUMA.
510........................... NON-EXTENSIVE BURNS W CC OR 0.6720 22.6 18.8
SIGNIFICANT TRAUMA.
511........................... \1\ NON-EXTENSIVE BURNS W/O CC 0.4175 17.0 14.2
OR SIGNIFICANT TRAUMA.
512........................... \7\ SIMULTANEOUS PANCREAS/ 0.0000 0.0 0.0
KIDNEYTRANSPLANT.
513........................... \7\ PANCREAS TRANSPLANT......... 0.0000 0.0 0.0
515........................... \4\ CARDIAC DEFIBRILLATOR 1.1625 29.5 24.6
IMPLANT W/O CARDIAC CATH.
518........................... \6\ PERCUTANEOUS CARDIOVASC PROC 0.4175 17.0 14.2
W/O CORONARY ARTERY STENT OR
AMI.
519........................... \4\ CERVICAL SPINAL FUSION W CC. 1.1625 29.5 24.6
520........................... \6\ CERVICAL SPINAL FUSION W/O 1.6835 37.1 30.9
CC.
521........................... \2\ ALCOHOL/DRUG ABUSE OR 0.5594 21.0 17.5
DEPENDENCE W CC.
522........................... \6\ ALCOHOL/DRUG ABUSE OR 0.5594 21.0 17.5
DEPENDENCE W REHABILITATION
THERAPY W/O CC.
523........................... \1\ ALCOHOL/DRUG ABUSE OR 0.4175 17.0 14.2
DEPENDENCE W/O REHABILITATION
THERAPY W/O CC.
524........................... \2\ TRANSIENT ISCHEMIA.......... 0.5594 21.0 17.5
525........................... \6\ OTHER HEART ASSIST SYSTEM 1.6835 37.1 30.9
IMPLANT.
528........................... \6\ INTRACRANIAL VASCULAR 1.6835 37.1 30.9
PROCEDURES W PDX HEMORRHAGE.
529........................... \5\ VENTRICULAR SHUNT PROCEDURES 1.6835 37.1 30.9
W CC.
530........................... \6\ VENTRICULAR SHUNT PROCEDURES 1.6835 37.1 30.9
W/O CC.
531........................... \5\ SPINAL PROCEDURES W CC...... 1.6835 37.1 30.9
532........................... \3\ SPINAL PROCEDURES W/O CC.... 0.7819 23.9 19.9
533........................... \4\ EXTRACRANIAL PROCEDURES W CC 1.1625 29.5 24.6
534........................... \6\ EXTRACRANIAL PROCEDURES W/O 1.1625 29.5 24.6
CC.
535........................... \5\ CARDIAC DEFIB IMPLANT W 1.6835 37.1 30.9
CARDIAC CATH W AMI/HF/SHOCK.
536........................... \6\ CARDIAC DEFIB IMPLANT W 1.1625 29.5 24.6
CARDIACCATH W/O AMI/HF/SHOCK.

[[Page 48330]]

537........................... LOCAL EXCISION & REMOVAL INT FIX 1.4672 39.9 33.3
DEVICES EXCEPT HIP & FEMUR W CC.
538........................... \4\ LOCAL EXCISION & REMOVAL INT 1.1625 29.5 24.6
FIX DEVICES EXCEPT HIP & FEMUR
W/O CC.
539........................... \4\ LYMPHOMA & LEUKEMIA W MAJOR 1.1625 29.5 24.6
O.R. PROCEDURE W CC.
540........................... \6\ LYMPHOMA & LEUKEMIA W MAJOR 0.4175 17.0 14.2
O.R. PROCEDURE W/O CC.
541........................... ECMO OR TRACH W MV 96+ HRS OR 3.8893 58.1 48.4
PDX EXC FACE, MOUTH & NECK W
MAJ O.R..
542........................... TRACH W MV 96+ HRS OR PDX EXC 2.8689 45.1 37.6
FACE, MOUTH & NECK W/O MAJ O.R..
543........................... \5\ CRANIOTOMY W MAJOR DEVICE 1.6835 37.1 30.9
IMPLANT OR ACUTE COMPLEX CNS
PDX.
544........................... \5\ MAJOR JOINT REPLACEMENT OR 1.6835 37.1 30.9
REATTACHMENT OF LOWER EXTREMITY.
545........................... \5\ REVISION OF HIP OR KNEE 1.6835 37.1 30.9
REPLACEMENT.
546........................... \6\ SPINAL FUSION EXC CERV WITH 1.6835 37.1 30.9
CURVATURE OF THE SPINE OR MALIG.
547........................... \6\ CORONARY BYPASS W CARDIAC 1.1625 29.5 24.6
CATH W MAJOR CV DX.
548........................... \6\ CORONARY BYPASS W CARDIAC 1.1625 29.5 24.6
CATHW/O MAJOR CV DX.
549........................... \6\ CORONARY BYPASS W/O CARDIAC 1.1625 29.5 24.6
CATH W MAJOR CV DX.
550........................... \6\ CORONARY BYPASS W/O CARDIAC 1.1625 29.5 24.6
CATH W/O MAJOR CV DX.
551........................... PERMANENT CARDIAC PACEMAKER IMPL 1.6035 29.5 24.6
W MAJ CV DX OR AICD LEAD OR
GNRTR.
552........................... \4\ OTHER PERMANENT CARDIAC 1.1625 29.5 24.6
PACEMAKER IMPLANT W/O MAJOR CV
DX.
553........................... OTHER VASCULAR PROCEDURES W CC W 1.5837 32.5 27.1
MAJOR CV DX.
554........................... OTHER VASCULAR PROCEDURES W CC W/ 1.2817 31.6 26.3
O MAJOR CV DX.
555........................... \3\ PERCUTANEOUS CARDIOVASCULAR 0.7819 23.9 19.9
PROC W MAJOR CV DX.
556........................... \6\ PERCUTANEOUS CARDIOVASC PROC 0.4175 17.0 14.2
W NON-DRUG-ELUTING STENT W/O
MAJ CV DX.
557........................... \4\ PERCUTANEOUS CARDIOVASCULAR 1.1625 29.5 24.6
PROC W DRUG-ELUTING STENT W
MAJOR CV DX.
558........................... \6\ PERCUTANEOUS CARDIOVASCULAR 0.4175 17.0 14.2
PROC W DRUG-ELUTING STENT W/O
MAJ CV DX.
559........................... \6\ ACUTE ISCHEMIC STROKE WITH 0.7819 23.9 19.9
USE OTHROMBOLYTIC AGENT F.
560........................... BACTERIAL & TUBERCULOUS 0.9308 25.5 21.3
INFECTIONS OF NERVOUS SYSTEM.
561........................... NON-BACTERIAL INFECTIONS OF 0.8145 22.3 18.6
NERVOUS SYSTEM EXCEPT VIRAL
MENINGITIS.
562........................... SEIZURE AGE >17 W CC............ 0.6844 23.2 19.3
563........................... \2\ SEIZURE AGE >17 W/O CC...... 0.5594 21.0 17.5
564........................... HEADACHES AGE >17............... 0.7565 24.1 20.1
565........................... RESPIRATORY SYSTEM DIAGNOSIS 2.0557 34.7 28.9
WITH VENTILATOR SUPPORT 96+
HOURS.
566........................... RESPIRATORY SYSTEM DIAGNOSIS 1.5445 27.4 22.8
WITH VENTILATOR SUPPORT < 96
HOURS.
567........................... \5\ STOMACH, ESOPHAGEAL & 1.6835 37.1 30.9
DUODENAL PROC AGE >17 W CC W
MAJOR GI DX.
568........................... \5\ STOMACH, ESOPHAGEAL & 1.6835 37.1 30.9
DUODENAL PROC AGE >17 W CC W/O
MAJOR GI DX.
569........................... \5\ MAJOR SMALL & LARGE BOWEL 1.6835 37.1 30.9
PROCEDURES W CC W MAJOR GI DX.
570........................... \5\ MAJOR SMALL & LARGE BOWEL 1.6835 37.1 30.9
PROCEDURES W CC W/O MAJOR GI DX.
571........................... MAJOR ESOPHAGEAL DISORDERS...... 0.8214 21.9 18.3
572........................... MAJOR GASTROINTESTINAL DISORDERS 0.8505 23.3 19.4
AND PERITONEAL INFECTIONS.
573........................... \5\ MAJOR BLADDER PROCEDURES.... 1.6835 37.1 30.9
574........................... MAJOR HEMATOLOGIC/IMMUNOLOGIC 0.8106 19.7 16.4
DIAG EXC SICKLE CELL CRISIS &
COAGUL.
575........................... SEPTICEMIA W MV 96+ HOURS AGE 1.6583 27.8 23.2
>17.
576........................... SEPTICEMIA W/O MV 96+ HOURS AGE 0.7925 23.0 19.2
>17.
577........................... \6\ CAROTID ARTERY STENT 1.1625 29.5 24.6
PROCEDURE.
578........................... O. R. PROCEDURE W PDX EXC 1.4849 35.7 29.8
POSTOPERATIVE OR POST-TRAUMATIC
INFECTION.
579........................... O. R. PROCEDURE W PDX OF 1.2978 35.2 29.3
POSTOPERATIVE OR POST-TRAUMATIC
INFECTION.
----------------------------------------------------------------------------------------------------------------
\1\ Relative weights for these LTC-DRGs were determined by assigning these cases to low-volume quintile 1.
\2\ Relative weights for these LTC-DRGs were determined by assigning these cases to low-volume quintile 2.
\3\ Relative weights for these LTC-DRGs were determined by assigning these cases to low-volume quintile 3.
\4\ Relative weights for these LTC-DRGs were determined by assigning these cases to low-volume quintile 4.

[[Page 48331]]

\5\ Relative weights for these LTC-DRGs were determined by assigning these cases to low-volume quintile 5.
\6\ Relative weights for these LTC-DRGs were determined by assigning these cases to the appropriate low volume
quintile because they had no LTCH cases in the FY 2005 MedPAR file.
\7\ Relative weights for these LTC-DRGs were assigned a value of 0.0000.
\8\ Relative weights for these LTC-DRGs were determined after adjusting to account for nonmonotonicity (see step
5 above).

Appendix A--Regulatory Impact Analysis

I. Overall Impact

We have examined the impacts of this final rule, this interim
final rule with comment period, and this notice with comment period
as required by Executive Order 12866 (September 1993, Regulatory
Planning and Review) and the Regulatory Flexibility Act (RFA)
(September 19, 1980, Pub. L. 96-354), section 1102(b) of the Social
Security Act, the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-
4), and Executive Order 13132.
Executive Order 12866 (as amended by Executive Order 13258,
which merely reassigns responsibility of duties) directs agencies to
assess all costs and benefits of available regulatory alternatives
and, if regulation is necessary, to select regulatory approaches
that maximize net benefits (including potential economic,
environmental, public health and safety effects, distributive
impacts, and equity). A regulatory impact analysis (RIA) must be
prepared for major rules with economically significant effects ($100
million or more in any 1 year).
We have determined that these rules are a major rule as defined
in 5 U.S.C. 804(2). We estimate that the changes for FY 2007
operating and capital payments will redistribute in excess of $100
million among different types of inpatient cases. The market basket
update to the IPPS rates required by the statute, in conjunction
with other payment changes finalized in this rule, will result in an
approximate $3.4 billion increase in FY 2007 operating and capital
payments. This amount does not reflect changes in hospital
admissions or case-mix intensity in operating PPS payments, which
would also affect overall payment changes. The $142 million in funds
for the loan program for cancer center costs under the Health Care
Infrastructure Improvement Program is appropriated specifically for
the loan program and not more than $2 million may be used for the
administration costs of the program.
The RFA requires agencies to analyze options for regulatory
relief of small businesses. For purposes of the RFA, small entities
include small businesses, nonprofit organizations, and government
agencies. Most hospitals and most other providers and suppliers are
considered to be small entities, either by nonprofit status or by
having revenues of $6 million to $29 million in any 1 year. (For
details, see the Small Business Administration's final rule that
sets forth size standards for health care industries at 65 FR 69432,
November 17, 2000.) For purposes of the RFA, all hospitals and other
providers and suppliers are considered to be small entities.
Individuals and States are not included in the definition of a small
entity. We believe that this proposed rule will have a significant
impact on small entities as explained in this Appendix. Because we
acknowledge that many of the affected entities are small entities,
the analysis discussed throughout the preamble of this proposed rule
constitutes our initial regulatory flexibility analysis. Therefore,
in the proposed rule, we solicited comments on our estimates and
analysis of the impact of the proposed rule on those small entities.
In addition, section 1102(b) of the Act requires us to prepare a
regulatory impact analysis for any proposed rule that may have a
significant impact on the operations of a substantial number of
small rural hospitals. This analysis must conform to the provisions
of section 603 of the RFA. With the exception of hospitals located
in certain New England counties, for purposes of section 1102(b) of
the Act, we previously defined a small rural hospital as a hospital
with fewer than 100 beds that is located outside of a Metropolitan
Statistical Area (MSA) or New England County Metropolitan Area
(NECMA). However, under the new labor market definitions, we no
longer employ NECMAs to define urban areas in New England.
Therefore, we now define a small rural hospital as a hospital that
is located outside of an MSA and has fewer than 100 beds. 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 IPPS, we continue to
classify these hospitals as urban hospitals.
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 whose mandates require spending in
any 1 year of $100 million in 1995 dollars, updated annually for
inflation. That threshold level is currently approximately $120
million. This proposed rule will not mandate any requirements for
State, local, or tribal governments, nor will it affect private
sector costs.
Executive Order 13132 establishes certain requirements that an
agency must meet when it promulgates a proposed rule (and subsequent
final rule) that imposes substantial direct requirement costs on
State and local governments, preempts State law, or otherwise has
Federalism implications. As stated above, this rule will not have a
substantial effect on State and local governments.
The following analysis, in conjunction with the remainder of
this document, demonstrates that this rule is consistent with the
regulatory philosophy and principles identified in Executive Order
12866, the RFA, and section 1102(b) of the Act. The rule will affect
payments to a substantial number of small rural hospitals, as well
as other classes of hospitals, and the effects on some hospitals may
be significant.

II. Objectives

The primary objective of the IPPS is to create incentives for
hospitals to operate efficiently and minimize unnecessary costs
while at the same time ensuring that payments are sufficient to
adequately compensate hospitals for their legitimate costs. In
addition, we share national goals of preserving the Medicare
Hospital Insurance Trust Fund.
We believe the changes in this final rule will further each of
these goals while maintaining the financial viability of the
hospital industry and ensuring access to high quality health care
for Medicare beneficiaries. We expect that these changes will ensure
that the outcomes of this payment system are reasonable and
equitable while avoiding or minimizing unintended adverse
consequences.

III. Limitations of Our Analysis

The following quantitative analysis presents the projected
effects of our policy changes, as well as statutory changes
effective for FY 2007, on various hospital groups. We estimate the
effects of individual policy changes by estimating payments per case
while holding all other payment policies constant. We use the best
data available, but, generally, we do not attempt to predict
behavioral responses to our policy changes, and we do not make
adjustments for future changes in such variables as admissions,
lengths of stay, or case-mix. As we have done in the previous rules,
we solicited comments and information about the anticipated effects
of these changes on hospitals and our methodology for estimating
them. Any timely comments we have received in response to the FY
2007 IPPS proposed rule are addressed below under the appropriate
subject heading in this final rule.

IV. Hospitals Included In and Excluded From the IPPS

The prospective payment systems for hospital inpatient operating
and capital-related costs encompass nearly all general short-term,
acute care hospitals that participate in the Medicare program. There
were 36 Indian Health Service hospitals in our database, which we
excluded from the analysis due to the special characteristics of the
prospective payment methodology for these hospitals. Among other
short-term, acute care hospitals, only the 46 such hospitals in
Maryland remain excluded from the IPPS under the waiver at section
1814(b)(3) of the Act.
As of July 2006, there are 3,595 IPPS hospitals to be included
in our analysis. This represents about 60 percent of all Medicare-
participating hospitals. The majority of this impact analysis
focuses on this set of hospitals. There are also approximately 1,282
critical access hospitals (CAHs). These small, limited service
hospitals are paid on the basis of reasonable costs rather than
under the IPPS. There are also 1,254 excluded hospitals

[[Page 48332]]

and 2,305 excluded units that are excluded from the IPPS. These
excluded hospitals include psychiatric hospitals and units (now
referred to as IPFs), rehabilitation hospitals and units (now
referred to as IRFs), long-term care hospitals (now referred to as
LTCHs), children's hospitals, and cancer hospitals. Religious Non-
Medical Health Care Institutions (RNHCIs) are also included. The
impacts of our policy changes on these hospitals and institutions
are discussed below.

V. Effects on Excluded Hospitals and Hospital Units

As of July 2006, there were 1,254 hospitals excluded from the
IPPS. Of these 1,254 hospitals, 482 IPFs, 81 children's hospitals,
11 cancer hospitals, and 17 RNHCIs are being paid, in whole or in
part, on a reasonable cost basis subject to the rate-of-increase
ceiling under Sec. 413.40. The remaining providers, 271 IRFs and
392 LTCHs, are paid 100 percent of the Federal prospective rate
under the IRF PPS and the LTCH PPS, respectively. We note that,
currently, there are 16 LTCHs that are being paid under the LTCH PPS
transition blend methodology, which is based in part on a reasonable
cost that is subject to a rate-of-increase ceiling under Sec.
413.40. Effective for cost reporting periods beginning on or after
October 1, 2006 (FY 2007), these LTCHs will no longer receive a
portion of their payment that is based, in part, on a reasonable
cost subject to a rate-of-increase ceiling. Rather, in accordance
with Sec. 412.533, for FY 2007, all LTCHs are to be paid 100
percent of the adjusted Federal prospective payment amount. In
addition, there are 1,293 IPFs (paid on a blend of the IPF PPS per
diem payment and the TEFRA reasonable cost-based payment) and 1,012
IRFs (paid under the IRF PPS) co-located in hospitals otherwise
subject to the IPPS. Under Sec. 413.40(a)(2)(i)(A), the rate-of-
increase ceiling is not applicable to the 93 IPPS excluded hospitals
and units in Maryland that are paid in accordance with the waiver at
section 1814(b)(3) of the Act.
In the past, hospitals and units excluded from the IPPS have
been paid based on their reasonable costs subject to limits as
established by the Tax Equity and Fiscal Responsibility Act of 1982
(TEFRA). Hospitals that continue to be paid fully on a reasonable
cost basis are subject to TEFRA limits for FY 2007. For these
hospitals (cancer and children's hospitals), consistent with section
1886(b)(3)(B)(ii) of the Act, as was proposed the final update will
be the percentage increase in the FY 2007 IPPS operating market
basket, currently estimated to be 3.4 percent. In addition, in
accordance with Sec. 403.752(a) of the regulations, RNHCIs are paid
under Sec. 413.40, which also uses section 1886(b)(3)(B)(ii) of the
Act to update the percentage increase in the rate-of-increase
limits. For RNHCIs, the update will be the percentage increase in
the FY 2007 IPPS operating market basket increase, currently
estimated to be 3.4 percent.
IRFs are paid under a prospective payment system (IRF PPS) for
cost reporting periods beginning on or after January 1, 2002. For
cost reporting periods beginning during FY 2007, the IRF PPS is
based on 100 percent of the adjusted Federal IRF prospective payment
amount, updated annually. Therefore, these hospitals are not
affected by this final rule.
Effective for cost reporting periods beginning on or after
October 1, 2002, LTCHs are paid under a LTCH PPS, based on a Federal
prospective payment amount that is updated annually. Existing LTCHs
receive a blended payment that consists of the Federal prospective
payment rate and a reasonable cost-based payment rate over a 5-year
transition period, unless the LTCH elects to be paid at 100 percent
of the Federal prospective rate at the beginning of any of its cost
reporting periods during the 5-year transition period. Under Sec.
412.533, the 5-year transition period for all existing LTCHs subject
to the LTCH PPS began with the LTCH's first cost reporting period
beginning on or after October 1, 2002, and is extended through the
LTCH's cost reporting period beginning on or after October 1, 2006.
In accordance with Sec. 412.533, for cost reporting periods
beginning on or after October 1, 2006, the LTCH PPS transition blend
percentages are 100 percent of the Federal prospective payment
amount and zero percent of the amount calculated under reasonable
cost principles. Therefore, even though FY 2007 is the fifth year of
the 5-year transition period established under Sec. 412.533,
because the reasonable cost principles amount is zero percent for
cost reporting periods beginning during FY 2007, LTCHs will no
longer receive a portion of their payment that is based in part on a
reasonable cost subject to the rate-of-increase ceiling. Thus, there
is no longer a need for an update factor for LTCH's TEFRA target
amount for FY 2007 and beyond.
Section 124 of the Medicare, Medicaid, and SCHIP Balanced Budget
Refinement Act of 1999 (BBRA) required the development of a per diem
prospective payment system (PPS) for payment of inpatient hospital
services furnished in IPFs. The final rule implementing the IPF PPS
(69 FR 66922) established a 3-year transition to the IPF PPS during
which some providers will receive a blend of the IPF PPS per diem
payment and the TEFRA reasonable cost-based payment. For purposes of
determining what the TEFRA payment to the IPF will be, we updated
the IPF's TEFRA target amount by the excluded hospital market basket
percentage increase of 3.4 percent.
The impact on excluded hospitals and hospital units of the
update in the rate-of-increase limit depends on the cumulative cost
increases experienced by each excluded hospital or unit since its
applicable base period. For excluded hospitals and units that have
maintained their cost increases at a level below the rate-of-
increase limits since their base period, the major effect is on the
level of incentive payments these hospitals and hospital units
receive. Conversely, for excluded hospitals and hospital units with
per-case cost increases above the cumulative update in their rate-
of-increase limits, the major effect is the amount of excess costs
that will not be reimbursed.
We note that, under Sec. 413.40(d)(3), an excluded hospital or
unit whose costs exceed 110 percent of its rate-of-increase limit
receives its rate-of-increase limit plus 50 percent of the
difference between its reasonable costs and 110 percent of the
limit, not to exceed 110 percent of its limit. In addition, under
the various provisions set forth in Sec. 413.40, certain excluded
hospitals and hospital units can obtain payment adjustments for
justifiable increases in operating costs that exceed the limit.
However, at the same time, by generally limiting payment increases,
we continue to provide an incentive for excluded hospitals and
hospital units to restrain the inappropriate spending for patient
services.

VI. Quantitative Effects of the Policy Changes Under the IPPS for
Operating Costs

A. Basis and Methodology of Estimates

In this final rule, we are announcing policy changes and payment
rate updates for the IPPS for operating costs. Changes to the
capital payments are discussed in section VIII. of this Appendix. We
note that due to the decision in Bellevue Hosp. Center v. Leavitt,
in which the Court of Appeals for the Second Circuit (the Court)
ordered CMS to apply the occupational mix adjustment to 100 percent
of the wage index effective for FY 2007 (see section III.C. of this
final rule for more details of this Court decision), we are unable
to finalize the FY 2007 wage index data at this time. Therefore, we
are also unable to finalize the relative weights, budget neutrality
calculations, the outlier threshold, the outlier offsets and the
standardized payment amounts. We have calculated tentative amounts
for all of these factors and have based the impacts shown in the
following pages on these tentative amounts. When the final 100
percent occupational mix adjusted wage data is available, we will
recalculate impacts and publish them in a separate Federal Register
notice prior to October 1, 2006.
Based on the overall percentage change in payments per case
estimated using our payment simulation model, we estimate that total
FY 2007 operating payments will increase 3.5 percent compared to FY
2006 largely due to the statutorily mandated update to the IPPS
rates. This amount does not reflect changes in hospital admissions
or case-mix intensity, which would also affect overall payment
changes.
We have prepared separate impact analyses of the changes to each
system. This section deals with changes to the operating prospective
payment system. Our payment simulation model relies on the most
recent available data to enable us to estimate the impacts on
payments per case of certain changes in this rule. However, there
are other changes for which we do not have data available that would
allow us to estimate the payment impacts using this model. For those
changes, we have attempted to predict the payment impacts based upon
our experience and other more limited data.
The data used in developing the quantitative analyses of changes
in payments per case presented below are taken from the FY 2005
MedPAR file and the most current Provider-Specific File that is used
for payment purposes. Although the analyses of the changes to the
operating PPS do not incorporate cost data, data from the most

[[Page 48333]]

recently available hospital cost report were used to categorize
hospitals. Our analysis has several qualifications. First, in this
analysis, we do not make adjustments for behavioral changes that
hospitals may adopt in response to the policy changes, and we do not
adjust for future changes in such variables as admissions, lengths
of stay, or case-mix. Second, due to the interdependent nature of
the IPPS payment components, it is very difficult to precisely
quantify the impact associated with each change. Third, we use
various sources for the data used to categorize hospitals in the
tables. In some cases, particularly the number of beds, there is a
fair degree of variation in the data from different sources. We have
attempted to construct these variables with the best available
source overall. However, for individual hospitals, some
miscategorizations are possible.
Using cases from the FY 2005 MedPAR file, we simulated payments
under the operating IPPS given various combinations of payment
parameters. Any short-term, acute care hospitals not paid under the
IPPS (Indian Health Service hospitals and hospitals in Maryland)
were excluded from the simulations. The impact of payments under the
capital IPPS, or the impact of payments for costs other than
inpatient operating costs, are not analyzed in this section.
Estimated payment impacts of FY 2007 changes to the capital IPPS are
discussed in section VIII. of this Appendix.
The changes discussed separately below are the following:
The effect of a reduced update to the standardized
amount for hospitals that do not comply with section
1886(b)(3)(B)(viii) of the Act by submitting quality data in
accordance with our requirements.
The effects of the MDH payment changes set forth in
section 5003 of Pub. L. 109-171.
The effects of the revisions we are adopting to our
methodology for calculating DRG relative weights.
The effects of the annual reclassification of diagnoses
and procedures and the recalibration of the DRG relative weights
required by section 1886(d)(4)(C) of the Act. The relative weights
used in estimating this impact are not yet final as the wage data
used in the relative weight computation is not available at this
time.
The effects of the changes in hospitals' wage index
values reflecting wage data from hospitals' cost reporting periods
beginning during FY 2003, compared to the FY 2002 wage data are
shown in this impact but are not yet final because the occupational
mix wage data that will be used to calculate the FY 2007 wage
indices are not available at this time.
The effects of the wage and recalibration budget
neutrality factors are shown in this impact but are not yet final
because occupational mix adjusted wage indices are yet to be
calculated.
The effects of the remaining labor market area
transition for those hospitals that were urban under the old labor
market area designations and are now considered rural hospitals are
shown in this impact but are not yet final pending calculation of
the final occupational mix adjusted wage indices.
The effects of geographic reclassifications by the
MGCRB that will be effective in FY 2007 are shown in this impact but
are not yet final because we will be making reclassification
decisions for hospitals subsequent to this final rule prior to
October 1, 2006, based on the final occupational mix adjusted wage
indices.
The effects of section 505 of Pub. L. 108-173, which
provides for an increase in a hospital's wage index if the hospital
qualifies by meeting a threshold percentage of residents of the
county where the hospital is located who commute to work at
hospitals in counties with higher wage indexes, are shown in this
impact but are not yet final because the final occupational mix
adjusted wage data are not available at this time.
The total estimated change in payments based on FY 2007
policies and MMA and DRA-imposed changes relative to payments based
on FY 2006 policies.
To illustrate the impacts of the FY 2007 changes, our analysis
begins with a FY 2006 baseline simulation model using: the FY 2007
market basket update of 3.4 percent; the FY 2006 DRG GROUPER
(version 23.0); the CBSA designations for hospitals based on OMB's
June 2003 MSA definitions; the FY 2006 wage index; and no MGCRB
reclassifications. Outlier payments are set at 5.1 percent of total
operating DRG and outlier payments.
Section 1886(b)(3)(B)(vii) of the Act, as added by section
501(b) of Pub. L. 108-173, and amended by section 5001(a) of Pub. L.
109-171, provides that, for FYs 2005 through 2006, the update
factors will be reduced by 0.4 percentage points for any hospital
that does not submit quality data. Section 5001(a) of Pub. L. 109-
171 provides that for FY 2007 and subsequent years, the update
factor will be reduced by 2.0 percentage points for any hospital
that does not submit quality data or that fails the quality data
validation process. At the time this impact was prepared, 117
providers did not receive the full market basket rate-of-increate
for FY 2006 because they failed the quality data submission process.
For purposes of the simulations shown below, we modeled the payment
changes for FY 2007 using a reduced update for these 117 hospitals.
However, we do not have enough information to determine which
hospitals will not receive the full market basket rate-of-increase
for FY 2007 at this time.
Each final and statutory policy change is then added
incrementally to this baseline, finally arriving at an FY 2007 model
incorporating all of the changes. This simulation allows us to
isolate the effects of each change.
Our final comparison illustrates the percent change in payments
per case from FY 2006 to FY 2007. Three factors not discussed
separately have significant impacts here. The first is the update to
the standardized amount. In accordance with section 1886(b)(3)(B)(i)
of the Act, we have updated standardized amounts for FY 2007 using
the most recently forecasted hospital market basket increase for FY
2007 of 3.4 percent. (Hospitals that fail to comply with the quality
data submission requirement to receive the full update will receive
an update reduced by 2.0 percentage points to 1.4 percent.) Under
section 1886(b)(3)(B)(iv) of the Act, the updates to the hospital-
specific amounts for sole community hospitals (SCHs) and for
Medicare-dependent small rural hospitals (MDHs) are also equal to
the market basket increase, or 3.4 percent.
A second significant factor that affects changes in hospitals'
payments per case from FY 2006 to FY 2007 is the change in MGCRB
status from one year to the next. That is, payments may be reduced
for hospitals reclassified in FY 2006 that are no longer
reclassified in FY 2007. Conversely, payments may increase for
hospitals not reclassified in FY 2006 that are reclassified in FY
2007. In some cases, these impacts can be quite substantial, so if a
relatively small number of hospitals in a particular category lose
their reclassification status, the percentage change in payments for
the category may be below the national mean. However, this effect is
alleviated by section 1886(d)(10)(D)(v) of the Act, which provides
that reclassifications for purposes of the wage index are for a 3-
year period.
A third significant factor is that we currently estimate that
actual outlier payments during FY 2006 will be 4.6 percent of total
DRG payments. When the FY 2006 final rule was published, we
projected FY 2006 outlier payments would be 5.1 percent of total DRG
plus outlier payments; the average standardized amounts were offset
correspondingly. The effects of the lower than expected outlier
payments during FY 2006 (as discussed in the Addendum to this final
rule) are reflected in the analyses below comparing our current
estimates of FY 2006 payments per case to estimated FY 2007 payments
per case (with outlier payments projected to equal 5.1 percent of
total DRG payments).

B. Analysis of Table I

Table I displays the results of our analysis of changes for FY
2007. The table categorizes hospitals by various geographic and
special payment consideration groups to illustrate the varying
impacts on different types of hospitals. The top row of the table
shows the overall impact on the 3,595 hospitals included in the
analysis. There are 149 fewer hospitals than were included in the
impact analysis in the FY 2006 final rule (70 FR 47690).
The next four rows of Table I contain hospitals categorized
according to their geographic location: All urban, which is further
divided into large urban and other urban; and rural. There are 2,590
hospitals located in urban areas included in our analysis. Among
these, there are 1,441 hospitals located in large urban areas
(populations over 1 million), and 1,149 hospitals in other urban
areas (populations of 1 million or fewer). In addition, there are
1,005 hospitals in rural areas. The next two groupings are by bed-
size categories, shown separately for urban and rural hospitals. The
final groupings by geographic location are by census divisions, also
shown separately for urban and rural hospitals.
The second part of Table I shows hospital groups based on
hospitals' FY 2007 payment classifications, including any

[[Page 48334]]

reclassifications under section 1886(d)(10) of the Act. For example,
the rows labeled urban, large urban, other urban, and rural show
that the number of hospitals paid based on these categorizations
after consideration of geographic reclassifications (including
reclassifications under 1886(d)(8)(B) and 1886(d)(8)(E) which have
implications for capital payments) are 2,608, 1,450, 1,158, and 987,
respectively.
The next three groupings examine the impacts of the changes on
hospitals grouped by whether or not they have GME residency programs
(teaching hospitals that receive an IME adjustment) or receive DSH
payments, or some combination of these two adjustments. There are
2,511 nonteaching hospitals in our analysis, 843 teaching hospitals
with fewer than 100 residents, and 241 teaching hospitals with 100
or more residents.
In the DSH categories, hospitals are grouped according to their
DSH payment status, and whether they are considered urban or rural
for DSH purposes. The next category groups together hospitals
considered urban after geographic reclassification, in terms of
whether they receive the IME adjustment, the DSH adjustment, both,
or neither.
The next five rows examine the impacts of the changes on rural
hospitals by special payment groups (sole community hospitals
(SCHs), rural referral centers (RRCs), and Medicare dependent
hospitals (MDHs)), as well as rural hospitals not receiving a
special payment designation. There were 187 RRCs, 376 SCHs, 146
MDHs, 98 hospitals that are both SCHs and RRCs, and 8 hospitals that
are both MDHs and RRCs.
The next two groupings are based on type of ownership and the
hospital's Medicare utilization expressed as a percent of total
patient days. These data are taken primarily from the FY 2004
Medicare cost reports, if available (otherwise FY 2003 data are
used).
The next series of groupings concern the geographic
reclassification status of hospitals. The first grouping displays
all urban hospitals that were reclassified by the MGCRB for FY 2007.
The next grouping shows the MGCRB rural reclassifications. The final
three rows in Table I contain hospitals located in urban counties,
but deemed to be rural under section 1886(d)(8)(E) of the Act,
hospitals located in rural counties but deemed to be urban under
section 1886(d)(8)(B) of the Act, and hospitals currently
reclassified under section 508 of Pub. L. 108-173, which expires on
March 31, 2007.

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C. Effects on the Hospitals That Failed the Quality Data Submission
Process (Column 2)

Column 2 of Table I shows the effect of assigning a reduced
update to the standardized amount to hospitals that either fail to
submit quality data or fail the data validation requirements. This
column shows the effect of paying these providers based on an update
of market basket, less 2.0 percentage points (1.4 percent) relative
to a full market basket update (3.4 percent), for FY 2007. There are
117 hospitals in this analysis that did not receive the full market
basket update for FY 2006. Most of these hospitals are either small
rural or small urban hospitals. For purposes of simulation only, we
used these same hospitals to simulate the effects on IPPS payments
receiving a reduced FY 2007 update. However, at this time,
information is not available to determine the hospitals that do not
meet the requirements for the full hospital market increase for FY
2007. If the same hospitals were to fail to meet the requirements
for the full market basket rate-of-increase for FY 2007 as in FY
2006, we project that hospitals in the small urban and rural
hospital categories (0-99 beds) will receive an overall decrease in
payments of 0.1 percent.

D. Effects of the DRA Provision Related to MDHs (Column 3)

In Column 3 of Table I, we show the effects of implementing
section 5003 of Pub. L. 109-171 for MDHs. Section 5003(b) requires
MDHs to rebase their hospital-specific rate to the FY 2002 cost
reporting period, if doing so increases their target amount. Section
5003(c) increases the hospital-specific payment amount from the
Federal rate plus 50 percent of the difference between the Federal
rate and the hospital-specific amount (presuming the hospital-
specific amount exceeds the Federal amount) to the Federal rate plus
75 percent of the difference. In addition, MDHs are no longer
subject to the 12-percent cap on their DSH payments, effective FY
2007.
This column compares the FY 2007 payment rates under the section
5003 provisions to payments under the FY 2006 MDH provisions. (The
MDH provisions were set to expire at the end of FY 2006 but were
extended by section 5003(a)(1).) Overall, hospitals experience a 0.1
percent increase. This is primarily due to the substantial increase
in payments to MDH providers; MDH providers experience a 4.7 percent
increase, while MDH/RRC combination providers experience an 11.5
percent increase.

E. Effects of the Changes to the DRG Reclassifications and Relative
Cost-Based Weights (Column 4)

In Column 4 of Table I, we present the combined effects of the
DRG reclassifications and recalibration, as discussed in section II.
of the preamble to this final rule. Section 1886(d)(4)(C)(i) of the
Act requires us annually to make appropriate classification changes
in order to reflect changes in treatment patterns, technology, and
any other factors that may change the relative use of hospital
resources.
As discussed in the preamble of this final rule, we are changing
the relative weight calculation methodology from a charge-based
method to a cost-based method. Further, we are implementing the new
methodology under a 3-year transition such that weights in FY 2007
are \1/3\ cost-based and \2/3\ charge-based. In this column, we
compare aggregate payments using the FY 2007 blended relative
weights(GROUPER Version 24) to the FY 2006 DRG relative charge
weights (GROUPER Version 23.0) so the percentages shown here
illustrate the effect of changes to the DRGs and relative weights.
The method of calculating the relative weights and the
reclassification changes to the GROUPER are described in more detail
in section II. of the preamble to this final rule. We note that,
consistent with section 1886(d)(4)(C)(iii) of the Act, we have
applied a budget neutrality factor to ensure that the overall
payment impact of the DRG changes (combined with the wage index
changes) is budget neutral. This tentative budget neutrality factor
of 0.997968 is applied to payments in Column 6 and not Column 4
because it is a combined DRG reclassification and recalibration and
wage index budget neutrality factor.
In general, surgical DRGs tend to have charges concentrated in
ancillary cost center groups while medical DRGs tend to have charges
concentrated in routine or intensive care unit (ICU) cost center
groups. As discussed in the preamble of this final rule, the CCRs
for ancillary cost center groups are lower than the cost to charge
ratios for routine and ICU cost center groups, indicating that the
charge markups for ancillary services are higher. Because the
standardized cost-based relative weight methodology adjusts the
weights to remove differential mark-ups in charges, the FY 2007
cost-based weights are redistributed among medical and surgical
DRGs, which will result in a redistribution of payments among
hospitals according to the types of cases they provide. For
instance, hospitals that perform more surgical procedures are likely
to experience decreases in payments while hospitals with heavy
concentrations of medical DRGs are expected to experience increases
in payments. Hospitals with a case-mix that is equal to average will
see little or no change in payment.
Due to the fact that we significantly modified our proposal and
are adopting cost weights without the hospital-specific portion of
the methodology, the impacts for the final rule are much smaller
than those we proposed. The payment impacts are further moderated
because we are implementing the change to the relative weights over
a 3-year transition period. Therefore, the impacts shown in this
column are generally smaller than those for the proposed rule. Rural
DSH hospitals with less than 100 beds and small rural hospitals (0-
49 beds) have payment increases of 0.6 percent and 0.7 percent,
respectively. Cardiac specialty hospitals experience the greatest
decline in payments of 2.2 percent and rural hospitals with more
than 200 beds and urban hospitals in the East South Central Region
have the next largest decreases of 0.1 percent.

F. Effects of Wage Index Changes (Column 5)

Section 1886(d)(3)(E) of the Act requires that, beginning
October 1, 1993, we annually update the wage data used to calculate
the wage index. In accordance with this requirement, the wage index
for FY 2007 is based on data submitted for hospital cost reporting
periods beginning on or after October 1, 2002 and before October 1,
2003. However, we note that this impact is calculated on wage data
with no occupational mix adjustment due to the decision in Bellevue
Hosp. Center v. Leavitt, in which the Court of Appeals for the
Second Circuit ordered CMS to apply the occupational mix adjustment
to 100 percent of the wage index effective for FY 2007 (see section
III.C. of this final rule for more details of this Court decision).
Because the effects of the wage index data are dependent, in part,
upon the occupational mix adjusted wage index, and due to the short
timeframe for implementing the Court's order, we are not able to
provide the final occupational mix adjusted wage data impacts with
this FY 2007 IPPS final rule. We will include the FY 2007
occupational mix adjusted wage index and related impacts in a
separate Federal Register notice to be published prior to October 1,
2006. We believe these procedures comply with section 1886(d)(6) of
the Act because, by August 1, we will have described our data and
methods for calculating the wage index and IPPS rates in this FY
2007 IPPS final rule, but the actual impacts concerning the wage
index will not be issued until a later date.
The estimated impact of the new wage data (with no occupational
mix applied) on hospital payments is isolated in Column 5 by holding
the other payment parameters constant in this simulation. That is,
Column 5 shows the percentage changes in payments when going from a
model using the FY 2006 wage index, based on FY 2002 wage data and
having a 10-percent occupational mix adjustment applied, to a model
using the FY 2007 pre-reclassification wage index, based on FY 2003
wage data with no occupational mix applied. The wage data collected
on the FY 2003 cost report are the same as the FY 2002 wage data
that were used to calculate the FY 2006 wage index. The impacts
shown in Column 5 are likely to change with the application of the
occupational mix adjustment to 100 percent of the wage index. The
final impacts will be shown and discussed in a subsequent Federal
Register notice to be published prior to October 1, 2006.

G. Combined Effects of DRG and Wage Index Changes, Including Budget
Neutrality Adjustment (Column 6)

Section 1886(d)(4)(C)(iii) of the Act requires that changes to
DRG reclassifications and the relative weights cannot increase or
decrease aggregate payments. In addition, section 1886(d)(3)(E) of
the Act specifies that any updates or adjustments to the wage index
are to be budget neutral. As noted in the Addendum to this final
rule, in determining the budget neutrality factor, we equated
simulated aggregate payments for FY 2006 and FY 2007 using the FY
2005 Medicare utilization data after applying the changes to

[[Page 48340]]

the DRG relative weights and the wage index. However, we note that
the payment impact and budget neutrality factors are calculated by
applying an occupational mix adjustment to 10 percent of the FY 2006
wage index and zero percent of the FY 2007 wage index due to the
decision in Bellevue Hosp. Center v. Leavitt, as stated previously.
We computed a tentative wage and DRG recalibration budget
neutrality factor of 0.997030. The 0.0 percent impact for all
hospitals demonstrates that these changes, in combination with the
budget neutrality factor, are budget neutral. In Table I, the
combined overall impacts of the effects of both the DRG
reclassifications and the updated wage index are shown in Column 6.
The changes in this column are the sum of the changes in Columns 4
and 5, combined with the budget neutrality factor for the wage
index, including the wage index floor for urban areas required by
section 4410 of Pub. L. 105-33. There also may be some variation of
plus or minus 0.1 percentage point due to rounding.
Currently, we project that large urban hospitals will show a 0.1
percent increase, other urban hospitals will experience a 0.1
percent decrease, and rural hospitals will not be affected. We are
not able to provide the final DRG and wage index budget neutrality
impacts with this FY 2007 IPPS final rule due to the short
timeframes for implementing the Court's order for implementation of
the occupational mix adjustment. However, we will recalculate the
budget neutrality factor to include the effects of the 100 percent
occupational mix adjustment when the data become available, and we
will publish updated payment impacts in a subsequent Federal
Register notice document prior to October 1, 2006.

H. Effects of the 3-Year Provision Allowing Urban Hospitals That
Were Converted to Rural as a Result of the FY 2005 Labor Market
Area Changes To Maintain the Wage Index of the Urban Labor Market
Area in Which They Were Formerly Located (Column 7)

To help alleviate the decreased payments for urban hospitals
that became rural under the new labor market area definitions, for
purposes of the wage index, we adopted a policy in FY 2005 to allow
them to maintain the wage index assignment of the MSA where they
were located for the 3-year period FY 2005, FY 2006, and FY 2007.
Column 7 shows the impact of the remaining labor market area
transition, for those hospitals that were urban under the old labor
market area designations and are now considered rural hospitals.
Section 1886(d)(3)(E) of the Act specifies that any updates or
adjustments to the wage index are to be budget neutral. Therefore,
we applied a tentative adjustment of 0.999605 to ensure that the
effects of reclassification are budget neutral as indicated by the
zero effect on payments to hospitals overall. However, we note that
this budget neutrality factor and this impact are both calculated
using FY 2007 wage data with no occupational mix adjustment due to
the decision in Bellevue Hosp. Center v. Leavitt. We are not able to
provide the final urban to rural hold harmless budget neutrality
impacts with this FY 2007 IPPS final rule. This information will
also be include in a separate Federal Register notice to be
published prior to October 1, 2006. Currently, the rural hospital
row shows a 0.3 percent benefit from this provision as these hold
harmless hospitals are now considered geographically rural.

I. Effects of MGCRB Reclassifications (Column 8)

Our impact analysis to this point has assumed hospitals are paid
on the basis of their actual geographic location (with the exception
of ongoing policies that provide that certain hospitals receive
payments on other bases than where they are geographically located,
such as hospitals in rural counties that are deemed urban under
section 1886(d)(8)(B) of the Act). The changes in Column 8 reflect
the per case payment impact of moving from this baseline to a
simulation incorporating the MGCRB decisions for FY 2007 which
affect hospitals' wage index area assignments.
By February 28 of each year, the MGCRB makes reclassification
determinations that will be effective for the next fiscal year,
which begins on October 1. The MGCRB may approve a hospital's
reclassification request for the purpose of using another area's
wage index value. The FY 2007 wage index values incorporate all of
the MGCRB's reclassification decisions for FY 2007. The wage index
values also reflect any decisions made by the CMS Administrator
through the appeals and review process through February 28, 2006.
For FY 2007, as stated in the FY 2006 IPPS final rule (70 FR
47382, August 12, 2005), we established procedural rules under
section 1886(d)(10)(D)(v) of the Act to address specific
circumstances where individual and group reclassifications involve a
section 508 hospital. The rules were designed to recognize the
special circumstances of section 508 hospital reclassifications
ending mid-year during FY 2007 and were intended to allow previously
approved reclassifications to continue through March 31, 2007, and
new section 1886(d)(10) reclassifications to begin April 1, 2007,
upon the conclusion of the section 508 reclassifications. Under
these procedural rules, some section 1886(d)(10) hospital
reclassifications are only in effect for the second half of the
fiscal year.
The first and second half fiscal year section 1886(d)(10)
reclassifications permitted under these procedural rules have
implications for the calculation of the reclassified wage indices
and the reclassification budget neutrality factor. Section
1886(d)(8)(c) of the Act provides requirements for determining the
wage index values for hospitals that were reclassified as a result
of the MGCRB decisions under 1886(d)(10) of the Act. As provided in
the statute, we are required to calculate a separate wage index for
hospitals reclassified to an area if including the wage data for the
reclassified hospitals would reduce the area wage index by more than
1 percent.
Because of the half-year reclassifications permitted under the
procedural rules, in this final rule, we are issuing two separate
wage indexes for affected areas (one effective from October 1, 2006,
through March 31, 2007 and a second reclassified wage index
effective April 1, 2007, through September 30, 2007). The FY 2007
wage index values are calculated based on the wage data for
hospitals reclassified to the area in the respective half of the
fiscal year. The impact of this policy is modeled in Column 8 of
Table I above.
The overall effect of geographic reclassification is required by
section 1886(d)(8)(D) of the Act to be budget neutral. In this final
rule, we are calculating one budget neutrality adjustment that
reflects the average of the adjustments required for first and
second half fiscal year reclassifications, respectively. Therefore,
we applied a tentative adjustment of 0.991850 to ensure that the
effects of the section 1886(d)(10) reclassifications are budget
neutral. (See section II.A. of the Addendum to this final rule.)
However, we note that this budget neutrality factor and this impact
are both calculated using wage adjustment applied due to the
decision in Bellevue Hosp. Center v. Leavitt. As noted earlier, CMS
will apply a reclassification decision for FY 2007 on behalf of
hospitals to give them the highest wage index. Hospitals will then
have 30 days from the date of public display of the separate notice
to be published prior to October 1, 2006 at the Office of the
Federal Register to revise the decision that CMS made on their
behalf. We are unable to state with certainty that all of the
reclassified providers shown in Table 9A in the Addendum to this
final rule will retain their approved reclassifications for FY 2007
once the final occupational mix adjusted wage indices are known. We
will include the FY 2007 occupational mix adjusted wage index
related impacts and our reclassification decisions made on behalf of
hospitals in a separate Federal Register notice document to be
published prior to October 1, 2006.

J. Effects of the Wage Index Adjustment for Out-Migration (Column
9)

Section 1886(d)(13) of the Act, as added by section 505 of Pub.
L. 108-173, provides for an increase in the wage index for hospitals
located in certain counties that have a relatively high percentage
of hospital employees who reside in the county, but work in a
different area with a higher wage index. Hospitals located in
counties that qualify for the payment adjustment are to receive an
increase in the wage index that is equal to a weighted average of
the difference between the wage index of the resident county and the
higher wage index work area(s), weighted by the overall percentage
of workers who are employed in an area with a higher wage index. We
note that this impact is based on the section 505 wage index
adjustments in place as of FY 2006. As the FY 2007 adjustments must
be calculated using wage data with an occupational mix adjustment
and because we do not yet have these data due to the decision in
Bellevue Hosp. Center v. Leavitt, we were unable to assess whether
any new counties would qualify for section 505 adjustments for FY
2007 prior to the publication of this final rule. In the notice that
we publish in the

[[Page 48341]]

Federal Register notice prior to October 1, 2006, we will show any
new counties that qualify for the section 505 adjustment for FY 2007
and any related impacts that result from application of the out-
migration adjustment to the revised occupational mix adjusted wage
indices.

K. Effects of All Changes (Column 10)

Column 10 compares our estimate of payments per case between FY
2006 and FY 2007, incorporating all changes reflected in this final
rule for FY 2007 (including statutory changes). This column includes
all of the policy changes. We note that this impact is calculated
using standardized amounts, outlier estimates, and budget neutrality
factors based on wage data with no occupational mix adjustment
applied due to the decision in Bellevue Hosp. Center v. Leavitt.
Currently, Column 10 reflects the impact of all FY 2007 changes
(other than the final occupational mix adjusted wage indices)
relative to FY 2006, including those shown in Columns 2 through 9 as
well as other factors that are not applied until the final rates are
calculated. The average increase for all hospitals is approximately
3.5 percent. This increase includes the effects of the 3.4 percent
market basket update. It also reflects the 0.5 percentage point
difference between the projected outlier payments in FY 2006 (5.1
percent of total DRG payments) and the current estimate of the
percentage of actual outlier payments in FY 2006 (4.6 percent), as
described in the introduction to this Appendix and the Addendum to
this final rule. As a result, payments are projected to be 0.5
percentage points lower in FY 2006 than originally estimated,
resulting in a 0.5 percentage point greater increase for FY 2007
than would otherwise occur. In addition, the impact of section 505
adjustments accounted for a 0.1 percent increase. Indirect medical
education formula changes for teaching hospitals under section 502
of Pub. L. 108-173, changes in payments due to the difference
between the FY 2006 and FY 2007 wage index values assigned to
providers reclassified under section 508 of Pub. L. 108-173, and
changes in the incremental increase in payments from section 505 of
Pub. L. 108-173 out-migration adjustments account for the remaining
-0.6 percent.
There might also be interactive effects among the various
factors comprising the payment system that we are not able to
isolate. For these reasons, the values in Column 10 may not equal
the product of the percentage changes described above.
The overall change in payments per case for hospitals in FY 2007
would increase by 3.5 percent. Hospitals in urban areas would
experience a 3.4 percent increase in payments per case compared to
FY 2006. Hospitals in large urban areas would experience a 3.5
percent increase in payments and hospitals in other urban areas
would experience a 3.3 percent increase in payments. Hospitals in
rural areas, meanwhile, would experience a 3.7 percent payment
increase.
Among urban census divisions, the largest payment increases
would be 4.5 percent in the Pacific region and 4.3 percent in the
Mountain region. The smallest urban increase is 2.2 percent in
Puerto Rico.
Among rural regions in Column 10, no hospital category would
experience overall payment decreases. The New England and Middle
Atlantic regions would benefit the most, with 5.6 and 5 percent
increases, respectively. The smallest increase would occur in the
Mountain region, with a 3.0 percent increases in payments.
Among special categories of rural hospitals in Column 10, MDH/
RRC providers receive an increase in payments of 11.5 percent and
MDH providers receive an increase of 4.7 percent, primarily due to
the changes to MDH payments set forth in section 5003 of Pub. L.
109-171.
Urban hospitals reclassified for the first half of FY 2007 are
anticipated to receive an increase of 3.6 percent, while urban
hospitals that reclassified for the second half of FY 2007 are
expected to receive an increase of 3.4 percent. The same set of
rural hospitals is reclassified for the first and second half of FY
2007. Rural hospitals reclassifying for the entire year of FY 2007
are anticipated to receive a 3.5 percent payment increase. Those
hospitals located in rural counties, but deemed to be urban under
section 1886(d)(8)(B) of the Act are expected to receive an increase
in payments of 4.4 percent. Hospitals that were reclassified under
section 508 of Pub. L. 108-173, which is only effective through
March 31, 2007, are expected to receive an increase of 1.7 percent.
This lower estimated increase in payment is due to the expiration of
the higher section 508 wage indices in effect for 6 months of FY
2007. We caution that all of these impacts will be revised prior to
October 1, 2006 when the occupational mix wage indices are
calculated for FY 2007.

L. Effects of Policy on Payment Adjustments for Low-Volume
Hospitals

For FY 2007, we are continuing to apply the volume adjustment
criteria we specified in the FY 2005 IPPS final rule (69 FR 49099).
We expect that two providers would receive the low-volume adjustment
for FY 2007. We included these additional payments to providers in
the impact table shown above and we estimate the impact of these
providers receiving the additional 25-percent payment increase to be
approximately $89,000.

M. Impact Analysis of Table II

Table II presents the projected impact of the changes for FY
2007 for urban and rural hospitals and for the different categories
of hospitals shown in Table I. It compares the estimated payments
per case for FY 2006 with the average estimated per case payments
for FY 2007, as calculated under our models. Thus, this table
presents, in terms of the average dollar amounts paid per discharge,
the combined effects of the changes presented in Table I. The
percentage changes shown in the last column of Table II equal the
percentage changes in average payments from Column 10 of Table I.

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VII. Effects of Other Policy Changes

In addition to those policy changes discussed above that we are
able to model using our IPPS payment simulation model, we are making
various other changes in this final rule. Generally, we have limited
or no specific data available with which to estimate the impacts of
these changes. Our estimates of the likely impacts associated with
these other changes are discussed below.

A. Effects of LTC-DRG Reclassifications and Relative Weights for
LTCHs

In section II.F. of the preamble to this final rule, we discuss
the changes in the LTC-DRG relative weights for FY 2007, which are
based on the Version 24.0 of the CMS GROUPER (including the changes
in the classifications, relative weights and geometric mean length
of stay for each LTC-DRG). As also discussed in that same section of
this final rule, currently, there is no statutory or regulatory
requirement that the annual update to the LTC-DRG classifications
and relative weights be done in a budget neutral manner. As
discussed above in section II.F. of the preamble of this final rule,
the LTCH PPS is still in the midst of a transition from a reasonable
cost-based payment system to fully Federal PPS payments, during
which time LTCH treatment patterns and coding practices, which are
reflected in the LTCH claims data, appear to continue to change as
LTCHs adapt to this new payment system.
The LTCH PPS was implemented for cost reporting periods
beginning on or after October 1, 2002 (FY 2003). Therefore, the FY
2005 MedPAR data used to compute the FY 2007 LTC-DRG relative
weights in this final rule are based on LTCH claims data taken from
only the second full year of the LTCH PPS. Based on LTCH cases in
the March 2006 update of the FY 2005 MedPAR files, we estimate that
the changes to the LTC-DRG classifications and relative weights for
FY 2007 would result in an aggregate decrease in LTCH PPS payments
of approximately 1.3 percent based on the data from the 369 LTCHs in
our database. (We note that this estimated aggregate decrease in
LTCH PPS payments of approximately 1.3 percent was determined based
on the current payment

[[Page 48344]]

rates and policies established in the RY 2007 LTCH PPS final rule
(71 FR 27798 through 27939) and the revised LTC-DRG classifications,
relative weights and average lengths of stay established for FY 2007
in this final rule).
When we compared the GROUPER Version 23.0 (FY 2006) LTC-DRG
relative weights to the GROUPER Version 24.0 (FY 2007) LTC-DRG
relative weights, we found that approximately 68 percent of the LTC-
DRGs would have a higher relative weight under Version 23.0, while
the remaining approximately 32 percent of the LTC-DRGs would have a
higher relative weight under Version 24.0. We also found that, based
on FY 2005 LTCH cases, the GROUPER Version 23.0 LTC-DRG relative
weights were, on average, approximately 3.3 percent higher than the
GROUPER Version 24.0 LTC-DRG relative weights. In addition, based on
an analysis of the most recent available LTCH claims data from the
FY 2005 MedPAR file, we continue to observe that the average LTC-DRG
relative weight decreases due to an increase of relatively lower
charge cases being assigned to LTC-DRGs with higher relative weights
in the prior year.
Contributing to this increase in these relatively lower charge
cases being assigned to LTC-DRGs with higher relative weights in the
prior year are improvements in coding practices, which are typical
when moving from a reasonable cost-based payment system to a PPS.
The impact of including additional cases with relatively lower
charges into LTC-DRGs that had a relatively higher relative weight
in the GROUPER Version 23.0 (FY 2006) is a decrease in the average
relative weight for those LTC-DRGs in the GROUPER Version 24.0. As
noted above in section II.F. of the preamble to this final rule,
LTCHs are a specialized provider type that typically do not treat a
broad spectrum of patients in their facilities with many different
diagnoses. While there are 538 valid GROUPER Version 24.0 LTC-DRGs,
183 LTC-DRGs have no LTCH cases. In addition, another 180 LTC-DRGs
are categorized as ``low volume'' (that is, have less than 25 cases
annually). Consequently, only about 175 LTC-DRGs are used by most
LTCHs on a ``regular basis'' (that is, nationally LTCHs discharge,
in total, an average of 25 or more of these cases annually).
Of these 175 LTC-DRGs that are used on a ``regular basis,'' we
found that approximately 65 percent of the LTC-DRGs would have
higher relative weights under GROUPER Version 23.0 in comparison to
GROUPER Version 24.0, and the remaining 35 percent of the 175 LTC-
DRGs that are used on a ``regular basis'' would have higher relative
weights under GROUPER Version 24.0 in comparison to GROUPER Version
23.0. In addition, about 30 percent of the 175 LTC-DRGs that are
used on a ``regular basis'' would experience a decrease in the
average charge per case as compared to the average charge per case
in that DRG based on FY 2004 data, which generally results in a
lower relative weight. Moreover, of the 175 LTC-DRGs that are used
on a ``regular basis,'' approximately 62 percent of those LTC-DRGs
would experience a change in the average charge per case from FY
2004 LTCH data as compared to FY 2005 LTCH data that is less than
the increase in overall average LTCH charges across all LTC-DRGs
from FY 2004 to FY 2005 of about 8.3 percent. Accordingly, those
LTC-DRGs would also have a reduction in their relative weight as
compared to the relative weight in FY 2006. For those LTC-DRGs in
which the average charge within the LTC-DRG increase is less than
8.3 percent, the relative weights for those LTC-DRGs would decrease
because the average charge for each of those LTC-DRGs is being
divided by a larger number (that is, the average charge across all
LTC-DRGs). For the reasons discussed above, we believe that the
changes in the LTC-DRG relative weights for FY 2007, which include a
significant number of LTC-DRGs with lower relative weights, would
result in approximately a 1.3 percent decrease in estimated
aggregate LTCH PPS payments.

B. Effects of New Technology Add-On Payments

In section II.G. of the preamble to this final rule, we discuss
add-on payments for new medical services and technologies. As
explained in that section, we are no longer required to ensure that
any add-on payments for new technology under section 1886(d)(5)(K)
of the Act are budget neutral. However, we are still providing an
estimate of the payment increases here, as they will have an impact
on total payments made in FY 2007. New technology add-on payments
are limited to the lesser of 50 percent of the costs of the
technology, or 50 percent of the costs in excess of the DRG payment
for the case. Because it is difficult to predict the actual new
technology add-on payment for each case, we are estimating the
increase in payment for FY 2007 as if every claim with these add-on
payments will receive the maximum add-on payment. As discussed in
section II.G. of the preamble to this final rule, we are approving
the X STOP Interspinous Process Decompression System for new
technology add-on payments. As stated in the proposed rule, the
applicant estimated that there would be a total of 2,124 patients
(424 in DRG 499 and 1,700 in DRG 500) eligible to receive the device
in FY 2007. Therefore, we estimate that payments for this technology
will increase overall FY 2007 payments by $9.35 million.
In addition, we are continuing to make add-on payments in FY
2007 for two technologies that were approved for FY 2006 new
technology add-on payments: Restore[supreg] Rechargeable Implantable
Neurostimulator and GORE TAG. We estimate these payments for these
technologies will increase overall FY 2007 payments by $6.01 million
and $16.61 million, respectively.
The total increase in payments for these three new technologies,
approximately $31.97 million, is not reflected in the tables.

C. Effects of Requirements for Hospital Reporting of Quality Data
for Annual Hospital Payment Update

In section IV.A. of the preamble to this final rule, we discuss
new requirements for hospital reporting of quality data based on our
continuing experience with this program and recent legislation.
Section 5001(a) of Pub. L. 109-171 (DRA) sets out extensive new
requirements for the Reporting Hospital Quality Data for Annual
Payment Update (RHQDAPU) program. The RHQDAPU program was
established to implement section 501(b) of Pub. L. 108-173 (MMA).
Section 5001(a) of Pub. L. 109-171 revised the mechanism used to
update the standardized amount for payment for hospital inpatient
operating costs. New sections 1886(b)(3)(B)(viii)(I) and (II) of the
Act provide that the payment update for FY 2007 and each subsequent
fiscal year will be reduced by 2.0 percentage points for any
``subsection (d) hospital'' that does not submit certain quality
data in a form and manner, and at a time, specified by the
Secretary.
We have modeled the payment impact of this change in Table 1 of
this Appendix, and discussed it in section VI. of this Appendix. We
discuss other policy changes we are making to the RHQDAPU program in
section IV.A. of the preamble to this final rule.
We also note that, for the FY 2007 payment update, hospitals
must pass our validation requirement of a minimum of 80 percent
reliability, based upon our chart-audit validation process, for the
first three quarters of data from CY 2005. These data were due to
the QIO Clinical Warehouse by July 15, 2005 (first quarter CY 2005
discharges), November 15, 2005 (second quarter CY 2005 discharges),
and February 15, 2005 (third quarter CY 2005 discharges). We have
continued our efforts to ensure that QIOs provide assistance to all
hospitals that wish to submit data. In the preamble of this final
rule, we are providing additional validation criteria to ensure that
the quality data being sent to CMS are accurate. The requirement of
5 charts per hospital will result in approximately 19,000 charts per
quarter total submitted to the agency. We reimburse hospitals for
the cost of sending charts to the Clinical Data Abstraction Center
(CDAC) at the rate of 12 cents per page for copying and
approximately $4.00 per chart for postage. Our experience shows that
the average chart received at the CDAC is approximately 140 pages.
Thus, the agency will have expenditures of approximately $380,000
per quarter to collect the charts. Given that we reimburse for the
data collection effort, we believe that a requirement for five
charts per hospital per quarter represents a minimal burden to the
participating hospital.

D. Effects of Other Policy Changes Affecting Sole Community
Hospitals (SCHs) and Medicare-Dependent, Small Rural Hospitals
(MDHs)

In section IV.C. of the preamble to this final rule, we discuss
the payment changes for MDHs made by section 5003 of Pub. L. 109-
171. We modeled the payment impact of these changes in Table 1 of
this Appendix and discussed them in section VI. of this Appendix.
In addition, in section IV.C.2. of the preamble to this final
rule, we discussed changes to the data source and methodology that
we will use to compute the volume decrease adjustment for MDHs and
SCHs. If certain requirements are met, this adjustment may be made
if the hospital's total discharges

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decrease by more than 5 percent from one cost reporting period to
the next. We do not believe that these changes will have any
significant impact on Medicare payment to these hospitals.

E. Effects of Policy on Payment for Direct Costs of Graduate
Medical Education

1. Determination of Weighted Average GME PRAs for Merged Teaching
Hospitals

In section IV.H.2. of the preamble to this final rule, we
discuss our changes related to determining the weighted average GME
PRA for a merged teaching hospital. Our current policy is that when
two or more teaching hospitals merge, we determine a weighted PRA
for the surviving merged hospital using GME costs and resident data
from the base year cost report for each teaching hospital in the
merger. We are revising our policy to determine a merged teaching
hospital's PRA by using PRA data and FTE resident data from the most
recent settled cost reports of the merging hospitals, rather than
using the direct GME cost data from the hospitals' base year cost
report. This policy revision is administrative in nature, and we do
not foresee that the revision will result in payment increases to
merged teaching hospitals.

2. Determination of PRAs for New Teaching Hospitals

In section IV.H.3. of the preamble to this final rule, we
discuss the methodology for determining the hospital-specific PRA
for new teaching hospitals and we make a change to the existing
regulations at Sec. 413.77(e) in order to specify a base period for
certain situations, that is, for new teaching hospitals that did not
have residents on duty during the first month of the cost reporting
period in which the hospital became a new teaching hospital. The
base period for these hospitals would be the next cost reporting
period following the cost reporting period where any residents were
on duty at the new teaching hospital. Because this change is
administrative in nature, we do not foresee that it will result in a
financial impact for FY 2007.

3. Requirements for Counting and Appropriate Documentation of FTE
Residents

In section IV.H.4. of the preamble to this final rule, we are
clarifying the policies that apply in determining hospitals' FTE
resident counts for Medicare GME payment purposes. Because this is a
clarification of existing policy, there is no financial impact for
FY 2007.

4. Resident Time Spent in Nonpatient Care Activities as Part of an
Approved Residency Program

In section IV.H.5. of the preamble to this final rule, we are
clarifying our policy that, with respect to residency training in
nonhospital settings, only the time residents spend in patient care
activities may be counted for purposes of direct GME and IME
payments; and with respect to training in the hospital, residents
training in all areas of the hospital complex may be counted for
direct GME purposes, but may only be counted for IME purposes if the
residents are furnishing patient care. Because we are clarifying
existing policy, there is no financial impact of this clarification
for FY 2007.

F. Effects of Policy Changes Relating to Emergency Services Under
EMTALA

In section IV.J. of the preamble to this final rule, we discuss
several policy changes under the EMTALA requirements. We are
clarifying that any participating hospital with specialized
capabilities or facilities, even if it does not have a dedicated
emergency department, may not refuse to accept an appropriate
transfer if the hospital has the capacity to treat the individual.
We note that this proposed revision does not reflect any change in
current CMS policy. We further note that the revision will not
require hospitals without dedicated emergency departments to open
dedicated emergency departments nor will it impose any EMTALA
obligation on these hospitals with respect to individuals who come
to the hospital as their initial point of entry into the medical
system seeking a medical screening examination or treatment for a
medical condition. Thus, there will be no impact on Medicare payment
policies or practices.
In addition, we are modifying the definition of ``labor'' to
state that a woman experiencing contractions is in true labor unless
a physician, certified nurse-midwife, or other qualified medical
person acting within his or her scope of practice as defined in
hospital medical staff bylaws and State law, certifies that, after a
reasonable time of observation, the woman is in false labor. The
effect of this change will be to have a single, uniform policy on
the personnel who are authorized to make a determination as to
whether an individual has an emergency medical condition. This
change will have a Medicare payment effect, if any, only on payments
to physicians and nonphysician practitioners under the physician fee
schedule. The amount of any impact will be negligible because only a
very small number of Medicare beneficiaries are women of
childbearing age.

G. Effects of Policy on Rural Community Hospital Demonstration
Program

In section IV.L. of the preamble to this final rule, we discuss
our implementation of section 410A of Pub. L. 108-173 that required
the Secretary to establish a demonstration that will modify
reimbursement for inpatient services for up to 15 small rural
hospitals. Section 410A(c)(2) requires that ``in conducting the
demonstration program under this section, the Secretary shall ensure
that the aggregate payments made by the Secretary do not exceed the
amount which the Secretary would have paid if the demonstration
program under this section was not implemented.'' As discussed in
section IV.L. of the preamble to this final rule, we are satisfying
this requirement by adjusting national IPPS rates by a factor that
is sufficient to account for the added costs of this demonstration.
We estimate that the average additional annual payment for FY 2007
that will be made to each participating hospital under the
demonstration will be approximately $1,021,985. We based this
estimate on the recent historical experience of the difference
between inpatient cost and payment for hospitals that are
participating in the demonstration. For the 9 participating
hospitals, the total annual impact of the demonstration program is
estimated to be $9,197,870. The adjustment factor to the Federal
rate used in calculating Medicare inpatient prospective payments as
a result of the demonstration is 0.999905.

H. Effects of Policy on Hospitals-Within-Hospitals and Satellite
Facilities

In section VI.A.5. of the preamble to this final rule, we
discuss our revision of the regulations for grandfathered HwHs,
grandfathered hospital satellites and grandfathered satellite units
at Sec. Sec. 412.22(f), 412.22(h), and 412.25(e), respectively, to
allow these facilities to increase or decrease their square footage
or decrease the number of beds without jeopardizing their
grandfathered status.
We estimate that there will be no net effect on the treatment of
such hospitals as a result of this final rule. Payments to most HwHs
and satellites are made on a prospective rate basis. For these
facilities, our policy of allowing either increases or decreases in
square footage would have no cost impact, since the prospective
rates are not affected by a facility's changes in square footage.
However, if grandfathered HwHs and satellites facilities were to
decrease their number of beds, as provided by the policy revision
that we are finalizing, the effect of this change will likely be a
reduction in Medicare payments to such hospitals and satellite
facilities because they will probably have fewer discharges.
A small number of grandfathered HwHs and satellite facilities,
specifically children's and cancer hospitals and satellites of these
facilities, are paid on a cost-related basis under the TEFRA system.
Under that system, increases or decreases in square footage may
cause corresponding increases or decreases in the costs on which
payments to the facilities are based. However, any increases in
costs caused by increased square footage may be offset by other
factors. For example, under our policy a grandfathered HwH or
satellite facility could reduce its number of beds and the decreased
utilization flowing from this change may offset any added costs
resulting from an increase in the square footage of a grandfathered
hospital or satellite facility paid under the TEFRA system.
Moreover, an increase in facility square footage to modernize a
physical facility or to accommodate new equipment or technology may
also result in improved efficiency, leading to reduced operating
costs. The cost savings resulting from these increases in efficiency
could also partially or entirely offset any cost increases. Because
we cannot predict which grandfathered HwHs or satellite facilities
will opt to increase or decrease their size or to decrease their bed
numbers, we are unable to quantify the impact of these changes. (We
are only aware of one cancer hospital and three children's hospitals
that are HwHs.) However, overall we expect that there will be
offsetting cost increases and reductions, with no net change in
costs.

[[Page 48346]]

I. Effects of Policy Changes to the Methodology for Determining
LTCH CCRs and the Reconciliation of LTCH PPS Outlier Payments

In section VI.A.6. of the preamble to this final rule, we
discuss our revision and clarification of the existing policies
governing the determination of LTCHs' CCRs and the reconciliation of
high-cost and short-stay outlier payments under the LTCH PPS. Under
the LTCH PPS high-cost outlier and short-stay outlier policies, CCRs
are used to determine the estimated cost of the case by multiplying
the LTCH's overall CCR by the Medicare allowable charges for the
case.
In that section, specifically, we present a revision of our
methodology for determining the annual LTCH CCR ceiling. Based on
the most recent complete IPPS total CCR data, we are establishing a
total CCR ceiling of 1.321 under the LTCH PPS effective October 1,
2006. This ceiling was determined based on the same data used to
determine the separate IPPS operating CCR ceiling (1.26) and IPPS
capital CCR ceiling (0.154). The LTCH CCR ceiling determined under
our current ``combined'' methodology will result in a slightly
higher LTCH CCR ceiling (that is, 1.26 + 0.154 = 1.414) for FY 2007
compared to the ``total'' CCR ceiling of 1.321 for FY 2007. However,
we note that, based on the most recent complete IPPS and LTCH CCR
data, there are no LTCHs that currently have a CCR that is greater
than the ceiling of 1.321 (the highest LTCH CCR in the database of
392 LTCHs is 1.1277). Therefore, based on these data, because no
LTCHs currently have a CCR that is in excess of the LTCH CCR ceiling
we are establishing for FY 2007 in this final rule, we believe that
there will be no significant impact on LTCH PPS payments based on
this policy.
Also in section VI.A.6. of the preamble to this final rule, we
discuss our revision of our methodology for determining the
applicable statewide average LTCH CCRs. Based on the most recent
complete IPPS total CCR data, the LTCH PPS statewide average CCRs
that would be effective October 1, 2006, are presented in Table 8C
of the Addendum to this final rule. A comparison of the statewide
average total CCRs in Table 8C of the Addendum to this final rule to
the ``combined'' statewide average CCRs that would be calculated
under our existing methodology from the operating PPS statewide
average CCRs in Table 8A of the Addendum to this final rule and the
capital PPS statewide average CCRs in Table 8B of the Addendum to
this final rule shows that the changes to our methodology for
determining LTCH statewide average CCRs will result in minor changes
in the average CCR for each state. In particular, the largest
decrease in a statewide average CCR (with the exception of Maryland,
which will be assigned the national average total CCR as discussed
in section VI.A.6 of the preamble of this final rule) will be in
urban Wyoming (-0.7 percent), and there is currently only one LTCH
located in Wyoming. The largest increase in a statewide average CCR
will be in urban District of Columbia (0.7 percent), and there are
currently only two LTCHs located in the District of Columbia. Thus,
we believe that the change in the methodology for determining the
applicable statewide average LTCH CCRs established in this final
rule will result in no significant impact on LTCH PPS payments.
In addition, in section VI.A.6 of the preamble of this final
rule we discussed our codification in Subpart O of 42 CFR Part 412
the provisions governing the determination of LTCHs' CCRs and the
reconciliation of high cost and short-stay outlier payments under
the LTCH PPS, including modifications and editorial clarifications
to our existing methodology. These changes are similar or almost
identical (except for the minor clarifications and modifications) to
our current policy governing the determination of LTCHs' CCRs and
the reconciliation of high cost and short-stay outlier payments
under the LTCH PPS, and therefore, there will be no expected impact
if such policies were codified.

J. Effects of Policy on Payment for Services Furnished Outside the
United States

In section VII. of the preamble to this final rule, we discuss
our clarification of our regulations regarding payment for Medicare
services furnished outside the United States. The clarification
revises references in our regulations that could be read to limit
Medicare payment for certain services furnished outside the United
States to services furnished in Canada or Mexico, contrary to the
provisions of the Act. Only a small fraction of Medicare claims are
paid as a result of services furnished outside of the United States.
Moreover, we are unaware of any claims for payment that would
otherwise satisfy the requirements under the Act that have not been
paid due to the language in our current regulations. Therefore,
because we are clarifying existing policy, this clarification has
little or no financial impact for FY 2007.

K. Effects of Policy on Limitation on Payments to SNFs

In section IX. of the preamble to this final rule, we discuss
the implementation of section 5004 of Pub. L. 109-171, which
mandated that, for cost reporting periods beginning on or after
October 1, 2005, Medicare payments to SNFs for certain otherwise
allowable debt amounts attributable to the coinsurance amounts for
patients who are not certain specified dual eligible individuals be
reduced by 30 percent. We anticipate that the provisions of section
5004 of Pub. L. 109-171 will result in a savings to the Medicare
program of $490 million over the 5-year period from FY 2006 to FY
2010.

L. Effects of Policy on CAP for Outpatient Drugs and Biologicals
Under Part B for the Purpose of Calculating the Average Sales Price

We have reviewed the effects of the provisions of XII. of this
final rule as required by Executive Order 12866, the RFA, section
1102(b) of the Social Security Act, the Unfunded Mandates Reform Act
of 1995, and Executive Order 13132. We believe the change to the
definition of ``unit'' will be beneficial to CAP drug vendors, as
they will be able to exclude from the ASP calculation, for the
initial 3-year contract period under the CAP, units of CAP drugs
sold to an approved CAP vendor for use under the CAP drug program.

VIII. Impact of Changes in the Capital PPS

A. General Considerations

Fiscal year (FY) 2001 was the last year of the 10-year
transition period established to phase in the PPS for hospital
capital-related costs. During the transition period, hospitals were
paid under one of two payment methodologies: fully prospective or
hold harmless. Under the fully prospective methodology, hospitals
were paid a blend of the capital Federal rate and their hospital-
specific rate (see Sec. 412.340). Under the hold-harmless
methodology, unless a hospital elected payment based on 100 percent
of the capital Federal rate, hospitals were paid 85 percent of
reasonable costs for old capital costs (100 percent for SCHs) plus
an amount for new capital costs based on a proportion of the capital
Federal rate (see Sec. 412.344). As we state in section V. of the
preamble of this final rule, with the 10-year transition period
ending with hospital cost reporting periods beginning on or after
October 1, 2001 (FY 2002), beginning in FY 2002 capital prospective
payment system payments for most hospitals are based solely on the
capital Federal rate. Therefore, we no longer include information on
obligated capital costs or projections of old capital costs and new
capital costs, which were factors needed to calculate payments
during the transition period, for our impact analysis.
In accordance with Sec. 412.312, the basic methodology for
determining a capital PPS payment is:
(Standard Federal Rate) x (DRG weight) x (Geographic Adjustment
Factor (GAF)) x (Large Urban Add-on, if applicable) x (COLA for
hospitals located in Alaska and Hawaii) x (1 + Disproportionate
Share (DSH) Adjustment Factor + Indirect Medical Education (IME)
Adjustment Factor, if applicable).
In addition, hospitals may also receive outlier payments for
those cases that qualify under the threshold established for each
fiscal year.
The data used in developing the impact analysis presented below
are taken from the March 2006 update of the FY 2005 MedPAR file and
the March 2006 update of the Provider-Specific File that is used for
payment purposes. Although the analyses of the changes to the
capital prospective payment system do not incorporate cost data, we
used the March 2006 update of the most recently available hospital
cost report data (FYs 2003 and 2004) to categorize hospitals. Our
analysis has several qualifications. First, we do not make
adjustments for behavioral changes that hospitals may adopt in
response to policy changes. Second, due to the interdependent nature
of the IPPS, it is very difficult to precisely quantify the impact
associated with each change. Third, we draw upon various sources for
the data used to categorize hospitals in the tables. In some cases
(for instance, the number of beds), there is a fair degree of
variation in the data from different sources. We have attempted to
construct these variables with the best available sources overall.
However, for

[[Page 48347]]

individual hospitals, some miscategorizations are possible.
Using cases from the March 2006 update of the FY 2005 MedPAR
file, we simulated payments under the capital PPS for FY 2006 and FY
2007 for a comparison of total payments per case. Any short-term,
acute care hospitals not paid under the general IPPS (Indian Health
Service hospitals and hospitals in Maryland) are excluded from the
simulations.
As we explain in section III.A. of the Addendum to this final
rule, payments are no longer made under the regular exceptions
provision under Sec. Sec. 412.348(b) through (e). Therefore, we no
longer use the actuarial capital cost model (described in Appendix B
of the August 1, 2001 proposed rule (66 FR 40099)). We modeled
payments for each hospital by multiplying the capital Federal rate
by the GAF and the hospital's case-mix. We then added estimated
payments for indirect medical education, disproportionate share,
large urban add-on, and outliers, if applicable. For purposes of
this impact analysis, the model includes the following assumptions:
We estimate that the Medicare case-mix index will
increase by 1.0 percent in both FYs 2006 and 2007.
We estimate that the Medicare discharges will be 13.5
million in FY 2006 and 13.1 million in FY 2007 for a 3.0 percent
decrease from FY 2006 to FY 2007.
The capital Federal rate was updated beginning in FY
1996 by an analytical framework that considers changes in the prices
associated with capital-related costs and adjustments to account for
forecast error, changes in the case-mix index, allowable changes in
intensity, and other factors. The FY 2007 update is 1.1 percent (see
section III.A.1.of the Addendum to this final rule).
In addition to the FY 2007 update factor, the tentative
FY 2007 capital Federal rate was calculated based on a tentative
GAF/DRG budget neutrality factor of 0.9994, a tentative outlier
adjustment factor of 0.9568, and an exceptions adjustment factor of
0.9997.

B. Results

We used the actuarial model described above to estimate the
potential impact of our changes for FY 2007 on total capital
payments per case, using a universe of 3,595 hospitals. As described
above, the individual hospital payment parameters are taken from the
best available data, including the March 2006 update of the FY 2005
MedPAR file, the March 2006 update to the Provider-Specific File,
and the most recent cost report data from the March 2006 update of
HCRIS. In Table III, we present a comparison of total payments per
case for FY 2006 compared to FY 2007 based on the FY 2007 payment
policies. Column 2 shows estimates of payments per case under our
model for FY 2006. Column 3 shows estimates of payments per case
under our model for FY 2007. Column 4 shows the total percentage
change in payments from FY 2006 to FY 2007. The change represented
in Column 4 includes the 1.1 percent update to the capital Federal
rate, a 0.0 percent increase in case-mix, changes in the adjustments
to the capital Federal rate (for example, the effect of the hospital
wage index on the GAF), and reclassifications by the MGCRB. The
comparisons are provided by: (1) Geographic location; (2) region;
and (3) payment classification.
The simulation results show that, on average, capital payments
per case can be expected to increase 2.3 percent in FY 2007. In
addition to the 1.1 percent increase due to the capital market
basket update, this projected increase in capital payments per case
is largely attributable to the change in the DRG recalibration
process methodology for FY 2007 as discussed in section II.C. of the
preamble. The tentative GAF and tentative outlier factor impose
equal but opposite effects on capital payments (-0.2 percent and 0.2
percent, respectively), and therefore have a zero net effect on
capital payments per case.
The results of our comparisons by geographic location and by
region are consistent with the results we expected after applying
the changes to the DRG recalibration methodology. The geographic
comparison shows that urban hospitals are expected to experience a
2.3 percent increase in IPPS capital payments per case, while rural
hospitals are expected to experience a 2.1 percent increase in
capital payments per case. This difference is mostly due to the
changes to the methodology used to recalibrate DRGs discussed in
section II.C. of the preamble of this final rule. As discussed in
greater detail in that section of this final rule, analysis of our
current methodology for setting DRG weights (using gross charges)
indicates that bias is introduced into the weighting process.
Specifically, we have also observed that ancillary service cost
centers, in general, have higher charge markups than routine and ICU
service cost centers, and therefore, higher weights for DRGs that
use more ancillary services as opposed to DRGs that use more routine
services. Surgical DRGs tend to have charges concentrated in
ancillary cost center groups while medical DRGs tend to have charges
concentrated in routine or ICU cost center groups. The bias in our
current methodology results in artificially higher DRG relative
weights for hospitals that are generally more expensive, such as
teaching hospitals and specialty hospitals. Hospitals with these
characteristics are generally found in urban locations.
The redistributive impact of our proposals to reform the current
DRG system was evident in the capital impact analysis as discussed
in the proposed rule. Consequently, the proposed rule impact
analysis showed greater capital increases per case for rural
hospitals, as expected, than for hospitals in urban locations. In
response to comments on the proposed rule, significant modifications
were made to our DRG proposals. The modifications made in this final
rule to our proposed changes to the DRG system are intended to
moderate the payment redistribution, and the capital impact analysis
reflects those modifications accordingly. Further mitigating the
effects of the changes is moving to a 3-year transition period to
apply the new methodology. The capital impact was also somewhat
affected by the wage-index changes from the proposed rule to the
final rule because the GAF values are derived from the wage index.
The wage index used in the proposed rule included an occupational
mix component. Due to circumstances as described in section III.C.
of the preamble to this final rule, the wage index used in these
calculations is tentative, and will be updated in a future Federal
Register document, as well as on the CMS Web site.
All regions are estimated to receive an increase in total
capital payments per case from FY 2006 to FY 2007. Changes vary by
region from a minimum increase of 0.4 percent (Puerto Rico) urban to
a maximum increase of 3.2 percent (Pacific) urban. The change in
payments per case for all hospitals is 2.3 percent and is similar to
the change indicated in the proposed rule. However, the differences
between urban and rural hospitals in this final rule are noticeably
less than the differences observed in the proposed rule. As
previously discussed, the increases in payments are largely
attributable to changes in the DRG recalibration methodology, and
the lesser degree of difference between rural and urban hospitals''
capital payment increases from the proposed rule and this final rule
is due to the modifications made to the proposed DRG reforms. By
type of ownership, the increases in payment are similar among all
three types. Government hospitals and proprietary hospitals are both
projected to have a 2.4 percent increase in total payments, while
payments to voluntary hospitals are expected to increase 2.3
percent.
Section 1886(d)(10) of the Act established the MGCRB. Before FY
2005, hospitals could apply to the MGCRB for reclassification for
purposes of the standardized amount, wage index, or both. Section
401(c) of Pub. L. 108-173 equalized the standardized amounts under
the operating IPPS. Therefore, beginning in FY 2005, there is no
longer reclassification for the purposes of the standardized
amounts; however, hospitals still may apply for reclassification for
purposes of the wage index for FY 2007. Reclassification for wage
index purposes also affects the GAF because that factor is
constructed from the hospital wage index.
As discussed in section III.H.5. of the preamble of this final
rule, procedural rules were established in the FY 2006 final rule
(70 FR 47382) to recognize the special circumstances of section 508
hospital reclassifications ending mid-year during FY 2007. Under
these procedural rules, some section 1886(d)(10) hospital
reclassifications are only in effect for the second half of the
fiscal year. These half fiscal year reclassifications have
implications for the calculation of reclassified wage indices and
therefore, affect capital payments because GAF values are calculated
from the hospital wage index.
To present the effects of the hospitals being reclassified for
FY 2007, we show the average payments per case for reclassified
hospitals for each half of FY 2007 compared to the average payments
per case for the same time period in FY 2006. The reclassified
groups are compared to all other nonreclassified hospitals for the
same time period. These categories are further identified by urban
and rural designation. In general, the average payments per case in
the first half of FY 2007

[[Page 48348]]

is the same as the average payments per case in the second half of
FY 2007 with the exception of urban reclassifications, which
decreases by 0.1 percent (2.5 percent to 2.4 percent) for the second
half of FY 2007. Rural nonreclassified hospitals are expected to
have the largest increases in payments (2.5 percent in both halves),
as compared to the 2.0 percent increase for rural reclassified
hospitals (for both halves of FY 2007). Falling between the
percentage increase for rural non-reclassified hospitals and the
increase for rural reclassified hospitals are the urban hospitals.
Reclassified (urban) hospitals are projected to have increases of
2.5 percent and 2.4 percent in the first and second halves of FY
2007, respectively, while nonreclassified (urban) hospitals are
projected to have a slightly lesser increase of 2.3 percent.
As discussed in section VI.B. of the preamble of this final
rule, we are making a technical revision to Sec. 412.316(b) and
Sec. 412.320 to clarify that hospitals reclassified as rural under
Sec. 412.103 are not eligible for the large urban add-on or for
capital DSH to reflect our historic policy that hospitals
reclassified as rural under Sec. 412.103 also are considered rural
under capital PPS regulations. Currently, there are 38 hospitals
that reclassified under this regulation and only 12 of these
hospitals (about 0.3 percent of all IPPS hospitals) will be affected
by the technical revisions to sections Sec. 412.316(b) and Sec.
412.320 concerning the treatment of hospitals reclassified as rural
under section Sec. 412.103. Based on the most recent available
data, we estimate that the impact of these changes will be a less
than 0.00001 percent decrease in aggregate IPPS payments.

Table III.--Comparison of Total Payments Per Case
[FY 2006 payments compared to FY 2007 payments]
----------------------------------------------------------------------------------------------------------------
Average FY Average FY
Number of 2006 2007
hospitals payments/ payments/ Change
case case
----------------------------------------------------------------------------------------------------------------
By Geographic Location:
All hospitals............................................... 3,595 753 771 2.3
Large urban areas (populations over 1 million).............. 1,441 849 870 2.5
Other urban areas (populations of 1 million of fewer)....... 1,149 731 746 2.1
Rural areas................................................. 1,005 513 524 2.1
Urban hospitals............................................. 2,590 796 814 2.3
0-99 beds............................................... 651 617 632 2.4
100-199 beds............................................ 867 673 691 2.7
200-299 beds............................................ 492 751 769 2.4
300-499 beds............................................ 413 827 845 2.2
500 or more beds........................................ 167 1,005 1,027 2.1
Rural hospitals............................................. 1,005 513 524 2.1
0-49 beds............................................... 348 422 433 2.5
50-99 beds.............................................. 370 469 481 2.5
100-149 beds............................................ 174 516 526 2.0
150-199 beds............................................ 68 564 574 1.8
200 or more beds........................................ 45 642 652 1.6
By Region:
Urban by Region............................................. 2,590 796 814 2.3
New England............................................. 128 853 870 2.0
Middle Atlantic......................................... 357 873 893 2.3
South Atlantic.......................................... 388 755 770 2.0
East North Central...................................... 395 782 802 2.6
East South Central...................................... 165 720 733 1.8
West North Central...................................... 157 783 799 2.1
West South Central...................................... 374 740 755 2.0
Mountain................................................ 149 787 811 3.1
Pacific................................................. 424 920 949 3.2
Puerto Rico............................................. 53 347 349 0.4
Rural by Region............................................. 1,005 513 524 2.1
New England............................................. 19 686 699 1.9
Middle Atlantic......................................... 72 518 532 2.6
South Atlantic.......................................... 176 497 509 2.2
East North Central...................................... 125 547 558 2.0
East South Central...................................... 180 476 486 2.2
West North Central...................................... 116 540 550 2.0
West South Central...................................... 193 464 473 1.9
Mountain................................................ 81 535 544 1.6
Pacific................................................. 43 616 631 2.4
By Payment Classification:
All hospitals............................................... 3,595 753 771 2.3
Large urban areas (populations over 1 million).............. 1,450 848 869 2.5
Other urban areas (populations of 1 million of fewer)....... 1,158 730 746 2.1
Rural areas................................................. 987 515 526 2.1
Teaching Status:
Non-teaching............................................ 2,511 630 645 2.5
Fewer than 100 Residents................................ 843 765 782 2.2
100 or more Residents................................... 241 1,100 1,125 2.2
Urban DSH:
100 or more beds.................................... 1,520 821 840 2.3
Less than 100 beds.................................. 347 543 558 2.7
Rural DSH:
Sole Community (SCH/EACH)........................... 385 464 475 2.2
Referral Center (RRC/EACH).......................... 199 569 580 1.9

[[Page 48349]]

Other Rural:
100 or more beds................................ 55 475 485 2.0
Less than 100 beds.............................. 183 423 433 2.5
Urban teaching and DSH:
Both teaching and DSH................................... 815 902 922 2.2
Teaching and no DSH..................................... 201 816 834 2.3
No teaching and DSH..................................... 1,052 667 684 2.6
No teaching and no DSH.................................. 540 700 717 2.4
Rural Hospital Types:
Non special status hospitals............................ 288 451 461 2.4
RRC/EACH................................................ 142 577 590 2.2
SCH/EACH................................................ 339 477 487 2.2
Medicare-dependent hospitals (MDH)...................... 127 433 445 2.7
SCH, RRC and EACH....................................... 83 580 588 1.3
Hospitals Reclassified by the Medicare Geographic Classification
Review Board:
FY2007 Reclassifications:
All Urban Reclassified 1st Half......................... 325 775 795 2.5
All Urban Non-Reclassified 1st Half..................... 2,240 800 819 2.3
All Rural Reclassified 1st Half......................... 375 558 569 2.0
All Rural Non-Reclassified 1st Half..................... 569 450 462 2.5
All Urban Reclassified 2nd Half......................... 385 800 819 2.4
All Urban Non-Reclassified 2nd Half..................... 2,180 796 815 2.3
All Rural Reclassified 2nd Half......................... 375 558 569 2.0
All Rural Non-Reclassified 2nd Half..................... 569 450 462 2.5
All Section 401 Reclassified Hospitals.................. 33 548 554 1.1
Other Reclassified Hospitals (Section 1886(d)(8)(B)).... 53 516 527 2.2
Type of Ownership:
Voluntary............................................... 2,102 771 789 2.3
Proprietary............................................. 880 679 696 2.4
Government.............................................. 603 740 757 2.4
Medicare Utilization as a Percent of Inpatient Days:
0-25.................................................... 243 999 1,030 3.0
25-50................................................... 1,328 855 875 2.3
50-65................................................... 1,478 663 679 2.3
Over 65................................................. 462 597 609 2.1
----------------------------------------------------------------------------------------------------------------

IX. Impact of Changes Relating to the Loan Program for Capital Cost
Under the Health Care Infrastructure Improvement Program

In section XI. of the preamble to this final rule, we finalize
the provisions of a September 30, 2005 interim final rule with
comment period and the proposed changes in a September 30, 2005
proposed rule relating to the selection criteria and the forgiveness
of indebtedness for loans made to certain hospitals engaged in
research in the causes, prevention, and treatment of cancer under
the Health Care Infrastructure Improvement Program. This section of
this final rule affects qualifying hospitals as defined in section
1897 of the Act that have been selected to receive funds under the
loan program.
This provision will have little impact on the Medicare Trust
Fund. The Congress provided $142 million for the loan program
effective July 1, 2004, through September 30, 2008, and of the $142
million, not more than $2 million may be used for the administration
of the loan program for each of the fiscal years (that is, 2004
through 2008).

X. Alternatives Considered

This final rule contains a range of policies, including some
changes related to specific DRA and MMA provisions. The preamble of
this final rule provides descriptions of the statutory provisions
that are addressed, identifies those policies when discretion has
been exercised, presents rationale for our decisions and, where
relevant, alternatives that were considered.
In addition, we did not consider any alternatives to the
policies we are implementing in this final rule relating to the
implementation of the loan program under the Health Care
Infrastructure Improvement Program because the statute specifically
authorized the conditions under which the Secretary may forgive a
loan provided under the program.

XI. Overall Conclusion

The changes in this final rule will affect all classes of
hospitals. Some hospitals are expected to experience significant
gains and others less significant gains, but overall hospitals are
projected to experience positive updates in IPPS payments in FY
2007. Table I of section VI of this Appendix demonstrates the
estimated distributional impact of the IPPS budget neutrality
requirements for DRG and wage index changes, for the hold harmless
transition for rural hospitals formerly classified as urban, and for
the wage index reclassifications under the MGCRB. Table I also shows
an overall increase of 3.4 percent in operating payments, which, in
conjunction with the estimated 2.0 percent increase in capital
payments to IPPS providers shown in Table III of section VIII of
this Appendix, should result in a net increase of $3.33 billion to
IPPS providers. The discussions presented in the previous pages, in
combination with the rest of this final rule, constitute a
regulatory impact analysis.

XII. Accounting Statement

As required by OMB Circular A-4 (available at http://www.whitehousegov/omb/circulars/a004/a-4.pdf), in Table IV below, we
have prepared an accounting statement showing the classification of
the expenditures associated with the provisions of this final rule.
This table provides our best estimate of the increase in Medicare
payments on providers as a result of the changes to the IPPS, the
LTCH case-mix, and the limitation on payments to SNFs for bad debt
presented in this rule. All expenditures are classified as transfers
to Medicare providers.
The Congress provided $142 million for the loan program,
effective July 1, 2004,

[[Page 48350]]

through September 30, 2008. Of the $142 million, not more than $2
million may be used for the administration of the loan program for
each of the fiscal years (that is FY 2004 through FY 2008).

Table IV.--Accounting Statement: Classification of Estimated
Expenditures From FY 2006 to FY 2007
------------------------------------------------------------------------
Transfers $3.889 billion
Category annualized monetized transfers federal government to IPPS
from whom to whom medicare providers, LTCHs,
and SNFs
------------------------------------------------------------------------
Total..................................... $3.889 Billion.
------------------------------------------------------------------------

XIII. Executive Order 12866

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

Appendix B: Recommendation of Update Factors for Operating Cost Rates
of Payment for Inpatient Hospital Services

I. Background

Section 1886(e)(4)(A) of the Act requires that the Secretary,
taking into consideration the recommendations of the Medicare
Payment Advisory Commission (MedPAC), recommend update factors for
inpatient hospital services for each fiscal year that take into
account the amounts necessary for the efficient and effective
delivery of medically appropriate and necessary care of high
quality. Under section 1886(e)(5)(B) of the Act, we are required to
publish factors recommended by the Secretary in the final IPPS rule.
Accordingly, we are publishing our final recommendations for the
appropriate update factors for the IPPS standardized amount, the
hospital-specific rates for SCHs and MDHs, and the rate-of-increase
limits for hospitals and hospital units excluded from the IPPS.
Section 1886(b)(3)(B)(i)(XX) of the Act, as amended by section
5001(a) of Pub. L. 109-171, sets the FY 2007 percentage increase in
the operating cost standardized amount equal to the rate-of-increase
in the hospital market basket for IPPS hospitals in all areas,
subject to the hospital submitting quality information under rules
established by the Secretary under section 1886(b)(3)(B)(viii) of
the Act. For hospitals that do not provide these data, the update is
equal to the market basket percentage increase less 2.0 percentage
points.
Consistent with current law, based on the Office of the
Actuary's second quarter 2006 forecast of the FY 2007 market basket
increase of 3.4 percent, the FY 2007 update to the standardized
amount for hospitals subject to the acute inpatient prospective
payment system is 3.4 percent (that is, the market basket rate-of-
increase) for hospitals in all areas, provided the hospital submits
quality data in accordance with our rules. For hospitals that do not
submit quality data, the update to the standardized amount is 1.4
percent (that is, the market basket rate-of-increase minus 2.0
percentage points). (In the proposed rule, the most recent estimate
of the market basket increase was also 3.4 percent.)
Section 1886(b)(3)(B)(iv) of the Act sets the FY 2007 percentage
increase in the hospital-specific rates applicable to SCHs and MDHs
equal to the rate set forth in section 1886(b)(3)(B)(i) of the Act
(that is, the same update factor as for all other hospitals subject
to the IPPS, or the rate-of-increase in the market basket).
Therefore, the update to the hospital-specific rates applicable to
SCHs and MDHs is also 3.4 percent.
Section 1886(b)(3)(B)(ii) of the Act is used for purposes of
determining the percentage increase in the rate-of-increase limits
for children's and cancer hospitals. Section 1886(b)(3)(B)(ii) of
the Act sets the percentage increase in the rate-of-increase limits
equal to the market basket percentage increase for years after FY
2002. In accordance with Sec. 403.752(a) of the regulations, RNHCIs
are paid under Sec. 413.40, which also uses section
1886(b)(3)(B)(ii) of the Act to update the percentage increase in
the rate-of-increase limits. Section 1886(j)(3)(C) of the Act
addresses the increase factor for the Federal prospective payment
rate of IRFs. Section 123 of Pub. L. 106-113, as amended by section
307(b) of Pub. L. 106-554, provides the statutory authority for
updating payment rates under the LTCH PPS.
Some LTCHs and IPFs are transitioning to 100 percent of the
Federal rate and currently receive a blend of reasonable cost-based
payments computed under the TEFRA methodology and their respective
Federal payment rates. As discussed below, the transition ends for
LTCHs (not defined as new and that have not elected to be paid under
100 percent of the Federal rate) for cost reporting periods
beginning on or after October 1, 2006. Therefore, because no portion
of LTCHs' prospective payments will be based on reasonable costs for
cost reporting periods beginning on or after October 1, 2006, we are
not providing an FY 2007 rate-of-increase adjustment under section
1886(b)(3)(B)(ii) of the Act for LTCHs.
Currently, children's hospitals, cancer hospitals and RNHCIs are
the remaining three types of hospitals still reimbursed fully under
reasonable costs. As we discuss in section IV. of the Addendum to
this final rule, we are providing the FY 2007 IPPS operating market
basket percentage increase (3.4 percent) that is being used to
update the target limits for children's hospitals, cancer hospitals,
and RNHCIs. (In the proposed rule, the most recent estimate of the
market basket increase was also 3.4 percent for children's
hospitals, cancer hospitals, and RNHCIs.)
Effective since cost reporting periods beginning FY 2003, LTCHs
have been paid under the LTCH PPS, which was implemented with a 5-
year transition period for LTCHs not defined as new under Sec.
412.23(e)(4) (hereafter referred to as ``existing''). (Refer to 67
FR 55954, August 30, 2002.) An existing LTCH could have elected to
be paid on 100 percent of the Federal prospective rate at the start
of any of its cost reporting periods during the 5-year transition
period. During this transition period, if an existing LTCH did not
elect to be paid 100 percent of the Federal prospective payment
rate, it received a payment which consisted of a blend of its
reasonable cost-based payment (subject to the TEFRA rate-of-increase
limits) and the Federal prospective payment rate. Because the
transition period ends with LTCH cost reporting periods beginning on
or after October 1, 2006, those LTCHs who now receive blended
payments will be paid based on 100 percent of the Federal
prospective rate.
Effective for cost reporting periods beginning on or after
January 1, 2005, IPFs are paid under the IPF PPS. IPF PPS payments
are based on a Federal per diem rate that is based on the sum of the
average routine operating, ancillary, and capital costs for each
patient day of psychiatric care in an IPF, adjusted for budget
neutrality. During a transition period between January 1, 2005 and
January 1, 2008, existing IPFs are paid based on a blend of the
reasonable cost-based payments, subject to the TEFRA limit, and the
Federal per diem base rate. For cost reporting periods beginning on
or after January 1, 2008, IPFs will be paid based on 100 percent of
the Federal per diem rate. For purposes of the update factor for FY
2007, the portion of the IPF PPS transitional blend payment based on
reasonable costs would be determined by updating the IPF's TEFRA
limit by the current estimate of the excluded hospital market
basket, which is estimated to be 3.4 percent. The update factor of
4.3 percent to the Federal per diem rate for July 1, 2006, through
June 30, 2007, was provided in the RY 2007 IPF final rule (71 FR
27046).
IRFs are paid under the IRF PPS for cost reporting periods
beginning on or after January 1, 2002. For cost reporting periods
beginning on or after October 1, 2002 (FY 2003), and thereafter, the
Federal prospective payments to IRFs are based on 100 percent of the
adjusted Federal IRF prospective payment amount, updated annually.
(Refer to the IRF final rule (69 FR 45721).) In the FY 2007 IRF PPS
proposed rule (71 FR 28106 and 28125), we proposed an update factor
of 3.4 percent to the IRF PPS for FY 2007. The final update factor
for the FY 2007 IRF PPS will be published in the FY 2007 IRF PPS
final rule.
Comment: One commenter believed the market basket update of 3.4
percent is inadequate. The commenter claimed that data for 1998
through 2006 indicate that hospital costs increased 37.9 percent,
while Medicare payments increased 19.7 percent, resulting in a
shortfall of $4.4 billion. The commenter noted that continual
underfunding by CMS will further threaten the financial viability of
not-for-profit hospitals in Michigan, thus limiting their ability to
provide service to Medicare beneficiaries and others.
Response: The current market basket forecast update of 3.4
percent is based on Global Insight, Inc.'s (GII) 2006 second quarter
forecast with historical data through the first quarter of 2006. GII
is a nationally recognized economic and financial forecasting firm
that contracts with CMS to forecast the components of the market
baskets. In the FY 2006 IPPS rule, we noted that over the last
several years, dramatic fluctuations in the price of certain costs

[[Page 48351]]

(mainly energy costs) have made it difficult to forecast the IPPS
market basket. With our input and consultation, GII recently
evaluated and modified its forecasting models to help enhance their
accuracy. GII's latest forecast is based on these improved models
and takes into account national and global economic trends.
We will continue to monitor both the accuracy of our market
basket updates and the profitability of IPPS hospitals, as well as
work with GII to ensure the most accurate updates possible.
Comment: One commenter was concerned that GII's methodology has
a built-in bias of under projecting during the period when the
overall economy is transitioning from a high growth and low
inflation era to a low growth and high inflation period. The
commenter explained that, during a transition period, the
extrapolation of historical data tends to have larger projection
variances and therefore adjustments should be made to correct these
systematic projection biases during the time of major business cycle
reversals. As a result, the commenter recommended that CMS include
an adjustment in its projection methodology to correct for this
systematic bias or adjust the projection error in its subsequent
years' payments.
Response: CMS and GII recognize the complexities associated with
projecting prices during times of major business cycle reversals.
GII includes adjustments in their forecasts to account for these
systematic biases. GII employs a simultaneous equation approach to
solve both macro and micro simulation models for the underlying
components of the hospital market basket. Using this simultaneous
approach facilitates the accurate inclusion of broader economic
conditions, such as economy-wide growth and inflationary pressures,
to be more accurately reflected in the micro level components that
comprise the market basket. In addition, as part of these micro
models, underlying businesses cycles, seasonal changes, and market
fluctuations are incorporated to ensure forecasts accurately control
for these market conditions during forecast cycles.
Comment: One commenter was concerned that it is consistently
disproportionately negatively affected by Medicare rate policies.
The commenter recommended that no hospital receive less payments in
the current year than the previous year or optimally CMS should
provide a minimum payment increase of 2 percent.
Response: We thank the commenter for its comments. However, as
noted above, section 1886(b)(3)(B)(i)(XX) of the Act, as amended by
section 5001(a) of Pub. L. 109-171, ties the FY 2007 percentage
increase in the operating cost standardized amount equal to the
rate-of-increase in the hospital market basket for IPPS hospitals in
all areas. Therefore, we do not have the statutory authority to
implement the changes to the update factors that the commenter is
requesting.

II. Secretary's Final Recommendation for Updating the Prospective
Payment System Standardized Amounts

In recommending an update, the Secretary takes into account the
factors such as the recommendations of MedPAC, the long-term
solvency of the Medicare Trust Funds, and the capacity of the
hospital industry to continually provide access to high quality care
to Medicare beneficiaries through adequate payment to health care
providers. In years prior to FY 2006, in making a recommendation, we
included an update framework that analyzed hospital productivity,
scientific and technological advances, practice pattern changes,
changes in case-mix, the effects of reclassification on
recalibration and forecast error correction. As we stated in the FY
2007 proposed rule, we are no longer including this analysis in our
recommendation for the update (71 FR 24420).
In the FY 2007 IPPS proposed rule, we proposed to recommend an
update of 2.95 percent, which reflected the CMS Office of the
Actuary's most recent forecast of the FY 2007 market basket increase
minus an adjustment factor of 0.45 percentage points based on the FY
2007 President's budget. We did not receive any public comments
regarding this issue. In this final rule, we are also recommending
an update for IPPS hospitals based on the forecasted market basket
increase of 3.4 percent from the Office of the Actuary's most recent
(second quarter) 2006 forecast of the FY 2007 market basket increase
minus an adjustment factor of 0.45 percentage points based on the FY
2007 President's budget. Thus, the Secretary's final recommendation
for the update to the IPPS standardized amount for all hospitals is
2.95 percentage points for hospitals that provide the required
quality data.
In addition to making a recommendation for IPPS hospitals, in
accordance with section 1886(e)(4)(A) of the Act, we are also
recommending update factors for all other types of hospitals. Using
the 2006 second quarter forecast from the Office of the Actuary of
the FY 2007 market basket increase and an adjustment factor based on
the FY 2007 President's budget, for FY 2007, for SCHs and MDHs, we
are also recommending an update of 2.95 percent.

III. Secretary's Final Recommendation for Updating the Rate-of-Increase
Limits for Excluded Hospitals and Hospital Units

We did not receive any public comments concerning our proposed
recommendations for updating the rate-of-increase for FY 2007 for
cancer hospitals, RNHCIs, and children's hospitals. Our final
recommendation does not differ from the proposed recommendation. The
second quarter forecast from the Office of the Actuary of the FY
2007 market basket increase is also 3.4 percent for these excluded
hospitals and hospital units. Thus, using an adjustment factor based
on the FY 2007 President's budget, the Secretary's final
recommendation is for a 2.95 percent increase to the target limits
for cancer hospitals, RNHCIs, and children's hospitals.
Further, we did not receive any public comments concerning our
proposed recommendations for the update factors for IPFs. For IPFs
that are currently paid a blend of reasonable cost-based (subject to
the TEFRA limits) and Federal prospective payment amounts, based on
the estimate from the Office of the Actuary and an adjustment factor
from the FY 2007 President's budget, in the proposed rule, we
recommended an update factor of 3.15 percent for the portion of the
payment that is based on reasonable costs, subject to the TEFRA
limits. Based on second quarter data from the Office of the Actuary
and an adjustment factor from the FY 2007 President's budget, we are
recommending a final update of 2.95 percent for the portion of the
payment that is based on reasonable costs, subject to the TEFRA
limits.
Consistent with the RY 2007 LTCH PPS proposed rule (71 FR 4648),
in the FY 2007 IPPS proposed rule, we recommended that the Federal
rate remain unchanged for FY 2007. In this final rule, consistent
with the RY 2007 LTCH final rule (71 FR 27826), we are recommending
that the Federal rate to the LTCH PPS remain unchanged for FY 2007.
In the RY 2007 IPF PPS proposed rule (71 FR 3620) and in the FY
2006 IPPS proposed rule, we proposed an update factor of 4.5 percent
to the IPF PPS for RY 2007. The proposed update reflected an
increase from the 18-month period beginning January 1, 2005, when
the IPF PPS was first adopted. However, in the RY 2007 IPF final
rule (71 FR 27040), we recommended an update factor of 4.3 percent.
Consistent with the RY 2007 IPF final rule, in this IPPS final rule,
we are recommending an update factor of 4.3 percent for IPFs.
In the FY 2007 IPPS proposed rule, consistent with the
President's FY 2007 budget, we recommended the Federal rate to the
IRF PPS remain unchanged for FY 2007. We note, as mentioned above,
in the FY 2007 IRF PPS proposed rule (71 FR 281206 and 28125), we
proposed an update factor of 3.4 percent to the IRF PPS for FY 2007.
The final update factor for the FY 2007 IRF PPS will be published in
the FY 2007 IRF PPS final rule. Therefore, in this final rule,
consistent with FY 2007 IRF PPS final rule, we are recommending the
update factor that will be published in the FY 2007 IRF PPS final
rule. We refer readers to the FY 2007 IRF PPS final rule to view the
update factor.

IV. Secretary's Recommendation for Updating the Capital Prospective
Payment Amounts

Because the operating and capital prospective payment systems
remain separate, we are continuing to use separate updates for
operating and capital payments. The final update to the capital
payment rates is discussed in section III. of the Addendum to this
final rule.

[FR Doc. 06-6692 Filed 8-1-06; 4:00 pm]
BILLING CODE 4120-01-P