[Federal Register Volume 72, Number 86 (Friday, May 4, 2007)]
[Notices]
[Pages 25602-25673]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-2172]



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Part V





Department of Health and Human Services





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Centers for Medicare and Medicaid Services



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 Medicare Program; Inpatient Psychiatric Facilities Prospective Payment 
System Payment Update for Rate Year Beginning July 1, 2007 (RY 2008); 
Notice

  Federal Register / Vol. 72, No. 86 / Friday, May 4, 2007 / Notices  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

[CMS-1479-N]
RIN 0938-AO40


Medicare Program; Inpatient Psychiatric Facilities Prospective 
Payment System Payment Update for Rate Year Beginning July 1, 2007 (RY 
2008)

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

ACTION: Notice.

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SUMMARY: This notice updates the prospective payment rates for Medicare 
inpatient psychiatric hospital services provided by inpatient 
psychiatric facilities (IPFs). These changes are applicable to IPF 
discharges occurring during the rate year beginning July 1, 2007 
through June 30, 2008.

EFFECTIVE DATE: The updated IPF prospective payment rates are effective 
for discharges occurring on or after July 1, 2007 through June 30, 
2008.

FOR FURTHER INFORMATION CONTACT: 
    Dorothy Myrick or Jana Lindquist, (410) 786-4533 (for general 
information).
    Heidi Oumarou, (410) 786-7942 (for information regarding the market 
basket and labor-related share).
    Theresa Bean, (410) 786-2287 (for information regarding the 
regulatory impact analysis).
    Matthew Quarrick, (410) 786-9867 (for information on the wage 
index).

SUPPLEMENTARY INFORMATION:

Table of Contents

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

I. Background
    A. Annual Requirements for Updating the IPF PPS
    B. Overview of the Legislative Requirements of the IPF PPS
    C. IPF PPS-General Overview
II. Transition Period for Implementation of the IPF PPS
III. Updates to the IPF PPS for RY Beginning July 1, 2007
    A. Determining the Standardized Budget-Neutral Federal Per Diem 
Base Rate
    1. Standardization of the Federal Per Diem Base Rate and 
Electroconvulsive Therapy Rate
    2. Calculation of the Budget Neutrality Adjustment
    a. Outlier Adjustment
    b. Stop-Loss Provision Adjustment
    c. Behavioral Offset
    B. Update of the Federal Per Diem Base Rate and 
Electroconvulsive Therapy Rate
    1. Market Basket for IPFs Reimbursed under the IPF PPS
    a. Market Basket Index for the IPF PPS
    b. Overview of the RPL Market Basket
    2. Labor-Related Share
    3. IPFs Paid Based on a Blend of the Reasonable Cost-based 
Payments
IV. Update of the IPF PPS Adjustment Factors
    A. Overview of the IPF PPS Adjustment Factors
    B. Patient-Level Adjustments
    1. Adjustment for DRG Assignment
    2. Payment for Comorbid Conditions
    3. Patient Age Adjustments
    4. Variable Per Diem Adjustments
    C. Facility-Level Adjustments
    1. Wage Index Adjustment
    2. Adjustment for Rural Location
    3. Teaching Adjustment
    4. Cost of Living Adjustment for IPFs located in Alaska and 
Hawaii
    5. Adjustment for IPFs With a Qualifying Emergency Department 
(ED)
    D. Other Payment Adjustments and Policies
    1. Outlier Payments
    a. Update to the Outlier Fixed Dollar Loss Threshold Amount
    b. Statistical Accuracy of Cost-to-Charge Ratios
    2. Stop-Loss Provision
V. Waiver of Proposed Rulemaking
VI. Collection of Information Requirements
VII. Regulatory Impact Analysis
Addenda

Acronyms

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

BBRA Medicare, Medicaid and SCHIP [State Children's Health Insurance 
Program] Balanced Budget Refinement Act of 1999, (Pub. L. 106-113)
CBSA Core-Based Statistical Area
CCR Cost-to-charge ratio
CMSA Consolidated Metropolitan Statistical Area
DSM-IV-TR Diagnostic and Statistical Manual of Mental Disorders 
Fourth Edition--Text Revision
DRGs Diagnosis-related groups
FY Federal fiscal year
ICD-9-CM International Classification of Diseases, 9th Revision, 
Clinical Modification
IPFs Inpatient psychiatric facilities
IRFs Inpatient rehabilitation facilities
LTCHs Long-term care hospitals
MedPAR Medicare provider analysis and review file
MSA Metropolitan Statistical Area
RY Rate Year
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, (Pub. L. 97-
248)

I. Background

A. Annual Requirements for Updating the IPF PPS

    In November 2004, we implemented the IPF PPS in a final rule that 
appeared in the November 15, 2004 Federal Register (69 FR 66922). In 
developing the IPF PPS, in order to ensure that the IPF PPS is able to 
account adequately for each IPF's case-mix, we performed an extensive 
regression analysis of the relationship between the per diem costs and 
certain patient and facility characteristics to determine those 
characteristics associated with statistically significant cost 
differences on a per diem basis. For characteristics with statistically 
significant cost differences, we used the regression coefficients of 
those variables to determine the size of the corresponding payment 
adjustments.
    In that final rule, we explained that we believe it is important to 
delay updating the adjustment factors derived from the regression 
analysis until we have IPF PPS data that includes as much information 
as possible regarding the patient-level characteristics of the 
population that each IPF serves. Therefore, we indicated that we did 
not intend to update the regression analysis and recalculate the 
Federal per diem base rate and the patient- and facility-level 
adjustment until we complete that analysis. Until that analysis is 
complete, we stated our intention to publish a notice in the Federal 
Register each spring to update the IPF PPS (71 FR 27041).
    Updates to the IPF PPS as specified in 42 CFR 412.428 include:
     A description of the methodology and data used to 
calculate the updated Federal per diem base payment amount.
     The rate of increase factor as described in Sec.  
412.424(a)(2)(iii), which is based on the excluded hospital with 
capital market basket under the update methodology of section 
1886(b)(3)(B)(ii) of the Act for each year.
     For discharges occurring on or after July 1, 2006, the 
rate of increase factor for the Federal portion of the IPF's payment, 
which is based on the rehabilitation, psychiatric, and long-term care 
(RPL) market basket.
     For discharges occurring on or after October 1, 2005, the 
rate of increase factor for the reasonable cost portion of the IPF's 
payment, which is based on the 2002-based excluded hospital market with 
capital basket.
     The best available hospital wage index and information 
regarding whether an adjustment to the Federal per diem base rate, 
which is needed to maintain budget neutrality.
     Updates to the fixed dollar loss threshold amount in order 
to maintain the appropriate outlier percentage.
     Describe the ICD-9-CM coding and DRG classification 
changes discussed in the annual update to the hospital

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inpatient prospective payment system (IPPS) regulations.
     Update to the electroconvulsive therapy (ECT) payment by a 
factor specified by CMS.
     Update to the national urban and rural cost to charge 
ratio medians and ceilings.
     Update to the cost of living adjustment factors for IPFs 
located in Alaska and Hawaii if appropriate.
    Our most recent annual update occurred in a final rule (71 FR 
27040, May 9, 2006) that set forth updates to the IPF PPS payment rates 
for RY 2007. We subsequently published a correction notice (71 FR 
37505, June 30, 2006) with respect to those payment rate updates.
    This notice does not initiate any policy changes with regard to the 
IPF PPS; rather, it simply provides an update to the rates for RY 2008 
(that is, the prospective payment rates applicable for discharges 
beginning July 1, 2007 through June 30, 2008). In establishing these 
payment rates, we update the IPF per diem payment rates that were 
published in the May 2006 IPF PPS final rule in accordance with our 
established polices.

B. Overview of the Legislative Requirements for the IPF PPS

    Section 124 of the BBRA required implementation of the IPF PPS. 
Specifically, section 124 of the BBRA mandated that the Secretary 
develop a per diem PPS for inpatient hospital services furnished in 
psychiatric hospitals and psychiatric units that includes in the PPS an 
adequate patient classification system that reflects the differences in 
patient resource use and costs among psychiatric hospitals and 
psychiatric units.
    Section 405(g)(2) of the Medicare Prescription Drug, Improvement, 
and Modernization Act of 2003 (MMA) (Pub. L. 108-173) extended the IPF 
PPS to distinct part psychiatric units of critical access hospitals 
(CAHs).
    To implement these provisions, we published various proposed and 
final rules in the Federal Register. For more information regarding 
these rules, see the CMS websites http://www.cms.hhs.gov/InpatientPsychFacilPPS/ and www.cms.hhs.gov/InpatientpsychfacilPPS/02_regulations.asp.

C. IPF PPS--General Overview

    The November 2004 IPF PPS final rule (69 FR 66922) established the 
IPF PPS, as authorized under section 124 of the BBRA and codified at 
subpart N of part 412 of the Medicare regulations. The November 2004 
IPF PPS final rule set forth the per diem Federal rates for the 
implementation year (that is, the 18-month period from January 1, 2005 
through June 30, 2006) that provided payment for the inpatient 
operating and capital costs to IPF's for covered psychiatric services 
they furnish (that is, routine, ancillary, and capital costs), but not 
costs of approved educational activities, bad debts, and other services 
or items that are outside the scope of the IPF PPS. Covered psychiatric 
services include services for which benefits are provided under the 
fee-for-service Part A (Hospital Insurance Program) Medicare program.
    The IPF PPS established the Federal per diem base rate for each 
patient day in an IPF derived from the national average daily routine 
operating, ancillary, and capital costs in IPFs in FY 2002. The average 
per diem cost was updated to the midpoint of the first year under the 
IPF PPS, standardized to account for the overall positive effects of 
the IPF PPS payment adjustments, and adjusted for budget neutrality.
    The Federal per diem payment under the IPF PPS is comprised of the 
Federal per diem base rate described above and certain patient- and 
facility-level payment adjustments that were found in the regression 
analysis to be associated with statistically significant per diem cost 
differences.
    The patient-level adjustments include age, DRG assignment, 
comorbidities, and variable per diem adjustments to reflect a higher 
per diem cost in the early days of a psychiatric stay. Facility-level 
adjustments include adjustments for the IPF's wage index, rural 
location, teaching status, a cost of living adjustment for IPFs located 
in Alaska and Hawaii, and presence of a qualifying emergency department 
(ED).
    The IPF PPS provides additional payments for: outlier cases; stop-
loss protection (which is applicable only during the IPF PPS transition 
period); interrupted stays; and a per treatment adjustment for patients 
who undergo ECT.
    A complete discussion of the regression analysis appears in the 
November 2004 IPF PPS final rule (69 FR 66933 through 66936).
    Section 124 of Medicare, Medicaid and SCHIP (State Children's 
Health Insurance Program) Balanced Budget Refinement Act of 1999, (Pub. 
L. 106-113) (BBRA) does not specify an annual update rate strategy for 
the IPF PPS and is broadly written to give the Secretary discretion in 
establishing an update methodology. Therefore, in the November 2004 IPF 
PPS final rule (69 FR 66966), we implemented the IPF PPS using the 
following update strategy-- (1) Calculate the final Federal per diem 
base rate to be budget neutral for the 18-month period of January 1, 
2005 through June 30, 2006; (2) use a July 1 through June 30 annual 
update cycle; and (3) allow the IPF PPS first update to be effective 
for discharges on or after July 1, 2006 through June 30, 2007.

II. Transition Period for Implementation of the IPF PPS

    In the November 2004 IPF PPS final rule, we established Sec.  
412.426 to provide for a 3-year transition period from reasonable cost-
based reimbursement to full prospective payment for IPFs. The purpose 
of the transition period is to allow existing IPFs time to adjust their 
cost structures and to integrate the effects of changing to the IPF 
PPS.
    New IPFs, as defined in Sec.  412.426(c), are paid 100 percent of 
the Federal per diem payment amount. For those IPFs that are 
transitioning to the new system, payment is based on an increasing 
percentage of the PPS payment and a decreasing percentage of each IPF's 
facility-specific Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA) reimbursement rate.

                                   Table 1.--IPF PPS Transition Blend Factors
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                                                                                                      IPF PPS
                Transition year                 Cost reporting periods beginning    TEFRA rate     federal rate
                                                           on or after              percentage      percentage
----------------------------------------------------------------------------------------------------------------
1.............................................  January 1, 2005.................              75              25
2.............................................  January 1, 2006.................              50              50
3.............................................  January 1, 2007.................              25              75
                                                January 1, 2008.................               0             100
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    Changes to the blend percentages occur at the beginning of an IPF's 
cost reporting period. However, regardless of when an IPF's cost 
reporting year begins, the payment update will be effective for 
discharges occurring on or after July 1, 2007 through June 30, 2008.
    We are currently in the third year of the transition period. As a 
result, for discharges occurring during IPF cost reporting periods 
beginning in calendar year (CY) 2007, IPFs would receive a blended 
payment consisting of 25 percent of the facility-specific TEFRA payment 
and 75 percent of the IPF PPS payment amount.
    For RY 2008, we are not making any changes to the transition period 
established in the November 2004 IPF PPS final rule.

III. Updates to the IPF PPS for RY Beginning July 1, 2007

    The IPF PPS is based on a standardized Federal per diem base rate 
calculated from FY 2002 IPF average costs per day and adjusted for 
budget-neutrality and updated to the midpoint of the implementation 
year. The Federal per diem base rate is used as the standard payment 
per day under the IPF PPS and is adjusted by the applicable wage index 
factor and the patient-level and facility-level adjustments that are 
applicable to the IPF stay.
    A detailed explanation of how we calculated the average per diem 
cost appears in the November 2004 IPF PPS final rule (69 FR 66926).

A. Determining the Standardized Budget-Neutral Federal Per Diem Base 
Rate

    Section 124(a)(1) of the BBRA requires that we implement the IPF 
PPS in a budget neutral manner. In other words, the amount of total 
payments under the IPF PPS, including any payment adjustments, must be 
projected to be equal to the amount of total payments that would have 
been made if the IPF PPS were not implemented. Therefore, we calculated 
the budget-neutrality factor by setting the total estimated IPF PPS 
payments to be equal to the total estimated payments that would have 
been made under the TEFRA methodology had the IPF PPS not been 
implemented.
    For the IPF PPS methodology, we calculated the final Federal per 
diem base rate to be budget neutral during the IPF PPS implementation 
period (that is, the 18-month period from January 1, 2005 through June 
30, 2006) using a July 1 update cycle.
    We updated the average cost per day to the midpoint of the IPF PPS 
implementation period (that is, October 1, 2005), and this amount was 
used in the payment model to establish the budget-neutrality 
adjustment.
    A step-by-step description of the methodology used to estimate 
payments under the TEFRA payment system appears in the November 2004 
IPF PPS final rule (69 FR 66926).
1. Standardization of the Federal Per Diem Base Rate and 
Electroconvulsive Therapy Rate
    In the November 2004 IPF PPS final rule, we describe how we 
standardized the IPF PPS Federal per diem base rate in order to account 
for the overall positive effects of the IPF PPS payment adjustment 
factors. To standardize the IPF PPS payments, we compared the IPF PPS 
payment amounts calculated from the FY 2002 Medicare Provider Analysis 
and Review (MedPAR) file to the projected TEFRA payments from the FY 
2002 cost report file updated to the midpoint of the IPF PPS 
implementation period (that is, October 2005). The standardization 
factor was calculated by dividing total estimated payments under the 
TEFRA payment system by estimated payments under the IPF PPS. The 
standardization factor was calculated to be 0.8367.
    As described in detail in the May 2006 IPF PPS final rule (71 FR 
27045), in reviewing the methodology used to simulate the IPF PPS 
payments used for the November 2004 IPF PPS final rule, we discovered 
that due to a computer code error, total IPF PPS payments were 
underestimated by about 1.36 percent. Since the IPF PPS payment total 
should have been larger than the estimated figure, the standardization 
factor should have been smaller (0.8254 vs. 0.8367). In turn, the 
Federal per diem base rate and the ECT rate should have been reduced by 
0.8254 instead of 0.8367.
    To resolve this issue, in RY 2007, we amended the Federal per diem 
base rate and the ECT payment rate prospectively. Using the 
standardization factor of 0.8254, the average cost per day was 
effectively reduced by 17.46 percent (100 percent minus 82.54 percent = 
17.46 percent).
2. Calculation of the Budget Neutrality Adjustment
    To compute the budget neutrality adjustment for the IPF PPS, we 
separately identified each component of the adjustment, that is, the 
outlier adjustment, stop-loss adjustment, and behavioral offset.
    A complete discussion of how we calculate each component of the 
budget neutrality adjustment appears in the November 2004 IPF PPS final 
rule (69 FR 66932 through 66933) and the May 2006 IPF PPS final rule 
(71 FR 27044 through 27046).
a. Outlier Adjustment
    Since the IPF PPS payment amount for each IPF includes applicable 
outlier amounts, we reduced the standardized Federal per diem base rate 
to account for aggregate IPF PPS payments estimated to be made as 
outlier payments. The outlier adjustment was calculated to be 2 
percent. As a result, the standardized Federal per diem base rate was 
reduced by 2 percent to account for projected outlier payments.
b. Stop-Loss Provision Adjustment
    As explained in the November 2004 IPF PPS final rule, we provide a 
stop-loss payment to ensure that an IPF's total PPS payments are no 
less than a minimum percentage of their TEFRA payment, had the IPF PPS 
not been implemented. We reduced the standardized Federal per diem base 
rate by the percentage of aggregate IPF PPS payments estimated to be 
made for stop-loss payments. As a result, the standardized Federal per 
diem base rate was reduced by 0.39 percent to account for stop-loss 
payments.
c. Behavioral Offset
    As explained in the November 2004 IPF PPS final rule, 
implementation of the IPF PPS may result in certain changes in IPF 
practices especially with respect to coding for comorbid medical 
conditions. As a result, Medicare may make higher payments than assumed 
in our calculations. Accounting for these effects through an adjustment 
is commonly known as a behavioral offset.
    Based on accepted actuarial practices and consistent with the 
assumptions made in other PPSs, we assumed in determining the 
behavioral offset that IPFs would regain 15 percent of potential 
``losses'' and augment payment increases by 5 percent. We applied this 
actuarial assumption, which is based on our historical experience with 
new payment systems, to the estimated ``losses'' and ``gains'' among 
the IPFs. The behavioral offset for the IPF PPS was calculated to be 
2.66 percent. As a result, we reduced the standardized Federal per diem 
base rate by 2.66 percent to account for behavioral changes. As 
indicated in the November 2004 IPF PPS final rule, we do not plan to 
change adjustment factors or projections, including the behavioral 
offset, until we analyze IPF PPS data. At that time, we will re-assess 
the accuracy of the behavioral offset along with the other factors 
impacting budget neutrality.

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    If we find that an adjustment is warranted, the percent difference 
may be applied prospectively to the established PPS rates to ensure the 
rates accurately reflect the payment level intended by the statute. In 
conducting this analysis, we will be interested in the extent to which 
improved documentation and coding of patients' primary and other 
diagnoses, which may not reflect real increases in underlying resource 
demands, has occurred under the PPS.

B. Update of the Federal Per Diem Base Rate and Electroconvulsive 
Therapy Rate

1. Market Basket for IPFs Reimbursed Under the IPF PPS
    As described in the November 2004 IPF PPS final rule, the average 
per diem cost was updated to the midpoint of the implementation year 
(69 FR 66931). This updated average per diem cost of $724.43 was 
reduced by 17.46 percent to account for standardization to projected 
TEFRA payments for the implementation period, by 2 percent to account 
for outlier payments, by 0.39 percent to account for stop-loss 
payments, and by 2.66 percent to account for the behavioral offset. The 
Federal per diem base rate in the implementation year was $575.95, and 
for RY 2007, it was $595.09.
    Applying the market basket increase of 3.2 percent and the wage 
index budget neutrality factor of 1.0014 yields a Federal per diem base 
rate of $614.99 for RY 2008. Similarly, applying the market basket 
increase and wage index budget neutrality factor to the RY 2007 ECT 
rate yields an ECT rate of $264.77 for RY 2008.
a. Market Basket Index for the IPF PPS
    The market basket index that was used to develop the IPF PPS was 
the excluded hospital with capital market basket. The market basket was 
based on 1997 Medicare cost report data and included data for Medicare 
participating IPFs, inpatient rehabilitation facilities (IRFs), long-
term care hospitals (LTCHs), cancer, and children's hospitals.
    We are presently unable to create a separate market basket 
specifically for psychiatric hospitals due to the following two 
reasons: (1) There is a very small sample size for free-standing 
psychiatric facilities; and (2) there are limited expense data for some 
categories on the free-standing psychiatric cost reports (for example, 
approximately 4 percent of free-standing psychiatric facilities 
reported contract labor cost data for FY 2002). However, since all 
IRFs, LTCHs, and IPFs are now paid under a PPS, we are updating PPS 
payments made under the IRF PPS, the LTCH PPS, and the IPF PPS using a 
market basket reflecting the operating and capital cost structures for 
IRFs, IPFs, and LTCHs (hereafter referred to as the rehabilitation, 
psychiatric, long-term care (RPL) market basket).
    We have excluded cancer and children's hospitals from the RPL 
market basket because their payments are based entirely on reasonable 
costs subject to rate-of-increase limits established under the 
authority of section 1886(b) of the Act, which are implemented in 
regulations at Sec.  413.40. They are not reimbursed under a PPS. Also, 
the FY 2002 cost structures for cancer and children's hospitals are 
noticeably different than the cost structures of the IRFs, IPFs, and 
LTCHs.
    The services offered in IRFs, IPFs, and LTCHs are typically more 
labor-intensive than those offered in cancer and children's hospitals. 
Therefore, the compensation cost weights for IRFs, IPFs, and LTCHs are 
larger than those in cancer and children's hospitals. In addition, the 
depreciation cost weights for IRFs, IPFs, and LTCHs are noticeably 
smaller than those for cancer and children's hospitals.
    A complete discussion of the RPL market basket appears in the May 
2006 IPF PPS final rule (71 FR 27046 through 27054).
b. Overview of the RPL Market Basket
    The RPL market basket is a fixed weight, Laspeyres-type price 
index. A market basket is described as a fixed-weight index because it 
answers the question of how much it would cost, at another time, to 
purchase the same mix of goods and services purchased to provide 
hospital services in a base period. The effects on total expenditures 
resulting from changes in the quantity or mix of goods and services 
(intensity) purchased subsequent to the base period are not measured. 
In this manner, the market basket measures only pure price change. Only 
when the index is rebased would the quantity and intensity effects be 
captured in the cost weights. Therefore, we rebase the market basket 
periodically so that cost weights reflect changes in the mix of goods 
and services that hospitals purchase (hospital inputs) to furnish 
patient care between base periods.
    The terms rebasing and revising, while often used interchangeably, 
actually denote different activities. Rebasing means moving the base 
year for the structure of costs of an input price index (for example, 
shifting the base year cost structure from FY 1997 to FY 2002). 
Revising means changing data sources, methodology, or price proxies 
used in the input price index. In 2006 we rebased and revised the 
market basket used to update the IPF PPS.
    Table 2 below sets forth the completed 2002-based RPL market basket 
including the cost categories, weights, and price proxies.

BILLING CODE 4120-01-P

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[GRAPHIC] [TIFF OMITTED] TN04MY07.099


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[GRAPHIC] [TIFF OMITTED] TN04MY07.100

BILLING CODE 4120-01-C
    For RY 2008, we evaluated the price proxies using the criteria of 
reliability, timeliness, availability, and relevance. Reliability 
indicates that the index is based on valid statistical methods and has 
low sampling variability. Timeliness implies that the proxy is 
published regularly, preferably at least once a quarter. Availability 
means that the proxy is publicly available. Finally, relevance means 
that the proxy is applicable and representative of the cost category 
weight to which it is applied. The Consumer Price Indexes (CPIs), 
Producer Price Indexes (PPIs), and Employment Cost Indexes (ECIs) used 
as proxies in this market basket meet these criteria.
    We note that the proxies are the same as those used for the FY 
1997-based excluded hospital with capital market basket. Because these 
proxies meet our criteria of reliability, timeliness, availability, and 
relevance, we believe they continue to be the best measure of price 
changes for the cost categories. For further discussion on the FY 1997-
based excluded hospital with capital market basket, see the August 1, 
2002 IPPS final rule (67 FR at 50042).
    The RY 2008 (that is, beginning July 1, 2007) update for the IPF 
PPS using

[[Page 25608]]

the FY 2002-based RPL market basket and Global Insight's 1st quarter 
2007 forecast for the market basket components is 3.2 percent. This 
includes increases in both the operating section and the capital 
section for the 12-month RY period (that is, July 1, 2007 through June 
30, 2008). Global Insight, Inc. is a nationally recognized economic and 
financial forecasting firm that contracts with CMS to forecast the 
components of the market baskets.
2. Labor-Related Share
    Due to the variations in costs and geographic wage levels, we 
believe that payment rates under the IPF PPS should continue to be 
adjusted by a geographic wage index. This wage index applies to the 
labor-related portion of the Federal per diem base rate, hereafter 
referred to as the labor-related share.
    The labor-related share is determined by identifying the national 
average proportion of operating costs that are related to, influenced 
by, or vary with the local labor market. Using our current definition 
of labor-related, the labor-related share is the sum of the relative 
importance of wages and salaries, fringe benefits, professional fees, 
labor-intensive services, and a portion of the capital share from an 
appropriate market basket. We used the FY 2002-based RPL market basket 
costs to determine the labor-related share for the IPF PPS.
    The labor-related share for RY 2008 is the sum of the RY 2008 
relative importance of each labor-related cost category, and reflects 
the different rates of price change for these cost categories between 
the base year (FY 2002) and RY 2008. The sum of the relative importance 
for the RY 2008 operating costs (wages and salaries, employee benefits, 
professional fees, and labor-intensive services) is 71.767, as shown in 
Table 3 below. The portion of capital that is influenced by the local 
labor market is estimated to be 46 percent, which is the same 
percentage used in the FY 1997-based IRF and IPF payment systems.
    Since the relative importance for capital is 8.742 percent of the 
FY 2002-based RPL market basket in RY 2008, we are taking 46 percent of 
8.742 percent to determine the labor-related share of capital for RY 
2008. The result is 4.021 percent, which we added to 71.767 percent for 
the operating cost amount to determine the total labor-related share 
for RY 2008. Thus, the labor-related share that we are using for IPF 
PPS in RY 2008 is 75.788 percent. Table 3 below shows the RY 2008 
relative importance of labor-related shares using the FY 2002-based RPL 
market basket. We note that this labor-related share is determined by 
using the same methodology as employed in calculating all previous IPF 
labor-related shares.
    A complete discussion of the IPF labor-related methodology appears 
in the November 2004 IPF PPS final rule (69 FR 66952 through 66954).

  Table 3.--Total Labor-Related Share--Relative Importance for RY 2008
------------------------------------------------------------------------
                                           FY 2002-based
                                            RPL market      FY 2002 RPL
                                              basket       market basket
              Cost category                  relative        relative
                                            importance      importance
                                           (Percent) RY    (Percent) RY
                                               2007            2008
------------------------------------------------------------------------
Wages and salaries......................          52.506          52.588
Employee benefits.......................          14.042          14.127
Professional fees.......................           2.886           2.907
All other labor-intensive services......           2.152           2.145
                                         -------------------------------
    Subtotal............................          71.586          71.767
Labor-related share of capital costs....           4.079           4.021
                                         -------------------------------
    Total...............................          75.665          75.788
------------------------------------------------------------------------

3. IPFs Paid Based on a Blend of the Reasonable Cost-Based Payments
    As stated in the FY 2006 IPPS final rule (70 FR 47399), for IPFs 
that are transitioning to the fully Federal prospective payment rate, 
we are now using the rebased and revised FY 2002-based excluded 
hospital market basket to update the reasonable cost-based portion of 
their payments.
    We chose FY 2002 as the base year for the excluded hospital market 
basket because this was the most recent, complete year of Medicare cost 
report data.
    The reasonable cost-based payments, subject to TEFRA limits, are 
determined on a FY basis. The FY 2008 update factor for the portion of 
the IPF PPS transitional blend payment based on reasonable costs will 
be published in the FY 2008 IPPS proposed and final rules.

IV. Update of the IPF PPS Adjustment Factors

A. Overview of the IPF PPS Adjustment Factors

    The IPF PPS payment adjustments were derived from a regression 
analysis of 100 percent of the FY 2002 MedPAR data file, which 
contained 483,038 cases. We used the same results of this regression 
analysis to implement the November 2004 and May 2006 IPF PPS final 
rules. We also use the same results of this regression analysis to 
update the IPF PPS for RY 2008.
    As previously stated, we do not plan to update the regression 
analysis until we analyze IPF PPS data. We plan to monitor claims and 
payment data independently from cost report data to assess issues, or 
whether changes in case-mix or payment shifts have occurred between 
free standing governmental, non-profit, and private psychiatric 
hospitals, and psychiatric units of general hospitals, and other issues 
of importance to psychiatric facilities.
    A complete discussion of the data file used for the regression 
analysis appears in the November 2004 IPF PPS final rule (69 FR 66935 
through 66936).

B. Patient-Level Adjustments

    In the May 2006 IPF PPS final rule (71 FR 27040) for RY 2007, we 
provided payment adjustments for the following patient-level 
characteristics: DRG assignment of the patient's principal diagnosis; 
selected comorbidities; patient age; and the variable per diem 
adjustments. As previously stated in the November 2004 IPF PPS final 
rule, we do not intend to update the adjustment factors derived from 
the regression analysis until we have IPF PPS data that includes as 
much information as possible regarding the patient-level

[[Page 25609]]

characteristics of the population that each IPF serves.
1. Adjustment for DRG Assignment
    The IPF PPS includes payment adjustments for the psychiatric DRG 
assigned to the claim based on each patient's principal diagnosis. In 
the May 2006 IPF PPS final rule (71 FR 27040), we explained that the 
IPF PPS includes 15 diagnosis-related group (DRG) adjustment factors. 
The adjustment factors were expressed relative to the most frequently 
reported psychiatric DRG in FY 2002, that is, DRG 430 (psychoses). The 
coefficient values and adjustment factors were derived from the 
regression analysis.
    In accordance with Sec.  412.27, payment under the IPF PPS is made 
for claims with a principal diagnosis included in the Diagnostic and 
Statistical Manual of Mental Disorder-Fourth Edition-Text Revision 
(DSM-IV-TR) or Chapter Five of the International Classification of 
Diseases-9th Revision-Clinical Modifications (ICD-9-CM).
    The Standards for Electronic Transaction final rule published in 
the Federal Register on August 17, 2000 (65 FR 50312), adopted the ICD-
9-CM as the designated code set for reporting diseases, injuries, 
impairments, other health related problems, their manifestations, and 
causes of injury, disease, impairment, or other health related 
problems.
    IPF claims with a principal diagnosis included in Chapter Five of 
the ICD-9-CM or the DSM-IV-TR will be paid the Federal per diem base 
rate under the IPF PPS, all other applicable adjustments, and a DRG 
adjustment. Psychiatric principal diagnoses that do not group to one of 
the 15 designated DRGs receive the Federal per diem base rate and all 
other applicable adjustments, but the payment would not include a DRG 
adjustment.
    We continue to believe that it is vital to maintain the same 
diagnostic coding and DRG classification for IPFs that is used under 
the IPPS for providing the same psychiatric care. All changes to the 
ICD-9-CM coding system that would impact the IPF PPS are addressed in 
the IPPS proposed and final rules published each year. The updated 
codes are effective October 1 of each year and must be used to report 
diagnostic or procedure information.
    The official version of the ICD-9-CM is available on CD-ROM from 
the U.S. Government Printing Office. The FY 2007 version can be ordered 
by contacting the Superintendent of Documents, U.S. Government Printing 
Office, Department 50, Washington, DC 20402-9329, telephone number 
(202) 512-1800. Questions concerning the ICD-9-CM should be directed 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, Mailstop C4-08-06, 
7500 Security Boulevard, Baltimore, Maryland 21244-1850.
    Further information concerning the official version of the ICD-9-CM 
can be found in the IPPS final regulation, ``Revision to Hospital 
Inpatient Prospective Payment Systems--2007 FY Occupational Mix 
Adjustment to Wage Index Implementation; Final Rule,'' in the August 
18, 2006 Federal Register (71 FR 47870) and at http://www.cms.hhs.gov/QuarterlyProviderUpdates/Downloads/CMS1488F.pdf.
    The three tables below list the FY 2007 new ICD-9-CM diagnosis 
codes, the one FY 2007 revised diagnosis code title, and the one 
invalid FY 2007 ICD diagnosis code, respectively, that group to one of 
the 15 DRGs for which the IPF PPS provides an adjustment. These tables 
are only a listing of FY 2007 changes and do not reflect all of the 
currently valid and applicable ICD-9-CM codes classified in the DRGs.
    Table 4 below lists the new FY 2007 ICD-9-CM diagnosis codes that 
are classified to one of the 15 DRGs that are provided a DRG adjustment 
in the IPF PPS. When coded as a principal code or diagnosis, these 
codes receive the correlating DRG adjustment.

                  Table 4.--FY 2007 New Diagnosis Codes
------------------------------------------------------------------------
         Diagnosis code                    Description             DRG
------------------------------------------------------------------------
331.83.........................  Mild cognitive impairment.....       12
333.71.........................  Althetoid cerebral palsy......       12
------------------------------------------------------------------------

    Table 5 below lists the ICD-9-CM diagnosis code whose title has 
been modified in FY 2007. Title changes do not impact the DRG 
adjustment. When used as a principal diagnosis, these codes still 
receive the correlating DRG adjustment.

                 Table 5.--Revised Diagnosis Code Title
------------------------------------------------------------------------
         Diagnosis code                    Description             DRG
------------------------------------------------------------------------
333.6..........................  Genetic torsion dystonia......       12
------------------------------------------------------------------------

    Table 6 below lists the invalid ICD-9-CM diagnosis code no longer 
applicable for the DRG adjustment in FY 2007.

                 Table 6.--Invalid Diagnosis Code Title
------------------------------------------------------------------------
         Diagnosis code                    Description             DRG
------------------------------------------------------------------------
333.7..........................  Symptomatic torsion dystonia..       12
------------------------------------------------------------------------

    Since we do not plan to update the regression analysis until we 
analyze IPF PPS data, the DRG adjustments factors, shown in Table 7 
below, will continue to be paid for RY 2008.
2. Payment for Comorbid Conditions
    The intent of the comorbidity adjustment is to recognize the 
increased cost associated with comorbid conditions by providing 
additional payments for certain concurrent medical or psychiatric 
conditions that are expensive to treat.
    In the May 2006 IPF PPS final rule, we established 17 comorbidity 
categories and identified the ICD-9-CM diagnosis codes that generate a 
payment adjustment under the IPF PPS.
    Comorbidities are specific patient conditions that are secondary to 
the patient's principal diagnosis, and that require treatment during 
the stay. Diagnoses that relate to an earlier episode of care and have 
no bearing on the current hospital stay are excluded and should not be 
reported on IPF claims. Comorbid conditions must exist at the time of 
admission or develop subsequently, and affect the treatment received, 
affect the length of stay (LOS) or affect both treatment and LOS.
    For each claim, an IPF may receive only one comorbidity adjustment 
per comorbidity category, but it may receive an adjustment for more 
than one comorbidity category. Billing instructions require that IPFs 
must enter the full ICD-9-CM codes for up to 8 additional diagnoses if 
they co-exist at the time of admission or develop subsequently.
    The comorbidity adjustments were determined based on the regression 
analysis using the diagnoses reported by hospitals in FY 2002. The 
principal diagnoses were used to establish the DRG adjustment and were 
not accounted for in establishing the comorbidity category adjustments, 
except where ICD-9-CM ``code first'' instructions apply. As we 
explained in the May 2006 IPF PPS final rule (71 FR 27040), the code 
first rule applies when a condition has both an underlying

[[Page 25610]]

etiology and a manifestation due to the underlying etiology. For these 
conditions, the ICD-9-CM has a coding convention that requires the 
underlying conditions to be sequenced first followed by the 
manifestation. Whenever a combination exists, there is a ``use 
additional code'' note at the etiology code and a ``code first'' note 
at the manifestation code.
    Although we are updating the IPF PPS to reflect updates to the ICD-
9-CM codes, the comorbidity adjustment factors currently in effect will 
remain in effect for RY 2008. As previously stated, we do not plan to 
update the regression analysis until we analyze IPF PPS data. The 
comorbidity adjustments are shown in Table 8 below.
[GRAPHIC] [TIFF OMITTED] TN04MY07.101

    As previously discussed in the DRG section, we believe it is 
essential to maintain the same diagnostic coding set for IPFs that is 
used under the IPPS for providing the same psychiatric care. Therefore, 
in this update notice, we are continuing to use the most current FY 
2007 ICD codes. They are reflected in the FY 2007 GROUPER, version 24.0 
and are effective for discharges occurring on or after October 1, 2006.
    Table 8 below lists the FY 2007 new ICD diagnosis codes that impact 
the comorbidity adjustments under the IPF PPS, Table 9 lists the 
revised ICD codes, and Table 10 lists the invalid ICD codes no longer 
applicable for the comorbidity adjustment. Table 11 lists all of the 
currently valid ICD codes applicable for the IPF PPS comorbidity 
adjustments.

BILLING CODE 4120-01-P

[[Page 25611]]

[GRAPHIC] [TIFF OMITTED] TN04MY07.102

    Table 9 below, which lists the FY 2007 revised ICD codes, does not 
reflect all of the currently valid ICD codes applicable for the IPF PPS 
comorbidity adjustments.

[[Page 25612]]

[GRAPHIC] [TIFF OMITTED] TN04MY07.103

    In Table 10 below, we list the FY 2007 invalid ICD diagnosis code 
238.7.

[[Page 25613]]



    Table 10.--FY 2007 Invalid ICD Codes No Longer Applicable for the
                         Comorbidity Adjustments
------------------------------------------------------------------------
                                                         Comorbidity
  Diagnosis code         Description          DR           category
------------------------------------------------------------------------
238.7.............  Other lymphatic and     413-414  Oncology Treatment.
                     hematopoietic
                     tissues.
------------------------------------------------------------------------

    The seventeen comorbidity categories for which we are providing an 
adjustment, their respective codes, including the new FY 2007 ICD 
codes, and their respective adjustment factors, are listed below in 
Table 11.
[GRAPHIC] [TIFF OMITTED] TN04MY07.104

BILLING CODE 4120-01-C
3. Patient Age Adjustments
    As explained in the November 2004 IPF PPS final rule, we analyzed 
the impact of age on per diem cost by examining the age variable (that 
is, the range of ages) for payment adjustments.
    In general, we found that the cost per day increases with 
increasing age. The older age groups are more costly than the under 45 
age group, the differences in per diem cost increase for each 
successive age group, and the differences are statistically 
significant.
    We do not plan to update the regression analysis until we analyze 
IPF PPS data. For RY 2008, we are continuing to use the patient age 
adjustments currently in effect and as shown in Table 12 below.

             TABLE 12.--Age Groupings and Adjustment Factors
------------------------------------------------------------------------
                                                              Adjustment
                            Age                                 factor
------------------------------------------------------------------------
Under 45...................................................         1.00
45 and under 50............................................         1.01
50 and under 55............................................         1.02
55 and under 60............................................         1.04
60 and under 65............................................         1.07
65 and under 70............................................         1.10

[[Page 25614]]

 
70 and under 75............................................         1.13
75 and under 80............................................         1.15
80 and over................................................         1.17
------------------------------------------------------------------------

4. Variable Per Diem Adjustments
    We explained in the November 2004 IPF PPS final rule that a 
regression analysis indicated that per diem cost declines as the LOS 
increases (69 FR 66946). The variable per diem adjustments to the 
Federal per diem base rate account for ancillary and administrative 
costs that occur disproportionately in the first days after admission 
to an IPF.
    We used a regression analysis to estimate the average differences 
in per diem cost among stays of different lengths. As a result of this 
analysis, we established variable per diem adjustments that begin on 
day 1 and decline gradually until day 21 of a patient's stay. For day 
22 and thereafter, the variable per diem adjustment remains the same 
each day for the remainder of the stay. However, the adjustment applied 
to day 1 depends upon whether the IPF has a qualifying ED. If an IPF 
has a qualifying ED, it receives a 1.31 adjustment factor for day 1 of 
each patient stay. If an IPF does not have a qualifying ED, it receives 
a 1.19 adjustment factor for day 1 of the stay. The ED adjustment is 
explained in more detail in section IV.C.5 of this notice.
    As previously stated, we do not plan to make changes to the 
regression analysis until we analyze IPF PPS data. Therefore, for RY 
2008, we are continuing to use the variable per diem adjustment factors 
currently in effect as shown in Table 13 below.
    A complete discussion of the variable per diem adjustments appears 
in the November 2004 IPF PPS final rule (69 FR 66946).

BILLING CODE 4120-01-P

[[Page 25615]]

[GRAPHIC] [TIFF OMITTED] TN04MY07.105

BILLING CODE 4120-01-C

C. Facility-Level Adjustments

    The IPF PPS includes facility-level adjustments for the wage index, 
IPFs located in rural areas, teaching IPFs, cost of living adjustments 
for IPFs located in Alaska and Hawaii, and IPFs with a qualifying ED.
1. Wage Index Adjustment
    As discussed in the May 2006 IPF PPS final rule, in providing an 
adjustment for area wage levels, the labor-related portion of an IPF's 
Federal prospective payment is adjusted using an appropriate wage 
index. An IPF's area wage index value is determined based on the actual 
location of the IPF in an urban or rural area as defined in Sec.  
412.64(b)(1)(ii)(A) through (C).
    Since the inception of a PPS for IPFs, we have used hospital wage 
data in developing a wage index to be applied to IPFs. We are 
continuing that practice for RY 2008. We apply the wage index 
adjustment to the labor-related portion of the Federal rate, which is 
75.788 percent. This percentage reflects the labor-related relative 
importance of the RPL market basket for RY 2008. The IPF PPS uses the 
pre-floor, pre-reclassified hospital wage index. Changes to the

[[Page 25616]]

wage index are made in a budget neutral manner, so that updates do not 
increase expenditures.
    For RY 2008, we are applying the most recent hospital wage index 
using the hospital wage data, and applying an adjustment in accordance 
with our budget neutrality policy. This policy requires us to estimate 
the total amount of IPF PPS payments in RY 2007 and divide that amount 
by the total estimated IPF PPS payments in RY 2008. The estimated 
payments are based on FY 2005 IPF claims, inflated to the appropriate 
RY. This quotient is the wage index budget neutrality factor, and it is 
applied in the update of the Federal per diem base rate for RY 2008. 
The wage index budget neutrality factor for RY 2008 is 1.0014.
    The wage index applicable for RY 2008 appears in Table 1 and Table 
2 in the Addendum of this notice. As explained in the May 2006 IPF PPS 
final rule for RY 2007 (71 FR 27061), the IPF PPS applies the hospital 
wage index without a hold-harmless policy, and without an out-commuting 
adjustment or out-migration adjustment because we feel these policies 
apply only to the IPPS.
    In the May 2006 IPF PPS final rule for RY 2007 (71 FR 27061), we 
adopted the changes discussed in the Office of Management and Budget 
(OMB) Bulletin No. 03-04 (June 6, 2003), which announced revised 
definitions for Metropolitan Statistical Areas (MSAs), and the creation 
of Micropolitan Statistical Areas and Combined Statistical Areas. In 
adopting the OMB Core-Based Statistical Area (CBSA) geographic 
designations, since the IPF PPS is already in a transition period from 
TEFRA payments to PPS payments, we did not provide a separate 
transition for the wage index.
    As was the case in RY 2007, for RY 2008, we will be using the full 
CBSA-based wage index values as presented in Tables 1 and 2 in the 
Addendum of this notice.
    Finally, we continue to use the same methodology discussed in the 
IPF PPS proposed rule for RY 2007 (71 FR 3633) and finalized in the May 
2006 IPF PPS final rule for RY 2007 (71 FR 27061) to address those 
geographic areas where there are no hospitals and, thus, no hospital 
wage index data on which to base the calculation of the RY 2008 IPF PPS 
wage index. For RY 2008, those areas consist of rural Massachusetts, 
rural Puerto Rico and urban CBSA (25980) Hinesville-Fort Stewart, GA.
    A complete discussion of the CBSA labor market definitions appears 
in the May 2006 IPF PPS final rule (71 FR 27061 through 27067).
2. Adjustment for Rural Location
    In the November 2004 IPF PPS final rule, we provided a 17 percent 
payment adjustment for IPFs located in a rural area. This adjustment 
was based on the regression analysis which indicated that the per diem 
cost of rural facilities was 17 percent higher than that of urban 
facilities after accounting for the influence of the other variables 
included in the regression. As previously stated, we do not intend to 
update the regression analysis until we analyze the IPF PPS data. At 
that time, we can compare rural and urban IPFs to determine how much 
more costly rural facilities are on a per diem basis under the IPF PPS.
    For RY 2008, we are applying a 17 percent payment adjustment for 
IPFs located in a rural area as defined at Sec.  412.64(b)(1)(ii)(C).
    A complete discussion of the adjustment for rural locations appears 
in the November 2004 IPF PPS final rule (69 FR 66954).
3. Teaching Adjustment
    In the November 2004 IPF PPS final rule, we implemented regulations 
at Sec.  412.424(d)(1)(iii) to establish a facility-level adjustment 
for IPFs that are, or are part of, teaching institutions. The teaching 
status adjustment accounts for the higher indirect operating costs 
experienced by facilities that participate in graduate medical 
education (GME) programs. Payments are made based on the number of 
full-time equivalent interns and residents training in the IPF.
    Medicare makes direct GME payments (for direct costs such as 
resident and teaching physician salaries, and other direct teaching 
costs) to all teaching hospitals including those paid under the IPPS, 
and those that were once paid under the TEFRA rate-of-increase limits 
but are now paid under other PPSs. These direct GME payments are made 
separately from payments for hospital operating costs and are not part 
of the PPSs. The direct GME payments do not address the higher indirect 
operating costs experienced by teaching hospitals.
    For teaching hospitals paid under the TEFRA rate-of-increase 
limits, Medicare did not make separate medical education payments 
because payments to these hospitals were based on the hospitals' 
reasonable costs. Since payments under TEFRA were based on hospitals' 
reasonable costs, the higher indirect costs that might be associated 
with teaching programs would automatically have been factored into the 
TEFRA payments.
    The results of the regression analysis of FY 2002 IPF data 
established the basis for the payment adjustments included in the 
November 2004 IPF PPS final rule. The results showed that the indirect 
teaching cost variable is significant in explaining the higher costs of 
IPFs that have teaching programs. We calculated the teaching adjustment 
based on the IPF's ``teaching variable,'' which is one plus the ratio 
of the number of full-time equivalent (FTE) residents training in the 
IPF (subject to limitations described below) to the IPF's average daily 
census (ADC).
    In the regression analysis, the logarithm of the teaching variable 
had a coefficient value of 0.5150. We converted this cost effect to a 
teaching payment adjustment by treating the regression coefficient as 
an exponent and raising the teaching variable to a power equal to the 
coefficient value. We note that the coefficient value of 0.5150 was 
based on the regression analysis holding all other components of the 
payment system constant.
    As with other adjustment factors derived through the regression 
analysis, we do not plan to rerun the regression analysis until we 
analyze IPF PPS data. Therefore, for RY 2008, we are retaining the 
coefficient value of 0.5150 for the teaching status adjustment to the 
Federal per diem base rate.
    A complete discussion of how the teaching status adjustment was 
calculated appears in the November 2004 IPF PPS final rule (69 FR 66954 
through 66957) and the May 2006 IPF PPS final rule (71 FR 27067 through 
27070).
4. Cost of Living Adjustment for IPFs Located in Alaska and Hawaii
    The IPF PPS includes a payment adjustment for IPFs located in 
Alaska and Hawaii based upon the county in which the IPF is located. As 
we explained in the November 2004 IPF PPS final rule, the FY 2002 data 
demonstrated that IPFs in Alaska and Hawaii had per diem costs that 
were disproportionately higher than other IPFs. Other Medicare PPSs 
(for example, the IPPS and IRF PPS) have adopted a cost of living 
adjustment (COLA) to account for the cost differential of care 
furnished in Alaska and Hawaii.
    We analyzed the effect of applying a COLA to payments for IPFs 
located in Alaska and Hawaii. The results of our analysis demonstrated 
that a COLA for IPFs located in Alaska and Hawaii would improve payment 
equity for these facilities. As a result of this analysis, we provided 
a COLA in the November 2004 IPF PPS final rule.
    In general, the COLA accounts for the higher costs in the IPF and 
eliminates the projected loss that IPFs in Alaska

[[Page 25617]]

and Hawaii would experience absent the COLA. A COLA factor for IPFs 
located in Alaska and Hawaii is made by multiplying the non-labor share 
of the Federal per diem base rate by the applicable COLA factor based 
on the COLA area in which the IPF is located.
    As previously stated, we will update the COLA factors if 
applicable, as updated by OPM. On August 2, 2006, the U.S. Office of 
Personnel Management (OPM) issued a final rule to change COLA rates 
effective September 1, 2006.
    The COLA factors are published on the OPM Web site at (http://www.opm.gov/oca/cola/rates.asp).
    We note that the COLA areas for Alaska are not defined by county as 
are the COLA areas for Hawaii. In 5 CFR Sec.  591.207, the OPM 
established the following COLA areas:
    (a) City of Anchorage, and 80-kilometer (50-mile) radius by road, 
as measured from the Federal courthouse;
    (b) City of Fairbanks, and 80-kilometer (50-mile) radius by road, 
as measured from the Federal courthouse;
    (c) City of Juneau, and 80-kilometer (50-mile) radius by road, as 
measured from the Federal courthouse;
    (d) Rest of the State of Alaska.
    In the November 2004 and May 2006 IPF PPS final rules, we showed 
only one COLA for Alaska because all four areas were the same amount 
(1.25). Effective September 1, 2006, the OPM updated the COLA amounts 
and there are now two different amounts for the Alaska COLA areas (1.24 
and 1.25).
    For RY 2008, IPFs located in Alaska and Hawaii will receive the 
updated COLA factors based on the COLA area in which the IPF is located 
and as shown in Table 14 below.

           Table 14.--COLA Factors for Alaska and Hawaii IPFs
------------------------------------------------------------------------
                          Location                               COLA
------------------------------------------------------------------------
                                                                  Alaska
    Anchorage..............................................         1.24
    Fairbanks..............................................         1.24
    Juneau.................................................         1.24
    Rest of Alaska.........................................         1.25
                                                                  Hawaii
    Honolulu County........................................         1.25
    Hawaii County..........................................         1.17
    Kauai County...........................................         1.25
    Maui County............................................         1.25
    Kalawao County.........................................         1.25
------------------------------------------------------------------------

    5. Adjustment for IPFs With a Qualifying Emergency Department (ED)
    Currently, the IPF PPS includes a facility-level adjustment for 
IPFs with qualifying EDs. We provide an adjustment to the standardized 
Federal per diem base rate to account for the costs associated with 
maintaining a full-service ED. The adjustment is intended to account 
for ED costs allocated to the hospital's distinct part psychiatric unit 
for preadmission services otherwise payable under the Medicare 
Outpatient Prospective Payment System (OPPS) furnished to a beneficiary 
during the day immediately preceding the date of admission to the IPF 
(see Sec.  413.40(c)) and the overhead cost of maintaining the ED. This 
payment is a facility-level adjustment that applies to all IPF 
admissions (with the one exception as described below), regardless of 
whether a particular patient receives preadmission services in the 
hospital's ED.
    The ED adjustment is incorporated into the variable per diem 
adjustment for the first day of each stay for IPFs with a qualifying 
ED. That is, IPFs with a qualifying ED receive an adjustment factor of 
1.31 as the variable per diem adjustment for day 1 of each stay. If an 
IPF does not have a qualifying ED, it receives an adjustment factor of 
1.19 as the variable per diem adjustment for day 1 of each patient 
stay.
    The ED adjustment is made on every qualifying claim except as 
described below. As specified in Sec.  412.424(d)(1)(v)(B), the ED 
adjustment is not made where a patient is discharged from an acute care 
hospital or CAH and admitted to the same hospital's or CAH's 
psychiatric unit. An ED adjustment is not made in this case because the 
costs associated with ED services are reflected in the DRG payment to 
the acute care hospital or through the reasonable cost payment made to 
the CAH. If we provided the ED adjustment in these cases, the hospital 
would be paid twice for the overhead costs of the ED (69 FR 66960).
    Therefore, when patients are discharged from an acute care hospital 
or CAH and admitted to the same hospital's or CAH's psychiatric unit, 
the IPF receives the 1.19 adjustment factor as the variable per diem 
adjustment for the first day of the patient's stay in the IPF. As 
previously stated, we do not intend to conduct a new regression 
analysis for this IPF PPS update. Rather, we plan to wait until we 
analyze IPF PPS data.
    For RY 2008, we are retaining the 1.31 adjustment factor for IPFs 
with qualifying EDs.
    A complete discussion of the steps involved in the calculation of 
the ED adjustment factor appears in the November 2004 IPF PPS final 
rule (69 FR 66959 through 66960) and the May 2006 IPF PPS final rule 
(71 FR 27070 through 27072).

D. Other Payment Adjustments and Policies

    For RY 2008, the IPF PPS includes the following payment 
adjustments: an outlier adjustment to promote access to IPF care for 
those patients who require expensive care and to limit the financial 
risk of IPFs treating unusually costly patients, and a stop-loss 
provision, applicable during the transition period, to reduce financial 
risk to IPFs projected to experience substantial reductions in Medicare 
payments under the IPF PPS.
1. Outlier Payments
    In the November 2004 IPF PPS final rule, we implemented regulations 
at Sec.  412.424(d)(3)(i) to provide a per-case payment for IPF stays 
that are extraordinarily costly. Providing additional payments for 
outlier cases to IPFs that are beyond the IPF's control strongly 
improves the accuracy of the IPF PPS in determining resource costs at 
the patient and facility level because facilities receive additional 
compensation over and above the adjusted Federal prospective payment 
amount for uniquely high-cost cases. These additional payments reduce 
the financial losses that would otherwise be caused by treating 
patients who require more costly care and, therefore, reduce the 
incentives to under-serve these patients.
    We make outlier payments for discharges in which an IPF's estimated 
total cost for a case exceeds a fixed dollar loss threshold amount 
(multiplied by the IPF's facility-level adjustments) plus the Federal 
per diem payment amount for the case.
    In instances when the case qualifies for an outlier payment, we pay 
80 percent of the difference between the estimated cost for the case 
and the adjusted threshold amount for days 1 through 9 of the stay 
(consistent with the median LOS for IPFs in FY 2002), and 60 percent of 
the difference for day 10 and thereafter. We established the 80 percent 
and 60 percent loss sharing ratios because we were concerned that a 
single ratio established at 80 percent (like other Medicare PPSs) might 
provide an incentive under the IPF per diem payment system to increase 
LOS in order to receive additional payments. After establishing the 
loss sharing ratios, we determined the current fixed dollar loss 
threshold amount of $6,200 through payment simulations designed to 
compute a dollar loss beyond which payments are estimated to meet the 2 
percent outlier spending target.

[[Page 25618]]

a. Update to the Outlier Fixed Dollar Loss Threshold Amount
    In accordance with the update methodology described in Sec.  
412.428(d), we are updating the fixed dollar loss threshold amount used 
under the IPF PPS outlier policy. Based on the regression analysis and 
payment simulations used to develop the IPF PPS, we established a 2 
percent outlier policy which strikes an appropriate balance between 
protecting IPFs from extraordinarily costly cases while ensuring the 
adequacy of the Federal per diem base rate for all other cases that are 
not outlier cases.
    We believe it is necessary to update the fixed dollar loss 
threshold amount because analysis of the latest available data (that 
is, FY 2005 IPF claims) and rate increases indicates adjusting the 
fixed dollar loss amount is necessary in order to maintain an outlier 
percentage that equals 2 percent of total estimated IPF PPS payments.
    In the May 2006 IPF PPS Final Rule (71 FR 27072), we describe the 
process by which we calculate the outlier fixed dollar loss threshold 
amount. We will continue to use this process for RY 2008. We begin by 
simulating aggregate payments with and without an outlier policy, and 
applying an iterative process to a fixed dollar loss amount that will 
result in outlier payments being equal to 2 percent of total estimated 
payments under the simulation.
    Based on this process, for RY 2008, the IPF PPS will use $6,488 as 
the fixed dollar loss threshold amount in the outlier calculation in 
order to maintain the 2 percent outlier policy.
b. Statistical Accuracy of Cost-to-Charge Ratios
    As previously stated, under the IPF PPS, an outlier payment is made 
if an IPF's cost for a stay exceeds a fixed dollar loss threshold 
amount. In order to establish an IPF's cost for a particular case, we 
multiply the IPF's reported charges on the discharge bill by its 
overall cost to charge ratio (CCR). This approach to determining an 
IPF's cost is consistent with the approach used under the IPPS and 
other PPSs. In FY 2004, we implemented changes to the IPPS outlier 
policy used to determine CCRs for acute care hospitals because we 
became aware that payment vulnerabilities resulted in inappropriate 
outlier payments. Under the IPPS, we established a statistical measure 
of accuracy for CCRs in order to ensure that aberrant CCR data did not 
result in inappropriate outlier payments.
    As we indicated in the November 2004 IPF PPS final rule, because we 
believe that the IPF outlier policy is susceptible to the same payment 
vulnerabilities as the IPPS, we adopted an approach to ensure the 
statistical accuracy of CCRs under the IPF PPS (69 FR 66961). 
Therefore, we adopted the following procedure in the November 2004 IPF 
PPS final rule:
     We calculated two national ceilings, one for IPFs located 
in rural areas and one for IPFs located in urban areas. We computed the 
ceilings by first calculating the national average and the standard 
deviation of the CCR for both urban and rural IPFs.
    To determine the rural and urban ceilings, we multiplied each of 
the standard deviations by 3 and added the result to the appropriate 
national CCR average (either rural or urban). The upper threshold CCR 
for IPFs in RY 2008 is 1.7255 for rural IPFs, and 1.7947 for urban 
IPFs, based on CBSA-based geographic designations. If an IPF's CCR is 
above the applicable ceiling, the ratio is considered statistically 
inaccurate and we assign the appropriate national (either rural or 
urban) median CCR to the IPF.
    We are applying the national CCRs to the following situations:
    ++ New IPFs that have not yet submitted their first Medicare cost 
report.
    ++ IPFs whose operating or capital CCR is in excess of 3 standard 
deviations above the corresponding national geometric mean (that is, 
above the ceiling).
    ++ Other IPFs for whom the Medicare contractor obtains inaccurate 
or incomplete data with which to calculate either an operating or 
capital CCR or both.
    For new IPFs, we are using these national CCRs until the facility's 
actual CCR can be computed using the first tentatively settled or final 
settled cost report, which will then be used for the subsequent cost 
report period.
    We are not making any changes to the procedures for ensuring the 
statistical accuracy of CCRs in RY 2008. However, we are updating the 
national urban and rural CCRs (ceilings and medians) for IPFs for RY 
2008 based on the CCRs entered in the latest available IPF PPS Provider 
Specific File.
    The national CCRs for RY 2008 are 0.71 for rural IPFs and 0.55 for 
urban IPFs and will be used in each of the three situations listed 
above. These calculations are based on the IPF's location (either urban 
or rural) using the CBSA-based geographic designations.
    A complete discussion regarding the national median CCRs appears in 
the November 2004 IPF PPS final rule (69 FR 66961 through 66964).
2. Stop-Loss Provision
    In the November 2004 IPF PPS final rule, we implemented a stop-loss 
policy that reduces financial risk to IPFs expected to experience 
substantial reductions in Medicare payments during the period of 
transition to the IPF PPS. This stop-loss policy guarantees that each 
facility receives total IPF PPS payments that are no less than 70 
percent of its TEFRA payments, had the IPF PPS not been implemented.
    This policy is applied to the IPF PPS portion of Medicare payments 
during the 3-year transition. During the first year, for transitioning 
IPFs, three-quarters of the payment was based on TEFRA and one-quarter 
on the IPF PPS payment amount. In the second year, one-half of the 
payment is based on TEFRA and one-half on the IPF PPS payment amount. 
In the third year, one-quarter of the payment is based on TEFRA and 
three-quarters on the IPF PPS. For cost report periods beginning on or 
after January 1, 2008, payments will be based 100 percent on the IPF 
PPS.
    The combined effects of the transition and the stop-loss policies 
ensure that the total estimated IPF PPS payments are no less than 92.5 
percent in the first year, 85 percent in the second year, and 77.5 
percent in the third year. Under the 70 percent policy, in the third 
year, 25 percent of an IPF's payment is TEFRA payments, and 75 percent 
is IPF PPS payments, which are guaranteed to be at least 70 percent of 
the TEFRA payments. The resulting 77.5 percent of TEFRA payments is the 
sum of 25 percent and 75 percent times 70 percent (which equals 52.5 
percent).
    In the implementation year, the 70 percent of TEFRA payment stop-
loss policy required a reduction in the standardized Federal per diem 
and ECT base rates of 0.39 percent in order to make the stop-loss 
payments budget neutral.
    For the RY 2008, we are not making any changes to the stop-loss 
policy. We will continue to monitor expenditures under this policy to 
evaluate its effectiveness in targeting stop-loss payments to IPFs 
facing the greatest financial risk.

V. Waiver of Proposed Rulemaking

    We ordinarily publish a notice of proposed rulemaking in the 
Federal Register to provide a period for public comment before the 
provisions of a rule take effect. We can waive this procedure, however, 
if we find good cause that a notice-and-comment procedure is 
impracticable, unnecessary, or contrary to the public

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interest and we incorporate a statement of finding and its reasons in 
the notice.
    We find it is unnecessary to undertake notice and comment 
rulemaking for the update in this notice because the update does not 
make any substantive changes in policy, but merely reflects the 
application of previously established methodologies. Therefore, under 5 
U.S.C. Sec.  553(b)(3)(B), for good cause, we waive notice and comment 
procedures.

VI. Collection of Information Requirement

    This document does not impose information collection and 
recordkeeping requirements. Consequently, it need not be reviewed by 
the Office of Management and Budget under the authority of the 
Paperwork Reduction Act of 1995.

VII. Regulatory Impact Analysis

A. Overall Impact

    We have examined the impacts of this notice as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review), 
the Regulatory Flexibility Act (RFA) (September 19, 1980, Pub. L. 96-
354), section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (UMRA) (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). 
For purposes of Title 5, United States Code, section 804(2), we treat 
this notice as a major rule because we estimate that the total impact 
of these changes would be an increase in payments of approximately $130 
million.
    The updates to the IPF labor-related share and wage indices are 
made in a budget neutral manner and thus have no effect on estimated 
costs to the Medicare program. Therefore, the estimated increased cost 
to the Medicare program is due to the update to the payment rates, 
which results in an increase of approximately $130 million in overall 
IPF payments from RY 2007 to RY 2008. The transition blend has a 
minimal impact on overall IPF payments in RY 2008. The distribution of 
these impacts is summarized in Table 15. The effect of the updates 
described in this notice result in an overall $130 million increase in 
payments from RY 2007 to RY 2008.
    The RFA requires agencies to analyze options for regulatory relief 
of small entities. For purposes of the RFA, small entities include 
small businesses, nonprofit organizations, and small governmental 
jurisdictions. Most IPFs and most other providers and suppliers are 
considered small entities, either by nonprofit status or by having 
revenues of $6.5 million to $31.5 million in any 1 year. (For details, 
see the Small Business Administration's Interim final rule that set 
forth size standards at 70 FR 72577, December 6, 2005.) Because we lack 
data on individual hospital receipts, we cannot determine the number of 
small proprietary IPFs or the proportion of IPFs' revenue that is 
derived from Medicare payments. Therefore, we assume that all IPFs are 
considered small entities. As shown in Table 15, we estimate that the 
net revenue impact of this notice on all IPFs is to increase payments 
by about 3.1 percent. Thus, we anticipate that this notice may have a 
significant impact on a substantial number of small entities. However, 
the estimated impact of this notice is a net increase in revenues 
across all categories of IPFs, so we believe that this notice would not 
impose a significant burden on small entities. Medicare contractors are 
not considered to be small entities. Individuals and States are not 
included in the definition of a small entity.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis if a rule may have a significant impact on 
the operations of a substantial number of small rural hospitals. This 
analysis must conform to the provisions of section 604 of the RFA. With 
the exception of hospitals located in certain New England counties, for 
purposes of section 1102(b) of the Act, we previously defined a small 
rural hospital as a hospital with fewer than 100 beds that is located 
outside of a Metropolitan Statistical Area (MSA) or New England County 
Metropolitan Area (NECMA). However, under the new labor market 
definitions, we no longer employ NECMAs to define urban areas in New 
England. Therefore, for purposes of this analysis, we now define a 
small rural hospital as a hospital with fewer than 100 beds that is 
located outside of an MSA.
    We have determined that this notice will have a substantial impact 
on hospitals classified as located in rural areas. As discussed earlier 
in this preamble, we will continue to provide a payment adjustment of 
17 percent for IPFs located in rural areas. In addition, we have 
established a 3-year transition to the new system to allow IPFs an 
opportunity to adjust to the new system. Therefore, the impacts shown 
in Table 15 below reflect the adjustments that are designed to minimize 
or eliminate any potentially significant negative impact that the IPF 
PPS may otherwise have on small rural IPFs.
    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any final 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 notice 
will not mandate any requirements for State, local, or tribal 
governments, nor would it affect private sector costs.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a final rule that imposes 
substantial direct requirement costs on State and local governments, 
preempts State law, or otherwise has Federalism implications.
    We have reviewed this notice under the criteria set forth in 
Executive Order 13132 and have determined that the notice will not have 
any substantial impact on the rights, roles, and responsibilities of 
State, local, or tribal governments.

B. Anticipated Effects of the Notice

    We discuss below the historical background of the IPF PPS and the 
impact of this notice on the Federal Medicare budget and on IPFs.
1. Budgetary Impact
    As discussed in the November 2004 and May 2006 IPF PPS final rules, 
we applied a budget neutrality factor to the Federal per diem and ECT 
base rates to ensure that total estimated payments under the IPF PPS in 
the implementation period would equal the amount that would have been 
paid if the IPF PPS had not been implemented. The budget neutrality 
factor includes the following components: Outlier adjustment, stop-loss 
adjustment, and the behavioral offset. We do not plan to change any of 
these adjustment factors or projections until we analyze IPF PPS data. 
In accordance with Sec.  412.424(c)(3)(ii), we will evaluate the 
accuracy of the budget neutrality adjustment within the first 5 years 
after implementation of the payment system. We may make a one-time 
prospective adjustment to the Federal per diem and ECT base rates to 
account for differences

[[Page 25620]]

between the historical data on cost-based TEFRA payments (the basis of 
the budget neutrality adjustment) and estimates of TEFRA payments based 
on actual data from the first year of the IPF PPS. As part of that 
process, we will re-assess the accuracy of all of the factors impacting 
budget neutrality.
    In addition, as discussed in section IV.C.1. of this notice, we are 
adopting the wage index and labor market share in a budget neutral 
manner by applying a wage index budget neutrality factor to the Federal 
per diem and ECT base rates. Thus, the budgetary impact to the Medicare 
program by the update of the IPF PPS will be due to the market basket 
updates (see section III.B. of this notice) and the planned update of 
the payment blend discussed below.
2. Impacts on Providers
    To understand the impact of the changes to the IPF PPS discussed in 
this notice on providers, it is necessary to compare estimated payments 
under the IPF PPS rates and factors for RY 2008 to estimated payments 
under the IPF PPS rates and factors for RY 2007. The estimated payments 
for RY 2007 are a blend of: 50 percent of the facility-specific TEFRA 
payment and 50 percent of the IPF PPS payment with stop-loss payment. 
The estimated payments for the RY 2008 IPF PPS are a blend of: 25 
percent of the facility-specific TEFRA payment and 75 percent of the 
IPF PPS payment with stop-loss payment. We determined the percent 
change of estimated RY 2008 IPF PPS payments to estimated RY 2007 IPF 
PPS payments for each category of IPFs. In addition, for each category 
of IPFs, we have included the estimated percent change in payments 
resulting from the wage index changes for the RY 2008 IPF PPS, the 
market basket update to IPF PPS payments, and the transition blend for 
the RY 2008 IPF PPS payment and the facility-specific TEFRA payment.
    To illustrate the impacts of the final RY 2008 changes, our 
analysis begins with a RY 2007 baseline simulation model based on FY 
2005 IPF payments inflated to the midpoint of RY 2007 using Global 
Insight's most recent forecast of the market basket update (see section 
III.B. of this notice); the estimated outlier payments in RY 2007; the 
estimated stop-loss payments in RY 2007; the CBSA designations for IPFs 
based on OMB's MSA definitions after June 2003; the FY 2006 pre-floor, 
pre-reclassified hospital wage index; the RY 2007 labor-market share; 
and the RY 2007 percentage amount of the rural adjustment. During the 
simulation, the outlier payment is maintained at the target of 2 
percent of total PPS payments.
    Each of the following changes is added incrementally to this 
baseline model in order for us to isolate the effects of each change:
     The FY 2007 pre-floor, pre-reclassified hospital wage 
index and RY 2008 final labor-related share.
     A blended market basket update of 3.2 percent resulting in 
an update to the hospital-specific TEFRA payment amount and an update 
to the IPF PPS base rates.
     The transition to 75 percent IPF PPS payment and 25 
percent facility-specific TEFRA payment.
     Our final comparison illustrates the percent change in 
payments from RY 2007 (that is, July 1, 2006 to June 30, 2007) to RY 
2008 (that is, July 1, 2007 to June 30, 2008).

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3. Results
    Table 15 above displays the results of our analysis. The table 
groups IPFs into the categories listed below based on characteristics 
provided in the Provider of Services (POS) file, the IPF provider 
specific file, and cost report data from HCRIS:
     Facility Type
     Location
     Teaching Status Adjustment
     Census Region
     Size

The top row of the table shows the overall impact on the 1,712 IPFs 
included in the analysis.
    In column 3, we present the effects of the budget-neutral update to 
the labor-related share and the wage index adjustment under the CBSA 
geographic area definitions announced by OMB in June 2003. This is a 
comparison of the simulated RY 2008 payments under the FY 2007 hospital 
wage index under CBSA classification and associated labor-related share 
to the simulated RY 2007 payments under the FY 2006 hospital wage index 
under CBSA classifications and associated labor-related share. There is 
no projected change in aggregate payments to IPFs, as indicated in the 
first row of column 3. There would, however, be small distributional 
effects among different categories of IPFs. For example, rural non-
profit IPFs will experience a 0.3 percent decrease in payments. IPFs 
located in the Mountain region will receive the largest increase of 0.5 
percent.
    In column 4, we present the effects of the market basket update to 
the IPF PPS payments by applying the TEFRA and PPS updates to payments 
under the revised budget neutrality factor and labor-related share and 
wage index under CBSA classification. In the aggregate this update is 
projected to be a 3.2 percent increase in overall payments to IPFs.
    In column 5, we present the effects of the payment change in 
transition blend percentages to the third year of the transition (TEFRA 
Rate Percentage = 25 percent, IPF PPS Federal Rate Percentage = 75 
percent) from the second year of the transition (TEFRA Rate Percentage 
= 50 percent, IPF PPS Federal Rate Percentage = 50 percent) of the IPF 
PPS under the revised budget neutrality factor, labor-related share and 
wage index under CBSA classification, and TEFRA and PPS updates to RY 
2007. The overall aggregate effect, across all hospital groups, is 
projected to be a 0.1 percent decrease in payments to IPFs. There are 
distributional effects of these changes among different categories of 
IPFs. Government psychiatric hospitals will receive the largest 
increase, with urban government hospitals receiving an 8.7 percent 
increase and rural government hospitals receiving an 8.8 percent 
increase. Alternatively, psychiatric units with fewer than 12 beds will 
receive the largest decrease of 4.4 percent.
    Column 6 compares our estimates of the changes reflected in this 
notice for RY 2008, to our estimates of payments for RY 2007 (without 
these changes). This column reflects all RY 2008 changes relative to RY 
2007 (as shown in columns 3 through 5). The average increase for all 
IPFs is approximately 3.1 percent. This increase includes the effects 
of the market basket updates resulting in a 3.2 percent increase in 
total RY 2008 payments and a 0.1 percent decrease in RY 2008 payments 
for the transition blend.
    Overall, the largest payment increase is projected to be among 
government IPFs. Urban and rural government psychiatric hospitals will 
receive a 12.4 percent increase. Rural non-profit IPFs will receive a 
0.1 percent decrease and psychiatric units with fewer than 12 beds will 
receive a 1.3 percent decrease.
    It is important to note that the projected impact on government 
IPFs has decreased from last year even though they are receiving a 
greater percentage of PPS payments in their transition blend. We 
believe the primary reason for this decrease is that the first ``year'' 
under the IPF PPS was actually 18 months in order to move the update 
for the IPF PPS to July 1 each year. As a result, the market basket 
increase and payments were projected to be greater. Subsequent updates 
are for a 12-month period and are of a smaller magnitude.
    In addition, the basis of payment under the TEFRA payment system 
was an IPF's fixed average cost per discharge. Thus, when the cost of a 
patient's care exceeded the average cost per discharge, psychiatric 
units of acute care hospitals that were not generally set up for 
patients with long-term psychiatric care needs often transferred these 
patients to government IPFs. Also, government and other freestanding 
IPFs that were not usually staffed to accommodate patients with 
comorbid medical conditions typically transferred these patients to 
psychiatric units of acute care hospitals. The IPF PPS, which provides 
comorbidity adjustments and is a per diem system, eliminates certain 
incentives to transfer. We believe that certain categories of IPFs are 
projected to receive increases in payment based on their ability to 
manage their longer-term patients as well as treat their more medically 
intensive cases.
4. Effect on the Medicare Program
    Based on actuarial projections resulting from our experience with 
other PPSs, we estimate that Medicare spending (total Medicare program 
payments) for IPF services over the next 5 years would be as follows:

                      Table 16.--Estimated Payments
------------------------------------------------------------------------
                                                              Dollars in
                          Rate year                             millions
------------------------------------------------------------------------
July 1, 2007 to June 30, 2008...............................      $4,245
July 1, 2008 to June 30, 2009...............................       4,440
July 1, 2009 to June 30, 2010...............................       4,606
July 1, 2010 to June 30, 2011...............................       4,803
July 1, 2011 to June 30, 2012...............................       5,032
------------------------------------------------------------------------

    These estimates are based on the current estimate of increases in 
the RPL market basket as follows:
     3.2 percent for RY 2008;
     3.2 percent for RY 2009;
     2.8 percent for RY 2010;
     3.1 percent for RY 2011; and
     3.2 percent for RY 2012.
    We estimate that there would be a change in fee-for-service 
Medicare beneficiary enrollment as follows:
     -0.1 percent in RY 2008;
     0.7 percent in RY 2009;
     0.3 percent in RY 2010;
     0.6 percent in RY 2011; and
     1.1 percent in RY 2012.
5. Effect on Beneficiaries
    Under the IPF PPS, IPFs will receive payment based on the average 
resources consumed by patients for each day. We do not expect changes 
in the quality of care or access to services for Medicare beneficiaries 
under the RY 2008 IPF PPS. In fact, we believe that access to IPF 
services will be enhanced due to the patient and facility level 
adjustment factors, all of which are intended to adequately reimburse 
IPFs for expensive cases. Finally, the stop-loss policy is intended to 
assist IPFs during the transition.

C. Accounting Statement

    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table 17 below, we 
have prepared an accounting statement showing the classification of the 
expenditures associated with the provisions of this notice. This table 
provides our best estimate of the increase in Medicare payments under 
the IPF PPS as a result of the changes presented in this notice based 
on the data for 1,712 IPFs in our database. All expenditures are 
classified as transfers to Medicare providers (that is, IPFs).

[[Page 25623]]



      Table 17.-- Accounting Statement: Classification of Estimated
      Expenditures, From the 2007 IPF PPS RY to the 2008 IPF PPS RY
                              [In millions]
------------------------------------------------------------------------
                 Category                             Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers............  $130.
From Whom To Whom?                          Federal Government To IPFs
                                             Medicare Providers.
------------------------------------------------------------------------

D. Conclusion

    This notice does not initiate any policy changes with regard to the 
IPF PPS; rather, it simply provides an update to the rates for RY 2008 
using established methodologies. In accordance with the provisions of 
Executive Order 12866, this rule was previously reviewed by OMB.

(Catalog of Federal Domestic Assistance Program No. 93.778, Medical 
Assistance Program)

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

    Dated: March 8, 2007.
Leslie V. Norwalk,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: March 29, 2007.
Michael O. Leavitt,
Secretary.
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Addendum B--RY 2008 CBSA Wage Index Tables

    In this addendum, we provide Tables 1 and 2 which indicate the 
CBSA-based wage index values for urban and rural providers.
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[FR Doc. 07-2172 Filed 4-30-07; 4:00 pm]
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