[Federal Register Volume 73, Number 81 (Friday, April 25, 2008)]
[Proposed Rules]
[Pages 22674-22714]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 08-1174]



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Part IV





Department of Health and Human Services





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Centers for Medicare & Medicaid



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42 CFR Part 412



Medicare Program; Inpatient Rehabilitation Facility Prospective Payment 
System for Federal Fiscal Year 2009; Proposed Rule

  Federal Register / Vol. 73, No. 81 / Friday, April 25, 2008 / 
Proposed Rules  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1554-P]
RIN 0938-AP19


Medicare Program; Inpatient Rehabilitation Facility Prospective 
Payment System for Federal Fiscal Year 2009

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would update the prospective payment rates 
for inpatient rehabilitation facilities (IRFs) for Federal fiscal year 
(FY) 2009 (for discharges occurring on or after October 1, 2008 and on 
or before September 30, 2009) as required under section 1886(j)(3)(C) 
of the Social Security Act (the Act). Section 1886(j)(5) of the Act 
requires the Secretary to publish in the Federal Register on or before 
the August 1 that precedes the start of each fiscal year, the 
classification and weighting factors for the IRF prospective payment 
system's (PPS) case-mix groups and a description of the methodology and 
data used in computing the prospective payment rates for that fiscal 
year.
    We are proposing to revise existing policies regarding the PPS 
within the authority granted under section 1886(j) of the Act.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on June 20, 2008.

ADDRESSES: In commenting, please refer to file code CMS-1554-P. Because 
of staff and resource limitations, we cannot accept comments by 
facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation to http://www.regulations.gov. Follow the instructions for 
``Comment or Submission'' and enter the filecode to find the document 
accepting comments.
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address only: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-1554-P, P.O. Box 8012, Baltimore, MD 21244-8012.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address ONLY: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-1554-P, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-8012.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to either of the following addresses.
    a. Room 445-G, Hubert H. Humphrey Building, 200 Independence 
Avenue, SW., Washington, DC 20201 (Because access to the interior of 
the HHH Building is not readily available to persons without Federal 
Government identification, commenters are encouraged to leave their 
comments in the CMS drop slots located in the main lobby of the 
building. A stamp-in clock is available for persons wishing to retain a 
proof of filing by stamping in and retaining an extra copy of the 
comments being filed.)
    b. 7500 Security Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
please call telephone number (410) 786-7195 in advance to schedule your 
arrival with one of our staff members.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Susanne Seagrave, (410) 786-0044, for 
information regarding the payment policies. Jeanette Kranacs, (410) 
786-9385, for information regarding the wage index.

SUPPLEMENTARY INFORMATION: Inspection of Public Comments: All comments 
received before the close of the comment period are available for 
viewing by the public, including any personally identifiable or 
confidential business information that is included in a comment. We 
post all comments received before the close of the comment period on 
the following Web site as soon as possible after they have been 
received: http://www.regulations.gov. Follow the search instructions on 
that Web site to view public comments.
    Comments received timely will also be available for public 
inspection as they are received, generally beginning approximately 3 
weeks after publication of a document, at the headquarters of the 
Centers for Medicare & Medicaid Services, 7500 Security Boulevard, 
Baltimore, Maryland 21244, Monday through Friday of each week from 8:30 
a.m. to 4 p.m. To schedule an appointment to view public comments, 
phone 1-800-743-3951.

Table of Contents

I. Background
    A. Historical Overview of the Inpatient Rehabilitation Facility 
Prospective Payment System (IRF PPS)
    B. Operational Overview of the Current IRF PPS
    C. Brief Summary of Proposed Revisions to the IRF PPS for 
Federal Fiscal Year (FY) 2009
II. Proposed Update to the Case-Mix Group (CMG) Relative Weights and 
Average Length of Stay Values for FY 2009
III. Proposed FY 2009 IRF PPS Federal Prospective Payment Rates
    A. Increase Factor for FY 2009 and Proposed FY 2009 Labor-
Related Share
    B. Proposed Area Wage Adjustment
    C. Description of the Proposed IRF Standard Payment Conversion 
Factor and Proposed Payment Rates for FY 2009
    D. Example of the Methodology for Adjusting the Proposed Federal 
Prospective Payment Rates
IV. Proposed Update to Payments for High-Cost Outliers Under the IRF 
PPS
    A. Proposed Update to the Outlier Threshold Amount for FY 2009
    B. Update to the IRF Cost-to-Charge Ratio Ceilings
V. Revisions to the Regulation Text in Response to the Medicare, 
Medicaid, and SCHIP Extension Act of 2007
VI. Post Acute Care Payment Reform
VII. Provisions of the Proposed Rule
VIII. Collection of Information Requirements
IX. Response to Public Comments
X. Regulatory Impact Statement
Regulation Text
Addendum
Acronyms

    Because of the many terms to which we refer by acronym in this 
proposed rule, we are listing the acronyms used and their 
corresponding terms in alphabetical order below.
ASCA Administrative Simplification Compliance Act, Pub. L. 107-105
BBA Balanced Budget Act of 1997, Pub. L. 105-33
BBRA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Balanced Budget Refinement Act of 1999, Pub. L. 
106-113
BIPA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Benefits Improvement and Protection Act of 2000, 
Pub. L. 106-554
CBSA Core-Based Statistical Area
CCR Cost-to-Charge Ratio
CFR Code of Federal Regulations
CMG Case-Mix Group
DRA Deficit Reduction Act of 2005, Pub. L. 109-171

[[Page 22675]]

DSH Disproportionate Share Hospital
ECI Employment Cost Index
FI Fiscal Intermediary
FR Federal Register
FY Federal Fiscal Year
GDP Gross Domestic Product
HHH Hubert H. Humphrey Building
HIPAA Health Insurance Portability and Accountability Act, Pub. L. 
104-191
IFMC Iowa Foundation for Medical Care
IPF Inpatient Psychiatric Facility
IPPS Inpatient Prospective Payment System
IRF Inpatient Rehabilitation Facility
IRF-PAI Inpatient Rehabilitation Facility-Patient Assessment 
Instrument
IRF PPS Inpatient Rehabilitation Facility Prospective Payment System
IRVEN Inpatient Rehabilitation Validation and Entry
LIP Low-Income Percentage
LTCH Long-Term Care Hospital
MAC Medicare Administrative Contractor
MEDPAR Medicare Provider Analysis and Review
MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Pub. L. 108-173
MSA Metropolitan Statistical Area
NAICS North American Industrial Classification System
OMB Office of Management and Budget
PAI Patient Assessment Instrument
PPS Prospective Payment System
RAND RAND Corporation
RFA Regulatory Flexibility Act, Pub. L. 96-354
RIA Regulatory Impact Analysis
RIC Rehabilitation Impairment Category
RPL Rehabilitation, Psychiatric, and Long-Term Care Hospital Market 
Basket
SCHIP State Children's Health Insurance Program
SIC Standard Industrial Code
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-
248

I. Background

A. Historical Overview of the Inpatient Rehabilitation Facility 
Prospective Payment System (IRF PPS)

    Section 4421 of the Balanced Budget Act of 1997 (BBA, Pub. L. 105-
33), as amended by section 125 of the Medicare, Medicaid, and SCHIP 
(State Children's Health Insurance Program) Balanced Budget Refinement 
Act of 1999 (BBRA, Pub. L. 106-113), and by section 305 of the 
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act 
of 2000 (BIPA, Pub. L. 106-554), provides for the implementation of a 
per discharge prospective payment system (PPS) under section 1886(j) of 
the Social Security Act (the Act) for inpatient rehabilitation 
hospitals and inpatient rehabilitation units of a hospital (hereinafter 
referred to as IRFs).
    Payments under the IRF PPS encompass inpatient operating and 
capital costs of furnishing covered rehabilitation services (that is, 
routine, ancillary, and capital costs) but not direct graduate medical 
education costs, costs of approved nursing and allied health education 
activities, bad debts, and other services or items outside the scope of 
the IRF PPS. Although a complete discussion of the IRF PPS provisions 
appears in the original, FY 2002 IRF PPS final rule (66 FR 41316) as 
revised in the FY 2006 IRF PPS final rule (70 FR 47880), we are 
providing below a general description of the IRF PPS for fiscal years 
(FYs) 2002 through 2005.
    Under the IRF PPS from FY 2002 through FY 2005, as described in the 
FY 2002 IRF PPS final rule (66 FR 41316), the Federal prospective 
payment rates were computed across 100 distinct case-mix groups (CMGs). 
We constructed 95 CMGs using rehabilitation impairment categories 
(RICs), functional status (both motor and cognitive), and age (in some 
cases, cognitive status and age may not be a factor in defining a CMG). 
In addition, we constructed five special CMGs to account for very short 
stays and for patients who expire in the IRF.
    For each of the CMGs, we developed relative weighting factors to 
account for a patient's clinical characteristics and expected resource 
needs. Thus, the weighting factors accounted for the relative 
difference in resource use across all CMGs. Within each CMG, we created 
tiers based on the estimated effects that certain comorbidities would 
have on resource use.
    We established the Federal PPS rates using a standardized payment 
conversion factor (formerly referred to as the budget neutral 
conversion factor). For a detailed discussion of the budget neutral 
conversion factor, please refer to our FY 2004 IRF PPS final rule (68 
FR 45684 through 45685). In the FY 2006 IRF PPS final rule (70 FR 
47880), we discussed in detail the methodology for determining the 
standard payment conversion factor.
    We applied the relative weighting factors to the standard payment 
conversion factor to compute the unadjusted Federal prospective payment 
rates under the IRF PPS from FYs 2002 through 2005. We then applied 
adjustments for geographic variations in wages (wage index), the 
percentage of low-income patients, and location in a rural area (if 
applicable) to the IRF's unadjusted Federal prospective payment rates. 
In addition, we made adjustments to account for short-stay transfer 
cases, interrupted stays, and high cost outliers.
    For cost reporting periods that began on or after January 1, 2002 
and before October 1, 2002, we determined the final prospective payment 
amounts using the transition methodology prescribed in section 
1886(j)(1) of the Act. Under this provision, IRFs transitioning into 
the PPS were paid a blend of the Federal IRF PPS rate and the payment 
that the IRF would have received had the IRF PPS not been implemented. 
This provision also allowed IRFs to elect to bypass this blended 
payment and immediately be paid 100 percent of the Federal IRF PPS 
rate. The transition methodology expired as of cost reporting periods 
beginning on or after October 1, 2002 (FY 2003), and payments for all 
IRFs now consist of 100 percent of the Federal IRF PPS rate.
    We established a CMS Web site as a primary information resource for 
the IRF PPS. The Web site URL is http://www.cms.hhs.gov/InpatientRehabFacPPS/ and may be accessed to download or view 
publications, software, data specifications, educational materials, and 
other information pertinent to the IRF PPS.
    Section 1886(j) of the Act confers broad statutory authority upon 
the Secretary to propose refinements to the IRF PPS. In the FY 2006 IRF 
PPS final rule (70 FR 47880) and in correcting amendments to the FY 
2006 IRF PPS final rule (70 FR 57166) that we published on September 
30, 2005, we finalized a number of refinements to the IRF PPS case-mix 
classification system (the CMGs and the corresponding relative weights) 
and the case-level and facility-level adjustments. Any reference to the 
FY 2006 IRF PPS final rule in this proposed rule also includes the 
provisions effective in the correcting amendments. For a detailed 
discussion of the final key policy changes for FY 2006, please refer to 
the FY 2006 IRF PPS final rule (70 FR 47880 and 70 FR 57166).
    In the FY 2007 IRF PPS final rule (71 FR 48354), we further refined 
the IRF PPS case-mix classification system (the CMG relative weights) 
and the case-level adjustments, to ensure that IRF PPS payments 
continue to reflect as accurately as possible the costs of care. For a 
detailed discussion of the FY 2007 policy revisions, please refer to 
the FY 2007 IRF PPS final rule (71 FR 48354).
    In the FY 2008 IRF PPS final rule (72 FR 44284), we updated the 
Federal prospective payment rates and the outlier threshold, revised 
the IRF wage index policy, and clarified how we determine high-cost 
outlier payments for transfer cases. For more information on the policy 
changes implemented for FY 2008, please refer to the FY 2008 IRF PPS 
final rule (72 FR 44284), in which we published the final FY 2008 IRF 
Federal prospective payment rates.

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    After publication of the FY 2008 IRF PPS final rule (72 FR 44284), 
section 115 of the Medicare, Medicaid, and SCHIP Extension Act of 2007, 
Public Law 110-173, amended section 1886(j)(3)(C) of the Act to apply a 
zero percent increase factor for FYs 2008 and 2009, effective for IRF 
discharges occurring on or after April 1, 2008. Section 1886(j)(3)(C) 
of the Act requires the Secretary to develop an increase factor to 
update the IRF Federal prospective payment rates for each FY. Based on 
the legislative change to the increase factor, we revised the FY 2008 
Federal prospective payment rates for IRF discharges occurring on or 
after April 1, 2008. Thus, the final FY 2008 IRF Federal prospective 
payment rates that were published in the FY 2008 IRF PPS final rule (72 
FR 44284) were effective for discharges occurring on or after October 
1, 2007 and on or before March 31, 2008; and the revised FY 2008 IRF 
Federal prospective payment rates will be effective for discharges 
occurring on or after April 1, 2008 and on or before September 30, 
2008. The revised FY 2008 Federal prospective payment rates are 
available on the CMS Web site at http://www.cms.hhs.gov/InpatientRehabFacPPS/07_DataFiles.asp#TopOfPage.

B. Operational Overview of the Current IRF PPS

    As described in the FY 2002 IRF PPS final rule, upon the admission 
and discharge of a Medicare Part A fee-for-service patient, the IRF is 
required to complete the appropriate sections of a patient assessment 
instrument, the Inpatient Rehabilitation Facility-Patient Assessment 
Instrument (IRF-PAI). All required data must be electronically encoded 
into the IRF-PAI software product. Generally, the software product 
includes patient grouping programming called the GROUPER software. The 
GROUPER software uses specific IRF-PAI data elements to classify (or 
group) patients into distinct CMGs and account for the existence of any 
relevant comorbidities.
    The GROUPER software produces a five-digit CMG number. The first 
digit is an alpha-character that indicates the comorbidity tier. The 
last four digits represent the distinct CMG number. Free downloads of 
the Inpatient Rehabilitation Validation and Entry (IRVEN) software 
product, including the GROUPER software, are available on the CMS Web 
site at http://www.cms.hhs.gov/InpatientRehabFacPPS/06_Software.asp.
    Once a patient is discharged, the IRF submits a Medicare claim (a 
Health Insurance Portability and Accountability Act (HIPAA, Pub. L. 
104-191) compliant electronic claim or, if the Administrative 
Compliance Act (ASCA, Pub. L. 107-105,) permits a paper claim, a UB-04 
or a CMS-1450, as appropriate) using the five-digit CMG number and 
sends it to the appropriate Medicare fiscal intermediary (FI) or 
Medicare Administrative Contractor (MAC). Claims submitted to Medicare 
must comply with both ASCA and HIPAA. Section 3 of the ASCA amends 
section 1862(a) of the Act by adding paragraph (22) which requires the 
Medicare program, subject to section 1862(h) of the Act, to deny 
payment under Part A or Part B for any expenses for items or services 
``for which a claim is submitted other than in an electronic form 
specified by the Secretary.'' Section 1862(h) of the Act, in turn, 
provides that the Secretary shall waive such denial in situations in 
which there is no method available for the submission of claims in an 
electronic form or the entity submitting the claim is a small provider.
    In addition, the Secretary also has the authority to waive such 
denial ``in such unusual cases as the Secretary finds appropriate.'' 
See also the final rule, ``Medicare Program; Electronic Submission of 
Medicare Claims'' (70 FR 71008, November 25, 2005). Section 3 of the 
ASCA operates in the context of the administrative simplification 
provisions of HIPAA, which include, among others, the requirements for 
transaction standards and code sets codified in 45 CFR, parts 160 and 
162, subparts A and I through R (generally known as the Transactions 
Rule). The Transactions Rule requires covered entities, including 
covered healthcare providers, to conduct covered electronic 
transactions according to the applicable transaction standards. (See 
the program claim memoranda issued and published by CMS at: http://www.cms.hhs.gov/ElectronicBillingEDITrans/ and listed in the addenda to 
the Medicare Intermediary Manual, Part 3, section 3600. CMS 
instructions for the limited number of Medicare claims submitted on 
paper are available at: http://www.cms.hhs.gov/manuals/downloads/clm104c25.pdf.)
    The Medicare FI or MAC processes the claim through its software 
system. This software system includes pricing programming called the 
``PRICER'' software. The PRICER software uses the CMG number, along 
with other specific claim data elements and provider-specific data, to 
adjust the IRF's prospective payment for interrupted stays, transfers, 
short stays, and deaths, and then applies the applicable adjustments to 
account for the IRF's wage index, percentage of low-income patients, 
rural location, and outlier payments. For discharges occurring on or 
after October 1, 2005, the IRF PPS payment also reflects the new 
teaching status adjustment that became effective as of FY 2006, as 
discussed in the FY 2006 IRF PPS final rule (70 FR 47880).

C. Brief Summary of Proposed Revisions to the IRF PPS for FY 2009

    In this proposed rule, we are proposing to make the following 
updates to the IRF PPS:
     Update the FY 2009 IRF PPS relative weights and average 
length of stay values using the most current and complete Medicare 
claims and cost report data, as discussed in section II.
     Update the FY 2009 IRF PPS payment rates by the proposed 
wage index and labor related share in a budget neutral manner, as 
discussed in sections III.A and B.
     Update the outlier threshold amount for FY 2009, as 
discussed in section IV.A.
     Update the cost-to-charge ratio ceiling and the national 
average urban and rural cost-to-charge ratios for purposes of 
determining outlier payments under the IRF PPS, as discussed in section 
IV.B.

II. Proposed Update to the CMG Relative Weights and Average Length of 
Stay Values for FY 2009

    As specified in 42 CFR 412.620(b)(1), we calculate a relative 
weight for each CMG that is proportional to the resources needed by an 
average inpatient rehabilitation case in that CMG. For example, cases 
in a CMG with a relative weight of 2, on average, will cost twice as 
much as cases in a CMG with a relative weight of 1. Relative weights 
account for the variance in cost per discharge due to the variance in 
resource utilization among the payment groups, and their use helps to 
ensure that IRF PPS payments support beneficiary access to care as well 
as provider efficiency.
    In this proposed rule, we propose to update the CMG relative 
weights and average length of stay values using the most recent 
available data (FY 2006). We propose to do this using the same 
methodology, with one change, that was described in the original, FY 
2002 IRF PPS final rule (66 FR 41316) and the FY 2006 IRF PPS final 
rule (70 FR 47880, 47887 through 47888). The proposed change to the 
methodology involves using new, more detailed cost-to-charge ratio 
(CCR) data from the cost reports of IRF subprovider units of primary 
acute care hospitals, instead of CCR data from the associated primary 
acute care

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hospitals, to calculate IRFs' average costs per case. For freestanding 
IRFs, we propose to continue using CCR data from the freestanding IRF's 
(that is, the primary hospital's) cost report. Previously, we were only 
able to use the CCR data from the cost reports of the primary acute 
care hospitals to estimate the relationship between costs and charges 
for the IRF subprovider units because those were the best data we had 
available. However, conceptually, the relationship between costs and 
charges in the primary acute care hospital could differ from the 
relationship between costs and charges in the IRF subprovider units. 
Since the two types of facilities provide a different range of services 
and treat different populations of patients, it might not be as precise 
to use the data from the primary acute care hospital to estimate the 
relationship between costs and charges in the IRF subprovider unit. 
When we analyzed the CMG relative weights for FY 2009, using both the 
primary acute care hospital CCRs and the IRF subprovider unit CCRs, we 
found that the CCRs we used made very little difference in the CMG 
relative weights. Since the data needed to calculate the IRF 
subprovider units' CCRs are now available in enough detail, and since 
conceptually it is more appropriate to use the cost report data from 
the IRF subprovider units to estimate the relationship between costs 
and charges in these IRF subprovider units, we are proposing this 
change to the methodology. As indicated previously, for freestanding 
IRFs, we propose to continue using CCR data from the freestanding IRF's 
(that is, the primary hospital's) cost report. In future years, we 
would continue to estimate the CMG relative weights using both the 
primary acute care hospital CCRs and the IRF subprovider unit CCRs to 
ensure that we continue to use the most appropriate data in updating 
the CMG relative weights.
    In calculating the CMG relative weights, we use a hospital-specific 
relative value method to estimate operating (routine and ancillary 
services) and capital costs of IRFs. To estimate these costs for FY 
2009, we propose to use the CCRs from the IRF subprovider units of 
primary acute care hospitals, except for the freestanding IRFs (for 
which we will continue to use the data from the cost report of the 
primary hospital, as discussed above). For FY 2009, we propose to use 
the same methodology we used to compute the CMG relative weights for 
FYs 2002 through 2008, with the one change described above, to update 
the CMG relative weights to reflect the most recent available data (FY 
2006). The process used to calculate the CMG relative weights for this 
proposed rule follows below:
    Step 1. We calculate the CMG relative weights by estimating the 
effects that comorbidities have on costs.
    Step 2. We adjust the cost of each Medicare discharge (case) to 
reflect the effects found in the first step.
    Step 3. We use the adjusted costs from the second step to calculate 
CMG relative weights, using the hospital-specific relative value 
method.
    Step 4. We normalize to the same average CMG relative weight from 
the CMG relative weights implemented in the FY 2002 IRF PPS final rule 
(66 FR 41316), the FY 2006 IRF PPS final rule (70 FR 47880), and the FY 
2007 IRF PPS final rule (71 FR 48354). (Note that we did not revise the 
CMG relative weights in the FY 2008 IRF PPS final rule (72 FR 44284)).
    Consistent with the way we implemented changes to the IRF 
classification system in the FY 2006 IRF PPS final rule (70 FR 47880 
and 70 FR 57166) and the FY 2007 IRF PPS final rule (71 FR 48354), we 
are proposing to make the revisions to the CMG relative weights for FY 
2009 in such a way that total estimated aggregate payments to IRFs for 
FY 2009 are the same with or without the proposed changes (that is, in 
a budget neutral manner) by applying a budget neutrality factor to the 
standard payment amount. To calculate the appropriate proposed budget 
neutrality factor to apply to the standard payment amount, we propose 
to use the following steps:
    Step 1. Calculate the estimated total amount of IRF PPS payments 
for FY 2009 (with no proposed changes to the CMG relative weights).
    Step 2. Apply the proposed changes to the CMG relative weights (as 
discussed above) to calculate the estimated total amount of IRF PPS 
payments for FY 2009.
    Step 3. Divide the amount calculated in step 1 by the amount 
calculated in step 2 to determine the proposed factor (0.9969) that 
would maintain the same total estimated aggregate payments in FY 2009 
with and without the proposed changes to the CMG relative weights.
    Step 4. Apply the proposed budget neutrality factor (0.9969) to the 
FY 2008 IRF PPS standard payment amount after the application of the 
budget-neutral wage adjustment factor.
    In section III.C of this proposed rule, we discuss the proposed 
methodology for calculating the standard payment conversion factor for 
FY 2009.
    Table 1 below, ``Proposed Relative Weights and Average Lengths of 
Stay for Case-Mix Groups,'' presents the CMGs, the comorbidity tiers, 
the proposed corresponding relative weights, and the proposed average 
length of stay values for each CMG and tier for FY 2009. The average 
length of stay for each CMG is used to determine when an IRF discharge 
meets the definition of a short-stay transfer, which results in a per 
diem case level adjustment. The proposed relative weights and average 
length of stay values shown in Table 1 are subject to change for the 
final rule based on analysis of updated data.

                                  Table 1.-- Proposed Relative Weights and Average Lengths of Stay for Case-Mix Groups
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                           Proposed relative weight                 Proposed average length of stay
              CMG                CMG Description (M = motor, C = ---------------------------------------------------------------------------------------
                                       cognitive, A = age)          Tier 1     Tier 2     Tier 3      None      Tier 1     Tier 2     Tier 3      None
--------------------------------------------------------------------------------------------------------------------------------------------------------
0101..........................  Stroke M>51.05..................     0.7741     0.7243     0.6463     0.6222          8          9          9          9
0102..........................  Stroke M>44.45 and M<51.05 and       0.9569     0.8953     0.7989     0.7691         11         11         11         10
                                 C>18.5.
0103..........................  Stroke M>44.45 and M<51.05 and       1.1184     1.0465     0.9338     0.8990         13         15         12         12
                                 C<18.5.
0104..........................  Stroke M>38.85 and M<44.45......     1.2008     1.1235     1.0025     0.9651         14         15         13         13
0105..........................  Stroke M>34.25 and M<38.85......     1.4207     1.3293     1.1861     1.1419         16         17         15         15
0106..........................  Stroke M>30.05 and M<34.25......     1.6395     1.5341     1.3688     1.3178         17         19         17         17
0107..........................  Stroke M>26.15 and M<30.05......     1.8826     1.7615     1.5718     1.5132         19         22         20         19
0108..........................  Stroke M<26.15 and A>84.5.......     2.2430     2.0987     1.8726     1.8028         29         27         24         23
0109..........................  Stroke M>22.35 and M<26.15 and       2.1639     2.0247     1.8066     1.7393         22         25         22         22
                                 A<84.5.
0110..........................  Stroke M<22.35 and A<84.5.......     2.6983     2.5247     2.2528     2.1688         30         31         27         27

[[Page 22678]]

 
0201..........................  Traumatic brain injury M>53.35       0.7957     0.6567     0.5947     0.5509         10          9          8          8
                                 and C>23.5.
0202..........................  Traumatic brain injury M>44.25       1.0090     0.8327     0.7541     0.6985         13         12         10         10
                                 and M<53.35 and C>23.5.
0203..........................  Traumatic brain injury M>44.25       1.2165     1.0040     0.9092     0.8422         14         13         12         12
                                 and C<23.5.
0204..........................  Traumatic brain injury M>40.65       1.3278     1.0959     0.9924     0.9193         15         15         13         13
                                 and M<44.25.
0205..........................  Traumatic brain injury M>28.75       1.6060     1.3255     1.2004     1.1119         17         17         16         15
                                 and M<40.65.
0206..........................  Traumatic brain injury M>22.05       2.0505     1.6923     1.5326     1.4197         21         21         20         19
                                 and M<28.75.
0207..........................  Traumatic brain injury M<22.05..     2.6905     2.2205     2.0109     1.8627         36         27         25         23
0301..........................  Non-traumatic brain injury           1.0947     0.9303     0.8501     0.7640         12         12         11         10
                                 M>41.05.
0302..........................  Non-traumatic brain injury           1.4084     1.1969     1.0937     0.9829         14         15         14         13
                                 M>35.05 and M<41.05.
0303..........................  Non-traumatic brain injury           1.6925     1.4384     1.3144     1.1812         17         18         16         15
                                 M>26.15 and M<35.05.
0304..........................  Non-traumatic brain injury           2.3001     1.9548     1.7862     1.6053         28         24         21         20
                                 M<26.15.
0401..........................  Traumatic spinal cord injury         0.9524     0.8236     0.7692     0.7107         12         11         10         10
                                 M>48.45.
0402..........................  Traumatic spinal cord injury         1.3448     1.1629     1.0862     1.0035         17         16         15         13
                                 M>30.35 and M<48.45.
0403..........................  Traumatic spinal cord injury         2.2969     1.9863     1.8552     1.7140         30         25         23         22
                                 M>16.05 and M<30.35.
0404..........................  Traumatic spinal cord injury         4.1471     3.5864     3.3497     3.0946         66         44         38         36
                                 M<16.05 and A>63.5.
0405..........................  Traumatic spinal cord injury         3.3687     2.9132     2.7209     2.5138         42         30         30         32
                                 M<16.05 and A<63.5.
0501..........................  Non-traumatic spinal cord injury     0.7485     0.6643     0.5859     0.5236          9          9          8          8
                                 M>51.35.
0502..........................  Non-traumatic spinal cord injury     1.0121     0.8982     0.7922     0.7080         12         12         11         10
                                 M>40.15 and M<51.35.
0503..........................  Non-traumatic spinal cord injury     1.3269     1.1777     1.0387     0.9282         15         15         14         12
                                 M>31.25 and M<40.15.
0504..........................  Non-traumatic spinal cord injury     1.6143     1.4327     1.2637     1.1293         19         19         17         15
                                 M>29.25 and M<31.25.
0505..........................  Non-traumatic spinal cord injury     1.9083     1.6936     1.4938     1.3349         21         19         19         17
                                 M>23.75 and M<29.25.
0506..........................  Non-traumatic spinal cord injury     2.6059     2.3127     2.0399     1.8229         30         29         24         23
                                 M<23.75.
0601..........................  Neurological M>47.75............     0.9507     0.7701     0.7182     0.6558         11         11          9          9
0602..........................  Neurological M>37.35 and M<47.75     1.2627     1.0228     0.9539     0.8710         14         13         12         12
0603..........................  Neurological M>25.85 and M<37.35     1.6055     1.3005     1.2129     1.1075         16         16         15         15
0604..........................  Neurological M<25.85............     2.1200     1.7172     1.6016     1.4624         25         21         20         18
0701..........................  Fracture of lower extremity          0.9081     0.7815     0.7372     0.6629         10         10         10          9
                                 M>42.15.
0702..........................  Fracture of lower extremity          1.1867     1.0212     0.9633     0.8662         14         14         13         12
                                 M>34.15 and M<42.15.
0703..........................  Fracture of lower extremity          1.4492     1.2471     1.1765     1.0579         16         16         15         14
                                 M>28.15 and M<34.15.
0704..........................  Fracture of lower extremity          1.8522     1.5939     1.5037     1.3520         19         20         19         18
                                 M<28.15.
0801..........................  Replacement of lower extremity       0.6786     0.5637     0.5166     0.4690          8          8          7          7
                                 joint M>49.55.
0802..........................  Replacement of lower extremity       0.9002     0.7477     0.6853     0.6221         10         10          9          9
                                 joint M>37.05 and M<49.55.
0803..........................  Replacement of lower extremity       1.2808     1.0639     0.9750     0.8851         13         13         13         12
                                 joint M>28.65 and M<37.05 and
                                 A>83.5.
0804..........................  Replacement of lower extremity       1.1331     0.9412     0.8625     0.7830         13         12         11         11
                                 joint M>28.65 and M<37.05 and
                                 A<83.5.
0805..........................  Replacement of lower extremity       1.4300     1.1879     1.0886     0.9882         16         15         14         13
                                 joint M>22.05 and M<28.65.

[[Page 22679]]

 
0806..........................  Replacement of lower extremity       1.7498     1.4535     1.3320     1.2092         21         19         16         15
                                 joint M<22.05.
0901..........................  Other orthopedic M>44.75........     0.8724     0.7428     0.6672     0.5950         12          9         10          9
0902..........................  Other orthopedic M>34.35 and         1.1764     1.0016     0.8997     0.8023         13         13         12         11
                                 M<44.75.
0903..........................  Other orthopedic M>24.15 and         1.5455     1.3159     1.1821     1.0541         16         17         15         14
                                 M<34.35.
0904..........................  Other orthopedic M<24.15........     1.9922     1.6963     1.5238     1.3588         23         21         20         18
1001..........................  Amputation, lower extremity          0.9530     0.9074     0.7850     0.7218         11         16         10         10
                                 M>47.65.
1002..........................  Amputation, lower extremity          1.2690     1.2083     1.0452     0.9611         14         15         13         13
                                 M>36.25 and M<47.65.
1003..........................  Amputation, lower extremity          1.8511     1.7625     1.5246     1.4019         19         21         19         18
                                 M<36.25.
1101..........................  Amputation, non-lower extremity      1.1511     1.0159     0.9562     0.8734         12         13         12         12
                                 M>36.35.
1102..........................  Amputation, non-lower extremity      1.7909     1.5805     1.4877     1.3589         19         21         18         16
                                 M<36.35.
1201..........................  Osteoarthritis M>37.65..........     1.0383     0.8996     0.8403     0.7356         12         11         11         10
1202..........................  Osteoarthritis M>30.75 and           1.3069     1.1323     1.0576     0.9258         13         15         13         12
                                 M<37.65.
1203..........................  Osteoarthritis M<30.75..........     1.6806     1.4561     1.3600     1.1906         16         18         17         16
1301..........................  Rheumatoid, other arthritis          1.2933     0.9197     0.8468     0.7603         13         12         11         10
                                 M>36.35.
1302..........................  Rheumatoid, other arthritis          1.7330     1.2324     1.1347     1.0188         18         15         14         14
                                 M>26.15 and M<36.35.
1303..........................  Rheumatoid, other arthritis          2.2338     1.5885     1.4625     1.3132         18         21         19         17
                                 M<26.15.
1401..........................  Cardiac M>48.85.................     0.8468     0.7331     0.6541     0.5895         10         10         10          9
1402..........................  Cardiac M>38.55 and M<48.85.....     1.1260     0.9748     0.8697     0.7838         13         13         12         11
1403..........................  Cardiac M>31.15 and M<38.55.....     1.4026     1.2142     1.0833     0.9764         14         15         14         13
1404..........................  Cardiac M<31.15.................     1.7824     1.5430     1.3767     1.2407         19         19         17         16
1501..........................  Pulmonary M>49.25...............     0.8979     0.8644     0.7627     0.7277         10         11         10         10
1502..........................  Pulmonary M>39.05 and M<49.25...     1.1288     1.0867     0.9588     0.9149         12         14         12         12
1503..........................  Pulmonary M>29.15 and M<39.05...     1.3885     1.3367     1.1795     1.1254         16         15         15         14
1504..........................  Pulmonary M<29.15...............     1.7937     1.7267     1.5236     1.4537         22         20         19         17
1601..........................  Pain syndrome M>37.15...........     0.9517     0.8382     0.7807     0.6881         13         11         11         10
1602..........................  Pain syndrome M>26.75 and            1.3184     1.1611     1.0815     0.9532         15         15         13         13
                                 M<37.15.
1603..........................  Pain syndrome M<26.75...........     1.6571     1.4593     1.3593     1.1981         15         19         17         16
1701..........................  Major multiple trauma without        1.0571     0.9515     0.8114     0.7336         12         14         12         10
                                 brain or spinal cord injury
                                 M>39.25.
1702..........................  Major multiple trauma without        1.4300     1.2870     1.0976     0.9924         16         15         14         13
                                 brain or spinal cord injury
                                 M>31.05 and M<39.25.
1703..........................  Major multiple trauma without        1.6793     1.5114     1.2889     1.1654         20         19         16         15
                                 brain or spinal cord injury
                                 M>25.55 and M<31.05.
1704..........................  Major multiple trauma without        2.1809     1.9629     1.6740     1.5135         25         23         20         20
                                 brain or spinal cord injury
                                 M<25.55.
1801..........................  Major multiple trauma with brain     0.9865     0.9494     0.7674     0.7313         14         13         11         10
                                 or spinal cord injury M>40.85.
1802..........................  Major multiple trauma with brain     1.6484     1.5864     1.2823     1.2221         20         19         17         16
                                 or spinal cord injury M>23.05
                                 and M<40.85.
1803..........................  Major multiple trauma with brain     2.8473     2.7401     2.2149     2.1108         38         33         27         25
                                 or spinal cord injury M<23.05.
1901..........................  Guillain Barre M>35.95..........     1.1894     0.8847     0.8847     0.8847         18         11         13         12
1902..........................  Guillain Barre M>18.05 and           2.3954     1.7817     1.7817     1.7817         30         23         21         22
                                 M<35.95.
1903..........................  Guillain Barre M<18.05..........     3.8382     2.8549     2.8549     2.8549         40         36         34         36
2001..........................  Miscellaneous M>49.15...........     0.8681     0.7274     0.6556     0.5908         10         10          9          8
2002..........................  Miscellaneous M>38.75 and            1.1547     0.9676     0.8721     0.7859         12         12         11         11
                                 M<49.15.
2003..........................  Miscellaneous M>27.85 and            1.4947     1.2525     1.1288     1.0173         16         15         14         13
                                 M<38.75.

[[Page 22680]]

 
2004..........................  Miscellaneous M<27.85...........     1.9862     1.6644     1.5000     1.3518         23         20         19         17
2101..........................  Burns M>0.......................     2.0633     1.8370     1.8370     1.3345         33         23         18         16
5001..........................  Short-stay cases, length of stay  .........  .........  .........     0.1503  .........  .........  .........          3
                                 is 3 days or fewer.
5101..........................  Expired, orthopedic, length of    .........  .........  .........     0.6577  .........  .........  .........          8
                                 stay is 13 days or fewer.
5102..........................  Expired, orthopedic, length of    .........  .........  .........     1.6370  .........  .........  .........         20
                                 stay is 14 days or more.
5103..........................  Expired, not orthopedic, length   .........  .........  .........     0.6924  .........  .........  .........          8
                                 of stay is 15 days or fewer.
5104..........................  Expired, not orthopedic, length   .........  .........  .........     1.9305  .........  .........  .........         23
                                 of stay is 16 days or more.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Generally, updates to the CMG relative weights result in some 
increases and some decreases to the CMG relative weight values. Table 2 
shows, overall, how the proposed revisions in this proposed rule would 
affect particular CMG relative weight values, which affect the overall 
distribution of payments within CMGs and tiers. Note that, because we 
propose to implement the CMG relative weight revisions in a budget 
neutral manner, total estimated aggregate payments to IRFs for FY 2009 
would not be affected. However, the proposed revisions would affect the 
distribution of payments within CMGs and tiers.

   Table 2.--Distributional Effects of the Proposed Changes to the CMG
     Relative Weights (FY 2008 Values Compared With FY 2009 Values)
------------------------------------------------------------------------
                                             Number of     Percentage of
            Percentage change             cases affected  cases affected
------------------------------------------------------------------------
Increased by 15% or more................              65             0.0
Increased by between 5% and 15%.........           4,979             1.2
Changed by less than 5%.................         390,600            96.1
Decreased by between 5% and 15%.........           1,706             0.4
Decreased by 15% or more................           2,531             2.3
------------------------------------------------------------------------

    As Table 2 shows, over 96 percent of all IRF cases are in CMGs and 
tiers that would experience less than a 5 percent change (either 
increase or decrease) in the CMG relative weight value as a result of 
the proposed revisions. The most significant increase in the proposed 
CMG relative weight values, in terms of the largest number of cases 
affected, would be a 3.3 percent increase in the CMG relative weight 
value for CMG A0802--Replacement of lower extremity joint, motor score 
greater than 37.05 and motor score less than 49.55--in the ``no-
comorbidity'' tier. In the FY 2006 data, 25,822 IRF discharges were 
classified into this CMG and tier. We believe that the higher costs 
reported in this CMG and tier in FY 2006, compared with those reported 
for this CMG and tier in FY 2003, may reflect recent IRF case mix 
changes caused, at least in part, by the phase-in of the ``75 percent'' 
rule and increased medical review of IRF discharges. These changes to 
the system have likely increased the complexity of patients being 
admitted to IRFs, especially among the lower-extremity joint 
replacement cases with no comorbidities, which do not meet the 75 
percent rule criteria and have been the focus of a lot of the medical 
review activities.
    These same trends explain the most significant decrease in the 
proposed CMG relative weight values, in terms of the largest number of 
cases affected. The proposed revisions would reduce the CMG relative 
weight value for CMG 5001--Short-stay cases, length of stay is 3 days 
or fewer--by 31.7 percent. This decrease is associated with a 
substantial decrease in the number of cases classified into this 
extremely short-stay CMG, from 10,222 IRF discharges in FY 2003 to 
2,376 IRF discharges in FY 2006. We believe that increases in the 
complexity of IRF patients resulting from the ``75 percent'' rule and 
the IRF medical review activities may mean that fewer IRF patients can 
effectively be treated in IRFs for 3 days or fewer.
    The changes in the proposed average length of stay values in this 
proposed rule, compared with the current (FY 2008) average length of 
stay values, are small and primarily distributional. Some values 
increase and some decrease, compared with the FY 2008 values. The only 
notable changes are in 3 of the CMGs for traumatic spinal cord 
injuries, B0403, B0404, and B0405 (all in tier 1), for which the 
proposed average length of stay values increased by 8.55 days, 14.92 
days, and 9.72 days, respectively. This may, again, be due to increases 
in the complexity of IRF patients resulting from the ``75 percent'' 
rule and the IRF medical review activities. The overall average length 
of stay in IRFs also increased from 12.8 days in FY 2003 to 13.9 days 
in FY 2006, which may be attributable to increases in IRFs' case mix 
over this period.
    Given the recent changes in IRFs' case mix, we believe that it is 
especially important to update the CMG relative weights and average 
length of stay values at this time to reflect these changes.

III. Proposed FY 2009 IRF PPS Federal Prospective Payment Rates

A. Increase Factor for FY 2009 and Proposed FY 2009 Labor-Related Share

    Section 1886(j)(3)(C) of the Act requires the Secretary to 
establish an increase factor that reflects changes over time in the 
prices of an appropriate mix

[[Page 22681]]

of goods and services included in the covered IRF services, which is 
referred to as a market basket index. According to section 
1886(j)(3)(A)(i) of the Act, the increase factor shall be used to 
update the IRF Federal prospective payment rates for each FY. However, 
section 115 of the Medicare, Medicaid, and SCHIP Extension Act of 2007, 
Public Law 110-173, amended section 1886(j)(3)(C) of the Act to apply a 
zero percent increase factor for FYs 2008 and 2009, effective for IRF 
discharges occurring on or after April 1, 2008. In accordance with 
section 1886(j)(3)(C) of the Act, as amended by the legislation, we are 
applying an increase factor of zero percent to update the proposed IRF 
Federal prospective payment rates for FY 2009 in this proposed rule.
    We continue to use the methodology described in the FY 2006 IRF PPS 
final rule to update the labor-related share for FY 2009. In FY 2004, 
we updated the 1992 market basket data to 1997 based on the methodology 
described in the FY 2004 IRF PPS final rule (68 FR 45688 through 
45689). As discussed in the FY 2006 IRF PPS final rule (70 FR 47915 
through 47917), we rebased and revised the market basket for FY 2006 
using the 2002-based cost structures for IRFs, inpatient psychiatric 
facilities (IPFs), and long-term care hospitals (LTCHs) to determine 
the FY 2006 labor-related share. For FYs 2007 and 2008, we used the 
same methodology discussed in the FY 2006 IRF PPS final rule (70 FR at 
47908 through 47917) to determine the IRF labor-related share. For FY 
2009, we continue to use the same methodology discussed in the FY 2006 
IRF PPS final rule. The labor-related share for FY 2009 is the sum of 
the FY 2009 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 FY 2009. For this 
proposed rule, the labor-related share reflects Global Insight's first 
quarter 2008 forecast. As shown in Table 3, the total FY 2009 
Rehabilitation, Psychiatric, and Long-Term Care Hospital Market Basket 
(RPL) labor-related share in this proposed rule is 75.691 percent. We 
propose to update the labor-related share with the most recent 
available data for the final rule.

     Table 3.--Proposed FY 2009 IRF RPL Labor-Related Share Relative
                               Importance
------------------------------------------------------------------------
                                                   Proposed FY 2009 IRF
                 Cost category                     labor-related share
                                                   relative importance
------------------------------------------------------------------------
Wages and salaries.............................                   52.683
Employee benefits..............................                   14.039
Professional fees..............................                    2.896
All other labor intensive services.............                    2.137
                                                ------------------------
    Subtotal:..................................                   71.755
                                                ========================
Labor-related share of capital costs (.46).....                    3.936
                                                ------------------------
    Total:.....................................                  75.691
------------------------------------------------------------------------
Source: GLOBAL INSIGHT, INC, 1st QTR, 2008; @USMACRO/CONTROL0308 @CISSIM/
  TL0208.SIM Historical Data through 4th QTR, 2007.

B. Proposed Area Wage Adjustment

    Section 1886(j)(6) of the Act requires the Secretary to adjust the 
proportion (as estimated by the Secretary from time to time) of 
rehabilitation facilities' costs attributable to wages and wage-related 
costs by a factor (established by the Secretary) reflecting the 
relative hospital wage level in the geographic area of the 
rehabilitation facility compared to the national average wage level for 
those facilities. The Secretary is required to update the IRF PPS wage 
index on the basis of information available to the Secretary on the 
wages and wage-related costs to furnish rehabilitation services. Any 
adjustments or updates made under section 1886(j)(6) of the Act for a 
FY are made in a budget neutral manner.
    In the FY 2008 IRF PPS final rule (72 FR 44299), we maintained the 
methodology described in the FY 2006 IRF PPS final rule to determine 
the wage index, labor market area definitions, and hold harmless policy 
consistent with the rationale outlined in the FY 2006 IRF PPS final 
rule (70 FR 47917 through 47933).
    For FY 2009, we propose to maintain the policies and methodologies 
described in the FY 2008 IRF PPS final rule relating to the labor 
market area definitions and the wage index methodology for areas with 
wage data. Therefore, this proposed rule continues to use the Core-
Based Statistical Area (CBSA) labor market area definitions and the 
pre-reclassification and pre-floor hospital wage index data based on 
2004 cost report data.
    When adopting new labor market designations made by the Office of 
Management and Budget (OMB), we identified some geographic areas where 
there were no hospitals and, thus, no hospital wage index data on which 
to base the calculation of the IRF PPS wage index. We continue to use 
the same methodology discussed in the FY 2008 IRF PPS final rule (72 FR 
44299) 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 FY 2009 IRF PPS wage index.
    Additionally, this proposed rule incorporates the CBSA changes 
published in the most recent OMB bulletin that applies to the hospital 
wage data used to determine the current IRF PPS wage index. The changes 
were nomenclature and did not represent substantive changes to the 
CBSA-based designations. Specifically, OMB added or deleted certain 
CBSA numbers and revised certain titles. The OMB bulletins are 
available online at http://www.whitehouse.gov/omb/bulletins/index.html.
    Finally, as discussed in the FY 2008 IRF PPS final rule (72 FR 
44298), FY 2008 was the third and final year of the 3-year phase-out of 
the budget neutral hold harmless policy. For FY 2008 and beyond, we no 
longer apply an adjustment for IRFs that meet the criteria described in 
the FY 2006 final rule (70 FR 47923 through 47926).
1. Clarification of New England Deemed Counties
    We are taking this opportunity to address the change in the 
treatment of ``New England deemed counties'' (that is, those counties 
in New England listed in Sec.  412.64(b)(1)(ii)(B) that were deemed

[[Page 22682]]

to be parts of urban areas under section 601(g) of the Social Security 
Amendments of 1983) that was made in the FY 2008 Inpatient Prospective 
Payment System (IPPS) final rule with comment period (72 FR 47337). 
These counties include the following: Litchfield County, CT; York 
County, ME; Sagadahoc County, ME; Merrimack County, NH; and Newport 
County, RI. Of these five ``New England deemed counties,'' three (York 
County, ME, Sagadahoc County, ME, and Newport County, RI) are also 
included in metropolitan statistical areas (MSAs) defined by OMB and 
are considered urban under both the current IPPS and IRF PPS labor 
market area definitions in Sec.  412.64(b)(1)(ii)(A). The remaining 
two, Litchfield County, CT and Merrimack County, NH, are geographically 
located in areas that are considered rural under the current IPPS (and 
IRF PPS) labor market area definitions, but have been previously deemed 
urban under the IPPS in certain circumstances, as discussed below.
    In the FY 2008 IPPS final rule with comment period, (72 FR 47337 
through 47338), Sec.  412.64(b)(1)(ii)(B) was revised that the two 
``New England deemed counties'' that are still considered rural under 
the OMB definitions (Litchfield County, CT and Merrimack County, NH), 
are no longer considered urban, effective for discharges occurring on 
or after October 1, 2007, and, therefore, are considered rural in 
accordance with Sec.  412.64(b)(1)(ii)(C). However, for purposes of 
payment under the IPPS, acute care hospitals located within those areas 
are treated as being reclassified to their deemed urban area effective 
for discharges occurring on or after October 1, 2007 (see 72 FR 47337 
through 47338). We note that the IRF PPS does not provide for 
geographic reclassification. Also, in the FY 2008 IPPS final rule with 
comment period (72 FR 47338), we explained that we limited this policy 
change for the ``New England deemed counties'' only to IPPS hospitals, 
and any change to non-IPPS provider wage indexes would be addressed in 
the respective payment system rules.
    Accordingly, as stated above, we are taking this opportunity to 
clarify the treatment of ``New England deemed counties'' under the IRF 
PPS in this proposed rule.
    As discussed above, the IRF PPS has consistently used the IPPS 
definition of ``urban'' and ``rural'' with regard to the wage index 
used in the IRF PPS. Under existing Sec.  412.602, an IRF's wage index 
is determined based on the location of the IRF in an urban or rural 
area as defined in Sec. Sec.  412.64(b)(1)(ii)(A) through (C).
    Historical changes to the labor market area/geographic 
classifications and annual updates to the wage index values under the 
IRF PPS are made effective October 1 each year. When we established the 
most recent IRF PPS payment rate update, effective for discharges 
occurring on or after October 1, 2007 through September 30, 2008, we 
considered the ``New England deemed counties'' (including Litchfield 
County, CT and Merrimack County, NH) as urban for FY 2008, as evidenced 
by the inclusion of Litchfield County, CT as one of the constituent 
counties of urban CBSA 25540 (Hartford-West Hartford-East Hartford, 
CT), and the inclusion of Merrimack County, NH as one of the 
constituent counties of urban CBSA 31700 (Manchester-Nashua, NH).
    As noted above, Sec.  412.602 indicates that the terms ``rural'' 
and ``urban'' are defined according to the definitions of those terms 
in Sec. Sec.  412.64(b)(1)(ii)(A) through (C). Applying the IPPS 
definitions, Litchfield County, CT and Merrimack County, NH are not 
considered ``urban'' under Sec. Sec.  412.64(b)(1)(ii)(A) and (B) as 
revised under the FY 2008 IPPS final rule and, therefore, are 
considered ``rural'' under Sec.  412.64(b)(1)(ii)(C). Accordingly, 
reflecting our policy to use the IPPS definitions of ``urban'' and 
``rural'', these two counties would be considered ``rural'' under the 
IRF PPS effective with the next update of the IRF PPS payment rates, 
October 1, 2008, and would no longer be included in urban CBSA 25540 
(Hartford-West Hartford-East Hartford, CT) and urban CBSA 31700 
(Manchester-Nashua, NH), respectively. We note that this policy is 
consistent with our policy of not taking into account IPPS geographic 
reclassifications in determining payments under the IRF PPS. We do not 
need to make any changes to our regulations to effectuate this change.
    There is one IRF (in Merrimack County, NH) that greatly benefits 
from treating these counties as rural. This IRF would begin to receive 
a higher wage index value and the 21.3 percent adjustment that is 
applied to IRF PPS payments for rural facilities. Currently, there are 
no IRFs in the following areas: Litchfield County, CT; rural 
Connecticut; or rural New Hampshire.
2. Multi-Campus Hospital Wage Index Data
    In the FY 2008 IRF PPS final rule (72 FR 44284, August 7, 2007), we 
established IRF PPS wage index values for FY 2008 calculated from the 
same data (collected from cost reports submitted by hospitals for cost 
reporting periods beginning during FY 2003) used to compute the FY 2007 
acute care hospital inpatient wage index, without taking into account 
geographic reclassification under sections 1886(d)(8) and (d)(10) of 
the Act. The IRF PPS wage index values applicable for discharges 
occurring on or after October 1, 2007 through September 30, 2008 are 
shown in Table 1 (for urban areas) and Table 2 (for rural areas) in the 
addendum to the FY 2008 IRF PPS final rule (72 FR 44312 through 44335).
    We are continuing to use IPPS wage data for the FY 2009 IRF PPS 
Wage Index, because we believe that using the hospital inpatient wage 
data is appropriate and reasonable for the IRF PPS. We note that the 
IPPS wage data used to determine the FY 2009 IRF wage index values 
reflect our policy that was adopted under the IPPS beginning in FY 
2008, which apportions the wage data for multi-campus hospitals located 
in different labor market areas (CBSAs) to each CBSA where the campuses 
are located (see the FY 2008 IPPS final rule with comment period (72 FR 
47317 through 47320)). We computed the FY 2009 IRF PPS wage index 
values presented in this notice consistent with our pre-reclassified 
IPPS wage index policy (that is, our historical policy of not taking 
into account IPPS geographic reclassifications in determining payments 
under the IRF PPS).
    For the FY 2009 IRF PPS, we computed the wage index from IPPS wage 
data (submitted by hospitals for cost reporting periods beginning in FY 
2004 and used in the FY 2008 IPPS wage index), which allocated salaries 
and hours to the campuses of two multi-campus hospitals with campuses 
that are located in different labor areas, one in Massachusetts and 
another in Illinois. Thus, the proposed FY 2009 IRF PPS wage index 
values for the following CBSAs are affected by this policy: Boston-
Quincy, MA (CBSA 14484), Providence-New Bedford-Falls River, RI-MA 
(CBSA 39300), Chicago-Naperville-Joliet, IL (CBSA 16974) and Lake 
County-Kenosha County, IL-WI (CBSA 29404) (please refer to Table 1 in 
the addendum of this proposed rule).
3. Methodology for Applying the Proposed Revisions to the Area Wage 
Adjustment for FY 2009 in a Budget-Neutral Manner
    To calculate the wage-adjusted facility payment for the payment 
rates set forth in this proposed rule, we multiply the unadjusted 
Federal prospective payment by the proposed FY 2009 RPL labor-related 
share (75.691 percent) to determine the labor-related portion of

[[Page 22683]]

the Federal prospective payments. We then multiply this labor-related 
portion by the applicable proposed IRF wage index shown in Table 1 for 
urban areas and Table 2 for rural areas in the addendum.
    Adjustments or updates to the IRF wage index made under section 
1886(j)(6) of the Act must be made in a budget neutral manner; 
therefore, we calculated a budget neutral wage adjustment factor as 
established in the FY 2004 IRF PPS final rule and codified at Sec.  
412.624(e)(1), and described in the steps below. We propose to use the 
following steps to ensure that the FY 2009 IRF standard payment 
conversion factor reflects the update to the proposed wage indexes 
(based on the FY 2004 pre-reclassified and pre-floor hospital wage 
data) and the proposed labor-related share in a budget neutral manner:
    Step 1. Determine the total amount of the estimated FY 2008 IRF PPS 
rates, using the FY 2008 standard payment conversion factor and the 
labor-related share and the wage indexes from FY 2008 (as published in 
the FY 2008 IRF PPS final rule).
    Step 2. Calculate the total amount of estimated IRF PPS payments, 
using the FY 2008 standard payment conversion factor and the proposed 
FY 2009 labor-related share and proposed CBSA urban and rural wage 
indexes.
    Step 3. Divide the amount calculated in step 1 by the amount 
calculated in step 2, which equals the FY 2009 budget neutral wage 
adjustment factor of 1.0004.
    Step 4. Apply the FY 2009 budget neutral wage adjustment factor 
from step 3 to the FY 2008 IRF PPS standard payment conversion factor 
after the application of the estimated market basket update to 
determine the FY 2009 standard payment conversion factor.

C. Description of the Proposed IRF Standard Payment Conversion Factor 
and Proposed Payment Rates for FY 2009

    To calculate the proposed standard payment conversion factor for FY 
2009, as illustrated in Table 5 below, we begin with the standard 
payment conversion factor for FY 2008. To explain how we determined the 
standard payment conversion factor for FY 2008, we include Table 4 
below. The final FY 2008 IRF standard payment conversion factor that we 
show in Tables 4 and 5 below is different than the IRF standard payment 
conversion factor that we finalized in the FY 2008 IRF PPS final rule 
(72 FR 44284) because we adjusted the IRF standard payment conversion 
factor for IRF discharges occurring on or after April 1, 2008 to 
reflect the changes codified in section 115 of the Medicare, Medicaid, 
and SCHIP Extension Act of 2007 (Pub. L. 110-173). Section 115 of the 
Medicare, Medicaid, and SCHIP Extension Act of 2007 amended section 
1886(j)(3)(C) of the Act to require the Secretary to apply a zero 
percent increase factor for FYs 2008 and 2009, effective for discharges 
occurring on or after April 1, 2008. Section 1886(j)(3)(C) of the Act 
requires the Secretary to develop an increase factor to update the IRF 
Federal prospective payment rates for each FY. For a discussion of the 
increase factor the Secretary typically uses to update the IRF Federal 
prospective payment rates, see the FY 2008 IRF PPS final rule (72 FR 
44284). In the FY 2008 IRF PPS final rule, we used the RPL market 
basket estimate described in that final rule (3.2 percent) to update 
the IRF standard payment conversion factor. As shown in Table 3 of the 
FY 2008 IRF PPS final rule, applying this market basket estimate to the 
standard payment amount resulted in a final standard payment conversion 
factor for FY 2008 of $13,451.
    However, section 115 of the Medicare, Medicaid, and SCHIP Extension 
Act of 2007 had the effect of changing the increase factor for FY 2008 
from 3.2 percent to zero percent for discharges occurring on or after 
April 1, 2008. This, in turn, had the effect of decreasing the IRF 
standard payment conversion factor for discharges occurring on or after 
April 1, 2008.
    As shown in Table 4, to develop the FY 2008 standard payment 
conversion factor for discharges beginning on or after April 1, 2008, 
we started with the FY 2007 standard payment conversion factor that was 
finalized in the FY 2007 IRF PPS final rule (71 FR 48354). We then 
multiplied this by the zero percent increase factor, as described 
above. Then, we applied the same FY 2008 budget neutrality factor 
(1.0041) for the Wage Index, Labor-Related Share, and the Hold Harmless 
Provision that was published in the FY 2008 IRF PPS Final Rule (72 FR 
44284). This resulted in the final FY 2008 standard payment conversion 
factor, effective for discharges occurring on or after April 1, 2008, 
of $13,034.

  Table 4.--Calculations To Determine the FY 2008 IRF Standard Payment
  Conversion Factor for Discharges Beginning on or After April 1, 2008
------------------------------------------------------------------------
               Explanation for adjustment                  Calculations
------------------------------------------------------------------------
FY 2007 Standard Payment Conversion Factor (published in         $12,981
 the FY 2007 IRF PPS Final Rule (71 FR 48354))..........
Zero Percent Increase Factor for Discharges Occurring on        x 1.0000
 or after April 1, 2008.................................
Budget Neutrality Factor for the Wage Index, Labor-             x 1.0041
 Related Share, and the Hold Harmless Provision that was
 published in the FY 2008 IRF PPS Final Rule (72 FR
 44284).................................................
Standard Payment Conversion Factor for Discharges              = $13,034
 Occurring on or After April 1, 2008....................
------------------------------------------------------------------------

    As a result, the IRF standard payment conversion factor changed 
from $13,451 for discharges occurring on or after October 1, 2007 to 
$13,034 for discharges occurring on or after April 1, 2008.
    Further, as required by section 115 of the Medicare, Medicaid, and 
SCHIP Extension Act of 2007, we apply an increase factor of zero 
percent to the standard payment conversion factor for FY 2009, meaning 
that it does not change from the current value of $13,034. Next, we 
apply the proposed combined budget neutrality factor for the FY 2009 
wage index and labor related share of 1.0004, which would result in a 
standard payment amount of $13,039. Finally, we apply the proposed 
budget neutrality factor for the revised CMG relative weights of 
0.9969, which would result in the proposed FY 2009 standard payment 
conversion factor of $12,999.

    Table 5.--Calculations to Determine the Proposed FY 2009 Standard
                        Payment Conversion Factor
------------------------------------------------------------------------
               Explanation for adjustment                  Calculations
------------------------------------------------------------------------
Standard Payment Conversion Factor for Discharges                $13,034
 Occurring on or After April 1, 2008....................

[[Page 22684]]

 
Zero Percent Increase Factor for FY 2009................        x 1.0000
Proposed Budget Neutrality Factor for the Wage Index and        x 1.0004
 Labor-Related Share....................................
Proposed Budget Neutrality Factor for the Revisions to          x 0.9969
 the CMG Relative Weights...............................
Proposed FY 2009 Standard Payment Conversion Factor.....       = $12,999
------------------------------------------------------------------------

    After the application of the CMG relative weights described in 
section II of this proposed rule, the resulting proposed unadjusted IRF 
prospective payment rates for FY 2009 are shown below in Table 6, 
``Proposed FY 2009 Payment Rates.''

                                    Table 6.--Proposed FY 2009 Payment Rates
----------------------------------------------------------------------------------------------------------------
                                      Payment rate tier  Payment rate tier  Payment rate tier   Payment rate no
                 CMG                          1                  2                  3             comorbidity
----------------------------------------------------------------------------------------------------------------
0101................................         $10,062.53          $9,415.18          $8,401.25          $8,087.98
0102................................          12,438.74          11,638.00          10,384.90           9,997.53
0103................................          14,538.08          13,603.45          12,138.47          11,686.10
0104................................          15,609.20          14,604.38          13,031.50          12,545.33
0105................................          18,467.68          17,279.57          15,418.11          14,843.56
0106................................          21,311.86          19,941.77          17,793.03          17,130.08
0107................................          24,471.92          22,897.74          20,431.83          19,670.09
0108................................          29,156.76          27,281.00          24,341.93          23,434.60
0109................................          28,128.54          26,319.08          23,483.99          22,609.16
0110................................          35,075.20          32,818.58          29,284.15          28,192.23
0201................................          10,343.30           8,536.44           7,730.51           7,161.15
0202................................          13,115.99          10,824.27           9,802.55           9,079.80
0203................................          15,813.28          13,051.00          11,818.69          10,947.76
0204................................          17,260.07          14,245.60          12,900.21          11,949.98
0205................................          20,876.39          17,230.17          15,604.00          14,453.59
0206................................          26,654.45          21,998.21          19,922.27          18,454.68
0207................................          34,973.81          28,864.28          26,139.69          24,213.24
0301................................          14,230.01          12,092.97          11,050.45           9,931.24
0302................................          18,307.79          15,558.50          14,217.01          12,776.72
0303................................          22,000.81          18,697.76          17,085.89          15,354.42
0304................................          29,899.00          25,410.45          23,218.81          20,867.29
0401................................          12,380.25          10,705.98           9,998.83           9,238.39
0402................................          17,481.06          15,116.54          14,119.51          13,044.50
0403................................          29,857.40          25,819.91          24,115.74          22,280.29
0404................................          53,908.15          46,619.61          43,542.75          40,226.71
0405................................          43,789.73          37,868.69          35,368.98          32,676.89
0501................................           9,729.75           8,635.24           7,616.11           6,806.28
0502................................          13,156.29          11,675.70          10,297.81           9,203.29
0503................................          17,248.37          15,308.92          13,502.06          12,065.67
0504................................          20,984.29          18,623.67          16,426.84          14,679.77
0505................................          24,805.99          22,015.11          19,417.91          17,352.37
0506................................          33,874.09          30,062.79          26,516.66          23,695.88
0601................................          12,358.15          10,010.53           9,335.88           8,524.74
0602................................          16,413.84          13,295.38          12,399.75          11,322.13
0603................................          20,869.89          16,905.20          15,766.49          14,396.39
0604................................          27,557.88          22,321.88          20,819.20          19,009.74
0701................................          11,804.39          10,158.72           9,582.86           8,617.04
0702................................          15,425.91          13,274.58          12,521.94          11,259.73
0703................................          18,838.15          16,211.05          15,293.32          13,751.64
0704................................          24,076.75          20,719.11          19,546.60          17,574.65
0801................................           8,821.12           7,327.54           6,715.28           6,096.53
0802................................          11,701.70           9,719.35           8,908.21           8,086.68
0803................................          16,649.12          13,829.64          12,674.03          11,505.41
0804................................          14,729.17          12,234.66          11,211.64          10,178.22
0805................................          18,588.57          15,441.51          14,150.71          12,845.61
0806................................          22,745.65          18,894.05          17,314.67          15,718.39
0901................................          11,340.33           9,655.66           8,672.93           7,734.41
0902................................          15,292.02          13,019.80          11,695.20          10,429.10
0903................................          20,089.95          17,105.38          15,366.12          13,702.25
0904................................          25,896.61          22,050.20          19,807.88          17,663.04
1001................................          12,388.05          11,795.29          10,204.22           9,382.68
1002................................          16,495.73          15,706.69          13,586.55          12,493.34
1003................................          24,062.45          22,910.74          19,818.28          18,223.30
1101................................          14,963.15          13,205.68          12,429.64          11,353.33
1102................................          23,279.91          20,544.92          19,338.61          17,664.34

[[Page 22685]]

 
1201................................          13,496.86          11,693.90          10,923.06           9,562.06
1202................................          16,988.39          14,718.77          13,747.74          12,034.47
1203................................          21,846.12          18,927.84          17,678.64          15,476.61
1301................................          16,811.61          11,955.18          11,007.55           9,883.14
1302................................          22,527.27          16,019.97          14,749.97          13,243.38
1303................................          29,037.17          20,648.91          19,011.04          17,070.29
1401................................          11,007.55           9,529.57           8,502.65           7,662.91
1402................................          14,636.87          12,671.43          11,305.23          10,188.62
1403................................          18,232.40          15,783.39          14,081.82          12,692.22
1404................................          23,169.42          20,057.46          17,895.72          16,127.86
1501................................          11,671.80          11,236.34           9,914.34           9,459.37
1502................................          14,673.27          14,126.01          12,463.44          11,892.79
1503................................          18,049.11          17,375.76          15,332.32          14,629.07
1504................................          23,316.31          22,445.37          19,805.28          18,896.65
1601................................          12,371.15          10,895.76          10,148.32           8,944.61
1602................................          17,137.88          15,093.14          14,058.42          12,390.65
1603................................          21,540.64          18,969.44          17,669.54          15,574.10
1701................................          13,741.24          12,368.55          10,547.39           9,536.07
1702................................          18,588.57          16,729.71          14,267.70          12,900.21
1703................................          21,829.22          19,646.69          16,754.41          15,149.03
1704................................          28,349.52          25,515.74          21,760.33          19,673.99
1801................................          12,823.51          12,341.25           9,975.43           9,506.17
1802................................          21,427.55          20,621.61          16,668.62          15,886.08
1803................................          37,012.05          35,618.56          28,791.49          27,438.29
1901................................          15,461.01          11,500.22          11,500.22          11,500.22
1902................................          31,137.80          23,160.32          23,160.32          23,160.32
1903................................          49,892.76          37,110.85          37,110.85          37,110.85
2001................................          11,284.43           9,455.47           8,522.14           7,679.81
2002................................          15,009.95          12,577.83          11,336.43          10,215.91
2003................................          19,429.61          16,281.25          14,673.27          13,223.88
2004................................          25,818.61          21,635.54          19,498.50          17,572.05
2101................................          26,820.84          23,879.16          23,879.16          17,347.17
5001................................               0.00               0.00               0.00           1,953.75
5101................................               0.00               0.00               0.00           8,549.44
5102................................               0.00               0.00               0.00          21,279.36
5103................................               0.00               0.00               0.00           9,000.51
5104................................               0.00               0.00               0.00          25,094.57
----------------------------------------------------------------------------------------------------------------

D. Example of the Methodology for Adjusting the Proposed Federal 
Prospective Payment Rates

    Table 7 illustrates the proposed methodology for adjusting the 
Federal prospective payments (as described in sections III.A through 
III.C of this proposed rule). The examples below are based on two 
hypothetical Medicare beneficiaries, both classified into CMG 0110 
(without comorbidities). The unadjusted Federal prospective payment 
rate for CMG 0110 (without comorbidities) appears in Table 6 above.
    One beneficiary is in Facility A, an IRF located in rural Spencer 
County, Indiana, and another beneficiary is in Facility B, an IRF 
located in urban Harrison County, Indiana. Facility A, a non-teaching 
hospital, has a disproportionate share hospital (DSH) percentage of 5 
percent (which results in a low-income percentage (LIP) adjustment of 
1.0309), a wage index of 0.8576, and an applicable rural adjustment of 
21.3 percent. Facility B, a teaching hospital, has a DSH percentage of 
15 percent (which results in a LIP adjustment of 1.0910), a wage index 
of 0.9065, and an applicable teaching status adjustment of 0.109.
    To calculate each IRF's labor and non-labor portion of the Federal 
prospective payment, we begin by taking the unadjusted Federal 
prospective payment rate for CMG 0110 (without comorbidities) from 
Table 6 above. Then, we multiply the estimated labor-related share 
(75.691) described in section III.A by the unadjusted Federal 
prospective payment rate. To determine the non-labor portion of the 
Federal prospective payment rate, we subtract the labor portion of the 
Federal payment from the unadjusted Federal prospective payment.
    To compute the wage-adjusted Federal prospective payment, we 
multiply the result of the labor portion of the Federal payment by the 
appropriate wage index found in the addendum in Tables 1 and 2, which 
would result in the wage-adjusted amount. Next, we compute the wage-
adjusted Federal payment by adding the wage-adjusted amount to the non-
labor portion.
    Adjusting the Federal prospective payment by the facility-level 
adjustments involves several steps. First, we take the wage-adjusted 
Federal prospective payment and multiply it by the appropriate rural 
and LIP adjustments (if applicable). Second, to determine the 
appropriate amount of additional payment for the teaching status 
adjustment (if applicable), we multiply the teaching status adjustment 
(0.109, in this example) by the wage-adjusted and rural-adjusted amount 
(if applicable). Finally, we add the additional teaching status 
payments (if applicable) to the wage, rural, and LIP-adjusted Federal 
prospective payment rates. Table 7 illustrates the components of the 
proposed adjusted payment calculation.

[[Page 22686]]



               Table 7.--Example of Computing an IRF-Proposed FY 2009 Federal Prospective Payment
----------------------------------------------------------------------------------------------------------------
                                                                                                Urban Facility B
               Steps                                                         Rural Facility A    (Harrison Co.,
                                                                            (Spencer Co., IN)         IN)
----------------------------------------------------------------------------------------------------------------
1.................................  Unadjusted Federal Prospective Payment         $28,192.23         $28,192.23
2.................................  Labor Share...........................          x 0.75691          x 0.75691
3.................................  Labor Portion of Federal Payment......       = $21,338.98       = $21,338.98
4.................................  CBSA Based Wage Index (shown in the              x 0.8576           x 0.9065
                                     Addendum, Tables 1 and 2).
5.................................  Wage-Adjusted Amount..................       = $18,300.31       = $19,343.79
6.................................  Non-labor Amount......................        + $6,853.25        + $6,853.25
7.................................  Wage-Adjusted Federal Payment.........       = $25,153.56       = $26,197.04
8.................................  Rural Adjustment......................            x 1.213            x 1.000
9.................................  Wage- and Rural-Adjusted Federal             = $30,511.27       = $26,197.04
                                     Payment.
10................................  LIP Adjustment........................           x 1.0309           x 1.0910
11................................  FY 2009 Wage-, Rural- and LIP-Adjusted       = $31,454.07       = $28,580.97
                                     Federal Prospective Payment Rate.
12................................  FY 2009 Wage- and Rural-Adjusted               $30,511.27         $26,197.04
                                     Federal Prospective Payment.
13................................  Teaching Status Adjustment............            x 0.000            x 0.109
14................................  Teaching Status Adjustment Amount.....            = $0.00        = $2,855.48
15................................  FY 2009 Wage-, Rural-, and LIP-              + $31,454.07       + $28,580.97
                                     Adjusted Federal Prospective Payment
                                     Rate.
16................................  Total FY 2009 Adjusted Federal               = $31,454.07       = $31,436.44
                                     Prospective Payment.
----------------------------------------------------------------------------------------------------------------

    Thus, the proposed adjusted payment for Facility A would be 
$31,454.07 and the proposed adjusted payment for Facility B would be 
$31,436.44.

IV. Proposed Update to Payments for High-Cost Outliers Under the IRF 
PPS

A. Proposed Update to the Outlier Threshold Amount for FY 2009

    Section 1886(j)(4) of the Act provides the Secretary with the 
authority to make payments in addition to the basic IRF prospective 
payments for cases incurring extraordinarily high costs. A case 
qualifies for an outlier payment if the estimated cost of the case 
exceeds the adjusted outlier threshold. We calculate the adjusted 
outlier threshold by adding the IRF PPS payment for the case (that is, 
the CMG payment adjusted by all of the relevant facility-level 
adjustments) and the adjusted threshold amount (also adjusted by all of 
the relevant facility-level adjustments). Then, we calculate the 
estimated cost of a case by multiplying the IRF's overall CCR by the 
Medicare allowable covered charge. If the estimated cost of the case is 
higher than the adjusted outlier threshold, we make an outlier payment 
for the case equal to 80 percent of the difference between the 
estimated cost of the case and the outlier threshold.
    In the FY 2002 IRF PPS final rule (66 FR 41316, 41362 through 
41363), we discussed our rationale for setting the outlier threshold 
amount for the IRF PPS so that estimated outlier payments would equal 3 
percent of total estimated payments. Subsequently, we updated the IRF 
outlier threshold amount in the FYs 2006, 2007, and 2008 IRF PPS final 
rules (70 FR 47880, 70 FR 57166, 71 FR 48354, and 72 FR 44284) to 
maintain estimated outlier payments at 3 percent of total estimated 
payments, and we also stated that we would continue to analyze the 
estimated outlier payments for subsequent years and adjust the outlier 
threshold amount as appropriate to maintain the 3 percent target.
    For this proposed rule, we performed an updated analysis of FY 2006 
claims and IRF-PAI data using the same methodology that we used to set 
the initial outlier threshold amount when we first implemented the IRF 
PPS in the FY 2002 IRF PPS final rule (66 FR 41316), which is also the 
same methodology we used to update the outlier threshold amounts for 
FYs 2006, 2007, and 2008. (Note that the methodology that we use to 
calculate the appropriate outlier threshold amount for each FY requires 
us to simulate Medicare payments for that FY, which requires the use of 
IRF-PAI data. The CMGs and tiers in effect for FY 2009 would be 
slightly different than those that were in effect for FY 2006, due to 
revisions that were implemented in the FY 2007 IRF PPS final rule (71 
FR 48354). Thus, we use the IRF-PAI data rather than the IRF claims 
data to classify the FY 2006 patients into the appropriate CMGs and 
tiers for FY 2009 to simulate payments and thereby calculate the 
appropriate outlier threshold amount.) We did not update the outlier 
threshold amounts for FYs 2003, 2004, and 2005 because data from the 
FYs immediately after we implemented the IRF PPS were not yet available 
to perform the analysis of the outlier threshold amount for these FYs.
    For FY 2009, based on an analysis of updated FY 2006 claims and 
IRF-PAI data, we estimate that IRF outlier payments as a percentage of 
total estimated payments would be 3.7 percent without the proposed 
change to the outlier threshold amount. The reason for this change is 
discussed below.
    In the FY 2008 IRF PPS final rule (72 FR 44284), we established an 
outlier threshold amount for FY 2008 that would maintain estimated IRF 
outlier payments equal to 3 percent of total estimated IRF payments. 
However, the estimate of the outlier threshold amount for a given FY is 
dependent upon the estimated total IRF PPS payments for that FY. If 
estimated total IRF PPS payments for a FY decrease, then the outlier 
threshold amount must increase to maintain estimated outlier payments 
at 3 percent of total estimated payments.
    Further, we use the IRF market basket estimate to project IRF cost 
increases for each FY. If we project IRF cost increases for a given FY 
that are larger than the projected increase in IRF PPS payments in that 
FY, then the outlier threshold amount must increase for that FY to 
maintain estimated outlier payments at 3 percent of total estimated 
payments.
    As discussed previously in this proposed rule, section 115 of the 
Medicare, Medicaid, and SCHIP Extension Act of 2007 (Pub. L. 110-173), 
which amended section 1886(j)(3)(C) of the Social Security Act, 
required the Secretary to apply a zero percent increase factor for FYs 
2008 and 2009, effective for discharges occurring on or after April 1, 
2008. The effect of this change was to decrease projected IRF PPS 
payments after we implemented what would have been the appropriate 
outlier threshold amount for FY 2008 if the increase factor had not 
been adjusted mid-year. We estimate that total IRF PPS payments for FY 
2008 decreased from approximately $6.5 billion to approximately $6.4 
billion as a result of the changes codified in section 115 of the 
Medicare, Medicaid, and SCHIP Extension Act of 2007 (Pub. L. 110-173). 
This reduction in estimated total payments for FY 2008, and lack of

[[Page 22687]]

increase to estimated total payments for FY 2009 that is an effect of 
the legislative adjustment to the increase factor for FY 2009 
(described above), had the indirect effect of increasing our estimates 
of outlier payments as a percentage of total estimated payments for FYs 
2008 and 2009. We estimate that IRF outlier payments as a percentage of 
total estimated payments for FY 2008 would exceed 3 percent, because of 
the change in estimated aggregate IRF PPS payments for FY 2008 that is 
described above.
    In addition, we estimate that IRF costs would increase by 3.0 
percent (the FY 2009 IRF market basket estimate) between FY 2008 and FY 
2009. The combined effect of the estimated decrease in IRF PPS payments 
for FY 2008, the lack of increase to IRF PPS payments for FY 2009 that 
is an effect of the legislative adjustment to the increase factor for 
FY 2009 (described above), and the projected 3.0 percent increase in 
IRF costs for FY 2009 is to increase estimated IRF outlier payments to 
3.7 percent of total estimated payments for FY 2009. This increase in 
estimated IRF outlier payments as a percentage of total estimated 
payments for FY 2009 results in a larger than anticipated increase in 
the outlier threshold amount for FY 2009 to maintain estimated outlier 
payments at 3 percent of total estimated payments.
    Based on the updated analysis of FY 2006 claims and IRF-PAI data 
and the revised estimates of total IRF PPS payments for FYs 2008 and 
2009 (as discussed above), we propose to update the outlier threshold 
amount to $9,191 to maintain estimated outlier payments at 3 percent of 
total estimated aggregate IRF payments for FY 2009.
    The outlier threshold amount for FY 2009 is subject to change in 
the final rule based on analysis of updated data.

B. Update to the IRF Cost-to-Charge Ratio Ceilings

    In accordance with the methodology stated in the FY 2004 IRF PPS 
final rule (68 FR 45692 through 45694), we apply a ceiling to IRFs' 
CCRs. Using the methodology described in that final rule, we propose to 
update the national urban and rural CCRs for IRFs. We apply the 
national urban and rural CCRs in the following situations:
     New IRFs that have not yet submitted their first Medicare 
cost report.
     IRFs whose overall CCR is in excess of the proposed 
national CCR ceiling for FY 2009, as discussed below.
     Other IRFs accurate data which to calculate an overall CCR 
are not available.
    Specifically, for FY 2009, we estimate a proposed national average 
CCR of 0.616 for rural IRFs, which we calculate by taking an average of 
the CCRs for all rural IRFs for which we have sufficient cost report 
data. Similarly, we estimate a proposed national CCR of 0.486 for urban 
IRFs, which we calculate by taking an average of the CCRs for all urban 
IRFs for which we have sufficient cost report data. We weight both of 
these averages by the IRFs' estimated costs, meaning that the CCRs of 
IRFs with higher costs factor more heavily into the averages than the 
CCRs of IRFs with lower costs. For new IRFs, we use these national CCRs 
until the facility's actual CCR can be computed using the first settled 
cost report (either tentative or final, whichever is earlier).
    In addition, we propose to set the national CCR ceiling at 1.58 for 
FY 2009. This means that, if an individual IRF's CCR exceeds this 
ceiling of 1.58 for FY 2009, we would replace the IRF's CCR with the 
appropriate national average CCR (either rural or urban, depending on 
the geographic location of the IRF). We estimate the national CCR 
ceiling by:
    Step 1. Taking the national average CCR of all IRFs for which we 
have sufficient cost report data (both rural and urban IRFs combined);
    Step 2. Estimating the standard deviation of the national average 
CCR computed in step 1;
    Step 3. Multiplying the standard deviation of the national average 
CCR computed in step 2 by a factor of 3; and
    Step 4. Adding the result from step 3 to the national average CCR 
of all IRFs for which we have sufficient cost report data, from step 1.
    We note that the proposed national average rural and urban CCRs and 
our estimate of the national CCR ceiling in this section are subject to 
change in the final rule based on analysis of updated data.

V. Revisions to the Regulation Text in Response to the Medicare, 
Medicaid, and SCHIP Extension Act of 2007

    Section 115 of the Medicare, Medicaid, and SCHIP Extension Act of 
2007 (Pub. L. 110-173) amended section 5005 of the Deficit Reduction 
Act of 2005 (DRA, Pub. L. 109-171) to revise the following elements of 
the 75 percent rule that are used to classify IRFs:
     The compliance rate that IRFs must meet to be excluded 
from the IPPS and to be paid under the IRF PPS shall be no greater than 
the 60 percent compliance rate that became effective for cost reporting 
periods beginning on or after July 1, 2006.
     Patient comorbidities that satisfy the criteria specified 
in 42 CFR 412.23(b)(2)(i) shall be included in the calculations used to 
determine whether an IRF meets the 60 percent compliance percentage for 
cost reporting periods beginning on or after July 1, 2007.
    Although section 115 of the Medicare, Medicaid, and SCHIP Extension 
Act of 2007 (Pub. L. 110-173) grants the Secretary broad discretion to 
implement compliance criteria up to 60 percent, we are setting the 
compliance rate at 60 percent, the highest level possible within 
current statutory authority, for the reasons discussed below. In 
addition, we will monitor the impact of the new compliance criteria to 
ensure that IRFs predominantly treat patients who benefit most from 
this level of care.
    We believe that a 60 percent compliance rate implements the 
provisions of the statute with minimal disruption to IRF operations. 
The 60 percent compliance rate has been in effect for cost reporting 
periods beginning on or after July 1, 2005, and the overwhelming 
majority of IRFs have already adjusted operations to meet or exceed the 
60 percent compliance rate. Fewer than 20 IRFs out of approximately 
1,250 IRFs nationwide have been declassified since the May 7, 2004 
final rule (69 FR 25752) became effective. Thus, a conservative 
estimate is that over 98 percent of IRFs have been able to meet or 
exceed the 60 percent compliance rate.
    Maintaining the 60 percent compliance rate also allows us to more 
effectively analyze changes in IRF operations and admissions patterns 
that would be needed to comply with the current statutory requirement 
to analyze IRF utilization and issue a report to Congress.
    Finally, we believe that setting the compliance rate at 60 percent, 
the highest level possible within current statutory authority, will 
help to ensure that IRFs predominantly treat patients who benefit most 
from this level of care. Prior to the implementation of section 115 of 
the Medicare, Medicaid, and SCHIP Extension Act of 2007 (Pub. L. 110-
173), the Medicare regulations in 42 CFR Sec.  412.23(b)(2) specified 
that a 75 percent compliance rate would become effective, and that 
comorbidities would no longer be used to determine whether an IRF met 
the 75 percent rule requirements, for cost reporting periods beginning 
on or after July 1, 2008.
    We note that the FY 2009 President's budget proposes a repeal of 
the provisions in section 115 of the Medicare, Medicaid, and SCHIP 
Extension Act of 2007 (Pub. L. 110-173) that require that the 
compliance rate be

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set no higher than 60 percent for cost reporting periods beginning on 
or after July 1, 2006 and that patient comorbidities continue to be 
used in the calculations for determining whether an IRF meets the 
compliance percentage for cost reporting periods beginning on or after 
July 1, 2007.
    For these reasons, we propose the following revisions to the 
regulation text in Sec.  412.23(b). Specifically, we propose to remove 
the following phrases from the first sentence of Sec.  412.23(b)(2)(i):
     ``and before July 1, 2007;'' and
     ``and for cost reporting periods beginning on or after 
July 1, 2007 and before July 1, 2008, the hospital has served an 
inpatient population of whom at least 65 percent,''
    We also propose to remove Sec.  412.23(b)(2)(ii) in its entirety, 
redesignate the existing Sec.  412.23(b)(2)(iii) to Sec.  
412.23(b)(2)(ii), and revise all references to the previously numbered 
Sec.  412.23(b)(2)(iii) accordingly.
    As noted above, we will continue to monitor trends in IRF 
utilization and spending to ensure that IRFs are treating the types of 
patients who benefit most from the intensive rehabilitation therapies 
provided in IRFs. In this regard, we will also continue to work with 
the Medicare contractors to review the medical necessity of IRF claims. 
With the IRF compliance rate set below 75 percent, it is particularly 
important for the Medicare contractors to review the medical necessity 
of IRF stays, regardless of whether the primary reason for admission is 
1 or more of the 13 conditions listed in Sec.  412.23(b)(2)(iii) (which 
is being redesignated as Sec.  412.23(b)(2)(ii) in this proposed rule). 
We also believe that it is important for us to work with stakeholders 
to review the IRF medical necessity criteria to ensure that they 
reflect the current practice of medicine, and that they are 
consistently interpreted and applied by the stakeholders.

VI. Post Acute Care Payment Reform

    Under current law, Medicare covers post-acute care (PAC) services 
in various care settings, including skilled nursing facilities (SNFs), 
home health agencies (HHAs), long-term care hospitals (LTCHs), and 
IRFs. Each of the PAC sites has a separate payment system that relies 
on different patient assessment instruments, although there is no 
mandated assessment instrument for LTCHs. The current model is based on 
provider-oriented ``silos'' with significant payment differentials 
existing between provider types that treat similar patients and provide 
similar services.
    In the FY 2007 IRF PPS proposed rule (71 FR at 28134), we described 
our plans to explore refinements to the existing PAC payment 
methodologies to create a more seamless system for the delivery and 
payment of PAC services under Medicare. The new model will focus on 
beneficiary needs rather than provider type and will be characterized 
by more consistent payments for the same type of care across different 
sites of service, quality driven pay-for-performance incentives, and 
collection of uniform clinical assessment information to support 
quality and discharge planning functions.
    We also noted in the FY 2007 IRF PPS proposed rule (71 FR at 28134) 
that section 5008 of the Deficit Reduction Act (DRA) of 2005 mandates a 
PAC payment reform demonstration for purposes of understanding costs 
and outcomes across different PAC sites. To meet this mandate, CMS 
implemented the PAC Payment Reform Demonstration (PAC-PRD) to examine 
differences in costs and outcomes for PAC patients of similar case mix 
who use different types of PAC providers and to develop a standardized 
patient assessment tool for use at acute care hospital discharge and at 
PAC admission and discharge. This tool, the Continuity Assessment 
Record and Evaluation (CARE) tool, will measure the health and 
functional status of Medicare acute discharges. During the 
demonstration, CARE will be completed upon a patient's discharge from 
the acute care hospital and upon admission and discharge from a PAC 
setting. The CARE instrument consists of a core set of assessment items 
that are common to all patients and care settings and are organized 
under several major domains: Medical, Functional, Cognitive, Social, 
and Continuity of Care, in addition to supplemental items for specific 
conditions and care settings.
    Additional information on the PAC-PRD is available at: http://www.cms.hhs.gov/DemoProjectsEvalRpts/MD/itemdetail.asp?filterType=dual,%20keyword&filterValue=post%20acute%20care&filterByDID=0&sortByDID=3&sortOrder=descending&itemID=CMS1201325&intNumPerPage=10.
    We are interested in receiving public comments on the CARE 
instrument, and specifically invite comments on how CARE might advance 
the use of Health Information Technology (HIT) in automating the 
process for collecting and submitting quality data. The CARE tool is 
available at http://www.cms.hhs.gov/paperworkreductionactof1995/pral/list.asp. Viewers should scroll down to the entry for CMS-10243, ``Data 
Collection for Administering the Medicare Continuity Assessment Record 
and Evaluation (CARE) Instrument.'' Viewers can then click on the link 
to CMS-10243, click on the link to ``Downloads,'' and open Appendix A 
(``CARE Tool Item Matrix,'' a .pdf file) and Appendix B (``CARE Tool 
Master Document,'' in Microsoft Word).
    In addition, we wish to take this opportunity to discuss recent 
developments in the related area of value-based purchasing (VBP). VBP 
ties payment to performance through the use of incentives based on 
measures of quality and cost of care. The implementation of VBP is 
rapidly transforming CMS from being a passive payer of claims to an 
active purchaser of higher quality, more efficient health care for 
Medicare beneficiaries. Our VBP initiatives include hospital pay for 
reporting (the Reporting Hospital Quality Data for the Annual Payment 
Update Program), physician pay for reporting (the Physician Quality 
Reporting Initiative), home health pay for reporting, the Hospital VBP 
Plan Report to Congress, and various VBP demonstration programs across 
payment settings, including the Premier Hospital Quality Incentive 
Demonstration and the Physician Group Practice Demonstration.
    The preventable hospital-acquired conditions (HAC) payment 
provision for IPPS hospitals is another of CMS' value-based purchasing 
initiatives. Section 1886(d)(4)(D) of the Act required the Secretary to 
select for the HAC IPPS payment provision conditions that: (a) Are high 
cost, high volume, or both; (b) are assigned to a higher-paying 
diagnosis-related group (DRG) when present as a secondary diagnosis; 
and (c) could reasonably have been prevented through the application of 
evidence-based guidelines. Beginning October 1, 2008, Medicare can no 
longer assign an inpatient hospital discharge to a higher-paying MS-DRG 
if a selected HAC condition was not present on admission. That is, the 
case will be paid as though the preventable condition that becomes a 
secondary diagnosis were not present. (Medicare will continue to assign 
a discharge to a higher-paying MS-DRG in those instances where the 
selected condition was, in fact, present on admission).
    The broad principle articulated in the HAC payment provision for 
IPPS hospitals--of Medicare not paying for these types of preventable 
conditions--could potentially be applied to other Medicare payment 
systems for similar conditions that occur in settings other than IPPS 
hospitals. Other possible

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settings of care might include hospital outpatient departments, SNFs, 
HHAs, end-stage renal disease facilities, and physician practices. The 
implementation would be different for each setting, as each payment 
system is different and the reasonable preventability through the 
application of evidence-based guidelines would vary for candidate 
conditions over the different settings. However, alignment of 
incentives across settings of care is an important goal for all of CMS' 
VBP initiatives, including the HAC provision.
    A related application of the broad principle behind the HAC payment 
provision for IPPS hospitals could be considered through Medicare 
secondary payer policy by requiring the provider that failed to prevent 
the occurrence of a preventable condition in one setting to pay for all 
or part of the necessary follow-up care in a second setting. This would 
help shield the Medicare program from inappropriately paying for the 
downstream effects of a preventable condition acquired in the first 
setting but treated in the second setting.
    We note that we are not proposing new Medicare policy in this 
discussion of the possible application of HACs payment policy for IPPS 
hospitals to other settings, as some of these approaches may require 
new statutory authority. Rather, we are seeking public comment on the 
application of the preventable HACs payment provision for IPPS 
hospitals to other Medicare payment systems and settings. We look 
forward to working with stakeholders in the fight against these 
preventable conditions.

VII. Provisions of the Proposed Rule

    We are proposing to make revisions to the regulation text in 
response to section 115 of the Medicare, Medicaid, and SCHIP Extension 
Act of 2007 (Pub. L. 110-173). Specifically, we are proposing to revise 
42 CFR part 412. We discuss these proposed revisions and others in 
detail below.

A. Section 412.23 Excluded Hospitals: Classifications

    As discussed in section V of this proposed rule, we propose to 
revise the regulation text in paragraph (b)(2)(i) and remove paragraph 
(b)(2)(ii) in response to section 115 of the Medicare, Medicaid, and 
SCHIP Extension Act of 2007. To summarize, for cost reporting periods--
    (1) Beginning on or after July 1, 2005, the hospital has served an 
inpatient population of whom at least 60 percent require intensive 
rehabilitation services for treatment of one or more of the conditions 
specified at paragraph (b)(2)(ii) of this section.
    (2) A comorbidity that meets the criteria as specified in Sec.  
412.23(b)(2)(i) (as amended by removing former (b)(2)(ii) and 
redesignating former (b)(2)(iii) as the new (b)(2)(ii)) may continue to 
be used to determine the compliance threshold.

B. Additional Proposed Changes

     Update the FY 2009 IRF PPS relative weights and average 
length of stay values using the most current and complete Medicare 
claims and cost report data, as discussed in section II.
     Update the FY 2009 IRF PPS payment rates by the proposed 
wage index and labor related share in a budget neutral manner, as 
discussed in section III.A and B.
     Update the outlier threshold amount for FY 2009, as 
discussed in section IV.A.
     Update the cost-to-charge ratio ceiling and the national 
average urban and rural cost-to-charge ratios for purposes of 
determining outlier payments under the IRF PPS, as discussed in section 
IV.B.

VIII. Collection of Information Requirements

    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.

IX. Response to Public Comments

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

X. Regulatory Impact Statement

    We have examined the impact of this proposed rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and Review), 
the Regulatory Flexibility Act (RFA, September 19, 1980, Pub. L. 96-
354), section 1102(b) of the Social Security Act, the Unfunded Mandates 
Reform Act of 1995 (Pub. L. 104-4), Executive Order 13132 on 
Federalism, and the Congressional Review Act (5 U.S.C. 804(2)).
    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 one 
year). This proposed rule does not reach the $100 million economic 
threshold and thus is not considered a major rule. We estimate that the 
total impact of the proposed changes in this proposed rule would be a 
decrease of approximately $20 million (this reflects a $20 million 
decrease due to the proposed update to the outlier threshold amount to 
decrease estimated outlier payments from approximately 3.3 percent in 
FY 2008 to 3 percent in FY 2009).
    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 IRFs and most other providers and suppliers are 
small entities, either by nonprofit status or by having revenues of 
$6.5 million to $31.5 million in any one year. (For details, see the 
Small Business Administration's final rule that set forth size 
standards for health care industries, at 65 FR 69432, November 17, 
2000.) Because we lack data on individual hospital receipts, we cannot 
determine the number of small proprietary IRFs or the proportion of 
IRFs' revenue that is derived from Medicare payments. Therefore, we 
assume that all IRFs (an approximate total of 1,200 IRFs, of which 
approximately 60 percent are nonprofit facilities) are considered small 
entities and that Medicare payment constitutes the majority of their 
revenues. The Department of Health and Human Services generally uses a 
revenue impact of 3 to 5 percent as a significance threshold under the 
RFA. Medicare fiscal intermediaries and carriers are not considered to 
be small entities. Individuals and States are not included in the 
definition of a small entity. We are not preparing an analysis for the 
RFA because we have determined, and the Secretary certifies, that this 
proposed rule would not have a significant economic impact on a 
substantial number of small entities.
    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

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hospitals. This analysis must conform to the provisions of section 603 
of the RFA. For purposes of section 1102(b) of the Act, we define a 
small rural hospital as a hospital that is located outside of a 
Metropolitan Statistical Area and has fewer than 100 beds. We are not 
preparing an analysis for section 1102(b) of the Act because we have 
determined, and the Secretary certifies, that this proposed rule would 
not have a significant impact on the operations of a substantial number 
of small rural hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any one year of 
$100 million in 1995 dollars, updated annually for inflation. That 
threshold level is currently approximately $130 million. This proposed 
rule would 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 proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. As stated above, this proposed rule would not have a 
substantial effect on State and local governments.
    In accordance with the provisions of Executive Order 12866, this 
regulation was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 412

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

    For the reasons set forth in the preamble, the Centers for Medicare 
& Medicaid Services proposes to amend 42 CFR chapter IV as follows:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

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

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

Subpart B--Hospital Services Subject to and Excluded From the 
Prospective Payment Systems for Inpatient Operating Costs and 
Inpatient Capital--Related Costs

    2. Section 412.23 is amended by--
    A. Revising paragraph (b)(2)(i).
    B. Removing paragraph (b)(2)(ii).
    C. Redesignating paragraph (b)(2)(iii) as (b)(2)(ii).
    The revision reads as follows:


Sec.  412.23  Excluded hospitals: Classifications.

* * * * *
    (b) * * *
    (2) * * *
    (i) For cost reporting periods beginning on or after July 1, 2004 
and before July 1, 2005, the hospital has served an inpatient 
population of whom at least 50 percent, and for cost reporting periods 
beginning on or after July 1, 2005, the hospital has served an 
inpatient population of whom at least 60 percent required intensive 
rehabilitation services for treatment of one or more of the conditions 
specified at paragraph (b)(2)(ii) of this section. A patient with a 
comorbidity, as defined at Sec.  412.602, may be included in the 
inpatient population that counts toward the required applicable 
percentage if--
    (A) The patient is admitted for inpatient rehabilitation for a 
condition that is not one of the conditions specified in paragraph 
(b)(2)(ii) of this section;
    (B) The patient has a comorbidity that falls in one of the 
conditions specified in paragraph (b)(2)(ii) of this section; and
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplemental Medical Insurance Program)

    Dated: March 20, 2008.
Kerry Weems,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Approved: April 10, 2008.
Michael O. Leavitt,
Secretary.
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