[Federal Register Volume 73, Number 161 (Tuesday, August 19, 2008)]
[Rules and Regulations]
[Pages 48434-49083]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-17914]



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Part II

Book 2 of 2 Books

Pages 48433-49084





Department of Health and Human Services





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 Centers for Medicare & Medicaid Services



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42 CFR Parts 411, 412, 413, 422, and 489



 Medicare Program; Changes to the Hospital Inpatient Prospective 
Payment Systems and Fiscal Year 2009 Rates; Payments for Graduate 
Medical Education in Certain Emergency Situations; Changes to 
Disclosure of Physician Ownership in Hospitals and Physician Self-
Referral Rules; Updates to the Long-Term Care Prospective Payment 
System; Updates to Certain IPPS-Excluded Hospitals; and Collection of 
Information Regarding Financial Relationships Between Hospitals; Final 
Rule

  Federal Register / Vol. 73, No. 161 / Tuesday, August 19, 2008 / 
Rules and Regulations  

[[Page 48434]]


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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 411, 412, 413, 422, and 489

[CMS-1390-F; CMS-1531-IFC1; CMS-1531-IFC2; CMS-1385-F4]
RIN 0938-AP15; RIN 0938-AO35; RIN 0938-AO65


Medicare Program; Changes to the Hospital Inpatient Prospective 
Payment Systems and Fiscal Year 2009 Rates; Payments for Graduate 
Medical Education in Certain Emergency Situations; Changes to 
Disclosure of Physician Ownership in Hospitals and Physician Self-
Referral Rules; Updates to the Long-Term Care Prospective Payment 
System; Updates to Certain IPPS-Excluded Hospitals; and Collection of 
Information Regarding Financial Relationships Between Hospitals

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

ACTION: Final rules.

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SUMMARY: We are revising the Medicare hospital inpatient prospective 
payment systems (IPPS) for operating and capital-related costs to 
implement changes arising from our continuing experience with these 
systems, and to implement certain provisions made by the Deficit 
Reduction Act of 2005, the Medicare Improvements and Extension Act, 
Division B, Title I of the Tax Relief and Health Care Act of 2006, the 
TMA, Abstinence Education, and QI Programs Extension Act of 2007, and 
the Medicare Improvements for Patients and Providers Act of 2008. In 
addition, in the Addendum to this final rule, we describe the changes 
to the amounts and factors used to determine the rates for Medicare 
hospital inpatient services for operating costs and capital-related 
costs. These changes are generally applicable to discharges occurring 
on or after October 1, 2008. We also are setting forth the update to 
the rate-of-increase limits for certain hospitals and hospital units 
excluded from the IPPS that are paid on a reasonable cost basis subject 
to these limits. The updated rate-of-increase limits are effective for 
cost reporting periods beginning on or after October 1, 2008.
    In addition to the changes for hospitals paid under the IPPS, this 
document contains revisions to the patient classifications and relative 
weights used under the long-term care hospital prospective payment 
system (LTCH PPS). This document also contains policy changes relating 
to the requirements for furnishing hospital emergency services under 
the Emergency Medical Treatment and Labor Act of 1986 (EMTALA).
    In this document, we are responding to public comments and 
finalizing the policies contained in two interim final rules relating 
to payments for Medicare graduate medical education to affiliated 
teaching hospitals in certain emergency situations.
    We are revising the regulatory requirements relating to disclosure 
to patients of physician ownership or investment interests in hospitals 
and responding to public comments on a collection of information 
regarding financial relationships between hospitals and physicians. In 
addition, we are responding to public comments on proposals made in two 
separate rulemakings related to policies on physician self-referrals 
and finalizing these policies.

DATES: Effective Dates: This final rule is effective on October 1, 
2008, with the following exceptions: Amendments to Sec. Sec.  412.230, 
412.232, and 412.234 are effective on September 2, 2008. Amendments to 
Sec. Sec.  411.357(a)(5)(ii), (b)(4)(ii), (1)(3)(i) and (ii), and 
(p)(1)(i)(A) and (B) and the definition of entity in Sec.  411.351 are 
effective on October 1, 2009.
    Applicability Dates: The provisions of Sec.  412.78 relating to 
payments to SCHs are applicable for cost reporting periods beginning on 
or after January 1, 2009. Our process for allowing certain hospitals to 
opt out of decisions made on behalf of hospitals (as discussed in 
section III.I.7. of this preamble) are applicable on August 19, 2008.

FOR FURTHER INFORMATION CONTACT: Gay Burton, (410) 786-4487, Operating 
Prospective Payment, MS-DRGs, Wage Index, New Medical Service and 
Technology Add-On Payments, Hospital Geographic Reclassifications, and 
Postacute Care Transfer Issues.
    Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded 
Hospitals, Direct and Indirect Graduate Medical Education, MS-LTC-DRGs, 
EMTALA, Hospital Emergency Services, and Hospital-within-Hospital 
Issues.
    Siddhartha Mazumdar, (410) 786-6673, Rural Community Hospital 
Demonstration Program Issues.
    Sheila Blackstock, (410) 786-3502, Quality Data for Annual Payment 
Update Issues.
    Thomas Valuck, (410) 786-7479, Hospital Value-Based Purchasing and 
Readmissions to Hospital Issues.
    Rebecca Paul, (410) 786-0852, Collection of Managed Care Encounter 
Data Issues.
    Jacqueline Proctor, (410) 786-8852, Disclosure of Physician 
Ownership in Hospitals and Financial Relationships between Hospitals 
and Physicians Issues.
    Lisa Ohrin, (410) 786-4565, and Don Romano, (410) 786-1401, 
Physician Self-Referral Issues.

SUPPLEMENTARY INFORMATION:

Electronic Access

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

Acronyms

AARP American Association of Retired Persons
AAHKS American Association of Hip and Knee Surgeons
AAMC Association of American Medical Colleges
ACGME Accreditation Council for Graduate Medical Education
AF Artrial fibrillation
AHA American Hospital Association
AICD Automatic implantable cardioverter defibrillator
AHIMA American Health Information Management Association
AHIC American Health Information Community
AHRQ Agency for Healthcare Research and Quality
AMA American Medical Association
AMGA American Medical Group Association
AMI Acute myocardial infarction
AOA American Osteopathic Association
APR DRG All Patient Refined Diagnosis Related Group System
ASC Ambulatory surgical center
ASITN American Society of Interventional and Therapeutic 
Neuroradiology
BBA Balanced Budget Act of 1997, Public Law 105-33
BBRA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Balanced Budget Refinement Act of 1999, Public 
Law 106-113
BIPA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Benefits Improvement and Protection Act of 2000, 
Public Law 106-554

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BLS Bureau of Labor Statistics
CAH Critical access hospital
CARE [Medicare] Continuity Assessment Record & Evaluation 
[Instrument]
CART CMS Abstraction & Reporting Tool
CBSAs Core-based statistical areas
CC Complication or comorbidity
CCR Cost-to-charge ratio
CDAC [Medicare] Clinical Data Abstraction Center
CDAD Clostridium difficile-associated disease
CIPI Capital input price index
CMI Case-mix index
CMS Centers for Medicare & Medicaid Services
CMSA Consolidated Metropolitan Statistical Area
COBRA Consolidated Omnibus Reconciliation Act of 1985, Public Law 
99-272
CoP [Hospital] condition of participation
CPI Consumer price index
CY Calendar year
DFRR Disclosure of financial relationship report
DRA Deficit Reduction Act of 2005, Public Law 109-171
DRG Diagnosis-related group
DSH Disproportionate share hospital
DVT Deep vein thrombosis
ECI Employment cost index
EMR Electronic medical record
EMTALA Emergency Medical Treatment and Labor Act of 1986, Public Law 
99-272
ESRD End-stage renal disease
FAH Federation of Hospitals
FDA Food and Drug Administration
FHA Federal Health Architecture
FIPS Federal information processing standards
FQHC Federally qualified health center
FTE Full-time equivalent
FY Fiscal year
GAAP Generally Accepted Accounting Principles
GAF Geographic Adjustment Factor
GME Graduate medical education
HACs Hospital-acquired conditions
HCAHPS Hospital Consumer Assessment of Healthcare Providers and 
Systems
HCFA Health Care Financing Administration
HCRIS Hospital Cost Report Information System
HHA Home health agency
HHS Department of Health and Human Services
HIC Health insurance card
HIPAA Health Insurance Portability and Accountability Act of 1996, 
Public Law 104-191
HIPC Health Information Policy Council
HIS Health information system
HIT Health information technology
HMO Health maintenance organization
HPMP Hospital Payment Monitoring Program
HSA Health savings account
HSCRC [Maryland] Health Services Cost Review Commission
HSRV Hospital-specific relative value
HSRVcc Hospital-specific relative value cost center
HQA Hospital Quality Alliance
HQI Hospital Quality Initiative
HWH Hospital-within-a hospital
ICD-9-CM International Classification of Diseases, Ninth Revision, 
Clinical Modification
ICD-10-PCS International Classification of Diseases, Tenth Edition, 
Procedure Coding System
ICR Information collection requirement
IHS Indian Health Service
IME Indirect medical education
IOM Institute of Medicine
IPF Inpatient psychiatric facility
IPPS [Acute care hospital] inpatient prospective payment system
IRF Inpatient rehabilitation facility
LAMCs Large area metropolitan counties
LTC-DRG Long-term care diagnosis-related group
LTCH Long-term care hospital
MA Medicare Advantage
MAC Medicare Administrative Contractor
MCC Major complication or comorbidity
MCE Medicare Code Editor
MCO Managed care organization
MCV Major cardiovascular condition
MDC Major diagnostic category
MDH Medicare-dependent, small rural hospital
MedPAC Medicare Payment Advisory Commission
MedPAR Medicare Provider Analysis and Review File
MEI Medicare Economic Index
MGCRB Medicare Geographic Classification Review Board
MIEA-TRHCA Medicare Improvements and Extension Act, Division B of 
the Tax Relief and Health Care Act of 2006, Public Law 109-432
MIPPA Medicare Improvements for Patients and Providers Act of 2008, 
Public Law 110-275
MMA Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Public Law 108-173
MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007, Public 
Law 110-173
MPN Medicare provider number
MRHFP Medicare Rural Hospital Flexibility Program
MRSA Methicillin-resistant Staphylococcus aureus
MSA Metropolitan Statistical Area
MS-DRG Medicare severity diagnosis-related group
MS-LTC-DRG Medicare severity long-term care diagnosis-related group
NAICS North American Industrial Classification System
NCD National coverage determination
NCHS National Center for Health Statistics
NCQA National Committee for Quality Assurance
NCVHS National Committee on Vital and Health Statistics
NECMA New England County Metropolitan Areas
NQF National Quality Forum
NTIS National Technical Information Service
NVHRI National Voluntary Hospital Reporting Initiative
OES Occupational employment statistics
OIG Office of the Inspector General
OMB Executive Office of Management and Budget
O.R. Operating room
OSCAR Online Survey Certification and Reporting [System]
PE Pulmonary embolism
PMS As Primary metropolitan statistical areas
POA Present on admission
PPI Producer price index
PPS Prospective payment system
PRM Provider Reimbursement Manual
ProPAC Prospective Payment Assessment Commission
PRRB Provider Reimbursement Review Board
PSF Provider-Specific File
PS&R Provider Statistical and Reimbursement (System)
QIG Quality Improvement Group, CMS
QIO Quality Improvement Organization
RAPS Risk Adjustment Processing System
RCE Reasonable compensation equivalent
RHC Rural health clinic
RHQDAPU Reporting hospital quality data for annual payment update
RNHCI Religious nonmedical health care institution
RRC Rural referral center
RUCAs Rural-urban commuting area codes
RY Rate year
SAF Standard Analytic File
SCH Sole community hospital
SFY State fiscal year
SIC Standard Industrial Classification
SNF Skilled nursing facility
SOCs Standard occupational classifications
SOM State Operations Manual
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Public Law 
97-248
TMA TMA [Transitional Medical Assistance], Abstinence Education, and 
QI [Qualifying Individuals] Programs Extension Act of 2007, Public 
Law. 110-09
TJA Total joint arthroplasty
UHDDS Uniform hospital discharge data set
VAP Ventilator-associated pneumonia
VBP Value-based purchasing

Table of Contents

I. Background
    A. Summary
    1. Acute Care Hospital Inpatient Prospective Payment System 
(IPPS)
    2. Hospitals and Hospital Units Excluded From the IPPS
    a. Inpatient Rehabilitation Facilities (IRFs)
    b. Long-Term Care Hospitals (LTCHs)
    c. Inpatient Psychiatric Facilities (IPFs)
    3. Critical Access Hospitals (CAHs)
    4. Payments for Graduate Medical Education (GME)
    B. Provisions of the Deficit Reduction Act of 2005 (DRA)
    C. Provisions of the Medicare Improvements and Extension Act 
Under Division B, Title I of the Tax Relief and Health Care Act of 
2006 (MIEA-TRHCA)
    D. Provision of the TMA, Abstinence Education, and QI Programs 
Extension Act of 2007
    E. Issuance of a Notice of Proposed Rulemaking
    1. Proposed Changes to MS-DRG Classifications and Recalibrations 
of Relative Weights
    2. Proposed Changes to the Hospital Wage Index

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    3. Other Decisions and Proposed Changes to the IPPS for 
Operating Costs and GME Costs
    4. Proposed Changes to the IPPS for Capital-Related Costs
    5. Proposed Changes to the Payment Rates for Excluded Hospitals 
and Hospital Units
    6. Proposed Changes Relating to Disclosure of Physician 
Ownership in Hospitals
    7. Proposed Changes and Solicitation of Comments on Physician 
Self-Referral Provisions
    8. Proposed Collection of Information Regarding Financial 
Relationships Between Hospitals and Physicians
    9. Determining Proposed Prospective Payment Operating and 
Capital Rates and Rate-of-Increase Limits
    10. Impact Analysis
    11. Recommendation of Update Factors for Operating Cost Rates of 
Payment for Inpatient Hospital Services
    12. Disclosure of Financial Relationships Report (DFRR) Form
    13. Discussion of Medicare Payment Advisory Commission 
Recommendations
    F. Public Comments Received on the FY 2009 IPPS Proposed Rule 
and Issues in Related Rules
    1. Comments on the FY 2009 IPPS Proposed Rule
    2. Comments on Phase-Out of the Capital Teaching Adjustment 
Under the IPPS Included in the FY 2008 IPPS Final Rule With Comment 
Period
    3. Comments on Policy Revisions Related to Payment to Medicare 
GME Affiliated Hospitals in Certain Declared Emergency Areas 
Included in Two Interim Final Rules With Comment Period
    4. Comments on Proposed Policy Revisions Related to Physician 
Self-Referrals Included in the CY 2008 Physician Fee Schedule 
Proposed Rule
    G. Provisions of the Medicare Improvements for Patients and 
Providers Act of 2008
II. Changes to Medicare Severity DRG (MS-DRG) Classifications and 
Relative Weights
    A. Background
    B. MS-DRG Reclassifications
    1. General
    2. Yearly Review for Making MS-DRG Changes
    C. Adoption of the MS-DRGs in FY 2008
    D. MS-DRG Documentation and Coding Adjustment, Including the 
Applicability to the Hospital-Specific Rates and the Puerto Rico-
Specific Standardized Amount
    1. MS-DRG Documentation and Coding Adjustment
    2. Application of the Documentation and Coding Adjustment to the 
Hospital-Specific Rates
    3. Application of the Documentation and Coding Adjustment to the 
Puerto Rico-Specific Standardized Amount
    4. Potential Additional Payment Adjustments in FYs 2010 Through 
2012
    E. Refinement of the MS-DRG Relative Weight Calculation
    1. Background
    2. Summary of RTI's Report on Charge Compression
    3. Summary of RAND's Study of Alternative Relative Weight 
Methodologies
    4. Refining the Medicare Cost Report
    5. Timeline for Revising the Medicare Cost Report
    6. Revenue Codes Used in the MedPAR File
    F. Preventable Hospital-Acquired Conditions (HACs), Including 
Infections
    1. General Background
    2. Statutory Authority
    3. Public Input
    4. Collaborative Process
    5. Selection Criteria for HACs
    6. HACs Selected During FY 2008 IPPS Rulemaking and Changes to 
Certain Codes
    a. Foreign Object Retained After Surgery
    b. Pressure Ulcers: Changes in Code Assignments
    7. Candidate HACs
    a. Manifestations of Poor Glycemic Control
    b. Surgical Site Infections
    c. Deep Vein Thrombosis (DVT)/Pulmonary Embolism (PE)
    d. Delirium
    e. Ventilator-Associated Pneumonia (VAP)
    f. Staphylococcus aureus Septicemia
    g. Clostridium difficile-Associated Disease (CDAD)
    h. Legionnaires' Disease
    i. Iatrogenic Pneumothorax
    j. Methicillin-resistant Staphylococcus aureus (MRSA)
    8. Present on Admission Indicator Reporting (POA)
    9. Enhancement and Future Issues
    a. Risk-Adjustment of Payments Related to HACs
    b. Risk-Based Measurement of HACs
    c. Use of POA Information
    d. Transition to ICD-10
    e. Healthcare-Associated Conditions in Other Payment Settings
    f. Relationship to NQF's Serious Reportable Adverse Events
    g. Additional Potential Candidate HACs, Suggested Through 
Comment
    10. HAC Coding
    a. Foreign Object Retained After Surgery
    b. MRSA
    c. POA
    11. HACs Selected for Implementation on October 1, 2008
    G. Changes to Specific MS-DRG Classifications
    1. Pre-MDCs: Artificial Heart Devices
    2. MDC 1 (Diseases and Disorders of the Nervous System)
    a. Transferred Stroke Patients Receiving Tissue Plasminogen 
Activator (tPA)
    b. Intractable Epilepsy With Video Electroencephalogram (EEG)
    3. MDC 5 (Diseases and Disorders of the Circulatory System)
    a. Automatic Implantable Cardioverter-Defibrillators (AICD) Lead 
and Generator Procedures
    b. Left Atrial Appendage Device
    4. MDC 8 (Diseases and Disorders of the Musculoskeletal System 
and Connective Tissue): Hip and Knee Replacements and Revisions
    a. Brief History of Development of Hip and Knee Replacement 
Codes
    b. Prior Recommendations of the AAHKS
    c. Adoption of MS-DRGs for Hip and Knee Replacements for FY 2008 
and AAHKS' Recommendations
    d. AAHKS' Recommendations for FY 2009
    e. CMS' Response to AAHKS' Recommendations
    f. Conclusion
    5. MDC 18 (Infections and Parasitic Diseases (Systemic or 
Unspecified Sites): Severe Sepsis
    6. MDC 21 (Injuries, Poisonings and Toxic Effects of Drugs): 
Traumatic Compartment Syndrome
    7. Medicare Code Editor (MCE) Changes
    a. List of Unacceptable Principal Diagnoses in MCE
    b. Diagnoses Allowed for Males Only Edit
    c. Limited Coverage Edit
    8. Surgical Hierarchies
    9. CC Exclusions List
    a. Background
    b. CC Exclusions List for FY 2009
    10. Review of Procedure Codes in MS-DRGs 981, 982, and 983; 984, 
985, and 986; and 987, 988, and 989
    a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-
DRGs 987 Through 989 to MDCs
    b. Reassignment of Procedures Among MS-DRGs 981 Through 983, 984 
Through 986, and 987 Through 989
    c. Adding Diagnosis or Procedure Codes to MDCs
    11. Changes to the ICD-9-CM Coding System
    12. Other MS-DRG Issues
    a. Heart Transplants or Implants of Heart Assist System and 
Liver Transplants
    b. New Codes for Pressure Ulcers
    c. Coronary Artery Stents
    d. TherOx (Downstream(r) System)
    e. Spinal Disc Devices
    f. Spinal Fusion
    g. Special Treatment for Hospitals With High Percentages of ESRD 
Discharges
    H. Recalibration of MS-DRG Weights
    I. Medicare Severity Long-Term Care Diagnosis Related Group (MS-
LTC-DRG) Reclassifications and Relative Weights for LTCHs for FY 
2009
    1. Background
    2. Changes in the MS-LTC-DRG Classifications
    a. Background
    b. Patient Classifications Into MS-LTC-DRGs
    3. Development of the FY 2009 MS-LTC-DRG Relative Weights
    a. General Overview of Development of the MS-LTC-DRG Relative 
Weights
    b. Data
    c. Hospital-Specific Relative Value (HSRV) Methodology
    d. Treatment of Severity Levels in Developing Relative Weights
    e. Low-Volume MS-LTC-DRGs
    4. Steps for Determining the FY 2009 MS-LTC-DRG Relative Weights
    5. Other Comments
    J. Add-On Payments for New Services and Technologies
    1. Background
    2. Public Input Before Publication of a Notice of Proposed 
Rulemaking on Add-On Payments

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    3. FY 2009 Status of Technologies Approved for FY 2008 Add-On 
Payments
    4. FY 2009 Applications for New Technology Add-On Payments
    a. CardioWest\TM\ Temporary Total Artificial Heart System 
(CardioWest\TM\ TAH-t)
    b. Emphasys Medical Zephyr[supreg] Endobronchial Valve 
(Zephyr[supreg] EBV)
    c. Oxiplex[supreg]
    d. TherOx Downstream[supreg] System
    5. Regulatory Changes
III. Changes to the Hospital Wage Index
    A. Background
    B. Requirements of Section 106 of the MIEA-TRHCA
    1. Wage Index Study Required Under the MIEA-TRHCA
    a. Legislative Requirement
    b. MedPAC's Recommendations
    c. CMS Contract for Impact Analysis and Study of Wage Index 
Reform
    d. Public Comments Received on the MedPAC Recommendations and 
the CMS/Acumen Wage Index Study and Analysis
    e. Impact Analysis of Using MedPAC's Recommended Wage Index
    2. CMS Proposals and Final Policy Changes in Response to 
Requirements Under Section 106(b) of the MIEA-TRHCA
    a. Proposed and Final Revision of the Reclassification Average 
Hourly Wage Comparison Criteria
    b. Within-State Budget Neutrality Adjustment for the Rural and 
Imputed Floors
    c. Within-State Budget Neutrality Adjustment for Geographic 
Reclassification
    C. Core-Based Statistical Areas for the Hospital Wage Index
    D. Occupational Mix Adjustment to the FY 2009 Wage Index
    1. Development of Data for the FY 2009 Occupational Mix 
Adjustment
    2. Calculation of the Occupational Mix Adjustment for FY 2009
    3. 2007-2008 Occupational Mix Survey for the FY 2010 Wage Index
    E. Worksheet S-3 Wage Data for the FY 2009 Wage Index
    1. Included Categories of Costs
    2. Excluded Categories of Costs
    3. Use of Wage Index Data by Providers Other Than Acute Care 
Hospitals Under the IPPS
    F. Verification of Worksheet S-3 Wage Data
    1. Wage Data for Multicampus Hospitals
    2. New Orleans' Post-Katrina Wage Index
    G. Method for Computing the FY 2009 Unadjusted Wage Index
    H. Analysis and Implementation of the Occupational Mix 
Adjustment and the FY 2009 Occupational Mix Adjusted Wage Index
    I. Revisions to the Wage Index Based on Hospital Redesignations
    1. General
    2. Effects of Reclassification/Redesignation
    3. FY 2009 MGCRB Reclassifications
    4. FY 2008 Policy Clarifications and Revisions
    5. Redesignations of Hospitals Under Section 1886(d)(8)(B) of 
the Act
    6. Reclassifications Under Section 1886(d)(8)(B) of the Act
    7. Reclassifications Under Section 508 of Public Law 108-173
    J. FY 2009 Wage Index Adjustment Based on Commuting Patterns of 
Hospital Employees
    K. Process for Requests for Wage Index Data Corrections
    L. Labor-Related Share for the Wage Index for FY 2009
IV. Other Decisions and Changes to the IPPS for Operating Costs and 
GME Costs
    A. Changes to the Postacute Care Transfer Policy
    1. Background
    2. Policy Change Relating to Transfers to Home With a Written 
Plan for the Provision of Home Health Services
    3. Evaluation of MS-DRGs Under Postacute Care Transfer Policy 
for FY 2009
    B. Reporting of Hospital Quality Data for Annual Hospital 
Payment Update 1. Background
    a. Overview
    b. Voluntary Hospital Quality Data Reporting
    c. Hospital Quality Data Reporting Under Section 501(b) of 
Public Law 108-173
    d. Hospital Quality Data Reporting Under Section 5001(a) of 
Public Law 109-171
    2. Quality Measures for the FY 2010 Payment Determination and 
Subsequent Years
    a. Quality Measures for the FY 2010 Payment Determination
    b. Possible New Quality Measures, Measure Sets, and Program 
Requirements for the FY 2011 Payment Determination and Subsequent 
Years
    c. Considerations in Expanding and Updating Quality Measures 
Under the RHQDAPU Program
    3. Form and Manner and Timing of Quality Data Submission
    4. RHQDAPU Program Procedures for FY 2009 and FY 2010
    a. RHQDAPU Program Procedures for FY 2009
    b. RHQDAPU Program Procedures for FY 2010
    5. HCAHPS Requirements for FY 2009 and FY 2010
    a. FY 2009 HCAHPS Requirements
    b. FY 2010 HCAHPS Requirements
    6. Chart Validation Requirements for FY 2009 and FY 2010
    a. Chart Validation Requirements for FY 2009
    b. Chart Validation Requirements for FY 2010
    c. Chart Validation Methods and Requirements Under Consideration 
for FY 2011 and Subsequent Years
    7. Data Attestation Requirements for FY 2009 and FY 2010
    a. Data Attestation Requirements for FY 2009
    b. Data Attestation Requirements for FY 2010
    8. Public Display Requirements
    9. Reconsideration and Appeal Procedures
    10. RHQDAPU Program Withdrawal Deadlines for FY 2009 and FY 2010
    11. Requirements for New Hospitals
    12. Electronic Medical Records
    13. RHQDAPU Data Infrastructure
    C. Medicare Hospital Value-Based Purchasing (VBP) Plan
    1. Medicare Hospital VBP Plan Report to Congress
    2. Testing and Further Development of the Medicare Hospital VBP 
Plan
    D. Sole Community Hospitals (SCHs) and Medicare-Dependent, Small 
Rural Hospitals (MDHs)
    1. Background
    2. Rebasing of Payments to SCHs
    3. Volume Decrease Adjustment for SCHs and MDHs: Data Sources 
for Determining Core Staff Values
    E. Rural Referral Centers (RRCs)
    1. Case-Mix Index
    2. Discharges
    F. Indirect Medical Education (IME) Adjustment
    1. Background
    2. IME Adjustment Factor for FY 2009
    G. Payments for Direct Graduate Medical Education (GME)
    1. Background
    2. Medicare GME Affiliation Provisions for Teaching Hospitals in 
Certain Emergency Situations
    a. Legislative Authority
    b. Regulatory Changes Issued in 2006 to Address Certain 
Emergency Situations
    c. Additional Regulatory Changes Issued in 2007 To Address 
Certain Emergency Situations
    d. Public Comments Received on the April 12, 2006 and November 
27, 2007 Interim Final Rules With Comment Period
    e. Provisions of the Final Rule
    f. Technical Correction
    H. Payments to Medicare Advantage Organizations: Collection of 
Risk Adjustment Data
    I. Hospital Emergency Services Under EMTALA
    1. Background
    2. EMTALA Technical Advisory Group (TAG) Recommendations
    3. Changes Relating to Applicability of EMTALA Requirements to 
Hospital Inpatients
    4. Changes to the EMTALA Physician On-Call Requirements
    a. Relocation of Regulatory Provisions
    b. Shared/Community Call
    5. Technical Change to Regulations
    J. Application of Incentives To Reduce Avoidable Readmissions to 
Hospitals
    1. Overview
    2. Measurement
    3. Shared Accountability
    4. VBP Incentives
    5. Direct Payment Adjustment
    6. Performance-Based Payment Adjustment
    7. Public Reporting of Readmission Rates
    8. Potential Unintended Consequences of VBP Incentives
    K. Rural Community Hospital Demonstration Program
V. Changes to the IPPS for Capital-Related Costs
    A. Background
    1. Exception Payments
    2. New Hospitals
    3. Hospitals Located in Puerto Rico
    B. Revisions to the Capital IPPS Based on Data on Hospital 
Medicare Capital Margins

[[Page 48438]]

    1. Elimination of the Large Add-On Payment Adjustment
    2. Changes to the Capital IME Adjustment
    a. Background and Changes Made for FY 2008
    b. Public Comments Received on Phase Out of Capital IPPS 
Teaching Adjustment Provisions Included in the FY 2008 IPPS Final 
Rule With Comment Period and on the FY 2009 IPPS Proposed Rule
VI. Changes for Hospitals and Hospital Units Excluded From the IPPS
    A. Payments to Excluded Hospitals and Hospital Units
    B. IRF PPS
    C. LTCH PPS
    D. IPF PPS
    E. Determining LTCH Cost-to-Charge Ratios (CCRs) Under the LTCH 
PPS
    F. Change to the Regulations Governing Hospitals-Within-
Hospitals
    G. Report of Adjustment (Exceptions) Payments
VII. Disclosure Required of Certain Hospitals and Critical Access 
Hospitals (CAHs) Regarding Physician Ownership
VIII. Physician Self-Referral Provisions
    A. General Overview
    1. Statutory Framework and Regulatory History
    2. Physician Self-Referral Provisions Finalized in this FY 2009 
IPPS Final Rule
    B. ``Stand in the Shoes'' Provisions
    1. Background
    a. Regulatory History of the Physician ``Stand in the Shoes'' 
Rules
    b. Summary of Proposed Revisions to the Physician ``Stand in the 
Shoes'' Rules
    c. Summary of Proposed DHS Entity ``Stand in the Shoes'' Rules
    2. Physician ``Stand in the Shoes'' Provisions
    3. DHS Entity ``Stand in the Shoes'' Provisions
    4. Application of the Physician ``Stand in the Shoes'' and the 
DHS Entity ``Stand in the Shoes'' Provisions (``Conventions'')
    5. Definitions: ``Physician'' and ``Physician Organization''
    C. Period of Disallowance
    D. Alternative Method for Compliance With Signature Requirements 
in Certain Exceptions
    E. Percentage-Based Compensation Formulae
    F. Unit of Service (Per Click) Payments in Lease Arrangements
    1. General Support for Proposal
    2. Authority
    3. Hospitals as Risk-Averse and Access to Care
    4. Evidence of Overutilization: Therapeutic Versus Diagnostic
    5. Per-Click Payments as Best Measure of Fair Market Value
    6. Lithotripsy as Not DHS
    7. Time-Based Rental Arrangements
    8. Physician Entities as Lessors
    9. Physicians and Physician Entities as Lessees
    G. Services Provided ``Under Arrangements'' (Services Performed 
by an Entity Other Than the Entity That Submits the Claim)
    1. Support for Proposal
    2. MedPAC Approach
    3. Authority for Proposal
    4. Community Benefit and Access to Care
    5. Hospitals as Risk-Averse
    6. Proposal Based on Anecdotal Evidence
    7. Cardiac Catheterization
    8. Therapeutic Versus Diagnostic
    9. Professional Fee Greater Than Incremental Return for 
Technical Component
    10. Existing Exceptions Are Sufficient Potection
    11. Suggested Changes to Definitions
    12. Cause Claim To Be Submitted
    13. Physician-Owned Implant Companies
    14. Procedures Must Be Done in a Hospital Setting Because the 
ASC Does Not Pay Enough
    15. Lithotripsy as Not DHS
    16. Procedures That Are DHS Only When Furnished in a Hospital
    17. Exceptions
    18. Personally Performed Services
    19. Outpatient Services Treated Differently Than Inpatient 
Services
    20. Sleep Centers
    21. Dialysis
    22. Effective Date
    H. Exceptions for Obstetrical Malpractice Insurance Subsidies
    I. Ownership or Investment Interest in Retirement Plans
    J. Burden of Proof
IX. Financial Relationships Between Hospitals and Physicians
X. MedPAC Recommendations
XI. Other Required Information
    A. Requests for Data From the Public
    B. Collection of Information Requirements
    1. Legislative Requirement for Solicitation of Comments
    2. Requirements in Regulatory Text
    a. ICRs Regarding Physician Reporting Requirements
    b. ICRs Regarding Risk Adjustment Data
    c. ICRs Regarding Basic Commitments of Providers
    3. Associated Information Collections Not Specified in 
Regulatory Text
    a. Present on Admission (POA) Indicator Reporting
    b. Add-On Payments for New Services and Technologies
    c. Reporting of Hospital Quality Data for Annual Hospital 
Payment Update
    d. Occupational Mix Adjustment to the FY 2009 Index (Hospital 
Wage Index Occupational Mix Survey)
    C. Waiver of Proposed Rulemaking, Waiver of Delay in Effective 
Date, and Retroactive Effective Date
    1. Requirements for Waivers and Retroactive Rulemaking
    2. FY 2008 Puerto Rico--Specific Rates
    3. Rebasing of Payments to SCHs
    4. Technical Change to Regulations Governing Payments to 
Hospitals With High Percentage of ESRD Discharges

Regulation Text

Addendum--Schedule of Standardized Amounts, Update Factors, and Rate-
of-Increase Percentages Effective With Cost Reporting Periods Beginning 
on or After October 1, 2008

I. Summary and Background
II. Changes to the Prospective Payment Rates for Hospital Inpatient 
Operating Costs for FY 2009
    A. Calculation of the Tentative Adjusted Standardized Amount
    B. Tentative Adjustments for Area Wage Levels and Cost-of-Living
    C. MS-DRG Relative Weights
    D. Calculation of the Prospective Payment Rates
III. Changes to Payment Rates for Acute Care Hospital Inpatient 
Capital-Related Costs for FY 2009
    A. Determination of Federal Hospital Inpatient Capital-Related 
Prospective Payment Rate Update
    B. Calculation of the Inpatient Capital-Related Prospective 
Payments for FY 2009
    C. Capital Input Price Index
IV. Changes to Payment Rates for Excluded Hospitals and Hospital 
Units: Rate-of-Increase Percentages
V. Tables
    Table 1A.--National Adjusted Operating Standardized Amounts, 
Labor/Nonlabor (69.7 Percent Labor Share/30.3 Percent Nonlabor Share 
If Wage Index Is Greater Than 1)
    Table 1B.--National Adjusted Operating Standardized Amounts, 
Labor/Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If 
Wage Index Is Less Than or Equal to 1)
    Table 1C.--Adjusted Operating Standardized Amounts for Puerto 
Rico, Labor/Nonlabor
    Table 1D.--Capital Standard Federal Payment Rate
    Table 2.--Hospital Case-Mix Indexes for Discharges Occurring in 
Federal Fiscal Year 2007; Hospital Average Hourly Wages for Federal 
Fiscal Years 2007 (2003 Wage Data), 2008 (2004 Wage Data), and 2009 
(2005 Wage Data); and 3-Year Average of Hospital Average Hourly 
Wages
    Table 3A.--FY 2009 and 3-Year Average Hourly Wage for Urban 
Areas by CBSA
    Table 3B.--FY 2009 and 3-Year Average Hourly Wage for Rural 
Areas by CBSA
    Table 4J.--Out-Migration Wage Adjustment--FY 2009
    Table 5.--List of Medicare Severity Diagnosis-Related Groups 
(MS-DRGs), Relative Weighting Factors, and Geometric and Arithmetic 
Mean Length of Stay
    Table 6A.--New Diagnosis Codes
    Table 6B.--New Procedure Codes
    Table 6C.--Invalid Diagnosis Codes
    Table 6D.--Invalid Procedure Codes
    Table 6E.--Revised Diagnosis Code Titles
    Table 6F.--Revised Procedure Code Titles
    Table 6G.--Additions to the CC Exclusions List (Available 
through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/)

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    Table 6H.--Deletions from the CC Exclusions List (Available 
through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/)
    Table 6I.--Complete List of Complication and Comorbidity (CC) 
Exclusions (Available only through the Internet on the CMS Web site 
at: http://www.cms.hhs.gov/AcuteInpatientPPS/)
    Table 6J.--Major Complication and Comorbidity (MCC) List 
(Available Through the Internet on the CMS Web site at:  http://www.cms.hhs.gov/AcuteInpatientPPS/)
    Table 6K.--Complication and Comorbidity (CC) List (Available 
Through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/)
    Table 7A.--Medicare Prospective Payment System Selected 
Percentile Lengths of Stay: FY 2007 MedPAR Update--March 2008 
GROUPER V25.0 MS-DRGs
    Table 7B.--Medicare Prospective Payment System Selected 
Percentile Lengths of Stay: FY 2007 MedPAR Update--March 2008 
GROUPER V26.0 MS-DRGs
    Table 8A.--Statewide Average Operating Cost-to-Charge Ratios--
July 2008
    Table 8B.--Statewide Average Capital Cost-to-Charge Ratios--July 
2008
    Table 8C.--Statewide Average Total Cost-to-Charge Ratios for 
LTCHs--July 2008
    Table 9A.--Hospital Reclassifications and Redesignations--FY 
2009
    Table 9B.--Hospitals Redesignated as Rural Under Section 
1886(d)(8)(E) of the Act--FY 2009
    Table 10.--Tentative Geometric Mean Plus the Lesser of .75 of 
the National Adjusted Operating Standardized Payment Amount 
(Increased To Reflect the Difference Between Costs and Charges) or 
.75 of One Standard Deviation of Mean Charges by Medicare Severity 
Diagnosis-Related Groups (MS-DRGs)--July 2008
    Table 11.--FY 2009 MS-LTC-DRGs, Relative Weights, Geometric 
Average Length of Stay, and Short-Stay Outlier (SSO) Threshold
Appendix A: Regulatory Impact Analysis
    I. Overall Impact
    II. Objectives
    III. Limitations of Our Analysis
    IV. Hospitals Included in and Excluded From the IPPS
    V. Effects on Excluded Hospitals and Hospital Units
    VI. Quantitative Effects of the Policy Changes Under the IPPS 
for Operating Costs
    A. Basis and Methodology of Estimates
    B. Analysis of Table I
    C. Effects of the Changes to the MS-DRG Reclassifications and 
Relative Cost-Based Weights (Column 2)
    D. Effects of Wage Index Changes (Column 3)
    E. Combined Effects of MS-DRG and Wage Index Changes (Column 4)
    F. Effects of MGCRB Reclassifications (Column 5)
    G. Effects of the Rural Floor and Imputed Rural Floor, Including 
the Transition To Apply Budget Neutrality at the State Level (Column 
6)
    H. Effects of the Wage Index Adjustment for Out-Migration 
(Column 7)
    I. Effects of All Changes With CMI Adjustment Prior to Estimated 
Growth (Column 8)
    J. Effects of All Changes With CMI Adjustment and Estimated 
Growth (Column 9)
    K. Effects of Policy on Payment Adjustments for Low-Volume 
Hospitals
    L. Impact Analysis of Table II
    VII. Effects of Other Policy Changes
    A. Effects of Policy on HACs, Including Infections
    B. Effects of MS-LTC-DRG Reclassifications and Relative Weights 
for LTCHs
    C. Effects of Policy Change Relating to New Medical Service and 
Technology Add-On Payments
    D. Effects of Requirements for Hospital Reporting of Quality 
Data for Annual Hospital Payment Update
    E. Effects of Policy Change to Methodology for Computing Core 
Staffing Factors for Volume Decrease Adjustment for SCHs and MDHs
    F. Impact of the Policy Revisions Related to Payment to 
Hospitals for Direct Graduate Medical Education (GME)
    G. Effects of Clarification of Policy for Collection of Risk 
Adjustment Data From MA Organizations
    H. Effects of Policy Changes Relating to Hospital Emergency 
Services Under EMTALA
    I. Effects of Implementation of Rural Community Hospital 
Demonstration Program
    J. Effects of Policy Changes Relating to Payments to Hospitals-
Within-Hospitals
    K. Effects of Policy Changes Relating to Requirements for 
Disclosure of Physician Ownership in Hospitals
    L. Effects of Policy Changes Relating to Physician Self-Referral 
Provisions
    M. Effects of Changes Relating to Reporting of Financial 
Relationships Between Hospitals and Physicians
VIII. Effects of Changes in the Capital IPPS
    A. General Considerations
    B. Results
IX. Alternatives Considered
X. Overall Conclusion
XI. Accounting Statement
XII. Executive Order 12866
Appendix B: Recommendation of Update Factors for Operating Cost 
Rates of Payment for Inpatient Hospital Services
    I. Background
    II. Inpatient Hospital Update for FY 2009
    III. Secretary's Final Recommendation
    IV. MedPAC Recommendation for Assessing Payment Adequacy and 
Updating Payments in Traditional Medicare

I. Background

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)
    Section 1886(d) of the Social Security Act (the Act) sets forth a 
system of payment for the operating costs of acute care hospital 
inpatient stays under Medicare Part A (Hospital Insurance) based on 
prospectively set rates. Section 1886(g) of the Act requires the 
Secretary to pay for the capital-related costs of hospital inpatient 
stays under a prospective payment system (PPS). Under these PPSs, 
Medicare payment for hospital inpatient operating and capital-related 
costs is made at predetermined, specific rates for each hospital 
discharge. Discharges are classified according to a list of diagnosis-
related groups (DRGs).
    The base payment rate is comprised of a standardized amount that is 
divided into a labor-related share and a nonlabor-related share. The 
labor-related share is adjusted by the wage index applicable to the 
area where the hospital is located. If the hospital is located in 
Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of-
living adjustment factor. This base payment rate is multiplied by the 
DRG relative weight.
    If the hospital treats a high percentage of low-income patients, it 
receives a percentage add-on payment applied to the DRG-adjusted base 
payment rate. This add-on payment, known as the disproportionate share 
hospital (DSH) adjustment, provides for a percentage increase in 
Medicare payments to hospitals that qualify under either of two 
statutory formulas designed to identify hospitals that serve a 
disproportionate share of low-income patients. For qualifying 
hospitals, the amount of this adjustment may vary based on the outcome 
of the statutory calculations.
    If the hospital is an approved teaching hospital, it receives a 
percentage add-on payment for each case paid under the IPPS, known as 
the indirect medical education (IME) adjustment. This percentage 
varies, depending on the ratio of residents to beds.
    Additional payments may be made for cases that involve new 
technologies or medical services that have been approved for special 
add-on payments. To qualify, a new technology or medical service must 
demonstrate that it is a substantial clinical improvement over 
technologies or services otherwise available, and that, absent an add-
on payment, it would be inadequately paid under the regular DRG 
payment.
    The costs incurred by the hospital for a case are evaluated to 
determine whether the hospital is eligible for an additional payment as 
an outlier case. This additional payment is designed to protect the 
hospital from large financial losses due to unusually expensive cases. 
Any outlier payment due is added to the DRG-adjusted base payment rate, 
plus

[[Page 48440]]

any DSH, IME, and new technology or medical service add-on adjustments.
    Although payments to most hospitals under the IPPS are made on the 
basis of the standardized amounts, some categories of hospitals are 
paid in whole or in part based on their hospital-specific rate based on 
their costs in a base year. For example, sole community hospitals 
(SCHs) receive the higher of a hospital-specific rate based on their 
costs in a base year (the higher of FY 1982, FY 1987, or FY 1996) or 
the IPPS rate based on the standardized amount. (We note that, as 
discussed in section IV.D.2. of this preamble, effective for cost 
reporting periods beginning on or after January 1, 2009, an SCH's 
hospital-specific rate will be based on their costs per discharge in FY 
2006 if greater than the hospital-specific rates based on its costs in 
FY 1982, FY 1987, or FY 1996, or the IPPS rate based on the 
standardized amount.) Until FY 2007, a Medicare-dependent, small rural 
hospital (MDH) has received the IPPS rate plus 50 percent of the 
difference between the IPPS rate and its hospital-specific rate if the 
hospital-specific rate based on their costs in a base year (the higher 
of FY 1982, FY 1987, or FY 2002) is higher than the IPPS rate. As 
discussed below, for discharges occurring on or after October 1, 2007, 
but before October 1, 2011, an MDH will receive the IPPS rate plus 75 
percent of the difference between the IPPS rate and its hospital-
specific rate, if the hospital-specific rate is higher than the IPPS 
rate. SCHs are the sole source of care in their areas, and MDHs are a 
major source of care for Medicare beneficiaries in their areas. Both of 
these categories of hospitals are afforded this special payment 
protection in order to maintain access to services for beneficiaries.
    Section 1886(g) of the Act requires the Secretary to pay for the 
capital-related costs of inpatient hospital services ``in accordance 
with a prospective payment system established by the Secretary.'' The 
basic methodology for determining capital prospective payments is set 
forth in our regulations at 42 CFR 412.308 and 412.312. Under the 
capital IPPS, payments are adjusted by the same DRG for the case as 
they are under the operating IPPS. Capital IPPS payments are also 
adjusted for IME and DSH, similar to the adjustments made under the 
operating IPPS. However, as discussed in section V.B.2. of this 
preamble, the capital IME adjustment will be reduced by 50 percent in 
FY 2009 (as established in the FY 2008 IPPS final rule with comment 
period). In addition, hospitals may receive outlier payments for those 
cases that have unusually high costs.
    The existing regulations governing payments to hospitals under the 
IPPS are located in 42 CFR Part 412, subparts A through M.
2. Hospitals and Hospital Units Excluded From the IPPS
    Under section 1886(d)(1)(B) of the Act, as amended, certain 
specialty hospitals and hospital units are excluded from the IPPS. 
These hospitals and units are: rehabilitation hospitals and units; 
long-term care hospitals (LTCHs); psychiatric hospitals and units; 
children's hospitals; and cancer hospitals. Religious nonmedical health 
care institutions (RNHCIs) are also excluded from the IPPS. Various 
sections of the Balanced Budget Act of 1997 (Pub. L. 105-33), the 
Medicare, Medicaid and SCHIP [State Children's Health Insurance 
Program] Balanced Budget Refinement Act of 1999 (Pub. L. 106-113), and 
the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection 
Act of 2000 (Pub. L. 106-554) provide for the implementation of PPSs 
for rehabilitation hospitals and units (referred to as inpatient 
rehabilitation facilities (IRFs)), LTCHs, and psychiatric hospitals and 
units (referred to as inpatient psychiatric facilities (IPFs)), as 
discussed below. Children's hospitals, cancer hospitals, and RNHCIs 
continue to be paid solely under a reasonable cost-based system.
    The existing regulations governing payments to excluded hospitals 
and hospital units are located in 42 CFR parts 412 and 413.
a. Inpatient Rehabilitation Facilities (IRFs)
    Under section 1886(j) of the Act, as amended, rehabilitation 
hospitals and units (IRFs) have been transitioned from payment based on 
a blend of reasonable cost reimbursement subject to a hospital-specific 
annual limit under section 1886(b) of the Act and the adjusted facility 
Federal prospective payment rate for cost reporting periods beginning 
on or after January 1, 2002 through September 30, 2002, to payment at 
100 percent of the Federal rate effective for cost reporting periods 
beginning on or after October 1, 2002. IRFs subject to the blend were 
also permitted to elect payment based on 100 percent of the Federal 
rate. The existing regulations governing payments under the IRF PPS are 
located in 42 CFR Part 412, Subpart P.
b. Long-Term Care Hospitals (LTCHs)
    Under the authority of sections 123(a) and (c) of Public Law 106-
113 and section 307(b)(1) of Public Law 106-554, the LTCH PPS was 
effective for a LTCH's first cost reporting period beginning on or 
after October 1, 2002. LTCHs that do not meet the definition of ``new'' 
under Sec.  412.23(e)(4) are paid, during a 5-year transition period, a 
LTCH prospective payment that is comprised of an increasing proportion 
of the LTCH Federal rate and a decreasing proportion based on 
reasonable cost principles. Those LTCHs that did not meet the 
definition of ``new'' under Sec.  412.23(e)(4) could elect to be paid 
based on 100 percent of the Federal prospective payment rate instead of 
a blended payment in any year during the 5-year transition. For cost 
reporting periods beginning on or after October 1, 2006, all LTCHs are 
paid 100 percent of the Federal rate. The existing regulations 
governing payment under the LTCH PPS are located in 42 CFR part 412, 
subpart O.
c. Inpatient Psychiatric Facilities (IPFs)
    Under the authority of sections 124(a) and (c) of Public Law 106-
113, inpatient psychiatric facilities (IPFs) (formerly psychiatric 
hospitals and psychiatric units of acute care hospitals) are paid under 
the IPF PPS. For cost reporting periods beginning on or after January 
1, 2008, all IPFs are paid 100 percent of the Federal per diem payment 
amount established under the IPF PPS. (For cost reporting periods 
beginning on or after January 1, 2005, and ending on or before December 
31, 2007, some IPFs received transitioned payments for inpatient 
hospital services based on a blend of reasonable cost-based payment and 
a Federal per diem payment rate.) The existing regulations governing 
payment under the IPF PPS are located in 42 CFR 412, Subpart N.
3. Critical Access Hospitals (CAHs)
    Under sections 1814, 1820, and 1834(g) of the Act, payments are 
made to critical access hospitals (CAHs) (that is, rural hospitals or 
facilities that meet certain statutory requirements) for inpatient and 
outpatient services are based on 101 percent of reasonable cost. 
Reasonable cost is determined under the provisions of section 
1861(v)(1)(A) of the Act and existing regulations under 42 CFR parts 
413 and 415.
4. Payments for Graduate Medical Education (GME)
    Under section 1886(a)(4) of the Act, costs of approved educational 
activities are excluded from the operating costs of inpatient hospital 
services. Hospitals with approved graduate medical education (GME) 
programs are paid for the direct costs of GME in accordance with 
section 1886(h) of the Act. The amount of payment for direct GME costs

[[Page 48441]]

for a cost reporting period is based on the hospital's number of 
residents in that period and the hospital's costs per resident in a 
base year. The existing regulations governing payments to the various 
types of hospitals are located in 42 CFR part 413.

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

    Section 5001(b) of the Deficit Reduction Act of 2005 (DRA), Public 
Law 109-171, requires the Secretary to develop a plan to implement, 
beginning with FY 2009, a value-based purchasing plan for section 
1886(d) hospitals defined in the Act. In section IV.C. of the preamble 
of this proposed rule, we discuss the report to Congress on the 
Medicare value-based purchasing plan and the current testing of the 
plan.

C. Provisions of the Medicare Improvements and Extension Act Under 
Division B, Title I of the Tax Relief and Health Care Act of 2006 
(MIEA-TRHCA)

    Section 106(b)(2) of the MIEA-TRHCA instructed the Secretary of 
Health and Human Services to include in the FY 2009 IPPS proposed rule 
one or more proposals to revise the wage index adjustment applied under 
section 1886(d)(3)(E) of the Act for purposes of the IPPS. The 
Secretary was also instructed to consider MedPAC's recommendations on 
the Medicare wage index classification system in developing these 
proposals. In section III. of the preamble of this final rule, we 
summarize Acumen's comparative and impact analysis of the MedPAC and 
CMS wage indices.

D. Provision of the TMA, Abstinence Education, and QI Programs 
Extension Act of 2007

    Section 7 of the TMA [Transitional Medical Assistance], Abstinence 
Education, and QI [Qualifying Individuals] Programs Extension Act of 
2007 (Pub. L. 110-90) provides for a 0.9 percent prospective 
documentation and coding adjustment in the determination of 
standardized amounts under the IPPS (except for MDHs, SCHs, and Puerto 
Rico hospitals) for discharges occurring during FY 2009. The 
prospective documentation and coding adjustment was established in FY 
2008 in response to the implementation of an MS-DRG system under the 
IPPS that resulted in changes in coding and classification that did not 
reflect real changes in case-mix under section 1886(d) of the Act. We 
discuss our implementation of this provision in section II.D. of the 
preamble of this final rule and in the Addendum and in Appendix A to 
this final rule.

E. Issuance of a Notice of Proposed Rulemaking

    On April 30, 2008, we issued in the Federal Register (73 FR 23528) 
a notice of proposed rulemaking that set forth proposed changes to the 
Medicare IPPS for operating costs and for capital-related costs in FY 
2009. We also set forth proposed changes relating to payments for GME 
and IME costs and payments to certain hospitals and units that continue 
to be excluded from the IPPS and paid on a reasonable cost basis that 
would be effective for discharges occurring on or after October 1, 
2008. In addition, we presented proposed changes relating to disclosure 
to patients of physician ownership and investment interests in 
hospitals, proposed changes to our physician self-referral regulations, 
and a solicitation of public comments on a proposed collection of 
information regarding financial relationships between hospitals and 
physicians.
    Below is a summary of the major changes that we proposed to make:
1. Proposed Changes to MS-DRG Classifications and Recalibrations of 
Relative Weights In section II. of the Preamble to the Proposed Rule, 
We Included--
     Proposed changes to MS-DRG reclassifications based on our 
yearly review.
     Proposed application of the documentation and coding 
adjustment to hospital-specific rates resulting from implementation of 
the MS-DRG system.
     Proposed changes to address the RTI reporting 
recommendations on charge compression.
     Proposed recalibrations of the MS-DRG relative weights.
    We also proposed to refine the hospital cost reports so that 
charges for relatively inexpensive medical supplies are reported 
separately from the costs and charges for more expensive medical 
devices. This proposal would be applied to the determination of both 
the IPPS and the OPPS relative weights as well as the calculation of 
the ambulatory surgical center payment rates.
    We presented a listing and discussion of additional hospital-
acquired conditions (HACs), including infections, that were proposed to 
be subject to the statutorily required quality adjustment in MS-DRG 
payments for FY 2009.
    We presented our evaluation and analysis of the FY 2009 applicants 
for add-on payments for high-cost new medical services and technologies 
(including public input, as directed by Pub. L. 108-173, obtained in a 
town hall meeting).
    We proposed the annual update of the MS-LTC-DRG classifications and 
relative weights for use under the LTCH PPS for FY 2009.
2. Proposed Changes to the Hospital Wage Index
    In section III. of the preamble to the proposed rule, we proposed 
revisions to the wage index and the annual update of the wage data. 
Specific issues addressed include the following:
     Proposed wage index reform changes in response to 
recommendations made to Congress as a result of the wage index study 
required under Public Law 109-432. We discussed changes related to 
reclassifications criteria, application of budget neutrality in 
reclassifications, and the rural floor and imputed floor budget 
neutrality at the State level.
     Changes to the CBSA designations.
     The methodology for computing the proposed FY 2009 wage 
index.
     The proposed FY 2009 wage index update, using wage data 
from cost reporting periods that began during FY 2005.
     Analysis and implementation of the proposed FY 2009 
occupational mix adjustment to the wage index.
     Proposed revisions to the wage index based on hospital 
redesignations and reclassifications.
     The proposed adjustment to the wage index for FY 2009 
based on commuting patterns of hospital employees who reside in a 
county and work in a different area with a higher wage index.
     The timetable for reviewing and verifying the wage data 
used to compute the proposed FY 2009 wage index.
     The proposed labor-related share for the FY 2009 wage 
index, including the labor-related share for Puerto Rico.
3. Other Decisions and Proposed Changes to the IPPS for Operating Costs 
and GME Costs
    In section IV. of the preamble to the proposed rule, we discussed a 
number of the provisions of the regulations in 42 CFR Parts 412, 413, 
and 489, including the following:
     Proposed changes to the postacute care transfer policy as 
it relates to transfers to home with the provision of home health 
services.
     The reporting of hospital quality data as a condition for 
receiving the full annual payment update increase.
     Proposed changes in the collection of Medicare Advantage 
(MA) encounter data that are used for computing the risk payment 
adjustment made to MA organizations.
     Discussion of the report to Congress on the Medicare 
value-based purchasing

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plan and current testing and further development of the plan.
     Proposed changes to the methodology for determining core 
staff values for the volume decrease payment adjustment for SCHs and 
MDHs.
     The proposed updated national and regional case-mix values 
and discharges for purposes of determining RRC status.
     The statutorily required IME adjustment factor for FY 2009 
and technical changes to the GME payment policies.
     Proposed changes to policies on hospital emergency 
services under EMTALA to address EMTALA Technical Advisory Group (TAG) 
recommendations.
     Solicitation of public comments on Medicare policies 
relating to incentives for avoidable readmissions to hospitals.
     Discussion of the fifth year of implementation of the 
Rural Community Hospital Demonstration Program.
4. Proposed Changes to the IPPS for Capital-Related Costs
    In section V. of the preamble to the proposed rule, we discussed 
the payment policy requirements for capital-related costs and capital 
payments to hospitals. We acknowledged the public comments that we 
received on the phase-out of the capital teaching adjustment included 
in the FY 2008 IPPS final rule with comment period, and again solicited 
public comments on this phase-out.
5. Proposed Changes to the Payment Rates for Excluded Hospitals and 
Hospital Unit
    In section VI. of the preamble to the proposed rule, we discussed 
proposed changes to payments to excluded hospitals and hospital units, 
proposed changes for determining LTCH CCRs under the LTCH PPS, and 
proposed changes to the regulations on hospitals-within-hospitals.
6. Proposed Changes Relating to Disclosure of Physician Ownership in 
Hospitals
    In section VII. of the preamble of the proposed rule, we presented 
proposed changes to the regulations relating to the disclosure to 
patients of physician ownership or investment interests in hospitals.
7. Proposed Changes and Solicitation of Comments on Physician Self-
Referral Provisions
    In section VIII. of the preamble of the proposed rule, we proposed 
changes to the physician self-referral regulations relating to the 
``Stand in Shoes'' provision and the period of disallowance for claims 
submitted in violation of the prohibition. In addition, we solicited 
public comments regarding physician-owned implant companies and 
gainsharing arrangements.
8. Proposed Collection of Information Regarding Financial Relationships 
Between Hospitals and Physicians
    In section IX. of the preamble of the proposed rule, we solicited 
public comments on our proposed collection of information regarding 
financial relationships between hospitals and physicians.
9. Determining Proposed Prospective Payment Operating and Capital Rates 
and Rate-of-Increase Limits
    In the Addendum to the proposed rule, we set forth proposed changes 
to the amounts and factors for determining the FY 2009 prospective 
payment rates for operating costs and capital-related costs. We also 
established the proposed threshold amounts for outlier cases. In 
addition, we addressed the proposed update factors for determining the 
rate-of-increase limits for cost reporting periods beginning in FY 2009 
for hospitals and hospital units excluded from the PPS.
10. Impact Analysis
    In Appendix A of the proposed rule, we set forth an analysis of the 
impact that the proposed changes would have on affected hospitals.
11. Recommendation of Update Factors for Operating Cost Rates of 
Payment for Inpatient Hospital Services
    In Appendix B of the proposed rule, as required by sections 
1886(e)(4) and (e)(5) of the Act, we provided our recommendations of 
the appropriate percentage changes for FY 2009 for the following:
     A single average standardized amount for all areas for 
hospital inpatient services paid under the IPPS for operating costs 
(and hospital-specific rates applicable to SCHs and MDHs).
     Target rate-of-increase limits to the allowable operating 
costs of hospital inpatient services furnished by hospitals and 
hospital units excluded from the IPPS.
12. Disclosure of Financial Relationships Report (DFRR) Form
    In Appendix C of the proposed rule, we presented the reporting form 
that we proposed to use for the proposed collection of information on 
financial relationships between hospitals and physicians discussed in 
section IX. of the preamble of the proposed rule.
13. Discussion of Medicare Payment Advisory Commission Recommendations
    Under section 1805(b) of the Act, MedPAC is required to submit a 
report to Congress, no later than March 1 of each year, in which MedPAC 
reviews and makes recommendations on Medicare payment policies. 
MedPAC's March 2008 recommendations concerning hospital inpatient 
payment policies address the update factor for inpatient hospital 
operating costs and capital-related costs under the IPPS and for 
hospitals and distinct part hospital units excluded from the IPPS. We 
addressed these recommendations in Appendix B of the proposed rule. For 
further information relating specifically to the MedPAC March 2008 
reports or to obtain a copy of the reports, contact MedPAC at (202) 
220-3700 or visit MedPAC's Web site at: http://www.medpac.gov.

F. Public Comments Received on the FY 2009 IPPS Proposed Rule and 
Issues in Related Rules

1. Comments on the FY 2009 IPPS Proposed Rule
    We received over 1,100 timely pieces of correspondence in response 
to the FY 2009 IPPS proposed rule issued in the Federal Register on 
April 30, 2008. These public comments addressed issues on multiple 
topics in the proposed rule. We present a summary of the public 
comments and our responses to them in the applicable subject-matter 
sections of this final rule.
2. Comments on Phase-Out of the Capital Teaching Adjustment Under the 
IPPS Included in the FY 2008 IPPS Final Rule With Comment Period
    In the FY 2008 IPPS final rule with comment period, we solicited 
public comments on our policy changes related to phase-out of the 
capital teaching adjustment to the capital payment update under the 
IPPS (72 FR 47401). We received approximately 90 timely pieces of 
correspondence in response to our solicitation. In section V. of the 
preamble of the FY 2009 IPPS proposed rule, we acknowledged receipt of 
those public comments and again solicited public comments on the phase-
out. We received numerous pieces of timely correspondence in response 
to the second solicitation. In section V. of this final rule, we 
summarize the public comments received on both the FY 2008 IPPS final 
rule with comment period and the FY 2009 IPPS proposed rule and present 
our responses.

[[Page 48443]]

3. Comments on Policy Revisions Related to Payment to Medicare GME 
Affiliated Hospitals in Certain Declared Emergency Areas Included in 
Two Interim Final Rules With Comment Period
    We have issued two interim final rules with comment periods in the 
Federal Register that modified the GME regulations as they apply to 
Medicare GME affiliated groups to provide for greater flexibility in 
training residents in approved residency programs during times of 
disasters: On April 12, 2006 (71 FR 18654) and on November 27, 2007 (72 
FR 66892). We received a number of timely pieces of correspondence in 
response to these interim final rules with comment period. In section 
IV.G. of the preamble of this final rule, we summarize and address 
these public comments.
4. Comments on Proposed Policy Revisions Related to Physician Self-
Referrals Included in the CY 2008 Physician Fee Schedule Proposed Rule
    On July 12, 2007, we issued in the Federal Register proposed 
revisions to physician payment policies under the CY 2008 Physician Fee 
Schedule (72 FR 38121). Among these proposed changes were a number of 
proposed changes relating to physician self-referral issues that we 
have not finalized: Burden of proof; obstetrical malpractice insurance 
subsidies; ownership or investment interest in retirement plans; units 
of service (per click) payments in space and equipment leases; ``set in 
advance'' percentage-based compensation arrangements; alternative 
criteria for satisfying certain exceptions; and services provided under 
arrangement. In section VIII. of the preamble to this final rule, we 
are addressing the public comments that we received on these proposed 
revisions, presenting our responses to the public comments, and 
finalizing these policies.

G. Provisions of the Medicare Improvements for Patients and Providers 
Act of 2008

    After publication of the FY 2009 IPPS proposed rule, the Medicare 
Improvements for Patients and Providers Act of 2008, Public Law 110-
275, was enacted on July 15, 2008. Public Law 110-275 contains several 
provisions that impact payments under the IPPS for FY 2009, which we 
discuss or are implementing in this final rule:
     Section 122 of Public Law 110-275 provides that, for cost 
reporting periods beginning on or after January 1, 2009, SCHs will be 
paid based on an FY 2006 hospital-specific rate (that is, based on 
their updated costs per discharge from their 12-month cost reporting 
period beginning during Federal fiscal year 2007), if this results in 
the greatest payment to the SCH. Therefore, effective with cost 
reporting periods beginning January 1, 2009, SCHs will be paid based on 
the rate that results in the greatest aggregate payment using either 
the Federal rate or their hospital-specific rate based on their cost 
per discharge for 1982, 1987, 1996, or 2006. We address this provision 
under section IV.D.2. of the preamble of this final rule.
     Section 124 of Public Law 110-275 extends, through FY 
2009, wage index reclassifications for hospitals reclassified under 
section 508 of Public Law 108-173 (the MMA) and certain special 
hospital exceptions extended under the Medicare and Medicaid SCHIP 
Extension Act (MMSEA) of 2007 (Pub. L. 110-173). We discuss this 
provision in section III.I.7. and various other sections of this final 
rule. We note that because of the timing of enactment of Public Law 
110-275, we are not able to recompute the FY 2009 wage index values for 
any hospital that would be reclassified under the section 508 
provisions in time for inclusion in this final rule. We will issue the 
final FY 2009 wage index values and other related tables, as specified 
in the Addendum to this final rule, in a separate Federal Register 
notice implementing this extension that will be published subsequent to 
this final rule.

II. Changes to Medicare Severity Diagnosis-Related Group (MS-DRG) 
Classifications and Relative Weights

A. Background

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

B. MS-DRG Reclassifications

1. General
    As discussed in the preamble to the FY 2008 IPPS final rule with 
comment period (72 FR 47138), we focused our efforts in FY 2008 on 
making significant reforms to the IPPS consistent with the 
recommendations made by MedPAC in its ``Report to the Congress, 
Physician-Owned Specialty Hospitals'' in March 2005. MedPAC recommended 
that the Secretary refine the entire DRG system by taking severity of 
illness into account and applying hospital-specific relative value 
(HSRV) weights to DRGs.\1\ We began this reform process by adopting 
cost-based weights over a 3-year transition period beginning in FY 2007 
and making interim changes to the DRG system for FY 2007 by creating 20 
new CMS DRGs and modifying 32 other DRGs across 13 different clinical 
areas involving nearly 1.7 million cases. As described in more detail 
below, these refinements were intermediate steps towards comprehensive 
reform of both the relative weights and the DRG system that is 
occurring as we undertook further study. For FY 2008, we adopted 745 
new Medicare Severity DRGs (MS-DRGs) to replace the CMS DRGs. We refer 
readers to section II.D. of the FY 2008 IPPS final rule with comment 
period for a full detailed discussion of how the MS-DRG system, based 
on severity levels of illness, was established (72 FR 47141).
---------------------------------------------------------------------------

    \1\ Medicare Payment Advisory Commission: Report to the 
Congress, Physician-Owned Specialty Hospitals, March 2005, page 
viii.
---------------------------------------------------------------------------

    Currently, cases are classified into MS-DRGs for payment under the 
IPPS based on the following information reported by the hospital: the 
principal diagnosis, up to eight additional diagnoses, and up to six 
procedures performed during the stay. In a small number of MS-DRGs, 
classification is also based on the age, sex, and discharge status of 
the patient. The diagnosis and procedure information is reported by the 
hospital using codes from the International Classification of Diseases, 
Ninth Revision, Clinical Modification (ICD-9-CM).
    Comment: Several commenters expressed concern that only nine 
diagnosis codes and six procedure codes are used by Medicare to process 
each

[[Page 48444]]

claim under the IPPS. The commenters stated that the implementation of 
new initiatives, such as the MS-DRG system, Present on Admission (POA) 
reporting, and the hospital-acquired condition (HAC) payment provision, 
depend on the capturing of all of the patient's diagnoses and 
procedures in order to fully represent the patient's severity of 
illness, complexity of care, and quality of care provided. In addition, 
the commenters stated that the adoption of ``component'' codes, such as 
the new ICD-9-CM codes for pressure ulcer stages, requires multiple 
diagnosis fields to represent a single diagnosis. The commenters 
recommended that CMS modify its systems so that the number of diagnoses 
codes processed would increase from 9 to 25 and the number of procedure 
codes processed would increase from 6 to 25. The commenters stated that 
hospitals submit claims to CMS in electronic format, and that the HIPAA 
compliant electronic transaction standard, HIPAA 837i, allows up to 25 
diagnoses and 25 procedures. The commenters stated that CMS does not 
require its fiscal intermediaries (or MAC) to process codes beyond the 
first nine diagnosis codes and six procedure codes. The commenters 
indicated that complex classification systems such as the proposed MS-
DRGs could use the information in these additional codes to improve 
patient classification.
    Response: The commenters are correct that CMS does not process 
codes submitted electronically on the 837i electronic format beyond the 
first nine diagnosis codes and first six procedure codes. While HIPAA 
requires CMS to accept up to 25 ICD-9-CM diagnosis and procedure codes 
on the HIPAA 837i electronic format, it does not require that CMS 
process that number of diagnosis and procedure codes. We agree with the 
commenters that there is value in retaining additional data on patient 
conditions that would result from expanding Medicare's data system so 
it can accommodate additional diagnosis and procedure codes. We have 
been considering this issue while we contemplate refinements to our DRG 
system to better recognize patient severity of illness. However, 
extensive lead time is required to allow for modifications to our 
internal and contractors' electronic systems in order to process and 
store this additional information. We are unable to currently move 
forward with this recommendation without carefully evaluating 
implementation issues. However, we will continue to carefully evaluate 
this request to expand the process capacity of our systems.
    The process of developing the MS-DRGs was begun by dividing all 
possible principal diagnoses into mutually exclusive principal 
diagnosis areas, referred to as Major Diagnostic Categories (MDCs). The 
MDCs were formulated by physician panels to ensure that the DRGs would 
be clinically coherent. The diagnoses in each MDC correspond to a 
single organ system or etiology and, in general, are associated with a 
particular medical specialty. Thus, in order to maintain the 
requirement of clinical coherence, no final MS-DRG could contain 
patients in different MDCs. For example, MDC 6 is Diseases and 
Disorders of the Digestive System. This approach is used because 
clinical care is generally organized in accordance with the organ 
system affected. However, some MDCs are not constructed on this basis 
because they involve multiple organ systems (for example, MDC 22 
(Burns)). For FY 2008, cases are assigned to one of 745 MS-DRGs in 25 
MDCs. The table below lists the 25 MDCs.

------------------------------------------------------------------------
                                  Major Diagnostic Categories (MDCs)
------------------------------------------------------------------------
1..........................  Diseases and Disorders of the Nervous
                              System.
2..........................  Diseases and Disorders of the Eye.
3..........................  Diseases and Disorders of the Ear, Nose,
                              Mouth, and Throat.
4..........................  Diseases and Disorders of the Respiratory
                              System.
5..........................  Diseases and Disorders of the Circulatory
                              System.
6..........................  Diseases and Disorders of the Digestive
                              System.
7..........................  Diseases and Disorders of the Hepatobiliary
                              System and Pancreas.
8..........................  Diseases and Disorders of the
                              Musculoskeletal System and Connective
                              Tissue.
9..........................  Diseases and Disorders of the Skin,
                              Subcutaneous Tissue and Breast.
10.........................  Endocrine, Nutritional and Metabolic
                              Diseases and Disorders.
11.........................  Diseases and Disorders of the Kidney and
                              Urinary Tract.
12.........................  Diseases and Disorders of the Male
                              Reproductive System.
13.........................  Diseases and Disorders of the Female
                              Reproductive System.
14.........................  Pregnancy, Childbirth, and the Puerperium.
15.........................  Newborns and Other Neonates with Conditions
                              Originating in the Perinatal Period.
16.........................  Diseases and Disorders of the Blood and
                              Blood Forming Organs and Immunological
                              Disorders.
17.........................  Myeloproliferative Diseases and Disorders
                              and Poorly Differentiated Neoplasms.
18.........................  Infectious and Parasitic Diseases (Systemic
                              or Unspecified Sites).
19.........................  Mental Diseases and Disorders.
20.........................  Alcohol/Drug Use and Alcohol/Drug Induced
                              Organic Mental Disorders.
21.........................  Injuries, Poisonings, and Toxic Effects of
                              Drugs.
22.........................  Burns.
23.........................  Factors Influencing Health Status and Other
                              Contacts with Health Services.
24.........................  Multiple Significant Trauma.
25.........................  Human Immunodeficiency Virus Infections.
------------------------------------------------------------------------

    In general, cases are assigned to an MDC based on the patient's 
principal diagnosis before assignment to an MS-DRG. However, under the 
most recent version of the Medicare GROUPER (Version 26.0), there are 9 
MS-DRGs to which cases are directly assigned on the basis of ICD-9-CM 
procedure codes. These MS-DRGs are for heart transplant or implant of 
heart assist systems; liver and/or intestinal transplants; bone marrow 
transplants; lung transplants; simultaneous pancreas/kidney 
transplants; pancreas transplants; and tracheostomies. Cases are 
assigned to these MS-DRGs before they are classified to an MDC. The 
table below lists the nine current pre-MDCs.

[[Page 48445]]



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

    Comment: One commenter noted that the MS-DRG titles for four MS-
DRGs have changed in Table 5 (which lists all of the MS-DRGs) in the 
Addendum to the proposed rule: MS-DRG 154 (Other Ear, Nose, Mouth and 
Throat Diagnoses with MCC); MS-DRG 155 (Other Ear, Nose, Mouth and 
Throat Diagnoses with CC); MS-DRG 156 (Other Ear, Nose, Mouth and 
Throat Diagnoses without CC/MCC); MS-DRG 250 (Percutaneous 
Cardiovascular Procedure without Coronary Artery Stent with MCC); and 
MS-DRG 251 (Percutaneous Cardiovascular Procedure without Coronary 
Artery Stent without MCC). The commenter stated that the current titles 
for these MS-DRGs are: MS-DRG 154 (Nasal Trauma and Deformity with 
MCC); MS-DRG 155 (Nasal Trauma and Deformity with CC); MS-DRG 156 
(Nasal Trauma and Deformity without CC/MCC); MS-DRG 250 (Percutaneous 
Cardiovascular Procedure without Coronary Artery Stent or AMI with 
MCC); and MS-DRG 251 (Percutaneous Cardiovascular Procedure without 
Coronary Artery Stent or AMI without MCC). The commenter inquired if 
these changes were discussed in the MS-DRGs section of the proposed 
rule.
    Response: The commenter is correct in that we changed these MS-DRG 
titles to better reflect the modification we made when we adopted the 
MS-DRGs for FY 2008. Specifically, CMS DRGs 72 (Nasal Trauma & 
Deformity) and 73 and 74 (Other Ear, Nose, Mouth and Throat Diagnoses 
Age > 17, Age 0-17, respectively) were consolidated to create MS-DRGs 
154, 155, 156 (72 FR 47156). There are other ear, nose, mouth, and 
throat diagnoses in addition to nasal trauma and deformity assigned to 
these MS-DRGs so we expanded the titles for MS-DRGs 154, 155, and 156. 
For MS-DRGs 250 and 251, ``or AMI'' was removed from the titles because 
these descriptors that were applicable in the CMS DRGs are no longer 
applicable in the MS-DRGs. We are making these corrections in this 
final rule.
    In addition to these changes to the MS-DRG titles, we are also 
amending one other MS-DRG title. Due to the creation, after the 
proposed rule was published, of 6 new ICD-9-CM diagnosis codes for 
various types of fevers, we are revising the title for MS-DRG 864 from 
``Fever of Unknown Origin'' to ``Fever''.
    Once the MDCs were defined, each MDC was evaluated to identify 
those additional patient characteristics that would have a consistent 
effect on hospital resource consumption. Because the presence of a 
surgical procedure that required the use of the operating room would 
have a significant effect on the type of hospital resources used by a 
patient, most MDCs were initially divided into surgical DRGs and 
medical DRGs. Surgical DRGs are based on a hierarchy that orders 
operating room (O.R.) procedures or groups of O.R. procedures by 
resource intensity. Medical DRGs generally are differentiated on the 
basis of diagnosis and age (0 to 17 years of age or greater than 17 
years of age). Some surgical and medical DRGs are further 
differentiated based on the presence or absence of a complication or 
comorbidity (CC) or a major complication or comorbidity (MCC).
    Generally, nonsurgical procedures and minor surgical procedures 
that are not usually performed in an operating room are not treated as 
O.R. procedures. However, there are a few non-O.R. procedures that do 
affect MS-DRG assignment for certain principal diagnoses. An example is 
extracorporeal shock wave lithotripsy for patients with a principal 
diagnosis of urinary stones. Lithotripsy procedures are not routinely 
performed in an operating room. Therefore, lithotripsy codes are not 
classified as O.R. procedures. However, our clinical advisors believe 
that patients with urinary stones who undergo extracorporeal shock wave 
lithotripsy should be considered similar to other patients who undergo 
O.R. procedures. Therefore, we treat this group of patients similar to 
patients undergoing O.R. procedures.
    Once the medical and surgical classes for an MDC were formed, each 
diagnosis class was evaluated to determine if complications or 
comorbidities would consistently affect hospital resource consumption. 
Each diagnosis was categorized into one of three severity levels. These 
three levels include a major complication or comorbidity (MCC), a 
complication or comorbidity (CC), or a non-CC. Physician panels 
classified each diagnosis code based on a highly iterative process 
involving a combination of statistical results from test data as well 
as clinical judgment. As stated earlier, we refer readers to section 
II.D. of the FY 2008 IPPS final rule with comment period for a full 
detailed discussion of how the MS-DRG system was established based on 
severity levels of illness (72 FR 47141).
    A patient's diagnosis, procedure, discharge status, and demographic 
information is entered into the Medicare claims processing systems and 
subjected to a series of automated screens called the Medicare Code 
Editor (MCE). The MCE screens are designed to identify cases that 
require further review before classification into an MS-DRG.
    After patient information is screened through the MCE and any 
further development of the claim is conducted, the cases are classified 
into the appropriate MS-DRG by the Medicare GROUPER software program. 
The GROUPER program was developed as a means of classifying each case 
into an MS-DRG on the basis of the diagnosis and procedure codes and, 
for a limited number of MS-DRGs, demographic information (that is, sex, 
age, and discharge status).
    After cases are screened through the MCE and assigned to an MS-DRG 
by the GROUPER, the PRICER software calculates a base MS-DRG payment. 
The PRICER calculates the payment for each case covered by the IPPS 
based on the MS-DRG relative weight and additional factors associated 
with each hospital, such as IME and DSH payment adjustments. These 
additional factors increase the payment amount to

[[Page 48446]]

hospitals above the base MS-DRG payment.
    The records for all Medicare hospital inpatient discharges are 
maintained in the Medicare Provider Analysis and Review (MedPAR) file. 
The data in this file are used to evaluate possible MS-DRG 
classification changes and to recalibrate the MS-DRG weights. However, 
in the FY 2000 IPPS final rule (64 FR 41500), we discussed a process 
for considering non-MedPAR data in the recalibration process. In order 
for us to consider using particular non-MedPAR data, we must have 
sufficient time to evaluate and test the data. The time necessary to do 
so depends upon the nature and quality of the non-MedPAR data 
submitted. Generally, however, a significant sample of the non-MedPAR 
data should be submitted by mid-October for consideration in 
conjunction with the next year's proposed rule. This date allows us 
time to test the data and make a preliminary assessment as to the 
feasibility of using the data. Subsequently, a complete database should 
be submitted by early December for consideration in conjunction with 
the next year's proposed rule.
    As we indicated above, for FY 2008, we made significant improvement 
in the DRG system to recognize severity of illness and resource usage 
by adopting MS-DRGs that were reflected in the FY 2008 GROUPER, Version 
25.0, and were effective for discharges occurring on or after October 
1, 2007. The changes we proposed for FY 2009 (and are adopting in this 
final rule) will be reflected in the FY 2009 GROUPER, Version 26.0, and 
will be effective for discharges occurring on or after October 1, 2008. 
As noted in the FY 2009 IPPS proposed rule (73 FR 23538), our DRG 
analysis for the FY 2009 proposed rule was based on data from the 
September 2007 update of the FY 2007 MedPAR file, which contains 
hospital bills received through September 30, 2007, for discharges 
through September 30, 2007. For this final rule, our analysis is based 
on more recent data from the March 2008 update of the FY 2007 MedPAR 
file, which contains hospital bills received through March 31, 2008, 
for discharges occurring in FY 2007.
2. Yearly Review for Making MS-DRG Changes
    Many of the changes to the MS-DRG classifications we make annually 
are the result of specific issues brought to our attention by 
interested parties. We encourage individuals with comments about MS-DRG 
classifications to submit these in a timely manner so they can be 
carefully considered for possible inclusion in the annual proposed rule 
and, if included, may be subjected to public review and comment. 
Therefore, similar to the timetable for interested parties to submit 
non-MedPAR data for consideration in the MS-DRG recalibration process, 
comments about MS-DRG classification issues should be submitted no 
later than early December in order to be considered and possibly 
included in the next annual proposed rule updating the IPPS.
    The actual process of forming the MS-DRGs was, and will likely 
continue to be, highly iterative, involving a combination of 
statistical results from test data combined with clinical judgment. In 
the FY 2008 IPPS final rule (72 FR 47140 through 47189), we described 
in detail the process we used to develop the MS-DRGs that we adopted 
for FY 2008. In addition, in deciding whether to make further 
modification to the MS-DRGs for particular circumstances brought to our 
attention, we considered whether the resource consumption and clinical 
characteristics of the patients with a given set of conditions are 
significantly different than the remaining patients in the MS-DRG. We 
evaluated patient care costs using average charges and lengths of stay 
as proxies for costs and relied on the judgment of our medical advisors 
to decide whether patients are clinically distinct or similar to other 
patients in the MS-DRG. In evaluating resource costs, we considered 
both the absolute and percentage differences in average charges between 
the cases we selected for review and the remainder of cases in the MS-
DRG. We also considered variation in charges within these groups; that 
is, whether observed average differences were consistent across 
patients or attributable to cases that were extreme in terms of charges 
or length of stay, or both. Further, we considered the number of 
patients who will have a given set of characteristics and generally 
preferred not to create a new MS-DRG unless it would include a 
substantial number of cases.

C. Adoption of the MS-DRGs in FY 2008

    In the FY 2006, FY 2007, and FY 2008 IPPS final rules, we discussed 
a number of recommendations made by MedPAC regarding revisions to the 
DRG system used under the IPPS (70 FR 47473 through 47482; 71 FR 47881 
through 47939; and 72 FR 47140 through 47189). As we noted in the FY 
2006 IPPS final rule, we had insufficient time to complete a thorough 
evaluation of these recommendations for full implementation in FY 2006. 
However, we did adopt severity-weighted cardiac DRGs in FY 2006 to 
address public comments on this issue and the specific concerns of 
MedPAC regarding cardiac surgery DRGs. We also indicated that we 
planned to further consider all of MedPAC's recommendations and 
thoroughly analyze options and their impacts on the various types of 
hospitals in the FY 2007 IPPS proposed rule.
    For FY 2007, we began this process. In the FY 2007 IPPS proposed 
rule, we proposed to adopt Consolidated Severity DRGs (CS DRGs) for FY 
2008 (if not earlier). However, based on public comments received on 
the FY 2007 IPPS proposed rule, we decided not to adopt the CS DRGs (71 
FR 47906 through 47912). Rather, we decided to make interim changes to 
the existing DRGs for FY 2007 by creating 20 new DRGs involving 13 
different clinical areas that would significantly improve the CMS DRG 
system's recognition of severity of illness. We also modified 32 DRGs 
to better capture differences in severity. The new and revised DRGs 
were selected from 40 existing CMS DRGs that contained 1,666,476 cases 
and represented a number of body systems. In creating these 20 new 
DRGs, we deleted 8 existing DRGs and modified 32 existing DRGs. We 
indicated that these interim steps for FY 2007 were being taken as a 
prelude to more comprehensive changes to better account for severity in 
the DRG system by FY 2008.
    In the FY 2007 IPPS final rule (71 FR 47898), we indicated our 
intent to pursue further DRG reform through two initiatives. First, we 
announced that we were in the process of engaging a contractor to 
assist us with evaluating alternative DRG systems that were raised as 
potential alternatives to the CMS DRGs in the public comments. Second, 
we indicated our intent to review over 13,000 ICD-9-CM diagnosis codes 
as part of making further refinements to the current CMS DRGs to better 
recognize severity of illness based on the work that CMS (then HCFA) 
did in the mid-1990s in connection with adopting severity DRGs. We 
describe below the progress we have made on these two initiatives, our 
actions for FY 2008, and our proposals for FY 2009 based on our 
continued analysis of reform of the DRG system. We note that the 
adoption of the MS-DRGs to better recognize severity of illness has 
implications for the outlier threshold, the application of the 
postacute care transfer policy, the measurement of real case-mix versus 
apparent case-mix, and the IME and DSH payment adjustments. We discuss 
these implications for FY 2009 in other sections of this preamble and 
in the Addendum to this final rule.

[[Page 48447]]

    In the FY 2007 IPPS proposed rule, we discussed MedPAC's 
recommendations to move to a cost-based HSRV weighting methodology 
using HSRVs beginning with the FY 2007 IPPS proposed rule for 
determining the DRG relative weights. Although we proposed to adopt the 
HSRV weighting methodology for FY 2007, we decided not to adopt the 
proposed methodology in the final rule after considering the public 
comments we received on the proposal. Instead, in the FY 2007 IPPS 
final rule, we adopted a cost-based weighting methodology without the 
HSRV portion of the proposed methodology. The cost-based weights are 
being adopted over a 3-year transition period in \1/3\ increments 
between FY 2007 and FY 2009. In addition, in the FY 2007 IPPS final 
rule, we indicated our intent to further study the HSRV-based 
methodology as well as other issues brought to our attention related to 
the cost-based weighting methodology adopted in the FY 2007 final rule. 
There was significant concern in the public comments that our cost-
based weighting methodology does not adequately account for charge 
compression--the practice of applying a higher percentage charge markup 
over costs to lower cost items and services and a lower percentage 
charge markup over costs to higher cost items and services. Further, 
public commenters expressed concern about potential inconsistencies 
between how costs and charges are reported on the Medicare cost reports 
and charges on the Medicare claims. In the FY 2007 IPPS final rule, we 
used costs and charges from the cost report to determine departmental 
level cost-to-charge ratios (CCRs) which we then applied to charges on 
the Medicare claims to determine the cost-based weights. The commenters 
were concerned about potential distortions to the cost-based weights 
that would result from inconsistent reporting between the cost reports 
and the Medicare claims. After publication of the FY 2007 IPPS final 
rule, we entered into a contract with RTI International (RTI) to study 
both charge compression and to what extent our methodology for 
calculating DRG relative weights is affected by inconsistencies between 
how hospitals report costs and charges on the cost reports and how 
hospitals report charges on individual claims. Further, as part of its 
study of alternative DRG systems, the RAND Corporation analyzed the 
HSRV cost-weighting methodology. We refer readers to section II.E. of 
the preamble of this final rule for discussion of the issue of charge 
compression and the HSRV cost-weighting methodology for FY 2009.
    We believe that revisions to the DRG system to better recognize 
severity of illness and changes to the relative weights based on costs 
rather than charges are improving the accuracy of the payment rates in 
the IPPS. We agree with MedPAC that these refinements should be 
pursued. Although we continue to caution that any prospective payment 
system based on grouping cases will always present some opportunities 
for providers to specialize in cases they believe have higher margins, 
we believe that the changes we have adopted and the continuing reforms 
we are making in this final rule for FY 2009 will improve payment 
accuracy and reduce financial incentives to create specialty hospitals.
    We refer readers to section II.D. of the FY 2008 IPPS final rule 
with comment period for a full discussion of how the MS-DRG system was 
established based on severity levels of illness (72 FR 47141).

D. MS-DRG Documentation and Coding Adjustment, Including the 
Applicability to the Hospital-Specific Rates and the Puerto Rico-
Specific Standardized Amount

1. MS-DRG Documentation and Coding Adjustment
    As stated above, we adopted the new MS-DRG patient classification 
system for the IPPS, effective October 1, 2007, to better recognize 
severity of illness in Medicare payment rates. Adoption of the MS-DRGs 
resulted in the expansion of the number of DRGs from 538 in FY 2007 to 
745 in FY 2008. By increasing the number of DRGs and more fully taking 
into account severity of illness in Medicare payment rates, the MS-DRGs 
encourage hospitals to improve their documentation and coding of 
patient diagnoses. In the FY 2008 IPPS final rule with comment period 
(72 FR 47175 through 47186), which appeared in the Federal Register on 
August 22, 2007, we indicated that we believe the adoption of the MS-
DRGs had the potential to lead to increases in aggregate payments 
without a corresponding increase in actual patient severity of illness 
due to the incentives for improved documentation and coding. In that 
final rule with comment period, using the Secretary's authority under 
section 1886(d)(3)(A)(vi) of the Act to maintain budget neutrality by 
adjusting the standardized amount to eliminate the effect of changes in 
coding or classification that do not reflect real changes in case-mix, 
we established prospective documentation and coding adjustments of -1.2 
percent for FY 2008, -1.8 percent for FY 2009, and -1.8 percent for FY 
2010.
    On September 29, 2007, the TMA, Abstinence Education, and QI 
Programs Extension Act of 2007, Public Law 110-90, was enacted. Section 
7 of Public Law 110-90 included a provision that reduces the 
documentation and coding adjustment for the MS-DRG system that we 
adopted in the FY 2008 IPPS final rule with comment period to -0.6 
percent for FY 2008 and -0.9 percent for FY 2009. To comply with 
section 7 of Public Law 110-90, in a final rule that appeared in the 
Federal Register on November 27, 2007 (72 FR 66886), we changed the 
IPPS documentation and coding adjustment for FY 2008 to -0.6 percent, 
and revised the FY 2008 payment rates, factors, and thresholds 
accordingly, with these revisions effective October 1, 2007.
    For FY 2009, Public Law 110-90 requires a documentation and coding 
adjustment of -0.9 percent instead of the -1.8 percent adjustment 
established in the FY 2008 IPPS final rule with comment period. As 
required by statute, we are applying a documentation and coding 
adjustment of -0.9 percent to the FY 2009 IPPS national standardized 
amount. The documentation and coding adjustments established in the FY 
2008 IPPS final rule with comment period, as amended by Public Law 110-
90, are cumulative. As a result, the -0.9 percent documentation and 
coding adjustment in FY 2009 is in addition to the -0.6 percent 
adjustment in FY 2008, yielding a combined effect of -1.5 percent.
    Comment: A number of commenters disagreed with the need for the 
documentation and coding adjustment and reiterated concerns about the 
documentation and coding adjustment expressed in prior comments on the 
FY 2008 IPPS proposed rule. Several of the commenters recommended that 
CMS not apply the documentation and coding adjustment to the national 
standardized amount in FY 2009.
    Response: The FY 2008 IPPS final rule (72 FR 47175 through 47186) 
established a documentation and coding adjustment for FY 2008, FY 2009, 
and FY 2010. The establishment of the documentation and coding 
adjustment was subject to notice and comment rulemaking. When we 
established the documentation and coding adjustment in the FY 2008 IPPS 
final rule with comment period, we considered concerns about the 
adjustment expressed by commenters on the FY 2008 IPPS proposed rule 
and provided responses to those public comments in the corresponding 
rule. Subsequently,

[[Page 48448]]

Congress enacted Public Law 110-90, which mandated that the 
documentation and coding adjustments established in the FY 2008 IPPS 
final rule with comment period be changed to -0.6 percent for FY 2008 
and -0.9 percent for FY 2009. As required by law, we are applying the 
statutorily specified documentation and coding adjustment to the FY 
2009 national standardized amount.
    Comment: One commenter stated that Public Law 110-90 requires an 
adjustment of -0.9 percent for FY 2009, not a cumulative adjustment of 
-1.5 percent for FY 2009.
    Response: The documentation and coding adjustments established in 
the FY 2008 IPPS final rule with comment period are cumulative. That 
final rule indicated that CMS believes that a -4.8 percent adjustment 
for documentation and coding is necessary (72 FR 47816). Rather than 
implement the full adjustment in 1 year, the final rule phased it in 
over 3 years: -1.2 percent in FY 2008, -1.8 percent in FY 2009, and -
1.8 percent in FY 2010, for a total of -4.8 percent. Public Law 110-90 
requires that in implementing the FY 2008 IPPS final rule with comment 
period, we substitute 0.6 percent for the 1.2 percent FY 2008 
documentation and coding adjustment established in that final rule and 
0.9 percent for the 1.8 percent FY 2009 documentation and coding 
adjustment established in that final rule. Public Law 110-90 did not 
make any change to the cumulative nature of the documentation and 
coding adjustments established in the FY 2008 IPPS final rule with 
comment period. Therefore, consistent with Public Law 110-90, we 
applied a -0.6 percent adjustment to the national standardized amount 
in FY 2008, and we are applying a -0.9 percent documentation and coding 
adjustment to the national standardized amount in FY 2009, which 
results in a cumulative effect of -1.5 percent by FY 2009.
    Comment: Several commenters suggested that the documentation and 
coding adjustment is intended to address inappropriate upcoding, where 
a hospital's coding is not justified by the medical record. The 
commenters suggested that CMS undertake studies to identify 
inappropriate coding by individual providers.
    Response: As we stated in the FY 2008 IPPS final rule with comment 
period, we do not believe there is anything inappropriate, unethical, 
or otherwise wrong with hospitals taking full advantage of coding 
opportunities to maximize Medicare payment as long as the coding is 
fully and properly supported by documentation in the medical record.
    The documentation and coding adjustment was developed based on the 
recognition that the MS-DRGs, by better accounting for severity of 
illness in Medicare payment rates, would encourage hospitals to ensure 
they had fully and accurately documented and coded all patient 
diagnoses and procedures consistent with the medical record in order to 
garner the maximum IPPS payment available under the MS-DRG system. For 
example, under the previous CMS DRGs, ``congestive heart failure, 
unspecified'' (code 428.0) was a CC. Under the MS-DRGs, this 
unspecified code has been made a non-CC, while more specific heart 
failure codes have been made CCs or MCCs. Because of this, hospitals 
have a financial incentive under the MS-DRG system, which they did not 
have under the previous CMS DRG system, to ensure that they code the 
type of heart failure a patient has as precisely as possible, 
consistent with the medical record.
    The statute requires that DRG recalibration be budget neutral. Due 
to the standard 2-year lag in claims data, when we recalibrated the MS-
DRGs in FY 2008, the calculations were based on FY 2006 claims data 
that reflected coding under the prior CMS DRG system. As a result, the 
claims data upon which the DRG recalibrations were performed in FY 2008 
did not reflect any improvements in documentation and coding encouraged 
by the MS-DRG system. Thus, our actuaries determined that a separate 
adjustment for documentation and coding improvements would be needed in 
order to ensure that the implementation of the MS-DRG system was budget 
neutral. This determination led to the establishment of the 
documentation and coding adjustment established in the FY 2008 IPPS 
final rule with comment period and amended by Public Law 110-90.
    As with any other DRG system, there is potential under the MS-DRG 
system for an individual provider to inappropriately code and bill for 
services. The MS-DRG documentation and coding adjustment was not 
developed to address such program integrity issues. Rather, the program 
integrity safeguards in place to address inappropriate billing under 
the CMS DRG system remain in place under the MS-DRG system.
2. Application of the Documentation and Coding Adjustment to the 
Hospital-Specific Rates
    Under section 1886(d)(5)(D)(i) of the Act, SCHs are paid based on 
whichever of the following rates yields the greatest aggregate payment: 
The Federal national rate; the updated hospital-specific rate based on 
FY 1982 costs per discharge; the updated hospital-specific rate based 
on FY 1987 costs per discharge; or the updated hospital-specific rate 
based on FY 1996 costs per discharge. Under section 1886(d)(5)(G) of 
the Act, MDHs are paid based on the Federal national rate or, if 
higher, the Federal national rate plus 75 percent of the difference 
between the Federal national rate and the updated hospital-specific 
rate based on the greater of either the FY 1982, 1987, or 2002 costs 
per discharge. In the FY 2008 IPPS final rule with comment period, we 
established a policy of applying the documentation and coding 
adjustment to the hospital-specific rates. In that rule, we indicated 
that because SCHs and MDHs use the same DRG system as all other 
hospitals, we believe they should be equally subject to the budget 
neutrality adjustment that we are applying for adoption of the MS-DRGs 
to all other hospitals. In establishing this policy, section 
1886(d)(3)(A)(vi) of the Act provides the authority to adjust ``the 
standardized amount'' to eliminate the effect of changes in coding or 
classification that do not reflect real change in case-mix. However, in 
a final rule that appeared in the Federal Register on November 27, 2007 
(72 FR 66886), we rescinded the application of the documentation and 
coding adjustment to the hospital-specific rates retroactive to October 
1, 2007. In that final rule, we indicated that, while we still believe 
it would be appropriate to apply the documentation and coding 
adjustment to the hospital-specific rates, upon further review, we 
decided that application of the documentation and coding adjustment to 
the hospital-specific rates is not consistent with the plain meaning of 
section 1886(d)(3)(A)(vi) of the Act, which only mentions adjusting 
``the standardized amount'' and does not mention adjusting the 
hospital-specific rates.
    In the FY 2009 IPPS proposed rule, we indicated that we continue to 
have concerns about this issue. Because hospitals paid based on the 
hospital-specific rate use the same MS-DRG system as other hospitals, 
we believe they have the potential to realize increased payments from 
coding improvements that do not reflect real increases in patients' 
severity of illness. In section 1886(d)(3)(A)(vi) of the Act,

[[Page 48449]]

Congress stipulated that hospitals paid based on the standardized 
amount should not receive additional payments based on the effect of 
documentation and coding changes that do not reflect real changes in 
case-mix. Similarly, we believe that hospitals paid based on the 
hospital-specific rate should not have the potential to realize 
increased payments due to documentation and coding improvements that do 
not reflect real increases in patients' severity of illness. While we 
continue to believe that section 1886(d)(3)(A)(vi) of the Act does not 
provide explicit authority for application of the documentation and 
coding adjustment to the hospital-specific rates, we believe that we 
have the authority to apply the documentation and coding adjustment to 
the hospital-specific rates using our special exceptions and adjustment 
authority under section 1886(d)(5)(I)(i) of the Act. The special 
exceptions and adjustment authority authorizes us to provide ``for such 
other exceptions and adjustments to [IPPS] payment amounts * * * as the 
Secretary deems appropriate.'' In light of this authority, for the FY 
2010 rulemaking, we plan to examine our FY 2008 claims data for 
hospitals paid based on the hospital-specific rate. In the FY 2009 IPPS 
proposed rule, we stated that if we find evidence of significant 
increases in case-mix for patients treated in these hospitals, we would 
consider proposing application of the documentation and coding 
adjustments to the FY 2010 hospital-specific rates under our authority 
in section 1886(d)(5)(I)(i) of the Act. As noted previously, the 
documentation and coding adjustments established in the FY 2008 IPPS 
final rule with comment period are cumulative. For example, the -0.9 
percent documentation and coding adjustment to the national 
standardized amount in FY 2009 is in addition to the -0.6 percent 
adjustment made in FY 2008, yielding a combined effect of -1.5 percent 
in FY 2009. Given the cumulative nature of the documentation and coding 
adjustments, if we were to propose to apply the documentation and 
coding adjustment to the FY 2010 hospital-specific rates, it may 
involve applying the FY 2008 and FY 2009 documentation and coding 
adjustments (-1.5 percent combined) plus the FY 2010 documentation and 
coding adjustment, discussed in the FY 2008 IPPS final rule with 
comment period, to the FY 2010 hospital-specific rates.
    Comment: A number of commenters opposed application of the 
documentation and coding adjustment to the hospital-specific rates. 
MedPAC supported application of a documentation and coding adjustment 
to the prospective payment rates and the hospital-specific rates for 
all IPPS hospitals that are paid based on their reported case-mix. 
Another commenter supported application of a documentation and coding 
adjustment to the hospital-specific rates if analysis of FY 2008 claims 
data supports a positive adjustment and recommended a transition be 
considered if the data support a negative adjustment.
    Response: We appreciate the comments received. We did not propose 
to apply the documentation and coding adjustment to the hospital-
specific rates for FY 2009. Instead, as we indicated in the proposed 
rule and reiterated above, we intend to consider whether such a 
proposal is warranted for FY 2010. To gather information to evaluate 
these considerations, we plan to perform analyses on FY 2008 claims 
data to examine whether there has been a significant increase in case-
mix for hospitals paid based on the hospital-specific rate. If we find 
that application of the documentation and coding adjustment to the 
hospital-specific rates for FY 2010 is warranted, we would include a 
proposal in the FY 2010 IPPS proposed rule, which would be open for 
public comment at that time.
3. Application of the Documentation and Coding Adjustment to the Puerto 
Rico-Specific Standardized Amount
    Puerto Rico hospitals are paid based on 75 percent of the national 
standardized amount and 25 percent of the Puerto Rico-specific 
standardized amount. As noted previously, the documentation and coding 
adjustment we adopted in the FY 2008 IPPS final rule with comment 
period relied upon our authority under section 1886(d)(3)(A)(vi) of the 
Act, which provides the authority to adjust ``the standardized amounts 
computed under this paragraph'' to eliminate the effect of changes in 
coding or classification that do not reflect real changes in case-mix. 
Section 1886(d)(3)(A)(vi) of the Act applies to the national 
standardized amounts computed under section 1886(d)(3) of the Act, but 
does not apply to the Puerto Rico-specific standardized amount computed 
under section 1886(d)(9)(C) of the Act. In calculating the FY 2008 
payment rates, we made an inadvertent error and applied the FY 2008 -
0.6 percent documentation and coding adjustment to the Puerto Rico-
specific standardized amount, relying on our authority under section 
1886(d)(3)(A)(vi) of the Act. However, section 1886(d)(3)(A)(vi) of the 
Act authorizes application of a documentation and coding adjustment to 
the national standardized amount and does not apply to the Puerto Rico-
specific standardized amount. In this final rule, we are correcting 
this inadvertent error by removing the -0.6 percent documentation and 
coding adjustment from the FY 2008 Puerto Rico-specific rates. The 
revised FY 2008 Puerto Rico-specific operating standardized amounts 
are: $1,471.10 for the labor share and $901.64 for the nonlabor share 
for a hospital with a wage index greater than 1 and $1,392.80 for the 
labor share and $979.94 for the non-labor share for a hospital with a 
wage index less than or equal to 1. The revised FY 2008 Puerto Rico 
capital payment rate is $202.89 (as discussed in section III.A.6.b. of 
the Addendum to this final rule). These revised rates are effective 
October 1, 2007, for FY 2008.
    While section 1886(d)(3)(A)(vi) of the Act is not applicable to the 
Puerto Rico-specific standardized amount, we believe that we have the 
authority to apply the documentation and coding adjustment to the 
Puerto Rico-specific standardized amount using our special exceptions 
and adjustment authority under section 1886(d)(5)(I)(i) of the Act. 
Similar to SCHs and MDHs that are paid based on the hospital-specific 
rate, discussed in section II.D.2. of this preamble, we believe that 
Puerto Rico hospitals that are paid based on the Puerto Rico-specific 
standardized amount should not have the potential to realize increased 
payments due to documentation and coding improvements that do not 
reflect real increases in patients' severity of illness. Consistent 
with the approach described for SCHs and MDHs in section II.D.2. of the 
preamble of this final rule, for the FY 2010 rulemaking, we plan to 
examine our FY 2008 claims data for hospitals in Puerto Rico. As we 
indicated in the FY 2009 proposed rule, if we find evidence of 
significant increases in case-mix for patients treated in these 
hospitals, we would consider proposing application of the documentation 
and coding adjustments to the FY 2010 Puerto Rico-specific standardized 
amount under our authority in section 1886(d)(5)(I)(i) of the Act. As 
noted previously, the documentation and coding adjustments established 
in the FY 2008 IPPS final rule with comment period are cumulative. 
Given the cumulative nature of the documentation and coding 
adjustments, if we were to propose to apply the documentation and 
coding adjustment to the FY 2010 Puerto Rico-specific standardized 
amount, it may involve applying the FY 2008 and FY

[[Page 48450]]

2009 documentation and coding adjustments (-1.5 percent combined) plus 
the FY 2010 documentation and coding adjustment, discussed in the FY 
2008 IPPS final rule with comment period, to the FY 2010 Puerto Rico-
specific standardized amount.
    Comment: Some commenters opposed application of the documentation 
and coding adjustment to the Puerto Rico-specific standardized amount. 
MedPAC supported application of a documentation and coding adjustment 
to the prospective payment rates and the hospital-specific rates for 
all IPPS hospitals that are paid based on their reported case-mix.
    Response: We appreciate the comments. We did not propose to apply 
the documentation and coding adjustment to the Puerto Rico-specific 
standardized amount for FY 2009. Instead, as we indicated in the 
proposed rule, we intend to consider whether such a proposal is 
warranted for FY 2010. To gather information to evaluate these 
considerations, we plan to perform analyses on FY 2008 claims data to 
examine whether there has been a significant increase in case-mix for 
hospitals in Puerto Rico. If we find that application of the 
documentation and coding adjustment to the Puerto Rico-specific 
standardized amount for FY 2010 is warranted, we would include a 
proposal in the FY 2010 proposed rule, which would be open for public 
comment at that time.
4. Potential Additional Payment Adjustments in FYs 2010 Through 2012
    Section 7 of Public Law 110-90 also provides for payment 
adjustments in FYs 2010 through 2012 based upon a retrospective 
evaluation of claims data from the implementation of the MS-DRG system. 
If, based on this retrospective evaluation, the Secretary finds that in 
FY 2008 and FY 2009, the actual amount of change in case-mix that does 
not reflect real change in underlying patient severity differs from the 
statutorily mandated documentation and coding adjustments implemented 
in those years, the law requires the Secretary to adjust payments for 
discharges occurring in FYs 2010 through 2012 to offset the estimated 
amount of increase or decrease in aggregate payments that occurred in 
FY 2008 and FY 2009 as a result of that difference, in addition to 
making an appropriate adjustment to the standardized amount under 
section 1886(d)(3)(A)(vi) of the Act.
    In order to implement these requirements of section 7 of Public Law 
110-90, we are planning a thorough retrospective evaluation of our 
claims data. Results of this evaluation would be used by our actuaries 
to determine any necessary payment adjustments in FYs 2010 through 2012 
to ensure the budget neutrality of the MS-DRG implementation for FY 
2008 and FY 2009, as required by law. In the FY 2009 IPPS proposed 
rule, we described our preliminary analysis plans to provide the 
opportunity for public input.
    In the proposed rule, we indicated that we intend to measure and 
corroborate the extent of the overall national average changes in case-
mix for FY 2008 and FY 2009. We expect part of this overall national 
average change would be attributable to underlying changes in actual 
patient severity and part would be attributable to documentation and 
coding improvements under the MS-DRG system. In order to separate the 
two effects, we plan to isolate the effect of shifts in cases among 
base DRGs from the effect of shifts in the types of cases within base 
DRGs. The shifts among base DRGs are the result of changes in principal 
diagnoses while the shifts within base DRGs are the result of changes 
in secondary diagnoses. Because we expect most of the documentation and 
coding improvements under the MS-DRG system will occur in the secondary 
diagnoses, we believe that the shifts among base DRGs are less likely 
to be the result of the MS-DRG system and the shifts within base DRGs 
are more likely to be the result of the MS-DRG system. We also 
anticipate evaluating data to identify the specific MS-DRGs and 
diagnoses that contributed significantly to the improved documentation 
and coding payment effect and to quantify their impact. This step would 
entail analysis of the secondary diagnoses driving the shifts in 
severity within specific base DRGs.
    In the proposed rule, we also stated that, while we believe that 
the data analysis plan described previously will produce an appropriate 
estimate of the extent of case-mix changes resulting from documentation 
and coding improvements, we may also decide, if feasible, to use 
historical data from our Hospital Payment Monitoring Program (HPMP) to 
corroborate the within-base DRG shift analysis. The HPMP is supported 
by the Medicare Clinical Data Abstraction Center (CDAC). From 1998 to 
2007, the CDAC obtained medical records for a sample of discharges as 
part of our hospital monitoring activities. These data were collected 
on a random sample of between 30,000 to 50,000 hospital discharges per 
year. The historical CDAC data could be used to develop an upper bound 
estimate of the trend in real case-mix growth (that is, real change in 
underlying patient severity) prior to implementation of the MS-DRGs.
    In the FY 2009 IPPS proposed rule, we solicited public comments on 
the analysis plans described above, as well as suggestions on other 
possible approaches for conducting a retrospective analysis to identify 
the amount of case-mix changes that occurred in FY 2008 and FY 2009 
that did not reflect real increases in patients' severity of illness.
    Comment: A few commenters, including MedPAC, expressed support for 
the analytic approach described in the proposed rule. A number of other 
commenters expressed concerns about certain aspects of the approach 
and/or suggested alternate analyses or study designs. In addition, one 
commenter recommended that any determination or retrospective 
evaluation by the actuaries of the impact of the MS-DRGs on case-mix be 
open to public scrutiny prior to the implementation of final payment 
adjustments for FY 2010 through FY 2012.
    Response: We thank the commenters for their comments. We will take 
all of the comments into consideration as we continue development of 
our analysis plans. Our analysis, findings, and any resulting proposals 
to adjust payments for discharges occurring in FYs 2010 through 2012 to 
offset the estimated amount of increase or decrease in aggregate 
payments that occurred in FY 2008 and FY 2009 will be discussed in 
future years' proposed rules, which will be open for public comment.
    Comment: One commenter expressed concern about the impact that an 
adjustment to the FY 2010 through FY 2012 payment rates could have on 
small rural hospitals. The commenter stated that if CMS finds that 
there was an increase in aggregate payments in FY 2008 or FY 2009 that 
requires an offsetting adjustment to the FY 2010 through FY 2012 
payment rates, CMS should consider a transition period before fully 
implementing such ad adjustment.
    Response: If our analysis suggests that an adjustment to the FY 
2010 through FY 2012 payment rates is necessary, a proposal would be 
made in a future proposed rule and the public would have an opportunity 
to comment on the proposal at that time.

E. Refinement of the MS-DRG Relative Weight Calculation

1. Background
    In the FY 2008 IPPS final rule with comment period (72 FR 47188), 
we

[[Page 48451]]

continued to implement significant revisions to Medicare's inpatient 
hospital rates by basing relative weights on hospitals' estimated costs 
rather than on charges. We continued our 3-year transition from charge-
based relative weights to cost-based relative weights. Beginning in FY 
2007, we implemented relative weights based on cost report data instead 
of based on charge information. We had initially proposed to develop 
cost-based relative weights using the hospital-specific relative value 
cost center (HSRVcc) methodology as recommended by MedPAC. However, 
after considering concerns raised in the public comments, we modified 
MedPAC's methodology to exclude the hospital-specific relative weight 
feature. Instead, we developed national CCRs based on distinct hospital 
departments and engaged a contractor to evaluate the HSRVcc methodology 
for future consideration. To mitigate payment instability due to the 
adoption of cost-based relative weights, we decided to transition cost-
based weights over 3 years by blending them with charge-based weights 
beginning in FY 2007. In FY 2008, we continued our transition by 
blending the relative weights with one-third charge-based weights and 
two-thirds cost-based weights.
    Also, in FY 2008, we adopted severity-based MS-DRGs, which 
increased the number of DRGs from 538 to 745. Many commenters raised 
concerns as to how the transition from charge-based weights to cost-
based weights would continue with the introduction of new MS-DRGs. We 
decided to implement a 2-year transition for the MS-DRGs to coincide 
with the remainder of the transition to cost-based relative weights. In 
FY 2008, 50 percent of the relative weight for each DRG was based on 
the CMS DRG relative weight and 50 percent was based on the MS-DRG 
relative weight. We refer readers to the FY 2007 IPPS final rule (71 FR 
47882) for more detail on our final policy for calculating the cost-
based DRG relative weights and to the FY 2008 IPPS final rule with 
comment period (72 FR 47199) for information on how we blended relative 
weights based on the CMS DRGs and MS-DRGs.
    As we transitioned to cost-based relative weights, some commenters 
raised concerns about potential bias in the weights due to ``charge 
compression,'' which is the practice of applying a higher percentage 
charge markup over costs to lower cost items and services, and a lower 
percentage charge markup over costs to higher cost items and services. 
As a result, the cost-based weights would undervalue high cost items 
and overvalue low cost items if a single CCR is applied to items of 
widely varying costs in the same cost center. To address this concern, 
in August 2006, we awarded a contract to RTI to study the effects of 
charge compression in calculating the relative weights and to consider 
methods to reduce the variation in the CCRs across services within cost 
centers. RTI issued an interim draft report in March 2007 which was 
posted on the CMS Web site with its findings on charge compression. In 
that report, RTI found that a number of factors contribute to charge 
compression and affect the accuracy of the relative weights. RTI found 
inconsistent matching of charges in the Medicare cost report and their 
corresponding charges in the MedPAR claims for certain cost centers. In 
addition, there was inconsistent reporting of costs and charges among 
hospitals. For example, some hospitals would report costs and charges 
for devices and medical supplies in the Medical Supplies Charged to 
Patients cost center, while other hospitals would report those costs 
and charges in their related ancillary departments such as Operating 
Room or Radiology. RTI also found evidence that certain revenue codes 
within the same cost center had significantly different markup rates. 
For example, within the Medicare Supplies Charged to Patients cost 
center, revenue codes for devices, implantables, and prosthetics had 
different markup rates than the other medical supplies in that cost 
center. RTI's findings demonstrated that charge compression exists in 
several CCRs, most notably in the Medical Supplies and Equipment CCR.
    RTI offered short-term, medium-term, and long-term recommendations 
to mitigate the effects of charge compression. RTI's short-term 
recommendations included expanding the distinct hospital CCRs to 19 by 
disaggregating the ``Emergency Room'' and ``Blood and Blood Products'' 
from the Other Services cost center and by estimating regression-based 
CCRs to disaggregate Medical Supplies, Drugs, and Radiology cost 
centers. RTI recommended, for the medium-term, to expand the MedPAR 
file to include separate fields that disaggregate several existing 
charge departments. In addition, RTI recommended improving hospital 
cost reporting instructions so that hospitals can properly report costs 
in the appropriate cost centers. RTI's long-term recommendations 
included adding new cost centers to the Medicare cost report, such as 
adding a ``Devices, Implants and Prosthetics'' line under ``Medical 
Supplies Charged to Patients'' and a ``CT Scanning and MRI'' 
subscripted line under ``Radiology-Diagnostics''.
    Among RTI's short-term recommendations, for FY 2008, we expanded 
the number of distinct hospital department CCRs from 13 to 15 by 
disaggregating ``Emergency Room'' and ``Blood and Blood Products'' from 
the Other Services cost center as these lines already exist on the 
hospital cost report. Furthermore, in an effort to improve consistency 
between costs and their corresponding charges in the MedPAR file, we 
moved the costs for cases involving electroencephalography (EEG) from 
the Cardiology cost center to the Laboratory cost center group which 
corresponds with the EEG MedPAR claims categorized under the Laboratory 
charges. We also agreed with RTI's recommendations to revise the 
Medicare cost report and the MedPAR file as a long-term solution for 
charge compression. We stated that, in the upcoming year, we would 
consider additional lines to the cost report and additional revenue 
codes for the MedPAR file.
    Despite receiving public comments in support of the regression-
based CCRs as a means to immediately resolve the problem of charge 
compression, particularly within the Medical Supplies and Equipment 
CCR, we did not adopt RTI's short-term recommendation to create four 
additional regression-based CCRs for several reasons. We were concerned 
that RTI's analysis was limited to charges on hospital inpatient 
claims, while typically hospital cost report CCRs combine both 
inpatient and outpatient services. Further, because both the IPPS and 
OPPS rely on cost-based weights, we preferred to introduce any 
methodological adjustments to both payment systems at the same time. We 
have since expanded RTI's analysis of charge compression to incorporate 
outpatient services. RTI has been evaluating the cost estimation 
process for the OPPS cost-based weights, including a reassessment of 
the regression-based CCR models using both outpatient and inpatient 
charge data. Because the RTI report was not available until after the 
conclusion of our proposed rule development process, we were unable to 
include a summary of the report in the FY 2009 IPPS proposed rule. The 
IPPS-related chapters of RTI's interim report were posted on the CMS 
Web site on April 22, 2008, for a 60-day comment period, and we 
welcomed comments on the report. In this final rule, we are providing a 
summary of RTI's findings and the public comments

[[Page 48452]]

we received in section II.E.2. of the preamble of this final rule.
2. Summary of RTI's Report on Charge Compression
    As stated earlier, subsequent to the release of the FY 2009 IPPS 
proposed rule, we posted on April 22, 2008, an interim report 
discussing RTI's research findings for the IPPS MS-DRG relative weights 
to be available during the public comment period on the FY 2009 IPPS 
proposed rule. This report can be found on RTI's Web site at: http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200804.pdf. The IPPS-specific chapters, which were 
separately displayed in the April 2008 interim report, as well as the 
more recent OPPS chapters, are included in the July 2008 RTI final 
report entitled, ``Refining Cost-to-Charge Ratios for Calculating APC 
and DRG Relative Payment Weights,'' that became available at the time 
of the development of this final rule. The RTI final report can be 
found on RTI's Web site at: http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200807_Final.pdf.
    RTI's final report distinguished between two types of research 
findings and recommendations: Those pertaining to the accounting or 
cost report data and those related to statistical regression analysis. 
Because the OPPS uses a hospital-specific CCR methodology, employs 
detailed cost report data, and estimates costs at the claim level, CMS 
asked RTI to closely evaluate the accounting component of the OPPS 
cost-based weight methodology. In reviewing the cost report data for 
nonstandard cost centers used in the crosswalk, RTI discovered some 
problems concerning the classification of nonstandard cost centers that 
impact both the IPPS and the OPPS. RTI reclassified nonstandard cost 
centers by reading providers' cost center labels. Standard cost centers 
are preprinted in the CMS-approved cost report software, while 
nonstandard cost centers are identified and updated periodically 
through analysis of frequently used labels. Under the IPPS, the line 
reassignments only slightly impact the 15 national aggregate CCRs used 
in the relative weight calculation. However, improved cost report data 
for CT Scanning, MRI, Nuclear Medicine, Therapeutic Radiology, and 
Cardiac Catheterization through line reassignments allowed for the 
reduction in aggregation bias by expanding the number of national CCRs 
available to separately capture these and other services. Importantly, 
RTI found that, under the IPPS and the OPPS, this improvement to the 
cost reporting data reduces some of the sources of aggregation bias 
without having to use regression-based adjustments.
    In general, with respect to the regression-based adjustments, RTI 
confirmed the findings of its March 2007 report that regression models 
are a valid approach for diagnosing potential aggregation bias within 
selected services for the IPPS and found that regression models are 
equally valid for setting payments under the OPPS. RTI also suggested 
that regression-based CCRs could provide a short-term correction until 
accounting data could be refined to support more accurate CCR estimates 
under both the IPPS and the OPPS. RTI again found aggregation bias in 
devices, drugs, and radiology and, using combined outpatient and 
inpatient claims, expanded the number of recommended regression-
adjusted CCRs to create seven regression-adjusted CCRs for Devices, IV 
Solutions, Cardiac Catheterization, CT Scanning, MRI, Therapeutic 
Radiology, and Nuclear Medicine.
    In almost all cases, RTI observed that potential distortions from 
aggregation bias and incorrect cost reporting in the OPPS relative 
weights were proportionally much greater than for MS-DRGs for both 
accounting-based and statistical adjustments because OPPS groups are 
small and generally price a single service. HCRIS line reassignments by 
themselves had little effect on most inpatient weights. However, just 
as the overall impacts on MS-DRGs were more moderate because MS-DRGs 
experienced offsetting effects in cost estimation among numerous 
revenue codes in an episode, a given hospital outpatient visit might 
include more than one service, leading to offsetting effects in cost 
estimation for services provided in the outpatient episode as a whole.
    Notwithstanding likely offsetting effects at the provider-level, 
RTI asserted that, while some averaging is appropriate for a 
prospective payment system, extreme distortions in payments for 
individual services bias perceptions of service profitability and may 
lead hospitals to inappropriately set their charge structure. RTI noted 
that this may not be true for ``core'' hospital services, such as 
oncology, but has a greater impact in evolving areas with greater 
potential for provider-induced demand, such as specialized imaging 
services. RTI also noted that cost-based weights are only one component 
of a final prospective payment rate. There are other rate adjustments 
(wage index, IME, and DSH) to payments derived from the revised cost-
based weights and the cumulative effect of these components may not 
improve the ability of final payment to reflect resource cost. With 
regard to APCs and MS-DRGs that contain substantial device costs, RTI 
cautioned that other prospective payment system adjustments (wage 
index, IME, and DSH) largely offset the effects of charge compression 
among hospitals that receive these adjustments. RTI endorsed short-term 
regression-based adjustments, but also concluded that more refined and 
accurate accounting data are the preferred long-term solution to 
mitigate charge compression and related bias in hospital cost-based 
weights.
    As a result of this research, RTI made 11 recommendations. The 
first set of recommendations is more applicable to the OPPS because it 
uses more granular HCRIS data and concentrates on short-term accounting 
changes to current cost report data. This set includes a recommendation 
that CMS immediately implement a review of HCRIS cost center 
assignments based on text searches of providers' line descriptions and 
reassign lines appropriately. The second set addresses short-term 
regression-based and other statistical adjustments. The third set 
focuses on clarifying existing cost report instructions to instruct 
providers to use all applicable standard cost centers, adding new 
standard cost centers (for Devices, CT Scans, MRIs, Cardiac 
Catheterization, and Infusion Drugs), and creating new charge category 
summaries in the MedPAR to match the new cost centers on the cost 
report. Specifically, the new MedPAR groups would be for Intermediate 
Care (revenue codes 0206 and 0214), Devices (revenue codes 0274, 0275, 
0276 and 0278), IV Solutions (revenue code 0258), CT Scanning (revenue 
codes 035x), Nuclear Medicine (revenue codes 034x, possibly combined 
with 0404), and Therapeutic Radiology (revenue codes 033x). RTI also 
recommends educating hospitals through industry-led educational 
initiatives directed at methods for capital cost finding, specifically 
encouraging providers to use direct assignment of equipment 
depreciation and lease costs wherever possible, or at least to allocate 
moveable equipment depreciation based on the dollar value of assigned 
depreciation costs. Lastly, although not directly the focus of its 
study, RTI mentions the problem of nursing cost compression in the 
relative weights, and notes that cost compression within inpatient 
nursing services is a significant source of distortion in the various 
IPPS' relative

[[Page 48453]]

weights, possibly more so than any of the factors studied by RTI. RTI 
suggests that it may be best for hospitals to agree to expand charge 
coding conventions for inpatient nursing, which would foster increased 
use of patient-specific nursing incremental charge codes in addition to 
baseline unit-specific per-diem charges.
    Comment: One commenter agreed with the enhancements made by RTI (in 
the portion of the RTI report that was made available to the public in 
the April 2008 report) to the model for disaggregating CCRs in the 
Medical Supplies cost center, but was ``disappointed'' that CMS did not 
post the complete report, including the impact of charge 
``decompression'' on the APC weights under the OPPS, and urged CMS to 
release the full report as soon as possible to allow a comprehensive 
review of the findings applicable to both the IPPS and the OPPS.
    Response: Because the final RTI report was not scheduled to be 
completed before July 2008, we were unable to make the complete report, 
including sections focusing on the OPPS, available to the public in 
April 2008. Because we wanted to give the public the benefit of a 60-
day comment period on the IPPS sections of the RTI report that would 
generally coincide with the 60-day comment period on the FY 2009 IPPS 
proposed rule, we chose to make available in April 2008 those sections 
of the RTI report that specifically dealt with the IPPS MS-DRG relative 
weights. We note that on July 3, 2008, we included on the CMS Web site 
the link to the complete RTI report: http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200807_Final.pdf.
    Comment: One commenter recommended that, for purposes of 
calculating the relative weights for FY 2009, CMS adopt RTI's 
recommendation to reassign cost center lines based on the provider's 
entered text description to correct errors in the assignment of costs 
and charges by hospitals in nonstandard cost centers on the cost 
report. The commenter also suggested that CMS adopt RTI's 
recommendation that, in the MedPAR file, intermediate care charges 
should be reclassified from the Intensive Care Unit cost center to the 
Routine cost center to correct a mismatch between where the 
intermediate care charges are assigned on the cost report (that is, in 
the Routine cost center) and where the charges are grouped in MedPAR 
(that is, with intensive care unit charges).
    Response: The commenter's recommendations are important and are 
consistent with existing Medicare policy. Currently, the MedPAR file 
incorrectly groups intermediate care charges with intensive care unit 
charges; intermediate care charges and costs are, in fact, to be 
included in the General Routine (that is, Adults and Pediatrics) cost 
center on the cost report, in accordance with section 2202.7.II.B. of 
the PRM-1. However, in its July 2008 report, RTI found that HCRIS line 
reassignments by themselves had little effect on most inpatient weights 
(page 8). The impact of adopting these recommendations would likely be 
more pronounced if we were adopting regression-based CCRs for purposes 
of calculating the relative weights for FY 2009. However, because we 
are not using regression-based CCRs for FY 2009, we do not believe it 
is necessary to adopt the commenter's recommendations for the MS-DRG 
relative weights at this time, but will consider them for future 
rulemaking.
    Comment: One commenter commended CMS for proposing to break out the 
existing line on the cost report for Medical Supplies Charged to 
Patients into two lines, one for costly devices and implants and the 
other for low-cost supplies, and for undertaking a comprehensive review 
of the cost report. However, the commenter observed that RTI's 2008 
report demonstrates that additional lines are also needed to further 
break out drugs, radiology (CT scans and MRI scans) and cardiac 
catheterization because hospitals apply varying markups within these 
cost centers as well.
    Response: We acknowledge, as RTI has found, that charge compression 
occurs in several cost centers that exist on the Medicare cost report. 
However, as we stated in the proposed rule, we proposed to focus on the 
CCR for Medical Supplies and Equipment because RTI found that the 
largest impact on the MS-DRG relative weights could result from 
correcting charge compression for devices and implants.
    We note that in the CY 2009 OPPS/ASC proposed rule (73 FR 41490), 
we are proposing to break the single standard Drugs Charged to Patient 
cost center, Line 56, into two standard cost centers, Drugs with High 
Overhead Cost Charged to Patients and Drugs with Low Overhead Cost 
Charged to Patients, to reduce the reallocation of pharmacy overhead 
cost from expensive to inexpensive drugs and biologicals. We use the 
term ``pharmacy overhead'' here to refer to overhead and related 
expenses such as pharmacy services and handling costs. This proposal is 
consistent with RTI's recommendation for creating a new cost center 
with a CCR that would be used to adjust charges to costs for drugs 
requiring detail coding. In the CY 2009 OPPS/ASC proposed rule, we note 
that comments on the proposed changes to the cost report for drugs 
should address any impact on both the inpatient and outpatient payment 
systems because both systems rely upon the Medicare hospital cost 
report for cost estimation. Furthermore, in that proposed rule, we 
specifically invited public comment on the appropriateness of creating 
standard cost centers for Computed Tomography (CT) Scanning, Magnetic 
Resonance Imaging (MRI), and Cardiac Catheterization, rather than 
continuing the established nonstandard cost centers for these services 
(73 FR 41431).
3. Summary of RAND's Study of Alternative Relative Weight Methodologies
    A second reason that we did not implement regression-based CCRs at 
the time of the FY 2008 IPPS final rule with comment period was our 
inability to investigate how regression-based CCRs would interact with 
the implementation of MS-DRGs. In the FY 2008 final rule with comment 
period (72 FR 47197), we stated that we engaged RAND as the contractor 
to evaluate the HSRV methodology in conjunction with regression-based 
CCRs and we would consider their analysis as we prepared for the FY 
2009 IPPS rulemaking process. We stated that we would analyze how the 
relative weights would change if we were to adopt regression-based CCRs 
and an HSRV methodology using fully-phased in MS-DRGs. We stated that 
we would consider the results of the second phase of the RAND study as 
we prepared for the FY 2009 IPPS rulemaking process. We had intended to 
include a detailed discussion of RAND's study in the FY 2009 IPPS 
proposed rule. However, due to some delays in releasing identifiable 
data to the contractor under revised data security rules, the report on 
this second stage of RAND's analysis was not completed in time for the 
development of the proposed rule. Therefore, we continued to have the 
same concerns with respect to uncertainty about how regression-based 
CCRs would interact with the MS-DRGs or an HSRV methodology, and we did 
not propose to adopt the regression-based CCRs or an HSRV methodology 
in the FY 2009 IPPS proposed rule. Nevertheless, we welcomed public 
comments on our proposals not to adopt regression-based CCRs or an HSRV 
methodology at that time or in the future. The RAND report on 
regression-based CCRs and the HSRV methodology was finalized at the 
conclusion of our proposed rule

[[Page 48454]]

development process and was posted on the CMS Web site on April 22, 
2008, for a 60-day comment period. Although we were unable to include a 
discussion of the results of the RAND study in the proposed rule, we 
welcomed public comment on the report. We are providing a summary of 
the report and the public comments we received below.
    RAND evaluated six different methods that could be used to 
establish relative weights: CMS' current relative weight methodology 
and five alternatives. In particular, RAND examined:
     How the relative weights differ across the alternative 
methodologies.
     How well each relative weight methodology explained 
variation in costs.
     Payment accuracy under each relative weight methodology 
and current facility-level adjustments.
     Payment implications of alternatives to the current 
methodology for establishing relative weights.
    RAND examined alternative relative weight methodologies including 
either our current methodology of 15 national CCRs or 19 CCRs that are 
disaggregated using the regression-based methodology, or hospital-
specific CCRs for 15 cost center groupings. The expansion from 15 to 19 
cost center groupings is intended to reduce charge compression in the 
relative weights introduced by combining services with different rates 
of charge markups into a single cost center for purposes of estimating 
cost. The hospital-specific CCRs are intended to account for 
differences in overall charging practices across hospitals (that is, 
smaller nonteaching hospitals tend not to have as much variation in 
rates of markup as larger teaching hospitals).
    In addition, RAND analyzed our standardization methodologies that 
account for systematic cost differences across hospitals. The purpose 
of standardization is to eliminate systematic facility-specific 
differences in cost so that these cost differences do not influence the 
relative weights. The three standardization methodologies analyzed by 
RAND include the ``hospital payment factor'' methodology currently used 
by CMS, where a hospital's wage index factor, and IME and/or DSH factor 
are divided out of its estimated DRG cost; the HSRV methodology that 
standardizes the cost for a given discharge by the hospital's own 
costliness rather than by the effect of the systematic cost differences 
across groups of hospitals; and the HSRVcc methodology, which removes 
hospital-level cost variation by calculating hospital-specific charge-
based relative values for each DRG at the cost center level and 
standardizing them for differences in case mix. Under the HSRVcc 
methodology, a national average charge-based relative weight is 
calculated for each cost center.
    RAND conducted two different types of analyses to evaluate 5 
alternative relative weight methodologies that varied use of 19 
national CCRs and 15 hospital-specific CCRs, and HSRV and HSRVcc 
standardization methodologies along with components of the current 
relative weight methodology using 15 national CCRs and hospital payment 
factor standardization. The first type of analysis compared the five 
alternative relative weight methodologies to CMS' current relative 
weight methodology and compared average payment under each relative 
weight methodology across different types of hospitals. The second 
analysis examined the relative payment accuracy of the relative weight 
methodologies. RAND used the costs under 15 hospital-specific CCRs as 
its hospital cost baseline. RAND noted that the choice for its baseline 
may affect the results of the analysis because relative weight 
methodologies that are similar to the 15 hospital-specific CCR 
methodology may be assessed more favorably because they are likely to 
have similar costs, while relative weight methodologies that are 
different from the 15 hospital-specific CCR methodology may not be as 
favorable. The payment accuracy analysis used a regression technique to 
evaluate how well the relative weight methodologies explained variation 
in costs and how well the hospital payments under the relative weight 
methodologies matched the costs per discharge. Finally, RAND examined 
payment-to-cost ratios among different types of hospitals.
    Overall, RAND found that none of the alternative methods of 
calculating the relative weights represented a marked improvement in 
payment accuracy over the current method, and there was little 
difference across methods in their ability to predict cost at either 
the discharge-level or the hospital-level. In their regression 
analysis, RAND found that after controlling for hospital payment 
factors, the relative weights are compressed. However, RAND also found 
that the hospital payment factors increase more rapidly than cost, so 
while the relative weights are compressed, these payment factors offset 
the compression so that total payment increases more rapidly than cost.
    RAND does not believe the regression-based charge compression 
adjustments significantly improve payment accuracy. RAND found that 
relative weights using the 19 national disaggregated regression-based 
CCRs result in significant redistributions in payments among hospital 
groupings. With regard to standardization methodologies, while RAND 
found that there is no clear advantage to the HSRV method or the HSRVcc 
method of standardizing cost compared to the current hospital payment 
factor standardization method, its analysis did reveal significant 
limitations of CMS' current hospital payment factor standardization 
method. The current standardization method has a larger impact on the 
relative weights and payment accuracy than any of the other 
alternatives that RAND analyzed because the method ``over-
standardizes'' by removing more variability for hospitals receiving a 
payment factor than can be empirically supported as being cost-related 
(particularly for IME and DSH). RAND found that instead of increasing 
proportionately with cost, the payment factors CMS currently uses (some 
of which are statutory), increase more rapidly than cost, thereby 
reducing payment accuracy. Further analysis is needed to isolate the 
cost-related component of the IPPS payment adjustments (some of which 
has already been done by MedPAC), use them to standardize cost, and 
revise the analysis of payment accuracy to reflect only the cost-
related component. Generally, RAND believes it is premature to consider 
further refinements in the relative weight methodology until data from 
FY 2008 or later that reflect coding improvement and other behavioral 
changes that are likely to occur as hospitals adopt the MS-DRGs can be 
evaluated.
    Comment: A number of commenters submitted comments on RAND's 
report. Some commenters supported RAND's methodology and findings. 
These commenters agreed with RAND's findings that regression-based CCRs 
would not have a material impact on payment accuracy. These commenters 
also agreed with RAND that CMS should wait until FY 2008 data are 
available to consider further refinements to the relative weight 
methodology.
    Some commenters disagreed with RAND's methodology and findings that 
the regression-based CCRs offer no improvement in payment accuracy. 
RAND found that regression-based CCRs result in significant 
redistributions in payment within hospital groups with increases in 
payments concentrated to the cardiac and orthopedic surgical DRGs. 
RAND's payment to cost ratio analysis, which measures payment equity 
across groups of hospitals, found that adopting regression-based CCRs 
led

[[Page 48455]]

to significant reductions in payment to cost ratio for rural hospitals. 
Commenters also indicated their belief that the payment-to-cost 
analysis is not the appropriate analysis to use because, in the 
hospital prospective payment system, costs at the DRG level are not 
precisely known. Furthermore, the commenters asserted RAND's analysis 
was flawed because, in its payment-to-cost analysis, RAND compared 
payment rates adjusted for charge compression with regression-based 
CCRs to payment rates unadjusted for charge compression. The commenters 
stated that when they compared payments adjusted for charge compression 
with regression-based CCRs to payment rates adjusted for charge 
compression, they found that regression-based CCRs improved payment 
accuracy. In addition, the commenters cited that RAND acknowledged that 
its choice for the baseline in comparing payment rates ``may affect the 
results and conclusions of our analysis''.
    Response: We appreciate the comments on the RAND report. Given the 
move to the MS-DRGs and the concerns surrounding documentation and 
coding and the most appropriate approach to improving payment accuracy, 
we generally agree with RAND's recommendation that it would be 
premature to revise the relative weights methodology until additional 
data from FY 2008 are available. With respect to the comments on RAND's 
analysis related to the regression-based CCRs, we understand the 
commenters' reasons for disputing RAND's choice to use a relative 
weight methodology that does not incorporate regression-based CCRs as 
its baseline for hospital costs. In RAND's payment-to-cost analysis, 
RAND used the relative weight methodology with 15 hospital-specific 
CCRs to determine the hospital costs baseline. RAND noted that, while 
it believes its choice of cost measure is appropriate, it recognizes 
that ``the choice may affect the results of the analysis because 
relative weight methods that use the hospital-specific CCRs may be 
assessed more favorably than would have been the case had we used a 
different cost measure. Similarly, the use of 15 rather than 19 cost 
center CCRs may favor the relative weight methods that do not account 
for charge compression.'' If a single method existed that clearly 
yielded the best measure of cost, it seems unlikely that a study to 
evaluate five alternative methods of calculating cost for the MS-DRG 
relative weights would have been necessary. We believe that it was 
within RAND's discretion to decide how best to conduct its payment 
analyses, and while there may be benefits and drawbacks to alternative 
approaches (including whether to use a baseline that adjusts for charge 
compression), RAND's choice is defensible. Accordingly, RAND's finding 
that regression-based CCRs do not improve payment accuracy cannot be 
summarily dismissed.
    Comment: Many commenters opposed the HSRV methodology for 
standardization. The commenters cited RAND's findings that the HSRV 
methodology inappropriately compresses the relative weights. They 
believed that the methodology only improves the accuracy of the 
relative weights under the unlikely situations where all hospitals have 
identical mix of patients and costs structures, or if all hospitals 
have identical costs across all cost centers or if all hospitals have 
the same case-mix and the costs differ by a constant factor across all 
DRGs and all cost centers. The commenters agreed with RAND that it 
would be premature to consider further refinements to the methodology 
for setting relative weights, including the HSRV method of 
standardization, until data from FY 2008 or later can be evaluated.
    Response: We appreciate the comments on the HSRV methodology, and 
we understand that many commenters continue to oppose to the HSRV 
methodology. In FY 2007, we did not adopt the HSRV methodology after 
consideration of concerns raised by commenters' opposition to the 
methodology. Instead, in the FY 2007 IPPS final rule (71 FR 47897), we 
stated that we would undertake further analysis to study the payment 
impacts of the HSRV methodology with regression-based CCRs under the 
MS-DRGs. We engaged RAND as our contractor to conduct this analysis, 
and in its report, RAND observed that relative weights that were based 
on hospital-specific CCRs with 15 cost centers that were standardized 
using the current standardization methodology would warrant further 
consideration as an improvement over the current relative weights. RAND 
did not find the HSRV or HSRVcc standardization methods to be 
preferable to the hospital payment factor method. However, RAND also 
cautioned that its results reveal some significant limitations of the 
current hospital payment factor method. Specifically, current IME and 
DSH payment adjustments increase more quickly than their cost, and when 
used for standardization, compress the relative weights. We agree with 
RAND that our current standardization process requires additional 
analysis, and therefore, we are not changing our current method of 
standardizing for FY 2009. We will continue to consider various options 
for improving payment accuracy.
    Comment: One commenter supported RAND's finding that CMS should 
revise its hospital payment factor method for standardizing claims 
charges to remove the effects of hospital-specific factors (that is, 
wage index, IME, and DSH) that affect cost estimates. The commenter 
recommended that CMS could improve its standardization process by 
removing the effects of these factors by using empirical estimates 
rather than using current policy adjustments. The commenter noted that 
MedPAC and CMS have done empirical estimates of these factors in the 
past.
    Response: One of the issues that the RAND report specifically 
addressed was standardization methods that account for systematic cost 
differences across hospitals. These methods include what RAND called 
the hospital payment factor method, which is CMS' current approach to 
standardizing claims charges, the HSRV methodology, and the HSRVcc 
methodology. Although RAND's results do not indicate that the HSRV or 
HSRVcc standardization method is clearly preferable to the hospital 
payment factor method, RAND found that the current hospital payment 
factor standardization method has significant limitations. 
Specifically, RAND found that the hospital payment factor method 
``over-standardizes'' by using a hospital payment factor that is larger 
than can be empirically supported as being cost-related (particularly 
for IME and DSH) and that has a larger impact on the relative weights 
and payment accuracy than other elements of the cost-based methodology. 
However, RAND cautions that ``re-estimating'' these payment factors 
``raises important policy issues that warrant additional analyses'' 
(page 49), particularly to ``determine the analytically justified-
levels using the MS-DRGs'' (page 110). In addition, we note that RTI, 
in its July 2008 final report, also observed that the adjustment 
factors under the IPPS (the wage index, IME, and DSH adjustments) 
complicate the determination of cost and these factors ``within the 
rate calculation may offset the effects of understated weights due to 
charge compression'' (page 109). We understand that MedPAC has done 
analysis of what the empirically-justified levels of the IME and DSH 
adjustment should be. We cannot propose to change the IME and DSH 
factors used for actual payment under the IPPS because these factors 
are

[[Page 48456]]

required by statute. After further studying the issue, we may consider 
proposing various options for improving payment accuracy when 
standardizing charges as part of the relative weights calculation.
    Comment: Many commenters continued to oppose adoption of the 
regression-based CCRs, asserting that the charge compression issue is 
not urgent enough to warrant the use of substitute data for real cost 
and charge information. The commenters indicated that many hospitals 
believe that most increases or decreases in the MS-DRG relative weights 
will have a minimal dollar impact on their bottom line. They further 
stated that the RAND report asserts that the regression-based CCR 
adjustments would not materially impact payment accuracy. The 
commenters also agreed with CMS' position at the time of the proposed 
rule that there had not been sufficient time to evaluate the impact of 
a regression-based approach on inpatient or outpatient services, and on 
the MS-DRGs. The commenters further believed that calculating 
regression-based CCRs is ``excessively complicated,'' is difficult to 
validate, and may be flawed to the extent that the regressions would be 
based on data in which the mismatch between MedPAR charges and cost 
report costs and charges has not been corrected. The commenters 
believed that more accurate and uniform reporting and improvements to 
the cost report is the best approach to improving payment accuracy.
    A number of commenters objected to the regression-based approach to 
break out the one CCR for all radiology services that CMS is currently 
using. The commenters noted that the RTI estimates suggest that 
hospitals mark up CT services on average by more than 1800 percent over 
cost (CCR 0.054), while routine radiology services are marked up by an 
average of more than 300 percent over cost. The commenters believed 
that this vast difference in the markup practices of hospitals seems 
implausible and, therefore, would result in significant payment 
distortions if CMS were to adopt RTI's disaggregated radiology CCRs or 
some related adjustment to the radiology CCR, for Medicare ratesetting. 
The commenters asserted that use of RTI's CCRs would significantly 
reduce payment for imaging-intensive DRGs in the inpatient setting for 
trauma services, but the impact on payments under the OPPS and the 
Medicare physician fee schedule (MPFS) imaging services capped by OPPS 
payments would be even more dramatic. The commenters believed that the 
CCRs for advanced imaging may reflect a misallocation of capital costs 
on the cost report. They further stated that this could indicate that 
many hospitals are reporting CT and MRI machines as fixed equipment and 
allocate the related capital costs as part of the facility's Building 
and Fixtures overhead cost center instead of reporting the capital 
costs directly in the Radiology cost center, resulting in RTI's 
estimate of the costs and CCRs for CT and MRI equipment to be too low. 
The commenters argued that, regardless of the reason for the low CCRs, 
the use of RTI's CCRs could result in aberrant payments for radiology 
services, where payments to a hospital for outpatient x-rays might be 
higher than the payment for a similar CT scan, and where the physician 
fee schedule rates for the technical component cost of the CT scan may 
also be less than the cost of these scans estimated by CMS, providing a 
disincentive for hospitals and physicians to provide these services. In 
concluding that RTI's analysis of the CCRs for imaging services is 
flawed, several commenters urged CMS to more carefully analyze CCRs for 
radiology before proposing any measures to change these CCRs. The 
commenters believed that if the underreported capital costs are 
considered, it is likely that the CCRs for CT scanning and MRI services 
would be approximately equal to the overall radiology CCR and no 
adjustment would be needed.
    A significant number of commenters supported applying the 
regression-based CCRs as a temporary solution to address charge 
compression. The commenters believed that because CMS' proposed changes 
to the cost report would not have an impact on the relative weights 
until FY 2012, implementation of regression-based CCRs is necessary in 
the interim. The commenters cited what they believed is ample evidence, 
particularly from the RTI report and from MedPAC, that regression-based 
CCRs are appropriate as a short-term solution.
    While several commenters agreed on the use of regression-based CCRs 
as a short-term solution to charge compression, many commenters gave 
varied suggestions as to how to implement these regression-based CCRs. 
The commenters suggested that CMS implement a 3-year phase-in of 
regression-based CCRs beginning in FY 2009 to mitigate any 
distributional impacts on hospitals. The commenters asked CMS to 
consider using a regression analysis for 25 percent of the estimated 
cost of medical supplies in FY 2009, then 50 percent in FY 2010, and 75 
percent in FY 2011. The commenters further stated that once the data 
from the new cost centers for supplies and devices are available, the 
regression adjustments could be phased out, or remain in use even after 
FY 2012, should the data from the new cost centers still be incomplete 
at that time. Furthermore, the commenters believed that this transition 
would remove the need for a transition period to separate CCRs for 
medical devices and medical supplies once the cost report data are 
available.
    Some commenters supported adoption of regression-based CCRs except 
for those within the radiology category. Other commenters suggested 
that CMS only implement regression-based CCRs for medical supplies and 
devices because the proposed changes to the cost report focused on the 
medical supplies and devices. They argued that CMS' proposed cost 
report changes for medical supplies and devices signifies that CMS 
believes it is most important to address charge compression in the 
medical supplies group.
    One commenter recommended that, based on the findings in RTI's 2008 
report, CMS should implement a total of 22 regression-based CCRs. (In 
its March 2007 report, RTI recommended that CMS expand the number of 
CCRs from 15 to 19 with the use of statistical adjustments to 
disaggregate medical devices from medical supplies, IV solutions and 
other drugs from drugs and CT scanning and MRI from radiology. In the 
interim RTI report posted on the CMS Web site on April 22, 2008, RTI 
increased the potential regression-based CCRs from 19 to 23 national 
CCRs after evaluating OPPS data with IPPS data.) The commenter believed 
that CMS should expand the number of CCRs from 15 to 22 with 
disaggregated CCRs for medical supplies, medical devices, IV solutions, 
other drugs and detail coded drugs, CT scans, MRI, therapeutic 
radiation and nuclear medicine. The commenter recommended implementing 
these regression-based CCRs to ensure payment equity across these types 
of services. Because of limited time to develop the final rule, the 
commenter recognized that it would be difficult for CMS to implement 
revised regression estimates. To account for this, the commenter 
recommended what the commenter believed is a relatively simple ratio 
technique, similar to RTI's methodology, to implement regression-based 
CCRs for the FY 2009 IPPS final rule. The commenter believed that CMS 
could use more detailed charge information from the Standard Analytic 
File (SAF) and the regression-based estimates from RTI's 2008 report to

[[Page 48457]]

calculate national CCRs for the subgroups within drugs, supplies and 
radiology. The commenter stated that CMS would then compare those CCRs 
under RTI's regression-based estimates to the RTI-estimated national 
CCR for the broader category. To further clarify its recommendation, 
the commenter stated that, for example, if CMS were to disaggregate the 
supplies CCR, CMS would create regression-based CCRs for medical 
supplies and medical devices based on RTI's regression-based CCRs for 
those subgroups. Then a ratio would be calculated comparing those CCRs 
to the original RTI-estimated national CCR for the broader supplies 
category. Those ratios would then be multiplied by their own national 
overall CCR for the broader supplies category to obtain national CCRs 
for the subgroup that reflect updated cost and charge data.
    Response: In the FY 2009 IPPS proposed rule (73 FR 23543), we 
stated several reasons why we did not propose to adopt any regression-
based CCRs for FY 2009. Specifically, because a number of commenters on 
the FY 2008 proposed rule objected to the adoption of the regression-
based CCRs, and because, at the time the FY 2009 IPPS proposed rule was 
under development, we did not yet have the results of the RTI study 
analyzing the effects of charge compression on inpatient and outpatient 
charges as well as the results of the RAND study analyzing how the 
relative weights would change if we were to adopt regression CCRs while 
simultaneously adopting the HSRV methodology using fully phased in MS-
DRGs, we did not propose to adopt regression-based CCRs in the FY 2009 
IPPS proposed rule. However, we did solicit public comments on our 
proposal not to adopt regression-based CCRs in the FY 2009 IPPS 
proposed rule. Consequently, as was the case during the FY 2008 IPPS 
proposed rule comment period, we received numerous public comments both 
against and in favor of adopting regression-based CCRs. Once again, we 
have considered all of the public comments we received. We have also 
considered the findings of the RAND report, and note that RAND believes 
that it may be premature to consider further refinements in the 
relative weight methodology until data using MS-DRGs from FY 2008 or 
later can be evaluated (page 108). Also noteworthy is RAND's belief 
that regression-based CCRs may not improve payment accuracy, and that 
it is equally if not more important to consider revisions to the 
current IPPS hospital payment factor standardization method in order to 
improve payment accuracy. We appreciate the recognition by one 
commenter that the time in which CMS must develop the final rule is 
limited, and the consideration given by this commenter in recommending 
a relatively simple approach to implementing the regression-based CCRs 
for FY 2009. Nevertheless, we agree with the commenters that believe 
that the best approach at this time to addressing charge compression is 
to focus on improving the accuracy of hospital cost reporting, coupled 
with long-term changes to the cost report discussed below so that CMS 
can continue to rely on hospital's reported cost and charge data. With 
respect to the CCR for radiology services, we note that the 2008 RTI 
report found that significant improvements and refinements to the 
radiology CCR can be achieved without using regression-based CCRs, 
simply by reallocating the costs and charges from nonstandard cost 
centers on the cost report and using increased charge detail from the 
SAF to supplement the radiology charges in the MedPAR. Therefore, as we 
stated in the FY 2009 IPPS proposed rule (73 FR XXXXX), we believe that 
ultimately, improved and more precise cost reporting is the best way to 
minimize charge compression and improve the accuracy of the cost 
weights. Accordingly, we are not adopting regression-based CCRs for the 
calculation of the FY 2009 IPPS relative weights.
    We received public comments on the FY 2008 IPPS proposed rule 
raising concerns on the accuracy of using regression-based CCR 
estimates to determine the relative weights rather than on the Medicare 
cost report. The commenters noted that regression-based CCRs would not 
fix the underlying mismatch of hospital reporting of costs and charges. 
Instead, the commenters suggested that the impact of charge compression 
might be mitigated through an educational initiative that would 
encourage hospitals to improve their cost reporting. The commenters 
recommended that hospitals be educated to report costs and charges in a 
way that is consistent with how charges are grouped in the MedPAR file. 
In an effort to achieve this goal, hospital associations have launched 
an educational campaign to encourage consistent reporting, which would 
result in consistent groupings of the cost centers used to establish 
the cost-based relative weights. The commenters requested that CMS 
communicate to the fiscal intermediaries/MACs that such action is 
appropriate. In the FY 2008 IPPS final rule with comment period, we 
stated that we were supportive of the educational initiative of the 
industry, and we encouraged hospitals to report costs and charges 
consistently with how the data are used to determine relative weights 
(72 FR 47196). We would also like to affirm that the longstanding 
Medicare principles of cost apportionment in the regulations at 42 CFR 
413.53 convey that, under the departmental method of apportionment, the 
cost of each ancillary department is to be apportioned separately 
rather than being combined with another ancillary department (for 
example, combining the cost of Medical Supplies Charged to Patients 
with the costs of Operating Room or any other ancillary cost center). 
(We note that, effective for cost reporting periods starting on or 
after January 1, 1979, the departmental method of apportionment 
replaced the combination method of apportionment where all the 
ancillary departments were apportioned in the aggregate (Section 2200.3 
of the PRM-I).)
    Furthermore, longstanding Medicare cost reporting policy has been 
that hospitals must include the cost and charges of separately 
``chargeable medical supplies'' in the Medical Supplies Charged to 
Patients cost center (line 55 of Worksheet A), rather than in the 
Operating Room, Emergency Room, or other ancillary cost centers. 
Routine services, which can include ``minor medical and surgical 
supplies'' (Section 2202.6 of the PRM-1), and items for which a 
separate charge is not customarily made, may be directly assigned 
through the hospital's accounting system to the department in which 
they were used, or they may be included in the Central Services and 
Supply cost center (line 15 of Worksheet A). Conversely, the separately 
chargeable medical supplies should be assigned to the Medical Supplies 
Charged to Patients cost center on line 55.
    We note that not only is accurate cost reporting important for IPPS 
hospitals to ensure that accurate relative weights are computed, but 
hospitals that are still paid on the basis of cost, such as CAHs and 
cancer hospitals, and SCHs and MDHs must adhere to Medicare cost 
reporting principles as well.
    The CY 2008 OPPS/ASC final rule with comment period (72 FR 66600 
through 66601) also discussed the issue of charge compression and 
regression-based CCRs, and noted that RTI is currently evaluating the 
cost estimation process underpinning the OPPS cost-based weights, 
including a reassessment of the regression models using both outpatient 
and inpatient charges, rather than inpatient charges only. In

[[Page 48458]]

responding to comments in the CY 2008 OPPS/ASC final rule with comment 
period, we emphasized that we ``fully support'' the educational 
initiatives of the industry and that we would ``examine whether the 
educational activities being undertaken by the hospital community to 
improve cost reporting accuracy under the IPPS would help to mitigate 
charge compression under the OPPS, either as an adjunct to the 
application of regression-based CCRs or in lieu of such an adjustment'' 
(72 FR 66601). However, as we stated in the FY 2008 IPPS final rule 
with comment period, we would consider the results of the RAND study 
before considering whether to adopt regression-based CCRs, and in the 
CY 2008 OPPS/ASC final rule with comment period (72 FR 66601), we 
stated that we would determine whether refinements should be proposed 
after reviewing the results of the RTI study.
    On February 29, 2008, we issued Transmittal 321, Change Request 
5928, to inform the fiscal intermediaries/MACs of the hospital 
associations' initiative to encourage hospitals to modify their cost 
reporting practices with respect to costs and charges in a manner that 
is consistent with how charges are grouped in the MedPAR file. We noted 
that the hospital cost reports submitted for FY 2008 may have costs and 
charges grouped differently than in prior years, which is allowable as 
long as the costs and charges are properly matched and the Medicare 
cost reporting instructions are followed. Furthermore, we recommended 
that fiscal intermediaries/MACs remain vigilant to ensure that the 
costs of items and services are not moved from one cost center to 
another without moving their corresponding charges. Due to a time lag 
in submittal of cost reporting data, the impact of changes in 
providers' cost reporting practices occurring during FY 2008 would be 
reflected in the FY 2011 IPPS relative weights.
    Comment: One commenter urged CMS to audit cost reports closely to 
ensure initial and ongoing compliance with the new reporting 
requirements. Several commenters who, over the course of the past year, 
have supported an educational initiative to encourage hospitals to 
prepare their Medicare cost reports such that Medicare charges, total 
charges, and total costs are aligned with each other, and with the 
current categories in the MedPAR file, continued to believe that this 
educational initiative is an important effort. These commenters 
appreciated CMS' efforts to inform the fiscal intermediaries/MACs of 
this educational initiative and to work with hospitals to ensure proper 
cost reporting (in Transmittal 321, Change Request 5928, issued 
February 29, 2008). However, the commenters expressed concern that this 
transmittal did not address the need by some hospitals to elect a cost-
estimated approach to ensure that costs and charges for supplies are 
aligned. The commenters urged CMS to instruct fiscal intermediaries/
MACs not to reverse or undo reporting that relies on estimation 
approaches to achieve this alignment, provided that hospitals submit 
adequate documentation of their methodology.
    Response: We agree that audit and compliance measures are 
important, and we will work within the audit budget to determine 
whether hospitals properly follow payment policies and the cost 
reporting instructions. With respect to Transmittal 321, Change Request 
5928, CMS did remind fiscal intermediaries/MACs that ``providers may 
submit cost reports with cost and charges grouped differently than in 
prior years, as long as the cost and charges are properly matched and 
Medicare cost reporting instructions are followed. Medicare contractors 
shall not propose adjustments that regroup costs and charges merely to 
be consistent with previous year's reporting if the costs and charges 
are properly grouped on the as-filed cost report.'' However, Medicare 
payment is governed by longstanding principles contained in Sec. Sec.  
413.20 and 413.24 which we cannot instruct the fiscal intermediaries/
MACs to overlook. In accordance with Sec.  413.20, the principles of 
cost reimbursement require that providers maintain sufficient financial 
records and statistical data for proper determination of costs payable 
under the program. Furthermore, Sec.  413.24(a) specifies that 
providers receiving payment on the basis of reimbursable cost must 
provide adequate cost data. This must be based on their financial and 
statistical records which must be capable of verification by qualified 
auditors. In addition, Sec.  413.24(c) states that adequate cost 
information must be obtained from the provider's records to support 
payments made for services furnished to beneficiaries. The requirement 
of adequacy of data implies that the data be accurate and in sufficient 
detail to accomplish the purpose for which the data are intended. 
Adequate data capable of being audited are consistent with good 
business concepts and effective and efficient management of any 
organization. Furthermore, we note that these cost reimbursement 
principles continue to apply even under the IPPS. Specifically, Sec.  
412.53 states, ``All hospitals participating in the prospective payment 
systems must meet the recordkeeping and cost reporting requirements of 
Sec. Sec.  413.20 and 413.24 of this chapter.'' Therefore, CMS cannot 
instruct the Medicare contractors to disregard these longstanding 
policies when auditing and settling cost reports.
4. Refining the Medicare Cost Report
    In developing the FY 2009 IPPS proposed rule, we considered whether 
there were concrete steps we could take to mitigate the bias introduced 
by charge compression in both the IPPS and OPPS relative weights in a 
way that balances hospitals' desire to focus on improving the cost 
reporting process through educational initiatives with device industry 
interest in adopting regression-adjusted CCRs. Although RTI recommended 
adopting regression-based CCRs, particularly for medical supplies and 
devices, as a short-term solution to address charge compression, RTI 
also recommended refinements to the cost report as a long-term 
solution. RTI's draft interim March 2007 report discussed a number of 
options that could improve the accuracy and precision of the CCRs 
currently being derived from the Medicare cost report and also reduce 
the need for statistically-based adjustments. As mentioned in the FY 
2008 IPPS final rule with comment period (72 FR 47193), we believe that 
RTI and many of the public commenters on the FY 2008 IPPS proposed rule 
concluded that, ultimately, improved and more precise cost reporting is 
the best way to minimize charge compression and improve the accuracy of 
cost weights. Therefore, in the FY 2009 IPPS proposed rule (73 FR 
23544), we proposed to begin making cost report changes geared to 
improving the accuracy of the IPPS and OPPS relative weights. However, 
we also received comments last year asking that we proceed cautiously 
with changing the Medicare cost report to avoid unintended consequences 
for hospitals that are paid on a cost basis (such as CAHs, cancer 
hospitals, and, to some extent, SCHs and MDHs), and to consider the 
administrative burden associated with adapting to new cost reporting 
forms and instructions. Accordingly, we proposed to focus in the FY 
2009 proposed rule on the CCR for Medical Supplies and Equipment 
because RTI found that the largest impact on the relative weights could 
result from correcting charge compression for devices and implants. 
When examining markup differences within the Medical Supplies Charged 
to Patients cost center, RTI found that its

[[Page 48459]]

``regression results provide solid evidence that if there were distinct 
cost centers for items, cost ratios for devices and implants would 
average about 17 points higher than the ratios for other medical 
supplies'' (January 2007 RTI report, page 59). This suggests that much 
of the charge compression within the Medical Supplies CCR results from 
inclusion of medical devices that have significantly different markups 
than the other supplies in that CCR. Furthermore, in the FY 2007 IPPS 
final rule and FY 2008 IPPS final rule with comment period, the Medical 
Supplies and Equipment CCR received significant attention by the public 
commenters.
    Although we proposed to make improvements to mitigate the effects 
of charge compression only on the Medical Supplies and Equipment CCR as 
a first step, we invited public comments as to whether to make other 
changes to the Medicare cost report to refine other CCRs. In addition, 
we indicated that we were open to making further refinements to other 
CCRs in the future. Therefore, in the FY 2009 IPPS proposed rule, we 
proposed to add only one cost center to the cost report, such that, in 
general, the costs and charges for relatively inexpensive medical 
supplies would be reported separately from the costs and charges of 
more expensive devices (such as pacemakers and other implantable 
devices). We indicated that we would consider public comments submitted 
on the proposed rule for purposes of both the IPPS and the OPPS 
relative weights and, by extension, the calculation of the ambulatory 
surgical center (ASC) payment rates (73 FR XXXXX).
    Under the IPPS for FY 2007 and FY 2008, the aggregate CCR for 
chargeable medical supplies and equipment was computed based on line 55 
for Medical Supplies Charged to Patients and lines 66 and 67 for DME 
Rented and DME Sold, respectively. To compute the 15 national CCRs used 
in developing the cost-based weights under the IPPS (explained in more 
detail under section II.H. of the preamble of the proposed rule and 
this final rule), we take the costs and charges for the 15 cost groups 
from Worksheet C, Part I of the Medicare cost report for all hospital 
patients and multiply each of these 15 CCRs by the Medicare charges on 
Worksheet D-4 for those same cost centers to impute the Medicare cost 
for each of the 15 cost groups. Under this proposal, the goal would be 
to split the current CCR for Medical Supplies and Equipment into one 
CCR for medical supplies, and another CCR for devices and DME Rented 
and DME Sold.
    In considering how to instruct hospitals on what to report in the 
cost center for medical supplies and the cost center for devices, we 
looked at the existing criteria for the type of device that qualifies 
for payment as a transitional pass-through device category in the OPPS. 
(There are no such existing criteria for devices under the IPPS.) The 
provisions of the regulations under Sec.  419.66(b) state that for a 
medical device to be eligible for pass-through payment under the OPPS, 
the medical device must meet the following criteria:
    a. If required by the FDA, the device must have received FDA 
approval or clearance (except for a device that has received an FDA 
investigational device exemption (IDE) and has been classified as a 
Category B device by the FDA in accordance with Sec. Sec.  405.203 
through 405.207 and 405.211 through 405.215 of the regulations) or 
another appropriate FDA exemption.
    b. The device is determined to be reasonable and necessary for the 
diagnosis or treatment of an illness or injury or to improve the 
functioning of a malformed body part (as required by section 
1862(a)(1)(A) of the Act).
    c. The device is an integral and subordinate part of the service 
furnished, is used for one patient only, comes in contact with human 
tissues, and is surgically implanted or inserted whether or not it 
remains with the patient when the patient is released from the 
hospital.
    d. The device is not any of the following:
     Equipment, an instrument, apparatus, implement, or item of 
this type for which depreciation and financing expenses are recovered 
as depreciable assets as defined in Chapter 1 of the Medicare Provider 
Reimbursement Manual (CMS Pub. 15-1).
     A material or supply furnished incident to a service (for 
example, a suture, customized surgical kit, or clip, other than a 
radiological site marker).
     Material that may be used to replace human skin (for 
example, a biological or synthetic material).
    These requirements are the OPPS criteria used to define a device 
for pass-through payment purposes and do not include additional 
criteria that are used under the OPPS to determine if a candidate 
device is new and represents a substantial clinical improvement, two 
other requirements for qualifying for pass-through payment.
    For purposes of applying the eligibility criteria, we interpret 
``surgical insertion or implantation'' to include devices that are 
surgically inserted or implanted via a natural or surgically created 
orifice as well as those devices that are inserted or implanted via a 
surgically created incision (70 FR 68630).
    In proposing to modify the cost report to have one cost center for 
medical supplies and one cost center for devices, we proposed that 
hospitals would determine what should be reported in the Medical 
Supplies cost center and what should be reported in the Medical Devices 
cost center using criteria consistent with those listed above that are 
included under Sec.  419.66(b), with some modification. Specifically, 
for purposes of the cost reporting instructions, we proposed that an 
item would be reported in the device cost center if it meets the 
following criteria:
    a. If required by the FDA, the device must have received FDA 
approval or clearance (except for a device that has received an FDA 
investigational device exemption (IDE) and has been classified as a 
Category B device by the FDA in accordance with Sec. Sec.  405.203 
through 405.207 and 405.211 through 405.215 of the regulations) or 
another appropriate FDA exemption.
    b. The device is reasonable and necessary for the diagnosis or 
treatment of an illness or injury or to improve the functioning of a 
malformed body part (as required by section 1862(a)(1)(A) of the Act).
    c. The device is an integral and subordinate part of the service 
furnished, is used for one patient only, comes in contact with human 
tissue, is surgically implanted or inserted through a natural or 
surgically created orifice or surgical incision in the body, and 
remains in the patient when the patient is discharged from the 
hospital.
    d. The device is not any of the following:
     Equipment, an instrument, apparatus, implement, or item of 
this type for which depreciation and financing expenses are recovered 
as depreciable assets as defined in Chapter 1 of the Medicare Provider 
Reimbursement Manual (CMS Pub. 15-1).
     A material or supply furnished incident to a service (for 
example, a surgical staple, a suture, customized surgical kit, or clip, 
other than a radiological site marker).
     Material that may be used to replace human skin (for 
example, a biological or synthetic material).
     A medical device that is used during a procedure or 
service and does not remain in the patient when the patient is released 
from the hospital.
    We proposed to select the existing criteria for what type of device 
qualifies

[[Page 48460]]

for payment as a transitional pass-through device under the OPPS as a 
basis for instructing hospitals on what to report in the cost center 
for Medical Supplies Charged to Patients or the cost center for Medical 
Devices Charged to Patients because these criteria are concrete and 
already familiar to the hospital community. However, the key difference 
between the existing criteria for devices that are eligible for pass-
through payment under the OPPS in the regulations at Sec.  419.66(b) 
and our proposed criteria stated above to be used for cost reporting 
purposes is that the device that is implanted remains in the patient 
when the patient is discharged from the hospital. Essentially, we 
proposed to instruct hospitals to report only implantable devices that 
remain in the patient at discharge in the cost center for devices. All 
other devices and nonroutine supplies which are separately chargeable 
would be reported in the medical supplies cost center. We believe that 
defining a device for cost reporting purposes based on criteria that 
specify implantation and adding that the device must remain in the 
patient upon discharge would have the benefit of capturing virtually 
all costly implantable devices (for example, implantable cardioverter 
defibrillators (ICDs), pacemakers, and cochlear implants) for which 
charge compression is a significant concern.
    However, we acknowledge that a definition of device based on 
whether an item is implantable and remains in the patient could, in 
some cases, include items that are relatively inexpensive (for example, 
urinary catheters, fiducial markers, vascular catheters, and drainage 
tubes), and which many would consider to be supplies. Thus, some modest 
amount of charge compression could still be present in the cost center 
for devices if the hospital does not have a uniform markup policy. In 
addition, requiring as a cost reporting criterion that the device is to 
remain in the patient at discharge could exclude certain technologies 
that are moderately expensive (for example, cryoablation probes, 
angioplasty catheters, and cardiac echocardiography catheters, which do 
not remain in the patient upon discharge). Therefore, some charge 
compression could continue for these technologies. We believe this 
limited presence of charge compression is acceptable, given that the 
proposed definition of device for cost reporting purposes would isolate 
virtually all of the expensive items, allowing them to be separately 
reported from most inexpensive supplies.
    The criteria we proposed above for instructing hospitals as to what 
to report in the device cost center specify that a device is not a 
material or supply furnished incident to a service (for example, a 
surgical staple, a suture, customized surgical kit, or clip, other than 
a radiological site marker) (emphasis added). We understand that 
hospitals may sometimes receive surgical kits from device manufacturers 
that consist of a high-cost primary implantable device, external 
supplies required for operation of the device, and other disposable 
surgical supplies required for successful device implantation. Often 
the device and the attending supplies are included on a single invoice 
from the manufacturer, making it difficult for the hospital to 
determine the cost of each item in the kit. In addition, manufacturers 
sometimes include with the primary device other free or ``bonus'' items 
or supplies that are not an integral and necessary part of the device 
(that is, not actually required for the safe surgical implantation and 
subsequent operation of that device). (We note that arrangements 
involving free or bonus items or supplies may implicate the Federal 
anti-kickback statute, depending on the circumstances.) One option is 
for the hospital to split the total combined charge on the invoice in a 
manner that the hospital believes best identifies the cost of the 
device alone. However, because it may be difficult for hospitals to 
determine the respective costs of the actual device and the attending 
supplies (whether they are required for the safe surgical implantation 
and subsequent operation of that device or not), we solicited comments 
with respect to how supplies, disposable or otherwise, that are part of 
surgical kits should be reported. We are distinguishing between such 
supplies that are an integral and necessary part of the primary device 
(that is, required for the safe surgical implantation and subsequent 
operation of that device) from other supplies that are not directly 
related to the implantation of that device, but may be included by the 
device manufacturer with or without charge as ``perks'' along with the 
kit. If it is difficult to break out the costs and charges of these 
lower cost items that are an integral and necessary part of the primary 
device, we would consider allowing hospitals to report the costs and 
charges of these lower cost supplies along with the costs and charges 
of the more expensive primary device in the cost report cost center for 
implantable devices. However, to the extent that device manufacturers 
could be encouraged to refine their invoicing practices to break out 
the charges and costs for the lower cost supplies and the higher cost 
primary device separately, so that hospitals need not ``guesstimate'' 
the cost of the device, this would facilitate more accurate cost 
reporting and, therefore, the calculation of more accurate cost-based 
weights. Under either scenario, even for an aggregated invoice that 
contains an expensive device, we believe that RTI's findings of 
significant differences in supply CCRs for hospitals with a greater 
percentage of charges in device revenue codes demonstrate that breaking 
the Medical Supplies Charged to Patients cost center into two cost 
centers and using appropriate revenue codes for devices, and 
crosswalking those costs to the proposed new ``Implantable Devices 
Charged to Patients'' cost center, will result in an increase in 
estimated device costs.
    In summary, we proposed to modify the cost report to have one cost 
center for ``Medical Supplies Charged to Patients'' and one cost center 
for ``Implantable Devices Charged to Patients.'' We proposed to 
instruct hospitals to report only devices that meet the four criteria 
listed above (specifically including that the device is implantable and 
remains in the patient at discharge) in the proposed new cost center 
for Implantable Devices Charged to Patients. All other devices and 
nonchargeable supplies would be reported in the Medical Supplies cost 
center. This would allow for two distinct CCRs, one for medical 
supplies and one for implantable devices and DME rented and DME sold.
    Comment: Many commenters supported the proposed cost reporting 
refinements to address charge compression in the medical supplies and 
devices CCR. However, most commenters stated that they preferred a more 
``comprehensive'' approach to reforming the cost report, expressing 
concern that CMS is taking a ``piecemeal'' approach which does not 
address the underlying problem of using an ``antiquated'' cost 
reporting instrument to collect cost data that neither suits the needs 
of CMS in calculating the relative weights, nor does it fit with the 
current accounting practices of hospitals. One commenter stated 
generally that the cost report and MedPAR data sources were never 
intended to be integrated, which affects the accuracy of the DRG 
recalibration. The commenter wanted CMS to improve the accuracy of the 
cost report by incorporating a new schedule to ``continue the reporting 
of revenue by UB revenue code by cost report line'' and to calculate a 
weighted CCR by UB

[[Page 48461]]

revenue code. The commenter believed this is a ``major area of reform'' 
to the cost report that would ``greatly enhance the accuracy of costing 
data'' not only for inpatient and outpatient PPS hospitals, but also 
for CAHs and children's and cancer hospitals. Nevertheless, these 
commenters supported CMS' proposal to split the ``Medical Supplies 
Charged to Patients'' cost center into one cost center for ``Medical 
Supplies Charged to Patients,'' and one for ``Implantable Devices 
Charged to Patients'' as a short-term approach, believing that this 
measure may help address charge compression in the relative weights of 
MS-DRGs that include medical supplies and devices. Another commenter 
encouraged CMS to complete a thorough review of charge compression and 
then separately propose rules that would provide hospitals with 
adequate notice to make the necessary changes, with implementation of 
those changes occurring no earlier than FY 2010. One commenter 
qualified its support for CMS' proposal on the contingency that CMS 
commits to working with the hospital industry to address the larger 
issues surrounding the cost reports as a data collection tool. Another 
commenter added that it did not oppose CMS' proposal, but stated that 
its ``comments should not be viewed as an endorsement to adding 
additional cost centers in the future'' and that CMS should ``proceed 
with extreme caution with any additional incremental changes.'' Other 
commenters were disappointed in what they characterized as ``CMS' 
failure to work with the hospital field from the outset on such an 
important endeavor.'' Another commenter suggested that CMS may want to 
use its database to run further analyses on charge compression because 
the majority of hospitals submitting clinical and financial data to the 
commenter have cost accounting systems. The commenters generally urged 
CMS to provide adequate notice to hospitals before making any changes 
to the cost report because hospitals will need to make significant 
revisions to their accounting and billing systems before the start of 
their fiscal years.
    One commenter supported CMS' proposal for using the existing 
requirements for determining which devices qualify for pass-through 
payment under the OPPS, and whether a device is implantable and remains 
in the patient upon discharge, as the criteria for determining what 
types of implantable devices would be reported in the proposed new cost 
center. The commenter believed that the proposed criteria are objective 
and most accurately describe the type of medical devices that are most 
impacted by charge compression. However, a large number of commenters 
opposed CMS' proposed criteria for distinguishing between low-cost 
supplies and high-cost devices for reporting in the proposed new cost 
report cost centers. Rather than using CMS' proposed criteria which are 
based on the existing requirements for determining which devices 
qualify for pass-through payment under the OPPS, and whether a device 
is implantable and remains in the patient upon discharge, in addition 
to use of existing revenue codes, most commenters preferred that the 
cost report cost centers be defined exclusively based on the use of 
existing revenue codes and associated definitions. The commenters 
pointed out that using existing revenue codes and definitions as they 
have been currently established by the National Uniform Billing 
Committee (NUBC) makes sense, as these definitions have been in place 
for some time and are used across all payers, not just by CMS. The 
commenters believed that introduction of exceptions by CMS to what 
hospitals may include in certain revenue codes can be disruptive to 
hospitals' billing and accounting systems. Furthermore, they added, 
this method is consistent with the analytic approach and revenue 
centers used by RTI to develop the regression-based CCRs for medical 
devices. Accordingly, the commenters recommended that the proposed new 
cost centers on the cost report for ``Medical Supplies Charged to 
Patients'' and ``Implantable Devices Charged to Patients'' be defined 
exclusively on the following revenue code criteria: Specifically, 
revenue codes 0275 (Pacemaker), 0276 (Intraocular lens), 0278 (other 
implants), and 0624 (FDA investigational devices) would be used in the 
proposed new cost center for high-cost devices. The commenters noted 
that revenue code 0624 generally consists of higher cost implants, but 
indicated that this revenue code could be refined at a later point by 
the NUBC to provide a revenue code that could be reported when the FDA 
investigational device does not include implants. According to the 
commenters, all other revenue codes in the device/supply category (in 
027x and 062x) would be reported in the lower cost medical supplies 
cost center on the cost report. The commenters acknowledged that 
distinguishing between low-cost supplies and high-cost devices through 
exclusive use of the existing revenue codes will not thoroughly 
separate low and high-cost items, and therefore, some amount of charge 
compression will remain in the proposed new ``Implantable Devices 
Charged to Patients CCR.'' Nevertheless, the commenters believed that 
use of existing revenue codes and definitions represents the most 
administratively simple and least burdensome approach to addressing 
charge compression; the incremental improvements of a more refined 
approach do not warrant more wholesale changes. One commenter, however, 
did recommend that CMS request new revenue codes from the NUBC as 
needed to identify all devices that would be reported in the new 
implantable devices cost center under the revised cost report 
definition of implantable device so as to minimize exclusion of 
innovative technologies and mitigate the impact of charge compression.
    Response: In the FY 2009 IPPS proposed rule (73 FR 23546), we 
stated that we have begun a comprehensive review of the Medicare 
hospital cost report, and our proposal to split the current cost center 
for Medical Supplies Charged to Patients into one line for ``Medical 
Supplies Charged to Patients'' and another line for ``Implantable 
Devices Charged to Patients'' is part of that initiative to update and 
revise the cost report. Under the effort to update the cost report and 
eliminate outdated requirements in conjunction with the PRA, changes to 
the cost report form and cost report instructions would be made 
available to the public for comment. Thus, the commenters would have an 
opportunity to suggest the more comprehensive reforms that they are 
advocating, and would similarly be able to make suggestions for 
ensuring that these reforms are made in a manner that is not disruptive 
to hospitals' billing and accounting systems, and are within the 
guidelines of GAAP, Medicare principles of reimbursement, and sound 
accounting practices. However, we note that while the commenters on the 
FY 2009 IPPS proposed rule appear to be advocating a more comprehensive 
and thorough approach to reforming the cost report, the public comments 
we received on the FY 2008 proposed rule urged us to proceed cautiously 
with changing the Medicare cost report to avoid unintended consequences 
for hospitals that are paid on a cost basis (such as CAHs, cancer 
hospitals, and, to some extent, SCHs and MDHs), and to consider the 
administrative burden associated with adapting to new cost report forms 
and instructions (73 FR 23544 and 72 FR 47193). We explained that 
because of these comments on the FY 2008 IPPS proposed rule, we

[[Page 48462]]

decided to start out slowly with modifying the cost report to improve 
the data used in calculating the cost-based weights. Specifically, we 
chose to focus initially on the cost center for Medical Supplies 
Charged to Patients, because RTI found that the largest impact on the 
DRG relative weights could result from correcting charge compression 
for devices and implants. We are willing to work with and consider 
comments from finance and cost report experts from the hospital 
community as we work to improve and modify the hospital cost report. As 
noted above, in the CY 2009 OPPS/ASC proposed rule (73 FR XXXXX), we 
also are proposing to break the single standard pharmacy cost center 
5600 into two standard cost centers, Drugs with High Overhead Cost 
Charged to Patients and Drugs with Low Overhead Cost Charged to 
Patients, and we are specifically inviting public comment on the 
appropriateness of creating standard cost centers for Computed 
Tomography (CT) Scanning, Magnetic Resonance Imaging (MRI), and Cardiac 
Catheterization, rather than continuing the established nonstandard 
cost centers for these services. Proposed changes to the cost report 
will impact both IPPS and OPPS, and public comments should address both 
systems.
    We have considered the comments in favor of finalizing our proposal 
to split the current cost center for Medical Supplies Charged to 
Patients into one line for ``Medical Supplies Charged to Patients'' and 
another line for ``Implantable Devices Charged to Patients,'' and the 
comments recommending that these cost centers be defined based solely 
on existing revenue codes. Although we believed that adopting the 
existing criteria for determining whether a device is eligible for 
pass-through payment under the OPPS to identify devices for the 
``Implantable Devices Charged to Patients'' cost center was a 
reasonable proposal because the criteria are concrete and already 
familiar to the hospital community, we understand that hospitals are 
already familiar with the definitions of the existing revenue codes as 
well because they have been in place for some time. In addition, 
identifying devices based only on the existing revenue code definitions 
is more straightforward than also incorporating the criteria for 
devices that qualify for OPPS pass-through payment. Therefore, we agree 
with the commenters that use of the existing revenue code definitions 
is the simplest and least burdensome approach for hospitals to 
implement that would concretely, although not completely, address 
charge compression.
    Accordingly, in this final rule, we are finalizing our proposed 
policy to split the current cost center for Medical Supplies Charged to 
Patients into one line for ``Medical Supplies Charged to Patients'' and 
another line for ``Implantable Devices Charged to Patients.'' However, 
when determining what should be reported in these respective cost 
centers, rather than finalize our proposed policy to use existing 
criteria for determining which devices qualify for OPPS pass-through 
payment, with the modification that the implantable device must remain 
in the patient at discharge, we are instead adopting the commenters' 
recommendation that hospitals should use revenue codes established by 
the NUBC to determine what should be reported in the ``Medical Supplies 
Charged to Patients'' and the ``Implantable Devices Charged to 
Patients'' cost centers. We note that use of the existing revenue codes 
will still generally result in implantable devices being reported in 
the ``Implantable Devices Charged to Patients'' cost center because 
revenue codes 0275 (Pacemaker), 0276 (Intraocular lens), 0278 (other 
implants), and 0624 (FDA investigational devices) for the most part, 
generally would be used for reporting higher cost implants. However, 
use of the existing NUBC definitions would not require that the 
implantable device remain in the patient when the patient is 
discharged; therefore, in this respect, the policy we are finalizing 
differs from the one we proposed.
    In the FY 2009 IPPS proposed rule (73 FR 23547), in an effort to 
improve the match between the costs and charges included on the cost 
report and the charges in the MedPAR file, we recommended that certain 
revenue codes be used for items reported in the new ``Medical Supplies 
Charged to Patients'' cost center and the new ``Implantable Devices 
Charged to Patients'' cost center, respectively. These recommendations 
were similar to the commenters' suggested method for use of existing 
revenue codes in determining whether an item should be reported in the 
proposed new supply or device cost center in the cost report. In this 
final rule, we are finalizing our policy to create a cost center for 
implantable devices. Under this policy, charges reported with revenue 
codes 0275 (Pacemaker), 0276 (Intraocular Lens), 0278 (Other Implants), 
and 0624 (Investigational Device (IDE)) would correspond to implantable 
devices reported in the new ``Implantable Devices Charged to Patients'' 
cost center. Items for which a hospital may have previously used 
revenue code 0270 (General Classification), but actually are an 
implantable device, should instead be billed with an implantable device 
revenue code. Conversely, items and supplies that are not implantable 
would be reported in the new ``Medical Supplies Charged to Patients'' 
cost center on the cost report. We would expect these items and 
supplies to be billed with revenue codes 0270 (general 
classifications), 0271 (nonsterile supply), 0272 (sterile supply), and 
0273 (take-home supplies). In the proposed rule, we indicated that 
revenue code 0274 (Prosthetic/Orthotic Devices) and revenue code 0277 
(Oxygen--Take Home) might be associated with the cost centers for 
Durable Medical Equipment (DME)-Rented and DME-Sold on the cost report. 
We received comments that indicated that all other (not implantable) 
supply revenue codes, including 0274, 0277, 0621, and 0622, should be 
associated with the new ``Medical Supplies Charged to Patients'' cost 
center. For the purpose of this final policy, we are most concerned 
with identifying the revenue code costs and charges that define the new 
``Implantable Devices Charged to Patients'' cost center. With the 
exception of the present proposal, CMS typically does not specify a 
revenue code-to-cost center crosswalk that hospitals must adopt to 
prepare their cost report. Beyond the supply revenue codes we 
identified above for ``Medical Supplies Charged to Patients,'' we 
assume hospitals will include other appropriate supply revenue codes in 
this new cost center, which may or may not include 0621, 0622, 0274, 
and 0277.
    Hospitals must continue to report ICD-9-CM codes and charges with 
an appropriate UB revenue code consistent with NUBC requirements. When 
reporting the appropriate revenue codes for services, hospitals should 
choose the most precise revenue code, or subcode if appropriate. As 
NUBC guidelines dictate: ``It is recommended that providers use the 
more detailed subcategory when applicable/available rather than revenue 
codes that end in ``0'' (General) or ``9'' (Other).'' Furthermore, 
hospitals are required to follow the Medicare cost apportionment 
regulations at 42 CFR 413.53(a)(1), which convey that, under the 
departmental method of apportionment, the cost of each ancillary 
department is to be apportioned separately rather than being combined 
with another department. In order to comply with the requirements of 
this regulation,

[[Page 48463]]

hospitals must follow the Medicare payment policies in section 2302.8 
of the PRM-I and the PRM-II in order to ensure that their ancillary 
costs and charges are reported in the appropriate cost centers on the 
cost report. We rely on hospitals to fully comply with the revenue code 
reporting instructions and Medicare cost apportionment policies.
    In general, proper reporting would dictate that if an item is 
reported as an implantable device on the cost report, it is an item for 
which the NUBC would require use of revenue code 0275 (Pacemaker), 0276 
(Intraocular Lens), 0278 (Other Implants), or 0624 (Investigational 
Device). Likewise, items reported as Medical Supplies should receive an 
appropriate revenue code indicative of supplies. We did indicate in the 
proposed rule that we might consider requesting additional revenue 
codes from the NUBC, but we note that because the majority of 
commenters have requested that they be allowed to use existing revenue 
codes to distinguish between the low cost supplies and high cost 
devices, we may wait and see what the results of that approach are 
before we request the creation of additional codes from the NUBC.
    We would also like to caution that, as the commenters themselves 
acknowledged, the use of existing revenue code definitions to crosswalk 
devices and supplies to the device cost center and supplies cost 
center, respectively, will not separate high and low cost items as 
thoroughly as would the use of the proposed criteria for implantable 
devices that remain in the patient at discharge. Therefore, some degree 
of charge compression will remain in the medical devices cost center. 
Furthermore, this methodology, and the accuracy of the relative 
weights, is heavily dependent upon hospitals' reporting practices. 
While CMS is responsible for issuing cost reporting instructions that 
are clear, hospitals are responsible for ensuring that their cost 
reporting and billing practices are consistent and conform to Medicare 
policy.
    Comment: A few commenters, who supported the proposal that only 
devices that are implantable and that remain in the patient at 
discharge should be reported in the new ``Implantable Devices Charged 
to Patients'' cost center, also expressed concern that there are 
instances where these criteria are too narrow. One commenter mentioned 
various types of implantable devices that do not remain in the patient 
at discharge, including atherectomy and thrombectomy catheters, laser 
sheaths for removal of pacemaker and defibrillator leads, and 
thrombolysis catheters. Two commenters mentioned one product, an 
external fixation device that is used to treat trauma of the upper and 
lower extremities and to assist in the treatment of severe fractures, 
and noted that this device is commonly removed from patients prior to 
discharge. The commenters believed that if this device is not assigned 
to a revenue code for an ``implantable device,'' the true implant costs 
for many of these discharges may not be recognized. One of the 
commenters asked that CMS consider exempting external fixation devices 
from the proposed ``implantable device'' standard, or provide another 
appropriate mechanism to ensure accurate cost reporting for this 
device. The other commenter also supported the creation of the devices 
cost center based on the use of existing revenue codes and associated 
definitions established by the NUBC. Another commenter stated that CMS' 
proposed definition of device as one that must remain in the patient at 
discharge could result in inconsistent billing and reporting because 
whether a device remains in the patient could depend on the particular 
patient's length of stay. The commenter used the example of an 
implantable port for medication delivery, where one patient is well 
enough to be discharged from the hospital but needs the port at home 
for extended IV therapy. Another patient with the same implantable 
medication port, however, may have additional complications and need to 
stay in the hospital longer, but may ultimately improve to the extent 
where he or she is discharged without the port. The commenter observed 
that, as a result, there could be a device that would qualify as an 
implant for some patients but not for others.
    Response: In the FY 2009 IPPS proposed rule (73 FR 23545), we 
acknowledged that a definition of a device based on whether it is 
implantable and remains in the patient at discharge could, in some 
cases, include some relatively inexpensive items, and could also 
exclude some expensive items. Therefore, some charge compression could 
continue for these technologies. We also acknowledge the point of one 
of the commenters that depending upon a patient's severity of the 
illness and length of stay, a device may or may not qualify as an 
implantable device based on our proposed criteria. However, we note 
that, in response to the many comments we received as summarized 
previously, we have decided not to finalize our proposed definition of 
a device, which was based on the existing OPPS criteria for identifying 
devices that qualify for pass-through payment, with the additional 
requirement that the device must remain in the patient at discharge. 
Instead, as suggested by the vast majority of commenters, we are 
finalizing a policy that would distinguish between supplies and devices 
based on the existing revenue codes and definitions. Therefore, while 
the device must still be implantable to map to the new implantable 
device cost center, our final policy no longer includes the requirement 
that the device remain in the patient at discharge. We expect hospitals 
to follow the revenue code definitions in assigning the costs and 
charges of devices.
    Comment: Commenters asked CMS to provide a contingency plan if the 
medical device CCR is substantially lower than the regression-based 
device CCR estimate or the current supplies CCR, once the data become 
available.
    Response: We agree that we will need to evaluate the medical supply 
and device CCRs once the data become available for FY 2012 ratesetting. 
At that point and forward, we will continue to analyze the cost report 
data. However, we point out that we do not believe it is appropriate to 
``pick and choose'' between CCRs; rather, the determining factor should 
be payment accuracy, regardless of whether one method increases or 
decreases payment for devices.
    Comment: One commenter supported CMS' proposal to split the medical 
supplies cost center. However, the commenter stated that CMS' proposal 
could result in the relative weight for MS-DRG 001 (Heart Transplant or 
Implant of Heart Assist with MCCs) being reduced because the weight for 
MS-DRG 001 is not ``device-driven'' due to the presence of a large 
number of hospitalizations with relatively low device costs (heart 
transplant and combined heart-lung transplant), which could weaken the 
effect of the proposed cost center changes with respect to the relative 
weight for MS-DRG 001. To remedy this, the commenter requested, in 
part, that CMS create a cost center on the cost report that would 
enable CMS to capture more accurate data on LVADs. In addition, the 
commenter noted that CMS should remain open to cost centers that 
capture devices in the $500-$2,500 range (Class I implantable devices), 
and separate cost centers for devices in the $2,500-$100,000 range 
(Class II implantable devices). The commenter stated that it would 
continue to monitor CMS' policy changes in the coming years and will 
provide input to the CMS regarding the

[[Page 48464]]

``impact to hospitals that provide lifesaving LVAD therapy to Medicare 
beneficiaries.''
    Response: We do not believe it is appropriate at this time to 
create a new cost center, or further refine the device cost center 
based on cost categories, so as to capture data more accurately for 
LVADs. Instead, as an initial step, we believe it would be better to 
finalize the broader proposal of creating one cost center for supplies, 
and a cost center for implantable devices, which would include LVADs. 
We are receptive to the commenter's input to CMS regarding the impact 
to hospitals that provide LVAD therapy as part of our own monitoring 
and analyses of the cost-based relative weights, and if appropriate, we 
may consider further refining the implantable devices cost center in 
the future.
    Comment: A number of commenters focused on the section of the 2007 
RTI report that highlighted the problem of nursing care cost 
compression. The report found that nursing care represents about 41 
percent of hospitals' costs, and these costs are allocated as fixed 
daily room rates, despite substantial evidence that daily nursing care 
hours and costs vary substantially among patients. As a result, the 
current DRG relative weights do not reflect differences in nursing 
care, leading to payment inaccuracy. One commenter noted that this 
creates a ``perverse incentive for hospitals to cut nursing staff as 
reimbursement is not matched to the average amount of nursing time and 
costs within each DRG as are the ancillary services.'' Some commenters 
reiterated their comments submitted on the FY 2008 IPPS proposed rule, 
recommending that CMS study adoption of Nursing Intensity Weights 
(NIWs), which is in use in the New York State Medicaid program. The 
commenters suggested that unbundling nursing care from current routine 
and intensive care daily rates and billing for nursing using the 023X 
revenue code for actual daily nursing time (nursing intensity) expended 
for individual patients provides a reasonable solution to the problem 
of nursing cost compression. Specifically, the commenters urged CMS to 
reconsider its proposal for FY 2009 and explore ways to:
    (a) Implement the recommendations of the RTI report to unbundle 
nursing care from current accommodation (room and board) revenue codes 
using the 023X Nursing Incremental Charge UB04 revenue code.
    (b) Modify the Medicare cost report to separate out nursing costs 
and hours of care to allow construction of a nursing cost to charge 
ratio within the existing routine and intensive care cost centers.
    (c) Develop a method to evaluate nursing performance by case mix 
within the new severity adjusted DRGs using the unbundled 023X nursing 
hours and costs data.
    (d) Incorporate the inpatient nursing performance measure into the 
emerging value-based purchasing effort in the coming fiscal years to 
identify low performing hospitals relative to the mean nursing 
intensity within MS-DRG and high cost hospitals.
    The commenters believed that accomplishing these four 
recommendations will ``improve overall payment accuracy, lead to a 
better understanding of how nursing care hours and costs are allocated 
to individual patients and by DRG within and across hospitals, identify 
hospital nursing performance, and inform policy makers on the state of 
inpatient nursing care in the United States.''
    Response: The commenters raised similar concerns in response to the 
FY 2008 IPPS proposed rule. In response to those comments, we 
acknowledged RTI's finding in its January 2007 report that ``because 
intensity of nursing is likely correlated with DRG assignment, this 
could be a significant source of bias in DRG weights,'' and agreed that 
this issue should be studied further. We appreciate that the commenters 
have also given more thought to methods of addressing nursing cost 
compression, but we note that the initiation and eventual success of 
much of these efforts lie within the hospital community. In its July 
2008 report, RTI states that, ``the best long-term solution would be 
for the industry to agree to expand charge coding conventions for 
inpatient nursing, which would foster increased use of patient-specific 
nursing incremental charge codes in addition to baseline unit-specific 
per-diem charges. Additional detail in revenue codes would permit 
inpatient charges to be converted by CCRs in the same way as charges 
for ancillary service use are converted, to more accurately aggregate 
costs at the level of the system payment unit.'' (page 118) Therefore, 
whether the preferred method would be to separate charges for nursing 
care from the accommodation revenue codes using the existing 023X 
(Incremental Nursing Care) revenue codes, or some other approach, we 
believe the hospital community must take the initiative to decide upon 
a uniform method of reporting nursing charges in such a manner that 
reflects the varying nursing intensity in caring for individual 
patients.
    The commenters requested that the cost report be modified to 
separate nursing costs and hours of care to allow for the calculation 
of CCRs for routine care and intensive care, and we believe this could 
possibly be a long-term goal. We note that RTI observes that given the 
inconsistent use of patient-level nursing acuity data systems, ``it is 
difficult to imagine an administratively feasible way to incorporate 
nursing acuity measures into standard Medicare reporting as a long-term 
solution for reducing nursing cost compression'' (page 118). However, 
we encourage the nursing community, the hospital industry, and others 
to consider researching ideas for how nursing intensity can be 
recognized in the cost weights.
    Comment: Several commenters responded to our solicitation for 
comments on how to report supplies that are part of surgical kits. The 
commenters generally did not support our proposal to require hospitals 
to separate the costs of supplies from devices within surgical kits. 
Some commenters recommended using the existing revenue codes so as not 
to increase the documentation burdens for hospitals. That is, the costs 
and charges of the kit should be reported consistent with the use of 
the revenue code, such that, for example, if the kit is billed with 
revenue code 0278 (Other Implants), it would be reported in the new 
``Implantable Devices Charged to Patients'' cost center. These 
commenters acknowledged that this approach will not separate all low 
cost items, but will still reduce charge compression.
    Another commenter stated that ``unbundling'' the device from the 
surgical kit would increase administrative costs for hospitals and 
vendors, and that more medical errors would likely result, which 
surgical packs were designed to reduce. Another commenter noted the 
terms CMS used in describing the supplies that are part of surgical 
kits, such as ``integral to'' or ``unrelated to,'' and ``free'' or 
``bonus'' items. The commenter recommended that CMS consider clarifying 
these terms via an issuance such as a transmittal or an MLN Matters 
article rather than the Federal Register because all healthcare 
providers do not read it, and that CMS' clarification provide 
``rationale that is vital to understanding underlying compliance 
concerns associated with supply charge practices.'' This commenter 
further recommended that as a long-term solution, CMS and the NUBC 
develop a revenue code called ``Integrated Supplies'' specifically to 
report supplies in customized kits, packs, and trays. This new revenue 
code

[[Page 48465]]

would capture all of the routine supplies that are part of the package 
in one charge, except for the charge for the implantable device, which 
would be itemized separately on the invoice The commenter noted that 
most hospitals' chargemaster software allows multiple charges to be 
linked together as part of a ``panel master.'' Therefore, the 
Integrated Supplies revenue code could be linked with the various 
revenue codes used for implantable devices (0275, 0276, and 0278), 
without requiring vendors and hospitals to itemize every single supply 
in a kit separately on an invoice or the chargemaster.
    One commenter stressed the value that packaging such items together 
has for hospitals, arguing that the kits reduce labor hours associated 
with the procedure, and that ``hospitals do not purchase these packages 
for what CMS refers to as `bonus' items, but for the efficiencies 
gained though the packaging of the items.'' The commenter did not 
believe such kits should be considered a violation of the anti-kickback 
statute.
    Response: In the FY 2009 IPPS proposed rule (73 FR 23545), we 
discussed how hospitals could accurately report the costs of an 
expensive device and the costs of less expensive supplies needed to 
implant that device on the cost report, given that often the device and 
the supplies are included on a single invoice from the manufacturer, 
making it difficult for the hospital to determine the cost of each item 
in the kit. We suggested that one option is for the hospital to split 
the total combined charge on the invoice in a manner that the hospital 
believes best identifies the cost of the device alone. However, because 
it may be difficult for hospitals to determine the respective costs of 
the actual device and the attending supplies (whether they are required 
for the safe surgical implantation and subsequent operation of that 
device or not), we solicited comments with respect to how supplies, 
disposable or otherwise, that are part of surgical kits should be 
reported. We distinguished between such supplies that are an integral 
and necessary part of the primary device (that is, required for the 
safe surgical implantation and subsequent operation of that device) 
from other supplies that are not directly related to the implantation 
of that device, but may be included by the device manufacturer with or 
without charge as ``perks'' along with the kit. We stated that if it is 
difficult to break out the costs and charges of these lower cost items 
that are an integral and necessary part of the primary device, we would 
consider allowing hospitals to report the costs and charges of these 
lower cost supplies along with the costs and charges of the more 
expensive primary device in the cost report cost center for implantable 
devices. However, we stated that to the extent that device 
manufacturers could be encouraged to refine their invoicing practices 
to break out the charges and costs for the lower cost supplies and the 
higher cost primary device separately, so that hospitals need not 
``guesstimate'' the cost of the device, this would facilitate more 
accurate cost reporting and, therefore, the calculation of more 
accurate cost-based weights.
    We have considered the public comments which essentially 
recommended that hospitals should not attempt to break out the costs of 
the expensive device from the attending supplies, but instead, that 
hospitals report the entire kit based on the single revenue code used 
for the device in the kit. We still believe that device manufacturers 
could make a better effort at refining their invoices to separately 
break out the charges and costs of the high-cost device from the low-
cost supplies because this would likely lead to more accurate cost 
reporting and a further mitigation of charge compression. Certainly, if 
the supplies that are included in the kit are not integral to and 
necessary for the safe, surgical implementation of the device, we 
believe that it would be best for hospitals to report those costs and 
charges separately from the costs and charges for the implantable 
device. Nevertheless, because commenters are generally satisfied with 
an approach for reporting the costs and charges of the entire kit based 
on the revenue code that is used for the device in that kit, we will 
accept the commenters' recommendation and permit hospitals to follow 
this approach in reporting the costs and charges of surgical kits. As 
we noted in the proposed rule, even for an aggregated invoice that 
contains an expensive device, we believe that RTI's findings of 
significant differences in supply CCRs for hospitals with a greater 
percentage of charges in device revenue codes demonstrate that breaking 
the Medical Supplies Charged to Patients cost center into two cost 
centers, using appropriate revenue codes for devices, and mapping those 
costs to the new ``Implantable Devices Charged to Patients'' cost 
center, will result in an increase in estimated device costs that could 
lead to more accurate payment for those costs. However, we do 
appreciate the acknowledgement from the commenter that it is important 
for the industry to understand the rationale for compliance 
requirements and the recommendation of the commenter that a new revenue 
code for Integrated Supplies be created as a long-term solution for 
capturing costs and charges of incidental supplies, and we may consider 
this as part of other changes that may or may not require NUBC 
approval.
    With respect to the commenter that argued that such kits should not 
be considered a violation of the anti-kickback statute, we note that we 
did not state that surgical kits should necessarily be considered a 
violation of the anti-kickback statute. The commenter made the point 
that hospitals do not purchase the kits for the value of the ``bonus 
items,'' but rather because of the increased efficiencies that result 
from packaging all the items necessary for a particular surgical 
procedure together. However, we point out that the IPPS proposed rule 
refers specifically to ``free or `bonus' items that are not an integral 
and necessary part of the device (that is, not actually required for 
the safe surgical implantation and subsequent operation of that 
device)'' (73 FR 23545, emphasis added). Therefore, the parenthetical 
sentence in the proposed rule that follows the reference to ``free'' or 
``bonus'' items refers to those free or bonus items that are not an 
integral and necessary part of the device implantation procedure and 
subsequent operation of that device. Specifically, we stated that 
``arrangements involving free or bonus items or supplies may implicate 
the Federal anti-kickback statute, depending on the circumstances'' (73 
FR 23545, emphasis added). That is, hospitals should be aware that, 
depending on the circumstances, kits that include other items that are 
unrelated to the safe implantation or operation of a device could 
possibly implicate the Federal anti-kickback statute.
    Comment: One commenter advised that many hospitals do not report 
some charges in the Medical/Surgical Supplies revenue codes when they 
consider those items to be part of hospital room and board (that is, 
blood transfusion administration). The commenter stated that hospitals 
seek guidance from CMS to avoid discrepancies in reporting, and 
recommended that CMS define what is included in ``room and board'' to 
further standardize billing practices and promote consistency and 
continuity across all hospitals.
    Response: CMS' longstanding policy with respect to what constitutes 
a routine service (sometimes called ``room and board'') as compared to 
an ancillary

[[Page 48466]]

service is discussed in the regulations at Sec.  413.53(b) and in the 
PRM-I under Section 2202.6 (Routine Services) and Section 2202.8 
(Ancillary Services). If an item is not specifically enumerated as a 
routine item or service in Section 2202.6, or an ancillary item or 
service in Section 2202.8, then the rules in Section 2203 of the PRM-I 
apply. This section requires that the common or established practice of 
providers of the same class in the same State should be followed. If 
there is no common or established classification of an item or service 
as routine or ancillary among providers of the same class in the same 
State, a provider's customary charging practice is recognized so long 
as it is consistently followed for all patients and does not result in 
an inequitable apportionment of cost to the program.
    With respect to blood transfusion/administration, to which the 
commenter refers, this service should not be billed under the Medical/
Surgical Supplies code, regardless of the hospital's accounting system. 
``Blood Transfusion/Administration'' is a service rather than an item, 
and the blood itself is also not treated as a medical supply item. The 
cost report includes a standard cost center for ``Blood Storing, 
Processing, and Transfusion'' (Line 47 of Worksheet A, under the 
``Ancillary Service Cost Centers''), and there is a UB revenue code 
0391 for Blood Administration, in addition to revenue codes in the 038X 
category for various blood products. However, the revenue codes for 
Medical/Surgical Supplies fall within another category, 027x. Because 
blood transfusion and blood products are not specifically mentioned in 
the definition of ``routine services'' in the PRM-1 under Section 
2202.6, or in the definition of ``ancillary services'' in Section 
2202.8, the commenter is asking whether it is appropriate not to bill a 
separate ancillary charge for the transfusions occurring in the routine 
cost centers, but to consider that the charge is encompassed in the 
routine Room and Board Charge under one of the Room and Board UB 
revenue codes.
    In accordance with PRM-I, Section 2202.8, if the provider does not 
impose a separate charge in addition to a routine service charge, the 
service is considered not to be ``ancillary''. As mentioned above, 
under PRM-I, Section 2203, the provider must consider the established 
practice of the same class of providers in the same State as to whether 
to include blood transfusion in the routine service charge (for both 
Medicare and non-Medicare patients). For blood transfused in the 
Operating Room, Emergency Room, or other ancillary cost centers, 
providers should be billing a separate charge (just as for implantable 
devices in case of Implantable Devices Charged to Patients) under UB 
revenue code 0391 (Blood Administration), and the cost and charges 
should be reported on Line 47 of the cost report.
    Comment: A few commenters indicated that, with the changes that CMS 
is proposing to the reporting of costs and charges of medical devices 
on the cost report, the quality of the cost data that CMS will be 
collecting will improve. Accordingly, they stated that, the CCR for the 
new ``Implantable Devices Charges to Patients'' cost center will 
improve to the extent that applying it to the reported charges for 
devices from the cost report will generate an actual device cost and 
that this actual device cost should be an accurate reflection of the 
hospital's device acquisition cost. Therefore, the commenter suggested 
that this cost should be determined and incorporated into the process 
for calculating the relative weights, and that CMS should use the 
actual cost in the relative weight calculation rather than an imputed 
cost estimated by applying a national CCR to claims charge data, in 
instances where the imputed cost is lower than the cost reported by the 
hospital on its cost report.
    Response: While we are optimistic that the addition of a new cost 
report line for implantable devices should certainly allow for the 
collection of more accurate cost data, we do not believe we can use 
this aggregate actual cost amount for setting relative weights. The 
costs and charges for all implantable devices for the hospital across 
all payers are collected and aggregated on the cost report. However, 
the cost of a specific device cannot be determined from this aggregated 
information. We have to estimate the cost of devices for each MS-DRG in 
each claim in order to estimate an average imputed cost for the entire 
MS-DRG, including device costs. Different MS-DRGs will include 
different kinds of devices, each with a different cost. We also do not 
believe it is appropriate to use the actual cost in the relative weight 
calculation rather than the imputed cost in instances where the imputed 
cost is lower than the cost reported by the hospital on its cost 
report, as the commenter suggested.
    We also solicited comments on alternative approaches that could be 
used in conjunction with or in lieu of the four proposed criteria for 
distinguishing between what should be reported in the new cost centers 
for Implantable Devices and Medical Supplies, respectively. Another 
option we considered would distinguish between high-cost and low-cost 
items based on a cost threshold. Under this methodology, we would also 
have one cost center for Medical Supplies and one cost center for 
Devices, but we would instruct hospitals to report items that are not 
movable equipment or a capital expense but are above a certain cost 
threshold in the cost center for Devices. Items costing below that 
threshold would be reported in the cost center for Medical Supplies.
    Establishing a cost threshold for cost reporting purposes would 
directly address the problem of charge compression and would enable 
hospitals to easily determine whether an item should be reported in the 
supply or the device cost center. A cost threshold would also 
potentially allow a broader variety of expensive, single use devices 
that do not remain in the patient at discharge to be reported in the 
device cost center (such as specialized catheters or ablation probes). 
While we have a number of concerns with the cost threshold approach, we 
nevertheless solicited public comments on whether such an approach 
would be worthwhile to pursue. Specifically, we are concerned that 
establishing a single cost threshold for pricing devices could possibly 
be inaccurate across hospitals. Establishing a threshold would require 
identifying a cost at which hospitals would begin applying reduced 
markup policies. Currently, we do not have data from which to derive a 
threshold. We have anecdotal reports that hospitals change their markup 
thresholds between $15,000 and $20,000 in acquisition costs. Recent 
research on this issue indicated that hospitals with average inpatient 
discharges in DRGs with supply charges greater than $15,000, $20,000, 
and $30,000 have higher supply CCRs (Advamed March 2006).
    Furthermore, although a cost threshold directly addresses charge 
compression, it may not eliminate all charge compression from the 
device cost center because a fixed cost threshold may not accurately 
capture differential markup policies for an individual hospital. At the 
same time, we also are concerned that establishing a cost threshold may 
interfere with the pricing practices of device manufacturers in that 
the prices for certain devices or surgical kits could be inflated to 
ensure that the devices met the cost threshold. We believe our proposed 
approach of identifying a group of items that are relatively expensive 
based on the existing criteria for OPPS device pass-through payment 
status, rather than adopting a cost threshold, would not

[[Page 48467]]

influence pricing by the device industry. In addition, if a cost 
threshold were adopted to distinguish between high-cost devices and 
low-cost supplies on the cost report, we would need to periodically 
reassess the threshold for changes in markup policies and price 
inflation over time.
    Comment: Several commenters addressed the use of a cost threshold 
to determine whether an item should be categorized in the medical 
device cost center of the cost report. Some commenters believed that 
establishing a cost threshold to determine whether an item should be 
reported as a device or a supply would be inappropriate because it is 
difficult to ensure that charges are properly reported because there 
would not be any specific revenue codes for these high-cost and low-
cost items. Further, commenters disagreed about what the threshold 
should be. (In the proposed rule, we had discussed that we have 
anecdotal evidence that inpatient discharges in DRGs with supply 
charges greater than $15,000, $20,000 and $30,000 have higher supply 
CCRs.) However, the commenters stated that if CMS used a cost 
threshold, it should be set lower at a range of $1,000 to $2,000. 
Another commenter recommended that CMS set a cost threshold at $4,000, 
so its nonimplantable device could qualify as a device for cost 
reporting purposes.
    Response: In the proposed rule, we proposed to instruct hospitals 
to report only devices that met our criteria (including that a device 
is implantable and remains in the patient upon discharge) in the new 
cost center for ``Implantable Devices Charged to Patients'' and to 
report all other devices and supplies in the new ``Medical Supplies 
Charged to Patients'' cost center. However, we also solicited comments 
on alternative approaches that could be used in conjunction with or in 
lieu of our proposed criteria to distinguish between the new cost 
center for Implantable Devices and the new cost center for Medical 
Supplies. One alternative could have been that hospitals report items 
above a certain cost threshold in the Medical Devices cost center while 
items costing below the threshold would be reported in the Medical 
Supplies cost center. The few commenters on this proposal were 
generally opposed to establishing a cost threshold to differentiate 
between medical devices and medical supplies. As discussed in our 
proposed rule (73 FR 23546), we continue to be concerned that a cost 
threshold may affect pricing practices of device manufacturers where 
prices of certain devices could be inflated to ensure the item met the 
threshold to be classified as a device. Further, we believe it would be 
difficult to establish a cost threshold because we currently have no 
empirical data from which to establish one, and the commenters 
disagreed with the anecdotal evidence we presented that a potential 
cost threshold for devices could be between $15,000 and $20,000. 
Therefore, the policy that we are finalizing in this final rule does 
not include a cost threshold to determine whether items should be 
reported as a medical device or a medical supply.
    Another option for distinguishing between high-cost and low-cost 
items for purposes of the cost report would be to divide the Medical 
Supplies Charged to Patients cost center based on markup policies by 
placing items with lower than average markups in a separate cost 
center. This approach would center on documentation requirements for 
differential charging practices that would lead hospitals to 
distinguish between the reporting of supplies and devices on different 
cost report lines. That is, because charge compression results from the 
different markup policies that hospitals apply to the supplies and 
devices they use based on the estimated costs of those supplies and 
devices, isolating supplies and devices with different markup policies 
mitigates aggregation in markup policies that cause charge compression 
and is specific to a hospital's internal accounting and pricing 
practices. If requested by the fiscal intermediaries/MACs at audit, 
hospitals could be required to submit documentation of their markup 
policies to justify the way they have reported relatively inexpensive 
supplies on one line and more expensive devices on the other line. We 
believe that it should not be too difficult for hospitals to document 
their markup practices because, as was pointed out by many commenters 
since the implementation of cost-based weights, the source of charge 
compression is varying markup practices. Greater knowledge of the 
specifics of hospital markup practices may allow ultimately for 
development of standard cost reporting instructions that instruct 
hospitals to report an item as a device or a supply based on the type 
of markup applied to that item. This option related to markup 
practices, the proposal to define devices based on four specific 
criteria, and the third alternative that would establish a cost 
threshold for purposes of distinguishing between high-cost and low-cost 
items could be utilized separately or in some combination for purposes 
of cost report modification. Again, in the proposed rule, we solicited 
comments on these alternative approaches. We also expressed interest in 
other recommendations for appropriate cost reporting improvements that 
address charge compression.
    Comment: One commenter supported the use of the markup threshold to 
separate medical supplies from medical devices because, according to 
the commenter, it would be the most accurate way to mitigate charge 
compression as the source of charge compression is hospitals' varying 
markup practices. However, the commenter noted that establishing a 
markup threshold would require additional documentation from hospitals 
that could be burdensome. Other commenters believed that a markup 
threshold would likely separate medical devices that were very 
expensive or very inexpensive, but would not address medical devices 
that are moderately priced. The commenters who opposed a markup 
threshold noted that because there is great variability in markup 
practices among hospitals, it would be difficult to apply a national 
markup threshold. The commenters also noted that urban hospitals 
compared to rural hospitals would have very different charging 
practices.
    Response: In the FY 2009 IPPS proposed rule, we listed several 
reasons why adopting a policy where high and low cost items would be 
divided based on markup policy could be appropriate (73 FR 23546). We 
also stated that this option would focus on documentation requirements, 
although we did not believe these documentation requirements would be 
too difficult. However, the commenters believed that this approach is 
too burdensome, and that it would be difficult to apply a national 
markup threshold given the varying markup practices among hospitals. 
Therefore, because most commenters approved of a revenue code-based 
approach to distinguishing between high-cost and low-cost items, we are 
not adopting a policy based on markup practices at this time.
5. Timeline for Revising the Medicare Cost Report
    As mentioned in the FY 2008 IPPS final rule with comment period (72 
FR 47198), we have begun a comprehensive review of the Medicare 
hospital cost report, and the finalized policy to split the current 
cost center for Medical Supplies Charged to Patients into one line for 
``Medical Supplies Charged to Patients'' and another line for 
``Implantable Devices Charged to Patients,'' as part of our initiative 
to update and revise the hospital cost

[[Page 48468]]

report. Under an effort initiated by CMS to update the Medicare 
hospital cost report to eliminate outdated requirements in conjunction 
with the PRA, we plan to propose the actual changes to the cost 
reporting form, the attending cost reporting software, and the cost 
report instructions in Chapter 36 of the Medicare PRM, Part II. We 
expect the proposed revision to the Medicare hospital cost report to be 
issued sometime after publication of this final rule. Because we are 
finalizing our proposal to create one cost center for ``Medical 
Supplies Charged to Patients'' and one cost center for ``Implantable 
Devices Charged to Patients'' in this final rule, the cost report forms 
and instructions should reflect those changes. In the FY 2009 IPPS 
proposed rule (73 FR 23547), we stated that we expect the revised cost 
report would be available for hospitals to use when submitting cost 
reports during FY 2009 (that is, for cost reporting periods beginning 
on or after October 1, 2008). We now believe the revised cost report 
may not be available until cost reporting periods starting after the 
Spring of 2009. Because there is approximately a 3-year lag between the 
availability of cost report data for IPPS and OPPS ratesetting purposes 
in a given fiscal year, we may be able to derive two distinct CCRs, one 
for medical supplies and one for devices, for use in calculating the FY 
2012 or FY 2013 IPPS relative weights and the CY 2012 or CY 2013 OPPS 
relative weights.
    Comment: Commenters generally expressed concern with the timeframe 
in which we proposed to implement the cost report changes. One 
commenter questioned hospitals' ability to quickly change their 
chargemaster to ensure that revenue codes are always reported in MedPAR 
consistently with the cost centers in which they are reported on the 
cost report. The commenter cautioned that initial calculations of the 
relative weights may not be accurate if hospitals do not have 
sufficient time to adapt to the new reporting requirements. Another 
commenter did not believe that the time between issuance of the final 
rule and October 1, 2008, is enough time for hospitals to make the 
changes to their processes and systems necessary to conform to the new 
cost reporting procedures. The commenter pointed out that hospital 
employees may need to be retrained, and new cost reporting technology 
may need to be purchased, all of which is costly to hospitals operating 
on tight margins. The commenter requested that CMS provide no less than 
6 months lead time, but preferably 1 year, before implementing any 
changes to the cost report, asserting that an ``overly-aggressive'' 
timeframe in which to implement changes to the cost report may lead to 
inaccurate data, which runs counter to CMS' goal of improving the 
accuracy of its CCR data.
    Response: We are sympathetic to the commenter's concerns, but we 
note that, thus far, we have not proposed to implement drastic changes 
to the cost report and cost reporting procedures that warrant overhaul 
of hospitals' current accounting systems. As we stated in the FY 2009 
IPPS proposed rule (73 FR 23543), longstanding Medicare policy has been 
that, under the departmental method of apportionment, the cost of each 
ancillary department is to be apportioned separately rather than being 
combined with another ancillary department. Hospitals must include the 
cost and charges of separately ``chargeable medical supplies'' in the 
Medical Supplies Charged to Patients cost center (line 55 of Worksheet 
A), rather than in the Operating Room, Emergency Room, or other 
ancillary cost centers. Routine services, which can include ``minor 
medical and surgical supplies'' (Section 2202.6 of the PRM, Part 1), 
and items for which a separate charge is not customarily made, may be 
directly assigned through the hospital's accounting system to the 
department in which they were used, or they may be included in the 
Central Services and Supply cost center (line 15 of Worksheet A). 
Conversely, the separately chargeable medical supplies should be 
assigned to the Medical Supplies Charged to Patients cost center on 
line 55. Our proposal to split the existing Medical Supplies Charged to 
Patients cost center into two cost centers, one specifically for 
``Implantable Devices Charged to Patients,'' is simply a refinement of 
what should be hospitals' existing cost reporting practices, wherein, 
rather than reporting all separately chargeable supplies and devices in 
one cost center, the devices would be reported in a separate, new cost 
center. We do not view this as a significant shift in cost reporting 
policy. Further, our adoption of the commenters' suggested method of 
separating supplies and devices based on existing revenue codes and 
NUBC definitions, with which all hospitals are already familiar, should 
minimize the disruption to hospitals' accounting and billing systems. 
Lastly, we note that, although participation in the hospital 
associations' educational initiatives has been voluntary, efforts have 
certainly been made by the hospital community over the past year to 
increase awareness and improve the accuracy of hospitals' cost 
reporting practices. Also, with respect to the commenter that 
questioned hospitals' ability to quickly change their chargemaster to 
ensure that revenue codes are always reported in the MedPACR file 
consistently with the cost centers in which they are reported on the 
cost report, as we stated in response to a previous comment, hospitals 
must use the billing codes as directed by the NUBC, regardless of the 
cost center in which the cost is reported on the cost report. Hospitals 
must continue to report ICD-9-CM codes and charges with an appropriate 
UB revenue code, consistent with NUBC requirements. When reporting the 
appropriate revenue code for services, hospitals should choose the most 
precise revenue code, or subcode if appropriate. As NUBC guidelines 
dictate: ``It is recommended that providers use the more detailed 
subcategory when applicable/available rather than revenue codes that 
end in ``0'' (General) or ``9'' (Other).'' Furthermore, with respect to 
the cost report, hospitals are required to follow the Medicare cost 
apportionment regulations at 42 CFR 413.53(a)(1) which convey that, 
under the departmental method of apportionment, the cost of each 
ancillary department is to be apportioned separately rather than 
combined with another department. In order to comply with the 
requirements of this regulation, hospitals must follow the Medicare 
payment policies in Section 2302/8 of the PRM-I and the PRM-II in order 
to ensure that their ancillary costs and charges are reported in the 
appropriate cost centers on the cost report. We rely on hospitals to 
fully comply with the revenue code reporting instructions and Medicare 
cost apportionment policies.
    Therefore, we do not believe that it is necessary to significantly 
delay availability of the revised cost reporting form beyond the date 
that we proposed; that is, for cost reporting periods starting after 
the Spring of 2009. In practice, hospitals need not have modified their 
systems (to the extent necessary) by the Spring of 2009, but rather, by 
the time they are completing and submitting cost reports for cost 
reporting periods beginning after the Spring of 2009. Further, as we 
have stated previously, no change to the actual cost reporting form 
will be undertaken without first going through notice and comment 
procedures in accordance with the PRA.

[[Page 48469]]

6. Revenue Codes Used in the MedPAR File
    An important first step in RTI's study (as explained in its March 
2007 report) was determining how well the cost report charges used to 
compute CCRs matched to the charges in the MedPAR file. This match (or 
lack thereof) directly affects the accuracy of the DRG cost estimates 
because MedPAR charges are multiplied by CCRs to estimate cost. RTI 
found inconsistent reporting between the cost reports and the claims 
data for charges in several ancillary departments (Medical Supplies, 
Operating Room, Cardiology, and Radiology). For example, the data 
suggested that some hospitals often include costs and charges for 
devices and other medical supplies within the Medicare cost report cost 
centers for Operating Room, Radiology, or Cardiology, while other 
hospitals include them in the Medical Supplies Charged to Patients cost 
center. While the educational initiative undertaken by the national 
hospital associations is encouraging hospitals to consistently report 
costs and charges for devices and other medical supplies only in the 
Medical Supplies Charged to Patients cost center, equal attention must 
be paid to the way in which charges are grouped by hospitals in the 
MedPAR file. Several commenters on the FY 2008 IPPS proposed rule 
supported RTI's recommendation of including additional fields in the 
MedPAR file to disaggregate certain cost centers. One commenter stated 
that the assignment of revenue codes and charges to revenue centers in 
the MedPAR file should be reviewed and changed to better reflect 
hospital accounting practices as reflected on the cost report (72 FR 
47198).
    In an effort to improve the match between the costs and charges 
included on the cost report and the charges in the MedPAR file, in the 
FY 2009 IPPS proposed rule, we recommended that certain revenue codes 
be used for items reported in the proposed Medical Supplies Charged to 
Patients cost center and the proposed Implantable Devices Charged to 
Patients cost center, respectively. Specifically, under the proposal to 
create a cost center for implantable devices that remain in the patient 
upon discharge, revenue codes 0275 (Pacemaker), 0276 (Intraocular 
Lens), and 0278 (Other Implants) would correspond to implantable 
devices reported in the proposed Implantable Devices Charged to 
Patients cost center. Items for which a hospital may have previously 
used revenue code 0270 (General Classification), but actually meet the 
proposed definition of an implantable device that remains in the 
patient upon discharge should instead be billed with the 0278 revenue 
code. Conversely, relatively inexpensive items and supplies that are 
not implantable and do not remain in the patient at discharge would be 
reported in the proposed Medical Supplies Charged to Patients cost 
center on the cost report, and should be billed with revenue codes 0271 
(nonsterile supply), 0272 (sterile supply), and 0273 (take-home 
supplies), as appropriate. Revenue code 0274 (Prosthetic/Orthotic 
devices) and revenue code 0277 (Oxygen--Take Home) should be associated 
with the costs reported on lines 66 and 67 for DME-Rented and DME-Sold 
on the cost report. Charges associated with supplies used incident to 
radiology or to other diagnostic services (revenue codes 0621 and 0622 
respectively) should match those items used incident to those services 
on the Medical Supplies Charged to Patients cost center of the cost 
report, because, under this proposal, supplies furnished incident to a 
service would be reported in the Medical Supplies Charged to Patients 
cost center. (We refer readers to item b. as listed under the proposed 
definition of a device in section II.E.4. of the preamble of this final 
rule.) A revenue code of 0623 for surgical dressings would similarly be 
associated with the costs and charges of items reported in the proposed 
Medical Supplies Charged to Patients cost center, while a revenue code 
of 0624 for FDA investigational device, if that device does not remain 
in the patient upon discharge, could be associated with items reported 
on the Medical Supplies Charged to Patients cost center as well.
    In general, proper reporting would dictate that if an item is 
reported as an implantable device on the cost report, it is an item for 
which the NUBC would require use of revenue code 0275 (Pacemaker), 0276 
(Intraocular Lens), 0278 (Other Implants), or 0624 (Investigational 
Device). Likewise, items reported as Medical Supplies Charged to 
Patients should receive an appropriate revenue code indicative of 
supplies. We understand that many of these revenue codes have been in 
existence for many years and have been added for purposes unrelated to 
the goal of refining the calculation of cost-based weights. 
Accordingly, in the proposed rule, we acknowledged that additional 
instructions relating to the appropriate use of these revenue codes may 
need to be issued. In addition, CMS or the hospital associations, or 
both, may need to request new revenue codes from the NUBC. In either 
case, we do not believe either action should delay use of the new 
Medical Supplies and Implantable Devices CCRs in setting payment rates. 
However, in light of our proposal to create two separate cost centers 
for Medical Supplies Charged to Patients and Implantable Devices 
Charged to Patients, respectively, we solicited comments on how the 
existing revenue codes or additional revenue codes could best be used 
in conjunction with the revised cost centers on the cost report.
    Comment: Two commenters supported CMS' efforts to better match 
costs and charges and reduce charge compression, but remained concerned 
about ``three key problems'' that result from using two different data 
sources (MedPAR and the cost report) to calculate relative weights:
     First, the method used by CMS to group hospital charges 
for the MedPAR files differs from that used by hospitals to group 
Medicare charges, total charges, and overall costs on the cost report.
     Second, hospitals group their Medicare charges, total 
charges, and overall costs in different departments on their cost 
reports for various reasons.
     Third, hospitals across the country complete their cost 
reports in different ways, as allowed by CMS. In addition, 
interpretations of Medicare allowable costs vary from one fiscal 
intermediary/MAC to another.
    The commenters were concerned that CMS' proposal might require 
hospitals to manually track a patient bill through several departments 
of the hospital to obtain information about implantable devices used, 
an effort that is difficult and inefficient. The commenters also stated 
that the combined use of hospital-specific charges and a national CCR 
result in a distortion of the MS-DRG relative weights and a shifting of 
Medicare payments among hospitals, not based on resource utilization, 
but rather on a mathematical calculation. One commenter recommended 
that CMS continue to collaborate with the workgroup heading up the 
educational initiative to develop a mechanism for determining the cost 
of implantable devices.
    Response: The commenters are correct that hospitals do have some 
flexibility in how they report and group charges, but we note that 
hospitals must separately apportion the costs of each ancillary 
department and not combine them with other ancillary departments 
(Section 2200.3 of the PRM-I). Further, hospitals must include costs 
and charges of separately chargeable medical supplies in the cost 
center for Medical Supplies Charged to Patients (Section 2202.6 of the 
PRM-I), and effective for

[[Page 48470]]

cost reporting periods beginning after the Spring of 2009, hospitals 
must include separately chargeable implantable medical devices in the 
new ``Implantable Devices Charged to Patients'' cost center. Further, 
because we are finalizing the policy that the existing revenue codes 
and definitions are to be used to determine whether an item is reported 
as a supply or an implantable device on the cost report, hospitals must 
ensure that they choose the most appropriate revenue codes in the 027x 
and 062x series to report supplies and implantable devices and 
subsequently matched to the appropriate cost center. As evidenced in 
the preceding comment summary, the vast majority of commenters believe 
that this is the least administratively burdensome approach for 
hospitals, and therefore, we are optimistic that the commenters' 
hospitals also have the capability to adapt to more careful cost 
reporting practices that are aligned with Medicare policy and the 
method used by CMS to group costs and charges in the relative weight 
calculation. We also do not believe that the use of hospital-specific 
charges together with national average CCRs redistributes Medicare 
payments among hospitals merely based on a mathematical calculation. As 
we stated in the FY 2008 IPPS final rule with comment period (72 FR 
47197), ``on the contrary, a system that improves payment accuracy and 
moderates the influence of individual hospital reporting practices on a 
national payment system is not one which haphazardly redistributes 
payments. We note that, in a report issued in July 2006, the GAO found 
that CMS' system of national CCRs shows promise to improve payment 
accuracy because it reduces the impact that individual hospital-
reporting practices has on the DRG relative weights (GAO-06-880, 
``CMS's Proposed Approach to Set Hospital Inpatient Payments Appears 
Promising'').''
    Comment: One commenter recommended that CMS revise the MedPAR file 
to be consistent with the 23 revenue center groups identified by the 
RTI report. The commenter believed this is a feasible long-term step 
because the MedPAR file is derived from a larger claims data set that 
has more detailed charge information that can be matched to the 23 
revenue centers analyzed by RTI.
    Response: In RTI's 2008 report, RTI recommended, as a medium-term 
goal, that CMS expand the MedPAR file to include separate fields that 
disaggregate several existing charge departments. RTI recommended that 
the new fields should include those used to compute the statistically 
disaggregated CCRs. To expand MedPAR, we would have to get detailed 
charge information from the Standard Analytic File. We agree that more 
detailed charge information on the MedPAR file would allow us to create 
more refined CCRs to mitigate charge compression. As we indicated in 
the FY 2008 final rule with comment period (72 FR 47198), we will 
consider suggestions for modifying the MedPAR in conjunction with other 
competing priorities we have for our information systems.
    Comment: One commenter recommended that CMS update its device-
dependent MS-DRG tables with a crosswalk to the specific Level II HCPCS 
device codes used in the associated surgical procedures. The commenter 
stated that although inpatient claims do not report HCPCS codes, most 
hospital chargemasters list device charges with the associated HCPCS 
codes and UB revenue center. The commenter further stated that when a 
device HCPCS code is entered on an inpatient claim, the HCPCS code is 
repressed but the device UB revenue code is shown on the claim along 
with the corresponding charge. The commenter believed the development 
of a HCPCS code to MS-DRG crosswalk would help providers validate that 
device charges are being uniformly captured on patients' claims, 
regardless of their inpatient or outpatient status. The commenter 
believed this crosswalk could also support development of a claim edit 
for both inpatient and outpatient claims based on the reporting of 
specific UB revenue codes and device HCPCS codes that would result in 
payment of a device-dependent MS-DRG or device-dependent APC.
    Response: As the commenter noted, unlike the OPPS, payments under 
the IPPS are not based on HCPCS codes. The IPPS also differs from the 
OPPS in that under the IPPS, the costs of individual services, even 
those using expensive devices, are components of the costs of a much 
larger group of services provided to a particular patient, and 
therefore, larger payment groups using more claims insure against bias 
in an MS-DRG weight despite possible errors in reporting the charge for 
an expensive device. Further, adoption of such a claim edit policy 
could require burdensome changes in coding practices by some hospitals. 
Therefore, we are not adopting the commenter's recommendation.
    Comment: One commenter urged CMS to undertake an analysis of the FY 
2007 fourth quarter MedPAR claims to determine whether documentation 
and coding-related payment increases are evident, and whether they are 
peculiar to most hospitals or only to a subset of hospitals. The 
commenter asked that if CMS observes that only a subset of hospitals 
are driving the documentation and coding-related increases, CMS hold 
the blend of the CMS DRG and the MS-DRG relative weights at 50/50 for 
FY 2009. Another commenter recommended that, in FY 2009, CMS continue 
to blend the CMS DRG and MS-DRG relative weights at 50/50 because the 
FY 2007 MedPAR claims that are used to calculate the FY 2009 relative 
weights do not reflect the significant changes that were made to the 
IPPS in FY 2008 (that is, the move to MS-DRGs and the revised CC list). 
The commenter believed that delaying full implementation of the MS-DRG 
weights until FY 2010 would allow use of the FY 2008 MedPAR claims 
data, which would reflect a full year of services coded under the new 
MS-DRGs and CC list. The commenters argued that this will, in turn, 
help improve the accuracy and consistency of the cost-based MS-DRG 
relative weights.
    Response: Because of the limited time we had available to address 
the public comments as well as analyze the FY 2007 fourth quarter 
MedPAR data, we were unable to perform an indepth analysis of where 
documentation and coding-related payment increases were most evident. 
However, we did perform some analysis, which did not show any obvious 
trends in subsets of hospitals. Furthermore, use of the FY 2007 MedPAR 
claims to set the FY 2009 MS-DRG relative weights represents the most 
recent and best data available from which to do so. Therefore, because 
we did not propose to delay the full implementation of the MS-DRGs and 
their attending relative weights in FY 2009, we are finalizing the 
transition to 100 percent MS-DRGs in FY 2009.
    Comment: One commenter expressed concern about the effect that a 
new CCR for Medical Devices might have on its Medicaid reimbursement 
because Medicaid does not pay for devices and the CCR for Medical 
Supplies and Equipment would be diluted.
    Response: The cost-based relative weights were developed solely 
using Medicare data. We are concerned that non-Medicare payers may be 
using our payment systems and rates without making refinements to 
address the needs of their own populations. We encourage non-Medicare 
payers to adapt the MS-DRGs and the relative weight methodology to 
better serve their needs.
    Comment: Numerous commenters asked that CMS make changes to the 
cost report or other changes to resolve concerns with charge 
compression in

[[Page 48471]]

hospital OPPS weights for pharmacy services, radiology services, 
radiopharmaceuticals, drugs and biologicals, and other services paid 
under the OPPS.
    Response: These comments are out of the scope of this final rule 
because we proposed only to change the cost report to address charge 
compression for devices under both the IPPS and the OPPS. The CY 2009 
OPPS/ASC proposed rule was published in the Federal Register on July 
18, 2008 (73 FR 41416), and public comments on the effects of charge 
compression on the OPPS weights for items and services other than 
devices should be made in response to that proposed rule. The comment 
period for the OPPS/ASC proposed rule closes at 5 p.m. E.S.T. on 
September 2, 2008.

F. Preventable Hospital-Acquired Conditions (HACs), Including 
Infections

1. General Background
    In its landmark 1999 report ``To Err is Human: Building a Safer 
Health System,'' the Institute of Medicine found that medical errors, 
particularly hospital-acquired conditions (HACs) caused by medical 
errors, are a leading cause of morbidity and mortality in the United 
States. The report noted that the number of Americans who die each year 
as a result of medical errors that occur in hospitals may be as high as 
98,000. The cost burden of HACs is also high. Total national costs of 
these errors due to lost productivity, disability, and health care 
costs were estimated at $17 to $29 billion.\2\ In 2000, the CDC 
estimated that hospital-acquired infections added nearly $5 billion to 
U.S. health care costs every year.\3\ A 2007 study found that, in 2002, 
1.7 million hospital-acquired infections were associated with 99,000 
deaths.\4\ Research has also shown that hospitals are not following 
recommended guidelines to avoid preventable hospital-acquired 
infections. A 2007 Leapfrog Group survey of 1,256 hospitals found that 
87 percent of those hospitals do not follow recommendations to prevent 
many of the most common hospital-acquired infections.\5\ The costs 
associated with hospital-acquired infections are particularly 
burdensome for Medicare, as Medicare covers a greater portion of 
patients with hospital-acquired infections than other payers. One study 
found that the payer mix for patients without infections was 37 percent 
Medicare, 28 percent commercial, 21 percent other, and 14 percent 
Medicaid, while the payer mix for patients with hospital-acquired 
infections was 57 percent Medicare, 17 percent commercial, 15 percent 
other, and 11 percent Medicaid.\6\
---------------------------------------------------------------------------

    \2\ Institute of Medicine: To Err Is Human: Building a Safer 
Health System, November 1999. Available at: http://www.iom.edu/Object.File/Master/4/117/ToErr-8pager.pdf.
    \3\ Centers for Disease Control and Prevention: Press Release, 
March 2000. Available at: http://www.cdc.gov/od/oc/media/pressrel/r2k0306b.htm.
    \4\ Klevens et al. Estimating Health Care-Associated Infections 
and Deaths in U.S. Hospitals, 2002. Public Health Reports. March-
April 2007. Volume 122.
    \5\ 2007 Leapfrog Group Hospital Survey. The Leapfrog Group 
2007. Available at: http://www.leapfroggroup.org/media/file/Leapfrog_hospital_acquired_infections_release.pdf.
    \6\ 1.6 Million Admission Analysis, MedMined, Inc. September 
2006.
---------------------------------------------------------------------------

    As one approach to combating HACs, including infections, in 2005 
Congress authorized CMS to adjust Medicare IPPS hospital payments to 
encourage the prevention of these conditions. The preventable HAC 
provision at section 1886(d)(4)(D) of the Act is part of an array of 
Medicare value-based purchasing (VBP) tools that CMS is using to 
promote increased quality and efficiency of care. Those tools include 
measuring performance, using payment incentives, publicly reporting 
performance results, applying national and local coverage policy 
decisions, enforcing conditions of participation, and providing direct 
support for providers through Quality Improvement Organization (QIO) 
activities. CMS' application of VBP tools through various initiatives, 
such as this HAC provision, is transforming Medicare from a passive 
payer to an active purchaser of higher value health care services. We 
are applying these strategies for inpatient hospital care and across 
the continuum of care for Medicare beneficiaries.
    Additionally, the President's FY 2009 Budget outlines another 
approach for addressing serious preventable adverse events (``never 
events''), including HACs (see section II.F.9. below for a discussion 
regarding which HACs are included in the list of Serious Reportable 
Adverse Events). The President's Budget proposal would: (1) Prohibit 
hospitals from billing the Medicare program for ``never events'' and 
prohibit Medicare payment for these events and (2) require hospitals to 
report any occurrence of these events or receive a reduced annual 
payment update.
    Medicare's IPPS encourages hospitals to treat patients efficiently. 
Hospitals receive the same DRG payment for stays that vary in length 
and in the services provided, which gives hospitals an incentive to 
avoid unnecessary costs in the delivery of care. In some cases, 
complications acquired in the hospital do not generate higher payments 
than the hospital would otherwise receive for uncomplicated cases paid 
under the same DRG. To this extent, the IPPS encourages hospitals to 
avoid complications. However, complications, such as infections 
acquired in the hospital, can generate higher Medicare payments in two 
ways. First, the treatment of complications can increase the cost of a 
hospital stay enough to generate an outlier payment. However, the 
outlier payment methodology requires that a hospital experience a large 
loss on an outlier case, which serves as an incentive for hospitals to 
prevent outliers. Second, under the MS-DRGs that took effect in FY 
2008, there are currently 258 sets of MS-DRGs that are split into 2 or 
3 subgroups based on the presence or absence of a complicating 
condition (CC) or a major complicating condition (MCC). If a condition 
acquired during a hospital stay is one of the conditions on the CC or 
MCC list, the hospital currently receives a higher payment under the 
MS-DRGs (prior to the October 1, 2008 effective date of the HAC payment 
provision). Medicare will continue to assign a discharge to a higher 
paying MS-DRG if the selected condition is present on admission. (We 
refer readers to section II.D. of the FY 2008 IPPS final rule with 
comment period for a discussion of DRG reforms (72 FR 47141).) The 
following is an example of how an MS-DRG may be paid under the HAC 
provision:

[[Page 48472]]



------------------------------------------------------------------------
                                            Present on
 Service: MS-DRG assignment * (examples     admission
  below with CC/MCC indicate a single       (status of    Median payment
       secondary diagnosis only)            secondary
                                            diagnosis)
------------------------------------------------------------------------
Principal Diagnosis:
     Intracranial hemorrhage or  ...............       $5,347.98
     cerebral infarction (stroke)
     without CC/MCC--MS-DRG 066........
------------------------------------------------------------------------
Principal Diagnosis:
     Intracranial hemorrhage or               Y         6,177.43
     cerebral infarction (stroke) with
     CC--MS-DRG 065....................
Example Secondary Diagnosis:
     Dislocation of patella-
     open due to a fall (code 836.4
     (CC))
------------------------------------------------------------------------
Principal Diagnosis:
     Intracranial hemorrhage or               N         5,347.98
     cerebral infarction (stroke) with
     CC--MS-DRG 065....................
Example Secondary Diagnosis:
     Dislocation of patella-
     open due to a fall (code 836.4
     (CC))
------------------------------------------------------------------------
Principal Diagnosis:
     Intracranial hemorrhage or               Y         8,030.28
     cerebral infarction (stroke) with
     MCC--MS-DRG 064...................
Example Secondary Diagnosis:
     Stage III pressure ulcer
     (code 707.23 (MCC))
------------------------------------------------------------------------
Principal Diagnosis:
     Intracranial hemorrhage or               N         5,347.98
     cerebral infarction (stroke) with
     MCC--MS-DRG 064...................
Example Secondary Diagnosis:
     Stage III pressure ulcer
     (code 707.23 (MCC))
------------------------------------------------------------------------
* Operating amounts for a hospital whose wage index is equal to the
  national average. Based on FY 2008 wage index.

    This example illustrates a payment scenario in which the CC/MCC 
indicates a single secondary diagnosis only. It is atypical for a 
hospitalized Medicare beneficiary to have only one secondary 
diagnosis.\7\
---------------------------------------------------------------------------

    \7\ Medicare Payment for Selected Adverse Events: Building the 
Business Case for Investing in Patient Safety. Health Affairs. Zhan 
et al. September 2006.
---------------------------------------------------------------------------

2. Statutory Authority
    Section 1886(d)(4)(D) of the Act required the Secretary to select 
at least two conditions by October 1, 2007, that are: (a) High cost, 
high volume, or both; (b) assigned to a higher paying MS-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 is not 
present on admission. That is, the case will be paid as though the 
secondary diagnosis were not present. Medicare will continue to assign 
a discharge to a higher paying MS-DRG if the selected condition is 
present on admission. However, if any nonselected CC/MCC appears on the 
claim, the claim will be paid at the higher MS-DRG rate; to cause a 
lower MS-DRG payment, all CCs/MCCs on the claim must be selected 
conditions for the HAC payment provision. Section 1886(d)(4)(D) of the 
Act provides that the list of conditions can be revised from time to 
time, as long as the list contains at least two conditions. Beginning 
October 1, 2007, we required hospitals to begin submitting information 
on Medicare claims specifying whether diagnoses were present on 
admission (POA).
    The POA indicator reporting requirement and the HAC payment 
provision apply to IPPS hospitals only. At this time, non-IPPS 
hospitals, including CAHs, LTCHs, IRFs, IPFs, cancer hospitals, 
children's inpatient hospitals, and hospitals in Maryland operating 
under waivers, are exempt from POA reporting and the HAC payment 
provision. Throughout this section, ``hospital'' refers to IPPS 
hospitals.
3. Public Input
    In the FY 2007 IPPS proposed rule (71 FR 24100), we sought public 
input regarding conditions with evidence-based prevention guidelines 
that should be selected in implementing section 1886(d)(4)(D) of the 
Act. The public comments we received were summarized in the FY 2007 
IPPS final rule (71 FR 48051 through 48053). In the FY 2008 IPPS 
proposed rule (72 FR 24716), we sought formal public comment on 
conditions that we proposed to select. In the FY 2008 IPPS final rule 
with comment period (72 FR 47200 through 47218), we summarized the 
public comments we received on the FY 2008 IPPS proposed rule, 
presented our responses, selected eight conditions to which the HAC 
provision will apply, and noted that we would be seeking comments on 
additional HAC candidates in the FY 2009 IPPS proposed rule.
    In the FY 2009 IPPS proposed rule (73 FR 23547), we proposed 
several candidate HACs in addition to proposing refinements to the 
previously selected HACs. In this FY 2009 IPPS final rule, we summarize 
the public comments we received on the FY 2009 IPPS proposed rule, 
present our responses, select additional conditions to which the HAC 
payment provision will apply, and note that we will be seeking comments 
on additional HAC candidates in the FY 2010 IPPS proposed rule.
4. Collaborative Process
    CMS experts worked closely with public health and infectious 
disease professionals from the CDC to identify the candidate 
preventable HACs, review comments, and select HACs. CMS and CDC staff 
also collaborated on the process for hospitals to submit a POA 
indicator for each diagnosis listed on IPPS hospital Medicare claims 
and on the payment implications of the various POA reporting options.
    On December 17, 2007, CMS and CDC hosted a jointly-sponsored HAC 
and POA Listening Session to receive input from interested 
organizations and individuals. The agenda, presentations, audio file, 
and written transcript of the listening session are available on the 
CMS Web site at: http://www.cms.hhs.gov/HospitalAcqCond/07_EducationalResources.asp. CMS and CDC also received verbal comments

[[Page 48473]]

during the listening session and subsequently received numerous written 
comments.
    Comment: Several commenters recommended that CMS develop an 
advisory panel of clinicians and scientists to provide the agency with 
guidance on which conditions are appropriate for inclusion under this 
policy.
    Response: We are committed to working with stakeholders as we 
refine and make additions to the HAC list each year. We intend to 
engage the public through rulemaking as discussed in section II.F.3. of 
this preamble and other mechanisms similar to those discussed above.
5. Selection Criteria for HACs
    In selecting proposed candidate conditions and finalizing 
conditions as HACs, CMS and CDC staff evaluated each condition against 
the criteria established by section 1886(d)(4)(D)(iv) of the Act.
     Cost or Volume--Medicare data \8\ must support that the 
selected conditions are high cost, high volume, or both. We have not 
yet analyzed Medicare claims data indicating which secondary diagnoses 
were POA because POA indicator reporting began only recently; 
therefore, the currently available data for candidate conditions 
includes all secondary diagnoses.
---------------------------------------------------------------------------

    \8\ For the HAC section of this FY 2009 IPPS final rule, the DRG 
analysis is based on data from the September 2007 update of the FY 
2007 MedPAR file, which contains hospital bills received through 
September 30, 2007.
---------------------------------------------------------------------------

     Complicating Condition (CC) or Major Complicating 
Condition (MCC)--Selected conditions must be represented by ICD-9-CM 
diagnosis codes that clearly identify the condition, are designated as 
a CC or an MCC, and result in the assignment of the case to an MS-DRG 
that has a higher payment when the code is reported as a secondary 
diagnosis. That is, selected conditions must be a CC or an MCC that 
would, in the absence of this provision, result in assignment to a 
higher paying MS-DRG.
     Evidence-Based Guidelines--Selected conditions must be 
considered reasonably preventable through the application of evidence-
based guidelines. By reviewing guidelines from professional 
organizations, academic institutions, and entities such as the 
Healthcare Infection Control Practices Advisory Committee (HICPAC), we 
evaluated whether guidelines are available that hospitals should follow 
to prevent the condition from occurring in the hospital.
     Reasonably Preventable--Selected conditions must be 
considered reasonably preventable through the application of evidence-
based guidelines.
6. HACs Selected During FY 2008 IPPS Rulemaking and Changes to Certain 
Codes
    The conditions that were selected for the HAC payment provision 
through the FY 2008 IPPS final rule with comment period are listed 
below. The HAC payment provision implications for these selected HACs 
will take effect on October 1, 2008. We refer readers to section 
II.F.6. of the FY 2008 IPPS final rule with comment period (72 FR 47202 
through 47218) for a detailed analysis supporting the selection of each 
of these HACs.

----------------------------------------------------------------------------------------------------------------
                                          Medicare data  (FY       CC/MCC  (ICD-9-CM     Selected evidence-based
             Selected HAC                       2007)                    codes)                 guidelines
----------------------------------------------------------------------------------------------------------------
Foreign Object Retained After Surgery   750 cases *...  998.4 (CC) or 998.7      NQF Serious Reportable
                                        $63,631/         (CC).                    Adverse Event.
                                        hospital stay.**.                                NQF's Safe Practices
                                                                                          for Better Healthcare
                                                                                          available at the Web
                                                                                          site: http://www.ahrq.gov/qual/nqfpract.htm.
Air Embolism.........................   57 cases......  999.1 (MCC)............  NQF Serious Reportable
                                        $71,636/                                  Adverse Event.
                                        hospital stay..                                  NQF's Safe Practices
                                                                                          for Better Healthcare
                                                                                          available at the Web
                                                                                          site: http://www.ahrq.gov/qual/nqfpract.htm.
Blood Incompatibility................   24 cases......  999.6 (CC).............  NQF Serious Reportable
                                        $50,455/                                  Adverse Event.
                                        hospital stay..                                  NQF's Safe Practices
                                                                                          for Better Healthcare
                                                                                          available at the Web
                                                                                          site: http://www.ahrq.gov/qual/nqfpract.htm.
Pressure Ulcer Stages III & IV.......   257,412 cases   707.23 (MCC) or 707.24   NQF Serious Reportable
                                        ***.                     (MCC).                   Adverse Event.
                                        $43,180/                                 Available at the Web
                                        hospital stay..                                   site: http://www.ncbi.nlm.nih.gov/books/bv.fcgi?rid=hstat2.chapter.4409.
Falls and Trauma:....................   193,566 cases.  Codes within these       NQF Serious Reportable
--Fracture...........................   $33,894/         ranges on the CC/MCC     Adverse Events address
--Dislocation........................   hospital stay..          list: 800-829, 830-      falls, electric shock,
--Intracranial Injury................                            839, 850-854, 925-929,   and burns.
--Crushing Injury....................                            940-949, 991-994.       NQF's Safe Practices
--Burn...............................                                                     for Better Healthcare
--Electric Shock.....................                                                     available at the Web
                                                                                          site: http://www.ahrq.gov/qual/nqfpract.htm.
Catheter-Associated Urinary Tract       12,185 cases..  996.64 (CC)............  Available at the Web
 Infection (UTI).                       $44,043/        Also excludes the         site: http://
                                        hospital stay..          following from acting    www.cdc.gov/ncidod/
                                                                 as a CC/MCC: 112.2       dhqp/gl--catheter--
                                                                 (CC), 590.10 (CC),       assoc.html.
                                                                 590.11 (MCC), 590.2
                                                                 (MCC), 590.3 (CC),
                                                                 590.80 (CC), 590.81
                                                                 (CC), 595.0 (CC),
                                                                 597.0 (CC), 599.0
                                                                 (CC)..
Vascular Catheter-Associated            29,536 cases..  999.31 (CC)............  Available at the Web
 Infection.                             $103,027/                                 site: http://
                                        hospital stay..                                   www.cdc.gov/ncidod/
                                                                                          dhqp/gl_
                                                                                          intravascular.html.

[[Page 48474]]

 
Surgical Site Infection-Mediastinitis   69 cases......  519.2 (MCC)............  Available at the Web
 After Coronary Artery Bypass Graft     $299,237/       And one of the            site: http://
 (CABG).                                hospital stay..          following procedure      www.cdc.gov/ncidod/
                                                                 codes: 36.10-36.19..     dhqp/gl--
                                                                                          surgicalsite.html.
----------------------------------------------------------------------------------------------------------------
* A case represents a patient discharge identified from the MedPAR database that met the associated HAC
  diagnosis/procedure criteria (a secondary diagnosis on the HAC list and, where appropriate, a procedure code
  described in conjunction with a specific HAC).
** Standardized charge is the total charge for a patient discharge record based on the CMS standardization file.
  The average standardized charge for the HAC is the average charge for all patient discharge records that met
  the associated HAC criteria.
*** The number of cases of pressure ulcers reflects CC/MCC assignments for codes 707.00 through 707.07 and
  707.09, which are currently being reported. New MCC codes 707.23 and 707.24 will be implemented on October 1,
  2008.

    In the FY 2009 IPPS proposed rule (73 FR 23552), we sought public 
comments on the following refinements to two of the previously selected 
HACs:
a. Foreign Object Retained After Surgery
    In the FY 2009 IPPS proposed rule (73 FR 23552), we solicited 
public comments regarding the inclusion of ICD-9-CM diagnosis code 
998.7 (Acute reaction to foreign substance accidentally left during a 
procedure) to more accurately and completely identify foreign object 
retained after surgery as an HAC.
    Comment: Commenters universally supported the addition of ICD-9-CM 
code 998.7 to identify foreign object retained after surgery as an HAC. 
The commenters also reiterated their support for recognizing foreign 
object retained after surgery as an HAC.
    Response: We appreciate the commenters' support. We refer readers 
to a more detailed discussion of HAC coding for foreign object retained 
after surgery in section II.F.10.a. of this preamble.
    After consideration of the public comments received, we are 
finalizing our proposal to include diagnosis code 998.7 as an 
additional code to code 998.4 selected in FY 2008 to identify foreign 
object retained after surgery as an HAC under the HAC payment 
provision.

                  Foreign Object Retained After Surgery
------------------------------------------------------------------------
          ICD-9-CM codes                      Code descriptor
------------------------------------------------------------------------
998.4............................  Foreign body accidentally left during
                                    a procedure.
998.7............................  Acute reaction to foreign substance
                                    accidentally left during a
                                    procedure.
------------------------------------------------------------------------

b. Pressure Ulcers
    In the FY 2009 IPPS proposed rule (73 FR 23552), we proposed that, 
beginning October 1, 2008, the codes used to make MS-DRG adjustments 
for pressure ulcers under the HAC provision would include proposed MCC 
codes 707.23 and 707.24 (pressure ulcer stages III and IV).
    Comment: Commenters supported the creation of the new ICD-9-CM 
codes 707.23 and 707.24 to capture the stage of the pressure ulcer and 
supported the use of these codes to identify pressure ulcer stages III 
and IV as HACs. However, some commenters expressed concern about the 
proposal to classify ICD-9-CM codes 707.23 and 707.24 as MCCs and to 
remove the CC/MCC classifications from the existing pressure site 
codes.
    Response: We appreciate the commenters support for using codes 
707.23 and 707.24 to identify pressure ulcer stages III and IV as HACs.
    In response to the commenters' concerns regarding the CC/MCC 
classification for these codes, we refer readers to section II.G.12. of 
this preamble where we address specific concerns about the creation of 
new codes for identifying pressure ulcers.
    After consideration of public comments received, we are adopting as 
final our proposal that, beginning October 1, 2008, the codes used to 
identify pressure ulcer stages III and IV as HACs include the following 
MCC codes:

                             Pressure Ulcers
------------------------------------------------------------------------
          ICD-9-CM codes                      Code descriptor
------------------------------------------------------------------------
707.23...........................  Pressure ulcer, stage III.
707.24...........................  Pressure ulcer, stage IV.
------------------------------------------------------------------------

7. Candidate HACs
    CMS and CDC have diligently worked together and with other 
stakeholders to identify and select candidates for the HAC payment 
provision. The additional candidate HACs selected in this FY 2009 IPPS 
final rule will have payment implications beginning October 1, 2008.
    As in the FY 2009 IPPS proposed rule, we present in this final rule 
the statutory criteria for each HAC candidate in tabular format. Each 
table contains the following:
     HAC Candidate--We sought public comment on all HAC 
candidates.
     Medicare Data--We sought public comment on the statutory 
criterion of high cost, high volume, or both as it applies to each HAC 
candidate.
     CC/MCC--We sought public comment on the statutory 
criterion that an ICD-9-CM diagnosis code(s) clearly identifies the HAC 
candidate.
     Selected Evidence-Based Guidelines--We sought public 
comment on whether guidelines are available that hospitals should 
follow to prevent the condition from occurring in the hospital.
     Reasonably Preventable--We sought public comment on 
whether each condition could be considered reasonably preventable 
through the application of evidence-based guidelines.
    Comment: Many commenters recommended various general standards for 
determining which conditions could reasonably have been prevented 
through the application of evidence-based guidelines. The majority of 
commenters favored a zero, or near zero, standard for those conditions 
to be considered reasonably preventable when evidence-based guidelines 
are followed.
    Response: We did not propose and did not specifically seek public 
comments on a general standard for reasonably preventable through the 
application of evidence-based guidelines in the FY 2009 IPPS proposed 
rule, and we are not setting a general standard in this final rule. We 
further note that the statute does not require that a condition be 
``always preventable'' in order to qualify as an HAC, but rather that 
it be ``reasonably preventable,'' which necessarily implies something 
less than 100 percent.
    After consideration of the public comments received and in light of 
the three statutory criteria, we are finalizing several additional 
conditions for the HAC payment provision. The additional conditions are 
defined by specific codes within the broad categories of manifestations 
of poor glycemic control, surgical site infections, and deep vein 
thrombosis/pulmonary embolism, as discussed below.

[[Page 48475]]

a. Manifestations of Poor Glycemic Control
    Hyperglycemia and hypoglycemia are extremely common laboratory 
findings in hospitalized patients and can be complicating features of 
underlying diseases and some therapies. However, we believe that 
extreme manifestations of poor glycemic control are reasonably 
preventable through the application of evidence-based guidelines and 
sound medical practice while in the hospital setting; specifically, we 
believe that they are preventable through the use of routine serum 
glucose measurement and control which are basic elements of good 
hospital care.
    We originally proposed the diagnosis codes representing four 
extreme manifestations of poor glycemic control as HACs, but we are not 
finalizing the following codes representing diabetic coma because the 
codes are nonspecific and more precise, specific codes are available to 
describe the condition: (1) Diabetes with coma, type II or unspecified 
type, not stated as controlled (250.30); (2) diabetes with coma, type 
I, not stated as controlled (250.31); (3) diabetes with coma, type II 
or unspecified type, uncontrolled (250.32); and (4) diabetes with coma, 
type I, uncontrolled (250.33).
    Comment: Commenters generally considered all of the manifestations 
of poor glycemic control together. The majority of commenters agreed 
that these extreme manifestations of poor glycemic control are 
reasonably preventable through the application of evidence-based 
guidelines. In support of selecting this condition, one commenter 
provided additional evidence-based guidelines addressing glycemic 
control.
    Response: We agree with commenters that extreme manifestations of 
poor glycemic control are reasonably preventable through the 
application of evidence-based guidelines. We are including the 
additional evidence-based guidelines submitted by a commenter in the 
chart for manifestations of poor glycemic control below.
    Comment: Of the proposed codes representing the manifestations of 
poor glycemic control, hypoglycemic coma received the most attention 
from commenters. Many commenters considered hypoglycemic coma to be a 
strong candidate because it is included in the NQF's list of Serious 
Reportable Adverse Events.
    Response: We agree with commenters that hypoglycemic coma is 
reasonably preventable through the application of evidence-based 
guidelines.
    Comment: Although the majority of commenters supported the 
selection of diabetic ketoacidosis, nonketotic hyperosmolar coma, and 
hypoglycemic coma as HACs, CMS received a small number of comments 
opposing the selection of codes from the manifestations of poor 
glycemic control category. Some commenters expressed that recent 
studies demonstrate that tight glycemic control in septic patients 
leads to poorer outcomes. One commenter identified the diabetic patient 
population as high risk, citing an estimate that any person with 
insulin-treated diabetes will experience 0.5 to 1.0 severe hypoglycemic 
events annually, which appears to not necessarily be within the control 
of caregivers.\9\
---------------------------------------------------------------------------

    \9\ The Diabetes Control and Complications Trial. New England 
Journal of Medicine, 1993, Vol. 329, pp. 977-986.
---------------------------------------------------------------------------

    Response: We have addressed the commenters' concerns about tight 
glycemic control and hypoglycemic events by selecting specific, narrow 
codes representing extreme manifestations as HACs. For example, the 
commenter's concern about the preventability of all hypoglycemic events 
is addressed by selecting as an HAC only the code representing 
hypoglycemic coma (251.0), an extreme manifestation. We further note 
that the statute does not require that a condition be ``always 
preventable'' in order to qualify as an HAC, but rather that it be 
``reasonably preventable,'' which necessarily implies something less 
than 100 percent.
    Comment: Commenters supported adding the following four secondary 
diabetes diagnosis codes: (1) ICD-9-CM code 249.10 (Secondary diabetes 
mellitus with ketoacidosis, not stated as uncontrolled, or 
unspecified); (2) ICD-9-CM code 249.11 (Secondary diabetes mellitus 
with ketoacidosis, uncontrolled); (3) ICD-9-CM code 249.20 (Secondary 
diabetes mellitus with hyperosmolarity, not stated as uncontrolled, or 
unspecified); and (4) ICD-9-CM code 249.21 (Secondary diabetes mellitus 
with hyperosmolarity, uncontrolled). These new secondary diabetes codes 
will be effective on October 1, 2008.
    Response: We agree with commenters that the secondary diabetes 
codes should be included to capture the full range of extreme 
manifestations of poor glycemic control as HACs. The secondary diabetes 
codes are clinically similar to the proposed codes and including these 
codes more accurately captures the range of manifestations of poor 
glycemic control.
    We are finalizing manifestations of poor glycemic control as an HAC 
because we have determined after considering the comments received that 
these conditions meet the statutory criteria. The following chart 
includes the codes that describe manifestations of the poor glycemic 
control as an HAC:

[[Page 48476]]

[GRAPHIC] [TIFF OMITTED] TR19AU08.332


[[Page 48477]]



                 Manifestations of Poor Glycemic Control
------------------------------------------------------------------------
          ICD-9-CM code                       Code descriptor
------------------------------------------------------------------------
249.10...........................  Secondary diabetes mellitus with
                                    ketoacidosis, not stated as
                                    uncontrolled, or unspecified.
249.11...........................  Secondary diabetes mellitus with
                                    ketoacidosis, uncontrolled.
249.20...........................  Secondary diabetes mellitus with
                                    hyperosmolarity, not stated as
                                    uncontrolled, or unspecified.
249.21...........................  Secondary diabetes mellitus with
                                    hyperosmolarity, uncontrolled.
250.10...........................  Diabetes with ketoacidosis, type II
                                    or unspecified type, not stated as
                                    uncontrolled.
250.11...........................  Diabetes with ketoacidosis, type I
                                    [juvenile type], not stated as
                                    uncontrolled.
250.12...........................  Diabetes with ketoacidosis, type II
                                    or unspecified type, uncontrolled.
250.13...........................  Diabetes with ketoacidosis, type I
                                    [juvenile type], uncontrolled.
250.20...........................  Diabetes with hyperosmolarity, type
                                    II or unspecified type, not stated
                                    as uncontrolled.
250.21...........................  Diabetes with hyperosmolarity, type I
                                    [juvenile type], not stated as
                                    uncontrolled.
250.22...........................  Diabetes with hyperosmolarity, type
                                    II or unspecified type,
                                    uncontrolled.
250.23...........................  Diabetes with hyperosmolarity, type I
                                    [juvenile type], uncontrolled.
251.0............................  Hypoglycemic coma.
------------------------------------------------------------------------

b. Surgical Site Infections
    In the FY 2009 IPPS proposed rule (73 FR 23553), we requested 
public comments on the applicability of each of the statutory criteria 
to surgical site infections following certain procedures. We were 
particularly interested in receiving comments on the degree of 
preventability of these infections. We also requested, and received, 
public comment on additional surgical procedures that would qualify for 
the HAC provision by meeting all of the statutory criteria.
    Comment: Numerous commenters raised issues regarding the 
applicability of each statutory criterion to surgical site infections 
generally, especially with regard to degree of preventability. 
Commenters raised concerns that patient characteristics and other 
factors can put patients at risk for surgical site infections 
regardless of the application of evidence-based guidelines. Commenters 
asserted that elective procedures have a tendency to be short-stay 
admissions or outpatient procedures, and if a surgical site infection 
presents after discharge, this HAC would not be captured under the 
inpatient provision.
    Response: We agree that the risk of a typical patient undergoing a 
procedure is a factor in determining whether these conditions are 
reasonably preventable (see discussion of risk adjustment in section 
II.F.9. of this preamble), but we do not agree that the average length 
of stay following the procedure or the ability to perform the procedure 
at an alternative site are determinative factors for selecting HACs.
    Comment: Some commenters emphasized that certain procedures 
typically thought of as elective by clinicians are not necessarily 
elective by patients. Two commenters noted that even if total knee 
replacement is considered nonemergent and therefore elective from a 
clinician's perspective, a patient may consider the surgery critical 
and urgent to avoid pain and immobility.
    Response: We agree with the commenters that procedures typically 
thought of as elective based on urgency are not necessarily viewed as 
elective from the perspective of the patient's quality of life. Given 
lack of consensus regarding the classification of procedures as 
elective, we have discontinued referring to this broad category of 
surgical site infections as ``following elective procedures.''
    Comment: Many commenters asserted that surgical site infections 
following total knee replacement could be considered reasonably 
preventable, however those commenters questioned why CMS proposed this 
HAC because the candidate codes are CCs, and total knee replacement 
procedures typically map to MS-DRGs that only split to MCCs.
    Response: We are unable to select this condition as an HAC because, 
as commenters noted, surgical site infection is a CC that does not 
trigger the higher paying MCC MS-DRG payment for total knee replacement 
procedures; thus, it does not meet the second statutory criterion. If a 
change to the MS-DRGs results in total knee replacement procedures 
mapping to MS-DRGs that split to CCs in the future, we could reconsider 
adding surgical site infections following total knee replacement as an 
HAC. In addition, we will be reviewing other ICD-9-CM MCC codes 
relevant to total knee replacement, and we will consider proposing 
those codes as future HAC candidates.
    Comment: Commenters addressed the discrepancy between the proposed 
CC code (Other postoperative infection) and the MS-DRG split only to 
MCC for total knee replacement and suggested that CMS review and 
consider adding other procedures that map to MS-DRGs that split by CC. 
One commenter referenced a 2002 meta-analysis finding that antibiotic 
prophylaxis is successful in significantly reducing the rates of 
postoperative spinal infections.\10\
---------------------------------------------------------------------------

    \10\ Baker, F.G.: Efficacy of prophylactic antibiotic therapy in 
spinal surgery: A meta-analysis. Neurosurgery. 51(2): 391-400 
(2002).
---------------------------------------------------------------------------

    Response: We agree with the commenters' recommendations and 
considered additional orthopedic procedures. We identified the 
following MS-DRGs that split by CC:
     MS-DRGs 453, 454, and 455 (Combined Anterior/Posterior 
Spinal Fusion with MCC, CC and without CC/MCC);
     MS-DRGs 471, 472, and 473 (Cervical Spinal Fusion, with 
MCC, CC and without CC/MCC);
     MS-DRGs 507 and 508 (Major Shoulder or Elbow Joint 
Procedures, with CC/MCC and without CC/MCC).
    In response to commenters' suggestions, we are selecting certain 
orthopedic procedures that fall within the MS-DRGs listed above in the 
HAC surgical site infection category. The category of surgical site 
infection following certain orthopedic surgeries includes selected 
procedures that are often elective and that involve the repair, 
replacement, or fusion of various joints including the shoulder, elbow, 
and spine. In future rulemaking, we will work with stakeholders to 
identify additional procedures, orthopedic and other types, for which 
surgical site infections can be considered reasonably preventable 
through the application of evidence-based guidelines.
    The following chart includes the codes that describe surgical site 
infection following certain orthopedic procedures as an HAC:

     Surgical Site Infection Following Certain Orthopedic Procedures
------------------------------------------------------------------------
          ICD-9-CM code                       Code descriptor
------------------------------------------------------------------------
996.67...........................  Infection and inflammatory reaction
                                    due to other orthopedic device and
                                    implant graft.
                                                   --OR--
998.59...........................  Other postoperative infection.
                                                  --AND--
81.01............................  Atlas-axis fusion.
81.02............................  Other cervical fusion anterior.
81.03............................  Other cervical fusion posterior.
81.04............................  Dorsal/dorsolum fusion anterior.

[[Page 48478]]

 
81.05............................  Dorsal/dorsolum fusion posterior.
81.06............................  Lumbar/lumbosac fusion anterior.
81.07............................  Lumbar/lumbosac fusion lateral.
81.08............................  Lumbar/lumbosac fusion posterior.
81.23............................  Arthrodesis of shoulder.
81.24............................  Arthrodesis of elbow.
81.31............................  Refusion of atlas-axis.
81.32............................  Refusion of other cervical spine
                                    anterior.
81.33............................  Refusion of other cervical spine
                                    posterior.
81.34............................  Refusion of dorsal spine anterior.
81.35............................  Refusion of dorsal spine posterior.
81.36............................  Refusion of lumbar spine anterior.
81.37............................  Refusion of lumbar spine lateral.
81.38............................  Refusion of lumbar spine posterior.
81.83............................  Shoulder arthroplast NEC.
81.85............................  Elbow arthroplast NEC.
------------------------------------------------------------------------

    We proposed surgical site infections following ligation and 
stripping of varicose veins as an HAC, but we are not finalizing this 
procedure because these MS-DRGs do not currently split into severity 
levels based on the presence of a CC, and the surgical site infection 
code is a CC. Thus, surgical site infection following ligation and 
stripping of varicose veins does not currently meet the second 
statutory HAC selection criterion of triggering the higher-paying MS-
DRG.
    We solicited comments on each of the statutory criteria as they 
apply to surgical site infections following laparoscopic bypass and 
gastroenterostomy. Laparoscopic gastroenterostomy (44.38) includes 
several different types of gastric bypass procedures, all of which are 
done using a laparoscope to avoid surgically opening the abdomen 
(laparotomy). Gastroenterostomy (44.39) is a general term that 
describes surgically connecting the stomach to another area of the 
intestine.
    Comment: Some commenters pointed out that the 208 cases cited in 
the FY 2009 IPPS proposed rule (73 FR 23553) is a relatively small 
number of cases, which may not meet the statutory criterion of high 
cost, high volume, or both.
    Response: As noted in the FY 2009 IPPS proposed rule, the average 
cost of a case with a surgical site infection following laparoscopic 
gastric bypass and gastroenterostomy is $180,142 per hospital stay, 
which we consider high cost. Thus, this condition meets the high cost 
statutory criterion.
    Comment: Many stakeholders from provider organizations, including 
medical specialty societies, cited that the population undergoing 
bariatric surgery for obesity is a high risk population per se; thus, 
the condition may not be considered reasonably preventable through the 
application of evidence-based guidelines. Commenters noted that these 
patients commonly have conditions, such as diabetes and hypertension, 
in addition to obesity, which are well-known risk factors for 
infections and other post-operative complications.
    Response: We recognize that patients undergoing this procedure may 
typically be high risk; however, (1) selecting this procedure as an HAC 
will have the positive effect of encouraging attention to risk 
assessment prior to surgery and (2) conditions such as complicated 
forms of diabetes, hypertensive heart and kidney disease, and a body 
mass index of 40 or higher are CCs or MCCs under the IPPS payment 
system that, when present on the claim, will continue to trigger the 
higher-paying MS-DRG. Thus, the usual presence of additional CC/MCCs on 
claims for these procedures serves as an ``inherent risk adjuster'' to 
payment for typical bariatric surgery cases for obese patients. We 
further note that the statute does not require that a condition be 
``always preventable'' in order to qualify as an HAC, but rather that 
it be ``reasonably preventable,'' which necessarily implies something 
less than 100 percent.
    Comment: One commenter noted that gastroenterostomy is routinely 
used to bypass a damaged or obstructed duodenum in high risk 
populations such as cancer patients.
    Response: In 2007, CMS issued Change Request (CR) 5477 regarding 
the proper use of ICD-9-CM codes for bariatric surgery for morbid 
obesity, available on the Web site at: http://www.cms.hhs.gov/Transmittals/downloads/R1233CP.pdf. This CR addresses the comment above 
by focusing on only those procedures with a primary diagnosis of 
obesity (278.01). Further, as referenced in CR 5477, bariatric surgery 
for obesity contains the following procedures: (1) Laparoscopic gastric 
bypass (44.38), (2) gastroenterostomy (44.39), and (3) laparoscopic 
gastric restrictive procedure (44.95). Laparoscopic gastric restrictive 
procedure (44.95) refers to the laparoscopic placement of a restrictive 
band around the stomach to reduce the effective size. By adopting the 
coding scheme laid out in CR 5477, we are finalizing not only 44.38 and 
44.39, but also 44.95, as procedures within the HAC category of 
surgical site infections following bariatric surgery for obesity. The 
addition of Laparoscopic gastric restrictive procedure (44.95) more 
completely and accurately captures the range of surgical site infection 
following bariatric surgery for obesity as an HAC.
    The following chart includes the codes that describe surgical site 
infection following bariatric surgery for obesity as an HAC:

     Surgical Site Infection Following Bariatric Surgery for Obesity
------------------------------------------------------------------------
          ICD-9-CM code                       Code descriptor
------------------------------------------------------------------------
278.01*..........................  Morbid obesity.
                                                  --AND--
998.59...........................  Other postoperative infection.
                                                  --AND--
44.38............................  Laparoscopic gastroenterostomy.
                                                   --OR--
44.39............................  Other gastroenterostomy.
                                                   --OR--
44.95............................  Laparoscopic gastric restrictive
                                    procedure.
------------------------------------------------------------------------
*As principal diagnosis.

    In the FY 2009 IPPS proposed rule, we requested, and received, 
public comment on additional surgical procedures that would meet the 
statutory criteria for a surgical site infection HAC.
    Comment: A commenter recommended that CMS add surgical site 
infection following implantation of cardiac devices as an HAC. The 
commenter noted a recent estimate of approximately 300,000 pacemaker 
implants performed in 2007.\11\ In addition, the commenter referenced 
that the estimated rate of infection following cardiac device 
implantation is 4 percent and that the cost to treat each pacemaker 
infection is approximately $25,000.\12\ Further, the commenter cited 
evidence-based guidelines for preventing these infections.\13\ \14\ 
\15\
---------------------------------------------------------------------------

    \11\ Morgan, J.P.: Cardiac Rhythm Management, Market Model, 
August 31, 2007.
    \12\ Darouiche, R.O.: Treatment of Infections Associated with 
Surgical Implants, New England Journal of Medicine, 350:1422-9 
(2004).
    \13\ Bratzler, D. et al.: Antimicrobial Prophylaxis for Surgery: 
An Advisory Statement from the National Surgical Infection 
Prevention Project, American Journal of Surgery, 189:395-404 (2005).
    \14\ Da Costa, A et al.: Antibiotic Prophylaxis for Permanent 
Pacemaker Implantation: A Meta-Analysis, Circulation; 97:1796-1801 
(1998).
    \15\ Klug, D. et al.: Risk Factors Related to Infection of 
Implanted Pacemakers and Cardioverter-Defibrillators: Results of a 
Large Prospective Study, Circulation, 116:1349-55 (2007).

---------------------------------------------------------------------------

[[Page 48479]]

    Response: We agree with the commenter that surgical site infection 
following certain cardiac device procedures is a strong candidate HAC. 
The condition is high cost and high volume, triggers a higher-paying 
MS-DRG, and may be considered reasonably preventable through the 
application of evidence-based guidelines. We did not propose this 
specific condition in the FY 2009 IPPS proposed rule; however, we 
expect to propose surgical site infection following certain cardiac 
device procedures, as well as surgical site infections following other 
types of device procedures, as future candidate HACs.
    We are selecting surgical site infections following certain 
orthopedic procedures, and bariatric surgery for obesity. These 
procedures will join mediastinitis following coronary artery bypass 
graft (CABG), which was selected in the FY 2008 IPPS final rule with 
comment period, as surgical site infection HACs. We look forward to 
working with stakeholders to identify additional procedures, such as 
device procedures, in which surgical site infections can be considered 
reasonably preventable through the application of evidence-based 
guidelines.

[[Page 48480]]

[GRAPHIC] [TIFF OMITTED] TR19AU08.331

c. Deep Vein Thrombosis (DVT)/Pulmonary Embolism (PE)
    In the FY 2009 IPPS proposed rule, we proposed DVT/PE as a 
candidate HAC. We solicited comments on each of the statutory criteria, 
with particular focus on the degree to which DVT can be diagnosed on 
hospital admission and can be considered reasonably preventable. DVT 
occurs when a blood clot forms in the deep veins of an extremity, 
usually the leg, and causes pain, swelling, and inflammation. PE occurs 
when a clot or piece of a clot migrates from its original site to the 
lungs, causing the death of lung tissue, which can be fatal.

[[Page 48481]]

    Comment: The majority of commenters emphasized the inability to 
determine whether DVT was present on admission. The commenters were 
concerned about the lack of a standard clinical definition and 
diagnostic criteria, as well as difficulty in identifying at-risk 
patients. One commenter suggested that nearly half of all DVT/PEs are 
asymptomatic on admission. One commenter explained that obtaining the 
most accurate results would require expensive diagnostic testing of all 
patients, implying that this strategy would not be cost-effective and 
would, therefore, be unreasonable.
    Response: The commenters' concerns about the ability to diagnose 
DVT do not preclude DVT/PE from being selected as an HAC, as the 
attending physician determines whether the condition was present on 
admission (``Y'' POA reporting option) or whether presence on admission 
cannot be determined based on clinical judgment (``W'' POA reporting 
option). Hospitals will continue to be paid the higher MS-DRG amount 
for HACs coded as ``Y'' or ``W'' (we refer readers to section II.F.8. 
of this preamble).
    Comment: Regarding the preventability of DVT/PE, one commenter 
cited reduction of DVT/PE occurrence through mentoring and onsite 
consultation as a particularly effective intervention strategy.
    Response: We agree that the occurrence of DVT/PE can be 
significantly reduced through the use of intervention strategies, 
including mentoring and onsite consultation.
    Comment: A large proportion of commenters underscored the 
importance of considering risk factors in weighing the degree of 
preventability. Commenters noted that common risk factors, some of 
which cannot be modified, include clotting disorders, obesity, 
hypercoagulable state, cancer, HIV, or rheumatoid arthritis.
    Response: We agree with commenters that the risk factors of a 
typical patient are important to consider when weighing the degree of 
preventability as it applies to DVT/PE (discussion of risk adjustment 
in section II.F.9. of this preamble). Selecting DVT/PE for these 
procedures as an HAC will have the positive effect of encouraging 
attention to risk assessment prior to surgery. Further, conditions such 
as clotting disorders, obesity, hypercoagulable state, cancer, HIV, and 
rheumatoid arthritis are CCs or MCCs under the IPPS payment system 
that, when present on the claim, will continue to trigger the higher-
paying MS-DRG. Thus, the usual presence of additional CC/MCCs on claims 
for these procedures serves as an ``inherent risk adjuster'' to payment 
for total knee replacement and hip replacement cases.
    Comment: Although no commenters submitted quantitative data to 
establish a rate of preventability, many commenters noted that 
adherence to evidence-based pharmacologic and nonpharmacologic 
interventions will not prevent all DVTs. One commenter suggested that 
DVT/PE should only be considered for the HAC payment provision when a 
patient did not receive proper prophylaxis.
    Response: The fact that prophylaxis will not prevent every 
occurrence of DVT/PE does not preclude its selection as a reasonably 
preventable HAC. Further, as discussed in section IV.B. of this 
preamble, the Reporting Hospital Quality Data for the Annual Payment 
Update program includes a process of care measure regarding venous 
thromboembolism (VTE) prophylaxis within 24 hours prior to or after 
surgery. An analysis of publicly available data on Hospital Compare 
indicates that the national rate for the VTE prophylaxis measure for 
the third quarter of 2007 is approximately 82 percent.\16\ We have 
concluded from these data that a significant number of patients are not 
receiving the recommended evidence-based prophylaxis. We further note 
that the statute does not require that a condition be ``always 
preventable'' in order to qualify as an HAC, but rather that it be 
``reasonably preventable,'' which necessarily implies something less 
than 100 percent.
---------------------------------------------------------------------------

    \16\ Hospital Compare available at the Web site: http://www.hospitalcompare.hhs.gov. Reviewed July 8, 2008.
---------------------------------------------------------------------------

    Comment: Commenters also noted that, in some cases, anticoagulation 
prophylaxis may be contraindicated based on individual patient factors, 
including an increased risk of bleeding in postoperative patients.
    Response: We agree with commenters that, in some cases, 
anticoagulation prophylaxis may be contraindicated. However, we do not 
view this as precluding the selection of DVT/PE as an HAC, as evidence-
based interventions beyond pharmacologic prophylaxis, such as 
mechanical prophylaxis and early movement, should also be applied.
    Comment: Some commenters supported DVT/PE as reasonably preventable 
through the application of evidence-based guidelines for certain 
subpopulations, specifically following certain orthopedic procedures.
    Response: We agree with commenters that DVT/PE is reasonably 
preventable in specific subpopulations, and we are therefore selecting 
DVT/PE following certain orthopedic surgeries, specifically certain hip 
and knee replacement surgeries, as HACs. Total knee replacement is a 
surgery performed to replace the entire knee joint with an artificial 
internal prosthesis because the native knee joint is no longer able to 
function, because it is very painful, or both, usually due to advanced 
osteoarthritis, and total hip replacement is the analogous operation 
involving the hip joint. Our decision may be construed as only applying 
to the MCC PE, rather than DVT/PE, following certain hip and knee 
replacement surgeries as HACs because of coding considerations. The MS-
DRGs that these procedures typically map to do not currently split 
based on CCs, and DVT is a CC.
    The following chart includes the codes that describe DVT/PE 
following certain orthopedic surgeries as an HAC:

----------------------------------------------------------------------------------------------------------------
                                          Medicare data  (FY       CC/MCC  (ICD-9-CM     Selected evidence-based
             Selected HAC                       2007)                    codes)                 guidelines
----------------------------------------------------------------------------------------------------------------
Deep Vein Thrombosis (DVT)/Pulmonary    4,250 cases...  DVT: 453.40-453.42 (CC)  Available on the Web
 Embolism (PE)                          $58,625/         OR                       site: http://
--Total Knee Replacement.............   hospital stay..         PE: 415.11 (MCC) or       www.chestjournal.org/
--Hip Replacement....................                            415.19 (MCC) AND.        cgi/reprint/126/3--
                                                                Total Knee Replacement:   suppl/172S.
                                                                 (81.54) OR.             Available on the Web
                                                                Hip Replacement: (00.85-  site: http://
                                                                 00.87, 81.51-81.52).     orthoinfo.aaos.org/
                                                                                          topic.cfm?topic=A00219
                                                                                          .
----------------------------------------------------------------------------------------------------------------


[[Page 48482]]


           Deep Vein Thrombosis (DVT)/Pulmonary Embolism (PE)
------------------------------------------------------------------------
          ICD-9-CM codes                      Code descriptors
------------------------------------------------------------------------
00.85............................  Resurfacing hip, total, acetabulum
                                    and femoral head.
00.86............................  Resurfacing hip, partial, femoral
                                    head.
00.87............................  Resurfacing hip, partial, acetabulum.
81.51............................  Total hip replacement.
81.52............................  Partial hip replacement.
81.54............................  Total knee replacement.
415.11...........................  Iatrogenic pulmonary embolism and
                                    infarction.
415.19...........................  Other pulmonary embolism and
                                    infarction--other.
453.40...........................  Venous embolism and thrombosis of
                                    unspecified deep vessels of lower
                                    extremity.
453.41...........................  Venous embolism and thrombosis of
                                    deep vessels of proximal lower
                                    extremity.
453.42...........................  Venous embolism and thrombosis of
                                    deep vessels of distal lower
                                    extremity.
------------------------------------------------------------------------

d. Delirium
    Delirium is a relatively abrupt deterioration in a patient's 
ability to sustain attention, learn, or reason. Delirium is strongly 
associated with aging and treatment of illnesses that are associated 
with hospitalizations. Delirium affects nearly half of hospital patient 
days for individuals age 65 and older, and approximately three-quarters 
of elderly individuals in intensive care units have delirium. About 14 
to 24 percent of hospitalized elderly individuals have delirium at the 
time of admission. Having delirium is a very serious risk factor, with 
1-year mortality of 35 to 40 percent, a rate as high as those 
associated with heart attacks and sepsis. The adverse effects of 
delirium routinely last for months. Delirium is a clinical diagnosis, 
commonly assisted by screening tests such as the Confusion Assessment 
Method. The clinician must establish that the onset has been abrupt and 
that the deficits affect the ability to maintain attention, maintain 
orderly thinking, and learn from new information. Delirium is 
substantially under-recognized and is regularly conflated with 
dementia. Because of the high rate of mortality and incidence noted 
above, we proposed delirium as a candidate HAC, and provided the 
following information for consideration:

----------------------------------------------------------------------------------------------------------------
                                          Medicare data  (FY                             Selected evidence-based
            HAC candidate                       2007)           CC/MCC  (ICD-9-CM code)         guidelines
----------------------------------------------------------------------------------------------------------------
Delirium.............................   480 cases.....  293.1 (CC).............  Available on the Web
                                        $23,290/                                  site: http://
                                        hospital stay..                                   www.ahrq.gov/clinic/
                                                                                          ptsafety/chap28.htm.
----------------------------------------------------------------------------------------------------------------

    We solicited comments on each of the statutory criteria, with 
particular focus on the degree to which delirium can be considered 
reasonably preventable through the application of evidence-based 
guidelines.
    Comment: Most commenters strongly opposed placing delirium on the 
HAC list. Citing a study mentioned in the FY 2009 IPPS proposed rule 
(73 FR 23555), commenters emphasized that the ability to prevent only 
30 to 40 percent of all delirium cases through the application of 
evidence-based guidelines does not, in their opinion, meet that 
statutory criterion. Many commenters stated that evidence-based 
guidelines, such as reducing certain medications, reorienting patients, 
assuring sleep and sensory input, and improving patient nutrition and 
hydration, were more appropriately used as process rather than outcome 
measures.
    A number of commenters stated that it is difficult to define and 
diagnose a condition that varies in degree, such as delirium. They 
stated that symptoms of delirium may be intermittent. In addition, the 
commenters indicated that it may be difficult to differentiate between 
delirium and intensive care unit psychosis resulting from pre-admission 
hypoxia. Many commenters noted that delirium may be caused by many 
factors unrelated to clinical treatment. For example, commenters stated 
that delirium is a common symptom in Alzheimer's patients, who are 
likely to become disoriented in unfamiliar hospital surroundings. One 
commenter also noted that the diagnosis is difficult to make if a 
patient is intoxicated.
    In addition to those commenters who expressed blanket support for 
selecting all candidate HACs, a few commenters explicitly supported 
inclusion of delirium as an HAC. One commenter suggested that delirium 
resulting from medication error could be reasonably prevented by 
implementation of computerized physician order entry systems. Another 
commenter suggested that prevention based on the six factors in the 
Confusion Assessment Model would improve intake assessment and health 
care quality.
    Response: After consideration of the public comments received, we 
have decided not to select delirium as an HAC in this final rule. We 
will continue to monitor the evidence-based guidelines surrounding 
prevention of delirium. If evidence warrants, we may consider proposing 
delirium as an HAC in the future. Although we are not selecting 
delirium as an HAC, we would like to recognize two additional ICD-9-CM 
codes 292.81 (CC) and 293.0 (CC) that the commenters suggested to 
identify delirium and note that their input will be taken into account 
in any future reconsideration.

                                Delirium
------------------------------------------------------------------------
          ICD-9-CM codes                      Code descriptors
------------------------------------------------------------------------
292.81...........................  Drug-induced delirium.
293.0............................  Delirium due to conditions classified
                                    elsewhere.
293.1............................  Subacute delirium.
------------------------------------------------------------------------

e. Ventilator-Associated Pneumonia (VAP)
    VAP is a serious hospital-acquired infection associated with high 
mortality, significantly increased length of stay, and high cost. It is 
typically caused by the aspiration of contaminated gastric or 
oropharyngeal secretions. The presence of an endotracheal tube 
facilitates both the contamination of secretions and aspiration. We 
presented the following information in the FY 2009 IPPS proposed rule 
for consideration:

[[Page 48483]]



----------------------------------------------------------------------------------------------------------------
                                          Medicare data  (FY                             Selected evidence-based
            HAC candidate                       2007)           CC/MCC  (ICD-9-CM code)         guidelines
----------------------------------------------------------------------------------------------------------------
Ventilator-Associated Pneumonia (VAP)   30,867 cases..  997.31 (CC)............  Available on the Web
                                        $135,795/                                 site: http://
                                        hospital stay..                                   www.rcjournal.com/cpgs/
                                                                                          09.03.0869.html.
----------------------------------------------------------------------------------------------------------------


                     Ventilator-Associated Pneumonia
------------------------------------------------------------------------
          ICD-9-CM code                       Code descriptor
------------------------------------------------------------------------
997.31...........................  Ventilator-associated pneumonia.
------------------------------------------------------------------------

    The CDC recently updated the ICD-9-CM coding guidelines for proper 
use of code 997.31, which goes into effect on October 1, 2008. The ICD-
9-CM Official Coding Guidelines are available at: http://www.cdc.gov/nchs/datawh/ftpserv/ftpICD9/ftpICD9.htm.
    We solicited comments on each of the statutory criteria, with 
particular focus on the degree to which evidence-based guidelines can 
reasonably prevent VAP.
    Comment: The majority of commenters addressed whether or not VAP 
could be considered reasonably preventable through the application of 
evidence-based guidelines. Citing literature mentioned in the IPPS FY 
2009 proposed rule, commenters noted that VAP is only preventable 40 
percent of the time, which, in their opinion, does not meet the 
statutory requirement for reasonably preventable through the 
application of evidence-based guidelines. (The proposed rule referenced 
the American Association of Respiratory Care (AARC) Evidence-Based 
Clinical Practice Guidelines as one example of an existing evidence-
based standard designed to prevent VAP.) A few commenters questioned 
the narrow focus of the AARC's guidelines.
    In addition to problems related to its preventability, many 
commenters also argued that VAP may be difficult to diagnose based on 
shortfalls associated with clinical definitions and diagnostic tests. 
The commenters stated that clinical cultures are not predictive for 
pneumonia, radiographic evidence of pneumonia is difficult to 
standardize, and vaccines do not protect against infection during the 
current hospital stay. The commenters pointed out that no standard 
definition of VAP exists--the definition is constructed of nonspecific 
clinical signs common to many complications; thus, because of its 
imprecise definition, selection of VAP as an HAC could be especially 
susceptible to unintended consequences. One commenter stated that the 
flexibility inherent to VAP's imprecise definitions coupled with threat 
of nonpayment created a ``perverse incentive'' to diagnose VAP as 
another condition. Commenters noted that patient risk factors may also 
impact the risk of developing VAP. For example, burn patients are 
especially susceptible to infections.
    While some commenters indicated that VAP is a serious condition and 
could be a good candidate HAC in the future, the many commenters argued 
that current evidence and technology are not well-enough developed at 
this time to meet the statutory requirement of reasonably preventable 
through the application of evidence-based guidelines. One commenter 
pointed out that the Institute for Healthcare Improvement and the Joint 
Commission are currently evaluating alternative standards for VAP 
prevention.
    Response: In light of the public comments that we received, we are 
not selecting VAP as an HAC. We will work in partnership with the CDC 
and closely monitor the evolving literature addressing the prevention 
of VAP through the application of evidence-based guidelines. If 
evidence warrants, we may consider proposing VAP as an HAC in the 
future.
f. Staphylococcus aureus Septicemia
    Staphylococcus aureus is a bacterium that lives on multiple 
anatomic sites in most people. It usually does not cause physical 
illness, but it can cause a variety of infections ranging from 
superficial boils to cellulitis to pneumonia to life-threatening 
bloodstream infections (septicemia). It typically becomes pathogenic by 
infecting normally sterile tissue through traumatized tissue, such as 
cuts or abrasions, or at the time of invasive procedures and can be 
both an early and/or late complication of trauma or surgery. 
Staphylococcus aureus septicemia can also be a late effect of an injury 
or a surgical procedure. Risk factors for developing Staphylococcus 
aureus septicemia include advanced age, debilitated state, 
immunocompromised status, and history of an invasive medical procedure.
    In the IPPS FY 2009 proposed rule, we presented the following 
information for consideration:

----------------------------------------------------------------------------------------------------------------
                                          Medicare data  (FY                             Selected evidence-based
            HAC candidate                       2007)           CC/MCC (ICD-9-CM codes)         guidelines
----------------------------------------------------------------------------------------------------------------
Staphylococcus aureus Septicemia.....   27,737 cases..  038.11(MCC) or 038.12    Available on the Web
                                        $84,976/         (MCC).                   site: http://
                                        hospital stay..                                   www.cdc.gov/ncidod/
                                                                                          dhqp/gl_
                                                                                          isolation.html.
                                                                Also excludes the        Available on the Web
                                                                 following from acting    site: http://
                                                                 as CC/MCC: 995.91        www.cdc.gov/ncidod/
                                                                 (MCC) 995.92 (MCC)       dhqp/gl--
                                                                 998.59 (CC).             intravascular.html
                                                                                          (Intravascular
                                                                                          catheter-associated
                                                                                          Staphylococcus aureus
                                                                                          Septicemia only).
----------------------------------------------------------------------------------------------------------------


                    Staphylococcus aureus Septicemia
------------------------------------------------------------------------
          ICD-9-CM codes                      Code descriptors
------------------------------------------------------------------------
038.11...........................  Staphylococcus aureus septicemia.
038.12...........................  Methicillin-resistant Staphylococcus
                                    aureus septicemia.
995.91...........................  Sepsis.
995.92...........................  Severe sepsis.
998.59...........................  Other postoperative infection.
------------------------------------------------------------------------

    We solicited comments on each of the statutory criteria, with 
particular focus on the degree to which this condition can be 
considered reasonably preventable through the application of evidence-
based guidelines.
    Comment: Many commenters described difficulty in determining 
whether an infection was present upon admission, as the development of

[[Page 48484]]

infection while in a hospital may not necessarily indicate that the 
infection was hospital-acquired. The commenters suggested that 
Staphylococcus aureus septicemia may also result from permanent 
tunneled and nontunneled catheters used in cancer patients or through 
dialysis shunts. The commenters asserted that the risk of infection may 
be higher for different subpopulations of patients.
    A large number of commenters suggested that the CDC's guidelines 
specific to vascular catheter-associated infections do not extend to 
Staphylococcus aureus septicemia generally. However, because the 
majority of Staphylococcus aureus septicemia events are related to 
catheters and skin lesions, commenters also argued that the previously 
selected HAC, vascular catheter-associated infections, will already 
capture the vast majority of preventable Staphylococcus aureus 
septicemia events. According to the commenters, adopting Staphylococcus 
aureus septicemia as an additional condition would yield little quality 
improvement but could cause expensive and unnecessary treatments for 
both hospitals and patients.
    Response: In light of these public comments, we are not selecting 
Staphylococcus aureus septicemia as an HAC in this final rule. If 
evidence warrants, we may consider proposing Staphylococcus aureus 
septicemia as an HAC in the future. We note that several commenters 
recognized that Staphylococcus aureus septicemia cases are being 
addressed through the vascular catheter-associated infection HAC that 
was selected in the FY 2008 IPPS final rule with comment period.
g. Clostridium difficile-Associated Disease (CDAD)
    Clostridium difficile is a bacterium that colonizes the 
gastrointestinal (GI) tract of a certain number of healthy people as 
well as being present on numerous environmental surfaces. Under 
conditions where the normal flora of the gastrointestinal tract is 
altered, Clostridium difficile can flourish and release large enough 
amounts of a toxin to cause severe diarrhea or even life-threatening 
colitis. Risk factors for CDAD include the prolonged use of broad 
spectrum antibiotics, gastrointestinal surgery, prolonged nasogastric 
tube insertion, and repeated enemas. CDAD can be acquired in the 
hospital or in the community. Its spores can live outside of the body 
for months and thus can be spread to other patients in the absence of 
meticulous hand washing by care providers and others who contact the 
infected patient.
    In the IPPS FY 2009 proposed rule, we presented the following 
information for consideration:

----------------------------------------------------------------------------------------------------------------
                                          Medicare data  (FY                             Selected evidence-based
            HAC candidate                       2007)            CC/MCC (ICD-9-CM code)         guidelines
----------------------------------------------------------------------------------------------------------------
Clostridium difficile-Associated        96,336 cases..  008.45 (CC)............  Available on the Web
 Disease (CDAD).                        $59,153/                                  site: http://
                                        hospital stay..                                   www.cdc.gov/ncidod/
                                                                                          dhqp/gl_
                                                                                          isolation.html.
                                                                                         Available on the Web
                                                                                          site: http://www.cdc.gov/ncidod/dhqp/id_CdiffFAQ_HCP.html#9.
----------------------------------------------------------------------------------------------------------------


                Clostridium difficile-Associated Disease
------------------------------------------------------------------------
          ICD-9-CM code                       Code descriptor
------------------------------------------------------------------------
008.45...........................  Clostridium difficile.
------------------------------------------------------------------------

    We solicited comments on each of the statutory criteria, with 
particular focus on the degree to which CDAD can be reasonably 
prevented through the application of evidence-based guidelines.
    Comment: The majority of commenters addressed preventability and 
the inability to distinguish between community-acquired and hospital-
acquired infections without culturing each patient to determine strain 
or type of infection. The commenters emphasized that CDAD is a known 
adverse side effect of appropriate broad spectrum antibiotic use. One 
commenter suggested establishing a unique ICD-9-CM code to identify 
cases of CDAD that occur other than as a side effect of broad spectrum 
treatment to distinguish situations of patient-to-patient transmission 
of Clostridium difficile that are more likely to be considered 
reasonably preventable. Commenters further asserted that the 
appropriate use of proton pump inhibitors and H2 blockers is also 
associated with CDAD infections and outbreaks. Many commenters stated 
that no specific evidence-based prevention guidelines are currently 
available, rather the CDC guidelines apply to patient-to-patient 
transmissions generally and do not apply to CDAD specifically. Many 
commenters addressed the difficulty of distinguishing between 
community-acquired and hospital-acquired infection as a barrier to 
adopting CDAD as an HAC.
    Response: In light of these public comments, we are not selecting 
CDAD as an HAC in this final rule. However, we continue to receive 
strong support from consumers and purchasers to include CDAD as an HAC, 
and we will continue to consult with the CDC regarding the evidence-
based prevention guidelines and coding for CDAD. If evidence warrants, 
we may consider proposing CDAD as an HAC in the future.
h. Legionnaires' Disease
    Legionnaires' Disease is a type of pneumonia caused by the 
bacterium Legionella pneumophila. It is contracted by inhaling 
contaminated water vapor or droplets. It is not spread person-to-
person. The bacterium thrives in warm aquatic environments and 
infections have been linked to large industrial water systems, 
including hospital water systems such as air conditioning cooling 
towers and potable water plumbing systems.
    In the FY 2009 IPPS proposed rule, we presented the following 
information for consideration:

----------------------------------------------------------------------------------------------------------------
                                                                                         Selected evidence-based
            HAC candidate              Medicare data (FY 2007)   CC/MCC (ICD-9-CM code)         guidelines
----------------------------------------------------------------------------------------------------------------
Legionnaires' Disease................   351 cases.....   482.84 (MCC)..........  Available at the Web
                                        $86,014/                                  site: http://
                                        hospital stay.                                    www.cdc.gov/ncidod/
                                                                                          dbmd/diseaseinfo/
                                                                                          legionellosis_g.htm.

[[Page 48485]]

 
                                                                                         Available at the Web
                                                                                          site: http://www.legionella.org/.
----------------------------------------------------------------------------------------------------------------


                          Legionnaires' Disease
------------------------------------------------------------------------
          ICD-9-CM code                       Code descriptor
------------------------------------------------------------------------
482.84...........................  Legionnaires' disease.
------------------------------------------------------------------------

    We requested public comment regarding the applicability of each of 
the statutory criteria to Legionnaires' Disease, particularly 
addressing the degree of preventability of this condition through the 
application of evidence-based guidelines and the degree to which 
hospital-acquired Legionnaires' Disease can be distinguished from 
community-acquired cases. We also sought comments on additional water-
borne pathogens that would qualify for the HAC provision by meeting the 
statutory criteria.
    Comment: Many commenters noted that Legionnaries' Disease is not a 
high volume condition and questioned whether it should be prioritized 
as an HAC. In addition, the commenters emphasized that CDC's 
Environmental Infection Control Guidelines recognize that the mere 
presence of the bacterium Legionella in the water supply is not 
necessarily associated with Legionnaires' Disease, and that without 
evidence of a dose-response relationship, surveillance and treatment is 
not recommended. The commenters stated that even when decontamination 
efforts are pursued, there is no guarantee that treatment will ensure 
Legionella can be completely eradicated from hospital water intakes 
without damaging infrastructures. In addition, many commenters 
expressed concern regarding the unintended consequence of increasing 
the use of costly sterile water in hospitals.
    When addressing the degree to which hospital-acquired Legionnaires' 
Disease can be distinguished from community-acquired cases, the 
commenters noted that the epidemiologic strain causing the disease is 
widespread in the community.
    Response: In light of these public comments, we are not selecting 
Legionnaires' Disease as an HAC in this final rule. Although we are not 
selecting Legionnaires' Disease as an HAC in this final rule, we will 
continue to consult with the CDC about the evidence-based prevention 
guidelines. If evidence warrants, we may consider Legionnaires' Disease 
and other water-borne pathogens suggested by commenters and noted in 
section II.F.9. of this preamble (Enhancement and Future Issues) as 
HACs in the future.
i. Iatrogenic Pneumothorax
    Iatrogenic pneumothorax refers to the accidental introduction of 
air into the pleural space, which is the space between the lung and the 
chest wall, by medical treatment or procedure. When air is introduced 
into this space, it partially or completely collapses the lung. 
Iatrogenic pneumothorax can occur during any procedure where there is 
the possibility of air entering the pleural space, including needle 
biopsy of the lung, thoracentesis, central venous catheter placement, 
pleural biopsy, tracheostomy, and liver biopsy. Iatrogenic pneumothorax 
can also occur secondary to positive pressure mechanical ventilation 
when an air sac in the lung ruptures, allowing air into the pleural 
space. In the FY 2009 IPPS proposed rule, we presented the following 
information for consideration:

----------------------------------------------------------------------------------------------------------------
                                          Medicare data  (FY                             Selected evidence-based
            HAC candidate                       2007)           CC/MCC  (ICD-9-CM code)         guidelines
----------------------------------------------------------------------------------------------------------------
Iatrogenic Pneumothorax..............   22,665 cases..   512.1 (CC)............  Available at the Web
                                        $75,089/                                  site: http://
                                        hospital stay..                                   www.ncbi.nlm.nih.gov/
                                                                                          pubmed/1485006.
----------------------------------------------------------------------------------------------------------------


                         Iatrogenic Pneumothorax
------------------------------------------------------------------------
          ICD-9-CM code                       Code descriptor
------------------------------------------------------------------------
512.1............................  Iatrogenic pneumothorax.
------------------------------------------------------------------------

    We solicited public comment on the applicability of each of the 
statutory criteria to this condition. We were particularly interested 
in receiving comments on the degree to which iatrogenic pneumothorax 
could be considered reasonably preventable through the application of 
evidence-based guidelines.
    Comment: Most commenters opposed the selection of iatrogenic 
pneumothorax as an HAC. They indicated that the evidence-based 
guidelines often acknowledge that iatrogenic pneumothorax is a known, 
relatively common risk for certain procedures. Further, with regard to 
evidence-based guidelines, many commenters opposed designation of this 
condition as an HAC due to a lack of consensus within the medical 
community regarding its preventability.\17\ Some commenters offered 
suggestions to exclude certain procedures or situations, including 
central line placement, thoracotomy, and use of a ventilator, if 
iatrogenic pneumothorax were to be selected as an HAC.
---------------------------------------------------------------------------

    \17\ Accidental Iatrogenic Pneumothorax in Hospitalized 
Patients. Zhan et al., Medical Care 44(2):182-6, 2006 Feb.
---------------------------------------------------------------------------

    Response: In light of these public comments, we are not selecting 
iatrogenic pneumothorax as an HAC in this final rule. Although we are 
not selecting iatrogenic pneumothorax as an HAC in this final rule, we 
do recognize this as an adverse event that occurs frequently. We will 
continue to review the development of evidence-based guidelines for the 
prevention of iatrogenic pneumothorax. If evidence warrants, we may 
consider iatrogenic pneumothorax as an HAC in the future.
j. Methicillin-Resistant Staphylococcus aureus (MRSA)
    In October 2007, the CDC published in the Journal of the American 
Medical Association an article citing high mortality rates from MRSA, 
an antibiotic-resistant ``superbug.'' The article estimates 19,000 
people died from MRSA infections in the United States in 2005. The 
majority of invasive MRSA cases are health care-related--contracted in 
hospitals or nursing homes--though community-acquired MRSA also poses a 
significant public health concern. Hospitals have been focused for 
years on controlling MRSA through the application of CDC's evidence-
based guidelines outlining best practices for combating the bacterium 
in that setting. In the proposed FY 2009 IPPS rule, we

[[Page 48486]]

presented the following information for consideration:

----------------------------------------------------------------------------------------------------------------
                                                                                        Selected evidence-based
             Condition               Medicare data (FY 2007)  CC/MCC (ICD-9-CM code)          guidelines
----------------------------------------------------------------------------------------------------------------
Methicillin-resistant                 88,374 (V09.0)  No CC/MCC.............  Available at the Web site:
 Staphylococcus aureus (MRSA) (Code   cases.                                           http://www.cdc.gov/ncidod/
 V09.0 includes infections with       $32,049/                                 dhqp/gl--isolation.html.
 microorganisms resistant to          hospital stay..
 penicillins).
----------------------------------------------------------------------------------------------------------------

    During its March 19-20, 2008 meeting, the ICD-9-CM Coordination and 
Maintenance Committee discussed several new codes to more accurately 
capture MRSA. The following new codes will be implemented on October 1, 
2008:

               Methicillin-Resistant Staphylococcus aureus
------------------------------------------------------------------------
          ICD-9-CM codes                      Code descriptors
------------------------------------------------------------------------
038.12............................  Methicillin-resistant Staphylococcus
                                     aureus septicemia.
041.12............................  Methicillin-resistant Staphylococcus
                                     aureus in conditions classified
                                     elsewhere and of unspecified site.
482.42............................  Methicillin-resistant Pneumonia due
                                     to Staphylococcus aureus.
V02.53............................  Carrier or suspected carrier of
                                     Methicillin-susceptible
                                     Staphylococcal aureus.
V02.54............................  Carrier or suspected carrier of
                                     Methicillin-resistant
                                     Staphylococcal aureus.
V12.04............................  Personal history of Methicillin-
                                     resistant Staphylococcal aureus.
------------------------------------------------------------------------

    Though we did not propose MRSA as a candidate HAC in the FY 2009 
IPPS proposed rule, MRSA can trigger the HAC payment provision. For 
every infectious condition selected as an HAC, MRSA could be the 
etiology of that infection. For example, if MRSA were the cause of a 
vascular catheter-associated infection (one of the eight conditions 
selected in the FY 2008 IPPS final rule with comment period), the HAC 
payment provision would apply to that MRSA infection. As we noted in 
the FY 2008 IPPS final rule with comment period (72 FR 47212), 
colonization by MRSA is not a reasonably preventable condition 
according to the current evidence-based guidelines. Therefore, MRSA 
does not meet the ``reasonably preventable'' statutory criterion for an 
HAC.
    Comment: The majority of commenters strongly supported the CMS 
decision not to propose MRSA as an HAC candidate.
    Response: We appreciate the support of the commenters and reiterate 
that MRSA is addressed by the HAC payment provision in situations where 
it triggers a condition that we have identified as an HAC. We also 
direct readers to a detailed discussion regarding coding of MRSA in 
section II.F.10.b. of this preamble. As we noted in the FY 2009 IPPS 
proposed rule (73 FR 23559), we are pursuing collaborative efforts with 
other HHS agencies to combat MRSA. The Agency for Healthcare Research 
and Quality (AHRQ) has launched a new initiative in collaboration with 
CDC and CMS to identify and suppress the spread of MRSA and related 
infections. In support of this work, Congress appropriated $5 million 
to fund research, implementation, management, and evaluation practices 
that mitigate such infections.
    CDC has carried out extensive research on the epidemiology of MRSA 
and effective techniques that could be used to treat the infection and 
reduce its spread. The following Web sites contain information that 
reflect CDC's commitment: (1) http://www.cdc.gov/ncidod/dhqp/ar_mrsa.html (health care-associated MRSA); (2) http://www.cdc.gov/ncidod/dhqp/ar_mrsa_ca_public.html (community-acquired MRSA); (3) http://www.cdc.gov/mmwr/preview/mmwrhtml/mm4908a1.htm; and (4) http://www.cdc.gov/handhygiene/.
    AHRQ has made previous investments in systems research to help 
monitor MRSA and related infections in hospital settings, as reflected 
in material on its Web sites at: http://www.guideline.gov/browse/guideline_index.aspx and http://www.ahrq.gov/clinic/ptsafety/pdf/ptsafety.pdf.
8. Present on Admission Indicator Reporting (POA)
    Collection of present on admission (POA) indicator data is 
necessary to identify which conditions were acquired during 
hospitalization for the HAC payment provision and for broader public 
health uses of Medicare data. Through Change Request (CR) No. 5679 
(released June 20, 2007), CMS issued instructions requiring IPPS 
hospitals to submit POA indicator data for all diagnosis codes on 
Medicare claims. CMS also issued CR No. 6086 (released June 30, 2008) 
regarding instructions for processing non-IPPS claims. Specific 
instructions on how to select the correct POA indicator for each 
diagnosis code are included in the ICD-9-CM Official Guidelines for 
Coding and Reporting, available at the CDC Web site: http://www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/icdguide07.pdf (POA reporting 
guidelines begin on page 92). Additional information regarding POA 
indicator reporting and application of the POA reporting options is 
available at the CMS Web site: http://www.cms.hhs.gov/HospitalAcqCond. 
CMS has historically not provided coding advice, rather we collaborate 
with the American Hospital Association (AHA) through the Coding Clinic 
for ICD-9-CM. CMS has been collaborating with the AHA to promote the 
Coding Clinic for ICD-9-CM as the source for coding advice about the 
POA indicator.
    There are five POA indicator reporting options, as defined by the 
ICD-9-CM Official Coding Guidelines:

------------------------------------------------------------------------
          Indicator                            Descriptor
------------------------------------------------------------------------
Y............................  Indicates that the condition was present
                                on admission.

[[Page 48487]]

 
W............................  Affirms that the provider has determined
                                based on data and clinical judgment that
                                it is not possible to document when the
                                onset of the condition occurred.
N............................  Indicates that the condition was not
                                present on admission.
U............................  Indicates that the documentation is
                                insufficient to determine if the
                                condition was present at the time of
                                admission.
1............................  Signifies exemption from POA reporting.
                                CMS established this code as a
                                workaround to blank reporting on the
                                electronic 4010A1. A list of exempt ICD-
                                9-CM diagnosis codes is available in the
                                ICD-9-CM Official Coding Guidelines.
------------------------------------------------------------------------

    In the FY 2009 IPPS proposed rule for the HAC payment provision (73 
FR 23559), we proposed to pay the CC/MCC MS-DRGs only for those HACs 
coded with ``Y'' and ``W'' indicators.
    Comment: Commenters overwhelmingly supported payment for both the 
POA ``Y'' and ``W'' options.
    Response: We agree with commenters and are finalizing our proposal 
to pay for both the POA ``Y'' and ``W'' options. We plan to analyze 
whether both the ``Y'' and ``W'' indicators are being used 
appropriately. Medicare program integrity initiatives closely monitor 
for inaccurate coding and coding that is inconsistent with medical 
record documentation.
    We proposed to not pay the CC/MCC MS-DRGs for HACs coded with the 
``N'' indicator.
    Comment: Commenters were in favor of not paying for the POA ``N'' 
indicator option.
    Response: We agree with the commenters and are finalizing our 
proposal to not pay for the POA ``N'' indicator option.
    Comment: The majority of commenters opposed not paying for the POA 
``U'' indicator option. Commenters expressed that the reporting of the 
POA indicators is still new, and hospitals continue to learn how to 
apply them, as well as educate their physicians on the required 
documentation without which POA reporting is impossible.
    Response: Although we recognize that POA indicator reporting is new 
for some IPPS hospitals, we are finalizing the proposed policy of not 
paying for the ``U'' option. We believe that this approach will 
encourage better documentation and will result in more accurate public 
health data.
    We plan to analyze whether both the ``N'' and ``U'' POA reporting 
options are being used appropriately. The American Health Information 
Management Association (AHIMA) has promulgated Standards of Ethical 
Coding that require accurate coding regardless of the payment 
implications of the diagnoses. That is, diagnoses and POA indicators 
must be reported accurately on claims regardless of the fact that 
diagnoses coded with an ``N'' or ``U'' indicator may no longer trigger 
a higher paying MS-DRG. Medicare program integrity initiatives closely 
monitor for inaccurate coding and coding inconsistent with medical 
record documentation.
    Although we proposed, and are now finalizing, the policy of not 
paying the CC/MCC MS-DRGs for HACs coded with the ``U'' indicator, we 
recognize that there may be some exceptional circumstances under which 
payment might be made. Death, elopement (leaving against medical 
advice), and transfers out of a hospital may preclude making an 
informed determination of whether an HAC was present on admission. We 
sought public comments on the potential use of patient discharge status 
codes to identify exceptional circumstances.
    Comment: The majority of commenters did not address the patient 
discharge status codes as an exception for payment when the ``U'' POA 
indicator is used. The commenters who did address this issue were in 
favor of using patient discharge status codes as an exception for 
payment.
    Response: We will monitor the extent to which and under what 
circumstances the ``U'' POA indicator code is used. In the future, we 
may consider proposing use of the patient discharge status codes to 
recognize exceptions for payment.
9. Enhancement and Future Issues
    In section II.F.9. of the FY 2009 IPPS proposed rule (73 FR 23560), 
we encouraged the public to provide ideas and models for combating 
preventable HACs through the application of VBP principles. We note 
that we are not proposing Medicare policy in this discussion. However, 
we believe that collaborating with stakeholders to improve the HAC 
policy is another step toward fulfilling VBP's potential to provide 
better health care for Medicare beneficiaries.
    To stimulate reflection and creativity, we presented several 
enhancement options, including: (a) Applying risk adjustment to make 
the HAC payment provision more precise; (b) collecting HAC rates to 
obtain a more robust longitudinal measure of a hospital's incidence of 
these conditions; (c) using POA information in various ways to decrease 
the incidence of preventable HACs; (d) adopting ICD-10 to facilitate 
more precise identification of HACs; (e) applying the principle of the 
IPPS HAC payment provision to Medicare payments in other care settings; 
(f) using CMS' authority to address events on the NQF's list of Serious 
Reportable Adverse Events; and (g) additional potential candidate HACs, 
suggested through comment, for future consideration.
a. Risk-Adjustment of Payments Related to HACs
    In the FY 2009 IPPS proposed rule, we suggested that payment 
adjustments made when one of the selected HACs occurs could be made 
more precise by reflecting various sources and degrees of individual 
patient or patient population risk. For example, a patient's medical 
history, current health status (including comorbidities), and severity 
of illness can affect the expected occurrence of conditions selected as 
HACs. Rather than not paying any additional amount when a selected HAC 
occurs during a hospitalization, payment reductions could be related to 
the expected occurrence of that condition (that is, the less likely the 
complication, the greater the payment reduction).
    In general, most commenters supported the idea of risk-adjusted 
payments for HACs, noting that proportional payments could reduce the 
risk of unintended consequences, as compared to the current HAC payment 
policy, through more equitable treatment of both hospitals and 
patients. Specifically, a few commenters expressed concern that all-or-
nothing payment for HACs may disproportionately impact urban, teaching, 
and academic hospitals that treat under-served populations. Commenters 
stated that, because these populations may be at greater risk for HACs, 
risk-adjusted payments could allow all hospitals to continue treating 
high-risk populations without being penalized for treating riskier 
patients.
    Commenters proposed addressing patient risk factors on both the 
individual and population levels. The majority of commenters supported 
assessing risk at the individual patient level. Although this approach 
may offer

[[Page 48488]]

the most precise risk adjustment, current technology and resources 
limit the ability to risk adjust at this level, as we discussed in the 
FY 2009 IPPS proposed rule. Risk adjustment at the subpopulation level, 
however, could capture and correct for high patient risk related to 
specific medical conditions. For example, many commenters noted that 
burn patients in particular are at high risk for some of the selected 
HACs, including infections. Other high-risk patient populations 
mentioned by commenters included trauma, immunosuppressed, and 
palliative care patients.
    Other commenters emphasized that for certain HACs, risk adjustment 
strategies would not be appropriate. Commenters stated that payments 
for ``never events,'' such as retention of a foreign object after 
surgery, air embolism, and blood incompatibility, should never be 
adjusted for risk because such occurrences can be considered absolutely 
preventable.
b. Rate-Based Measurement of HACs
    In the FY 2009 IPPS proposed rule, we suggested that a hospital's 
rates of HACs could be included as a measurement domain within each 
hospital's total performance score under a pay-for-performance model 
like the Medicare Hospital Value-Based Purchasing Plan. (We refer 
readers to section IV.C. of this preamble for a discussion of the 
Plan.) We asserted that measurement of rates over time could be a more 
meaningful, actionable, and fair way to adjust a hospital's MS-DRG 
payments for the incidence of HACs. The consequence of a higher 
incidence of measured conditions would be a lower VBP incentive 
payment, while public reporting of the measured rates of HACs would 
give hospitals an additional, nonfinancial incentive to prevent 
occurrence of the conditions.
    The majority of commenters preferred a standardized framework for 
rate-based measurement and VBP payment implications for HACs, as 
opposed to not being paid the higher MS-DRG amount. Many commenters 
suggested determining expected rates of HACs and using those expected 
rates as benchmark targets for comparison, rewarding providers who stay 
at or below benchmark, while decreasing payment for those who exceed 
the benchmark.
    Though the majority of commenters supported rate-based measurement 
of HACs, some commenters raised issues. A number of commenters noted 
that the extremely low incidence of ``never events'' could preclude 
meaningful rate-based measurement of the occurrence of those events. 
Other commenters opposed public reporting of the rates as a 
nonfinancial VBP incentive.
c. Use of POA Information
    In the FY 2009 IPPS proposed rule, we asserted that POA data could 
be used to better understand and prevent the occurrence of HACs. 
Medicare data could be analyzed separately or in combination with 
private sector or State POA data, which are currently available in 
certain States. Health services researchers could use these data in a 
variety of ways to assess the incidence of HACs and to identify best 
practices for HAC prevention. In addition, publicly reported POA data 
could also be used to support better health care decision making by 
Medicare beneficiaries, as well as other health care consumers, 
professionals, and caregivers.
    Commenters addressed various uses of POA data, including informing 
risk adjustment, making benchmark comparisons between and within 
hospitals, and public reporting. Commenters noted that POA data have 
important applications to risk adjustment for quality measurement. In 
the absence of risk adjustment mechanisms, one commenter suggested that 
CMS expand POA codes beyond those discussed in section II.F.8. of the 
preamble of the proposed rule to include a code that would preclude 
reduced payment if the provider attests that ``the HAC is believed to 
be the result of a natural disease process/severe patient condition and 
is not believed to be indicative of the level of the quality of care 
provided.'' Nearly all commenters addressing the use of POA data urged 
CMS to provide hospitals with timely feedback of POA information. 
Specifically, many commenters wanted CMS to provide each hospital with 
its POA rates and comparisons to peer hospitals.
    Commenters' responses to publicly reporting POA data were mixed. A 
large number of commenters opposed public reporting of POA data, 
arguing that only measures endorsed by the NQF and adopted by the HQA 
should be considered for public reporting. A few commenters voiced 
concern that public reporting would discourage hospitals from 
accurately reporting POA data. A few commenters suggested a phased-in 
public reporting timeline for POA data, allowing hospital data to 
remain confidential for a period while hospitals adjust to new coding 
and reporting requirements. Nearly all commenters stated that, if POA 
data were to be publicly reported, the data should be posted on 
Hospital Compare.
d. Transition to ICD-10
    In the FY 2009 IPPS proposed rule, we suggested that adopting ICD-
10 codes to replace the outdated, vague codes of ICD-9-CM would allow 
CMS to capture more accurate and precise information about HACs.\18\ 
Noting that the current ICD-9-CM codes are over three decades old, we 
proposed that ICD-10 codes more precisely capture information using 
current medical terminology. For example, ICD-9-CM codes for pressure 
ulcers do not provide information about the size, depth, or exact 
location of the ulcer, while ICD-10 has 125 codes to capture this 
information.
---------------------------------------------------------------------------

    \18\ In the FY 2009 IPPS proposed rule, there is a typographical 
error such that the rule refers to ICD-10-PCS (procedure codes) 
rather than ICD-10 (diagnosis codes).
---------------------------------------------------------------------------

    A number of commenters supported the adoption of ICD-10. Many of 
the commenters pointed out that the adoption of ICD-10 would facilitate 
more precise identification of HACs. Several commenters supported the 
adoption of ICD-10 with an appropriate 2-year transition period. 
Commenters stated that they have known since the 1990's that the ICD-9-
CM coding structure was reaching its limits, and it was becoming 
increasingly difficult to identify new technologies that are commonly 
used in today's medical practices. The commenters stated that there is 
a critical need to move in a timely manner to CM and ICD-10-PCS because 
hospitals would have the ability to capture data more accurately, thus 
providing higher quality and more accurate data for reporting. 
Commenters urged the implementation of ICD-10 to ensure the 
availability of appropriate, consistent, and accurate clinical 
information reflective of patients' medical conditions and care 
provided. Commenters asserted that this would allow the nation to 
better measure quality, implement value-based purchasing, identify 
hospital-acquired conditions, and continue to refine a prospective 
payment system that improves recognition of variances in severity of 
illness.
    One commenter expressed concern about the benefit of moving to ICD-
10 and believed that its benefit in the outpatient setting had not been 
demonstrated. The commenter expressed concern about the cost of moving 
to a new coding system with the need to update software and redraft 
policies.

[[Page 48489]]

e. Healthcare-Associated Conditions in Other Payment Settings
    In the FY 2009 IPPS proposed rule, we suggested that the broad 
principle of Medicare not paying for preventable healthcare-associated 
conditions could potentially be applied in Medicare payment settings 
beyond IPPS hospitals, including for example, hospital outpatient 
departments, SNFs, and physician practices. Although the implementation 
would be different for each setting, alignment of incentives across 
settings of care is an important goal for all of CMS' VBP initiatives. 
To stimulate public input, we have included a discussion in several 
Medicare payment regulations regarding application of the broad 
principle of Medicare not paying for preventable healthcare-associated 
conditions in payment settings beyond IPPS. The discussion was included 
in the following regulations: FY 2009 IRF proposed rule (73 FR 22688), 
the CY 2009 OPPS/ASC proposed rule (73 FR 41547), the FY 2009 SNF 
proposed rule (73 FR 25932), and the FY 2009 LTCH final rule (73 FR 
26829).
    Commenters' reaction to the notion of applying the IPPS HAC payment 
provision to other settings was mixed. A number of commenters 
recognized that this use of payment incentives could promote better 
continuity of care (including documentation) and a reduction in 
avoidable readmissions. Commenters noted that aligned payment 
incentives would force pre- and post-acute care settings to share 
accountability for preventing healthcare-associated conditions. One 
commenter who supported expanding the policy to nursing homes suggested 
that CMS consider including dehydration measures for nonpayment in that 
setting.
    While many commenters recognized potential benefits, many other 
commenters raised concerns or opposed implementing the IPPS HAC payment 
provision in other settings. Generally, commenters who were opposed to 
expanding the policy's reach believed that doing so would be premature 
until CMS assesses the impacts of the policy in the IPPS setting. 
Commenters also raised concerns about applying the policy in particular 
settings. For example, many commenters stated that Medicare payment for 
the physician setting is extremely different from that of the IPPS 
setting and that attribution issues in particular would make the policy 
difficult to accurately and fairly implement.
    Commenters suggested that, if CMS did implement a similar policy in 
the physician setting, the agency should ensure that the policy does 
not create disincentives for treating high-risk patients. From the 
long-term care perspective, one commenter noted that the risk of an 
adverse event occurring increases with the duration of the stay and so 
such a policy would be particularly concerning for LTCHs.
f. Relationship to NQF's Serious Reportable Adverse Events
    In the FY 2009 IPPS proposed rule, we discussed how CMS has applied 
its authority to address the events on the NQF's list of Serious 
Reportable Adverse Events (also known as ``never events''). We have 
adopted a number of items from the NQF's list of events as HACs. 
However, we also discussed that the HAC payment provision is not 
ideally suited to address every condition on the NQF's list.
    Commenters unanimously asserted that CMS should not pay for never 
events. However, many commenters were concerned about the widespread 
misperception that HACs are never events, which can be considered 
absolutely preventable. Commenters urged CMS to explicitly 
differentiate its ``reasonably preventable'' HACs from the ``never 
events'' on the NQF's list of Serious Reportable Adverse Events.
    Commenters suggested alternatives to Medicare's existing authority 
under the HAC provision to address never events. One commenter 
suggested that no higher CC/MCC MS-DRG payment should be made for 
claims including a selected HAC if that HAC overlaps with a never 
event. This would preclude a higher MS-DRG payment regardless of 
whether any other CC/MCCs that would otherwise trigger a higher MS-DRG 
payment are present on the claim.
g. Additional Potential Candidate HACs, Suggested Through Comment
    We received the following suggestions of potential candidates for 
the HAC payment provision:
     Surgical site infection following device procedures
     Failure to rescue
     Death or disability associated with drugs, devices, or 
biologics
     Events on the NQF's list of Serious Reportable Adverse 
Events, not previously addressed by the HAC payment provision
     Dehydration
     Malnutrition
     Water-borne pathogens, not previously addressed by the HAC 
payment provision.
    We reiterate that we are not making policy in this subsection; 
rather, we are providing a summary of the comments. We would like to 
thank commenters for the thoughtful comments received, and we will take 
this input into consideration as we develop any future regulatory and/
or legislative proposals to refine and enhance the HAC payment 
provision.
10 HAC Coding
    This HAC coding section addresses additional coding issues that 
were raised by commenters regarding the selected and candidate HACs.
a. Foreign Object Retained After Surgery
    Comment: One commenter requested that CMS provide technical 
guidance on how to address certain situations related to retained 
foreign objects. According to the commenter, in certain circumstances, 
it may be in the best interest of the patient not to remove the object. 
For example, the commenter stated that leaving a patient under 
anesthesia for a prolonged period of time and displacing internal 
organs in search of a surgical object left in the body may be more 
harmful than leaving the object inside the patient and completing a 
surgery in an expedited fashion. The commenter suggested that CMS 
clearly specify that the policy applies to an unintended retention of a 
foreign object, to allow physicians to exercise clinical judgment 
regarding the relative risk of leaving an object versus removing it.
    Response: We believe that ICD-9-CM codes 998.4 and 998.7 clearly 
describe the application of the HAC provision to a foreign body 
``inadvertently'' or ``accidentally'' left in a patient during a 
procedure.
b. MRSA
    Comment: Commenters raised issues regarding the MRSA coding. One 
commenter stated that the recent addition of unique MRSA ICD-9-CM codes 
will allow for improved tracking of MRSA infections and will complement 
the surveillance efforts underway at the CDC and the AHRQ. The 
commenter stated that the creation of new MRSA-specific codes will 
generate better data on which to base important MRSA prevention and 
management policy decisions, and will allow the health care community 
to more effectively address this growing public health problem. The 
commenter stated that CMS could reflect the increased utilization of 
resources associated with MRSA diagnoses by making CC/MCC 
classifications for the following three MRSA codes: Code 038.12 
(Methicillin-resistant Staphylococcus aureus septicemia--MCC); code 
482.42 (Methicillin-resistant

[[Page 48490]]

pneumonia due to Staphylococcus aureus--MCC); and code 041.12 
(Methicillin-resistant Staphylococcus aureus in conditions classified 
elsewhere and of unspecified site--CC).
    As justification for this request, the commenter pointed out that 
the predecessor codes for 038.12 and 482.42 are MCCs. The predecessor 
code for 038.12 is 038.11 (Staphylococcus aureus septicemia), which is 
an MCC. The predecessor code for 482.42 is 482.41 (Pneumonia due to 
Staphylococcus aureus), which is also an MCC.
    The commenter's justification for making 041.12 a CC is not based 
on the predecessor code's CC/MCC assignment. The commenter acknowledged 
the predecessor code, 041.11 (Staphylococcus aureus) is a non-CC. The 
commenter reviewed data provided in the development of the original CC/
MCC classifications for the MS-DRGs and acknowledged that the data did 
not clearly support making predecessor code 041.11 a CC. The commenter 
also recognized that clinical judgment was also used in deciding the 
non-CC/CC/MCC classification of each diagnosis code. Given CMS' use of 
both data and clinical evaluation, the commenter stated that code 
041.11 ``captures many minor and routine bacterial infections that are 
relatively simple and inexpensive to treat--in other words, diagnoses 
that do not lead to substantially increased use of hospital 
resources.'' Therefore, the commenter found it understandable that the 
predecessor code, 041.11, was classified as a non-CC.
    However, the commenter believed that the new MRSA specific code, 
041.12, will allow differentiation between MRSA and other infections 
and will likely show that these MRSA infections are significantly more 
difficult and expensive to treat. Therefore, the commenter requested 
that code 041.12 be classified as a CC.
    Response: The final CC/MCC classifications for new ICD-9-CM 
diagnosis codes are shown in Table 6A of the Addendum to this final 
rule. This table shows that we have classified codes 038.12 
(Methicillin-resistant Staphylococcus aureus septicemia) and 482.42 
(Methicillin-resistant pneumonia due to Staphylococcus aureus) as MCCs. 
We agree that, based on the predecessor code and our clinical 
evaluation, this MCC classification is warranted.
    We disagree with classifying code 041.12 (Methicillin-resistant 
Staphylococcus aureus in conditions classified elsewhere and of 
unspecified site) as a CC. As is shown in Table 6A, we have classified 
this code as a non-CC. We agree with the commenter that the predecessor 
code was a non-CC. However, we also point out that all codes in the 
041.00-041.9 category of bacterial infection in conditions classified 
elsewhere and of unspecified site are non-CCs. All of the codes in this 
category are used as an additional code to identify a bacterial agent 
in diseases that are classified by another more precise code. For 
instance, if a patient has a MRSA urinary tract infection or infected 
toenail, one would assign a code for the specific type and location of 
the infection (for example, urinary tract infection or infected toenail 
bed) and an additional code to fully describe the bacterial agent, such 
as MRSA. The CC/MCC classification would be determined by the more 
precise infection code (for example, urinary tract infection or 
infected toenail bed).
    We do not believe it is appropriate to change the CC/MCC 
classification of one of the codes in the category of bacterial 
infection in conditions classified elsewhere and of unspecified site to 
a CC while leaving all of the others as non-CCs. Further, we believe it 
is more appropriate to assign a CC/MCC classification based on the more 
precise description of the patient's infection such as pneumonia, 
septicemia, or nail bed infection. Therefore, we have made code 041.12 
a non-CC, as shown in Table 6A of the Addendum to this final rule.
c. POA
    Comment: Commenters raised issues regarding the timing of 
laboratory testing (receiving results in 48-72 hours) and the effect 
this may have on the POA indicator reported for the HAC candidates 
proposed, such as Staphylococcus aureus septicemia and CDAD. The 
commenters expressed concern that when a lab test including cultures is 
performed upon admission, the results may not be available until 48-72 
hours later. The commenters were not clear on how the POA indicator 
would be applied in this scenario.
    Response: We acknowledge the commenter's concerns regarding correct 
assignment of the POA indicator when lab tests are involved. We refer 
the reader to the ICD-9-CM Official Guidelines for Coding and 
Reporting, Appendix I, Present on Admission Reporting Guidelines. These 
guidelines have been updated to address the issue of timeframe for POA 
identification and documentation. The updated guidelines recognize that 
in some clinical situations it may take a period of time after 
admission before a definitive diagnosis can be made. Determination of 
whether the condition was present on admission will be based on the 
applicable POA guidelines or on the physician's best clinical judgment. 
The guidelines address several scenarios, including those with 
infections and organisms, and how to assign the POA indicator. We also 
note that in this final rule we decided not to select at this time the 
proposed HAC cited by the commenter, Staphylococcus aureus septicemia, 
as an HAC.
11. HACs Selected for Implementation on October 1, 2008
    The following table sets out a complete list of the HACs selected 
for implementation on October 1, 2008 in this final rule and in the FY 
2008 IPPS final rule with comment period:

 
------------------------------------------------------------------------
                  HAC                        CC/MCC (ICD-9-CM codes)
------------------------------------------------------------------------
Foreign Object Retained After Surgery..  998.4 (CC)
                                         998.7 (CC)
Air Embolism...........................  999.1 (MCC)
Blood Incompatibility..................  999.6 (CC)
Pressure Ulcer Stages III & IV.........  707.23 (MCC)
                                         707.24 (MCC)
Falls and Trauma:......................  Codes within these ranges on
                                          the CC/MCC list:
    --Fracture.........................  800-829
    --Dislocation......................   830-839
    --Intracranial Injury..............  850-854
    --Crushing Injury..................  925-929
    --Burn.............................  940-949

[[Page 48491]]

 
    --Electric Shock...................  991-994
Catheter-Associated Urinary Tract        996.64 (CC)
 Infection (UTI).
                                         Also excludes the following
                                          from acting as a CC/MCC:
                                         112.2 (CC)
                                         590.10 (CC)
                                         590.11 (MCC)
                                         590.2 (MCC)
                                         590.3 (CC)
                                         590.80 (CC)
                                         590.81 (CC)
                                         595.0 (CC)
                                         597.0 (CC)
                                         599.0 (CC)
Vascular Catheter-Associated Infection.  999.31 (CC)
Manifestations of Poor Glycemic Control  250.10-250.13 (MCC)
                                         250.20-250.23 (MCC)
                                         251.0 (CC)
                                         249.10-249.11 (MCC)
                                         249.20-249.21 (MCC)
Surgical Site Infection, Mediastinitis,  519.2 (MCC)
 Following Coronary Artery Bypass Graft  And one of the following
 (CABG).                                  procedure codes: 36.10-36.19
Surgical Site Infection Following        996.67 (CC)
 Certain Orthopedic Procedures.
                                         998.59 (CC)
                                         And one of the following
                                          procedure codes: 81.01-81.08,
                                          81.23-81.24, 81.31-81.83,
                                          81.83, 81.85
Surgical Site Infection Following        Principal Diagnosis--278.01
 Bariatric Surgery for Obesity.          998.59 (CC)
                                         And one of the following
                                          procedure codes: 44.38, 44.39,
                                          or 44.95
Deep Vein Thrombosis and Pulmonary       415.11 (MCC)
 Embolism Following Certain Orthopedic   415.19 (MCC)
 Procedures.
                                         453.40-453.42 (MCC)
                                         And one of the following
                                          procedure codes: 00.85-00.87,
                                          81.51-81.52, or 81.54
------------------------------------------------------------------------

G. Changes to Specific MS-DRG Classifications

1. Pre-MDCs: Artificial Heart Devices
    Heart failure affects more than 5 million patients in the United 
States with 550,000 new cases each year, and causes more than 55,000 
deaths annually. It is a progressive disease that is medically managed 
at all stages, but over time leads to continued deterioration of the 
heart's ability to pump sufficient amounts of adequately oxygenated 
blood throughout the body. When medical management becomes inadequate 
to continue to support the patient, the patient's heart failure would 
be considered to be the end stage of the disease. At this point, the 
only remaining treatment options are a heart transplant or mechanical 
circulatory support. A device termed an artificial heart has been used 
only for severe failure of both the right and left ventricles, also 
known as biventricular failure. Relatively small numbers of patients 
suffer from biventricular failure, but the exact numbers are unknown. 
There are about 4,000 patients approved and waiting to receive heart 
transplants in the United States at any given time, but only about 
2,000 hearts per year are transplanted due to a scarcity of donated 
organs. There are a number of mechanical devices that may be used to 
support the ventricles of a failing heart on either a temporary or 
permanent basis. When it is apparent that a patient will require long-
term support, a ventricular support device is generally implanted and 
may be considered either as a bridge to recovery or a bridge to 
transplantation. Sometimes a patient's prognosis is uncertain, and with 
device support the native heart may recover its function. However, when 
recovery is not likely, the patient may qualify as a transplant 
candidate and require mechanical circulatory support until a donor 
heart becomes available. This type of support is commonly supplied by 
ventricular assist devices (VADs), which are surgically attached to the 
native ventricles but do not replace them.
    Devices commonly called artificial hearts are biventricular heart 
replacement systems that differ from VADs in that a substantial part of 
the native heart, including both ventricles, is removed. When the heart 
remains intact, it remains possible for the native heart to recover its 
function after being assisted by a VAD. However, because the artificial 
heart device requires the resection of the ventricles, the native heart 
is no longer intact and such recovery is not possible. The designation 
``artificial heart'' is somewhat of a misnomer because some portion of 
the native heart remains and there is no current mechanical device that 
fully replaces all four chambers of the heart. Over time, better 
descriptive language for these devices may be adopted.
    In 1986, CMS made a determination that the use of artificial hearts 
was not covered under the Medicare program. To conform to that 
decision, we placed ICD-9-CM procedure code 37.52 (Implantation of 
total replacement heart system) on the GROUPER program's MCE in the 
noncovered procedure list.
    On August 1, 2007, CMS began a national coverage determination 
process for artificial hearts. SynCardia Systems, Inc. submitted a 
request for reconsideration of the longstanding noncoverage policy when 
its device, the CardioWest\TM\ Temporary Total Artificial Heart (TAH-t) 
System, is used for ``bridge to transplantation'' in accordance with 
the FDA-labeled indication for the device. ``Bridge to 
transplantation'' is a phrase meaning

[[Page 48492]]

that a patient in end-stage heart failure may qualify as a heart 
transplant candidate, but will require mechanical circulatory support 
until a donor heart becomes available. The CardioWest\TM\ TAH-t System 
is indicated for use as a bridge to transplantation in cardiac 
transplant-eligible candidates at risk of imminent death from 
biventricular failure. The system is intended for use inside the 
hospital as the patient awaits a donor heart. The ultimate desired 
outcome for insertion of the TAH-t is a successful heart transplant, 
along with the potential that offers for cure from heart failure.
    CMS determined that a broader analysis of artificial heart coverage 
was deemed appropriate, as another manufacturer, Abiomed, Inc., has 
developed an artificial heart device, AbioCor[supreg] Implantable 
Replacement Heart Device, with different indications. SynCardia 
Systems, Inc. has received approval of its device from the FDA for 
humanitarian use as destination therapy for patients in end-stage 
biventricular failure who cannot qualify as transplant candidates. The 
AbioCor[supreg] Implantable Replacement Heart Device is indicated for 
use in severe biventricular end-stage heart disease patients who are 
not cardiac transplant candidates and who are less than 75 years old, 
who require multiple inotropic support, who are not treatable by VAD 
destination therapy, and who cannot be weaned from biventricular 
support if they are on such support. The desired outcome for this 
device is prolongation of life and discharge to home.
    On February 1, 2008, CMS published a proposed coverage decision 
memorandum for artificial hearts which stated, in part, that while the 
evidence is inadequate to conclude that the use of an artificial heart 
is reasonable and necessary for Medicare beneficiaries, the evidence is 
promising for the uses of artificial heart devices as described above. 
CMS supports additional research for these devices, and therefore 
proposed that the artificial heart will be covered by Medicare when 
performed under the auspices of a clinical study. The study must meet 
all of the criteria listed in the proposed decision memorandum. This 
proposed coverage decision memorandum may be found on the CMS Web site 
at: http://www.cms.hhs.gov/mcd/viewdraftdecisionmemo.asp?id=211.
    Following consideration of the public comments received, CMS made a 
final decision to cover artificial heart devices for Medicare 
beneficiaries under ``Coverage with Evidence Development'' when 
beneficiaries are enrolled in a clinical study that meets all of the 
criteria set forth by CMS. These criteria can be found in the final 
decision memorandum on the CMS Web site at: http://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=211. The effective date of this decision was 
May 1, 2008.
    The topic of coding of artificial heart devices was discussed at 
the September 27-28, 2007 ICD-9-CM Coordination and Maintenance 
Committee meeting held at CMS in Baltimore, MD. We note that this topic 
was placed on the Committee's agenda because any proposed changes to 
the ICD-9-CM coding system must be discussed at a Committee meeting, 
with opportunity for comment from the public. At the September 2007 
Committee meeting, the Committee accepted oral comments from 
participants and encouraged attendees or anyone with an interest in the 
topic to comment on proposed changes to the code, inclusion terms, or 
exclusion terms. We accepted written comments until October 12, 2007. 
As a result of discussion and comment from the Committee meeting, the 
Committee revised the title of procedure code 37.52 for artificial 
hearts to read ``Implantation of internal biventricular heart 
replacement system'' with an inclusion note specifying that this is the 
code for an artificial heart. This code can be found in Table 6F, 
Revised Procedure Code Titles, in the Addendum to this final rule. In 
addition, the Committee created new code 37.55 (Removal of internal 
biventricular heart replacement system) to identify explantation of the 
artificial heart prior to heart transplantation. This code can be found 
in Table 6B, New Procedure Codes, in the Addendum to this final rule.
    To make conforming changes to the IPPS system with regard to the 
proposed revision to the coverage decision for artificial hearts, in 
the FY 2009 IPPS proposed rule (73 FR 23563), we proposed to remove 
procedure code 37.52 from MS-DRG 215 (Other Heart Assist System 
Implant) and assign it to MS-DRG 001 (Heart Transplant or Implant of 
Heart Assist System with Major Comorbidity or Complication (MCC)) and 
MS-DRG 002 (Heart Transplant or Implant of Heart Assist System without 
Major Comorbidity or Complication (MCC)). In addition, we proposed to 
remove procedure code 37.52 from the MCE ``Non-Covered Procedure'' edit 
and assign it to the ``Limited Coverage'' edit. In addition, we 
proposed to include in this edit the requirement that ICD-9-CM 
diagnosis code V70.7 (Examination of participant in clinical trial) 
also be present on the claim. We proposed that claims submitted without 
both procedure code 37.52 and diagnosis code V70.7 would be denied 
because they would not be in compliance with the proposed coverage 
policy.
    Comment: Commenters supported CMS' proposal to remove procedure 
code 37.52 from MS-DRG 215 and reassign it to MS-DRGs 001 and 002. We 
did not receive any public comments regarding the corresponding change 
to the MCE.
    Response: We appreciate the commenters' support.
    Comment: One commenter suggested that CMS create a new MS-DRG 
combining all implantable heart assist devices to ensure that the 
proposed changes to cost centers reflect both LVAD device costs and 
implantable artificial hearts. The commenter suggested that if CMS were 
unwilling to create an MS-DRG combining all the implantable heart 
assist devices, an acceptable alternative would be to assign all 
ventricular assist devices identified by ICD-9-CM procedure code 37.66 
(Insertion of implantable heart assist system) into MS-DRG 001, 
irrespective of the absence of a secondary diagnosis code determined to 
be an MCC.
    Response: We believe that we have already appropriately created MS-
DRGs combining heart transplantation, heart assist devices, and other 
VAD device insertion in MS-DRGs 001 and 002. As the coverage decision 
for artificial hearts has only become effective May 1, 2008, CMS has no 
data to suggest that the cost centers will not adequately reflect the 
cost of all implantable heart devices. We also point out that change to 
the structure of the MS-DRGs is most appropriately discussed in the 
proposed rule, so that the public has a chance to review the proposal 
and comment on it as it affects a facility or medical practice.
    With regard to the alternative suggestion of assigning all VADs to 
MS-DRG 001, irrespective of the presence of an MCC, we point out that 
when the MS-DRGs were originally created for use beginning FY 2008, the 
data suggested the appropriateness of separating the patients based on 
their severity as determined by the presence of an MCC or a CC. We do 
not have convincing evidence that hospitals are not being adequately 
reimbursed for the VAD procedures. Therefore, we are not adopting this 
suggestion.
    After consideration of the public comments received, in this final 
rule, we are assigning code 37.52 (now titled ``Implantation of total 
internal biventricular heart replacement system'') to MS-DRGs 001 and 
002, as

[[Page 48493]]

proposed. In addition, we are removing code 37.52 from the ``Non-
Covered Procedure'' edit and assign it to the ``Limited Coverage'' 
edit. This means that implantation of an artificial heart in a Medicare 
beneficiary will be covered when the implanting facility has met the 
criteria as set forth by CMS. In addition, both procedure code 37.52 
and diagnosis code V07.7 must be present on the claim in order for the 
claim to be considered a covered Medicare service.
    To reiterate, during FY 2008, we made mid-year changes to portions 
of the GROUPER program not affecting MS-DRG assignment or ICD-9-CM 
coding. However, as the final coverage decision memorandum for 
artificial hearts was published after the CMS contractor's testing and 
release of the mid-year product, changes to the MCE included in the 
proposed rule were not included in that revision of the GROUPER Version 
25.0. GROUPER Version 26.0, which will be in use for FY 2009, contains 
the final changes that we are adopting in this final rule. The edits in 
the MCE Version 25.0 will be effective retroactive to May 1, 2008. (To 
reduce confusion, we note that the version number of the MCE is one 
digit lower than the current GROUPER version number; that is, Version 
26.0 of the GROUPER uses Version 25.0 of the MCE.)
2. MDC 1 (Diseases and Disorders of the Nervous System)
a. Transferred Stroke Patients Receiving Tissue Plasminogen Activator 
(tPA)
    In 1996, the FDA approved the use of tissue plasminogen activator 
(tPA), one type of thrombolytic agent that dissolves blood clots. In 
1998, the ICD-9-CM Coordination and Maintenance Committee created code 
99.10 (Injection or infusion of thrombolytic agent) in order to be able 
to uniquely identify the administration of these agents. Studies have 
shown that tPA can be effective in reducing the amount of damage the 
brain sustains during an ischemic stroke, which is caused by blood 
clots that block blood flow to the brain. tPA is approved for patients 
who have blood clots in the brain, but not for patients who have a 
bleeding or hemorrhagic stroke. Thrombolytic therapy has been shown to 
be most effective when used within the first 3 hours after the onset of 
an embolic stroke, but it is contraindicated in hemorrhagic strokes.
    For FY 2006, we modified the structure of CMS DRGs 14 (Intracranial 
Hemorrhage or Cerebral Infarction) and 15 (Nonspecific CVA and 
Precerebral Occlusion without Infarction) by removing the diagnostic 
ischemic (embolic) stroke codes. We created a new CMS DRG 559 (Acute 
Ischemic Stroke with Use of Thrombolytic Agent) which increased 
reimbursement for patients who sustained an ischemic or embolic stroke 
and who also had administration of tPA. The intent of this DRG was not 
to award higher payment for a specific drug, but to recognize the need 
for better overall care for this group of patients. Even though tPA is 
indicated only for a small proportion of stroke patients, that is, 
those patients experiencing ischemic strokes treated within 3 hours of 
the onset of symptoms, our data suggested that there was a sufficient 
quantity of patients to support the DRG change. While our goal is to 
make payment relate more closely to resource use, we also note that use 
of tPA in a carefully selected patient population may lead to better 
outcomes and overall care and may lessen the need for postacute care.
    For FY 2008, with the adoption of MS-DRGs, CMS DRG 559 became MS-
DRGs 061 (Acute Ischemic Stroke with Use of Thrombolytic Agent with 
MCC), 062 (Acute Ischemic Stroke with Use of Thrombolytic Agent with 
CC), and 063 (Acute Ischemic Stroke with Use of Thrombolytic Agent 
without CC/MCC). Stroke cases in which no thrombolytic agent was 
administered were grouped to MS-DRGs 064 (Intracranial Hemorrhage or 
Cerebral Infarction with MCC), 065 (Intracranial Hemorrhage or Cerebral 
Infarction with CC), or 066 (Intracranial Hemorrhage or Cerebral 
Infarction without CC/MCC). The MS-DRGs that reflect use of a 
thrombolytic agent, that is, MS-DRGs 061, 062, and 063, have higher 
relative weights than the hemorrhagic or cerebral infarction MS-DRGs 
064, 065, and 066.
    The American Society of Interventional and Therapeutic 
Neuroradiology (ASITN) (now the Society of NeuroInterventional Surgery 
(SNIS)) and the American Academy of Neurology Professional Association 
(AANPA) have made us aware of a treatment issue that is of concern to 
the stroke provider's community. In some instances, patients suffering 
an embolytic or thrombolytic stroke are evaluated and given tPA in a 
community hospital's emergency department, and then are transferred to 
a larger facility's stroke center that is able to provide the level of 
services required by the increased severity of these cases. The 
facility providing the administration of tPA in its emergency 
department does not realize increased reimbursement, as the patient is 
often transferred as soon a possible to a stroke center. The facility 
to which the patient is transferred does not realize increased 
reimbursement, as the tPA was not administered there. The ASITN/SNIS 
requested that CMS give permission to code the administration of tPA as 
if it had been given in the receiving facility. This would result in 
the receiving facility being paid the higher weighted MS-DRGs 061, 062, 
or 063 instead of MS-DRGs 064, 065, or 066. The ASITN/SNIS's rationale 
was that the patients who received tPA in another facility (even though 
administration of tPA may have alleviated some of the worst 
consequences of their strokes) are still extremely compromised and 
require increased health care services that are much more resource 
consumptive than patients with less severe types of stroke. We have 
advised the ASITN/SNIS that hospitals may not report services that were 
not performed in their facility.
    We recognize that the ASITN/SNIS's concerns potentially have merit 
but the quantification of the increased resource consumption of these 
patients is not currently possible in the existing ICD-9-CM coding 
system. Without specific length of stay and average charges data, we 
are unable to determine an appropriate MS-DRG for these cases. 
Therefore, we advised the ASITN/SNIS and AANAP to present a request at 
the diagnostic portion of the ICD-9-CM Coordination and Maintenance 
Committee meeting on March 20, 2008, for creation of a code that would 
recognize the fact that the patient had received a thrombolytic agent 
for treatment of the current stroke. In the proposed rule, we indicated 
that if this request was presented at the March 20, 2008 meeting, it 
could not be approved in time to be published as a new code in Table 6A 
in the proposed rule. However, we indicated that if a diagnosis code 
was created by the National Centers for Health Statistics as a result 
of that meeting, it would be added to the list of codes published in 
the FY 2009 IPPS final rule effective on October 1, 2008. With such 
information appearing on subsequent claims, we will have a better idea 
of how to classify these cases within the MS-DRGs. Therefore, because 
we did not have data to identify these patients at the time we issued 
the FY 2009 IPPS proposed rule, we did not propose an MS-DRG 
modification for the stroke patients receiving tPA in one facility 
prior to being transferred to another facility.
    The AANPA did make such a request at the Coordination and 
Maintenance Committee Meeting on March 20, 2008, which resulted in the 
creation of code V45.88 (Status post administration of tPA (rtPA) in a 
different facility within the last 24 hours prior to admission to 
current facility). This code can be found

[[Page 48494]]

on Table 6A in the Addendum to this final rule.
    Comment: All of the commenters approved the creation of a V-code to 
identify patients who had tPA administered at another hospital but were 
then transferred to a tertiary facility with the specialized stroke 
center resources to provide optimal patient care throughout the 
patient's entire hospital stay. According to two of the commenters, the 
description of patients who receive intravenous tPA administration at 
one facility but are then transferred to a tertiary hospital's stroke 
center are commonly referred to in the health care industry as ``drip 
and ship''.
    The commenters agreed with CMS' suggestion to recognize these 
patients by specific diagnostic coding, and suggested that CMS gather 
data in order to appropriately categorize these patients in the MS-DRG 
system. One commenter specifically suggested that data be collected via 
the new diagnostic code in FY 2009 with a view toward establishing a 
new MS-DRG or set of MS-DRGs in FY 2010.
    Response: We appreciate the support from the industry regarding 
creation of a unique code and subsequent data gathering. We believe 
that the transferred patients who have received tPA are a unique 
category of patients, but without precise and evidentiary data, we are 
not able yet to evaluate whether a modification of the structure of the 
MS-DRG system concerning these stroke patients is warranted. We will 
continue to examine these cases and the broad category of stroke DRGs 
in our upcoming reviews of revisions to the MS-DRG classifications that 
may be warranted.
    Comment: One commenter disagreed with CMS' suggestion that a new 
diagnostic code be approved and used to identify ``drip and ship'' 
cases. The commenter believed that CMS may not be able to identify this 
patient population based on the restriction of the CMS claims 
processing system. The commenter encouraged CMS to update the claims 
processing systems to accept the reporting of more than eight secondary 
diagnosis codes per claim.
    Response: We believe that the commenter has misunderstood our 
statement in the proposed rule (73 FR 23563 and 23564). We stated: ``* 
* * the quantification of the increased resource consumption of these 
patients is not currently possible in the existing ICD-9-CM coding 
system. Without specific length of stay and average charge data, we are 
unable to determine an appropriate MS-DRG for these cases.'' This 
statement was made in the context of describing the need for a specific 
code describing patients to whom tPA had been administered in another 
setting and who then were transferred to a tertiary care hospital. We 
did not intend to open the CMS claims processing system for discussion 
of possible changes.
    There are currently six stroke MS-DRGs as described above, with MS-
DRGs 061, 062, and 063 identifying cases of acute ischemic stroke with 
use of thrombolytic agents, by severity, and MS-DRGs 064, 065, and 066 
identifying cases of intracranial hemorrhage or cerebral infarction, 
again divided by severity as determined by the presence of an MCC, a 
CC, or neither a CC or an MCC. We believe to arbitrarily assign the 
``drip and ship'' cases to any one of these six DRGs is capricious and 
lacks objectivity. Further, in the interest of longitudinal data, we 
point out that epidemiologists will be able to gather their statistics 
more logically if we ultimately assign the cases to the most 
appropriate MS-DRG(s) after it has been proven that the patients 
consume a certain level of resources during their inpatient hospital 
course of treatment.
    Comment: One commenter encouraged CMS to assign all patients 
receiving tPA in a transferring hospital to the categorization of those 
patients in MS-DRGs 061, 062, and 063 at the receiving hospital as 
``the payment rate for these transferred patients should be the same as 
for patients treated with tPA in the admitting hospital because the 
remainder of the care is the same. The commenter believed that 
establishment of a separate code should not be a prerequisite to 
including these cases in MS-DRGs 061, 062, and 063 if CMS would allow 
hospitals to code the administration of tPA as if it had occurred at 
the receiving hospital until such time as a new code is established.
    Response: The new diagnostic code V45.88 (Status post 
administration of tPA (rtPA) in a different facility within the last 24 
hours prior to admission to current facility) has been established, and 
will be implemented for FY 2009 for those patients who are discharged 
on or after October 1, 2008. This will allow CMS sufficient time to 
collect accurate data on the most appropriate assignment of these 
patients in the MS-DRG system. We point out that other commenters have 
supported this position by urging CMS to gather data in order to create 
a new DRG for these patients. As we do not yet have comprehensive 
information on this category of patients regarding frequency, 
distribution, length of stay, or charge data, we do not believe it is 
appropriate to assign these cases to a potentially inappropriate MS-
DRG. We point out the MS-DRGs system is a system of averages. If we 
assign cases to an MS-DRG based on what the industry believes to be 
warranted, but if later data for the cases reflect that the cases are 
less costly than assumed, the result would be that, in subsequent 
annual recalibrations, the relative weight(s) for those MS-DRGs would 
decrease. This would ultimately result in a lower payment for precisely 
those cases that should be receiving higher payment due to their 
complexity.
    In addition, we reiterate our position regarding the submission of 
an ICD-9-CM code for a service that was not specifically performed at a 
facility receiving the transferred patient. Hospitals are not permitted 
to report services that were not performed in their facilities.
    Comment: Two commenters suggested that, if a new code describing 
the administration of tPA at another facility is created, the new code 
be assigned to the list of major comorbidities and complications. The 
commenter suggested that this action would allow cases to be assigned 
to MS-DRG 064 (Intracranial Hemorrhage or Cerebral Infarction with MCC) 
or MS-DRG 067 (Nonspecific Cerebrovascular Accident and Precerebral 
Occlusion without Infarction with MCC).
    The commenters also suggested that, if a new code describing the 
administration of tPA at another facility was not created, a proxy code 
that is already in the list of MCCs could be assigned to the ``drip and 
ship'' cases that would then allow hospitals to be compensated for this 
category of more severe patients. The commenters suggested code 286.5 
(Hemorrhagic disorder due to intrinsic circulating anticoagulants) as a 
proxy code.
    Response: We believe the types of action suggested by the 
commenters would result in a dilution of the principles upon which the 
MS-DRGs are structured. When we created the MS-DRGs for implementation 
beginning with FY 2008, we did so based on data and statistics. As we 
stated in the FY 2008 IPPS final rule: ``The purpose of the MS-DRGs is 
to more accurately stratify groups of Medicare patients with varying 
levels of severity'' (72 FR 47155). Therefore, we would not assign the 
new diagnostic code V45.88 that we have created (discussed earlier) to 
the list of MCCs or CCs without understanding the ramifications of such 
an action on the rest of the MS-DRGs and thus compromise our own need 
for accuracy. We refer the readers to the FY 2008 IPPS final rule that 
identifies the criteria we used to create the lists of MCCs and CCs (72 
FR 47153). In the

[[Page 48495]]

same vein, we would not randomly choose a code that is already assigned 
to the list of MCCs and suggest that hospitals include this code on 
their claims submission to insure placement of the case in a higher-
weighted MS-DRG. We believe that this violate the intent of the 
construction of the CCs and MCCs. We also believe that the hospital 
personnel responsible for entering these codes on the claim would be 
reluctant to do so, given that the patient may not actually have this 
condition.
    After consideration of the public comments received, we are 
specifying that, for FY 2009 and absent any other conditions or 
procedures that would result in an alternative MS-DRG assignment, 
stroke cases involving patients who receive intravenous tPA 
administration at one facility but are then transferred to a tertiary 
hospital's stroke center will continue to be assigned to MS-DRGs 064, 
065, and 066. We will continue to monitor the cases of patients 
suffering an embolytic or thrombolytic stroke who are evaluated and 
given tPA in a community hospital's emergency department and then are 
transferred to another facility. In the future, we will evaluate our 
data for potential MS-DRG reassignment based on the use of the new 
diagnostic code V45.88, and we are strongly encouraging receiving 
hospitals to include this code on appropriate claims.
b. Intractable Epilepsy With Video Electroencephalogram (EEG)
    As we did for FY 2008, we received a request from an individual 
representing the National Association of Epilepsy Centers to consider 
further refinements to the MS-DRGs describing seizures. Specifically, 
the representative recommended that a new MS-DRG be established for 
patients with intractable epilepsy who receive an electroencephalogram 
with video monitoring (vEEG) during their hospital stay. Similar to the 
initial recommendation, the representative stated that patients who 
suffer from uncontrolled seizures or intractable epilepsy are admitted 
to an epilepsy center for a comprehensive evaluation to identify the 
epilepsy seizure type, the cause of the seizure, and the location of 
the seizure. These patients are admitted to the hospital for 4 to 6 
days with 24-hour monitoring that includes the use of EEG video 
monitoring along with cognitive testing and brain imaging procedures.
    Effective October 1, 2007, MS-DRG 100 (Seizures with MCC) and MS-
DRG 101 (Seizures without MCC) were implemented as a result of 
refinements to the DRG system to better recognize severity of illness 
and resource utilization. Once again, the representative applauded CMS 
for making changes in the DRG structure to better recognize differences 
in patient severity. However, the representative stated that a subset 
of patients in MS-DRG 101 who have a primary diagnosis of intractable 
epilepsy and are treated with vEEG are substantially more costly to 
treat than other patients in this MS-DRG and represent the majority of 
patients being evaluated by specialized epilepsy centers. 
Alternatively, the representative stated that he was not requesting any 
change in the structure of MS-DRG 100. According to the representative, 
the number of cases that would fall into this category is not 
significant. The representative further noted that this is a change 
from last year's request.
    Epilepsy is currently identified by ICD-9-CM diagnosis codes 345.0x 
through 345.9x. There are two fifth digits that may be assigned to a 
subset of the epilepsy codes depending on the physician documentation:
     ``0'' for without mention of intractable epilepsy
     ``1'' for with intractable epilepsy
    With the assistance of an outside reviewer, the representative 
analyzed cost data for MS-DRGs 100 and 101, which focused on three 
subsets of patients identified with a primary diagnosis of epilepsy or 
convulsions who also received vEEG (procedure code 89.19):
     Patients with a primary diagnosis of epilepsy with 
intractability specified (codes 345.01 through 345.91)
     Patients with a primary diagnosis of epilepsy without 
intractability specified (codes 345.00 through 345.90)
     Patients with a primary diagnosis of convulsions (codes 
780.39)
    The representative acknowledged that the association did not 
include any secondary diagnoses in its analyses. Based on its results, 
the representative recommended that CMS further refine MS-DRG 101 by 
subdividing cases with a primary diagnosis of intractable epilepsy 
(codes 345.01 through 345.91) when vEEG (code 89.19) is also performed 
into a separate MS-DRG that would be defined as ``MS-DRG XXX'' 
(Epilepsy Evaluation without MCC).
    According to the representative, these cases are substantially more 
costly than the other cases within MS-DRG 101 and are consistent with 
the criteria for dividing MS-DRGs on the basis of CCs and MCCs. In 
addition, the representative stated that the request would have a 
minimal impact on most hospitals but would substantially improve the 
accuracy of payment to hospitals specializing in epilepsy care.
    In the FY 2009 IPPS proposed rule, we discussed our performance of 
an analysis using FY 2007 MedPAR data. As shown in the table below, we 
found a total of 54,060 cases in MS-DRG 101 with average charges of 
$14,508 and an average length of stay of 3.69 days. There were 879 
cases with intractable epilepsy and vEEG with average charges of 
$19,227 and an average length of stay of 5 days.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRG                                    cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
MS-DRG 100--All Cases...........................................          16,142            6.34         $27,623
MS-DRG 100--Cases with Intractable Epilepsy with vEEG (Codes                  69            6.6           26,990
 345.01, 345.11, 345.41, 345.51, 345.61, 345.71, 345.81, 345.91)
MS-DRG 100--Cases with Intractable Epilepsy without vEEG........             328            7.81          32,539
MS-DRG 101--All cases...........................................          54,060            3.69          14,508
MS-DRG 101--Cases with Intractable Epilepsy with vEEG (Codes                 879            5.0           19,227
 345.01, 345.11, 345.41, 345.51, 345.61, 345.71, 345.81, 345.91)
MS-DRG 101--Cases with Intractable Epilepsy without vEEG........           1,351            4.25          14,913
----------------------------------------------------------------------------------------------------------------

    In applying the criteria to establish subgroups, the data do not 
support the creation of a new subdivision for MS-DRG 101 for cases with 
intractable epilepsy and vEEG, nor does the data support moving the 879 
cases from MS-DRG 101 to MS-DRG 100. Moving the 879 cases to MS-DRG 100 
would mean moving cases with average charges of approximately $19,000 
into an MS-DRG with average charges of $28,000. Therefore, we did not 
propose to refine

[[Page 48496]]

MS-DRG 101 by subdividing cases with a primary diagnosis of intractable 
epilepsy (codes 345.01 through 345.91) when vEEG (code 89.19) is also 
performed into a separate MS-DRG.
    Comment: One commenter supported the National Association of 
Epilepsy Centers in recommending that MS-DRG 101 be subdivided for a 
subset of patients with a primary diagnosis of intractable epilepsy 
(codes 345.01 through 345.91) when EEG with video monitoring is 
reported. Similar to the Association's comments, the commenter stated 
that this subgroup of patients is most often admitted to hospitals with 
specialized epilepsy centers for a comprehensive evaluation to 
determine epilepsy seizure type, cause and location for consideration 
of surgery or to alter medications, and that the hospitalization is 
longer than the other cases in MS-DRG 101, resulting in higher costs 
(due to continuous 24-hour EEG with video monitoring (vEEG) and 
additional expensive diagnostic tests such as MRI, ictal SPECT, PET, 
and neuropsychological testing).
    The commenter acknowledged that CMS has set specific criteria for 
the establishment of a new MS-DRG. According to the commenter, the FY 
2007 data analyzed by the Association reported that the intractable 
epilepsy with vEEG cases exceed the average charge criteria as well as 
the minimum number of cases needed to establish a separate DRG. 
However, the total number of cases in the subgroup represents less than 
2 percent of the cases in MS-DRG 101, while the criterion calls for a 
threshold of 5 percent. The commenter stated that the number of cases 
is small because most patients with intractable epilepsy admitted to 
the hospital for vEEG are younger than 65 years of age and are eligible 
for Medicare due to their disability. In addition, the commenter 
indicated that the population is typically covered by private insurance 
or Medicaid. The commenter asserted that the Medicare intractable 
epilepsy with vEEG cases will remain small, but asked that CMS 
establish the separate MS-DRG as it has done for pediatric and other 
small subgroups of patients.
    Lastly, like the Association, the commenter noted that most of the 
admissions of the epilepsy subgroup occur in a relatively small number 
of hospitals with specialized epilepsy centers. The commenter believed 
that the establishment of a separate MS-DRG for the epilepsy subgroup 
would have a minimal impact on most hospitals, but would substantially 
improve the accuracy of payment to hospitals that specialize in 
epilepsy care.
    Response: We appreciate the commenter's comments. As we indicated 
in the proposed rule and in this final rule, we performed an analysis 
of the FY 2007 MedPAR data. In applying the criteria to establish 
subgroups, the data did not support the creation of a new subdivision 
for MS-DRG 101 for cases with intractable epilepsy and vEEG.
    As mentioned elsewhere in this final rule, we received several 
comments acknowledging CMS' discussion of the FY 2008 implementation of 
MS-DRGs and lack of data to support major MS-DRG changes for FY 2009. 
The commenters accepted CMS' proposal of not making significant 
revisions to the MS-DRGs until claims data under the new MS-DRG system 
are available. Therefore, as final policy for FY 2009, we are not 
modifying MS-DRG 101.
3. MDC 5 (Diseases and Disorders of the Circulatory System)
a. Automatic Implantable Cardioverter-Defibrillators (AICD) Lead and 
Generator Procedures
    In the FY 2008 IPPS final rule with comment period (72 FR 47257), 
we created a separate, stand alone DRG for automatic implantable 
cardioverter-defibrillator (AICD) generator replacements and 
defibrillator lead replacements. The new MS-DRG 245 (AICD lead and 
generator procedures) contains the following codes:
     00.52, Implantation or replacement of transvenous lead 
[electrode] into left ventricular coronary venous system
     00.54, Implantation or replacement of cardiac 
resynchronization defibrillator pulse generator device only [CRT-D]
     37.95, Implantation of automatic cardioverter/
defibrillator lead(s) only
     37.96, Implantation of automatic cardioverter/
defibrillator pulse generator only
     37.97, Replacement of automatic cardioverter/defibrillator 
lead(s) only
     37.98, Replacement of automatic cardioverter/defibrillator 
pulse generator only
    Commenters on the FY 2008 IPPS proposed rule supported this MS-DRG, 
which recognizes the distinct differences in resource utilization 
between pacemaker and defibrillator generators and leads. One commenter 
suggested that CMS consider additional refinements for the 
defibrillator generator and leads. In reviewing the standardized 
charges for the AICD leads, the commenter believed that the leads may 
be more appropriately assigned to another DRG such as MS-DRG 243 
(Permanent Cardiac Pacemaker Implant with CC) or MS-DRG 258 (Cardiac 
Pacemaker Device Replacement with MCC). The commenter recommended that 
CMS consider moving the defibrillator leads back into a pacemaker DRG, 
either MS-DRG 243 or MS-DRG 258.
    In response to the commenter, we indicated that the data supported 
separate MS-DRGs for these very different devices (72 FR 47257). We 
indicated that moving the defibrillator leads back into a pacemaker MS-
DRG defeated the purpose of creating separate MS-DRGs for 
defibrillators and pacemakers. Therefore, we finalized MS-DRG 245 as 
proposed with the leads and generator codes listed above.
    After publication of the FY 2008 IPPS final rule with comment 
period, we received a request from a manufacturer that recommended a 
subdivision for MS-DRG 245 (AICD Lead and Generator Procedures). The 
requestor suggested creating a new MS-DRG to separate the implantation 
or replacement of the AICD leads from the implantation or replacement 
of the AICD pulse generators to better recognize the differences in 
resource utilization for these distinct procedures.
    The requestor applauded CMS' decision to create separate MS-DRGs 
for the pacemaker device procedures from the AICD procedures in the FY 
2008 IPPS final rule (72 FR 47257). The requestor further acknowledged 
its support of the clinically distinct MS-DRGs for pacemaker devices. 
Currently, MS-DRGs 258 and 259 (Cardiac Pacemaker Device Replacement 
with MCC and without MCC, respectively) describe the implantation or 
replacement of pacemaker generators, while MS-DRGs 260, 261, and 262 
(Cardiac Pacemaker Revision Except Device Replacement with MCC, with 
CC, without CC/MCC, respectively) describe the insertion or replacement 
of pacemaker leads.
    The requestor believed that the IPPS ``needs to continue to evolve 
to accurately reflect clinical differences and costs of services.'' As 
such, the requestor recommended that CMS follow the same structure as 
it did with the pacemaker MS-DRGs for MS-DRG 245 to separately identify 
the implantation or replacement of the defibrillator leads (codes 
37.95, 37.97, and 00.52) from the implantation or replacement of the 
pulse generators (codes 37.96, 37.98 and 00.54).
    In the FY 2009 IPPS proposed rule, we discussed our analysis of the 
FY 2007 MedPAR data, in which we found a total of 5,546 cases in MS-DRG 
245 with average charges of $62,631 and an average length of stay of 
3.3 days. We

[[Page 48497]]

found 1,894 cases with implantation or replacement of the defibrillator 
leads (codes 37.95, 37.97, and 00.52) with average charges of $42,896 
and an average length of stay of 3.4 days. We also found a total of 
3,652 cases with implantation or replacement of the pulse generator 
(codes 37.96, 37.98, 00.54) with average charges of $72,866 and an 
average length of stay of 3.2 days.
    We agree with the requestor that the IPPS should accurately 
recognize differences in resource utilization for clinically distinct 
procedures. As the data demonstrate, average charges for the 
implantation or replacement of the AICD pulse generators are 
significantly higher than for the implantation or replacement of the 
AICD leads. Therefore, we proposed to create a new MS-DRG 265 to 
separately identify these distinct procedures.
    Comment: Several commenters expressed their appreciation and 
applauded CMS for acting on the proposal to subdivide MS-DRG 245 and 
create a new MS-DRG to recognize the differences in resource 
utilization for the implantation or replacement of leads from the 
implantation or replacement of pulse generators. The commenters 
supported these refinements to the MS-DRG classification system and 
stated that this proposed modification would ``reflect appropriate 
allocation and use of resources.''
    Response: We appreciate the commenters' support. We proposed that 
the title for this new MS-DRG 265 would be ``AICD Lead Procedures'' and 
would include procedure codes that identify the AICD leads (codes 
37.95, 37.97 and 00.52). We also proposed that the title for MS-DRG 245 
would be revised to ``AICD Generator Procedures'' and include procedure 
codes 37.96, 37.98, and 00.54. We believe these changes will better 
reflect the clinical differences and resources utilized for these 
distinct procedures.
    Therefore, in this final rule, we are finalizing our proposals to 
revise the title of MS-DRG 245 to read ``AICD Generator Procedures'', 
which includes procedure codes 37.96, 37.98, 00.54 and to create a new 
MS-DRG 265 (AICD Lead Procedures) to include procedure codes 37.95, 
37.97 and 00.52, effective October 1, 2009.
b. Left Atrial Appendage Device
    Atrial fibrillation (AF) is the primary cardiac abnormality 
associated with ischemic or embolytic stroke. Most ischemic strokes 
associated with AF are possibly due to an embolism or thrombus that has 
formed in the left atrial appendage. Evidence from studies such as 
transesophageal echocardiography shows left atrial thrombi to be more 
frequent in AF patients with ischemic stroke as compared to AF patients 
without stroke. While anticoagulation medication can be efficient in 
ischemic stroke prevention, there can be problems of safety and 
tolerability in many patients, especially those older than 75 years. 
Chronic warfarin therapy has been proven to reduce the risk of embolism 
but there can be difficulties concerning its administration. Frequent 
blood tests to monitor warfarin INR are required at some cost and 
patient inconvenience. In addition, because warfarin INR is affected by 
a large number of drug and dietary interactions, it can be 
unpredictable in some patients and difficult to manage. The efficacy of 
aspirin for stroke prevention in AF patients is less clear and remains 
controversial. With the known disutility of warfarin and the 
questionable effectiveness of aspirin, a device-based solution may 
provide added protection against thromboembolism in certain patients 
with AF.
    At the April 1, 2004 ICD-9-CM Coordination and Maintenance 
Committee meeting, a proposal was presented for the creation of a 
unique procedure code describing insertion of the left atrial appendage 
filter system. Subsequently, ICD-9-CM code 37.90 (Insertion of left 
atrial appendage device) was created for use beginning October 1, 2004. 
This code was designated as a non-operating room (non-O.R.) procedure, 
and had an effect only on cases in MDC 5, CMS DRG 518 (Percutaneous 
Cardiovascular Procedure without Coronary Artery Stent or Acute 
Myocardial Infarction). With the adoption of MS-DRGs in FY 2008, CMS 
DRG 518 was divided into MS-DRGs 250 (Percutaneous Cardiovascular 
Procedure without Coronary Artery Stent or AMI with MCC) and 251 
(Percutaneous Cardiovascular Procedure without Coronary Artery Stent or 
AMI without MCC).
    We have reviewed the data concerning this procedure code annually. 
Using FY 2005 MedPAR data for the FY 2007 IPPS final rule, 24 cases 
were reported, and the average charges ($27,620) closely mimicked the 
average charges of the other 22,479 cases in CMS DRG 518 ($28,444). As 
the charges were comparable, we made no recommendations to change the 
CMS DRG assignment for FY 2007.
    Using FY 2006 MedPAR data for the FY 2008 IPPS final rule, we 
divided CMS DRG 518 into the cases that would be reflected in the MS-
DRG configuration; that is, we divided the cases based on the presence 
or absence of an MCC. There were 35 cases without an MCC with average 
charges of $24,436, again mimicking the 38,002 cases with average 
charges of $32,546. There were 3 cases with an MCC with average charges 
of $62,337, compared to the 5,458 cases also with an MCC with average 
charges of $53,864. Again, it was deemed that cases with code 37.90 
were comparable to the rest of the cases in CMS DRG 518, and the 
decision was made not to make any changes in the DRG assignment for 
this procedure code. As noted above, CMS DRG 518 became MS-DRGs 250 and 
251 in FY 2008.
    We have received a request regarding code 37.90 and its placement 
within the MS-DRG system for FY 2009. The requestor, a manufacturer's 
representative, asked for either the reassignment of code 37.90 to an 
MS-DRG that would adequately cover the costs associated with the 
complete procedure or the creation of a new MS-DRG that would reimburse 
hospitals adequately for the cost of the device. The requestor reported 
that the device's IDE clinical trial is nearing completion, with the 
conclusion of study enrollment in May 2008. The requestor will continue 
to enroll patients in a Continued Use Registry following completion of 
the trial. The requestor reported that it did not charge hospitals for 
the atrial appendage device, estimated to cost $6,000, during the trial 
period, but it will begin to charge hospitals upon the completion of 
the trial in May. The requestor provided us with its data showing what 
it believed to be a differential of $107 more per case than the payment 
average for MS-DRG 250, and a shortfall of $3,808 per case than the 
payment average for MS-DRG 251.
    The requestor pointed out that code 37.90 is assigned to both MS-
DRGs 250 and 251, but stated that the final MS-DRG assignment would be 
MS-DRG 251 when the patient has a principal diagnosis of atrial 
fibrillation (code 427.31) because AF is not presently listed as a CC 
or an MCC. We note that it is the principal diagnosis that is used to 
determine assignment of a case to the correct MDC and subsequently the 
MS-DRG. Secondary or additional diagnosis codes are the only codes that 
can be used to determine the presence of a CC or an MCC.
    With regard to the request to create a specific MS-DRG for the 
insertion of this device titled ``Percutaneous Cardiovascular 
Procedures with Implantation of a Left Atrial Appendage Device without 
CC/MCC'', we point out that the payments under a prospective

[[Page 48498]]

payment system are predicated on averages. The device is already 
assigned to MS-DRGs containing other percutaneous cardiovascular 
devices; to create a new MS-DRG specific to this device would be to 
remove all other percutaneously inserted devices and base the MS-DRG 
assignment solely on the presence of code 37.90. This approach negates 
our longstanding method of grouping like procedures, and removes the 
concept of averaging. Further, to ignore the structure of the MS-DRG 
system solely for the purpose of increasing payment for one device 
would set an unwelcome precedent for defining all of the other MS-DRGs 
in the system. We also point out that the final rule establishing the 
MS-DRGs set forth five criteria, all five of which are required to be 
met, in order to warrant creation of a CC or an MCC subgroup within a 
base MS-DRG. The criteria can be found in the FY 2008 IPPS final rule 
with comment period (72 FR 47169). One of the criteria specifies that 
there will be at least 500 cases in the CC or MCC subgroup. To date, 
there are not enough cases assigned to code 37.90 that are reported 
within the MedPAR data.
    Using FY 2007 MedPAR data, for the FY 2009 IPPS proposed rule, we 
reviewed MS-DRGs 250 and 251 for the presence of the left atrial 
appendage device. The following table displays our results:

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRG                                    cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
250--All Cases..................................................           6,424            7.72      $60,597.58
250--Cases with code 37.90......................................               4            6.50       65,829.51
250--Cases without code 37.90...................................           6,420            7.72       60,594.32
251--All Cases..................................................          39,456            2.84       35,719.81
251--Cases with code 37.90......................................             101            1.30       20,846.09
251--Cases without code 37.90...................................          39,335            2.85       35,757.98
----------------------------------------------------------------------------------------------------------------

    There were a total of 105 cases assigned code 37.90 that were 
reported for Medicare beneficiaries in the 2007 MedPAR data. There are 
4 cases with an atrial appendage device in MS-DRG 250 that have higher 
average charges than the other 6,420 cases in the MS-DRG, and that have 
slightly shorter lengths of stay by 1.25 days. However, the more 
telling data are located in MS-DRG 251, which shows that the 101 cases 
in which an atrial appendage device was implanted have much lower 
average charges ($20,846.09) than the other 39,355 cases in the MS-DRG 
with average charges of $35,758.98. The difference in the average 
charges is approximately $14,912, so even when the manufacturer begins 
charging the hospitals the estimated $6,000 for the device, there is 
still a difference of approximately $8,912 in average charges based on 
the comparison within the total MS-DRG 251. Interestingly, the 101 
cases also have an average length of stay of less than half of the 
average length of stay compared to the other cases assigned to that MS-
DRG.
    Because the data did not support either the creation of a unique 
MS-DRG or the assignment of procedure code 37.90 to another higher-
weighted MS-DRG, we did not propose any change to MS-DRGs 250 and 251, 
or to code 37.90 for FY 2009. We believe, based on the past 3 years' 
comparisons, that this code is appropriately located within the MS-DRG 
structure.
    We did not receive any comments on our proposal to make no changes 
to MS-DRGs 250 or 251, or on the assignment of code 37.90 (Insertion of 
left atrial appendage device) within the MS-DRG structure. Therefore, 
in the absence of comment to the contrary, and in the presence of what 
we believe to be compelling evidence concerning the accuracy of the 
placement of code 37.90 in the current MS-DRG structure, we are not 
modifying MS-DRG 250 or 251 or procedure code 37.90 for FY 2009.
    As an additional note, we point out that the titles of MS-DRGs 250 
and 251 have been changed for FY 2009. We have removed the reference to 
AMI, as that portion of the title was a holdover from the CMS DRGs last 
used in FY 2007. The correct titles are: MS-DRG 250 (Percutaneous 
Cardiovascular Procedure without Coronary Artery Stent with MCC) and 
MS-DRG 251 (Percutaneous Cardiovascular Procedure without Coronary 
Artery Stent without MCC). The entire list of MS-DRGs can be found in 
Table 5 of the Addendum to this final rule.
4. MDC 8 (Diseases and Disorders of the Musculoskeletal System and 
Connective Tissue): Hip and Knee Replacements and Revisions
    For FY 2009, we again received a request from the American 
Association of Hip and Knee Surgeons (AAHKS), a specialty group within 
the American Academy of Orthopedic Surgeons (AAOS), concerning 
modifications of the lower joint procedure MS-DRGs. The request is 
similar, in some respects, to the AAHKS' request in FY 2008, 
particularly as it relates to separating routine and complex 
procedures. For the benefit of the reader, we are republishing a 
history of the development of DRGs for hip and knee replacements and a 
summary of the AAHKS FY 2008 request that were included in the FY 2008 
IPPS final rule with comment period (72 FR 47222 through 47224) before 
we discuss the AAHKA's more recent request.
a. Brief History of Development of Hip and Knee Replacement Codes
    In the FY 2006 IPPS final rule (70 FR 47303), we deleted CMS DRG 
209 (Major Joint and Limb Reattachment Procedures of Lower Extremity) 
and created two new CMS DRGs: 544 (Major Joint Replacement or 
Reattachment of Lower Extremity) and 545 (Revision of Hip or Knee 
Replacement). The two new CMS DRGs were created because revisions of 
joint replacement procedures are significantly more resource intensive 
than original hip and knee replacements procedures. CMS DRG 544 
included the following procedure code assignments:
     81.51, Total hip replacement
     81.52, Partial hip replacement
     81.54, Total knee replacement
     81.56, Total ankle replacement
     84.26, Foot reattachment
     84.27, Lower leg or ankle reattachment
     84.28, Thigh reattachment
    CMS DRG 545 included the following procedure code assignments:
     00.70, Revision of hip replacement, both acetabular and 
femoral components
     00.71, Revision of hip replacement, acetabular component
     00.72, Revision of hip replacement, femoral component
     00.73, Revision of hip replacement, acetabular liner and/
or femoral head only
     00.80, Revision of knee replacement, total (all 
components)
     00.81, Revision of knee replacement, tibial component

[[Page 48499]]

     00.82, Revision of knee replacement, femoral component
     00.83, Revision of knee replacement, patellar component
     00.84, Revision of knee replacement, tibial insert (liner)
     81.53, Revision of hip replacement, not otherwise 
specified
     81.55, Revision of knee replacement, not otherwise 
specified
    Further, we created a number of new ICD-9-CM procedure codes 
effective October 1, 2005, that better distinguish the many different 
types of joint replacement procedures that are being performed. In the 
FY 2006 IPPS final rule (70 FR 47305), we indicated a commenter had 
requested that, once we receive claims data using the new procedure 
codes, we closely examine data from the use of the codes under the two 
new CMS DRGs to determine if future additional DRG modifications are 
needed.
b. Prior Recommendations of the AAHKS
    Prior to this year, the AAHKS had recommended that we make further 
refinements to the CMS DRGs for knee and hip arthroplasty procedures. 
The AAHKS previously presented data to CMS on the important differences 
in clinical characteristics and resource utilization between primary 
and revision total joint arthroplasty procedures. The AAHKS stated that 
CMS' decision to create a separate DRG for revision of total joint 
arthroplasty (TJA) in October 2005 resulted in more equitable 
reimbursement for hospitals that perform a disproportionate share of 
complex revision of TJA procedures, recognizing the higher resource 
utilization associated with these cases. The AAHKS stated that this 
important payment policy change led to increased access to care for 
patients with failed total joint arthroplasties, and ensured that high 
volume TJA centers could continue to provide a high standard of care 
for these challenging patients.
    The AAHKS further stated that the addition of new, more descriptive 
ICD-9-CM diagnosis and procedure codes for TJA in October 2005 gave it 
the opportunity to further analyze differences in clinical 
characteristics and resource intensity among TJA patients and 
procedures. Inclusive of the preparatory work to submit its 
recommendations, the AAHKS compiled, analyzed, and reviewed detailed 
clinical and resource utilization data from over 6,000 primary and 
revision TJA procedure codes from 4 high volume joint arthroplasty 
centers located within different geographic regions of the United 
States: University of California, San Francisco, CA; Mayo Clinic, 
Rochester, MN; Massachusetts General Hospital, Boston, MA; and the 
Hospital for Special Surgery, New York, NY. Based on its analysis, the 
AAHKS recommended that CMS examine Medicare claims data and consider 
the creation of separate DRGs for total hip and total knee arthroplasty 
procedures. The AAHKS stated that based on the differences between 
patient characteristics, procedure characteristics, resource 
utilization, and procedure code payment rates between total hip and 
total knee replacements, separate DRGs were warranted. Furthermore, the 
AAHKS recommended that CMS create separate base DRGs for routine versus 
complex joint revision or replacement procedures as shown below.

Routine Hip Replacements

     00.73, Revision of hip replacement, acetabular liner and/
or femoral head only
     00.85, Resurfacing hip, total, acetabulum and femoral head
     00.86, Resurfacing hip, partial, femoral head
     00.87, Resurfacing hip, partial, acetabulum
     81.51, Total hip replacement
     81.52, Partial hip replacement
     81.53, Revision of hip replacement, not otherwise 
specified

Complex Hip Replacements

     00.70, Revision of hip replacement, both acetabular and 
femoral components
     00.71, Revision of hip replacement, acetabular component
     00.72, Revision of hip replacement, femoral component

Routine Knee Replacements and Ankle Procedures

     00.83, Revision of knee replacement, patellar component
     00.84, Revision of knee replacement, tibial insert (liner)
     81.54, Revision of knee replacement, not otherwise 
specified
     81.55, Revision of knee replacement, not otherwise 
specified
     81.56, Total ankle replacement

Complex Knee Replacements and Other Reattachments

     00.80, Revision of knee replacement, total (all 
components)
     00.81, Revision of knee replacement, tibial component
     00.82, Revision of knee replacement, femoral component
     84.26, Foot reattachment
     84.27, Lower leg or ankle reattachment
     84.28, Thigh reattachment
    The AAHKS also recommended the continuation of CMS DRG 471 
(Bilateral or Multiple Major Joint Procedures of Lower Extremity) 
without modifications. CMS DRG 471 included any combination of two or 
more of the following procedure codes:
     00.70, Revision of hip replacement, both acetabular and 
femoral components
     00.80, Revision of knee replacement, total (all 
components)
     00.85, Resurfacing hip, total, acetabulum and femoral head
     00.86, Resurfacing hip, partial, femoral head
     00.87, Resurfacing hip, partial, acetabulum
     81.51, Total hip replacement
     81.52, Partial hip replacement
     81.54, Total knee replacement
     81.56, Total ankle replacement
c. Adoption of MS-DRGs for Hip and Knee Replacements for FY 2008 and 
AAHKS' Recommendations
    In the FY 2008 IPPS final rule with comment period (72 FR 47222 
through 47226), we adopted MS-DRGs to better recognize severity of 
illness for FY 2008. The MS-DRGs include two new severity of illness 
levels under the then current base DRG 544. We also added three new 
severity of illness levels to the base DRG for Revision of Hip or Knee 
Replacement. The new MS-DRGs are as follows:
     MS-DRG 466 (Revision of Hip or Knee Replacement with MCC)
     MS-DRG 467 (Revision of Hip or Knee Replacement with CC)
     MS-DRG 468 (Revision of Hip or Knee Replacement without 
CC/MCC)
     MS-DRG 469 (Major Joint Replacement or Reattachment of 
Lower Extremity with MCC)
     MS-DRG 470 (Major Joint Replacement or Reattachment of 
Lower Extremity without MCC)
    We found that the MS-DRGs greatly improved our ability to identify 
joint procedures with higher resource costs. In the final rule, we 
presented data indicating the average charges for each new MS-DRG for 
the joint procedures.
    In the FY 2008 IPPS final rule with comment period, we acknowledged 
the valuable assistance the AAHKS had provided to CMS in creating the 
new joint replacement procedure codes and modifying the joint 
replacement DRGs beginning in FY 2006. These efforts greatly improved 
our ability to categorize significantly different groups of patients 
according to severity of illness. Commenters on the FY 2008 proposed 
rule had encouraged CMS to continue working with the orthopedic

[[Page 48500]]

community, including the AAHKS, to monitor the need for additional new 
DRGs. The commenters stated that MS-DRGs 466 through 470 are a good 
first step. However, they stated that CMS should continue to evaluate 
the data for these procedures and consider additional refinements to 
the MS-DRGs, including the need for additional severity levels. AAHKS 
stated that its data suggest that all three base DRGs (primary 
replacement, revision of major joint replacement, and bilateral joint 
replacement) should be separated into three severity levels (that is, 
MCC, CC, and non-CC). (We had proposed three severity levels for 
revision of hip and knee replacement (MS-DRGs 466, 467, and 468), and 
AAHKS agreed with this 3-level subdivision.)
    The AAHKS recommended that the base DRG for the proposed two 
severity subdivision MS-DRGs for major joint replacement or 
reattachment of lower extremity with and without CC/MCC (MS-DRGs 483 
and 484) be subdivided into three severity levels, as was the case for 
the revision of hip and knee replacement MS-DRGs. AAHKS also 
recommended that the two severity subdivision MS-DRGs for bilateral or 
multiple major joint procedures of lower extremity with and without MCC 
(MS-DRGs 461 and 462) be subdivided three ways for this base DRG. AAHKS 
acknowledged that the three way split would not meet all five of the 
criteria for establishing a subgroup, and stated that these criteria 
were too restrictive, lack face validity, and create perverse admission 
selection incentives for hospitals by significantly overpaying for 
cases without a CC and underpaying for cases with a CC. It recommended 
that the existing five criteria be modified for low volume subgroups to 
assure materiality. For higher volume MS-DRG subgroups, the AAHKS 
recommended that two other criteria be considered, particularly for 
nonemergency, elective admissions:
     Is the per-case underpayment amount significant enough to 
affect admission vs. referral decisions on a case-by-case basis?
     Is the total level of underpayments sufficient to 
encourage systematic admission vs. referral policies, procedures, and 
marketing strategies?
    The AAHKS also recommended refining the five existing criteria for 
MCC/CC/without subgroups as follows:
     Create subgroups if they meet the five existing criteria, 
with cost difference between subgroups ($1,350) substituted for charge 
difference between subgroups ($4,000);
     If a proposed subgroup meets criteria number 2 and 3 (at 
least 5 percent and at least 500 cases) but fails one of the others, 
then create the subgroup if either of the following criteria are met:
     At least $1,000 cost difference per case between 
subgroups; or
     At least $1 million overall cost should be shifted to 
cases with a CC (or MCC) within the base DRG for payment weight 
calculations.
    In response, we indicated that we did not believe it was 
appropriate to modify our five criteria for creating severity 
subgroups. Our data did not support creating additional subdivisions 
based on the criteria. At that time, we believed the criteria we 
established to create subdivisions within a base DRG were reasonable 
and establish the appropriate balance between better recognition of 
severity of illness, sufficient differences between the groups, and a 
reasonable number of cases in each subgroup. However, we indicated that 
we may consider further modifications to the criteria at a later date 
once we have had some experience with MS-DRGs created using the 
proposed criteria.
    The AAHKS indicated in its response to the FY 2008 proposed rule 
that it continued to support the separation of routine and complex 
joint procedures. It believed that certain joint replacement procedures 
have significantly lower average charges than do other joint 
replacements. The AAKHS' data suggest that more routine joint 
replacements are associated with substantially less resource 
utilization than other more complex revision procedures. The AAHKS 
stated that leaving these procedures in the revision MS-DRGs results in 
substantial overpayment for these relatively simple, less costly 
revision procedures, which in turn results in a relative underpayment 
for the more complex revision procedures.
    In response, we examined data on this issue and identified two 
procedure codes for partial knee revisions that had significantly lower 
average charges than did other joint revisions. The two codes are as 
follows:
     00.83 Revision of knee replacement, patellar component
     00.84 Revision of total knee replacement, tibial insert 
(liner)
    The data suggest that these less complex partial knee revisions are 
less resource intensive than other cases assigned to MS-DRGs 466, 467, 
or 468. We examined other orthopedic DRGs to which these two codes 
could be assigned. We found that these cases have very similar average 
charges to those in MS-DRG 485 (Knee Procedures with Principal 
Diagnosis of Infection with MCC), MS-DRG 486 (Knee Procedures with 
Principal Diagnosis of Infection with CC), MS-DRG 487 (Knee Procedures 
with Principal Diagnosis of Infection without CC), MS-DRG 488 (Knee 
Procedures without Principal Diagnosis of Infection with CC or MCC), 
and MS-DRG 489 (Knee Procedures without Principal Diagnosis of 
Infection without CC).
    Given the very similar resource requirements of MS-DRG 485 and the 
fact that these DRGs also contain knee procedures, we moved codes 00.83 
and 00.84 out of MS-DRGs 466, 467, and 468 and into MS-DRGs 485, 486, 
487, 488, and 489. We also indicated that we would continue to monitor 
the revision MS-DRGs to determine if additional modifications are 
needed.
d. AAHKS' Recommendations for FY 2009
    The AAHKS' current request involves the following recommendations:
     That CMS consolidate and reassign certain joint procedures 
that have a diagnosis of an infection or malignancy into MS-DRGs that 
are similar in terms of clinical characteristics and resource 
utilization. The AAKHS further identifies groups called Stage 1 and 2 
procedures that it believes require significant differences in resource 
utilization.
     That CMS reclassify certain specific joint procedures, 
which AAHKS refers to as ``routine,'' out of their current MS-DRG 
assignments. The three joint procedures that AAHKS classifies as 
``routine'' are codes 00.73 (Revision of hip replacement, acetabular 
liner and/or femoral head only), 00.83 (Revision of knee replacement, 
patellar component), and 00.84 (Revision of total knee replacement, 
tibial insert (liner)). The AAHKS advocated removing these three 
``routine'' procedures from the following DRGs: MS-DRGs 466, 467, and 
468, MS-DRGs 485, 486, and 487, and MS-DRGs 488 and 489. The AAHKS 
refers to MS-DRGs 466, 467, and 468 as ``complex'' revision MS-DRGs, 
and recommended that the three ``routine'' procedures be moved out of 
MS-DRGs 466, 467, and 468 and MS-DRGs 485, 486, and 489 and into MS-
DRGs 469 and 470 (Major Joint Replacement or Reattachment of Lower 
Extremity with and without MCC, respectively). The AAHKS contended that 
the three ``routine'' procedures have similar clinical characteristics 
and resource utilization to those in MS-DRGs 469.
    The recommendations suggested by AAHKS are quite complex and 
involve a number of specific code lists and MS-DRG assignment changes. 
We discuss each of these requests in detail below.
    (1) AAHKS Recommendation 1: Consolidate and reassign patients with

[[Page 48501]]

hip and knee prosthesis related infections or malignancies.
    The AAHKS pointed out that deep infection is one of the most 
devastating complications associated with hip and knee replacements. 
These infections have been reported to occur in approximately 0.5 
percent to 3 percent of primary and 4 percent to 6 percent of revision 
total joint replacement procedures. These infections often result in 
the need for multiple reoperations, prolonged use of intravenous and 
oral antibiotics, extended inpatient and outpatient rehabilitation, and 
frequent followup visits. Furthermore, clinical outcomes following 
single- and two-stage revision total joint arthroplasty procedures have 
been less favorable than revision for other causes of failure not 
associated with infection.
    In addition to the clinical impact, the AAHKS stated that infected 
total joint replacement procedures also have substantial economic 
implications for patients, payers, hospitals, physicians, and society 
in terms of direct medical costs, resource utilization, and the 
indirect costs associated with lost wages and productivity. The AAHKS 
stated that the considerable resources required to care for these 
patients have resulted in a strong financial disincentive for 
physicians and hospitals to provide care for patients with infected 
total joint replacements, an increased economic burden on the high 
volume tertiary care referral centers where patients with infected hip 
replacement procedures are frequently referred for definitive 
management. The AAHKS further stated that, in some cases, there are 
compromised patient outcomes due to treatment delays as patients with 
infected joint replacements seek providers who are willing to care for 
them.
    Once a deep infection of a total joint prosthesis is identified, 
the first stage of treatment involves a hospital admission for removal 
of the infected prosthesis and debridement of the involved bone and 
surrounding tissue. During the same procedure, an antibiotic-
impregnated cement spacer is typically inserted to maintain alignment 
of the limb during the course of antibiotic therapy. The patient is 
then discharged to a rehabilitation facility/nursing home (or to home 
if intravenous therapy can be safely arranged for the patient) for a 6-
week course of IV antibiotic treatment until the infection has cleared.
    After the completion of antibiotic therapy, the hip or knee may be 
reaspirated to look for evidence of persistent infection or eradication 
of infection. A second stage procedure is then undertaken, where the 
patient is readmitted, the hip or knee is reexplored, and the cement 
spacer removed. If there are no signs of persistent infection, a hip or 
knee prosthesis is reimplanted, often using bone graft and costly 
revision implants in order to address extensive bone loss and distorted 
anatomy. Thus, the entire course of treatment for patients with 
infected joint replacements is 4 to 6 months, with an additional 6 to 
12 months of rehabilitation. Furthermore, clinical outcomes following 
revision for infection are poor relative to outcomes following revision 
for other aseptic causes. The AAHKS noted that patients with bone 
malignancy have a similar treatment focus--surgery to remove diseased 
tissue, chemotherapy to treat the malignancy, and implantation of the 
new prosthesis. They also have similar resource use. For simplicity, 
the AAHKS' discussion focused on infected joint prostheses, but it 
suggested that the issues it raises would apply to patients with a 
malignancy as well.
    The AAHKS stated that these patients are currently grouped in 
multiple MS-DRGs, and the cases are often ``outliers'' in each one. 
AAHKS proposed to consolidate these patients with similar clinical 
characteristics and treatment into MS-DRGs reflective of their resource 
utilization.
    The AAHKS states that these more severe patients are currently 
classified into the following MS-DRGs:
     MS-DRGs 463, 463, and 465 (Wound Debridement and Skin 
Graft Excluding Hand, for Musculoskeletal-Connective Tissue Disease 
with MCC, with CC, without CC/MCC, respectively)
     MS-DRGs 480, 481, and 482 (Hip and Femur Procedures Except 
Major Joint with MCC, with CC, without CC/MCC, respectively)
     MS-DRGs 485, 486, and 487 (Knee Procedures with Principal 
Diagnosis of Infection and with MCC, with CC, and without CC/MCC, 
respectively)
     MS-DRGs 488 and 489 (Knee Procedures without Principal 
Diagnosis of Infection and with CC/MCC and without CC/MCC, 
respectively)
     MS-DRGs 495, 496, and 497 (Local Excision and Removal of 
Internal Fixation Devices Except Hip and Femur with MCC, with CC, and 
without CC/MCC, respectively)
     Other MS-DRGs (The AAHKS did not specify what these other 
MS-DRGs were.)
    The AAHKS indicated that cases with the severe diagnoses of 
infections, neoplasms, and structural defects have similarities. These 
similarities are due to an overlap of a severe diagnosis (including a 
principal diagnosis of code 996.66 (Infected joint prosthesis) and the 
resulting need for more extensive surgical procedures. The AAHKS stated 
that currently these patients are grouped into MS-DRGs by major 
procedure alone. AAHKS recommended that these cases be grouped into 
what it refers to as Stages 1 and 2 as follows:
     Stage 1 would include the removal of an infected 
prosthesis and includes cases in MS-DRGs 463, 464, and 465, 480, 481, 
and 482, 485 through 489, and 495, 496, and 497. Stage 1 joint 
procedure codes would include codes 80.05 (Arthrotomy for removal of 
prosthesis, hip), 80.06 (Arthrotomy for removal of prosthesis, knee), 
00.73 (Revision of hip replacement, acetabular liner and/or femoral 
head only), and 00.84 (Revision of knee replacement, tibial insert 
(liner)).
     Stage 2 would include the implant of a new prosthesis and 
includes cases in MS-DRGs 461 and 462, 463, 464, and 465, 466, 467, and 
468, and 469 and 470. Stage 2 joint procedure codes would include codes 
00.70 (Revision of hip replacement, both acetabular and femoral 
components), 00.71 (Revision of hip replacement, acetabular component), 
00.72 (Revision of hip replacement, femoral component), 00.80 (Revision 
of knee replacement, total (all components)), 00.81 (Revision of knee 
replacement, tibial component), 00.82 (Revision of knee replacement, 
femoral component), 00.85 (Resurfacing hip, total, acetabulum and 
femoral head), 00.86 (Resurfacing hip, partial, femoral head), 00.87 
(Resurfacing hip, partial, acetabulum), 81.51 (Total hip replacement), 
81.52 (Partial hip replacement), 81.53 (Revise hip replacement), 81.54 
(Total knee replacement), 81.55 (Revise knee replacement), and 81.56 
(Total ankle replacement).
    As stated earlier, the AAHKS recommended patients with certain more 
severe diagnoses be grouped into a higher severity level. While most of 
AAHKS' comments focused on joint replacement patients with infections, 
the AAHKS also believed that patients with certain neoplasms require 
greater resources. To this group of infections and neoplasms, the AAHKS 
recommended the addition of four codes that capture acquired 
deformities. The AAHKS believed that these codes would capture 
admissions for the second stage of the treatment for an infected joint. 
The AAHKS stated that the significance of these diagnoses when they are 
reported as the principal code position was significant in predicting 
resource utilization. However, the impact was not as significant when 
the diagnosis was reported as a secondary diagnosis.

[[Page 48502]]

The AAHKS recommended that patients with one of the following 
infection/neoplasm/defect principal diagnosis codes be segregated into 
a higher severity level.

Stage 1 Infection/Neoplasm/Defect Principal Diagnosis Codes

     170.7 (Malignant neoplasm of long bones of lower limb)
     171.3 (Malignant neoplasm of soft tissue, lower limb, 
including hip)
     711.05 (Pyogenic arthritis, pelvic region and thigh)
     711.06 (Pyogenic arthritis, lower leg)
     730.05 (Acute osteomyelitis, pelvic region and thigh)
     730.06 (Acute osteomyelitis, lower leg)
     730.15 (Chronic osteomyelitis, pelvic region and thigh)
     730.16 (Chronic osteomyelitis, lower leg)
     730.25 (Unspecified osteomyelitis, pelvic region and 
thigh)
     730.26 (Unspecified osteomyelitis, lower leg)
     996.66 (Infection and inflammatory reaction due to 
internal joint prosthesis)
     996.67 (Infection and inflammatory reaction due to other 
internal orthopedic device, implant, and graft)

Stage 2 Infection/Neoplasm/Defect Principal Diagnosis Codes (an 
Asterisk * Shows the Diagnoses Included in Stage 2 That Were Not Listed 
in Stage 1)

     170.7 (Malignant neoplasm of long bones of lower limb)
     171.3 (Malignant neoplasm of soft tissue, lower limb, 
including hip)
     198.5 (Secondary malignant neoplasm of bone and bone 
marrow) *
     711.05 (Pyogenic arthritis, pelvic region and thigh)
     711.06 (Pyogenic arthritis, lower leg)
     730.05 (Acute osteomyelitis, pelvic region and thigh)
     730.06 (Acute osteomyelitis, lower leg)
     730.15 (Chronic osteomyelitis, pelvic region and thigh)
     730.16 (Chronic osteomyelitis, lower leg)
     730.25 (Unspecified osteomyelitis, pelvic region and 
thigh)
     730.26 (Unspecified osteomyelitis, lower leg)
     736.30 (Acquired deformities of hip, unspecified 
deformity)
     736.39 (Other acquired deformities of hip) *
     736.6 (Other acquired deformities of knee) *
     736.89 (Other acquired deformities of other parts of 
limbs) *
     996.66 (Infection and inflammatory reaction due to 
internal joint prosthesis) *
     996.67 (Infection and inflammatory reaction due to other 
internal orthopedic device, implant, and graft) *
    For the Stage 2 procedures, AAHKS also suggested the use of the 
following secondary diagnosis codes to assign the cases to a higher 
severity level. These conditions would not be the reason the patient 
was admitted to the hospital. They would instead represent secondary 
conditions that were also present on admission or conditions that were 
diagnosed after admission.

Stage 2 Infection/Neoplasm/Defect Secondary Diagnosis Codes

     170.7 (Malignant neoplasm of long bones of lower limb)
     171.3 (Malignant neoplasm of soft tissue, lower limb, 
including hip)
     711.05 (Pyogenic arthritis, pelvic region and thigh)
     711.06 (Pyogenic arthritis, lower leg)
     730.05 (Acute osteomyelitis, pelvic region and thigh)
     730.06 (Acute osteomyelitis, lower leg)
     730.15 (Chronic osteomyelitis, pelvic region and thigh)
     730.16 (Chronic osteomyelitis, lower leg)
     730.25 (Unspecified osteomyelitis, pelvic region and 
thigh)
     730.26 (Unspecified osteomyelitis, lower leg)
     996.66 (Infection and inflammatory reaction due to 
internal joint prosthesis)
     996.67 (Infection and inflammatory reaction due to other 
internal orthopedic device, implant, and graft)
    (2) AAHKS Recommendation 2: Reclassify certain specific joint 
procedures.
    The AAHKS suggested that cases with the infection/neoplasm/defect 
diagnoses listed above be segregated according to the Stage 1 and 2 
groups listed above. The AAHKS made one final recommendation concerning 
joint procedure cases with infections. It identified a subset of 
patients who had a principal diagnosis of code 996.66 (Infection and 
inflammatory reaction due to internal joint prosthesis) and who also 
had a secondary diagnosis of sepsis or septicemia. The AAHKS believed 
that these patients are for the most part admitted with both the joint 
infection and sepsis/septicemia present at the time of admission. The 
codes for sepsis/septicemia are classified as MCCs under MS-DRGs. The 
AAHKS believed it is inappropriate to count the secondary diagnosis of 
sepsis/septicemia as an MCC when it is reported with code 996.66. The 
AAHKS believed that counting sepsis and septicemia as an MCC results in 
double counting the infections. It believed that the joint infection 
and septicemia are the same infection. The AAHKS recommended that the 
following sepsis and septicemia codes not count as an MCC when reported 
with code 996.66:
     038.0 (Streptococcal septicemia)
     038.10 (Staphylococcal septicemia, unspecified)
     038.11 (Staphylococcal aureus septicemia)
     038.19 (Other staphylococcal septicemia)
     038.2 (Pneumococcal septicemia [streptococcus pneumonia 
septicemia])
     038.3 (Septicemia due anaerobes)
     038.40 (Septicemia due to gram-negative organisms)
     038.41 (Hemophilus influenzae [H. Influenzae])
     038.42 (Escherichia coli [E. Coli])
     038.43 (Pseudomonas)
     038.44 (Serratia)
     038.49 (Other septicemia due to gram-negative organisms)
     038.8 (Other specified septicemias)
     038.9 (Unspecified septicemia)
     995.91 (Sepsis)
     995.92 (Severe sepsis)
e. CMS' Response to AAHKS' Recommendations
    The MS-DRG modifications proposed by the AAHKS are quite complex 
and have many separate parts. We made changes to the MS-DRGs in FY 2008 
as a result of a request by the AAHKS as discussed above, to recognize 
two types of partial knee replacements as less complex procedures. We 
have no data on how effective the new MS-DRGs for joint procedures are 
in differentiating patients with varying degrees of severity. 
Therefore, as we indicated in the proposed rule, we analyzed data 
reported prior to the adoption of MS-DRGs to analyze each of the 
recommendations made. We begin our analysis by focusing first on the 
more simple aspects of the recommendations made by the AAHKS.
    (1) Changing the MS-DRG assignment for codes 00.73, 00.83, and 
00.84.
    As discussed previously, in FY 2008, the AAHKS recommended that CMS 
classify certain joint procedures as either routine or complex. We 
examined the data for these cases and found that the following two 
codes had significantly lower charges than the other joint revisions: 
00.83 (Revision of knee replacement, patellar component) and 00.84 
(Revision of knee replacement, tibial insert (liner)). Therefore, we 
moved these two codes to MS-DRGs 485, 486, and 487, and MS-DRGs 488 and 
489.
    As a result of AAHKS' most recent recommendations, we once again

[[Page 48503]]

examined claims data for these two knee procedures (codes 00.83 and 
00.84) as well as its request that we move code 00.73 (Revision of hip 
replacement, acetabular liner and/or femoral head only). Code 00.73 is 
assigned to MS-DRGs 466, 467, and 468. The following tables show our 
findings.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRG                                    cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
485--All Cases..................................................           1,122           12.20      $64,672.47
485--Cases with Code 00.83 or 00.84.............................             179           11.83       64,446.68
485--Cases without Code 00.83 or 00.84..........................             943           12.27       64,715.33
486--All Cases..................................................           2,061            8.03       40,758.55
486--Cases with Code 00.83 or 00.84.............................             464            7.34       39,864.39
486--Cases without Code 00.83 or 00.84..........................           1,597            8.23       41,018.34
487--All Cases..................................................           1,236            5.67       29,180.88
487--Cases with Code 00.83 or 00.84.............................             284            5.61       31,231.79
487--Cases without Code 00.83 or 00.84..........................             952            5.68       28,569.06
488--All Cases..................................................           2,374            5.17       30,180.80
488--Cases with Code 00.83 or 00.84.............................             754            4.09       28,432.06
488--Cases without Code 00.83 or 00.84..........................           1,620            5.67       30,994.73
489--All Cases..................................................           5,493            3.04       21,385.67
489--Cases with Code 00.83 or 00.84.............................           2,154            3.07       23,122.18
489--Cases without Code 00.83 or 00.84..........................           3,339            3.03       20,265.44
469--All Cases..................................................          29,030            8.17       56,681.64
470--All Cases..................................................         385,123            3.93       36,126.23
466--All Cases..................................................           3,888            9.18       76,015.66
466--Cases with Code 00.73......................................             273           10.02       71,293.33
466--Cases without Code 00.73...................................           3,616            9.12       76,372.06
467--All Cases..................................................          13,551            5.50       53,431.63
467--Cases with Code 00.73......................................           1,078            5.94       43,635.63
467--Cases without Code 00.73...................................          12,484            5.47       54,284.13
468--All Cases..................................................          19,917            3.94       44,055.62
468--Cases with Code 00.73......................................           1,688            3.93       33,449.22
468--Cases without Code 00.73...................................          18,232            3.94       45,037.09
469--All Cases..................................................          29,030            8.17       56,681.64
470--All Cases..................................................         385,123            3.93       36,126.23
----------------------------------------------------------------------------------------------------------------

    The tables show that codes 00.73, 00.83, and 00.84 are 
appropriately assigned to their current MS-DRGs. The data do not 
support moving these three codes to MS-DRGs 469 and 470. Therefore, we 
did not propose a change of MS-DRG assignment for codes 00.73, 00.83, 
and 00.84 for FY 2009.
    (2) Excluding sepsis and septicemia from being an MCC with code 
996.66.
    There are cases where a patient may be admitted with an infection 
of a joint prosthesis (code 996.66) and also have sepsis. In these 
cases, it may be possible to perform joint procedures as suggested by 
AAHKS. However, in other cases, a patient may be admitted with an 
infection of a joint prosthesis and then develop sepsis during the 
stay. Because our current data do not indicate whether a condition is 
present on admission, we could not determine whether or not the sepsis 
occurred after admission. Our data have consistently shown that cases 
of sepsis and septicemia require significant resources. Therefore, we 
classified the sepsis and septicemia codes as MCCs. Our clinical 
advisors do not believe it is appropriate to exclude all cases of 
sepsis and septicemia that are reported as a secondary diagnosis with 
code 996.66 from being classified as a MCC. We discuss septicemia as 
part of the HAC provision under section II.F. of the preamble of the 
proposed rule and this final rule. For the purposes of classifying 
sepsis and septicemia as non-CCs when reported with code 996.66, we do 
not support this recommendation. Therefore, in the proposed rule, we 
did not propose that the sepsis and septicemia codes be added to the CC 
exclusion list for code 996.66.
    (3) Differences between Stage 1 and 2 cases with severe diagnoses.
    As indicated in the proposed rule, we next examined data on AAHKS' 
suggestion that there are significant differences in resource 
utilization for cases they refer to as Stage 1 and 2. AAHKS stated that 
this is particularly true for those with infections, neoplasms, or 
structural defects. We used the list of procedure codes listed above 
that AAHKS describes as Stage 1 and 2 procedures. We also used AAHKS' 
designated lists of Stage 1 and 2 principal diagnosis codes to examine 
this proposal. This proposal entails moving cases with a Stage 1 or 2 
principal diagnosis and procedure out of their current MS-DRG 
assignment in the following 19 MS-DRGs and into a newly consolidated 
set of MS-DRGs: MS-DRGs 463, 464, and 465, 480, 481, and 482, 485 
through 489, and 495, 496, and 497.
    As can be seen from the information below, there was not a 
significant difference in average charges between these Stage 1 and 
Stage 2 cases that have an MCC.

----------------------------------------------------------------------------------------------------------------
                                                                                  Average length      Average
                             Stage 1                                Total cases       of stay         charges
----------------------------------------------------------------------------------------------------------------
                          Stage 1 Cases With Infection, Neoplasm, or Structural Defect
----------------------------------------------------------------------------------------------------------------
With MCC........................................................           1,306            14.1         $79,232
Without MCC.....................................................           4,115             7.6         $44,716
----------------------------------------------------------------------------------------------------------------

[[Page 48504]]

 
                          Stage 2 Cases With Infection, Neoplasm, or Structural Defect
----------------------------------------------------------------------------------------------------------------
With MCC........................................................           1,072            10.9         $80,781
Without MCC.....................................................           5,413             6.0         $57,355
----------------------------------------------------------------------------------------------------------------

    Average charges for Stage 1 cases with an MCC was $79,232 compared 
to $80,781 for Stage 2. Stage 1 cases without an MCC had average 
charges of $44,716 compared to $57,355. These data do not support 
reconfiguring the current MS-DRGs based on this new subdivision.
    (4) Moving joint procedure cases to new MS-DRGs based on secondary 
diagnoses of infection.
    We examined AAHKS' recommendation that Stage 2 joint cases with 
specific secondary diagnoses of infection or neoplasm be moved out of 
their current MS-DRG assignments and into a newly constructed MS-DRG. 
We indicated in the proposed rule that we are reluctant to make this 
type of significant DRG change to the joint MS-DRGs based on the 
presence of a secondary diagnosis. This results in the movement of 
cases out of MS-DRGs which were configured based on the reason for the 
admission (for example, principal diagnosis) and surgery. The cases 
would instead be assigned based on conditions that are reported as 
secondary diagnoses. In some cases, the infection may have developed or 
be diagnosed during the admission. This would be a significant logic 
change to the MS-DRGs for joint procedures. This logic change would 
involve setting a new precedent of reassigning cases to a different MS-
DRG if an infection is reported as a secondary diagnosis. The secondary 
diagnosis of infection could be present on admission or develop after 
the admission. Currently, secondary diagnoses are evaluated to 
determine if they are an MCC or CC, and then they can lead to the case 
being assigned to a higher severity level. The secondary diagnoses do 
not currently lead to the removal of the case from the MS-DRG and 
reassignment to a new MS-DRG. We have not had an opportunity to examine 
claims data based on hospital discharges under the MS-DRGs which began 
October 1, 2008. Our clinical advisors believe it would be more 
appropriate to wait for data under the new MS-DRG system to determine 
how well the new severity levels are addressing accurate payment for 
these cases before considering this approach to assigning cases to a 
MS-DRG.
    (5) Moving cases with infection, neoplasms, or structural defects 
out of 19 MS-DRGs and into two newly developed MS-DRGs.
    The last recommended by AAHKS that we considered was moving cases 
with a principal diagnosis of infection, neoplasm, or structural defect 
from their list of Stage 1 and 2 diagnoses and consolidating them into 
newly constructed and modified MS-DRGs. AAHKS could not identify an 
existing set of MS-DRGs with similar resource utilizations into which 
the Stage 1 cases could be assigned. Therefore, the AAHKS recommended 
that CMS create three new MS-DRGs for Stage 1 cases with infections, 
neoplasms and structural defects which would be titled ``Arthrotomy/
Removal/Component exchange of Infected Hip or Knee Prosthesis with MCC, 
with CC, and without CC/MCC'', respectively.
    The AAHKS recommended moving Stage 2 cases out of MS-DRGs 466, 467, 
and 468, and 469 and 470 and into MS-DRGs 461 and 462. AAHKS 
recommended that MS-DRGs 461 and 462 be renamed ``Major Joint 
Procedures of Lower Extremity--Bilateral/Multiple/Infection/
Malignancy''.
    As we indicated in the proposed rule, in reviewing these proposed 
changes, we had a number of concerns. The first concern was that these 
proposed changes would result in the removal of cases with varying 
average charges from 19 current MS-DRGs and consolidating them into two 
separate sets of MS-DRGs. As the data below indicate, the average 
charges vary from as low as $29,181 in MS-DRG 487 to $81,089 in MS-DRG 
463. Furthermore, the average charges for these infection/neoplasm/
structural defect cases are very similar to other cases in their 
respective MS-DRG assignments for many of these MS-DRGs. There are 
cases where the average charges are higher. In MS-DRG 469 and 470, the 
infection/neoplasm/structural defect cases are significantly higher. 
However, there are only 136 cases in MS-DRG 469 out of a total of 
29,030 cases with these diagnoses. There are only 673 cases in MS-DRG 
470 out of a total of 385,123 cases with one of these diagnoses. The 
table below clearly demonstrates the wide variety of charges for cases 
with these diagnoses.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRGs                                   cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
463--All Cases..................................................           4,747           16.25      $73,405.46
463--Cases with PDX of Infection/Malignancy/React...............           1,009           17.79       81,089.07
464--All Cases..................................................           5,499           10.21       44,387.73
464--Cases with PDX of Infection/Malignancy/React...............           1,420           10.59       46,800.60
465--All Cases..................................................           2,271            5.95       26,631.57
465--Cases with PDX of Infection/Malignancy/React...............             557           10.59       29,816.40
466--All Cases..................................................           3,888            9.18       76,015.66
466--Cases with PDX of Infection/Malignancy/React...............             890           10.67       79,334.69
467--All Cases..................................................          13,551            5.50       53,431.63
467--Cases with PDX of Infection/Malignancy/React...............           2,401            6.71       58,506.86
468--All Cases..................................................          19,917            3.94       44,055.62
468--Cases with PDX of Infection/Malignancy/React...............           1,994            4.76       54,322.03
469--All Cases..................................................          29,030            8.17       56,681.64
469--Cases with PDX of Infection/Malignancy/React...............             136           11.74       85,256.07
470--All Cases..................................................         385,123            3.93       36,126.23
470--Cases with PDX of Infection/Malignancy/React...............             673            6.44       59,676.31
480--All Cases..................................................          25,391            9.32       52,281.65
480--Cases with PDX of Infection/Malignancy/React...............             880           14.53       76,355.15
481--All Cases..................................................          68,655            5.94       32,963.64

[[Page 48505]]

 
481--Cases with PDX of Infection/Malignancy/React...............             878            8.78       48,655.30
482--All Cases..................................................          45,832            4.86       27,266.20
482--Cases with PDX of Infection/Malignancy/React...............             577            6.19       37,572.38
485--All Cases..................................................           1,122           12.20       64,672.47
485--Cases with PDX of Infection/Malignancy/React...............           1,122           12.20       64,672.47
486--All Cases..................................................           2,061            8.03       40,758.55
486--Cases with PDX of Infection/Malignancy/React...............           2,061            8.03       40,758.55
487--All Cases..................................................           1,236            5.67       29,180.88
487--Cases with PDX of Infection/Malignancy/React...............           1,236            5.67       29,180.88
488--All Cases..................................................           2,374            5.17       30,180.80
488--Cases with PDX of Infection/Malignancy/React...............              31            7.13       50,155.42
489--All Cases..................................................           5,493            3.04       21,385.67
489--Cases with PDX of Infection/Malignancy/React...............              36            3.72       35,313.84
495--All Cases..................................................           1,860           10.94       55,103.91
495--Cases with PDX of Infection/Malignancy/React...............           1,025           11.74       59,453.69
496--All Cases..................................................           5,203            5.95       32,177.29
496--Cases with PDX of Infection/Malignancy/React...............           2,759            6.98       36,940.99
497--All Cases..................................................           6,259            3.01       21,445.60
497--Cases with PDX of Infection/Malignancy/React...............           1,500            5.18       29,966.98
----------------------------------------------------------------------------------------------------------------

    Given the wide variety of charges and the small number of cases 
where there are differences in charges, we do not believe the data 
support the AAKHS' recommendations. The data do not support removing 
these cases from the 19 MS-DRGs above and consolidating them into a new 
set of MS-DRGs, either newly created, or by adding them to MS-DRG 461 
or 462, which have average charges of $80,718 and $57,355, 
respectively.
    A second major concern involves redefining MS-DRGs 461 and 462 is 
that these MS-DRGs currently capture bilateral and multiple joint 
procedures. These MS-DRGs were specifically created to capture a unique 
set of patients who undergo procedures on more than one lower joint. 
Redefining these MS-DRGs to include both single and multiple joints 
undermines the clinical coherence of this MS-DRG. It would create a 
widely diverse group of patients based on either a list of specific 
diagnoses or the fact that the patient had multiple lower joint 
procedures.
    Comment: While we did not receive any public comments specifically 
supporting the reassignment of codes 00.73, 00.83, and 00.84 to MS-DRGs 
469 and 470, several commenters acknowledged CMS' discussion of the FY 
2008 implementation of MS-DRGs and lack of data to support major MS-DRG 
changes for FY 2009. The commenters accepted CMS' proposal of not 
making significant revisions to the MS-DRGs until claims data under the 
new MS-DRG system are available.
    Several commenters suggested an alternative way of capturing the 
more resource intensive joint procedure cases, particularly those 
involving an infected joint. The commenters recommended moving codes 
80.05 (Arthrotomy for removal of hip prosthesis) and 80.06 (Arthrotomy 
for removal of knee prosthesis) into MS-DRGs 463 through 465 (Wound 
Debridement and Skin Graft Except Hand, for Musculoskeletal-Connective 
Tissue Disease with MCC, with CC, and without CC/MCC, respectively). 
(We note that code 80.05 is currently assigned to MS-DRGs 480 through 
482 (Hip and Femur Procedures Except Major Joint with MCC, with CC, and 
without CC/MCC, respectively). Code 80.06 is currently assigned to MS-
DRGs 495 through 497 (Local Excision and Removal Internal Fixation 
Devices Except Hip and Femur with MCC, with CC, and without CC/MCC, 
respectively).)
    The commenters stated that a deep infection is one of the most 
devastating complications associated with hip and knee joint 
replacements, and that these cases require increased costs and resource 
utilization. The commenters believed that there is a strong financial 
disincentive for physicians and hospitals to provide care for patients 
with infected joint replacements. They indicated that this leads to an 
increased economic burden on tertiary care referral centers where 
patients with infected joint replacements are frequently referred for 
definitive management.
    The commenters believed that codes 80.05 and 80.06 were a good 
proxy for cases of infected joints containing a previously implanted 
joint prosthesis. The commenters suggested that moving these two codes 
was considerably less complex than the previously discussed revisions 
to the joint DRGs. They also believed these two codes clearly captured 
cases with infected joint prostheses. The commenters believed that 
these codes would only be reported in cases of an infected joint where 
the previous infected prosthesis was removed and no new prosthesis was 
inserted. The commenters stated that when a previously implanted joint 
prosthesis is removed and replaced with a new prosthesis, coders assign 
only the code for the insertion of the new prosthesis. They added that 
they do not routinely assign an additional code for the removal of the 
joint prosthesis (code 80.05 or 80.06). The commenters also stated that 
when there is an infected joint, the joint prosthesis may be removed 
and extensive debridement may be provided involving bone and 
surrounding tissue. The commenters further stated that an antibiotic-
impregnated cement spacer may be inserted to maintain alignment of the 
limb during the course of antibiotic therapy. According to the 
commenters, the new prosthesis will not be inserted until such time as 
the infection is fully resolved. In this case, the commenter stated 
that code 80.05 or 80.06 would be reported.
    The commenters believed that when codes 80.05 or 80.06 are reported 
to capture the removal of a joint prosthesis, one can assume that the 
patient had a joint infection. Therefore, the commenters requested that 
codes 80.05 and 80.06 be reassigned to MS-DRGs 463, 464, and 465 
because wound debridement is a treatment for infected joints.
    Response: We agree with the commenters that we should not move 
codes 00.73, 00.83, and 00.84 to MS-DRGs 469 and 470. Our data do not 
support this change. Therefore, in this final rule for FY 2009, we are 
not moving codes 00.73, 00.83, and 00.84 to MS-DRGs 469 and 470.

[[Page 48506]]

    We evaluated the alternative suggestion of moving codes 80.05 and 
80.06 into MS-DRGs 463, 464, and 465. We disagree with the suggestion 
that the use of codes 80.05 and 80.06 serves as a good proxy for cases 
of infected joint prostheses. These two codes are used to capture the 
fact that a previously inserted joint prosthesis is now being removed. 
These prostheses can be removed for a variety of reason including 
wearing, breakage, and infection. Assuming that these cases are 
infections and then moving the cases to the debridement DRGs, MS-DRGs 
463, 464, and 465, is inappropriate. We acknowledge that when a patient 
has an infected joint prosthesis, the prosthesis may be removed and 
treatment for the infection instituted, such as debridement. However, 
the most specific way of identifying these cases would be to examine 
the diagnosis code for the presence of an infection and to look for a 
debridement procedure code.
    Furthermore, the current codes for removal of joint prostheses do 
not have specific instructions indicating that a coder must not report 
codes 80.05 and 80.06 when also reporting one of the joint revision 
codes. While the coding index implies that one does not need to report 
a code for the removal of the prosthesis when it is being replaced, it 
is not precluded under the codes. If a code is reported for the removal 
of the previous joint prosthesis along with a code for the joint 
revision, the proposed logic change would result in the case being 
assigned to MS-DRGs 463, 464, and 465 even though the patient did not 
have an infection or a debridement performed. This DRG assignment would 
be a result of the surgical hierarchy which places the debridement DRGs 
(MS-DRGs 463, 464, and 465) higher than the joint revision DRGs (MS-
DRGs 466, 467, and 468). The proposed MS-DRG logic change could lead to 
the misclassification of many joint revision cases that did not have an 
infection or a debridement into the debridement DRGs.
    We plan to discuss the need to provide more definitive coding notes 
under codes 80.05 and 80.06 at the September 24-25, 2008 ICD-9-CM 
Coordination and Maintenance Committee meeting to better clarify that 
one would not assign a code for the removal of a joint prosthesis if a 
new prosthesis is inserted. This clarification may be useful when 
considering future refinements to the joint procedure DRGs. However, at 
this time, we believe that codes 80.05 and 80.06 cannot be used as a 
definitive means of capturing cases of an infected joint prosthesis. We 
believe it is more appropriate to utilize diagnosis codes to clearly 
identify joint infections and debridement codes to indicate 
debridement. We will continue to examine means to better classify joint 
infections under the MS-DRGs. However, we are not moving codes 80.05 
and 80.06 into MS-DRGs 463, 464, and 465 at this time. In addition, as 
stated previously, we also are not moving codes 00.73, 00.83, and 00.84 
to MS-DRGs 469 and 470. We are making no changes to the joint procedure 
MS-DRGs for FY 2009.
    Comment: One commenter provided additional recommendations to those 
discussed in the previous comment. The commenter stated that, after 
submission of his first comment, he had discovered a technical anomaly 
in the treatment of patients with hip and knee revision who also have a 
debridement that relates to the surgical hierarchy in MDC 8. The 
commenter pointed out that the wound debridement and skin graft MS-DRGs 
(MS-DRGs 463, 464, and 465) are currently sequenced before the revision 
of hip or knee replacement MS-DRGs (MS-DRGs 466, 467, and 468). 
Therefore, the commenter added, if codes are reported for revision of 
hip or knee replacement as well as for debridement of an infection, the 
case will be assigned to MS-DRGs 463, 467, or 465. The commenter 
believed that cases with both a debridement and a total revision 
prosthesis are more clinically similar to the revision cases than the 
debridement cases. Therefore, the commenter requested that the order of 
the wound debridement and skin graft MS-DRGs and the revision of the 
hip and knee MS-DRGs be reversed.
    Response: We agree that the current logic for wound debridement of 
infections results in cases being assigned to MS-DRGs 463, 467, and 
465. We also agree that joint revisions without debridements of 
infections are currently assigned to MS-DRGs 466, 467, and 468. We 
point out that this logic results in patients with infections being 
assigned to the exact MS-DRGs requested by the commenters in the prior 
discussion. We believe this current logic results in the appropriate 
assignment of joint revisions with and without debridements.
    MS-DRGs 466, 467, and 468 contain revisions for both total and 
partial joint revisions. For instance, MS-DRGs 466, 467, and 468 
includes revisions of the total hip joint as well as a partial hip 
revision of only the femoral component. The commenter believed that a 
subset of the revision cases, those with a total revision, are more 
clinically similar to the revision cases than to the debridement cases. 
For this reason, the commenter recommended that the surgical hierarchy 
be changed so that revision of a hip and knee prosthesis in MS-DRGs 
466, 467, and 468 should be placed above the debridement MS-DRGs (MS-
DRGs 463, 464, and 465). We point out that the surgical hierarchy is 
based on all cases within each DRG, not a subset. Furthermore, we have 
no MS-DRG claims data on which to evaluate the need to change the 
surgical hierarchy based on this recommendation. We note that this 
discussion reinforces the point that the current codes for debridement 
of an infection and joint revisions seem to correctly assign cases to 
the most appropriate MS-DRG. Therefore, in this final rule, we are not 
making any changes to the joint procedure MS-DRGs for FY 2009. We are 
deferring the examination of infections of joint replacements until 
such time as we have MS-DRG claims data.
    Comment: Several commenters expressed their concern about the joint 
procedure MS-DRGs. The commenters supported CMS' efforts in the FY 2008 
IPPS final rule to better reflect the clinical needs of patients and 
the resources used by hospitals. The commenters particularly 
appreciated CMS' adoption of the FY 2008 refined joint replacement MS-
DRGs that better recognize patient acuity. However, the commenters 
believed that further refinements and additional MS-DRGs are needed for 
joint procedures. The commenters stated that the joint procedure MS-
DRGs could be improved by making changes in FY 2009 to the MCC/CC 
classifications of specific codes that represent conditions impacting 
joint procedure patients. In particular, the commenters recommended the 
following changes:
     Changing the following codes from non-CCs to CCs: 731.3 
(Major osseous defects); 278.0 (Overweight and obesity); V85.35 (Body 
Mass index 35.0-35.9, adult); V85.36 (Body Mass index 36.0-36.9, 
adult); and V85.37 (Body Mass index 37.0-37.9, adult).
     Changing the following codes from non-CCs to MCCs: 278.01 
(Morbid obesity); V85.38 (Body Mass index 38.0-38.9, adult); and V85.39 
(Body Mass index 39.0-39.9, adult).
     Changing code V85.40 (Body Mass index 40 and over, adult) 
from a CC to an MCC.
    The commenters also recommended that CMS continue to evaluate the 
MS-DRG assignments for codes 00.73 (Revision of hip replacement, 
acetabular liner and/or femoral head only) and 00.84 (Revision of total 
knee replacement, tibial insert (liner)). The commenters stated that 
once CMS receives MS-DRG data, these data may

[[Page 48507]]

support reassigning these codes to other MS-DRGs.
    Response: While we acknowledge that the commenters were concerned 
about the effect that the obesity may have on joint patients, we point 
out that specific codes are classified as CCs or MCCs based on how they 
affect a wide range of patients. In the creation of the MS-DRGs, 
clinical evaluation and claims data did support the current MCC/CC 
classifications for these codes. However, as we gain experience and 
data under the MS-DRG system, we will continue to examine ways to 
improve the joint procedure MS-DRGs. We do not have MS-DRG data to 
evaluate these MCC/CC reclassifications or the possible reassignment of 
codes 00.73 or 00.84 at this time.
    Therefore, in this final rule, we are not changing the MCC/CC 
classifications or the MS-DRG reassignments for codes 00.73, 00.83, or 
00.84 for FY 2009. We also are not making changes to the joint 
procedure MS-DRGs for FY 2009.
f. Conclusion
    The AAHKS recommended a number of complicated, interrelated MS-DRG 
changes to the joint procedure MS-DRGs. We have not yet had the 
opportunity to review data for these cases under the new MS-DRGs. We 
did analyze the impact of these recommendations using cases prior to 
the implementation of MS-DRGs. The recommendations were difficult to 
analyze because there were so many separate logic changes that impacted 
a number of MS-DRGs. We did examine each major suggestion separately, 
and found that our data and clinical analysis did not support making 
these changes. Therefore, in the FY 2009 IPPS proposed rule, we did not 
propose any revisions to the joint procedure MS-DRGs for FY 2009, nor 
are we making any revisions in this final rule. We look forward to 
examining these issues once we receive data under the MS-DRG system. As 
we indicated in the proposed rule, we also welcome additional 
recommendations from the AAHKS and others on a more incremental 
approach to resolving its concerns about the ability of the current MS-
DRGs to adequately capture differences in severity levels for joint 
procedure patients.
5. MDC 18 (Infections and Parasitic Diseases (Systemic or Unspecified 
Sites): Severe Sepsis
    We received a request from a manufacturer to modify the titles for 
three MS-DRGs with the most significant concentration of severe sepsis 
patients. The manufacturer stated that modification of the titles will 
assist in quality improvement efforts and provide a better reflection 
on the types of patients included in these MS-DRGs. Specifically, the 
manufacturer urged CMS to incorporate the term ``severe sepsis'' into 
the titles of the following MS-DRGs that became effective October 1, 
2007 (FY 2008)
     MS-DRG 870 (Septicemia with Mechanical Ventilation 96+ 
Hours)
     MS-DRG 871 (Septicemia without Mechanical Ventilation 96+ 
Hours with MCC)
     MS-DRG 872 (Septicemia without Mechanical Ventilation 96+ 
Hours without MCC)
    These MS-DRGs were created to better recognize severity of illness 
among patients diagnosed with conditions including septicemia, severe 
sepsis, septic shock, and systemic inflammatory response syndrome 
(SIRS) who are also treated with mechanical ventilation for a specified 
duration of time.
    According to the manufacturer, ``severe sepsis is a common, deadly 
and costly disease, yet the number of patients impacted and the 
outcomes associated with their care remain largely hidden within the 
administrative data set.'' The manufacturer further noted that, 
although improvements have been made in the ICD-9-CM coding of severe 
sepsis (diagnosis code 995.92) and septic shock (diagnosis code 
785.52), results of an analysis demonstrated an unacceptably high 
mortality rate for patients reported to have those conditions. The 
manufacturer believed that revising the titles to incorporate ``severe 
sepsis'' will provide various clinicians and researchers the 
opportunity to improve outcomes for these patients. Therefore, the 
manufacturer recommended revising the current MS-DRG titles as follows:
     Proposed Revised MS-DRG 870 (Septicemia or Severe Sepsis 
with Mechanical Ventilation 96+ Hours)
     Proposed Revised MS-DRG 871 (Septicemia or Severe Sepsis 
without Mechanical Ventilation 96+ Hours with MCC)
     Proposed Revised MS-DRG 872 (Septicemia or Severe Sepsis 
without Mechanical Ventilation 96+ Hours without MCC)
    Comment: Many commenters applauded CMS for helping to promote 
quality improvement efforts for patients with severe sepsis. The 
commenters expressed their support for revising the titles of MS-DRGs 
870, 871, and 872 to include the term ``Severe Sepsis''. The commenters 
agreed that MS-DRGs 870, 871, and 872 already include a significant 
concentration of patients with severe sepsis and the change would 
increase awareness as well as facilitate research to improve care and 
patient outcomes.
    Response: As we indicated in the proposed rule, we agree that 
revising the current MS-DRG titles to include the term ``Severe 
Sepsis'' would better assist in the recognition and identification of 
this disease, which could lead to better clinical outcomes and quality 
improvement efforts. In addition, both severe sepsis (diagnosis code 
995.92) and septic shock (diagnosis code 785.52) are currently already 
assigned to these three MS-DRGs. Therefore, as we proposed, in this 
final rule we are revising the titles of MS-DRGs 870, 871, and 872 to 
reflect severe sepsis in the titles for FY 2009, as suggested and 
listed above.
    Comment: One commenter thanked CMS for the proposal to modify the 
titles for MS-DRGs 870, 871, and 872 by including the term ``severe 
sepsis'' and suggested that the title for MS-DRG 853 (Infectious and 
Parasitic Diseases with O.R. Procedure with MCC) be modified to include 
the term ``severe sepsis and other'' as well. The commenter stated 
that, based on an analysis the commenter conducted using Medicare 
discharge data, the concentration of patients with severe sepsis (code 
995.92) and septic shock (code 785.52) in surgical MS-DRG 853 is 
comparable to the concentration of patients in medical MS-DRGs 870, 
871, and 872.
    According to the commenter's study, 43.1 percent of cases in MS-DRG 
853 represent patients with severe sepsis. As a result of these 
findings, the commenter stated that revising the title for MS-DRG 853 
to include the term ``severe sepsis and other'' would be consistent 
with the rationale for proposing to modify the titles to MS-DRGs 870, 
871, and 872. The commenter asserted that this additional MS-DRG 
modification would also better assist in the recognition and 
identification of severe sepsis, leading to better clinical outcomes 
and quality improvement efforts.
    Response: We appreciate the commenter's support for the proposal to 
modify the titles to MS-DRGs 870, 871, and 872 to include the term 
``Severe Sepsis''. As stated above, we agree and are finalizing the 
proposed revisions to the titles for MS-DRGs 870, 871, and 872 for FY 
2009.
    With regard to modifying the title to MS-DRG 853, we point out that 
the MS-DRG titles generally do not reflect all of the diagnoses or 
conditions that may have a significant concentration of patients within 
that particular MS-DRG.

[[Page 48508]]

In other words, the foundation of the MS-DRG titles represents 
``Diagnostic-Related Groups'' [emphasis added].
    We have also received several comments acknowledging CMS' 
discussion of the FY 2008 implementation of MS-DRGs and the lack of 
data to support major MS-DRG changes at this time. Overall, the 
commenters accepted CMS' proposal of not making significant revisions 
to the MS-DRGs until claims data under this new system are available. 
Therefore, as final policy for FY 2009, we are not making any change to 
the title for MS-DRG 853.
    Comment: One commenter agreed with CMS' proposal to revise the 
descriptions for MS-DRGs 870, 871, and 872 by including the term 
``Severe Sepsis'' in the titles. However, the commenter also suggested 
that CMS continue to study technological advances that may provide 
earlier identification of sepsis and clinical findings that indicate 
endotoxemia as a ``driver of morbidity and mortality in sepsis.''
    The commenter believed that it would be essential to continue 
making modifications to the MS-DRG classification system to recognize 
newer technologies and treatments. Specifically, this commenter asked 
that CMS consider endotoxemia as an MCC, stating this would be 
consistent with the current MS-DRG system's designation of sepsis and 
septicemia as MCCs.
    Response: We acknowledge the commenter's suggestion and appreciate 
the support for modifying the titles for MS-DRGs 870, 871, and 872 to 
include the term ``Severe Sepsis''. As mentioned earlier, we are 
finalizing the proposed revisions to the titles for these MS-DRGs for 
FY 2009.
    In response to the commenter's recommendation that the MS-DRG 
classification system continue to be modified for purposes of 
recognizing new technologies or treatments, we do have a process in 
place under which we annually evaluate data and specific issues brought 
to our attention to determine if revisions are warranted. We refer the 
reader to section II.B.2 of the preamble in this final rule for a 
discussion on this process, as well as section II.J. of the preamble of 
this final rule for a discussion on the new technology add-on payment 
policy.
    The term ``endotoxemia'' is defined as the presence of endotoxins 
in the blood. This condition (or finding) is established on the basis 
of a laboratory test. The ICD-9-CM coding system currently indexes the 
term ``endotoxemia'' with the instructional note to ``code to 
condition''. This instruction refers the coder to seek the underlying, 
definitive condition that is established and documented as a result of 
the laboratory finding of endotoxemia. Therefore, an ICD-9-CM code for 
endotoxemia does not exist and consideration cannot be given as to a 
severity level assignment such as MCC, as the commenter requested. 
However, as the commenter pointed out, the diagnoses of sepsis and 
septicemia are currently designated as MCCs and, as such; patients with 
these diagnoses are already appropriately identified in the 
classification system, despite the presence or absence of endotoxemia.
6. MDC 21 (Injuries, Poisonings and Toxic Effects of Drugs): Traumatic 
Compartment Syndrome
    Traumatic compartment syndrome is a condition in which increased 
pressure within a confined anatomical space that contains blood 
vessels, muscles, nerves, and bones causes a decrease in blood flow and 
may lead to tissue necrosis.
    There are five ICD-9-CM diagnosis codes that were created effective 
October 1, 2006, to identify traumatic compartment syndrome of various 
sites.
     958.90 (Compartment syndrome, unspecified)
     958.91 (Traumatic compartment syndrome of upper extremity)
     958.92 (Traumatic compartment syndrome of lower extremity)
     958.93 (Traumatic compartment syndrome of abdomen)
     958.99 (Traumatic compartment syndrome of other sites)
    Cases with one of the diagnosis codes listed above reported as the 
principal diagnosis and no operating room procedure are assigned to 
either MS-DRG 922 (Other Injury, Poisoning and Toxic Effect Diagnosis 
with MCC) or MS-DRG 923 (Other Injury, Poisoning and Toxic Effect 
Diagnosis without MCC) in MDC 21.
    In the FY 2008 IPPS final rule with comment period when we adopted 
the MS-DRGs, we inadvertently omitted the addition of these traumatic 
compartment syndrome codes 958.90 through 958.99 to the multiple trauma 
MS-DRGs 963 (Other Multiple Significant Trauma with MCC), MS-DRG 964 
(Other Multiple Significant Trauma with CC), and MS-DRG 965 (Other 
Multiple Significant Trauma without CC/MCC) in MDC 24 (Multiple 
Significant Trauma). Cases are assigned to MDC 24 based on the 
principal diagnosis of trauma and at least two significant trauma 
diagnosis codes (either as principal or secondary diagnoses) from 
different body site categories. There are eight different body site 
categories as follows:
     Significant head trauma
     Significant chest trauma
     Significant abdominal trauma
     Significant kidney trauma
     Significant trauma of the urinary system
     Significant trauma of the pelvis or spine
     Significant trauma of the upper limb
     Significant trauma of the lower limb
    Therefore, in the FY 2009 IPPS proposed rule, we proposed to add 
traumatic compartment syndrome codes 958.90 through 958.99 to MS-DRGs 
963 and MS-DRG 965 in MDC 24. Under this proposal, codes 958.90 through 
958.99 would be added to the list of principal diagnosis of significant 
trauma. In addition, code 958.91 would be added to the list of 
significant trauma of upper limb, code 958.92 would be added to the 
list of significant trauma of lower limb, and code 958.93 would be 
added to the list of significant abdominal trauma.
    We did not address the consolidation of heart transplant MS-DRGs or 
liver transplant MS-DRGs in the FY 2009 IPPS proposed rule. However, we 
received a comment on these issues.
    Comment: One commenter representing a national association of 
health information professionals expressed appreciation to CMS for 
proposing to add the traumatic compartment syndrome codes to the 
multiple trauma MS-DRGs in order to correct a previous omission.
    Response: We appreciate the commenter's support.
    In this final rule, we are adopting as final our proposal to add 
traumatic compartment syndrome codes 958.90 through 958.99 to MS-DRGs 
963 and MS-DRG 965 in MDC 24. Codes 958.90 through 958.99 are added to 
the list of principal diagnosis of significant trauma. In addition, 
code 958.91 is added to the list of significant trauma of upper limb, 
code 958.92 is added to the list of significant trauma of lower limb, 
and code 958.93 is added to the list of significant abdominal trauma.
7. Medicare Code Editor (MCE) Changes
    As explained under section II.B.1. of the preamble of this final 
rule, the Medicare Code Editor (MCE) is a software program that detects 
and reports errors in the coding of Medicare claims data. Patient 
diagnoses, procedure(s), and demographic information are entered into 
the Medicare claims processing systems and are subjected to a series of 
automated screens. The MCE screens are designed to identify cases that 
require further review before classification into a DRG.

[[Page 48509]]

For FY 2009, we proposed to make the following changes to the MCE 
edits:
a. List of Unacceptable Principal Diagnoses in MCE
    Diagnosis code V62.84 (Suicidal ideation) was created for use 
beginning October 1, 2005. At the time the diagnosis code was created, 
it was not clear that the creation of this code was requested in order 
to describe the principal reason for admission to a facility or the 
principal reason for treatment. The NCHS Official ICD-9-CM Coding 
Guidelines therefore categorized the group of codes in V62.X for use 
only as additional or secondary diagnoses. It has been brought to the 
government's attention that the use of this code is hampered by its 
designation as an additional-only diagnosis. NCHS has therefore 
modified the Official Coding Guidelines for FY 2009 by making this code 
acceptable as a principal diagnosis as well as an additional diagnosis. 
In order to conform to this change by NCHS, we proposed to remove code 
V62.84 from the MCE list of ``Unacceptable Principal Diagnoses'' for FY 
2009.
    We did not receive any public comments on this proposal. Therefore, 
in this final rule, we are adopting as final our proposal to remove 
code V62.84 from the MCE list of ``Unacceptable Principal Diagnoses'' 
for FY 2009.
b. Diagnoses Allowed for Males Only Edit
    There are four diagnosis codes that were inadvertently left off of 
the MCE edit titled ``Diagnoses Allowed for Males Only.'' These codes 
are located in the chapter of the ICD-9-CM diagnosis codes entitled 
``Diseases of Male Genital Organs.'' We are proposing to add the 
following four codes to this MCE edit: 603.0 (Encysted hydrocele), 
603.1 (Infected hydrocele), 603.8 (Other specified types of hydrocele), 
and 603.9 (Hydrocele, unspecified). We have had no reported problems or 
confusion with the omission of these codes from this section of the 
MCE, but in order to have an accurate product, we proposed that these 
codes be added for FY 2009.
    We did not receive any public comments on these proposed MCE 
revisions. Therefore, for FY 2009, we are implementing the proposed 
changes as final by adding codes 603.0, 603.1, 603.8, and 603.9 to the 
MCE edit of diagnosis allowed for males only.
c. Limited Coverage Edit
    As explained in section II.G.1. of the preamble of the proposed 
rule, we proposed to remove procedure code 37.52 (Implantation of 
internal biventricular heart replacement system) from the MCE ``Non-
Covered Procedure'' edit and to assign it to the ``Limited Coverage'' 
edit. We proposed to include in this proposed edit the requirement that 
ICD-9-CM diagnosis code V70.7 (Examination of participant in clinical 
trial) also be present on the claim. We proposed that claims submitted 
without both procedure code 37.52 and diagnosis code V70.7 would be 
denied because they would not be in compliance with the coverage policy 
explained in section II.G.1. of this preamble.
    We did not receive any public comments on this proposed MCE 
revision. Therefore, for FY 2009, we are implementing the proposed 
changes as final by removing code 37.52 from the ``Non-Covered 
Procedures'' edit and assigning it to the ``Limited Coverage'' edit. In 
addition, included in this edit is the requirement that ICD-9-CM 
diagnosis code V70.7 also be present on the claim. Claims submitted on 
behalf of Medicare beneficiaries that do not have both procedure code 
37.52 and diagnosis code V70.7 will be denied, retroactive to May 1, 
2008 (the date of the coverage decision memorandum described in section 
II.G.1. of the preamble of this final rule).
8. Surgical Hierarchies
    Some inpatient stays entail multiple surgical procedures, each one 
of which, occurring by itself, could result in assignment of the case 
to a different MS-DRG within the MDC to which the principal diagnosis 
is assigned. Therefore, it is necessary to have a decision rule within 
the GROUPER by which these cases are assigned to a single MS-DRG. The 
surgical hierarchy, an ordering of surgical classes from most resource-
intensive to least resource-intensive, performs that function. 
Application of this hierarchy ensures that cases involving multiple 
surgical procedures are assigned to the MS-DRG associated with the most 
resource-intensive surgical class.
    Because the relative resource intensity of surgical classes can 
shift as a function of MS-DRG reclassification and recalibrations, we 
reviewed the surgical hierarchy of each MDC, as we have for previous 
reclassifications and recalibrations, to determine if the ordering of 
classes coincides with the intensity of resource utilization.
    A surgical class can be composed of one or more MS-DRGs. For 
example, in MDC 11, the surgical class ``kidney transplant'' consists 
of a single MS-DRG (MS-DRG 652) and the class ``kidney, ureter and 
major bladder procedures'' consists of three MS-DRGs (MS-DRGs 653, 654, 
and 655). Consequently, in many cases, the surgical hierarchy has an 
impact on more than one MS-DRG. The methodology for determining the 
most resource-intensive surgical class involves weighting the average 
resources for each MS-DRG by frequency to determine the weighted 
average resources for each surgical class. For example, assume surgical 
class A includes MS-DRGs 1 and 2 and surgical class B includes MS-DRGs 
3, 4, and 5. Assume also that the average charge of MS-DRG 1 is higher 
than that of MS-DRG 3, but the average charges of MS-DRGs 4 and 5 are 
higher than the average charge of MS-DRG 2. To determine whether 
surgical class A should be higher or lower than surgical class B in the 
surgical hierarchy, we would weight the average charge of each MS-DRG 
in the class by frequency (that is, by the number of cases in the MS-
DRG) to determine average resource consumption for the surgical class. 
The surgical classes would then be ordered from the class with the 
highest average resource utilization to that with the lowest, with the 
exception of ``other O.R. procedures'' as discussed below.
    This methodology may occasionally result in assignment of a case 
involving multiple procedures to the lower-weighted MS-DRG (in the 
highest, most resource-intensive surgical class) of the available 
alternatives. However, given that the logic underlying the surgical 
hierarchy provides that the GROUPER search for the procedure in the 
most resource-intensive surgical class, in cases involving multiple 
procedures, this result is sometimes unavoidable.
    We note that, notwithstanding the foregoing discussion, there are a 
few instances when a surgical class with a lower average charge is 
ordered above a surgical class with a higher average charge. For 
example, the ``other O.R. procedures'' surgical class is uniformly 
ordered last in the surgical hierarchy of each MDC in which it occurs, 
regardless of the fact that the average charge for the MS-DRG or MS-
DRGs in that surgical class may be higher than that for other surgical 
classes in the MDC. The ``other O.R. procedures'' class is a group of 
procedures that are only infrequently related to the diagnoses in the 
MDC, but are still occasionally performed on patients in the MDC with 
these diagnoses. Therefore, assignment to these surgical classes should 
only occur if no other surgical class more closely related to the 
diagnoses in the MDC is appropriate.
    A second example occurs when the difference between the average 
charges for two surgical classes is very small.

[[Page 48510]]

We have found that small differences generally do not warrant 
reordering of the hierarchy because, as a result of reassigning cases 
on the basis of the hierarchy change, the average charges are likely to 
shift such that the higher-ordered surgical class has a lower average 
charge than the class ordered below it.
    For FY 2009, we proposed to revise the surgical hierarchy for MDC 5 
(Diseases and Disorders of the Circulatory System) by reordering MS-DRG 
245 (AICD Generator Procedures) above new MS-DRG 265 (AICD Lead 
Procedures).
    We did not receive any public comments on the proposed change to 
the surgical hierarchy described above. Based on the test of the 
proposed revision using the March 2008 update of the FY 2007 MedPAR 
file and the revised GROUPER software, we found that the revision is 
still supported by the data. Therefore, we are incorporating the 
proposed revision to the surgical hierarchy as final for FY 2009.
9. CC Exclusions List
a. Background
    As indicated earlier in the preamble of this final rule, under the 
IPPS DRG classification system, we have developed a standard list of 
diagnoses that are considered CCs. Historically, we developed this list 
using physician panels that classified each diagnosis code based on 
whether the diagnosis, when present as a secondary condition, would be 
considered a substantial complication or comorbidity. A substantial 
complication or comorbidity was defined as a condition that, because of 
its presence with a specific principal diagnosis, would cause an 
increase in the length of stay by at least 1 day in at least 75 percent 
of the patients. We refer readers to section II.D.2. and 3. of the 
preamble of the FY 2008 IPPS final rule with comment period for a 
discussion of the refinement of CCs in relation to the MS-DRGs we 
adopted for FY 2008 (72 FR 47152 through 47121).
b. CC Exclusions List for FY 2009
    In the September 1, 1987 final notice (52 FR 33143) concerning 
changes to the DRG classification system, we modified the GROUPER logic 
so that certain diagnoses included on the standard list of CCs would 
not be considered valid CCs in combination with a particular principal 
diagnosis. We created the CC Exclusions List for the following reasons: 
(1) To preclude coding of CCs for closely related conditions; (2) to 
preclude duplicative or inconsistent coding from being treated as CCs; 
and (3) to ensure that cases are appropriately classified between the 
complicated and uncomplicated DRGs in a pair. As we indicated above, we 
developed a list of diagnoses, using physician panels, to include those 
diagnoses that, when present as a secondary condition, would be 
considered a substantial complication or comorbidity. In previous 
years, we have made changes to the list of CCs, either by adding new 
CCs or deleting CCs already on the list.
    In the May 19, 1987 proposed notice (52 FR 18877) and the September 
1, 1987 final notice (52 FR 33154), we explained that the excluded 
secondary diagnoses were established using the following five 
principles:
     Chronic and acute manifestations of the same condition 
should not be considered CCs for one another.
     Specific and nonspecific (that is, not otherwise specified 
(NOS)) diagnosis codes for the same condition should not be considered 
CCs for one another.
     Codes for the same condition that cannot coexist, such as 
partial/total, unilateral/bilateral, obstructed/unobstructed, and 
benign/malignant, should not be considered CCs for one another.
     Codes for the same condition in anatomically proximal 
sites should not be considered CCs for one another.
     Closely related conditions should not be considered CCs 
for one another.
    The creation of the CC Exclusions List was a major project 
involving hundreds of codes. We have continued to review the remaining 
CCs to identify additional exclusions and to remove diagnoses from the 
master list that have been shown not to meet the definition of a 
CC.\19\
---------------------------------------------------------------------------

    \19\ See the FY 1989 final rule (53 FR 38485, September 30, 
1988), for the revision made for the discharges occurring in FY 
1989; the FY 1990 final rule (54 FR 36552, September 1, 1989), for 
the FY 1990 revision; the FY 1991 final rule (55 FR 36126, September 
4, 1990), for the FY 1991 revision; the FY 1992 final rule (56 FR 
43209, August 30, 1991) for the FY 1992 revision; the FY 1993 final 
rule (57 FR 39753, September 1, 1992), for the FY 1993 revision; the 
FY 1994 final rule (58 FR 46278, September 1, 1993), for the FY 1994 
revisions; the FY 1995 final rule (59 FR 45334, September 1, 1994), 
for the FY 1995 revisions; the FY 1996 final rule (60 FR 45782, 
September 1, 1995), for the FY 1996 revisions; the FY 1997 final 
rule (61 FR 46171, August 30, 1996), for the FY 1997 revisions; the 
FY 1998 final rule (62 FR 45966, August 29, 1997) for the FY 1998 
revisions; the FY 1999 final rule (63 FR 40954, July 31, 1998), for 
the FY 1999 revisions; the FY 2001 final rule (65 FR 47064, August 
1, 2000), for the FY 2001 revisions; the FY 2002 final rule (66 FR 
39851, August 1, 2001), for the FY 2002 revisions; the FY 2003 final 
rule (67 FR 49998, August 1, 2002), for the FY 2003 revisions; the 
FY 2004 final rule (68 FR 45364, August 1, 2003), for the FY 2004 
revisions; the FY 2005 final rule (69 FR 49848, August 11, 2004), 
for the FY 2005 revisions; the FY 2006 final rule (70 FR 47640, 
August 12, 2005), for the FY 2006 revisions; the FY 2007 final rule 
(71 FR 47870) for the FY 2007 revisions; and the FY 2008 final rule 
(72 FR 47130) for the FY 2008 revisions. In the FY 2000 final rule 
(64 FR 41490, July 30, 1999, we did not modify the CC Exclusions 
List because we did not make any changes to the ICD-9-CM codes for 
FY 2000.
---------------------------------------------------------------------------

    For FY 2009, as we proposed, in this final rule we are making 
limited revisions to the CC Exclusions List to take into account the 
changes that will be made in the ICD-9-CM diagnosis coding system 
effective October 1, 2008. (See section II.G.11. of the preamble of 
this final rule for a discussion of ICD-9-CM changes.) We are making 
these changes in accordance with the principles established when we 
created the CC Exclusions List in 1987. In addition, as discussed in 
section II.D.3. of the preamble of this final rule, we are indicating 
on the CC exclusion list some updates to reflect the exclusion of a few 
codes from being an MCC under the MS-DRG system that we adopted for FY 
2008.
    Tables 6G and 6H, Additions to and Deletions from the CC Exclusion 
List, respectively, which will be effective for discharges occurring on 
or after October 1, 2008, are not being published in this final rule 
because of the length of the two tables. Instead, we are making them 
available through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS. Each of these principal diagnoses 
for which there is a CC exclusion is shown in Tables 6G and 6H with an 
asterisk, and the conditions that will not count as a CC, are provided 
in an indented column immediately following the affected principal 
diagnosis.
    A complete updated MCC, CC, and Non-CC Exclusions List is also 
available through the Internet on the CMS Web site at: http:/
www.cms.hhs.gov/AcuteInpatientPPS. Beginning with discharges on or 
after October 1, 2008, the indented diagnoses will not be recognized by 
the GROUPER as valid CCs for the asterisked principal diagnosis.
    To assist readers in the review of changes to the MCC and CC lists 
that occurred as a result of updates to the ICD-9-CM codes, as 
described in Tables 6A, 6C, and 6E, we are providing the following 
summaries of those MCC and CC changes.
    In the summary tables, the diagnosis codes with an asterisk (*) 
were discussed at the March 19-20, 2008 ICD-9-CM Coordination and 
Maintenance Committee meeting and were not finalized in time to include 
in the proposed rule. Code 998.33 in Table 6J1, marked with two 
asterisks (**), had a change in code title subsequent to the

[[Page 48511]]

proposed rule. The new codes will be implemented on October 1, 2008.

         Summary of Additions to the MS-DRG MCC List--Table 6I.1
------------------------------------------------------------------------
             Code                              Description
------------------------------------------------------------------------
038.12*.......................  Methicillin resistant Staphylococcus
                                 aureus septicemia.
249.10........................  Secondary diabetes mellitus with
                                 ketoacidosis, not stated as
                                 uncontrolled, or unspecified.
249.11........................  Secondary diabetes mellitus with
                                 ketoacidosis, uncontrolled.
249.20........................  Secondary diabetes mellitus with
                                 hyperosmolarity, not stated as
                                 uncontrolled, or unspecified.
249.21........................  Secondary diabetes mellitus with
                                 hyperosmolarity, uncontrolled.
249.30........................  Secondary diabetes mellitus with other
                                 coma, not stated as uncontrolled, or
                                 unspecified.
249.31........................  Secondary diabetes mellitus with other
                                 coma, uncontrolled.
482.42*.......................  Methicillin resistant pneumonia due to
                                 Staphylococcus aureus.
535.71*.......................  Eosinophilic gastritis, with hemorrhage.
707.23........................  Pressure ulcer, stage III.
707.24........................  Pressure ulcer, stage IV.
777.50........................  Necrotizing enterocolitis in newborn,
                                 unspecified.
777.51........................  Stage I necrotizing enterocolitis in
                                 newborn.
777.52........................  Stage II necrotizing enterocolitis in
                                 newborn.
777.53........................  Stage III necrotizing enterocolitis in
                                 newborn.
780.72........................  Functional quadriplegia.
------------------------------------------------------------------------


        Summary of Deletions From the MS-DRG MCC List--Table 6I.2
------------------------------------------------------------------------
             Code                              Description
------------------------------------------------------------------------
136.2.........................  Specific infections by free-living
                                 amebae.
511.8.........................  Other specified forms of pleural
                                 effusion, except tuberculous.
707.02........................  Pressure ulcer, upper back.
707.03........................  Pressure ulcer, lower back.
707.04........................  Pressure ulcer, hip.
707.05........................  Pressure ulcer, buttock.
707.06........................  Pressure ulcer, ankle.
707.07........................  Pressure ulcer, heel.
777.5.........................  Necrotizing enterocolitis in fetus or
                                 newborn.
------------------------------------------------------------------------


         Summary of Additions to the MS-DRG CC List--Table 6J.1
------------------------------------------------------------------------
             Code                              Description
------------------------------------------------------------------------
046.11........................  Variant Creutzfeldt-Jakob disease.
046.19........................  Other and unspecified Creutzfeldt-Jakob
                                 disease.
046.71........................  Gerstmann-Str[auml]ussler-Scheinker
                                 syndrome.
046.72........................  Fatal familial insomnia.
046.79........................  Other and unspecified prion disease of
                                 central nervous system.
059.01........................  Monkeypox.
059.21........................  Tanapox.
136.29........................  Other specific infections by free-living
                                 amebae.
199.2.........................  Malignant neoplasm associated with
                                 transplant organ.
203.02........................  Multiple myeloma, in relapse.
203.12........................  Plasma cell leukemia, in relapse.
203.82........................  Other immunoproliferative neoplasms, in
                                 relapse.
204.02........................  Acute lymphoid leukemia, in relapse.
204.12........................  Chronic lymphoid leukemia, in relapse.
204.22........................  Subacute lymphoid leukemia, in relapse.
204.82........................  Other lymphoid leukemia, in relapse.
204.92........................  Unspecified lymphoid leukemia, in
                                 relapse.
205.02........................  Acute myeloid leukemia, in relapse.
205.12........................  Chronic myeloid leukemia, in relapse.
205.22........................  Subacute myeloid leukemia, in relapse.
205.32........................  Myeloid sarcoma, in relapse.
205.82........................  Other myeloid leukemia, in relapse.
205.92........................  Unspecified myeloid leukemia, in
                                 relapse.
206.02........................  Acute monocytic leukemia, in relapse.
206.12........................  Chronic monocytic leukemia, in relapse.
206.22........................  Subacute monocytic leukemia, in relapse.
206.82........................  Other monocytic leukemia, in relapse.
206.92........................  Unspecified monocytic leukemia, in
                                 relapse.
207.02........................  Acute erythremia and erythroleukemia, in
                                 relapse.
207.12........................  Chronic erythremia, in relapse.
207.22........................  Megakaryocytic leukemia, in relapse.
207.82........................  Other specified leukemia, in relapse.

[[Page 48512]]

 
208.02........................  Acute leukemia of unspecified cell type,
                                 in relapse.
208.12........................  Chronic leukemia of unspecified cell
                                 type, in relapse.
208.22........................  Subacute leukemia of unspecified cell
                                 type, in relapse.
208.82........................  Other leukemia of unspecified cell type,
                                 in relapse.
208.92........................  Unspecified leukemia, in relapse.
209.00........................  Malignant carcinoid tumor of the small
                                 intestine, unspecified portion.
209.01........................  Malignant carcinoid tumor of the
                                 duodenum.
209.02........................  Malignant carcinoid tumor of the
                                 jejunum.
209.03........................  Malignant carcinoid tumor of the ileum.
209.10........................  Malignant carcinoid tumor of the large
                                 intestine, unspecified portion.
209.11........................  Malignant carcinoid tumor of the
                                 appendix.
209.12........................  Malignant carcinoid tumor of the cecum.
209.13........................  Malignant carcinoid tumor of the
                                 ascending colon.
209.14........................  Malignant carcinoid tumor of the
                                 transverse colon.
209.15........................  Malignant carcinoid tumor of the
                                 descending colon.
209.16........................  Malignant carcinoid tumor of the sigmoid
                                 colon.
209.17........................  Malignant carcinoid tumor of the rectum.
209.20........................  Malignant carcinoid tumor of unknown
                                 primary site.
209.21........................  Malignant carcinoid tumor of the
                                 bronchus and lung.
209.22........................  Malignant carcinoid tumor of the thymus.
209.23........................  Malignant carcinoid tumor of the
                                 stomach.
209.24........................  Malignant carcinoid tumor of the kidney.
209.25........................  Malignant carcinoid tumor of foregut,
                                 not otherwise specified.
209.26........................  Malignant carcinoid tumor of midgut, not
                                 otherwise specified.
209.27........................  Malignant carcinoid tumor of hindgut,
                                 not otherwise specified.
209.29........................  Malignant carcinoid tumor of other
                                 sites.
209.30........................  Malignant poorly differentiated
                                 neuroendocrine carcinoma, any site.
238.77........................  Post-transplant lymphoproliferative
                                 disorder (PTLD).
279.50........................  Graft-versus-host disease, unspecified.
279.51........................  Acute graft-versus-host disease.
279.52........................  Chronic graft-versus-host disease.
279.53........................  Acute on chronic graft-versus-host
                                 disease.
346.60........................  Persistent migraine aura with cerebral
                                 infarction, without mention of
                                 intractable migraine without mention of
                                 status migrainosus.
346.61........................  Persistent migraine aura with cerebral
                                 infarction, with intractable migraine,
                                 so stated, without mention of status
                                 migrainosus.
346.62........................  Persistent migraine aura with cerebral
                                 infarction, without mention of
                                 intractable migraine with status
                                 migrainosus.
346.63........................  Persistent migraine aura with cerebral
                                 infarction, with intractable migraine,
                                 so stated, with status migrainosus.
349.31*.......................  Accidental puncture or laceration of
                                 dura during a procedure.
349.39*.......................  Other dural tear.
511.81........................  Malignant pleural effusion.
511.89........................  Other specified forms of effusion,
                                 except tuberculous.
649.70........................  Cervical shortening, unspecified as to
                                 episode of care or not applicable.
649.71........................  Cervical shortening, delivered, with or
                                 without mention of antepartum
                                 condition.
649.73........................  Cervical shortening, antepartum
                                 condition or complication.
695.12........................  Erythema multiforme major.
695.13........................  Stevens-Johnson syndrome.
695.14........................  Stevens-Johnson syndrome-toxic epidermal
                                 necrolysis overlap syndrome.
695.15........................  Toxic epidermal necrolysis.
695.53........................  Exfoliation due to erythematous
                                 condition involving 30-39 percent of
                                 body surface.
695.54........................  Exfoliation due to erythematous
                                 condition involving 40-49 percent of
                                 body surface.
695.55........................  Exfoliation due to erythematous
                                 condition involving 50-59 percent of
                                 body surface.
695.56........................  Exfoliation due to erythematous
                                 condition involving 60-69 percent of
                                 body surface.
695.57........................  Exfoliation due to erythematous
                                 condition involving 70-79 percent of
                                 body surface.
695.58........................  Exfoliation due to erythematous
                                 condition involving 80-89 percent of
                                 body surface.
695.59........................  Exfoliation due to erythematous
                                 condition involving 90 percent or more
                                 of body surface.
997.31........................  Ventilator associated pneumonia.
997.39........................  Other respiratory complications.
998.30........................  Disruption of wound, unspecified.
998.33**......................  Disruption of traumatic injury wound
                                 repair.
999.81........................  Extravasation of vesicant chemotherapy.
999.82........................  Extravasation of other vesicant agent
------------------------------------------------------------------------


         Summary of Deletions to the MS-DRG CC List--Table 6J.2
------------------------------------------------------------------------
             Code                              Description
------------------------------------------------------------------------
046.1.........................  Jakob-Creutzfeldt disease.
337.0.........................  Idiopathic peripheral autonomic
                                 neuropathy.
695.1.........................  Erythema multiforme.
707.00........................  Pressure ulcer, unspecified site.
707.01........................  Pressure ulcer, elbow.

[[Page 48513]]

 
707.09........................  Pressure ulcer, other site.
997.3.........................  Respiratory complications.
999.8.........................  Other transfusion reaction.
------------------------------------------------------------------------

    Alternatively, the complete documentation of the GROUPER logic, 
including the current CC Exclusions List, is available from 3M/Health 
Information Systems (HIS), which, under contract with CMS, is 
responsible for updating and maintaining the GROUPER program. The 
current DRG Definitions Manual, Version 25.0, is available for $225.00, 
which includes $15.00 for shipping and handling. Version 26.0 of this 
manual, which includes the final FY 2009 DRG changes, is available in 
hard copy for $250.00. Version 26.0 of the manual is also available on 
a CD for $200.00; a combination hard copy and CD is available for 
$400.00. These manuals may be obtained by writing 3M/HIS at the 
following address: 100 Barnes Road, Wallingford, CT 06492; or by 
calling (203) 949-0303. Please specify the revision or revisions 
requested.
10. Review of Procedure Codes in MS DRGs 981, 982, and 983; 984, 985, 
and 986; and 987, 988, and 989.
    Each year, we review cases assigned to former CMS DRG 468 
(Extensive O.R. Procedure Unrelated to Principal Diagnosis), CMS DRG 
476 (Prostatic O.R. Procedure Unrelated to Principal Diagnosis), and 
CMS DRG 477 (Nonextensive O.R. Procedure Unrelated to Principal 
Diagnosis) to determine whether it would be appropriate to change the 
procedures assigned among these CMS DRGs. Under the MS-DRGs that we 
adopted for FY 2008, CMS DRG 468 was split three ways and became MS-
DRGs 981, 982, and 983 (Extensive O.R. Procedure Unrelated to Principal 
Diagnosis with MCC, with CC, and without CC/MCC). CMS DRG 476 became 
MS-DRGs 984, 985, and 986 (Prostatic O.R. Procedure Unrelated to 
Principal Diagnosis with MCC, with CC, and without CC/MCC). CMS DRG 477 
became MS-DRGs 987, 988, and 989 (Nonextensive O.R. Procedure Unrelated 
to Principal Diagnosis with MCC, with CC, and without CC/MCC).
    MS-DRGs 981 through 983, 984 through 986, and 987 through 989 
(formerly CMS DRGs 468, 476, and 477, respectively) are reserved for 
those cases in which none of the O.R. procedures performed are related 
to the principal diagnosis. These DRGs are intended to capture atypical 
cases, that is, those cases not occurring with sufficient frequency to 
represent a distinct, recognizable clinical group. MS-DRGs 984 through 
986 (previously CMS DRG 476) are assigned to those discharges in which 
one or more of the following prostatic procedures are performed and are 
unrelated to the principal diagnosis:
     60.0, Incision of prostate
     60.12, Open biopsy of prostate
     60.15, Biopsy of periprostatic tissue
     60.18, Other diagnostic procedures on prostate and 
periprostatic tissue
     60.21, Transurethral prostatectomy
     60.29, Other transurethral prostatectomy
     60.61, Local excision of lesion of prostate
     60.69, Prostatectomy, not elsewhere classified
     60.81, Incision of periprostatic tissue
     60.82, Excision of periprostatic tissue
     60.93, Repair of prostate
     60.94, Control of (postoperative) hemorrhage of prostate
     60.95, Transurethral balloon dilation of the prostatic 
urethra
     60.96, Transurethral destruction of prostate tissue by 
microwave thermotherapy
     60.97, Other transurethral destruction of prostate tissue 
by other thermotherapy
     60.99, Other operations on prostate
    All remaining O.R. procedures are assigned to MS-DRGs 981 through 
983 and 987 through 989, with MS-DRGs 987 through 989 assigned to those 
discharges in which the only procedures performed are nonextensive 
procedures that are unrelated to the principal diagnosis.\20\
---------------------------------------------------------------------------

    \20\ The original list of the ICD-9-CM procedure codes for the 
procedures we consider nonextensive procedures, if performed with an 
unrelated principal diagnosis, was published in Table 6C in section 
IV. of the Addendum to the FY 1989 final rule (53 FR 38591). As part 
of the FY 1991 final rule (55 FR 36135), the FY 1992 final rule (56 
FR 43212), the FY 1993 final rule (57 FR 23625), the FY 1994 final 
rule (58 FR 46279), the FY 1995 final rule (59 FR 45336), the FY 
1996 final rule (60 FR 45783), the FY 1997 final rule (61 FR 46173), 
and the FY 1998 final rule (62 FR 45981), we moved several other 
procedures from DRG 468 to DRG 477, and some procedures from DRG 477 
to DRG 468. No procedures were moved in FY 1999, as noted in the 
final rule (63 FR 40962); in FY 2000 (64 FR 41496); in FY 2001 (65 
FR 47064); or in FY 2002 (66 FR 39852). In the FY 2003 final rule 
(67 FR 49999) we did not move any procedures from DRG 477. However, 
we did move procedure codes from DRG 468 and placed them in more 
clinically coherent DRGs. In the FY 2004 final rule (68 FR 45365), 
we moved several procedures from DRG 468 to DRGs 476 and 477 because 
the procedures are nonextensive. In the FY 2005 final rule (69 FR 
48950), we moved one procedure from DRG 468 to 477. In addition, we 
added several existing procedures to DRGs 476 and 477. In the FY 
2006 (70 FR 47317), we moved one procedure from DRG 468 and assigned 
it to DRG 477. In FY 2007, we moved one procedure from DRG 468 and 
assigned it to DRGs 479, 553, and 554. In FY 2008, no procedures 
were moved, as noted in the final rule with comment period (72 FR 
46241).
---------------------------------------------------------------------------

    For FY 2009, we did not propose to change the procedures assigned 
among these DRGs. We did not receive any public comments on our 
proposal and, therefore, are adopting it as final for FY 2009 in this 
final rule.
a. Moving Procedure Codes From MS-DRGs 981 Through 983 or MS-DRGs 987 
Through 989 to MDCs
    We annually conduct a review of procedures producing assignment to 
MS-DRGs 981 through 983 (formerly CMS DRG 468) or MS-DRGs 987 through 
989 (formerly CMS DRG 477) on the basis of volume, by procedure, to see 
if it would be appropriate to move procedure codes out of these DRGs 
into one of the surgical DRGs for the MDC into which the principal 
diagnosis falls. The data are arrayed in two ways for comparison 
purposes. We look at a frequency count of each major operative 
procedure code. We also compare procedures across MDCs by volume of 
procedure codes within each MDC.
    We identify those procedures occurring in conjunction with certain 
principal diagnoses with sufficient frequency to justify adding them to 
one of the surgical DRGs for the MDC in which the diagnosis falls. For 
FY 2009, we did not propose to remove any procedures from MS-DRGs 981 
through 983 or MS-DRGs 987 through 989. We did not receive any public 
comments on our proposal and, therefore, we are adopting it as final 
for FY 2009 in this final rule.
b. Reassignment of Procedures Among MS-DRGs 981 Through 983, 984 
Through 986, and 987 Through 989
    We also annually review the list of ICD-9-CM procedures that, when 
in combination with their principal

[[Page 48514]]

diagnosis code, result in assignment to MS-DRGs 981 through 983, 984 
through 986, and 987 through 989 (formerly, CMS DRGs 468, 476, and 477, 
respectively), to ascertain whether any of those procedures should be 
reassigned from one of these three DRGs to another of the three DRGs 
based on average charges and the length of stay. We look at the data 
for trends such as shifts in treatment practice or reporting practice 
that would make the resulting DRG assignment illogical. If we find 
these shifts, we would propose to move cases to keep the DRGs 
clinically similar or to provide payment for the cases in a similar 
manner. Generally, we move only those procedures for which we have an 
adequate number of discharges to analyze the data.
    For FY 2009, we did not propose to move any procedure codes among 
these DRGs. We did not receive any public comments on our proposal and, 
therefore, we are adopting it as final for FY 2009 in this final rule.
c. Adding Diagnosis or Procedure Codes to MDCs
    Based on our review this year, as we proposed, we are not adding 
any diagnosis codes to MDCs for FY 2009. We did not receive any public 
comments on this subject.
11. Changes to the ICD-9-CM Coding System
    As described in section II.B.1. of the preamble of this final rule, 
the ICD-9-CM is a coding system used for the reporting of diagnoses and 
procedures performed on a patient. In September 1985, the ICD-9-CM 
Coordination and Maintenance Committee was formed. This is a Federal 
interdepartmental committee, co-chaired by the National Center for 
Health Statistics (NCHS), the Centers for Disease Control and 
Prevention, and CMS, charged with maintaining and updating the ICD-9-CM 
system. The Committee is jointly responsible for approving coding 
changes, and developing errata, addenda, and other modifications to the 
ICD-9-CM to reflect newly developed procedures and technologies and 
newly identified diseases. The Committee is also responsible for 
promoting the use of Federal and non-Federal educational programs and 
other communication techniques with a view toward standardizing coding 
applications and upgrading the quality of the classification system.
    The Official Version of the ICD-9-CM contains the list of valid 
diagnosis and procedure codes. (The Official Version of the ICD-9-CM is 
available from the Government Printing Office on CD-ROM for $27.00 by 
calling (202) 512-1800.) Complete information on ordering the CD-ROM is 
also available at: http://www.cdc.gov/nchs/products/_prods/subject/icd96ed.htm. The Official Version of the ICD-9-CM is no longer 
available in printed manual form from the Federal Government; it is 
only available on CD-ROM. Users who need a paper version are referred 
to one of the many products available from publishing houses.
    The NCHS has lead responsibility for the ICD-9-CM diagnosis codes 
included in the Tabular List and Alphabetic Index for Diseases, while 
CMS has lead responsibility for the ICD-9-CM procedure codes included 
in the Tabular List and Alphabetic Index for Procedures.
    The Committee encourages participation in the above process by 
health-related organizations. In this regard, the Committee holds 
public meetings for discussion of educational issues and proposed 
coding changes. These meetings provide an opportunity for 
representatives of recognized organizations in the coding field, such 
as the American Health Information Management Association (AHIMA), the 
American Hospital Association (AHA), and various physician specialty 
groups, as well as individual physicians, health information management 
professionals, and other members of the public, to contribute ideas on 
coding matters. After considering the opinions expressed at the public 
meetings and in writing, the Committee formulates recommendations, 
which then must be approved by the agencies.
    The Committee presented proposals for coding changes for 
implementation in FY 2009 at a public meeting held on September 27-28, 
2007 and finalized the coding changes after consideration of comments 
received at the meetings and in writing by December 3, 2007. Those 
coding changes are announced in Tables 6A through 6F in the Addendum to 
this final rule. The Committee held its 2008 meeting on March 19-20, 
2008. New codes for which there was a consensus of public support and 
for which complete tabular and indexing changes were made by May 2008 
will be included in the October 1, 2008 update to ICD-9-CM. Code 
revisions that were discussed at the March 19-20, 2008 Committee 
meeting but that could not be finalized in time to include them in the 
Addendum to the proposed rule are included in Tables 6A through 6F of 
this final rule and are marked with an asterisk (*).
    Copies of the minutes of the procedure codes discussions at the 
Committee's September 27-28, 2007 meeting and March 19-20, 2008 meeting 
can be obtained from the CMS Web site at: http://cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp. The minutes of the 
diagnosis codes discussions at the September 27-28, 2007 meeting and 
March 19-20, 2008 meeting are found at: http://www.cdc.gov/nchs/icd9.htm. Paper copies of these minutes are no longer available and the 
mailing list has been discontinued. These Web sites also provide 
detailed information about the Committee, including information on 
requesting a new code, attending a Committee meeting, and timeline 
requirements and meeting dates.
    We encourage commenters to address suggestions on coding issues 
involving diagnosis codes to: Donna Pickett, Co-Chairperson, ICD-9-CM 
Coordination and Maintenance Committee, NCHS, Room 2402, 3311 Toledo 
Road, Hyattsville, MD 20782. Comments may be sent by E-mail to: 
[email protected].
    Questions and comments concerning the procedure codes should be 
addressed to: Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination 
and Maintenance Committee, CMS, Center for Medicare Management, 
Hospital and Ambulatory Policy Group, Division of Acute Care, C4-08-06, 
7500 Security Boulevard, Baltimore, MD 21244-1850. Comments may be sent 
by E-mail to: [email protected].
    The ICD-9-CM code changes that have been approved will become 
effective October 1, 2008. The new ICD-9-CM codes are listed, along 
with their DRG classifications, in Tables 6A and 6B (New Diagnosis 
Codes and New Procedure Codes, respectively) in the Addendum to this 
final rule. As we stated above, the code numbers and their titles were 
presented for public comment at the ICD-9-CM Coordination and 
Maintenance Committee meetings. Both oral and written comments were 
considered before the codes were approved. In the FY 2009 IPPS proposed 
rule, we only solicited comments on the proposed classification of 
these new codes.
    For codes that have been replaced by new or expanded codes, and the 
corresponding new or expanded diagnosis codes are included in Table 6A. 
New procedure codes are shown in Table 6B. Diagnosis codes that have 
been replaced by expanded codes or other codes or have been deleted are 
in Table 6C (Invalid Diagnosis Codes). These invalid diagnosis codes 
will not be recognized by the GROUPER beginning with discharges 
occurring on or after October 1, 2008. Table 6D contains invalid 
procedure codes. These

[[Page 48515]]

invalid procedure codes will not be recognized by the GROUPER beginning 
with discharges occurring on or after October 1, 2008. Revisions to 
diagnosis code titles are in Table 6E (Revised Diagnosis Code Titles), 
which also includes the MS-DRG assignments for these revised codes. 
Table 6F includes revised procedure code titles for FY 2009.
    In the September 7, 2001 final rule implementing the IPPS new 
technology add-on payments (66 FR 46906), we indicated we would attempt 
to include proposals for procedure codes that would describe new 
technology discussed and approved at the Spring meeting as part of the 
code revisions effective the following October. As stated previously, 
ICD-9-CM codes discussed at the March 19-20, 2008 Committee meeting 
that received consensus and that were finalized by May 2008, are 
included in Tables 6A through 6F of the Addendum to this final rule.
    Comment: One commenter was encouraged that CMS and the CDC have 
acted favorably on the commenter's proposal to create a new ICD-9-CM 
diagnosis code for heparin-induced thrombocytopenia (HIT).
    According to the commenter, a specific code dedicated to this 
disease will provide more information regarding the prevalence of the 
condition and the cost associated with treating the disease. The 
increased focus on this condition can in turn promote proper screening 
to avoid its occurrence and improve patient safety. Accurate diagnosis 
and coding will also ensure that proper protocols are put in place and 
HIT specific treatment is rendered, thereby reducing adverse events 
when HIT does arise.
    Response: We appreciate the comment. Effective October 1, 2008, an 
ICD-9-CM diagnosis code 289.84 (Heparin-induced thrombocytopenia (HIT)) 
is created.
    Section 503(a) of Public Law 108-173 included a requirement for 
updating ICD-9-CM codes twice a year instead of a single update on 
October 1 of each year. This requirement was included as part of the 
amendments to the Act relating to recognition of new technology under 
the IPPS. Section 503(a) amended section 1886(d)(5)(K) of the Act by 
adding a clause (vii) which states that the ``Secretary shall provide 
for the addition of new diagnosis and procedure codes on April 1 of 
each year, but the addition of such codes shall not require the 
Secretary to adjust the payment (or diagnosis-related group 
classification) * * * until the fiscal year that begins after such 
date.'' This requirement improves the recognition of new technologies 
under the IPPS system by providing information on these new 
technologies at an earlier date. Data will be available 6 months 
earlier than would be possible with updates occurring only once a year 
on October 1.
    While section 1886(d)(5)(K)(vii) of the Act states that the 
addition of new diagnosis and procedure codes on April 1 of each year 
shall not require the Secretary to adjust the payment, or DRG 
classification, under section 1886(d) of the Act until the fiscal year 
that begins after such date, we have to update the DRG software and 
other systems in order to recognize and accept the new codes. We also 
publicize the code changes and the need for a mid-year systems update 
by providers to identify the new codes. Hospitals also have to obtain 
the new code books and encoder updates, and make other system changes 
in order to identify and report the new codes.
    The ICD-9-CM Coordination and Maintenance Committee holds its 
meetings in the spring and fall in order to update the codes and the 
applicable payment and reporting systems by October 1 of each year. 
Items are placed on the agenda for the ICD-9-CM Coordination and 
Maintenance Committee meeting if the request is received at least 2 
months prior to the meeting. This requirement allows time for staff to 
review and research the coding issues and prepare material for 
discussion at the meeting. It also allows time for the topic to be 
publicized in meeting announcements in the Federal Register as well as 
on the CMS Web site. The public decides whether or not to attend the 
meeting based on the topics listed on the agenda. Final decisions on 
code title revisions are currently made by March 1 so that these titles 
can be included in the IPPS proposed rule. A complete addendum 
describing details of all changes to ICD-9-CM, both tabular and index, 
is published on the CMS and NCHS Web sites in May of each year. 
Publishers of coding books and software use this information to modify 
their products that are used by health care providers. This 5-month 
time period has proved to be necessary for hospitals and other 
providers to update their systems.
    A discussion of this timeline and the need for changes are included 
in the December 4-5, 2005 ICD-9-CM Coordination and Maintenance 
Committee minutes. The public agreed that there was a need to hold the 
fall meetings earlier, in September or October, in order to meet the 
new implementation dates. The public provided comment that additional 
time would be needed to update hospital systems and obtain new code 
books and coding software. There was considerable concern expressed 
about the impact this new April update would have on providers.
    In the FY 2005 IPPS final rule, we implemented section 
1886(d)(5)(K)(vii) of the Act, as added by section 503(a) of Public Law 
108-173, by developing a mechanism for approving, in time for the April 
update, diagnosis and procedure code revisions needed to describe new 
technologies and medical services for purposes of the new technology 
add-on payment process. We also established the following process for 
making these determinations. Topics considered during the Fall ICD-9-CM 
Coordination and Maintenance Committee meeting are considered for an 
April 1 update if a strong and convincing case is made by the requester 
at the Committee's public meeting. The request must identify the reason 
why a new code is needed in April for purposes of the new technology 
process. The participants at the meeting and those reviewing the 
Committee meeting summary report are provided the opportunity to 
comment on this expedited request. All other topics are considered for 
the October 1 update. Participants at the Committee meeting are 
encouraged to comment on all such requests. There were no requests 
approved for an expedited April l, 2008 implementation of an ICD-9-CM 
code at the September 27-28, 2007 Committee meeting. Therefore, there 
were no new ICD-9-CM codes implemented on April 1, 2008.
    We believe that this process captures the intent of section 
1886(d)(5)(K)(vii) of the Act. This requirement was included in the 
provision revising the standards and process for recognizing new 
technology under the IPPS. In addition, the need for approval of new 
codes outside the existing cycle (October 1) arises most frequently and 
most acutely where the new codes will identify new technologies that 
are (or will be) under consideration for new technology add-on 
payments. Thus, we believe this provision was intended to expedite data 
collection through the assignment of new ICD-9-CM codes for new 
technologies seeking higher payments.
    Current addendum and code title information is published on the CMS 
Web site at: http://www.cms.hhs.gov/icd9ProviderDiagnosticCodes/01_overview.asp#TopofPage. Information on ICD-9-CM diagnosis codes, along 
with the Official ICD-9-CM Coding Guidelines, can be found on the Web 
site at: http://www.cdc.gov/

[[Page 48516]]

nchs/icd9.htm. Information on new, revised, and deleted ICD-9-CM codes 
is also provided to the AHA for publication in the Coding Clinic for 
ICD-9-CM. AHA also distributes information to publishers and software 
vendors.
    CMS also sends copies of all ICD-9-CM coding changes to its 
contractors for use in updating their systems and providing education 
to providers.
    These same means of disseminating information on new, revised, and 
deleted ICD-9-CM codes will be used to notify providers, publishers, 
software vendors, contractors, and others of any changes to the ICD-9-
CM codes that are implemented in April. The code titles are adopted as 
part of the ICD-9-CM Coordination and Maintenance Committee process. 
Thus, although we publish the code titles in the IPPS proposed and 
final rules, they are not subject to comment in the proposed or final 
rules. We will continue to publish the October code updates in this 
manner within the IPPS proposed and final rules. For codes that are 
implemented in April, we will assign the new procedure code to the same 
DRG in which its predecessor code was assigned so there will be no DRG 
impact as far as DRG assignment. Any midyear coding updates will be 
available through the Web sites indicated above and through the Coding 
Clinic for ICD-9-CM. Publishers and software vendors currently obtain 
code changes through these sources in order to update their code books 
and software systems. We will strive to have the April 1 updates 
available through these Web sites 5 months prior to implementation 
(that is, early November of the previous year), as is the case for the 
October 1 updates.
12. Other MS-DRG Issues
a. Heart Transplants or Implants of Heart Assist System and Liver 
Transplants
    Comment: One commenter representing transplant surgeons was 
concerned about the proposed reductions in the MS-DRG relative weights 
for MS-DRG 002 (Heart Transplant or Implant of Heart Assist System 
without MCC) and MS-DRG 006 (Liver Transplant without MCC). According 
to the commenter, the relative weight for MS-DRG 006 would decrease by 
approximately 33 percent and the relative weight for MS-DRG 002 would 
be reduced by 20 percent. The commenter also reported that only 30 
percent of the heart transplant cases were assigned to MS-DRG 002 and 
26 percent of the liver transplant cases were assigned to MS-DRG 006. 
The commenter questioned the statistical reliability of the data and 
recommended that CMS establish a single MS-DRG for heart transplants 
and a single MS-DRG for liver transplants.
    The commenter stated that one factor that influences hospital costs 
and lengths of stay is the characteristics of the donor organ. The 
commenter stated that the donor risk index (DRI) and the model for end-
stage liver disease (MELD) system which prioritizes patients waiting 
for liver transplants by severity of illness are two important factors 
for any severity index for transplant DRGs. This information is not 
identified in the MedPAR data. The commenter acknowledged that it is in 
the process of developing a proposal for NCHS to incorporate this 
information into potential ICD-9-CM diagnosis codes. The commenter 
stated that, until these factors can be incorporated into the data, it 
is not appropriate to have severity-based DRGs for heart and liver 
transplant procedures based on CC or MCC that have not been validated 
as predictors in the transplant population.
    The commenter also requested that CMS create a new MS-DRG for 
combined liver/kidney transplants. These cases are currently assigned 
to the liver transplant DRGs 005-006 (Liver Transplant with MCC or 
Intestinal Transplant and Liver Transplant without MCC). While the 
commenter acknowledged that most of these cases would be assigned to 
MS-DRG 005, the MCC group, the commenter contended that a separate DRG 
is needed to address the significantly higher costs and length of stay 
associated with combined liver/kidney transplants.
    Response: As we stated in the FY 2008 IPPS final rule (72 FR 
47251), clinical evaluation and claims data supported the current MCC 
split for heart and liver transplants. Several commenters accepted 
CMS's proposal of not making significant revisions to the MS-DRGs until 
claims data under the new MS-DRG system are available. At this time, we 
do not have MS-DRG data to evaluate these significant changes. 
Therefore, we are not implementing any changes to the transplant MS-
DRGs for FY 2009.
b. New Codes for Pressure Ulcers
    As discussed in the FY 2008 IPPS final rule with comment period (72 
FR 47205-47206), we referred the need for more detailed ICD-9-CM 
pressure ulcer codes to the CDC. The topic of expanding pressure ulcer 
codes to capture the stage of the ulcer was addressed at the September 
27-28, 2007, meeting of the ICD-9-CM Coordination and Maintenance 
Committee. A summary report of that meeting is available on the Web 
site at: http://www.cdc.gov/nchs/about/otheract/icd9/maint/maint.htm.
    At the September 2007 meeting of the ICD-9-CM Coordination and 
Maintenance Committee, numerous wound care professionals supported 
modifying the pressure ulcer codes to capture staging information. The 
stage of the pressure ulcer is a powerful predictor of severity and 
resource utilization. At the meeting, the ICD-9-CM Coordination and 
Maintenance Committee discussed the creation of pressure ulcer codes to 
capture staging information. The new codes, along with their CC/MCC 
classifications, are shown in Table 6A of the Addendum to the proposed 
rule and this final rule. The new codes are as follows:
     707.20 (Pressure ulcer, unspecified stage)
     707.21 (Pressure ulcer stage I)
     707.22 (Pressure ulcer stage II)
     707.23 (Pressure ulcer stage III)
     707.24 (Pressure ulcer stage IV)
     707.25 (Pressure ulcer unstageable)
    Comment: Several commenters supported the ICD-9-CM diagnosis codes 
for pressure ulcer stages. The commenters also supported the revised 
terminology for the existing decubitus ulcer codes (707.00 through 
707.09), stating that changing these code titles from decubitus ulcer 
to pressure ulcer is a more accurate and appropriate nomenclature. 
Further, the commenters asked for additional pressure ulcer stage codes 
beyond what was created for FY 2009, as shown in Table 6A of the 
Addendum to this final rule (codes 707.20 through 707.25). Instead of a 
single code for pressure ulcer, unstageable (707.25), the commenters 
requested the following:
     Recommended new code: 707.25 (Deep tissue injury)
     Recommended new code: 707.26 (Unstageable pressure ulcers)
    The commenters asked that both of these proposed new codes be 
classified as MCCs because either condition can progress to a stage III 
or stage IV pressure ulcer. In addition, the commenters stated that 
unstageable pressure ulcers will be a stage III or stage IV if 
debridement takes place. However, the commenters added, debridement is 
not always indicated in unstageable pressure ulcers, so the wound may 
remain unstageable throughout the entire stay. The commenters further 
stated that deep tissue injury can deteriorate rapidly into a stage III 
or stage IV pressure ulcer, even with optimal treatment.
    Response: As stated earlier, the creation of new codes for pressure

[[Page 48517]]

ulcers was discussed at the ICD-9-CM Coordination and Maintenance 
Committee on September 28, 2007. CDC received formal comments on the 
proposed new codes through December 3, 2007. CDC considered a wide 
range of comments, including those mentioned above. CDC finalized the 
pressure ulcer stage codes, which included new codes 707.20 through 
707.25. As mentioned above, CDC created a new ICD-9-CM code, 707.25 
(Pressure ulcer, unstageable) to include pressure ulcers described as 
unstageable as well as pressure ulcers documented as deep tissue 
injury. The ICD-9-CM index specifically assigns pressure ulcers that 
are described as deep tissue injuries to code 707.25. These new codes 
will go into effect on October 1, 2008. After experience is gained 
using these new codes, the public can request that the ICD-9-CM 
Coordination and Maintenance Committee reconsider the issue of pressure 
ulcer coding.
    We do not support the request to make ICD-9-CM code 707.25 
(Pressure ulcer, unstageable) an MCC. Unstageable indicates that the 
stage of the pressure ulcer cannot be determined because it is covered 
by a dressing or because it is covered by a black eschar. If the ulcer 
does deteriorate and is determined to be a stage III or stage IV 
pressure ulcer, then stage III or IV codes will be reported. To 
classify an unstageable pressure ulcer as the same severity as a stage 
III or stage IV because it may become a stage III or stage IV is 
inappropriate. Therefore, we are not changing the MCC/CC classification 
of code 707.25 (Pressure ulcer, unstageable), and it will remain a non-
CC.
    The CDC has recently updated the ICD-9-CM coding guidance for 
pressure ulcers. Code assignments for pressure ulcer stages may be 
based on medical record documentation from clinicians who are not the 
patient's provider. The coding guidelines are available at: http://www.cdc.gov/nchs/datawh/ftpserv/ftpICD9/ftpICD9.htm.
c. Coronary Artery Stents
    This topic was not raised by CMS in the proposed rule. However, 
four commenters have taken this opportunity to comment on the content 
of MS-DRG 246 (Percutaneous Cardiovascular Procedure with Drug-Eluting 
Stent with MCC or 4+ Vessels/Stents), and 248 (Percutaneous 
Cardiovascular Procedure with Non-Drug-Eluting Stent with MCC or 4+ 
Vessels/Stents) in MDC 5 (Diseases and Disorders of the Circulatory 
System).
    For a comprehensive review of the most recent discussion concerning 
coronary stents, both drug-eluting and non-drug-eluting, we refer 
readers to FY 2006 IPPS final rule (70 FR 47929 through 47295). In 
Table 6B of that rule, we published the new ICD-9-CM procedure codes 
describing newly created adjunct codes 00.40 through 00.43 (codes 
describing the number of blood vessels upon which a procedure had been 
performed) and 00.45 through 00.48 (codes describing the number of 
vascular stents which had been inserted). These codes were available 
for use beginning October 1, 2006, for FY 2007. We note that under the 
former CMS DRG structure, the DRGs containing either drug-eluting or 
non-drug-eluting stents were located in CMS DRG 556 (Percutaneous 
Cardiovascular Procedure with Non-Drug-Eluting Stent without Major 
Cardiovascular Diagnosis), CMS DRG 557 (Percutaneous Cardiovascular 
Procedure with Drug-Eluting Stent with Major Cardiovascular Diagnosis), 
or CMS DRG 558 (Percutaneous Cardiovascular Procedure with Drug-Eluting 
Stent without Major Cardiovascular Diagnosis).
    In response to a late comment during the last update cycle 
regarding insertion of four or more stents, CMS had reviewed, but did 
not publish, FY 2007 MedPAR data containing some statistics included in 
MS-DRGs 246 and 248. The ICD-9-CM procedure codes we reviewed were:
     00.66 (Percutaneous transluminal coronary angioplasty 
[PTCA] or coronary atherectomy)
     00.40 (Procedure on single vessel)
     00.41 (Procedure on two vessels)
     00.42 (Procedure on three vessels)
     00.43 (Procedure on four or more vessels)
     00.44 (Procedure on vessel bifurcation)
     00.45 (Insertion of one vascular stent)
     00.46 (Insertion of two vascular stents)
     00.47 (Insertion of three vascular stents)
     00.48 (Insertion of four or more vascular stents)
    We arrayed the data several ways, looking at PTCA cases with 4+ 
vessels without 4+ stents (codes 00.66 with 00.43), with 4+ stents 
without 4+ vessels (codes 00.66 with 00.48), and the balance of the 
contents of MS-DRGs 246 and 248 eliminating PTCA plus 4+ vessels and 4+ 
stents (codes 00.66 plus 00.43) and (codes 00.66 plus 00.48). In 
addition, we reviewed the data on cases involving 1-3 vessels with 4+ 
stents (codes 00.40 through 00.42 with 00.48) and 1-3 stents with 4+ 
vessels (codes 00.45 through 00.47 with 00.43). We also reviewed MS-
DRGs 246, 247, 248, and 249 containing the code for vessel bifurcation 
(code 00.44). The data we reviewed are represented in the tables below.

----------------------------------------------------------------------------------------------------------------
                                                                     Number of    Average length      Average
                             MS-DRGs                                   cases          of stay         charges
----------------------------------------------------------------------------------------------------------------
246--All Cases..................................................          27,591            5.36      $65,423.34
246--Cases with PTCA with 4+ vessels without 4+ stents (Codes                311            2.56       50,986.31
 00.66 with 00.43)..............................................
246--Cases with PTCA with 4+ stents without 4+ vessels (Codes              5,697            2.73       66,275.14
 00.66 with 00.48)..............................................
246--Cases without Codes 00.66 with 00.43 or 00.66 with 00.48...          21,289            6.13       65,329.96
247--All Cases..................................................         180,307            2.17       42,084.09
248--All Cases..................................................          12,979            6.03       59,016.01
248--Cases with PTCA with 4+ vessels without 4+ stents (Codes                 59            2.44       44,454.05
 00.66 with 00.48)..............................................
248--Cases with PTCA with 4+ stents withouth 4+ vessels (Codes             1,474            3.57       57,210.58
 00.66 with 00.48)..............................................
248--Cases without Codes 00.66 with 00.43 or 00.66 with 00.48...          11,396            6.38       59,318.54
249--All Cases..................................................          65,858            2.50       36,958.18
246--All Cases..................................................          27,591            5.36       65,423.34
246--Cases with 1-3 vessels with 4+ stents (Codes 00.40-00.42              3,901            2.67       64,363.82
 with 00.48)....................................................
246--Cases with 1-3 stents with 4+ vessels (Codes 00.45-00.47                214            2.45       50,425.73
 with 00.43)....................................................
246--Cases with procedure on vessel bifurcation (Code 00.44)....             387            3.56       62,338.01
247--All Cases..................................................         180,307            2.17       42,084.09
247--Cases with procedure on vessel bifurcation (Code 00.44)....           1,742            1.97       42,212.23
248--All Cases..................................................          12,979            6.03       59,016.01
248--Cases with 1-3 vessels with 4+ stents (Codes 00.40-00.42                961            3.60       55,721.11
 with 00.48)....................................................
248--Cases with 1-3 stents with 4+ vessels (Codes 00.45-00.47                 45            2.36       45,491.68
 with 00.43)....................................................

[[Page 48518]]

 
248--Cases with procedure on vessel bifurcation (Code 00.44)....              92            5.22       65,756.27
249--All Cases..................................................          65,858            2.50       36,958.18
249--Cases with procedure on vessels bifurcation (Code 00.44)...             422            2.31       38,507.05
----------------------------------------------------------------------------------------------------------------

    The results of our review do not suggest to us that there should be 
any proposal for change to MS-DRGs 246 or 248 for FY 2009 because there 
was no compelling evidence that the cases involving either 4+ vessels 
or 4+ stents were inappropriately placed in the MS-DRGs.
    Comment: Three commenters urged CMS to revise the GROUPER logic to 
include ICD-9-CM procedure codes 00.42 and 00.47 in MS-DRG 246. In 
addition, the commenters suggested the CMS revise the GROUPER logic for 
the bare metal stents in MS-DRG 248 by assigning codes 00.42 and 00.47 
there as well. One commenter stated that assigning these codes to the 
``with MCC'' MS-DRGs increases payment accuracy.
    Response: We agree that reassigning these codes to MS-DRG 246 and 
248 would increase payment. However, at this time we are not convinced 
that a change of this nature would increase payment accuracy. As 
previously stated, we reviewed the data for cases involving 4+ vessels 
and 4+ stents as shown above in the tables, but did not specifically 
review the data for cases involving 3 vessels and/or 3 stents inserted 
at one operative episode. However, we note that while all three 
commenters submitted data based on the MedPAR files of FY 2007, their 
conclusions regarding the numbers of cases and the charges were not 
consistent among themselves, nor did their data match our figures, even 
to the number of cases under review.
    We note that evaluation of CMS's data comparing insertion of 1-3 
stents with 4+ vessels shows an average length of stay almost 3 days 
lower than the average length of stay for the entire MS-DRG 246, as 
well as average charges $15,000 lower than the average for the entire 
DRG. Another evaluation of CMS's data comparing insertion in 1-3 
vessels with 4+ stents shows an average length of stay of 2.7 days 
lower than the average length of stay for the entire MS-DRG 246, as 
well as average charges more than $1,000 lower than the average for the 
entire DRG. We believe that these data do not support an MS-DRG change.
    Comment: One commenter, a device manufacturer, believed that MS-
DRGs 246 through 251 (percutaneous cardiovascular procedures with and 
without drug-eluting and non-drug-eluting stents and with and without 
MCCs) contain appropriate procedure code assignments. The commenter 
indicated its intent to continue to monitoring the data in these MS-
DRGs in an effort to improve coding accuracy and appropriate hospital 
resource allocation, but, at this time, recommended no changes to this 
group of MS-DRGs.
    Response: We appreciate the commenter's feedback and look forward 
to working with the industry to assure appropriate payment to hospitals 
under all MS-DRGs.
    As stated above, the topic of reassigning certain procedure codes 
for numbers of cardiac stents in cardiac vessels was not discussed in 
the FY 2009 IPPS proposed rule; therefore, no proposals had been made 
by CMS. We believe it is inappropriate to make these MS-DRG 
modifications without claims data under the MS-DRG system. Therefore, 
we will continue to monitor MDC 5 and the stent MS-DRGs. Should there 
be evidence-based justification for reassignment of codes within these 
MS-DRGs, we will be open to proposing to make changes to the structure 
of the MS-DRG in the future.
d. TherOx (Downstream[supreg] System)
    This topic was not discussed in the FY 2009 IPPS proposed rule. 
However, one commenter addressed this subject.
    TherOx, manufacturer of the Downstream[supreg] System, also known 
as SuperSaturated Oxygen Therapy (SSO2) or Aqueous Oxygen 
(AO) System, is a new technology involving the creation and delivery of 
superoxygenated arterial blood directly to reperfused areas of 
myocardial tissue. The concept is that this will reduce infarct size by 
minimizing microvascular damage in heart attack patients following 
percutaneous coronary intervention. The Downstream[supreg] System is 
the console portion of a disposable cartridge-based system that 
withdraws a small amount of the patient's arterial blood, mixes it with 
a small amount of saline, and supersaturates it with oxygen to create 
highly oxygen-enriched blood, which is delivered directly to the 
infarct-related artery via the TherOx infusion catheter. An additional 
100 minutes of catheterization laboratory time is required for this 
procedure. According to the proposed package insert, the 
Downstream[supreg] System will be used for patients undergoing a 
percutaneous cardiovascular procedure in which a stent is implanted. 
According to the manufacturer, factoring in the average charges for 
supplies ($2,333), procedure time ($8,727) and device cost ($10,560), 
the additional charges unique to the Downstream[reg] System are 
estimated to be $21,620.
    At the September 27, 2007, a request was made before the ICD-9-CM 
Coordination and Maintenance Committee to consider establishing a new 
code to describe this intervention. A new code, 00.49 (SuperSaturated 
oxygen therapy) was created for use beginning October 1, 2008, for FY 
2009. This code can be found in Table 6B of the Addendum to this final 
rule.
    Comment: One commenter, the manufacturer of the Downstream[supreg] 
System, expressed concern about the assignment of code 00.49 as a non-
O.R. procedure in the proposed rule. This is indicated by an ``N'' in 
the O.R. column of Table 6B, and indicates that the GROUPER program 
will not take this code into account when reviewing Medicare claims 
data for MS-DRG assignment. The manufacturer encouraged CMS to assign 
code 00.49 to MS-DRG 246 (Percutaneous Cardiovascular Procedures with 
Drug-Eluting Stent with MCC or 4+ Vessels/Stents), irrespective of the 
actual presence of a drug-eluting stent or an MCC.
    The manufacturer also encouraged CMS to help ensure that hospitals 
adopt this unique and beneficial treatment option in a timely manner 
after its FDA approval by assigning cases using the technology to MS-
DRG 246, stating that: ``This action will provide appropriate 
reimbursement [to hospitals] for its use''. The manufacturer further 
noted that in 2002, CMS established DRG assignments for drug-eluting 
stents, a technology that had not yet been approved by the FDA. The 
manufacturer requested that CMS take similar action [to the precedent 
set for drug-eluting stents] for cases involving patients that have had 
an anterior ST-elevated myocardial infarction (STEMI) and have received 
a stent and the Downstream[supreg] System.
    The manufacturer further noted that assigning all cases using the 
Downstream[supreg] System to MS-DRG 246 is

[[Page 48519]]

consistent with CMS' past MS-DRG reclassifications, pointing out that, 
in the FY 2008 final rule, CMS reorganized several MS-DRGs to better 
recognize the costs of particular technologies. The example was given 
concerning the reassignment of all cases utilizing the Gliadel[supreg] 
Wafer to MS-DRG 023 after CMS found that the average charges for 
Gliadel[supreg] cases in MS-DRG 024 were 27 percent greater than the 
average charges for non-Gliadel[supreg] cases. The manufacturer 
encourages CMS to follow this example ``by assigning all cases using 
the Downstream[supreg] System to MS-DRG 246 where the average charges 
of these cases will be more closely aligned with the overall average of 
charges in the MS-DRG.''
    Response: We note that procedure code 00.49 is so new that it has 
not yet had a chance to be reflected in the MedPAR database. Therefore, 
we do not have data on the impact of the Downstream[supreg] System 
procedure, which is an adjunct therapy to PTCA. Without claims data, we 
cannot evaluate the commenter's suggestion that the use of the 
Downstream[supreg] System is equivalent to cases in MS-DRG 246 which 
include the insertion of drug-eluting stents with MCC or 4+ vessels/
stent. We also believe that the Downstream[supreg] System is not a 
stand-alone procedure (that is, it is only performed after a PTCA has 
been done, and while the patient is still in the catheterization 
laboratory). Therefore, it is most appropriately described as non-O.R. 
in its GROUPER designation. This would continue to allow the MS-DRG 
assignment to be based on the definitive procedures performed such as a 
PTCA or the insertions of stents, and not on adjunctive procedures.
    When we created the severity-based MS-DRGs for use beginning in FY 
2008, we thoroughly reviewed over 13,000 diagnosis codes in order to 
establish realistic severity measures. We had two major goals: To 
create DRGs that would more accurately reflect the severity of the 
cases assigned to them; and to create groups that would have sufficient 
volume so that meaningful and stable payment weights could be 
developed. We developed a set of five criteria to determine whether an 
MS-DRG should be subdivided into subgroups based on the presence of a 
CC or an MCC, and determined that a subgroup had to meet all five 
criteria in order to be so subdivided. These criteria can be reviewed 
in the FY 2008 final rule with comment period (72 FR 47169). There was 
no criteria suggesting that device-based procedures be assigned to the 
MS-DRG with an MCC designation in order for additional reimbursement to 
be made available to hospitals.
    The commenter used the example of our review of the Gliadel[supreg] 
Wafer and subsequent MS-DRG reassignment to bolster the argument that 
these Downstream[supreg] System cases should be assigned to MS-DRG 246. 
We point out that the commenter himself noted that this reassignment 
took place after CMS had reviewed the MedPAR data and was able to 
determine that the average charges for Gliadel[supreg] cases in MS-DRG 
024 were 27 percent greater than the average charges for non-
Gliadel[supreg] cases, thereby warranting such a change.
    Without evidence-based data, we are reluctant to subjectively 
assign a technology to an MS-DRG based on assumption. Further, to 
ignore the structure of the MS-DRG system solely for the purpose of 
increasing payment for one device would set an unwelcome precedent for 
defining all of the other MS-DRGs in the system, as previously stated 
in the FY 2007 IPPS final rule (71 FR 47943). We believe that the MS-
DRG structure for the percutaneous procedures with stent insertion (MS-
DRGs 246, 247, 248, and 249, with and without volume of vessels and/or 
stents, and with or without CC/MCC) are appropriate MS-DRG assignments 
for the Downstream[supreg] System, and the cases will be assigned based 
on the presence of either a drug-eluting or a non-drug eluting stent, 
and the presence or absence of an MCC. Therefore, for FY 2009, because 
there is no data to support the assignment of procedure code 00.49 to 
MS-DRG 246, we are not making the change requested by the commenter. 
Should there be evidence-based justification for assignment of code 
00.49 in the future, we will be open to making a proposal to change the 
structure of these MS-DRGs.
e. Spinal Disc Devices
    This topic was not discussed in the FY 2009 IPPS proposed rule. 
However, one commenter addressed this subject.
    Comment: One commenter representing a manufacturer of artificial 
disc devices recommended that CMS create a new MS-DRG for disc device 
procedures in MDC 8 (Diseases and Disorders of the Musculoskeletal 
System and Connective Tissue). Specifically, the commenter suggested 
that ICD-9-CM codes 84.58 (Implantation of interspinous process 
decompression device), 84.59 (Insertion of other spinal devices), 84.62 
(Insertion of total spinal disc prosthesis, cervical), and 84.65 
(Insertion of total spinal disc prosthesis, lumbosacral) be moved into 
a separate MS-DRG that combines procedures that utilize expensive 
implantable devices. According to the commenter, by creating this new 
MS-DRG, CMS would avoid classifying these procedures with procedures 
that do not utilize devices.
    Response: We point out that ICD-9-CM code 84.58 was deleted 
effective October 1, 2007 (FY 2008). The procedure previously assigned 
to that code was reassigned to new ICD-9-CM code 84.80 (Insertion or 
replacement of interspinous process device(s)).
    With regards to the creation of a new MS-DRG for the procedure 
codes 84.59, 84.62, and 84.65, we refer the reader to the FY 2008 IPPS 
proposed rule (72 FR 24733 through 24735) and the FY 2008 IPPS final 
rule with comment period (72 FR 47226 through 47232) for a discussion 
on the comprehensive evaluation of all the spinal DRGs in the 
development of the MS-DRG classification system. Effective October 1, 
2007, all the aforementioned procedures were grouped together in MS-DRG 
490 (Back and Neck Procedures Except Spinal Fusion with CC/MCC or Disc 
Device/Neurostimulator). The modifications made to the spinal DRGs for 
FY 2008 recognized the similar utilization of resources, differences in 
levels of severity and the complexity of the services being performed 
on patients undergoing those types of procedures.
    In response to the suggested creation of a new, separate MS-DRG to 
combine spinal procedures that utilize expensive implantable devices, 
we note that the MS-DRG classification system (and more importantly, 
the IPPS), is not based solely on the cost of devices; it is not a 
device classification system. We refer the reader to section II.B.2. of 
the preamble to this final rule for a summary of the process and 
criteria utilized in determining whether specific MS-DRG modifications 
are warranted in a given year.
    We note that several commenters acknowledged CMS' discussion of the 
FY 2008 implementation of the MS-DRGs and the lack of data to support 
major MS-DRG changes for FY 2009. In addition, several commenters 
accepted CMS' proposal of not making significant revisions to the MS-
DRGs until claims data under the new MS-DRG system are available. 
Therefore, because we do not have claims data at this time to evaluate 
the need for revisions to MS-DRGs, we are not making any revisions to 
the MS-DRGs involving implantable spinal devices for FY 2009.
f. Spinal Fusion
    This topic was not discussed in the FY 2009 IPPS proposed rule. 
However, one commenter addressed this subject.

[[Page 48520]]

    Comment: Similar to last year, a manufacturer again requested that 
CMS reassign procedure code 84.82 (Insertion or replacement of pedicle-
based dynamic stabilization device(s)), which was effective October 1, 
2007, from MS-DRG 490 (Back and Neck Procedures Except Spinal Fusion 
with CC/MCC or Disc Device/Neurostimulator) to MS-DRG 460 (Spinal 
Fusion Except Cervical without MCC).
    As a result of CMS' final policy for FY 2008 that assigned 
procedure code 84.82 to MS-DRG 490, the commenter reported that it 
conducted a number of analyses that included: (1) A clinical comparison 
of the implant procedure of dynamic stabilization and instrumented 
spinal fusion; (2) a comparison of average charge data in MS-DRGs 460 
and 490 utilizing FY 2007 MedPAR data; and (3) a cost comparison of 
claims including the implant of the Dynesys[supreg] system compared to 
those of spinal fusion.
    Due to the fact that claims data on procedure code 84.82 was 
unavailable in the MedPAR file, the commenter stated it utilized 
procedure code 84.59 (Insertion of other spinal devices) and conducted 
the same analysis CMS had done for FY 2008. Results of the commenter's 
analysis showed a large increase in the volume of cases with procedure 
code 84.59 assigned, which, according to the commenter, provided a more 
reliable number of cases to compare average charges.
    Response: We appreciate the commenter's analysis and acknowledge 
the commenter's request. In response to the commenter's analyses of the 
charge data for procedure code 84.59, the Dynesys[supreg] system is not 
the only technology that was assigned to code 84.59 in the years that 
the commenter examined. During that time, there were a number of other 
spinal technologies that were under development or in clinical trials 
that were also assigned procedure code 84.59 because a unique code for 
their specific technology did not yet exist.
    As stated in the FY 2008 final rule with comment period (72 FR 
47228), we conducted a comprehensive review of the entire group of 
spine DRGs in the development of the MS-DRG system. In the analysis 
that we conducted, the data demonstrated that procedures assigned to 
MS-DRG 490 were not the same in terms of resource utilization, severity 
of illness, and complexity of care, as those assigned to MS-DRG 460 
(Spinal Fusion Except Cervical without MCC). As we stated earlier, we 
received several comments acknowledging CMS' discussion of the recent 
implementation of MS-DRGs and lack of data to support major MS-DRG 
changes for FY 2009. The commenters accepted CMS' proposal of not 
making significant revisions to the MS-DRGs until claims data under the 
new MS-DRG system are available. Therefore, as final policy for FY 
2009, we are not reassigning procedure code 84.82 from MS-DRG 490 to 
MS-DRG 460.
g. Special Treatment for Hospitals With High Percentages of ESRD 
Discharges
    In our existing regulations under 42 CFR 412.104, we provide that 
CMS will make an additional payment to a hospital for inpatient 
services furnished to a beneficiary with end-stage renal disease (ESRD) 
who is discharged and who receives a dialysis treatment during a 
hospital stay, if the hospital has established that ESRD beneficiary 
discharges constitute 10 percent or more of its total Medicare 
discharges. However, as specified in the regulations, in determining a 
hospital's eligibility for this additional payment, we excluded from 
the hospital's ESRD beneficiary discharge count discharges classified 
into the following CMS DRGs: DRG 302 (Kidney Transplant); DRG 316 
(Renal Failure); or DRG 317 (Admit for Renal Dialysis). As discussed in 
section II.C. of the preamble of this final rule, we adopted the MS-DRG 
classification system for FY 2008 to better recognize severity of 
illness. Under the MS-DRG system, these three DRGs have been changed. 
Therefore, we are revising Sec.  412.104 to make the three DRG numbers 
and titles consistent with their replacement MS-DRGs. DRG 302 (Kidney 
Transplant) became MS-DRG 652; DRG 316 (Renal Failure) became MS-DRG 
682 (Renal Failure with MCC), MS-DRG 683 (Renal Failure with CC), and 
MS-DRG 684 (Renal Failure without CC/MCC); and DRG 317 (Admit for Renal 
Dialysis) became MS-DRG 685 (Admit for Renal Dialysis).

H. Recalibration of MS-DRG Weights

    In section II.E. of the preamble of this final rule, we state that 
we are fully implementing the cost-based DRG relative weights for FY 
2009, which is the third year in the 3-year transition period to 
calculate the relative weights at 100 percent based on costs. In the FY 
2008 IPPS final rule with comment period (72 FR 47267), as recommended 
by RTI, for FY 2008, we added two new CCRs for a total of 15 CCRs: One 
for ``Emergency Room'' and one for ``Blood and Blood Products,'' both 
of which can be derived directly from the Medicare cost report.
    As we proposed, in developing the FY 2009 system of weights, we 
used two data sources: Claims data and cost report data. As in previous 
years, the claims data source is the MedPAR file. This file is based on 
fully coded diagnostic and procedure data for all Medicare inpatient 
hospital bills. The FY 2007 MedPAR data used in this final rule include 
discharges occurring on October 1, 2006, through September 30, 2007, 
based on bills received by CMS through March 2008, from all hospitals 
subject to the IPPS and short-term, acute care hospitals in Maryland 
(which are under a waiver from the IPPS under section 1814(b)(3) of the 
Act). The FY 2007 MedPAR file used in calculating the relative weights 
includes data for approximately 11,554,993 Medicare discharges from 
IPPS providers. Discharges for Medicare beneficiaries enrolled in a 
Medicare Advantage managed care plan are excluded from this analysis. 
The data exclude CAHs, including hospitals that subsequently became 
CAHs after the period from which the data were taken. The second data 
source used in the cost-based relative weighting methodology is the FY 
2006 Medicare cost report data files from HCRIS (that is, cost reports 
beginning on or after October 1, 2005, and before October 1, 2006), 
which represents the most recent full set of cost report data 
available. We used the March 31, 2008 update of the HCRIS cost report 
files for FY 2006 in setting the relative cost-based weights.
    The methodology we used to calculate the DRG cost-based relative 
weights from the FY 2007 MedPAR claims data and FY 2006 Medicare cost 
report data is as follows:
     To the extent possible, all the claims were regrouped 
using the FY 2009 MS-DRG classifications discussed in sections II.B. 
and G. of the preamble of this final rule.
     The transplant cases that were used to establish the 
relative weights for heart and heart-lung, liver and/or intestinal, and 
lung transplants (MS-DRGs 001, 002, 005, 006, and 007, respectively) 
were limited to those Medicare-approved transplant centers that have 
cases in the FY 2007 MedPAR file. (Medicare coverage for heart, heart-
lung, liver and/or intestinal, and lung transplants is limited to those 
facilities that have received approval from CMS as transplant centers.)
     Organ acquisition costs for kidney, heart, heart-lung, 
liver, lung, pancreas, and intestinal (or multivisceral organs) 
transplants continue to be paid on a reasonable cost basis. Because 
these acquisition costs are paid separately from the prospective 
payment rate, it is necessary to subtract the acquisition charges from 
the total charges on each transplant bill that showed acquisition

[[Page 48521]]

charges before computing the average cost for each DRG and before 
eliminating statistical outliers.
     Claims with total charges or total length of stay less 
than or equal to zero were deleted. Claims that had an amount in the 
total charge field that differed by more than $10.00 from the sum of 
the routine day charges, intensive care charges, pharmacy charges, 
special equipment charges, therapy services charges, operating room 
charges, cardiology charges, laboratory charges, radiology charges, 
other service charges, labor and delivery charges, inhalation therapy 
charges, emergency room charges, blood charges, and anesthesia charges 
were also deleted.
     At least 95.9 percent of the providers in the MedPAR file 
had charges for 10 of the 15 cost centers. Claims for providers that 
did not have charges greater than zero for at least 10 of the 15 cost 
centers were deleted.
     Statistical outliers were eliminated by removing all cases 
that were beyond 3.0 standard deviations from the mean of the log 
distribution of both the total charges per case and the total charges 
per day for each DRG.
    Once the MedPAR data were trimmed and the statistical outliers were 
removed, the charges for each of the 15 cost groups for each claim were 
standardized to remove the effects of differences in area wage levels, 
IME and DSH payments, and for hospitals in Alaska and Hawaii, the 
applicable cost-of-living adjustment. Because hospital charges include 
charges for both operating and capital costs, we standardized total 
charges to remove the effects of differences in geographic adjustment 
factors, cost-of-living adjustments, DSH payments, and IME adjustments 
under the capital IPPS as well. Charges were then summed by DRG for 
each of the 15 cost groups so that each DRG had 15 standardized charge 
totals. These charges were then adjusted to cost by applying the 
national average CCRs developed from the FY 2006 cost report data.
    The 15 cost centers that we used in the relative weight calculation 
are shown in the following table. The table shows the lines on the cost 
report and the corresponding revenue codes that we used to create the 
15 national cost center CCRs.
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    We developed the national average CCRs as follows:
    Taking the FY 2006 cost report data, we removed CAHs, Indian Health 
Service hospitals, all-inclusive rate hospitals, and cost reports that 
represented time periods of less than 1 year (365 days). We included 
hospitals located in Maryland as we are including their charges in our 
claims database. We then created CCRs for each provider for each cost 
center (see prior table for line items used in the calculations) and 
removed any CCRs that were greater than 10 or less than 0.01. We 
normalized the departmental CCRs by dividing the CCR for each 
department by the total CCR for the hospital for the purpose of 
trimming the data. We then took the logs of the normalized cost center 
CCRs and removed any cost center CCRs where the log of the cost center 
CCR was greater or less than the mean log plus/minus 3 times the 
standard deviation for the log of that cost center CCR. Once the cost 
report data were trimmed, we calculated a Medicare-specific CCR. The 
Medicare-specific CCR was determined by taking the Medicare charges for 
each line item from Worksheet D-4 and deriving the Medicare-specific 
costs by applying the hospital-specific departmental CCRs to the 
Medicare-specific charges for each line item from Worksheet D-4. Once 
each hospital's Medicare-specific costs were established, we summed the 
total Medicare-specific costs and divided by the sum of the total 
Medicare-specific charges to produce national average, charge-weighted 
CCRs.
    After we multiplied the total charges for each DRG in each of the 
15 cost centers by the corresponding national average CCR, we summed 
the 15 ``costs'' across each DRG to produce a total standardized cost 
for the DRG. The average standardized cost for each DRG was then 
computed as the total standardized cost for the DRG divided by the 
transfer-adjusted case count for the DRG. The average cost for each DRG 
was then divided by the national average standardized cost per case to 
determine the relative weight.
    The new cost-based relative weights were then normalized by an 
adjustment factor of 1.50598 so that the average case weight after 
recalibration was equal to the average case weight before 
recalibration. The normalization adjustment is intended to ensure that 
recalibration by itself neither increases nor decreases total payments 
under the IPPS, as required by section 1886(d)(4)(C)(iii) of the Act.
    The 15 national average CCRs for FY 2009 are as follows:

------------------------------------------------------------------------
                          Group                                 CCR
------------------------------------------------------------------------
Routine Days............................................           0.546
Intensive Days..........................................           0.486
Drugs...................................................           0.205
Supplies & Equipment....................................           0.345
Therapy Services........................................           0.423
Laboratory..............................................           0.169
Operating Room..........................................           0.295
Cardiology..............................................           0.190
Radiology...............................................           0.171
Emergency Room..........................................           0.292
Blood and Blood Products................................           0.444
Other Services..........................................           0.432
Labor & Delivery........................................           0.476
Inhalation Therapy......................................           0.199
Anesthesia..............................................           0.149
------------------------------------------------------------------------

    As we explained in section II.E. of the preamble of this final 
rule, we are completing our 2-year transition to the MS-DRGs. For FY 
2008, the first year of the transition, 50 percent of the relative 
weight for an MS-DRG was based on the two-thirds cost-based weight/one-
third charge-based weight calculated using FY 2006 MedPAR data grouped 
to the Version 24.0 (FY 2007) DRGs. The remaining 50 percent of the FY 
2008 relative weight for an MS-DRG was based on the two-thirds cost-
based weight/one-third charge-based weight calculated using FY 2006 
MedPAR grouped to the Version 25.0 (FY 2008) MS-DRGs. In FY 2009, the 
relative weights are based on 100 percent cost

[[Page 48528]]

weights computed using the Version 26.0 (FY 2009) MS-DRGs.
    When we recalibrated the DRG weights for previous years, we set a 
threshold of 10 cases as the minimum number of cases required to 
compute a reasonable weight. We are using that same case threshold in 
recalibrating the MS-DRG weights for FY 2009. Using the FY 2007 MedPAR 
data set, there are 8 MS-DRGs that contain fewer than 10 cases. Under 
the MS-DRGs, we have fewer low-volume DRGs than under the CMS DRGs 
because we no longer have separate DRGs for patients age 0 to 17 years. 
With the exception of newborns, we previously separated some DRGs based 
on whether the patient was age 0 to 17 years or age 17 years and older. 
Other than the age split, cases grouping to these DRGs are identical. 
The DRGs for patients age 0 to 17 years generally have very low volumes 
because children are typically ineligible for Medicare. In the past, we 
have found that the low volume of cases for the pediatric DRGs could 
lead to significant year-to-year instability in their relative weights. 
Although we have always encouraged non-Medicare payers to develop 
weights applicable to their own patient populations, we have heard 
frequent complaints from providers about the use of the Medicare 
relative weights in the pediatric population. We believe that 
eliminating this age split in the MS-DRGs will provide more stable 
payment for pediatric cases by determining their payment using adult 
cases that are much higher in total volume. All of the low-volume MS-
DRGs listed below are for newborns. Newborns are unique and require 
separate DRGs that are not mirrored in the adult population. Therefore, 
it remains necessary to retain separate DRGs for newborns. In FY 2009, 
because we do not have sufficient MedPAR data to set accurate and 
stable cost weights for these low-volume MS-DRGs, we are computing 
weights for the low-volume MS-DRGs by adjusting their FY 2008 weights 
by the percentage change in the average weight of the cases in other 
MS-DRGs. The crosswalk table is shown below:

------------------------------------------------------------------------
                                                       Crosswalk to MS-
        Low-volume MS-DRG            MS-DRG title             DRG
------------------------------------------------------------------------
768.............................  Vaginal Delivery    FY 2008 FR weight
                                   with O.R.           (adjusted by
                                   Procedure Except    percent change in
                                   Sterilization and/  average weight of
                                   or D&C.             the cases in
                                                       other MS-DRGs).
789.............................  Neonates, Died or   FY 2008 FR weight
                                   Transferred to      (adjusted by
                                   Another Acute       percent change in
                                   Care Facility.      average weight of
                                                       the cases in
                                                       other MS-DRGs).
790.............................  Extreme Immaturity  FY 2008 FR weight
                                   or Respiratory      (adjusted by
                                   Distress            percent change in
                                   Syndrome, Neonate.  average weight of
                                                       the cases in
                                                       other MS-DRGs).
791.............................  Prematurity with    FY 2008 FR weight
                                   Major Problems.     (adjusted by
                                                       percent change in
                                                       average weight of
                                                       the cases in
                                                       other MS-DRGs).
792.............................  Prematurity         FY 2008 FR weight
                                   without Major       (adjusted by
                                   Problems.           percent change in
                                                       average weight of
                                                       the cases in
                                                       other MS-DRGs).
793.............................  Full-Term Neonate   FY 2008 FR weight
                                   with Major          (adjusted by
                                   Problems.           percent change in
                                                       average weight of
                                                       the cases in
                                                       other MS-DRGs).
794.............................  Neonate with Other  FY 2008 FR weight
                                   Significant         (adjusted by
                                   Problems.           percent change in
                                                       average weight of
                                                       the cases in
                                                       other MS-DRGs).
795.............................  Normal Newborn....  FY 2008 FR weight
                                                       (adjusted by
                                                       percent change in
                                                       average weight of
                                                       the cases in
                                                       other MS-DRGs).
------------------------------------------------------------------------

    We did not receive any public comments on this section. Therefore, 
we are adopting the national average CCRs as proposed, with the MS-DRG 
weights recalibrated based on these CCRs.

I. Medicare Severity Long-Term Care (MS-LTC-DRG) Reclassifications and 
Relative Weights for LTCHs for FY 2009

1. Background
    Section 123 of the BBRA requires that the Secretary implement a PPS 
for LTCHs (that is, a per discharge system with a diagnosis-related 
group (DRG)-based patient classification system reflecting the 
differences in patient resources and costs). Section 307(b)(1) of the 
BIPA modified the requirements of section 123 of the BBRA by requiring 
that the Secretary examine ``the feasibility and the impact of basing 
payment under such a system [the long-term care hospital (LTCH) PPS] on 
the use of existing (or refined) hospital DRGs that have been modified 
to account for different resource use of LTCH patients, as well as the 
use of the most recently available hospital discharge data.''
    When the LTCH PPS was implemented for cost reporting periods 
beginning on or after October 1, 2002, we adopted the same DRG patient 
classification system (that is, the CMS DRGs) that was utilized at that 
time under the IPPS. As a component of the LTCH PPS, we refer to the 
patient classification system as the ``long-term care diagnosis-related 
groups (LTC-DRGs).'' As discussed in greater detail below, although the 
patient classification system used under both the LTCH PPS and the IPPS 
are the same, the relative weights are different. The established 
relative weight methodology and data used under the LTCH PPS result in 
LTC-DRG relative weights that reflect ``the differences in patient 
resource use * * *'' of LTCH patients (section 123(a)(1) of the BBRA 
(Pub. L. 106-113). As part of our efforts to better recognize severity 
of illness among patients, in the FY 2008 IPPS final rule with comment 
period (72 FR 47130), the MS-DRGs and the Medicare severity long-term 
care diagnosis-related groups (MS-LTC-DRGs) were adopted for the IPPS 
and the LTCH PPS, respectively, effective October 1, 2007 (FY 2008). 
For a full description of the development and implementation of the MS-
DRGs and MS-LTC-DRGs, we refer readers to the FY 2008 IPPS final rule 
with comment period (72 FR 47141 through 47175 and 47277 through 
47299). (We note that, in that same final rule, we revised the 
regulations at Sec.  412.503 to specify that for LTCH discharges 
occurring on or after October 1, 2007, when applying the provisions of 
42 CFR Part 412, Subpart O applicable to LTCHs for policy descriptions 
and payment calculations, all references to LTC-DRGs would be 
considered a reference to MS-LTC-DRGs. For the remainder of this 
section, we present the discussion in terms of the current MS-LTC-DRG 
patient classification system unless specifically referring to the 
previous LTC-DRG patient classification system that was in effect 
before October 1, 2007.) We believe the MS-DRGs (and by extension, the 
MS-LTC-DRGs) represent a substantial improvement over the previous CMS 
DRGs in their ability to differentiate cases based on severity of 
illness and resource consumption.

[[Page 48529]]

    The MS-DRGs represent an increase in the number of DRGs by 207 
(that is, from 538 to 745) (72 FR 47171). In addition to improving the 
DRG system's recognition of severity of illness, we believe the MS-DRGs 
are responsive to the public comments that were made on the FY 2007 
IPPS proposed rule with respect to how we should undertake further DRG 
reform. The MS-DRGs use the CMS DRGs as the starting point for revising 
the DRG system to better recognize resource complexity and severity of 
illness. We have generally retained all of the refinements and 
improvements that have been made to the base DRGs over the years that 
recognize the significant advancements in medical technology and 
changes to medical practice.
    Consistent with section 123 of the BBRA, as amended by section 
307(b)(1) of the BIPA, and Sec.  412.515, we use information derived 
from LTCH PPS patient records to classify LTCH discharges into distinct 
MS-LTC-DRGs based on clinical characteristics and estimated resource 
needs. We then assign an appropriate weight to the MS-LTC-DRGs to 
account for the difference in resource use by patients exhibiting the 
case complexity and multiple medical problems characteristic of LTCHs.
    Generally, under the LTCH PPS, a Medicare payment is made at a 
predetermined specific rate for each discharge; and that payment varies 
by the MS-LTC-DRG to which a beneficiary's stay is assigned. Cases are 
classified into MS-LTC-DRGs for payment based on the following six data 
elements:
     Principal diagnosis.
     Up to eight additional diagnoses.
     Up to six procedures performed.
     Age.
     Sex.
     Discharge status of the patient.
    Upon the discharge of the patient from a LTCH, the LTCH must assign 
appropriate diagnosis and procedure codes from the most current version 
of the International Classification of Diseases, Ninth Revision, 
Clinical Modification (ICD-9-CM). HIPAA Transactions and Code Sets 
Standards regulations at 45 CFR parts 160 and 162 require that no later 
than October 16, 2003, all covered entities must comply with the 
applicable requirements of Subparts A and I through R of Part 162. 
Among other requirements, those provisions direct covered entities to 
use the ASC X12N 837 Health Care Claim: Institutional, Volumes 1 and 2, 
Version 4010, and the applicable standard medical data code sets for 
the institutional health care claim or equivalent encounter information 
transaction (45 CFR 162.1002 and 45 CFR 162.1102). For additional 
information on the ICD-9-CM Coding System, we refer readers to the FY 
2008 IPPS final rule with comment period (72 FR 47241 through 47243 and 
47277 through 47281). We also refer readers to the detailed discussion 
on correct coding practices in the August 30, 2002 LTCH PPS final rule 
(67 FR 55981 through 55983). Additional coding instructions and 
examples are published in the Coding Clinic for ICD-9-CM, a product of 
the American Hospital Association.
    Medicare contractors (that is, fiscal intermediaries or MACs) enter 
the clinical and demographic information into their claims processing 
systems and subject this information to a series of automated screening 
processes called the Medicare Code Editor (MCE). These screens are 
designed to identify cases that require further review before 
assignment into a MS-LTC-DRG can be made. During this process, the 
following types of cases are selected for further development:
     Cases that are improperly coded. (For example, diagnoses 
are shown that are inappropriate, given the sex of the patient. Code 
68.69 (Other and unspecified radical abdominal hysterectomy) would be 
an inappropriate code for a male.)
     Cases including surgical procedures not covered under 
Medicare. (For example, organ transplant in a nonapproved transplant 
center.)
     Cases requiring more information. (For example, ICD-9-CM 
codes are required to be entered at their highest level of specificity. 
There are valid 3-digit, 4-digit, and 5-digit codes. That is, code 262 
(Other severe protein-calorie malnutrition) contains all appropriate 
digits, but if it is reported with either fewer or more than 3 digits, 
the claim will be rejected by the MCE as invalid.)
    After screening through the MCE, each claim is classified into the 
appropriate MS-LTC-DRG by the Medicare LTCH GROUPER software. The 
Medicare GROUPER software, which is used under the LTCH PPS, is 
specialized computer software, and is the same GROUPER software program 
used under the IPPS. The GROUPER software was developed as a means of 
classifying each case into a MS-LTC-DRG on the basis of diagnosis and 
procedure codes and other demographic information (age, sex, and 
discharge status). Following the MS-LTC-DRG assignment, the Medicare 
contractor determines the prospective payment amount by using the 
Medicare PRICER program, which accounts for hospital-specific 
adjustments. Under the LTCH PPS, we provide an opportunity for the LTCH 
to review the MS-LTC-DRG assignments made by the Medicare contractor 
and to submit additional information within a specified timeframe as 
provided in Sec.  412.513(c).
    The GROUPER software is used both to classify past cases to measure 
relative hospital resource consumption to establish the MS-LTC-DRG 
weights and to classify current cases for purposes of determining 
payment. The records for all Medicare hospital inpatient discharges are 
maintained in the MedPAR file. The data in this file are used to 
evaluate possible MS-DRG and MS-LTC-DRG classification changes and to 
recalibrate the MS-DRG and MS-LTC-DRG relative weights during our 
annual update under both the IPPS (Sec.  412.60(e)) and the LTCH PPS 
(Sec.  412.517), respectively.
    In the June 6, 2003 LTCH PPS final rule (68 FR 34122), we changed 
the LTCH PPS annual payment rate update cycle to be effective July 1 
through June 30 instead of October 1 through September 30. In addition, 
because the patient classification system utilized under the LTCH PPS 
uses the same DRGs as those used under the IPPS for acute care 
hospitals, in that same final rule, we explained that the annual update 
of the LTC-DRG classifications and relative weights will continue to 
remain linked to the annual reclassification and recalibration of the 
DRGs used under the IPPS. Therefore, we specified that we will continue 
to update the LTC-DRG classifications and relative weights to be 
effective for discharges occurring on or after October 1 through 
September 30 each year. We further stated that we will publish the 
annual proposed and final update of the LTC-DRGs in the same notice as 
the proposed and final update for the IPPS (69 FR 34125).
    In the RY 2009 LTCH PPS final rule (73 FR 26798), due to 
administrative considerations as well as in response to numerous 
comments urging CMS to establish one rulemaking cycle that would 
encompass the update of the LTCH PPS payment rates, which has been 
updated on a rate year basis, effective July 1 as well as the 
development of the MS-LTC-DRG weights, which are updated on a fiscal 
year basis, effective October 1, we amended the regulations at Sec.  
412.503 and Sec.  412.535 in order to consolidate the rate year and 
fiscal year rulemaking cycles. Specifically, the annual update of the 
LTCH PPS payment rates (and description of the methodology and data 
used to calculate these payment rates) and the annual update of the MS-
LTC-

[[Page 48530]]

DRG classifications and associated weighting factors for LTCHs will be 
effective on October 1 of each Federal fiscal year beginning October 1, 
2009. In order to revise the payment rate update from July 1 through 
June 30 to an October 1 through September 30 cycle, we extended the 
2009 rate period to September 30, 2009, so that RY 2009 is 15 months. 
This 15-month rate year period is July 1, 2008, through September 30, 
2009. We believe that extending RY 2009 by 3 months (to include July, 
August, and September) provides for a smooth transition to a 
consolidated annual update for both the LTCH PPS payment rates and the 
LTCH PPS MS-LTC-DRG classifications and weighting factors. 
Consequently, under the extension of RY 2009 to a 15-month rate period, 
after September 30, 2009, when the RY 2009 cycle ends, the LTCH PPS 
payment rates and other policy changes will subsequently be updated on 
an October 1 through September 30 cycle in conjunction with the annual 
update to the MS-LTC-DRG classifications and relative weights. 
Accordingly, the next update to the LTCH PPS payment rates, after the 
15-month RY 2009, will begin October 1, 2009, coinciding with the 2010 
Federal fiscal year.
    In the past, the annual update to the DRGs used under the IPPS has 
been based on the annual revisions to the ICD-9-CM codes and was 
effective each October 1. As discussed in the FY 2009 IPPS proposed 
rule (73 FR 23591 through 23592), with the implementation of section 
503(a) of Public Law 108-173, there is the possibility that one feature 
of the GROUPER software program may be updated twice during a Federal 
fiscal year (October 1 and April 1) as required by the statute for the 
IPPS. Section 503(a) of Public Law 108-173 amended section 
1886(d)(5)(K) of the Act by adding a new clause (vii) which states that 
``the Secretary shall provide for the addition of new diagnosis and 
procedure codes in [sic] April 1 of each year, but the addition of such 
codes shall not require the Secretary to adjust the payment (or 
diagnosis-related group classification) * * * until the fiscal year 
that begins after such date.'' This requirement improves the 
recognition of new technologies under the IPPS by accounting for those 
ICD-9-CM codes in the MedPAR claims data earlier than the agency had 
accounted for new technology in the past. In implementing the statutory 
change, the agency has provided that ICD-9-CM diagnosis and procedure 
codes for new medical technology may be created and assigned to 
existing DRGs in the middle of the Federal fiscal year, on April 1. 
However, this policy change does not impact the DRG relative weights in 
effect for that year, which will continue to be updated only once a 
year (October 1). The use of the ICD-9-CM code set is also compliant 
with the current requirements of the Transactions and Code Sets 
Standards regulations at 45 CFR parts 160 and 162, promulgated in 
accordance with HIPAA.
    As noted above, the patient classification system used under the 
LTCH PPS is the same patient classification system that is used under 
the IPPS. Therefore, the ICD-9-CM codes currently used under both the 
IPPS and the LTCH PPS have the potential of being updated twice a year. 
This requirement is included as part of the amendments to the Act 
relating to recognition of new medical technology under the IPPS.
    Because we do not publish a midyear IPPS rule, any April 1 ICD-9-CM 
coding update will not be published in the Federal Register. Rather, we 
will assign any new diagnosis or procedure codes to the same DRG in 
which its predecessor code was assigned, so that there will be no 
impact on the DRG assignments (as also discussed in section II.G.11. of 
the preamble of this final rule). Any coding updates will be available 
through the Web sites provided in section II.G.11. of the preamble of 
this final rule and through the Coding Clinic for ICD-9-CM. Publishers 
and software vendors currently obtain code changes through these 
sources in order to update their code books and software system. If new 
codes are implemented on April 1, revised code books and software 
systems, including the GROUPER software program, will be necessary 
because the most current ICD-9-CM codes must be reported. Therefore, 
for purposes of the LTCH PPS, because each ICD-9-CM code must be 
included in the GROUPER algorithm to classify each case under the 
correct LTCH PPS, the GROUPER software program used under the LTCH PPS 
would need to be revised to accommodate any new codes.
    In implementing section 503(a) of Public Law 108-173, there will 
only be an April 1 update if new technology diagnosis and procedure 
code revisions are requested and approved. We note that any new codes 
created for April 1 implementation will be limited to those primarily 
needed to describe new technologies and medical services. However, we 
reiterate that the process of discussing updates to the ICD-9-CM is an 
open process through the ICD-9-CM Coordination and Maintenance 
Committee. Requestors will be given the opportunity to present the 
merits for a new code and to make a clear and convincing case for the 
need to update ICD-9-CM codes for purposes of the IPPS new technology 
add-on payment process through an April 1 update (as also discussed in 
section II.G.11. of the preamble of this final rule).
    At the September 27, 2007 ICD-9-CM Coordination and Maintenance 
Committee meeting, there were no requests for an April 1, 2008 
implementation of ICD-9-CM codes. Therefore, the next update to the 
ICD-9-CM coding system will occur on October 1, 2008 (FY 2009). Because 
there were no coding changes suggested for an April 1, 2008 update, the 
ICD-9-CM coding set implemented on October 1, 2008, will continue 
through September 30, 2009 (FY 2009). The update to the ICD-9-CM coding 
system for FY 2009 is discussed in section II.G.11. of the preamble of 
this final rule.
    Accordingly, in this final rule, as discussed in greater detail 
below and as we proposed, we are modifying and revising the MS-LTC-DRG 
classifications and relative weights to be effective October 1, 2008 
through September 30, 2009 (FY 2009). As discussed in greater detail 
below, the MS-LTC-DRGs for FY 2009 in this final rule are the same as 
the MS-DRGs for the IPPS for FY 2009 (GROUPER Version 26.0) discussed 
in section II.B. of the preamble to this final rule.
2. Changes in the MS-LTC-DRG Classifications
a. Background
    As discussed earlier, section 123 of Public Law 106-113 
specifically requires that the agency implement a PPS for LTCHs that is 
a per discharge system with a DRG-based patient classification system 
reflecting the differences in patient resources and costs in LTCHs. 
Section 307(b)(1) of Public Law 106-554 modified the requirements of 
section 123 of Public Law 106-113 by specifically requiring that the 
Secretary examine ``the feasibility and the impact of basing payment 
under such a system [the LTCH PPS] on the use of existing (or refined) 
hospital diagnosis-related groups (DRGs) that have been modified to 
account for different resource use of long-term care hospital patients 
as well as the use of the most recently available hospital discharge 
data.''
    Consistent with section 123 of Public Law 106-113 as amended by 
section 307(b)(1) of Public Law 106-554 and Sec.  412.515 of our 
existing regulations, the

[[Page 48531]]

LTCH PPS uses information from LTCH patient records to classify patient 
cases into distinct LTC-DRGs based on clinical characteristics and 
expected resource needs. As described in section II.D. of the preamble 
of this final rule, for FY 2008, we adopted MS-DRGs under the IPPS 
because we believe that this system results in a significant 
improvement in the DRG system's recognition of severity of illness and 
resource usage. We stated that we believe these improvements in the DRG 
system are equally applicable to the LTCH PPS. The changes we are 
making in this FY 2009 IPPS final rule are reflected in the FY 2009 
GROUPER, Version 26.0, that will be effective for discharges occurring 
on or after October 1, 2008, through September 30, 2009.
    Consistent with our historical practice of having LTC-DRGs 
correspond to the DRGs applicable under the IPPS, under the broad 
authority of section 123(a) of Public Law 106-113, as modified by 
section 307(b) of Public Law 106-554, under the LTCH PPS for FY 2008, 
we adopted the use of MS-LTC-DRGs, which correspond to the MS-DRGs we 
adopted under the IPPS. In addition, as stated above, we are using the 
final FY 2009 GROUPER Version 26.0, established in section II.B. of 
this final rule, to classify cases effective for LTCH discharges 
occurring on or after October 1, 2008, and through September 30, 2009. 
The changes to the MS-DRG classification system that we are using under 
the IPPS for FY 2009 (GROUPER Version 26.0) are discussed in section 
II.B. of the preamble to this final rule.
    Under the LTCH PPS, as described in greater detail below, we 
determine relative weights for each of the MS-LTC-DRGs to account for 
the difference in resource use by patients exhibiting the case 
complexity and multiple medical problems characteristic of LTCH 
patients. (Unless otherwise noted in this final rule, our MS-LTC-DRG 
analysis is based on LTCH data from the March 2008 update of the FY 
2007 MedPAR file, which contains hospital bills received through March 
31, 2008, for discharges occurring in FY 2007.)
    LTCHs do not typically treat the full range of diagnoses as do 
acute care hospitals. Therefore, as we discussed in the August 30, 2002 
LTCH PPS final rule (67 FR 55985), which implemented the LTCH PPS, and 
the FY 2008 IPPS final rule with comment period (72 FR 47283), we use 
low-volume quintiles in determining the DRG relative weights for DRGs 
with less than 25 LTCH cases (low-volume MS-LTC-DRGs). Specifically, we 
group those low-volume DRGs into 5 quintiles based on average charges 
per discharge. (A listing of the composition of low-volume quintiles 
for the FY 2008 MS-LTC-DRGs (based on FY 2006 MedPAR data) appears in 
section II.I.3. of the FY 2008 IPPS final rule with comment period (72 
FR 47281 through 47288).) We also adjust for cases in which the stay at 
the LTCH is less than or equal to five-sixths of the geometric average 
length of stay; that is, short-stay outlier (SSO) cases, as discussed 
below in section II.I.4. of the preamble of this final rule.
b. Patient Classifications Into MS-LTC-DRGs
    Generally, under the LTCH PPS, Medicare payment is made at a 
predetermined specific rate for each discharge; that is, payment varies 
by the DRG to which a beneficiary's stay is assigned. Just as cases 
have been classified into the MS-DRGs for acute care hospitals under 
the IPPS (discussed in section II.B. of the preamble of this final 
rule), cases have been classified into MS-LTC-DRGs for payment under 
the LTCH PPS based on the principal diagnosis, up to eight additional 
diagnoses, and up to six procedures performed during the stay, as well 
as demographic information about the patient. The diagnosis and 
procedure information is reported by the hospital using the ICD-9-CM 
coding system. Under the MS-DRGs for the IPPS and the MS-LTC-DRGs for 
the LTCH PPS, these factors will not change.
    Section II.B. of the preamble of this final rule discusses the 
organization of the existing MS-DRGs, which we are maintaining under 
the MS-LTC-DRG system. As noted above, the patient classification 
system for the LTCH PPS is derived from the IPPS DRGs and is similarly 
organized into 25 major diagnostic categories (MDCs). Most of these 
MDCs are based on a particular organ system of the body and the 
remainder involves multiple organ systems (such as MDC 22, Burns). 
Accordingly, the principal diagnosis determines MDC assignment. Within 
most MDCs, cases are then divided into surgical DRGs and medical DRGs. 
Under the MS-DRGs, some surgical and medical DRGs are further defined 
for severity purposes based on the presence or absence of MCCs or CCs. 
The existing MS-LTC-DRGs are similarly categorized. (We refer readers 
to section II.B. of the preamble of this final rule for further 
discussion of surgical DRGs and medical DRGs.)
    Therefore, consistent with the MS-DRGs, a base MS-LTC-DRG may be 
subdivided according to three alternatives. The first alternative 
includes division of the DRG into one, two, or three severity levels. 
The most severe level has cases with at least one code that is a major 
CC, referred to as ``with MCC''. The next lower severity level contains 
cases with at least one CC, referred to as ``with CC''. Those DRGs 
without an MCC or a CC are referred to as ``without CC/MCC''. When data 
do not support the creation of three severity levels, the base DRG is 
divided into either two levels or the base is not subdivided.
    The two-level subdivisions consist of one of the following 
subdivisions: ``with CC/MCC'' or ``without CC/MCC.'' In this type of 
subdivision, cases with at least one code that is on the CC or MCC list 
are assigned to the ``with CC/MCC'' DRG. Cases without a CC or an MCC 
are assigned to the ``without CC/MCC'' DRG.
    The other type of two-level subdivision is as follows: ``with MCC'' 
and without MCC.'' In this type of subdivision, cases with at least one 
code that is on the MCC list are assigned to the ``with MCC'' DRG. 
Cases that do not have an MCC are assigned to the ``without MCC' DRG. 
This type of subdivision could include cases with a CC code, but no 
MCC.
3. Development of the FY 2009 MS-LTC-DRG Relative Weights
a. General Overview of Development of the MS-LTC-DRG Relative Weights
    As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 
55981), one of the primary goals for the implementation of the LTCH PPS 
is to pay each LTCH an appropriate amount for the efficient delivery of 
medical care to Medicare patients. The system must be able to account 
adequately for each LTCH's case-mix in order to ensure both fair 
distribution of Medicare payments and access to adequate care for those 
Medicare patients whose care is more costly. To accomplish these goals, 
we have annually adjusted the LTCH PPS standard Federal prospective 
payment system rate by the applicable relative weight in determining 
payment to LTCHs for each case. (As we have noted above, we adopted the 
MS-LTC-DRGs for the LTCH PPS beginning in FY 2008. However, this change 
in the patient classification system does not affect the basic 
principles of the development of relative weights under a DRG-based 
prospective payment system.)
    Although the adoption of the MS-LTC-DRGs resulted in some 
modifications of existing procedures for assigning weights in cases of 
zero volume and/or nonmonotonicity, as discussed in the FY 2008 IPPS 
final rule with comment period (72 FR 47289 through 47295) and the FY 
2009 IPPS

[[Page 48532]]

proposed rule and as detailed in the following sections, the basic 
methodology for developing the FY 2009 MS-LTC-DRG relative weights in 
this final rule continue to be determined in accordance with the 
general methodology established in the August 30, 2002 LTCH PPS final 
rule (67 FR 55989 through 55991). Under the LTCH PPS, relative weights 
for each MS-LTC-DRG are a primary element used to account for the 
variations in cost per discharge and resource utilization among the 
payment groups (Sec.  412.515). To ensure that Medicare patients 
classified to each MS-LTC-DRG have access to an appropriate level of 
services and to encourage efficiency, we calculate a relative weight 
for each MS-LTC-DRG that represents the resources needed by an average 
inpatient LTCH case in that MS-LTC-DRG. For example, cases in an MS-
LTC-DRG with a relative weight of 2 will, on average, cost twice as 
much to treat as cases in an MS-LTC-DRG with a weight of 1.
b. Data
    In the FY 2009 IPPS proposed rule (73 FR 23593), to calculate the 
proposed MS-LTC-DRG relative weights for FY 2009, we obtained total 
Medicare allowable charges from FY 2007 Medicare LTCH bill data from 
the December 2007 update of the MedPAR file, which were the best 
available data at that time, and we used the proposed Version 26.0 of 
the CMS GROUPER that was also proposed for use under the IPPS to 
classify LTCH cases for FY 2009. We also proposed that if more recent 
data became available, we would use those data and the finalized 
Version 26.0 of the CMS GROUPER in establishing the FY 2009 MS-LTC-DRG 
relative weights in the final rule. Consistent with that proposal, to 
calculate the MS-LTC-DRG relative weights for FY 2009, in this final 
rule, we obtained total Medicare allowable charges from FY 2007 
Medicare LTCH bill data from the March 2008 update of the FY 2007 
MedPAR file, which are the best available data at this time, and we 
used the Version 26.0 of the CMS GROUPER that will be used under the 
IPPS (as discussed in section III.B. of the preamble of this final 
rule).
    Consistent with our historical methodology, as proposed, we have 
excluded the data from LTCHs that are all-inclusive rate providers and 
LTCHs that are reimbursed in accordance with demonstration projects 
authorized under section 402(a) of Public Law 90-248 or section 222(a) 
of Public Law 92-603. (We refer readers to the FY 2008 IPPS final rule 
with comment period (72 FR 47282).) Therefore, in the development of 
the FY 2009 MS-LTC-DRG relative weights in this final rule, we have 
excluded the data of the 17 all-inclusive rate providers and the 2 
LTCHs that are paid in accordance with demonstration projects that had 
claims in the FY 2007 MedPAR file.
c. Hospital-Specific Relative Value (HSRV) Methodology
    By nature, LTCHs often specialize in certain areas, such as 
ventilator-dependent patients and rehabilitation and wound care. Some 
case types (DRGs) may be treated, to a large extent, in hospitals that 
have, from a perspective of charges, relatively high (or low) charges. 
This nonarbitrary distribution of cases with relatively high (or low) 
charges in specific MS-LTC-DRGs has the potential to inappropriately 
distort the measure of average charges. To account for the fact that 
cases may not be randomly distributed across LTCHs, as we proposed, in 
this final rule, we used a hospital-specific relative value (HSRV) 
methodology to calculate the MS-LTC-DRG relative weights instead of the 
methodology used to determine the MS-DRG relative weights under the 
IPPS described in section II.H. of the preamble of this final rule. We 
believe this method will remove this hospital-specific source of bias 
in measuring LTCH average charges. Specifically, we are reducing the 
impact of the variation in charges across providers on any particular 
MS-LTC-DRG relative weight by converting each LTCH's charge for a case 
to a relative value based on that LTCH's average charge.
    Under the HSRV methodology, we standardize charges for each LTCH by 
converting its charges for each case to hospital-specific relative 
charge values and then adjusting those values for the LTCH's case-mix. 
The adjustment for case-mix is needed to rescale the hospital-specific 
relative charge values (which, by definition, average 1.0 for each 
LTCH). The average relative weight for a LTCH is its case-mix, so it is 
reasonable to scale each LTCH's average relative charge value by its 
case-mix. In this way, each LTCH's relative charge value is adjusted by 
its case-mix to an average that reflects the complexity of the cases it 
treats relative to the complexity of the cases treated by all other 
LTCHs (the average case-mix of all LTCHs).
    In accordance with the methodology established in the August 30, 
2002 LTCH PPS final rule (67 FR 55989 through 55991), we continue to 
standardize charges for each case by first dividing the adjusted charge 
for the case (adjusted for SSOs under Sec.  412.529 as described in 
section II.I.4. (step 3) of the preamble of this final rule) by the 
average adjusted charge for all cases at the LTCH in which the case was 
treated. SSO cases are cases with a length of stay that is less than or 
equal to five-sixths the average length of stay of the MS-LTC-DRG 
(Sec.  412.529 and Sec.  412.503). The average adjusted charge reflects 
the average intensity of the health care services delivered by a 
particular LTCH and the average cost level of that LTCH. The resulting 
ratio is multiplied by that LTCH's case-mix index to determine the 
standardized charge for the case.
    Multiplying by the LTCH's case-mix index accounts for the fact that 
the same relative charges are given greater weight at a LTCH with 
higher average costs than they would at a LTCH with low average costs, 
which is needed to adjust each LTCH's relative charge value to reflect 
its case-mix relative to the average case-mix for all LTCHs. Because we 
standardize charges in this manner, we count charges for a Medicare 
patient at a LTCH with high average charges as less resource intensive 
than they would be at a LTCH with low average charges. For example, a 
$10,000 charge for a case at a LTCH with an average adjusted charge of 
$17,500 reflects a higher level of relative resource use than a $10,000 
charge for a case at a LTCH with the same case-mix, but an average 
adjusted charge of $35,000. We believe that the adjusted charge of an 
individual case more accurately reflects actual resource use for an 
individual LTCH because the variation in charges due to systematic 
differences in the markup of charges among LTCHs is taken into account.
d. Treatment of Severity Levels in Developing Relative Weights
    Under the MS-LTC-DRGs, for purposes of the setting of the relative 
weights, as we discussed in the FY 2009 IPPS proposed rule (73 FR 
23594), there would be three different categories of DRGs based on 
volume of cases within specific MS-LTC-DRGs. MS-LTC-DRGs with at least 
25 cases are each assigned a unique relative weight; low-volume MS-LTC-
DRGs (that is, MS-LTC-DRGs that contain between one and 24 cases 
annually) are grouped into quintiles (described below) and assigned the 
weight of the quintile. No-volume MS-LTC-DRGs (that is, no cases in the 
database were assigned to those MS-LTC-DRGs) are crosswalked to other 
MS-LTC-DRGs based on the clinical similarities and assigned the 
relative weight of the crosswalked MS-LTC-DRG. (We provide in-depth 
discussions of our policy regarding weight setting for low-volume MS-
LTC-

[[Page 48533]]

DRGs in section II.I.3.e. of the preamble of this final rule and for 
no-volume MS-LTC-DRGs, under Step 5 in section II.I.4. of the preamble 
of this final rule.)
    As described above, in response to the need to account for severity 
and pay appropriately for cases, we developed a severity-adjusted 
patient classification system which we adopted for both the IPPS and 
the LTCH PPS in FY 2008. As described in greater detail above, the MS-
LTC-DRG system can accommodate three severity levels: ``with MCC'' 
(most severe); ``with CC,'' and ``without CC/MCC'' (the least severe) 
with each level assigned an individual MS-LTC-DRG number. In cases with 
two subdivisions, the levels are either ``with CC/MCC'' and ``without 
CC/MCC'' or ``with MCC'' and ``without MCC''. For example, under the 
MS-LTC-DRG system, multiple sclerosis and cerebellar ataxia with MCC is 
MS-LTC-DRG 58; multiple sclerosis and cerebellar ataxia with CC is MS-
LTC-DRG 59; and multiple sclerosis and cerebellar ataxia without CC/MCC 
is MS-LTC-DRG 60. For purposes of discussion in this section, the term 
``base DRG'' is used to refer to the DRG category that encompasses all 
levels of severity for that DRG. For example, when referring to the 
entire DRG category for multiple sclerosis and cerebellar ataxia, which 
includes the above three severity levels, we would use the term ``base-
DRG.''
    As noted above, while the LTCH PPS and the IPPS use the same 
patient classification system, the methodology that is used to set the 
DRG weights for use in each payment system differs because the overall 
volume of cases in the LTCH PPS is much less than in the IPPS. As a 
general rule, consistent with the methodology we used when we adopted 
the MS-LTC-DRGs in the FY 2008 IPPS final rule with comment period (72 
FR 47278 through 47281), as we proposed, we determined the FY 2009 
relative weights for the MS-LTC-DRGs using the following steps: (1) If 
an MS-LTC-DRG has at least 25 cases, it is assigned its own relative 
weight; (2) if an MS-LTC-DRG has between 1 and 24 cases, it is assigned 
to a quintile for which we compute a relative weight for all of the MS-
LTC-DRGS assigned to that quintile; and (3) if an MS-LTC-DRG has no 
cases, it is crosswalked to another MS-LTC-DRG based upon clinical 
similarities to assign an appropriate relative weight (as described 
below in detail in Step 5 of the Steps for Determining the FY 2009 MS-
LTC-DRG Relative Weights). Furthermore, in determining the FY 2009 MS-
LTC-DRG relative weights, when necessary, as we proposed, we are making 
adjustments to account for nonmonotonicity, as explained below.
    Theoretically, cases under the MS-LTC-DRG system that are more 
severe require greater expenditure of medical care resources and will 
result in higher average charges. Therefore, in the three severity 
levels, weights should increase with severity, from lowest to highest. 
If the weights do not increase (that is, if based on the relative 
weight methodology outlined above, the MS-LTC-DRG with MCC would have a 
lower relative weight than one with CC, or the MS-LTC-DRG without CC/
MCC would have a higher relative weight than either of the others), 
there is a problem with monotonicity. Since the start of the LTCH PPS 
for FY 2003 (67 FR 55990), in determining the LTC-DRG relative weights, 
we have made adjustments in order to maintain monotonicity by grouping 
both sets of cases together and establishing a new relative weight for 
both LTC-DRGs. We continue to believe that utilizing nonmonotonic 
relative weights to adjust Medicare payments would result in 
inappropriate payments because, in a nonmonotonic system, cases that 
are more severe and require greater expenditure of medical care 
resources would be paid based on a lower relative weight than cases 
that are less severe and require lower resource use. The procedure for 
dealing with nonmonotonicity under the MS-LTC-DRG classification system 
is discussed in greater detail below in section II.I.4. (Step 6) of the 
preamble of this final rule.
e. Low-Volume MS-LTC-DRGs
    In order to account for MS-LTC-DRGs with low volume (that is, with 
fewer than 25 LTCH cases), consistent with the methodology we 
established when we implemented the LTCH PPS (August 30, 2002; 67 FR 
55984 through 55995), we group those ``low-volume MS-LTC-DRGs'' (that 
is, MS-LTC-DRGs that contained between 1 and 24 cases annually) into 
one of five categories (quintiles) based on average charges, for the 
purposes of determining relative weights (72 FR 47283 through 47288). 
In determining the FY 2009 MS-LTC-DRG relative weights in this final 
rule, as we proposed, we continue to employ this quintile methodology 
for low-volume MS-LTC-DRGs. In addition, in cases where the initial 
assignment of a low-volume MS-LTC-DRG to quintiles results in 
nonmonotonicity within a base-DRG, in order to ensure appropriate 
Medicare payments, consistent with our historical methodology, we are 
making adjustments to the treatment of low-volume MS-LTC-DRGs to 
preserve monotonicity, as discussed in detail below in section II.I.4 
(Step 6 of the methodology for determining the FY 2009 MS-LTC-DRG 
relative weights). In this final rule, using LTCH cases from the March 
2008 update of the FY 2007 MedPAR file, we identified 290 MS-LTC-DRGs 
that contained between 1 and 24 cases. This list of MS-LTC-DRGs was 
then divided into one of the 5 low-volume quintiles, each containing 58 
MS-LTC-DRGs (290/5 = 58). As proposed, we assigned a low-volume MS-LTC-
DRG to a specific low-volume quintile by sorting the low-volume MS-LTC-
DRGs in ascending order by average charge in accordance with our 
established methodology. Specifically, for this final rule, the 290 
low-volume MS-LTC-DRGs were sorted by ascending order by average charge 
and assigned to a specific low-volume quintile (as described below). 
After sorting the 290 low-volume MS-LTC-DRGs by average charge in 
ascending order, we grouped the first fifth (1st through 58th) of low-
volume MS-LTC-DRGs (with the lowest average charge) into Quintile 1. 
This process was repeated through the remaining low-volume MS-LTC-DRGs 
so that each of the 5 low-volume quintiles contains 58 MS-LTC-DRGs. The 
highest average charge cases are grouped into Quintile 5. (We note 
that, consistent with our historical methodology, if the number of low-
volume MS-LTC-DRGs had not been evenly divisible by 5, we would have 
used the average charge of the low-volume MS-LTC-DRG to determine which 
low-volume quintile would have received the additional low-volume MS-
LTC-DRG.)
    Accordingly, in order to determine the relative weights for the MS-
LTC-DRGs with low-volume for FY 2009, as proposed, we used the five 
low-volume quintiles described above. The composition of each of the 
five low-volume quintiles shown in the chart below was used in 
determining the MS-LTC-DRG relative weights for FY 2009 (Table 11 of 
the Addendum to this final rule). We determined a relative weight and 
(geometric) average length of stay for each of the five low-volume 
quintiles using the methodology that we applied to the regular MS-LTC-
DRGs (25 or more cases), as described in section II.I.4. of the 
preamble of this final rule. As we proposed, we assigned the same 
relative weight and average length of stay to each of the low-volume 
MS-LTC-DRGs that make up an individual low-volume quintile. We note 
that, as this system is dynamic, it is possible that the number and 
specific type of

[[Page 48534]]

MS-LTC-DRGs with a low volume of LTCH cases will vary in the future. We 
use the best available claims data in the MedPAR file to identify low-
volume MS-LTC-DRGs and to calculate the relative weights based on our 
methodology.
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    We note that we will continue to monitor the volume (that is, the 
number of LTCH cases) in the low-volume quintiles to ensure that our 
quintile assignments result in appropriate payment for such cases and 
do not result in an unintended financial incentive for LTCHs to 
inappropriately admit these types of cases.
4. Steps for Determining the FY 2009 MS-LTC-DRG Relative Weights
    In general, as we proposed, the FY 2009 MS-LTC-DRG relative weights 
in this final rule were determined based on the methodology established 
in the August 30, 2002 LTCH PPS final rule (67 FR 55989 through 55991). 
In summary, for FY 2009, we grouped LTCH cases to the appropriate MS-
LTC-DRG, while taking into account the low-volume MS-LTC-DRGs (as 
described above), before the FY 2009 MS-LTC-DRG relative weights were 
determined. After grouping the cases to the appropriate MS-LTC-DRG (or 
low-volume quintile), we calculated the relative weights for FY 2009 by 
first removing statistical outliers and cases with a length of stay of 
7 days or less (as discussed in greater detail below). Next, we 
adjusted the number of cases in each MS-LTC-DRG (or low-volume 
quintile) for the effect of SSO cases (as also discussed in greater 
detail below). The SSO adjusted discharges and corresponding charges 
were used to calculate ``relative adjusted weights'' in each MS-LTC-DRG 
(or low-volume quintile) using the HSRV method (described above). In 
general, to determine the FY 2009 MS-LTC-DRG relative weights in this 
final rule, as we proposed, we used the same methodology we used in 
determining the FY 2008 MS-LTC-DRG relative weights in the FY 2008 IPPS 
final rule with comment period (72 FR 47281 through 47299). However, as 
we proposed, we made a modification to our methodology for determining 
relative weights for MS-LTC-DRGs with no LTCH cases (as discussed in 
greater detail in Step 5 below). Also, we note that, although we are 
generally using the same methodology in this final rule (with the 
exception noted above) as the

[[Page 48541]]

methodology used in the FY 2008 IPPS final rule with comment, the 
discussion presented below of the steps for determining the FY 2009 MS-
LTC-DRG relative weights varies slightly from the discussion of the 
steps for determining the FY 2008 MS-LTC-DRG relative weights 
(presented in the FY 2008 IPPS final rule with comment) because we took 
this opportunity to refine our description to more precisely explain 
our methodology for determining the MS-LTC-DRG relative weights.
    As discussed in the FY 2008 IPPS final rule with comment when we 
adopted the MS-LTC-DRGs, the adoption of the MS-LTC-DRGs with either 
two or three severity levels resulted in some slight modifications of 
procedures for assigning relative weights in cases of zero volume and/
or nonmonotonicity (described in detail below) from the methodology we 
established when we implemented the LTCH PPS in the August 30, 2002 
LTCH PPS final rule. As also discussed in the FY 2008 IPPS final rule 
with comment when we adopted the MS-LTC-DRGs, we implemented the MS-
LTC-DRGs with a 2-year transition beginning in FY 2008. For FY 2008, 
the first year of the transition, 50 percent of the relative weight for 
a MS-LTC-DRG was based on the average LTC-DRG relative weight under 
Version 24.0 of the LTC-DRG GROUPER. The remaining 50 percent of the 
relative weight was based on the MS-LTC-DRG relative weight under 
Version 25.0 of the MS-LTC-DRG GROUPER. In FY 2009, the MS-LTC-DRG 
relative weights are based on 100 percent of the MS-LTC-DRG relative 
weights. Accordingly, in determining the FY 2009 MS-LTC-DRG relative 
weights in this final rule, there was no longer a need to include a 
step to calculate MS-LTC-DRG transition blended relative weights (see 
Step 7 in the FY 2008 IPPS final rule with comment period (72 FR 
47295). Therefore, as we proposed, in this final rule, we determined 
the FY 2009 MS-LTC-DRG relative weights based solely on the MS-LTC-DRG 
relative weight under Version 26.0 of the MS-LTC-DRG GROUPER, which is 
discussed in section II.B. of the preamble of this final rule. 
Furthermore, as we proposed, we determined the final FY 2009 MS-LTC-DRG 
relative weights in this final rule based on the final Version 26.0 of 
the MS-LTC-DRG GROUPER that is presented in this final rule.
    Below we discuss in detail the steps for calculating the FY 2009 
MS-LTC-DRG relative weights. We note that, as we stated above in 
section II.I.3.b. of the preamble of this final rule, we have excluded 
the data of all-inclusive rate LTCHs and LTCHs that are paid in 
accordance with demonstration projects that had claims in the FY 2007 
MedPAR file.
    Step 1--Remove statistical outliers.
    As we proposed, the first step in the calculation of the FY 2009 
MS-LTC-DRG relative weights is to remove statistical outlier cases. 
Consistent with our historical relative weight methodology, we continue 
to define statistical outliers as cases that are outside of 3.0 
standard deviations from the mean of the log distribution of both 
charges per case and the charges per day for each MS-LTC-DRG. These 
statistical outliers are removed prior to calculating the relative 
weights because we believe that they may represent aberrations in the 
data that distort the measure of average resource use. Including those 
LTCH cases in the calculation of the relative weights could result in 
an inaccurate relative weight that does not truly reflect relative 
resource use among the MS-LTC-DRGs.
    Step 2--Remove cases with a length of stay of 7 days or less.
    The MS-LTC-DRG relative weights reflect the average of resources 
used on representative cases of a specific type. Generally, cases with 
a length of stay of 7 days or less do not belong in a LTCH because 
these stays do not fully receive or benefit from treatment that is 
typical in a LTCH stay, and full resources are often not used in the 
earlier stages of admission to a LTCH. If we were to include stays of 7 
days or less in the computation of the FY 2009 MS-LTC-DRG relative 
weights, the value of many relative weights would decrease and, 
therefore, payments would decrease to a level that may no longer be 
appropriate. We do not believe that it would be appropriate to 
compromise the integrity of the payment determination for those LTCH 
cases that actually benefit from and receive a full course of treatment 
at a LTCH, by including data from these very short-stays. Therefore, 
consistent with our historical relative weight methodology, in 
determining the FY 2009 MS-LTC-DRG relative weights, as we proposed, we 
removed LTCH cases with a length of stay of 7 days or less.
    Step 3--Adjust charges for the effects of SSOs.
    After removing cases with a length of stay of 7 days or less, we 
are left with cases that have a length of stay of greater than or equal 
to 8 days. As we proposed, as the next step in the calculation of the 
FY 2009 MS-LTC-DRG relative weights, consistent with our historical 
relative weight methodology, we adjusted each LTCH's charges per 
discharge for those remaining cases for the effects of SSOs (as defined 
in Sec.  412.529(a) in conjunction with Sec.  412.503 for LTCH 
discharges occurring on or after October 1, 2008). (We note that even 
if a case was removed in Step 2 (that is, cases with a length of stay 
of 7 days or less), it was paid as an SSO if its length of stay was 
less than or equal to five-sixths of the average length of stay of the 
MS-LTC-DRG.)
    We made this adjustment by counting an SSO case as a fraction of a 
discharge based on the ratio of the length of stay of the case to the 
average length of stay for the MS-LTC-DRG for non-SSO cases. This has 
the effect of proportionately reducing the impact of the lower charges 
for the SSO cases in calculating the average charge for the MS-LTC-DRG. 
This process produces the same result as if the actual charges per 
discharge of an SSO case were adjusted to what they would have been had 
the patient's length of stay been equal to the average length of stay 
of the MS-LTC-DRG.
    Counting SSO cases as full discharges with no adjustment in 
determining the FY 2009 MS-LTC-DRG relative weights would lower the FY 
2009 MS-LTC-DRG relative weight for affected MS-LTC-DRGs because the 
relatively lower charges of the SSO cases would bring down the average 
charge for all cases within an MS-LTC-DRG. This would result in an 
``underpayment'' for non-SSO cases and an ``overpayment'' for SSO 
cases. Therefore, as we proposed, we adjusted for SSO cases under Sec.  
412.529 in this manner because it results in more appropriate payments 
for all LTCH cases.
    Step 4--Calculate the FY 2009 MS-LTC-DRG relative weights on an 
iterative basis.
    Consistent with our historical relative weight methodology, as we 
proposed, we calculated the MS-LTC-DRG relative weights using the HSRV 
methodology, which is an iterative process. First, for each LTCH case, 
we calculate a hospital-specific relative charge value by dividing the 
SSO adjusted charge per discharge (see step 3) of the LTCH case (after 
removing the statistical outliers (see step 1)) and LTCH cases with a 
length of stay of 7 days or less (see step 2) by the average charge per 
discharge for the LTCH in which the case occurred. The resulting ratio 
was then multiplied by the LTCH's case-mix index to produce an adjusted 
hospital-specific relative charge value for the case. An initial case-
mix index value of 1.0 is used for each LTCH.
    For each MS-LTC-DRG, the FY 2009 relative weight was calculated by 
dividing the average of the adjusted hospital-specific relative charge 
values (from above) for the MS-LTC-DRG by

[[Page 48542]]

the overall average hospital-specific relative charge value across all 
cases for all LTCHs. Using these recalculated MS-LTC-DRG relative 
weights, each LTCH's average relative weight for all of its cases (that 
is, its case-mix) were calculated by dividing the sum of all the LTCH's 
MS-LTC-DRG relative weights by its total number of cases. The LTCHs' 
hospital-specific relative charge values above were multiplied by these 
hospital-specific case-mix indexes. These hospital-specific case-mix 
adjusted relative charge values were then used to calculate a new set 
of MS-LTC-DRG relative weights across all LTCHs. This iterative process 
was continued until there was convergence between the weights produced 
at adjacent steps, for example, when the maximum difference is less 
than 0.0001.
    Step 5--Determine an FY 2009 relative weight for MS-LTC-DRGs with 
no LTCH cases.
    As we stated above, we determined the FY 2009 relative weight for 
each MS-LTC-DRG using total Medicare allowable charges reported in the 
best available LTCH claims data (that is, the March 2008 update of the 
FY 2007 MedPAR file for this final rule). Of the FY 2009 MS-LTC-DRGs, 
we identified a number of MS-LTC-DRGs for which there were no LTCH 
cases in the database. That is, based on data from the FY 2007 MedPAR 
file used for this final rule, no patients who would have been 
classified to those MS-LTC-DRGs were treated in LTCHs during FY 2007 
and, therefore, no charge data were available for those MS-LTC-DRGs. 
Thus, in the process of determining the MS-LTC-DRG relative weights, we 
were unable to calculate relative weights for these MS-LTC-DRGs with no 
LTCH cases using the methodology described in Steps 1 through 4 above. 
However, because patients with a number of the diagnoses under these 
MS-LTC-DRGs may be treated at LTCHs, consistent with our historical 
methodology, as we proposed, we assigned relative weights to each of 
the no-volume MS-LTC-DRGs based on clinical similarity and relative 
costliness (with the exception of ``transplant'' MS-LTC-DRGs and 
``error'' MS-LTC-DRGs as discussed below). In general, we determined FY 
2009 relative weights for the MS-LTC-DRGs with no LTCH cases in the FY 
2007 MedPAR file used in this final rule (that is, ``no-volume MS-LTC-
DRGs) by crosswalking each no-volume MS-LTC-DRG to another MS-LTC-DRG 
with a calculated relative weight (determined in accordance with the 
methodology described above). Then, the ``no-volume'' MS-LTC-DRG was 
assigned the same relative weight of the MS-LTC-DRG to which it was 
crosswalked (as described in greater detail below). As noted above, as 
proposed, we made a modification to our methodology for determining 
relative weights for MS-LTC-DRGs with no LTCH cases in this final rule, 
which is discussed in greater detail below. As also noted above, even 
where we are not changing our existing methodology, as we did in the FY 
2009 IPPS proposed rule, we took this opportunity to refine our 
description to more precisely explain our proposed methodology for 
determining the MS-LTC-DRG relative weights in this final rule.
    Specifically, in this final rule, as we proposed, we determined the 
relative weight for each MS-LTC-DRG using total Medicare allowable 
charges reported in the March 2008 update of the FY 2007 MedPAR file. 
Of the 746 MS-LTC-DRGs for FY 2009, we identified 203 MS-LTC-DRGs for 
which there were no LTCH cases in the database (including the 8 
``transplant'' MS-LTC-DRGs and 2 ``error'' MS-LTC-DRGs). For this final 
rule, as noted above and as we proposed, we assigned relative weights 
for each of the 203 no-volume MS-LTC-DRGs (with the exception of the 8 
``transplant'' MS-LTC-DRGs and the 2 ``error'' MS-LTC-DRGs, which are 
discussed below) based on clinical similarity and relative costliness 
to one of the remaining 543 (746-203= 543) MS-LTC-DRGs for which we 
were able to determine relative weights, based on FY 2007 LTCH claims 
data. (For the remainder of this discussion, we refer to one of the 543 
MS-LTC-DRGs for which we were able to determine relative weight as the 
``crosswalked'' MS-LTC-DRG.) Then, as we proposed, we assigned the no-
volume MS-LTC-DRG the relative weight of the crosswalked MS-LTC-DRG. As 
discussed in the FY 2009 IPPS proposed rule (73 FR 23602), this 
approach differs from the one we used to determine the FY 2008 MS-LTC-
DRG relative weights when there were no LTCH cases (72 FR 47290). 
Specifically, in determining the FY 2008 MS-LTC-DRG relative weights in 
the FY 2008 IPPS final rule with comment period, if the no volume MS-
LTC-DRG was crosswalked to a MS-LTC-DRG that had 25 or more cases and, 
therefore, was not in a low-volume quintile, we assigned the relative 
weight of a quintile to a no-volume MS-LTC-DRG (rather than assigning 
the relative weight of the crosswalked MS-LTC-DRG). While we believe 
this approach would result in appropriate LTCH PPS payments (because it 
is consistent with our methodology for determining relative weights for 
MS-LTC-DRGs that have a low volume of LTCH cases (which is discussed 
above in section II.I.3.e. of this preamble)), upon further review 
during the development of the FY 2009 MS-LTC-DRG relative weights in 
this final rule, we now believe that assigning the relative weight of 
the crosswalked MS-LTC-DRG to the no-volume MS-LTC-DRG would result in 
more appropriate LTCH PPS payments because those cases generally 
require equivalent relative resource (and therefore should generally 
have the same LTCH PPS payment). The relative weight of each MS-LTC-DRG 
should reflect relative resource of the LTCH cases grouped to that MS-
LTC-DRG. Because the no-volume MS-LTC-DRGs are crosswalked to other MS-
LTC-DRGs based on clinical similarity and relative costliness, which 
usually require equivalent relative resource use, we believe that 
assigning the no-volume MS-LTC-DRG the relative weight of the 
crosswalked MS-LTC-DRG would result in appropriate LTCH PPS payments. 
(As explained below in Step 6, when necessary, we made adjustments to 
account for nonmonotonicity.)
    Comment: Although we did not receive any comments on any of the 
specific proposed MS-LTC-DRG no-volume crosswalks presented in the 
table in the proposed rule, we received one general comment on our 
description of the proposed methodology to determine the proposed no-
volume MS-LTC-DRGs crosswalks for FY 2009. Specifically, the commenter 
stated that, although it generally supported the proposed methodology 
for determining relative weights for the no-volume MS-LTC-DRGs, it was 
not clear how CMS was able to compare the ``relative costliness'' of 
the no-volume MS-LTC-DRGs to other MS-LTC-DRGs because, by definition, 
the no-volume MS-LTC-DRGs do not have costs associated with them (since 
there are no LTCH cases in the data). The commenter questioned whether 
CMS may have evaluated the relative costliness of the proposed no-
volume FY 2009 MS-LTC-DRGs using prior years' LTCH data or if relative 
costliness was assessed based on the cost experience of those MS-DRGs 
under the IPPS. The commenter requested that, in the final rule, CMS 
provide additional detail on the ``relative costliness'' aspect of the 
proposed no-volume crosswalk methodology.
    Response: We appreciate the commenter's support of our proposed 
methodology for determining relative weight for the no-volume MS-LTC-
DRGs for FY 2009. As requested by the commenter, we are taking this

[[Page 48543]]

opportunity to provide additional information on how we evaluated the 
relative costliness in determining the applicable MS-LTC-DRG to which a 
no-volume MS-LTC-DRG was cross-walked in order to assign an appropriate 
relative weight for the no-volume MS-LTC-DRGs in FY 2009. In general, 
most of the no-volume MS-LTC-DRGs historically have not had any cases 
in the LTCH data. Therefore, we typically are unable to evaluate 
relative costliness based on prior years' LTCH claims data. In 
evaluating the relative costliness for most of the no-volume MS-LTC-
DRGs, a group of CMS Medical Officers, who have extensive knowledge and 
familiarity with both the IPPS and LTCH DRG-based payment systems, used 
their DRG experience to evaluate the relative costliness of the no-
volume MS-LTC-DRGs. Specifically, the relative costliness of each of 
the no-volume MS-LTC-DRGs was assessed by taking into consideration 
factors such as relative resource use, clinical cohesiveness, and the 
comparableness of services provided, based on the collective IPPS and 
LTCH PPS experience of those Medical Officers. We also note, as 
discussed above, the no-volume MS-LTC-DRG crosswalks are based on both 
clinical similarity and relative costliness, including such factors as 
care provided during the period of time surrounding surgery, surgical 
approach (if applicable), length of time of surgical procedure, 
postoperative care, and length of stay. We believe in the rare event 
that there would be a few LTCH cases grouped to one of the no-volume 
MS-LTC-DRGs in the future, the relative weights assigned based on the 
crosswalked MS-LTC-DRGs will result in an appropriate LTCH PPS payment 
because the crosswalks, which are based on similar clinical similarity 
and relative costliness, generally require equivalent relative resource 
use.
    In this final rule, we are adopting the methodology we proposed for 
determining the relative weights for the no-volume MS-LTC-DRGs. Our 
methodology for determining the relative weights for the no-volume MS-
LTC-DRGs is as follows: We crosswalk the no-volume MS-LTC-DRG to an MS-
LTC-DRG for which there are LTCH cases in the FY 2007 MedPAR file and 
to which it is similar clinically in intensity of use of resources and 
relative costliness as determined by criteria such as care provided 
during the period of time surrounding surgery, surgical approach (if 
applicable), length of time of surgical procedure, postoperative care, 
and length of stay. We then assign the relative weight of the 
crosswalked MS-LTC-DRG as the relative weight for the no-volume MS-LTC-
DRG such that both of these MS-LTC-DRGs (that is, the no-volume MS-LTC-
DRG and the crosswalked MS-LTC-DRG) would have the same relative 
weight. We note that if the crosswalked MS-LTC-DRG has 25 cases or 
more, its relative weight, which is calculated using the methodology 
described in steps 1 through 4 above, is assigned to the no-volume MS-
LTC-DRG as well. Similarly, if the MS-LTC-DRG to which the no-volume 
MS-LTC-DRG is crosswalked has 24 or less cases, and therefore is 
designated to one of the low-volume quintiles for purposes of 
determining the relative weights, we assign the relative weight of the 
applicable low-volume quintile to the no-volume MS-LTC-DRG such that 
both of these MS-LTC-DRGs (that is, the no-volume MS-LTC-DRG and the 
crosswalked MS-LTC-DRG) have the same relative weight. (As we noted 
above, in the infrequent case where nonmonotonicity involving a no-
volume MS-LTC-DRG results, additional measures as described in Step 6 
are required in order to maintain monotonically increasing relative 
weights.)
    For this final rule, a list of the no-volume FY 2009 MS-LTC-DRGs 
and the FY 2009 MS-LTC-DRG to which it is crosswalked (that is, the 
crosswalked MS-LTC-DRG) is shown in the chart below.
BILLING CODE 4120-01-P

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[GRAPHIC] [TIFF OMITTED] TR19AU08.000


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[GRAPHIC] [TIFF OMITTED] TR19AU08.001


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[GRAPHIC] [TIFF OMITTED] TR19AU08.004

BILLING CODE 4120-01-C
    To illustrate this methodology for determining the relative weights 
for the MS-LTC-DRGs with no LTCH cases, we are providing the following 
example, which refers to the no-volume MS-LTC-DRGs crosswalk 
information for FY 2009 provided in the chart above.

    Example: There were no cases in the FY 2007 MedPAR file used for 
this final rule for MS-LTC-DRG 61 (Acute Ischemic Stroke with Use of 
Thrombolytic Agent with MCC). We determined that MS-LTC-DRG 70 
(Nonspecific Cerebrovascular Disorders with MCC) was similar 
clinically and based on resource use to MS-LTC-DRG 61. Therefore, we 
assigned the same relative weight of MS-LTC-DRG 70 of 0.8718 for FY 
2009 to MS-LTC-DRG 61 (Table 11 of the Addendum to this final rule).

    Furthermore, for FY 2009, consistent with our historical relative 
weight methodology, as we proposed, we are establishing MS-LTC-DRG 
relative weights of 0.0000 for the following transplant MS-LTC-DRGs: 
Heart Transplant or Implant of Heart Assist System with MCC (MS-LTC-DRG 
1); Heart Transplant or Implant of Heart Assist System without MCC (MS-
LTC-DRG 2); Liver Transplant with MCC or Intestinal Transplant (MS-LTC-
DRG 5); Liver Transplant without MCC (MS-LTC-DRG 6); Lung Transplant 
(MS-LTC-DRG 7); Simultaneous Pancreas/Kidney Transplant (MS-LTC-DRG 8); 
Pancreas Transplant (MS-LTC-DRG 10); and Kidney Transplant (MS-LTC-DRG 
652). This is because Medicare will only cover these procedures if they 
are performed at a hospital that has been certified for the specific 
procedures by Medicare and presently no LTCH has been so certified. 
Based on our research, we found that most LTCHs only perform minor 
surgeries, such as minor small and large bowel procedures, to the 
extent any surgeries are performed at all. Given the extensive criteria 
that must be met to become certified as a transplant center for 
Medicare, we believe it is unlikely that any LTCHs will become 
certified as a transplant center. In fact, in the more than 20 years 
since the implementation of the IPPS, there has never been a LTCH that 
even expressed an interest in becoming a transplant center.
    If in the future a LTCH applies for certification as a Medicare-
approved transplant center, we believe that the application and 
approval procedure would allow sufficient time for us to determine 
appropriate weights for the

[[Page 48549]]

MS-LTC-DRGs affected. At the present time, we only include these eight 
transplant MS-LTC-DRGs in the GROUPER program for administrative 
purposes only. Because we use the same GROUPER program for LTCHs as is 
used under the IPPS, removing these MS-LTC-DRGs would be 
administratively burdensome.
    Again, we note that, as this system is dynamic, it is entirely 
possible that the number of MS-LTC-DRGs with no volume of LTCH cases 
based on the system will vary in the future. We used the most recent 
available claims data in the MedPAR file to identify no-volume MS-LTC-
DRGs and to determine the relative weights in this final rule.
    Step 6--Adjust the FY 2009 MS-LTC-DRG relative weights to account 
for nonmonotonically increasing relative weights.
    As discussed in section II.B. of the preamble of this final rule, 
the MS-DRGs (used under the IPPS) on which the MS-LTC-DRGs are based 
provide a significant improvement in the DRG system's recognition of 
severity of illness and resource usage. The MS-DRGs contain base DRGs 
that have been subdivided into one, two, or three severity levels. 
Where there are three severity levels, the most severe level has at 
least one code that is referred to as an MCC. The next lower severity 
level contains cases with at least one code that is a CC. Those cases 
without an MCC or a CC are referred to as without CC/MCC. When data did 
not support the creation of three severity levels, the base was divided 
into either two levels or the base was not subdivided. The two-level 
subdivisions could consist of the CC/MCC and the without CC/MCC. 
Alternatively, the other type of two level subdivision could consist of 
the MCC and without MCC.
    In those base MS-LTC-DRGs that are split into either two or three 
severity levels, cases classified into the ``without CC/MCC'' MS-LTC-
DRG are expected to have a lower resource use (and lower costs) than 
the ``with CC/MCC'' MS-LTC-DRG (in the case of a two-level split) or 
the ``with CC'' and ``with MCC'' MS-LTC-DRGs (in the case of a three-
level split). That is, theoretically, cases that are more severe 
typically require greater expenditure of medical care resources and 
will result in higher average charges. Therefore, in the three severity 
levels, relative weights should increase by severity, from lowest to 
highest. If the relative weights do not increase (that is, if within a 
base MS-LTC-DRG, an MS-LTC-DRG with MCC has a lower relative weight 
than one with CC, or the MS-LTC-DRG without CC/MCC has a higher 
relative weight than either of the others, they are nonmonotonic). We 
continue to believe that utilizing nonmonotonic relative weights to 
adjust Medicare payments would result in inappropriate payments. 
Consequently, in general, as we proposed, we combined MS-LTC-DRG 
severity levels within a base MS-LTC-DRG for the purpose of computing a 
relative weight when necessary to ensure that monotonicity is 
maintained. In determining the FY 2009 MS-LTC-DRG relative weights in 
this final rule, in general, we are using the same methodology to 
adjust for nonmonotonicity that we used to determine the FY 2008 MS-
LTC-DRG relative weights in the FY 2008 IPPS final rule with comment 
(72 FR 47293 through 47295). However, as noted above and as we did in 
the proposed rule, we are taking this opportunity to refine our 
description to more precisely explain our methodology for determining 
the MS-LTC-DRG relative weights in this final rule. We note that we did 
not receive any comments on our refinement to the description of our 
methodology for adjusting for nonmonotonicity in determining the 
relative weights for FY 2009 that was presented in the FY 2009 IPPS 
proposed rule. In determining the FY 2009 MS-LTC-DRG relative weights 
in this final rule, under each of the example scenarios provided below, 
we combined severity levels within a base MS-LTC-DRG as follows:
    The first example of nonmonotonically increasing relative weights 
for a MS-LTC-DRG pertains to a base MS-LTC-DRG with a three-level split 
and each of the three levels has 25 or more LTCH cases and, therefore, 
none of those MS-LTC-DRGs is assigned to one of the five low-volume 
quintiles. In this final rule, if nonmonotonicity was detected in the 
relative weights of the MS-LTC-DRGs in adjacent severity levels (for 
example, the relative weight of the ``with MCC'' (the highest severity 
level) is less than the ``with CC'' (the middle level), or the ``with 
CC'' is less than the ``without CC/MCC''), we combined the nonmonotonic 
adjacent MS-LTC-DRGs and redetermined a relative weight based on the 
case-weighted average of the combined LTCH cases of the nonmonotonic 
MS-LTC-DRGs. The case-weighted average charge is calculated by dividing 
the total charges for all LTCH cases in both severity levels by the 
total number of LTCH cases for both MS-LTC-DRGs. The same relative 
weight is assigned to both affected levels of the base MS-LTC-DRG. If 
nonmonotonicity remains an issue because the above process resulted in 
a relative weight that was still nonmonotonic to the remaining MS-LTC-
DRG relative weight within the base MS-LTC-DRG, we combined all three 
of the severity levels to redetermine the relative weights based on the 
case-weighted average charge of the combined severity levels. This same 
relative weight was then assigned to each of the MS-LTC-DRGs in that 
base MS-LTC-DRG.
    A second example of nonmonotonically increasing relative weights 
for a base MS-LTC-DRG pertains to the situation where there are three 
severity levels and one or more of the severity levels within a base 
MS-LTC-DRG has less than 25 LTCH cases (that is, low volume). In this 
final rule, if nonmonotonicity occurs in the case where either the 
highest or lowest severity level (``with MCC'' or ``without CC/MCC'') 
has 25 LTCH cases or more and the other two severity levels are low 
volume (and therefore the other two severity levels are otherwise 
assigned the relative weight of the applicable low-volume quintile(s)), 
we combined the data for the cases in the two adjacent low-volume MS-
LTC-DRGs for the purpose of determining a relative weight. If the 
combination resulted in at least 25 cases, we redetermined one relative 
weight based on the case-weighted average charge of the combined 
severity levels and assigned this same relative weight to each of the 
severity levels. If the combination resulted in less than 25 cases, 
based on the case-weighted average charge of the combined low-volume 
MS-LTC-DRGs, both MS-LTC-DRGs were assigned to the appropriate low-
volume quintile (discussed above in section II.I.3.e. of this preamble) 
based on the case-weighted average charge of the combined low-volume 
MS-LTC-DRGs. Then the relative weight of the affected low-volume 
quintile was redetermined and that relative weight was assigned to each 
of the affected severity levels (and all of the MS-LTC-DRGs in the 
affected low-volume quintile). If nonmonotonicity persisted, we 
combined all three severity levels and redetermined one relative weight 
based on the case-weighted average charge of the combined severity 
levels and this same relative weight was assigned to each of the three 
levels.
    Similarly, in nonmonotonic cases where the middle level has 25 
cases or more but either or both of the lowest or highest severity 
level has less than 25 cases (that is, low volume), we combined the 
nonmonotonic low-volume MS-LTC-DRG with the middle level MS-LTC-DRG of 
the base MS-

[[Page 48550]]

LTC-DRG. We redetermined one relative weight based on the case-weighted 
average charge of the combined severity levels and assigned this same 
relative weight to each of the affected MS-LTC-DRGs. If nonmonotonicity 
persisted, we combined all three levels for the purpose of 
redetermining a relative weight based on the case-weighted average 
charge of the combined severity levels, and assigned that relative 
weight to each of the three severity levels.
    In the case where all three severity levels in the base MS-LTC-DRGs 
were low-volume MS-LTC-DRGs and two of the severity levels were 
nonmonotonic in relation to each other, we combined the two adjacent 
nonmonotonic severity levels. If that combination resulted in less than 
25 cases, both low-volume MS-LTC-DRGs were assigned to the appropriate 
low-volume quintile (discussed above in section II.I.3.e. of this 
preamble) based on the case-weighted average charge of the combined 
low-volume MS-LTC-DRGs. Then the relative weight of the affected low-
volume quintile was redetermined and that relative weight was assigned 
to each of the affected severity levels (and all of the MS-LTC-DRGs in 
the affected low-volume quintile). If the nonmonotonicity persisted, we 
combined all three levels of that base MS-LTC-DRG for the purpose of 
redetermining a relative weight based on the case-weighted average 
charge of the combined severity levels, and assigned that relative 
weight to each of the three severity levels. If that combination of all 
three severity levels resulted in less than 25 cases, we assigned that 
``combined'' base MS-LTC-DRG to the appropriate low-volume quintile 
based on the case-weighted average charge of the combined low-volume 
MS-LTC-DRGs. Then the relative weight of the affected low-volume 
quintile was redetermined and that relative weight was assigned to each 
of the affected severity levels (and all of the MS-LTC-DRGs in the 
affected low-volume quintile).
    Another example of nonmonotonicity involves a base MS-LTC-DRG with 
three severity levels where at least one of the severity levels has no 
cases. As discussed above in greater detail in Step 5, based on 
resource use intensity and clinical similarity, as we proposed, we 
crosswalked a no-volume MS-LTC-DRG to an MS-LTC-DRG that had at least 
one case. Under our methodology for the treatment of no-volume MS-LTC-
DRGs, the no-volume MS-LTC-DRG was assigned the same relative weight as 
the MS-LTC-DRG to which the no-volume MS-LTC-DRG was crosswalked. For 
many no-volume MS-LTC-DRGs, as shown in the chart above in Step 5, the 
application of our methodology resulted in a crosswalked MS-LTC-DRG 
that is the adjacent severity level in the same base MS-LTC-DRG. 
Consequently, in most instances, the no-volume MS-LTC-DRG and the 
adjacent MS-LTC-DRG to which it was crosswalked did not result in 
nonmonotonicity because both of these severity levels would have the 
same relative weight. (In this final rule, under our methodology for 
the treatment of no-volume MS-LTC-DRGs, in the case where the no-volume 
MS-LTC-DRG was either the highest or lowest severity level, the 
crosswalked MS-LTC-DRG would be the middle level (``with CC'') within 
the same base MS-LTC-DRG, and therefore the no-volume MS-LTC-DRG 
(either the ``with MCC'' or the ``without CC/MCC'') and the crosswalked 
MS-LTC-DRG (the ``with CC'') would have the same relative weight. 
Consequently, no adjustment for monotonicity was necessary.) However, 
if our methodology for determining relative weights for no-volume MS-
LTC-DRGs resulted in nonmonotonicity with the third severity level in 
the base MS-LTC-DRG, all three severity levels were combined for the 
purpose of redetermining one relative weight based on the case-weighted 
average charge of the combined severity levels. This same relative 
weight was assigned to each of the three severity levels in the base 
MS-LTC-DRG.
    Thus far in the discussion, we have presented examples of 
nonmonotonicity in a base MS-LTC-DRG that has three severity levels. We 
apply the same process where the base MS-LTC-DRG contains only two 
severity levels. For example, if nonmonotonicity occurs in a base MS-
LTC-DRG with two severity levels (that is, the relative weight of the 
higher severity level is less than the lower severity level), where 
both of the MS-LTC-DRGs have at least 25 cases or where one or both of 
the MS-LTC-DRGs is low volume (that is, less than 25 cases), we combine 
the two MS-LTC-DRGs of that base MS-LTC-DRG for the purpose of 
redetermining a relative weight based on the combined case-weighted 
average charge for both severity levels. This same relative weight is 
assigned to each of the two severity levels in the base MS-LTC-DRG. 
Specifically, if the combination of the two severity levels results in 
at least 25 cases, we redetermine one relative weight based on the 
case-weighted average charge and assign that relative weight to each of 
the two MS-LTC-DRGs. If the combination results in less than 25 cases, 
we assign both MS-LTC-DRGs to the appropriate low-volume quintile 
(discussed above in section II.I.3.e. of this preamble) based on their 
combined case-weighted average charge. Then the relative weight of the 
affected low-volume quintile is redetermined and that relative weight 
is assigned to each of the affected severity levels.
    Step 7-- Calculate the FY 2009 budget neutrality factor.
    As we established in the RY 2008 LTCH PPS final rule (72 FR 26882), 
under the broad authority conferred upon the Secretary under section 
123 of Public Law 106-113 as amended by section 307(b) of Public Law 
106-554 to develop the LTCH PPS, beginning with the MS-LTC-DRG update 
for FY 2008, the annual update to the MS-LTC-DRG classifications and 
relative weights is done in a budget neutral manner such that estimated 
aggregate LTCH PPS payments would be unaffected, that is, would be 
neither greater than nor less than the estimated aggregate LTCH PPS 
payments that would have been made without the MS-LTC-DRG 
classification and relative weight changes. Specifically, in that same 
final rule, we established under Sec.  412.517(b) that the annual 
update to the MS-LTC-DRG classifications and relative weights be done 
in a budget neutral manner. For a detailed discussion on the 
establishment of the requirement to update the MS-LTC-DRG 
classifications and relative weights in a budget neutral manner, we 
refer readers to the RY 2008 LTCH PPS final rule (72 FR 26880 through 
26884). Updating the MS-LTC-DRGs in a budget neutral manner results in 
an annual update to the individual MS-LTC-DRG classifications and 
relative weights based on the most recent available data to reflect 
changes in relative LTCH resource use. To accomplish this, for each 
annual update, the MS-LTC-DRG relative weights are uniformly adjusted 
to ensure that estimated aggregate payments under the LTCH PPS would 
not be affected (that is, decreased or increased). Consistent with that 
provision, as we proposed, we updated the MS-LTC-DRG classifications 
and relative weights for FY 2009 based on the most recent available 
data and included a budget neutrality adjustment that was applied in 
determining the MS-LTC-DRG relative weights.
    To ensure budget neutrality in updating the MS-LTC-DRG 
classifications and relative weights under Sec.  412.517(b), consistent 
with the budget neutrality methodology we established in the FY 2008 
IPPS final rule with comment period (72 FR 47295

[[Page 48551]]

through 47296), in determining the budget neutrality adjustment for FY 
2009 in this final rule, as we proposed, we used a method that is 
similar to the methodology used under the IPPS. Specifically, for FY 
2009, after recalibrating the MS-LTC-DRG relative weights as we do 
under the methodology as described in detail in Steps 1 through 6 
above, we calculated and applied a normalization factor to those 
relative weights to ensure that estimated payments were not influenced 
by changes in the composition of case types or the changes to the 
classification system. That is, the normalization adjustment is 
intended to ensure that the recalibration of the MS-LTC-DRG relative 
weights (that is, the process itself) neither increases nor decreases 
total estimated payments.
    To calculate the normalization factor for FY 2009, as we proposed, 
we used the following steps: (1) We use the most recent available 
claims data (FY 2007) and the MS-LTC-DRG relative weights (determined 
above in Steps 1 through 6 above) to calculate the average CMI; (2) we 
group the same claims data (FY 2007) using the FY 2008 GROUPER (Version 
25.0) and FY 2008 relative weights (established in the FY 2008 IPPS 
final rule with comment period (72 FR 47295 through 47296)) and 
calculate the average CMI: and (3), we compute the ratio of these 
average CMIs by dividing the average CMI determined in step (2) by the 
average CMI determined in step (1). In determining the MS-LTC-DRG 
relative weights for FY 2009, based on the latest available LTCH claims 
data, the normalization factor is estimated as 1.03887, which is 
applied in determining each MS-LTC-DRG relative weight. That is, each 
MS-LTC-DRG relative weight is multiplied by 1.03887 in the first step 
of the budget neutrality process. Accordingly, the relative weights in 
Table 11 in the Addendum of this final rule reflect this normalization 
factor. We also ensured that estimated aggregate LTCH PPS payments 
(based on the most recent available LTCH claims data) after 
reclassification and recalibration (the new FY 2009 MS-LTC-DRG 
classifications and relative weights) are equal to estimated aggregate 
LTCH PPS payments (for the same most recent available LTCH claims data) 
before reclassification and recalibration (the existing FY 2008 MS-LTC-
DRG classifications and relative weights). Therefore, we calculated the 
budget neutrality adjustment factor by simulating estimated total 
payments under both sets of GROUPERs and relative weights using current 
LTCH PPS payment policies (RY 2009) and the most recent available LTCH 
claims data (FY 2007). As we discussed in the FY 2009 IPPS proposed 
rule (73 FR 23608), we have established payments rates and policies for 
RY 2009 prior to the development of the FY 2009 IPPS final rule (73 FR 
26788 through 26874). Therefore, for purposes of determining the FY 
2009 budget neutrality factor in this final rule, as we proposed, we 
simulated estimated total payments using the most recent LTCH PPS 
payment policies and LTCH claims data that are available at this time. 
As noted above, the most recent available LTCH claims data are from the 
March 2008 update of the FY 2007 MedPAR file.
    Accordingly, we used RY 2009 LTCH PPS rates and policies in 
determining the FY 2009 budget neutrality adjustment in this final 
rule, using the following steps: (1) We simulated estimated total 
payments using the normalized relative weights under GROUPER Version 
26.0 (as described above); (2) we simulated estimated total payments 
using the FY 2008 GROUPER (Version 25.0) and FY 2008 MS-LTC-DRG 
relative weights (as established in the FY 2008 IPPS final rule (72 FR 
47295 through 47296)); and (3) we calculated the ratio of these 
estimated total payments by dividing the estimated total payments 
determined in step (2) by the estimated total payments determined in 
step (1). Then, each of the normalized relative weights was multiplied 
by the budget neutrality factor to determine the budget neutral 
relative weight for each MS-LTC-DRG.
    Accordingly, in determining the MS-LTC-DRG relative weights for FY 
2009 in this final rule, based on the most recent available LTCH claims 
data, we are establishing a budget neutrality factor of 1.04186, which 
was applied to the normalized relative weights (described above). The 
FY 2009 MS-LTC-DRG relative weights in Table 11 in the Addendum of this 
final rule reflect this budget neutrality factor.
    Table 11 in the Addendum to this final rule lists the MS-LTC-DRGs 
and their respective budget neutral relative weights, geometric mean 
length of stay, and five-sixths of the geometric mean length of stay 
(used in the determination of SSO payments under Sec.  412.529) for FY 
2009.
5. Other Comments
    Comment: While CMS did not propose for FY 2009 an adjustment for 
improved coding practices resulting from the transition to the MS-LTC-
DRG system, one commenter urged CMS to wait until sufficient claims 
data under the MS-LTC-DRG system are available to provide CMS with a 
solid benchmark on coding behavior for the comparison between the 
previous LTC-DRG and current MS-LTC-DRG systems. The commenter believed 
that any evaluation of the need for an adjustment for improved coding 
practices should take into account all of the previous case-mix 
adjustments to the market basket and the self-correcting nature of the 
current policy of the budget neutral reweighting of the MS-LTC-DRG 
relative weights. Furthermore, the commenter believed that it would not 
be appropriate to apply a coding adjustment to the MS-LTC-DRGs where 
coding changes would not be expected to change as a result of the 
transitioning from LTC-DRGs to MS-LTC-DRGs (for example, in ventilator 
DRGs where there have been no changes from the LTC-DRG system to the 
MS-LTC-DRG system).
    Response: At this time, we have not proposed any adjustment for FY 
2009 to account for improved coding practices resulting from the 
transition to the MS-LTC-DRG system. In the FY 2008 IPPS final rule 
with comment period (72 FR 47297 through 47299), we indicated that we 
believe that the adoption of the MS-LTC-DRGs would create a risk of 
increased aggregate levels of payment as a result of increased 
documentation and coding. However, we acknowledged, at the time, that 
because we had not been able to determine an appropriate adjustment 
factor for LTCHs and because we have an established mechanism to adjust 
LTCH PPS payments to account for the effects of changes in 
documentation and coding practices, we believed that it was appropriate 
to continue to use this established process. We note that, in the FY 
2008 IPPS final rule with comment period, we responded to comments 
similar to the one summarized above. In section II.D.4. of this final 
rule, we discuss the intended future evaluation of claims data and 
resulting case-mix growth from the implementation of the MS-DRG system. 
A similar retrospective evaluation will be conducted for MS-LTC-DRGs. 
The analysis, findings, and any resulting proposals to adjust payments 
to offset the estimated amount of increase or decrease in aggregate 
payments that occurred in FY 2008 and FY 2009 for LTCHs as a result of 
coding improvements, will be discussed in future years' proposed rules, 
which would be open for public comment.
    Comment: One commenter addressed our discussion in the RY 2009 LTCH 
final rule on the possible application to LTCHs of the broad principle 
articulated in the HACs payment provision that

[[Page 48552]]

goes into effect for acute care hospitals paid under the IPPS for FY 
2009.
    Response: We appreciate the commenter's support and remarks 
concerning the possible application of a HACs payment provision to 
LTCHs. Although we did not propose a HAC provision under the LTCH PPS 
nor did we discuss the possible application of one in the FY 2009 IPPS 
proposed rule, we will take into account the commenter's concerns and 
recommendations in our ongoing consideration of the applicability of a 
possible HACs policy for LTCHs.

J. Add-On Payments for New Services and Technologies

1. Background
    Sections 1886(d)(5)(K) and (L) of the Act establish a process of 
identifying and ensuring adequate payment for new medical services and 
technologies (sometimes collectively referred to in this section as 
``new technologies'') under the IPPS. Section 1886(d)(5)(K)(vi) of the 
Act specifies that a medical service or technology will be considered 
new if it meets criteria established by the Secretary after notice and 
opportunity for public comment. Section 1886(d)(5)(K)(ii)(I) of the Act 
specifies that the process must apply to a new medical service or 
technology if, ``based on the estimated costs incurred with respect to 
discharges involving such service or technology, the DRG prospective 
payment rate otherwise applicable to such discharges under this 
subsection is inadequate.''
    The regulations implementing this provision establish three 
criteria for new medical services and technologies to receive an 
additional payment. First, 42 CFR 412.87(b)(2) states that a specific 
medical service or technology will be considered new for purposes of 
new medical service or technology add-on payments until such time as 
Medicare data are available to fully reflect the cost of the technology 
in the DRG weights through recalibration. Typically, there is a lag of 
2 to 3 years from the point a new medical service or technology is 
first introduced on the market (generally on the date that the 
technology receives FDA approval/clearance) and when data reflecting 
the use of the medical service or technology are used to calculate the 
DRG weights. For example, data from discharges occurring during FY 2007 
are used to calculate the FY 2009 DRG weights in this final rule. 
Section 412.87(b)(2) of our existing regulations provides that ``a 
medical service or technology may be considered new within 2 or 3 years 
after the point at which data begin to become available reflecting the 
ICD-9-CM code assigned to the new medical service or technology 
(depending on when a new code is assigned and data on the new medical 
service or technology become available for DRG recalibration). After 
CMS has recalibrated the DRGs based on available data to reflect the 
costs of an otherwise new medical service or technology, the medical 
service or technology will no longer be considered `new' under the 
criterion for this section.''
    The 2-year to 3-year period during which a medical service or 
technology can be considered new would ordinarily begin on the date on 
which the medical service or technology received FDA approval or 
clearance. (We note that, for purposes of this section of the final 
rule, we refer to both FDA approval and FDA clearance as FDA 
``approval.'') However, in some cases, initially there may be no 
Medicare data available for the new service or technology following FDA 
approval. For example, the newness period could extend beyond the 2-
year to 3-year period after FDA approval is received in cases where the 
product initially was generally unavailable to Medicare patients 
following FDA approval, such as in cases of a national noncoverage 
determination or a documented delay in bringing the product onto the 
market after that approval (for instance, component production or drug 
production has been postponed following FDA approval due to shelf life 
concerns or manufacturing issues). After the DRGs have been 
recalibrated to reflect the costs of an otherwise new medical service 
or technology, the medical service or technology is no longer eligible 
for special add-on payment for new medical services or technologies 
(Sec.  412.87(b)(2)). For example, an approved new technology that 
received FDA approval in October 2007 and entered the market at that 
time may be eligible to receive add-on payments as a new technology for 
discharges occurring before October 1, 2010 (the start of FY 2011). 
Because the FY 2011 DRG weights would be calculated using FY 2009 
MedPAR data, the costs of such a new technology would be fully 
reflected in the FY 2011 DRG weights. Therefore, the new technology 
would no longer be eligible to receive add-on payments as a new 
technology for discharges occurring in FY 2011 and thereafter.
    Section 412.87(b)(3) further provides that, to be eligible for the 
add-on payment for new medical services or technologies, the DRG 
prospective payment rate otherwise applicable to the discharge 
involving the new medical services or technologies must be assessed for 
adequacy. Under the cost criterion, to assess the adequacy of payment 
for a new technology paid under the applicable DRG-prospective payment 
rate, we evaluate whether the charges for cases involving the new 
technology exceed certain threshold amounts. In the FY 2004 IPPS final 
rule (68 FR 45385), we established the threshold at the geometric mean 
standardized charge for all cases in the DRG plus 75 percent of 1 
standard deviation above the geometric mean standardized charge (based 
on the logarithmic values of the charges and converted back to charges) 
for all cases in the DRG to which the new medical service or technology 
is assigned (or the case-weighted average of all relevant DRGs, if the 
new medical service or technology occurs in more than one DRG).
    However, section 503(b)(1) of Public Law 108-173 amended section 
1886(d)(5)(K)(ii)(I) of the Act to provide that, beginning in FY 2005, 
CMS will apply ``a threshold * * * that is the lesser of 75 percent of 
the standardized amount (increased to reflect the difference between 
cost and charges) or 75 percent of one standard deviation for the 
diagnosis-related group involved.'' (We refer readers to section IV.D. 
of the preamble to the FY 2005 IPPS final rule (69 FR 49084) for a 
discussion of the revision of the regulations to incorporate the change 
made by section 503(b)(1) of Pub. L. 108-173.) Table 10 in section XIX. 
of the interim final rule with comment period published in the Federal 
Register on November 27, 2007, contained the final thresholds that are 
being used to evaluate applications for new technology add-on payments 
for FY 2009 (72 FR 66888 through 66892). An applicant must demonstrate 
that the cost threshold is met using information from inpatient 
hospital claims.
    We note that section 124 of Public Law 110-275 extends, through FY 
2009, wage index reclassifications under section 508 of Public Law 108-
173 (the MMA) and special exceptions contained in the final rule 
promulgated in the Federal Register on August 11, 2004 (69 FR 49105, 
49107) and extended under section 117 of the MMSEA of 2007 (Pub. L. 
110-173). The wage data affects the standardized amounts (as well as 
the outlier offset and budget neutrality factors that are applied to 
the standardized amounts), which we use to compute the cost criterion 
thresholds in Table 10 of this final rule. Therefore, the thresholds 
reflected in Table 10 of this final rule are tentative. A new Table 10 
with revised thresholds will be published when section 124 of Public 
Law 110-275 is implemented and the

[[Page 48553]]

wage index rates for FY 2009 are finalized. Subsequent to the 
publication of this final rule, we will publish a Federal Register 
document listing the final version of Table 10 that will be used to 
determine if an applicant for new technology add-on payments in FY 2010 
meets the cost threshold for new technology add-on payments for FY 
2010. The final thresholds also will be published on the CMS Web site.
    In the September 7, 2001 final rule that established the new 
technology add-on payment regulations (66 FR 46917), we discussed the 
issue of whether the HIPAA Privacy Rule at 45 CFR parts 160 and 164 
applies to claims information that providers submit with applications 
for new technology add-on payments. Specifically, we explained that 
health plans, including Medicare, and providers that conduct certain 
transactions electronically, including the hospitals that would be 
receiving payment under the FY 2001 IPPS final rule, are required to 
comply with the HIPAA Privacy Rule. We further explained how such 
entities could meet the applicable HIPAA requirements by discussing how 
the HIPAA Privacy Rule permitted providers to share with health plans 
information needed to ensure correct payment, if they had obtained 
consent from the patient to use that patient's data for treatment, 
payment, or health care operations. We also explained that, because the 
information to be provided within applications for new technology add-
on payment would be needed to ensure correct payment, no additional 
consent would be required. The HHS Office of Civil Rights has since 
amended the HIPAA Privacy Rule, but the results remain. The HIPAA 
Privacy Rule no longer requires covered entities to obtain consent from 
patients to use or disclose protected health information for treatment, 
payment, or health care operations, and expressly permits such entities 
to use or to disclose protected health information for any of these 
purposes. (We refer readers to 45 CFR 164.502(a)(1)(ii), and 
164.506(c)(1) and (c)(3), and the Standards for Privacy of Individually 
Identifiable Health Information published in the Federal Register on 
August 14, 2002, for a full discussion of changes in consent 
requirements.)
    Section 412.87(b)(1) of our existing regulations provides that a 
new technology is an appropriate candidate for an additional payment 
when it represents ``an advance that substantially improves, relative 
to technologies previously available, the diagnosis or treatment of 
Medicare beneficiaries.'' For example, a new technology represents a 
substantial clinical improvement when it reduces mortality, decreases 
the number of hospitalizations or physician visits, or reduces recovery 
time compared to the technologies previously available. (We refer 
readers to the September 7, 2001 final rule for a complete discussion 
of this criterion (66 FR 46902).)
    The new medical service or technology add-on payment policy under 
the IPPS provides additional payments for cases with relatively high 
costs involving eligible new medical services or technologies while 
preserving some of the incentives inherent under an average-based 
prospective payment system. The payment mechanism is based on the cost 
to hospitals for the new medical service or technology. Under Sec.  
412.88, if the costs of the discharge (determined by applying CCRs as 
described in Sec.  412.84(h)) exceed the full DRG payment (including 
payments for IME and DSH, but excluding outlier payments), Medicare 
will make an add-on payment equal to the lesser of: (1) 50 percent of 
the estimated costs of the new technology (if the estimated costs for 
the case including the new technology exceed Medicare's payment) or (2) 
50 percent of the difference between the full DRG payment and the 
hospital's estimated cost for the case. Unless the discharge qualifies 
for an outlier payment, Medicare payment is limited to the full DRG 
payment plus 50 percent of the estimated costs of the new technology.
    Section 1886(d)(4)(C)(iii) of the Act requires that the adjustments 
to annual DRG classifications and relative weights must be made in a 
manner that ensures that aggregate payments to hospitals are not 
affected. Therefore, in the past, we accounted for projected payments 
under the new medical service and technology provision during the 
upcoming fiscal year, while at the same time estimating the payment 
effect of changes to the DRG classifications and recalibration. The 
impact of additional payments under this provision was then included in 
the budget neutrality factor, which was applied to the standardized 
amounts and the hospital-specific amounts. However, section 503(d)(2) 
of Public Law 108-173 provides that there shall be no reduction or 
adjustment in aggregate payments under the IPPS due to add-on payments 
for new medical services and technologies. Therefore, following section 
503(d)(2) of Public Law 108-173, add-on payments for new medical 
services or technologies for FY 2005 and later years have not been 
subjected to budget neutrality.
    Applicants for add-on payments for new medical services or 
technologies for FY 2010 must submit a formal request, including a full 
description of the clinical applications of the medical service or 
technology and the results of any clinical evaluations demonstrating 
that the new medical service or technology represents a substantial 
clinical improvement, along with a significant sample of data to 
demonstrate the medical service or technology meets the high-cost 
threshold. Complete application information, along with final deadlines 
for submitting a full application, will be posted as it becomes 
available on our Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/08_newtech.asp#TopOfPage. To allow interested parties to identify the 
new medical services or technologies under review before the 
publication of the proposed rule for FY 2010, the Web site will also 
list the tracking forms completed by each applicant.
    The Council on Technology and Innovation (CTI) at CMS oversees the 
agency's cross-cutting priority on coordinating coverage, coding and 
payment processes for Medicare with respect to new technologies and 
procedures, including new drug therapies, as well as promoting the 
exchange of information on new technologies between CMS and other 
entities. The CTI, composed of senior CMS staff and clinicians, was 
established under section 942(a) of Public Law 108-173. The Council is 
co-chaired by the Director of the Office of Clinical Standards and 
Quality (OCSQ) and the Director of the Center for Medicare Management 
(CMM), who is also designated as the CTI's Executive Coordinator.
    The specific processes for coverage, coding, and payment are 
implemented by CMM, OCSQ, and the local claims-payment contractors (in 
the case of local coverage and payment decisions). The CTI supplements 
rather than replaces these processes by working to assure that all of 
these activities reflect the agency-wide priority to promote high-
quality, innovative care, and at the same time to streamline, 
accelerate, and improve coordination of these processes to ensure that 
they remain up to date as new issues arise. To achieve its goals, the 
CTI works to streamline and create a more transparent coding and 
payment process, improve the quality of medical decisions, and speed 
patient access to effective new treatments. It is also dedicated to 
supporting better decisions by patients and doctors in using Medicare-
covered services through the promotion of better evidence development, 
which is critical for

[[Page 48554]]

improving the quality of care for Medicare beneficiaries.
    CMS plans to continue its Open Door forums with stakeholders who 
are interested in CTI's initiatives. In addition, to improve the 
understanding of CMS' processes for coverage, coding, and payment and 
how to access them, the CTI is developing an ``innovator's guide'' to 
these processes. This guide will, for example, outline regulation 
cycles and application deadlines. The intent is to consolidate this 
information, much of which is already available in a variety of CMS 
documents and in various places on the CMS Web site, in a user-friendly 
format.
    In the meantime, we invite any product developers with specific 
issues involving the agency to contact us early in the process of 
product development if they have questions or concerns about the 
evidence that would be needed later in the development process for the 
agency's coverage decisions for Medicare.
    The CTI aims to provide useful information on its activities and 
initiatives to stakeholders, including Medicare beneficiaries, 
advocates, medical product manufacturers, providers, and health policy 
experts. Stakeholders with further questions about Medicare's coverage, 
coding, and payment processes, or who want further guidance about how 
they can navigate these processes, can contact the CTI at 
[email protected] or from the ``Contact Us'' section of the CTI home page 
(http://www.cms.hhs.gov/CouncilonTechInnov/).
    Comment: One commenter supported CMS' emphasis on the role of the 
CTI. The commenter also urged CMS to remain vigilant in ensuring that 
CTI's activities do not inadvertently layer new processes and 
requirements onto those already applicable to innovative medical 
technology.
    Response: We appreciate the support from the commenter. As 
discussed in the proposed rule, we intend to continue to use the CTI to 
promote high quality, innovative care while working to streamline, 
accelerate and improve coordination of the coverage, coding, and 
payment processes.
2. Public Input Before Publication of a Notice of Proposed Rulemaking 
on Add-On Payments
    Section 1886(d)(5)(K)(viii) of the Act, as amended by section 
503(b)(2) of Public Law 108-173, provides for a mechanism for public 
input before publication of a notice of proposed rulemaking regarding 
whether a medical service or technology represents a substantial 
clinical improvement or advancement. The process for evaluating new 
medical service and technology applications requires the Secretary to--
     Provide, before publication of a proposed rule, for public 
input regarding whether a new service or technology represents an 
advance in medical technology that substantially improves the diagnosis 
or treatment of Medicare beneficiaries;
     Make public and periodically update a list of the services 
and technologies for which applications for add-on payments are 
pending;
     Accept comments, recommendations, and data from the public 
regarding whether a service or technology represents a substantial 
clinical improvement; and
     Provide, before publication of a proposed rule, for a 
meeting at which organizations representing hospitals, physicians, 
manufacturers, and any other interested party may present comments, 
recommendations, and data regarding whether a new medical service or 
technology represents a substantial clinical improvement to the 
clinical staff of CMS.
    In order to provide an opportunity for public input regarding add-
on payments for new medical services and technologies for FY 2009 prior 
to publication of the FY 2009 IPPS proposed rule, we published a notice 
in the Federal Register on December 28, 2007 (72 FR 73845 through 
73847), and held a town hall meeting at the CMS Headquarters Office in 
Baltimore, MD, on February 21, 2008. In the announcement notice for the 
meeting, we stated that the opinions and alternatives provided during 
the meeting would assist us in our evaluations of applications by 
allowing public discussion of the substantial clinical improvement 
criterion for each of the FY 2009 new medical service and technology 
add-on payment applications before the publication of the FY 2009 IPPS 
proposed rule.
    Approximately 70 individuals attended the town hall meeting in 
person, while approximately 20 additional participants listened over an 
open telephone line. Each of the four FY 2009 applicants presented 
information on its technology, including a focused discussion of data 
reflecting the substantial clinical improvement aspect of the 
technology. We considered each applicant's presentation made at the 
town hall meeting, as well as written comments submitted on each 
applicant's application, in our evaluation of the new technology add-on 
applications for FY 2009 in the FY 2009 proposed rule and in this final 
rule. We received two comments during the town hall meeting. In the 
proposed rule, we summarized the comments we received at the town hall 
meeting or, if applicable, indicated at the end of the discussion of 
each application that no comments were received on that new technology. 
We refer readers to the FY 2009 IPPS proposed rule at 73 FR 23611 for 
those comments and responses.
    In addition to the comment summaries and our responses presented in 
the proposed rule, we received additional comments as summarized below.
    Comment: A number of commenters addressed topics relating to the 
marginal cost factor for the new technology add-on payment, the 
potential implementation of ICD-10-CM, the use of external data in 
determining the cost threshold, and the use of the date that a ICD-9-CM 
code is assigned to a technology or the FDA approval date (whichever is 
later) as the start of the newness period.
    Response: We did not request public comments nor propose to make 
any changes to any of the issues addressed above. Because these 
comments are out of the scope of the provisions in the proposed rule, 
we are not providing a complete summary of the comments or responding 
to them in this final rule.
3. FY 2009 Status of Technologies Approved for FY 2008 Add-On Payments
    We did not approve any applications for new technology add-on 
payments for FY 2008. For additional information, we refer readers to 
the FY 2008 IPPS final rule with comment period (72 FR 47305 through 
47307).
4. FY 2009 Applications for New Technology Add-On Payments
    We received four applications to be considered for new technology 
add-on payment for FY 2009. A discussion of each of these applications 
is presented below. We note that, in the past, we have considered 
applications during the rulemaking process that had not yet received 
FDA approval, but were anticipating FDA approval prior to publication 
of the IPPS final rule. In such cases, we generally provide a more 
limited discussion of those technologies in the proposed rule because 
it is not known if these technologies will meet the newness criterion 
in time for us to conduct a complete analysis in the final rule. This 
year, three out of four applicants had not yet received FDA approval of 
their technologies (Emphasys Medical Zephyr[supreg] Endobronchial 
Valve, Oxiplex[supreg], and the TherOx Downstream[supreg] System) prior 
to

[[Page 48555]]

issuance of the proposed rule. Consequently, we presented a limited 
analysis of them in the proposed rule. At the time of the development 
of this final rule, FDA approval was still pending for all three of the 
applicants. Therefore, those three applications are not eligible for 
consideration for FY 2009 new technology add-on payments because they 
do not meet the newness criterion (because, by definition, a technology 
that has not received FDA approval cannot be considered ``new'' for 
purposes of new technology add-on payments). Because those applications 
do not meet the newness criterion, the cost threshold criterion and the 
substantial clinical improvement criterion applicable to those 
applications are not discussed in this final rule. If FDA approval is 
received in time for consideration for the FY 2010 new technology add-
on payment application process, we encourage those applicants to submit 
new technology add-on payments applications for consideration during 
the FY 2010 IPPS rulemaking process.
a. CardioWestTM Temporary Total Artificial Heart System 
(CardioWestTM TAH-t)
    SynCardia Systems, Inc. submitted an application for approval of 
the CardioWestTM temporary Total Artificial Heart system 
(TAH-t) for new technology add-on payments for FY 2009. The TAH-t is a 
technology that is used as a bridge to heart transplant device for 
heart transplant-eligible patients with end-stage biventricular 
failure. The TAH-t pumps up to 9.5 liters of blood per minute. This 
high level of perfusion helps improve hemodynamic function in patients, 
thus making them better heart transplant candidates.
    The TAH-t was approved by the FDA on October 15, 2004, for use as a 
bridge to transplant device in cardiac transplant-eligible candidates 
at risk of imminent death from biventricular failure. The TAH-t is 
intended to be used in hospital inpatients. One of the FDA's post-
approval requirements is that the manufacturer agrees to provide a 
post-approval study demonstrating success of the device at one center 
can be reproduced at other centers. The study was to include at least 
50 patients who would be followed up to 1 year, including (but not 
limited to) the following endpoints; survival to transplant, adverse 
events, and device malfunction.
    In the past, Medicare did not cover artificial heart devices, 
including the TAH-t. However, on February 1, 2008, CMS proposed to 
reverse a national noncoverage determination that would extend coverage 
to this technology within the confines of an approved clinical study. 
(To view the proposed national coverage determination (NCD), we refer 
readers to the CMS Web site at http://www.cms.hhs.gov/mcd/viewdraftdecisionmemo.asp?from2=viewdraftdecisionmemo.asp&id=211&). On 
May 1, 2008, CMS issued a final NCD expanding Medicare coverage of 
artificial hearts when they are implanted as part of a study that is 
approved by the FDA and is determined by CMS to meet CMS' Coverage with 
Evidence Development (CED) clinical research criteria. (The final NCD 
is available on the CMS Web site at: http://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=211.)
    Because Medicare's previous coverage policy with respect to this 
device has precluded payment from Medicare, we do not expect the costs 
associated with this technology to be currently reflected in the data 
used to determine MS-DRGs relative weights. As we have indicated in the 
past, and as we discussed in the proposed rule, although we generally 
believe that the newness period would begin on the date that FDA 
approval was granted, in cases where the applicant can demonstrate a 
documented delay in market availability subsequent to FDA approval, we 
would consider delaying the start of the newness period. This 
technology's situation represents such a case. We also note that 
section 1886(d)(5)(K)(ii)(II) of the Act requires that we provide for 
the collection of cost data for a new medical service or technology for 
a period of at least 2 years and no more than 3 years ``beginning on 
the date on which an inpatient hospital code is issued with respect to 
the service or technology.'' Furthermore, the statute specifies that 
the term ``inpatient hospital code'' means any code that is used with 
respect to inpatient hospital services for which payment may be made 
under the IPPS and includes ICD-9-CM codes and any subsequent 
revisions. Although the TAH-t has been described by the ICD-9-CM 
code(s) (described below in the cost threshold discussion) since the 
time of its FDA approval, because the TAH-t has not been covered under 
the Medicare program (and, therefore, no Medicare payment has been made 
for this technology), this code is not ``used with respect to inpatient 
hospital services for which payment'' is made under the IPPS, and thus 
we assume that none of the costs associated with this technology would 
be reflected in the Medicare claims data used to recalibrate the MS-DRG 
weights for FY 2009. For this reason, as discussed in the proposed 
rule, despite its FDA approval date, it appeared that this technology 
would still be eligible to be considered ``new'' for purposes of the 
new technology add-on payment if and when the proposal to reverse the 
national noncoverage determination concerning this technology was 
finalized. Therefore, based on this information, we stated that we 
believed that the TAH-t would meet the newness criterion on the date 
that Medicare coverage began, consistent with issuance of the final 
NCD. Because the final NCD was issued and became effective on May 1, 
2008, we believe that the TAH-t meets the newness criterion as of May 
1, 2008.
    Comment: One commenter, the manufacturer, agreed with CMS' 
statement in the proposed rule that the TAH-t appeared to meet the 
newness criterion even though it received FDA approval more than 3 
years ago. The commenter stated that because the TAH-t had not been 
covered by Medicare in any setting until the coverage decision issued 
on May 1, 2008, the costs associated with the TAH-t are not yet 
reflected in the Medicare claims data used to recalibrate the FY 2009 
MS-DRG relative weights.
    Response: We agree with the commenter and, as we discussed in the 
proposed rule, we continue to believe that the TAH-t meets the newness 
criterion despite having received FDA approval more than 3 years ago 
because it was not covered by Medicare until May 1, 2008. Therefore, as 
stated above, we believe that the TAH-t meets the newness criterion as 
of May 1, 2008.
    In an effort to demonstrate that TAH-t would meet the cost 
criterion, as presented in the proposed rule, the applicant submitted 
data based on 28 actual cases of the TAH-t. The data included 6 cases 
(or 21.4 percent of cases) from 2005, 13 cases (or 46.5 percent of 
cases) from 2006, 7 cases (or 25 percent of cases) from 2007, and 2 
cases (or 7.1 percent of cases) from 2008. Currently, cases involving 
the TAH-t are assigned to MS-DRG 215 (Other Heart Assist System 
Implant). As discussed below in this section, we are proposing to 
remove the TAH-t from MS-DRG 215 and reassign the TAH-t to MS-DRGs 001 
(Heart Transplant or Implant of Heart Assist System with MCC) and 002 
(Heart Transplant or Implant of Heart Assist System without MCC). 
Therefore, to determine if the technology meets the cost criterion, it 
is appropriate to compare the average standardized charge per case to 
the thresholds for MS-DRGs 001, 002, and 215 included in Table 10 of 
the

[[Page 48556]]

November 27, 2007 interim final rule (72 FR 66888 through 66889). The 
thresholds for MS-DRGs 001, 002, and 215 included in Table 10 are 
$345,031, $178,142, and $151,824, respectively. Based on the 28 cases 
the applicant submitted, the average standardized charge per case was 
$731,632. Because the average standardized charge per case is much 
greater than the thresholds cited above for MS-DRG 215 (and MS-DRGs 001 
and 002, should the proposal to reassign the TAH-t be finalized), the 
applicant asserted that the TAH-t meets the cost criterion whether or 
not the costs were analyzed by using either a case-weighted threshold 
or case-weighted standardized charge per case.
    In addition to analyzing the costs of actual cases involving the 
TAH-t, the applicant searched the FY 2006 MedPAR file to identify cases 
involving patients who would have potentially been eligible to receive 
the TAH-t. The applicant submitted three different MedPAR analyses. The 
first MedPAR analysis involved a search for cases using ICD-9-CM 
diagnosis code 428.0 (Congestive heart failure) in combination with 
ICD-9-CM procedure code 37.66 (Insertion of implantable heart assist 
system), and an inpatient hospital length of stay greater than or equal 
to 60 days. The applicant found two cases that met this criterion, 
which had an average standardized charge per case of $821,522. The 
second MedPAR analysis searched for cases with ICD-9-CM diagnosis code 
428.0 (Congestive heart failure) and one or more of the following ICD-
9-CM procedure codes: 37.51 (Heart transplant), 37.52 (Implantation of 
total heart replacement system), 37.64 (Removal of heart assist 
system), 37.66 (Insertion of implantable heart assist system), or 37.68 
(Insertion of percutaneous external heart assist device), and a length 
of stay greater than or equal to 60 days. The applicant found 144 cases 
that met this criterion, which had an average standardized charge per 
case of $841,827. The final MedPAR analysis searched for cases with 
ICD-9-CM procedure code 37.51 (Heart transplant) in combination with 
one of the following ICD-9-CM procedure codes: 37.52 (Implantation of 
total heart replacement system), 37.65 (Implantation of external heart 
system), or 37.66 (Insertion of implantable heart assist system). The 
applicant found 37 cases that met this criterion, which had an average 
standardized charge per case of $896,601. Because only two cases met 
the criterion for the first analysis, consistent with historical 
practice, we would not consider it to be of statistical significance 
and, therefore, would not rely upon it to demonstrate whether the TAH-t 
would meet the cost threshold. However, both of the additional analyses 
seem to provide an adequate number of cases to demonstrate whether the 
TAH-t would meet the cost threshold. We assume that none of the costs 
associated with this technology would be reflected in the MedPAR 
analyses that the applicant used to demonstrate that the technology 
would meet the cost criterion. We note that, under all three of the 
analyses the applicant performed, it identified cases that would have 
been eligible for the TAH-t, but did not remove charges that were 
unrelated to the TAH-t, nor did the applicant insert a proxy of charges 
related to the TAH-t. However, as stated above, the average 
standardized charge per case is much greater than any of the thresholds 
for MS-DRGs 001, 002, and 215. Therefore, even if the applicant were to 
approximate what the costs of cases eligible to receive the TAH-t would 
have been by removing non-TAH-t associated charges and inserting 
charges related to the TAH-t, it appears that the average standardized 
charges per case for cases eligible for the TAH-t would exceed the 
relevant thresholds included in Table 10 (as discussed above) and would 
therefore appear to meet the cost criterion. In the FY 2009 IPPS 
proposed rule, we invited public comment on whether TAH-t met the cost 
criterion.
    Comment: One commenter, the manufacturer, asserted that it believed 
that the TAH-t satisfied the cost criterion by exceeding the cost 
threshold and agreed with CMS' discussion in the proposed rule that the 
TAH-t appeared to meet the cost threshold.
    Response: Based on data submitted by the applicant and discussed in 
the proposed rule, we noted that the TAH-t appeared to meet the cost 
threshold criterion. Using the March update of the FY 2007 MedPAR file, 
we searched for cases that matched the manufacturer's second and third 
MedPAR analyses described above. (As previously noted, because the 
first analysis only returned two cases, we did not simulate it for the 
final rule.) When we simulated the second and third analyses, we found 
a total of 75 cases and 79 cases, respectively (that mapped to CMS DRG 
103 (Heart Transplant or Implant of Heart Assist System) which 
crosswalks to MS-DRGs 001 and 002), with an average standardized charge 
per case of $883,301 and $830,200, respectively. Therefore, because the 
average standardized charge exceeds the thresholds of MS-DRGs 001 and 
002 ($345,031 and $178,142, respectively) based on data submitted by 
the applicant and on our analyses of MedPAR data, we believe that the 
TAH-t meets the cost threshold criterion.
    As noted in section II.G.1. of the preamble to the FY 2009 IPPS 
proposed rule, we proposed to remove the TAH-t from MS-DRG 215 and 
reassign the TAH-t to MS-DRGs 001 and 002. As stated earlier, on May 1, 
2008, CMS issued an NCD that extends coverage to artificial heart 
devices within the confines of an FDA-approved clinical study. 
Therefore, as of May 1, 2008, the MCE will require both procedure code 
37.52 (Implantation of total replacement heart system) and diagnosis 
code reflecting clinical trial--V70.7 (Examination of participant in 
clinical trial). As we stated in the proposed rule, the TAH-t appeared 
to meet the cost thresholds for MS-DRGs 001, 002, and 215. Therefore, 
we noted, its proposed reassignment from MS-DRG 215 to MS-DRGs 001 and 
002 would not appear to have a material effect on meeting the cost 
thresholds in MS-DRGs 001 and 002 should the reassignment proposal be 
finalized. In section II.G.1. of the preamble of this final rule, we 
finalized the proposal to reassign cases involving the TAH-t from MS-
DRG 215 to MS-DRGs 001 and 002. We refer readers to that section for 
additional information.
    The manufacturer stated that the TAH-t is the only mechanical 
circulatory support device intended as a bridge-to-transplant for 
patients with irreversible biventricular failure. It also asserted that 
the TAH-t improves clinical outcomes because it has been shown to 
reduce mortality in patients who are otherwise in end-stage heart 
failure. In addition, the manufacturer claimed that the TAH-t provides 
greater hemodynamic stability and end-organ perfusion, thus making 
patients who receive it better candidates for eventual heart 
transplant.
    We did not receive any written comments or public comments at the 
town hall meeting regarding whether this technology represents a 
substantial clinical improvement in the treatment of inpatients with 
end-stage biventricular heart failure relative to previous technology 
available to the Medicare population. However, in the FY 2009 IPPS 
proposed rule, we welcomed comments from the public regarding whether 
the TAH-t represents a substantial clinical improvement.
    Comment: One commenter, the manufacturer, stated that, with regard 
to whether the TAH-t meet the substantial clinical improvement 
criterion, the TAH-t ``fulfills a role that no other mechanical 
circulatory support device can for patients in irreversible

[[Page 48557]]

biventricular failure * * *'' With respect to the coverage decision 
that was issued on May 1, 2008, the commenter stated that ``the 
agency's reversal of such a longstanding noncoverage policy alone 
demonstrates that the TAH-t is a substantial clinical improvement.''
    Response: We disagree with the commenter's assertion that CMS' 
recent change to the coverage decision alone demonstrates that the TAH-
t is a substantial clinical improvement. Rather the coverage decision 
signifies that the TAH-t device is ``reasonable and necessary'' within 
the parameters of approved clinical trial studies. In our view, 
demonstration of substantial clinical improvement requires that a 
higher threshold be met. That is, not only is the device safe and 
effective (as indicated by FDA approval) and reasonable and necessary 
(as indicated by CMS coverage), but the device offers such clinical 
improvement over previously available technologies to the Medicare 
population that Medicare will lessen barriers inhibiting physicians and 
hospitals from utilizing the costly new technology so as not to hinder 
Medicare beneficiaries' access to the technology before its costs are 
adequately reflected in the MS-DRG payment system.
    However, we agree with the commenter's assertion that the TAH-t 
``fulfills a role that no other mechanical circulatory support device 
can for patients in irreversible biventricular failure.'' We note that 
the TAH-t is the only available FDA-approved temporary total artificial 
heart device. Clinical evidence submitted by the applicant supports the 
manufacturer's assertion that the TAH-t provides a treatment option for 
patients suffering from biventricular failure who may be unresponsive 
to, or ineligible for, currently available treatments (including other 
mechanical circulatory devices). Specifically, the applicant referred 
to the FDA approved multicenter IDE clinical trial in which 81 patients 
at risk of imminent death from biventricular heart failure received the 
device. At 30 days, 69.1 percent of those patients met the treatment 
success criteria for the study, which included: Having an improvement 
in heart failure from New York Heart Association Class IV to Class I or 
II, not being bedridden, not being ventilator dependent and not being 
on dialysis. Therefore, the TAH-t appears to provide a viable treatment 
option to patients who might otherwise be at risk for imminent death, 
and who, by virtue of successful bridge to transplant, may ultimately 
benefit from the extended survival that is possible with heart 
transplant. We acknowledge that there were some patients who did not 
survive despite receiving the TAH-t, but we believe at this time that 
the benefit provided by the device to patients who might otherwise be 
at risk for imminent death outweighs the risks associated with the 
device. Therefore, we believe that this device has demonstrated that it 
is a substantial clinical improvement over existing technology for 
those patients who meet the specific criteria for inclusion in an 
approved clinical trial for purposes of FY 2009 new technology add-on 
payments.
    After evaluation of the three new technology add-on criteria 
(newness, costs, and substantial clinical improvement) and 
consideration of the public comments received, we are approving the 
TAH-t for FY 2009 new technology add-on payment. As discussed above, we 
believe that the TAH-t offers a new treatment option that previously 
did not exist for patients with end-stage biventricular failure. 
However, we recognize that the TAH-t's Medicare coverage is limited to 
approved clinical trial settings. The new technology add-on payment 
status does not negate the restrictions under the NCD nor does it 
obviate the need for continued monitoring of clinical evidence for the 
TAH-t, and we remain interested in seeing whether the clinical evidence 
from the CED parameters demonstrates that the TAH-t continues to be 
effective. If evidence is found that the TAH-t may no longer offer a 
substantial clinical improvement, we reserve the right to discontinue 
new technology add-on payments, even within the 2 to 3 year period that 
the device may still be considered to be new. The new technology add-on 
payment for FY 2009 will be triggered by the presence of ICD-9-CM 
procedure code 37.52 (Implantation of total heart replacement system), 
condition code 30, and diagnosis code reflecting clinical trial--V70.7 
(Examination of participant in clinical trial). As noted in the 
proposed rule, the manufacturer submitted data to support its estimated 
operating cost per case involving the TAH-t procedure of $106,000. 
Accordingly, we are finalizing a maximum add-on payment of $53,000 
(that is, 50 percent of the estimated operating costs of the device) 
for cases that involve this technology.
b. Emphasys Medical Zephyr[supreg] Endobronchial Valve (Zephyr[supreg] 
EBV)
    Emphasys Medical submitted an application for new technology add-on 
payments for FY 2009 for the Emphasys Medical Zephyr[supreg] 
Endobronchial Valve (Zephyr[supreg] EBV). The Zephyr[supreg] EBV is 
intended to treat patients with emphysema by reducing volume in the 
diseased, hyperinflated portion of the emphysematous lung with fewer 
risks and complications than with more invasive surgical alternatives. 
Zephyr[supreg] EBV therapy involves placing small, one-way valves in 
the patients' airways to allow air to flow out of, but not into, the 
diseased portions of the lung thus reducing the hyperinflation. A 
typical procedure involves placing three to four valves in the target 
lobe using a bronchoscope, and the procedure takes approximately 20 to 
40 minutes to complete. The Zephyr[supreg] EBVs are designed to be 
relatively easy to place, and are intended to be removable so that, 
unlike more risky surgical alternatives such as Lung Volume Reduction 
Surgery (LVRS) or Lung Transplant, the procedure has the potential to 
be fully reversible.
    In the proposed rule, we noted that the Zephyr[supreg] EBV had yet 
to receive approval from the FDA, but the manufacturer indicated to CMS 
that it expected to receive its FDA approval in the second or third 
quarter of 2008. Because the technology had not yet been approved by 
the FDA, we limited our discussion of this technology in the proposed 
rule to data that the applicant submitted, rather than make specific 
proposals with respect to whether the device would meet the new 
technology add-on criteria.
    In an effort to demonstrate that the Zephyr[supreg] EBV would meet 
the cost criterion, as discussed in the proposed rule, the applicant 
searched the FY 2006 MedPAR file for cases with one of the following 
ICD-9-CM diagnosis codes: 492.0 (Emphysematous bleb), 492.8 (Other 
emphysema, NEC), or 496 (Chronic airway obstruction, NEC). Based on the 
diagnosis codes searched by the applicant, cases of the Zephyr[supreg] 
EBV would be most prevalent in MS- DRGs 190 (Chronic Obstructive 
Pulmonary Disease with MCC), 191 (Chronic Obstructive Pulmonary Disease 
with CC), and 192 (Chronic Obstructive Pulmonary Disease without CC/
MCC). The applicant found 1,869 cases (or 12.8 percent of cases) in MS-
DRG 190, 5,789 cases (or 39.5 percent of cases) in MS-DRG 191, and 
6,995 cases (or 47.7 percent of cases) in MS-DRG 192 (which equals a 
total of 14,653 cases). The average standardized charge per case was 
$21,567 for MS-DRG 190, $15,494 for MS-DRG 191, and $11,826 for MS-DRG 
192. The average standardized charge per case does not include charges 
related to the Zephyr[supreg] EBV; therefore, it is necessary to add 
the charges related to the device to the average standardized charge 
per case in

[[Page 48558]]

evaluating the cost threshold criteria. Although the applicant 
submitted data related to the estimated cost of the Zephyr[supreg] EBV 
per case, the applicant noted that the cost of the device was 
proprietary information because the device is not yet available on the 
open market. The applicant estimated $23,920 in charges related to the 
Zephyr[supreg] EBV (based on a 100 percent charge markup of the cost of 
the device). In addition to case-weighting the data based on the amount 
of cases that the applicant found in the FY 2006 MedPAR file, the 
applicant case-weighted the data based on its own projections of how 
many Medicare cases it would expect to map to MS-DRGs 190, 191, and 192 
in FY 2009. The applicant projected that, 5 percent of the cases would 
map to MS-DRG 190, 15 percent of the cases would map to MS-DRG 191, and 
80 percent of the cases would map to MS-DRG 192. Adding the charges 
related to the device to the average standardized charge per case 
(based on the applicant's projected case distribution) resulted in a 
case-weighted average standardized charge per case of $36,782 ($12,862 
plus $23,920). Using the thresholds published in Table 10 (72 FR 
66889), the case-weighted threshold for MS-DRGs 190, 191, and 192 was 
$18,394. Because the case-weighted average standardized charge per case 
for the applicable MS-DRGs exceed the case-weighted threshold amount, 
the applicant maintained that the Zephyr[supreg] EBV would meet the 
cost criterion. As noted above, the applicant also performed a case-
weighted analysis of the data based on the 14,653 cases the applicant 
found in the FY 2006 MedPAR file. Based on this analysis, the applicant 
found that the case-weighted average standardized charge per case 
($38,441 based on the 14,653 cases) exceeded the case-weighted 
threshold ($20,606 based on the 14,653 cases). Based on both analyses 
described above, we stated in the proposed rule that it appeared that 
the applicant would meet the cost criterion.
    In the FY 2009 IPPS proposed rule, we invited public comment on 
whether Zephyr[supreg] EBV met the cost criterion.
    Comment: One commenter, the manufacturer, addressed issues 
regarding whether the Zephyr[supreg] EBV met the cost criterion.
    Response: Because the Zephyr[supreg] EBV has not yet received FDA 
approval, and therefore, does not meet the newness criterion, as 
discussed above, it is not eligible for the IPPS new technology add-on 
payments for FY 2009. Therefore, we are not summarizing the details of 
this comment nor responding to them in this final rule.
    As discussed in the proposed rule, the applicant also asserted that 
the Zephyr[supreg] EBV is a substantial clinical improvement because it 
provides a new therapy along the continuum of care for patients with 
emphysema that offers improvement in lung function over standard 
medical therapy while incurring significantly less risk than more 
invasive treatments such as LVRS and lung transplant. Specifically, the 
applicant submitted data from the ongoing pivotal Endobronchial Valve 
for Emphysema Palliation (VENT) trial,\21\ which compared 220 patients 
who received EBV treatment to 101 patients who received standard 
medical therapy, including bronchodilators, steroids, mucolytics, and 
supplemental oxygen. At 6 months, patients who received the 
Zephyr[supreg] EBV had an average of 7.2 percent and 5.8 percent 
improvement (compared to standard medical therapy) in the primary 
effectiveness endpoints of the Forced Expiratory Volume in 1 second 
test (FEV1), and the 6 Minute Walk Test (6MWT), respectively. Both 
results were determined by the applicant to be statistically 
significant. The FEV1 results were determined using the t-test 
parametric confidence intervals (the p value determined using the one-
side t-test adjusted for unequal variance) and the 6MWT results were 
determined using the Mann-Whitney nonparametric confidence intervals 
(the p value was calculated using the one-sided Wilcoxon rank sum 
test). However, the data also showed that patients who received the 
Zephyr[supreg] EBV experienced a number of adverse events, including 
hemoptyis, pneumonia, respiratory failure, pneumothorax, and COPD 
exacerbations, as well as valve migrations and expectorations that, in 
some cases, required repeat bronchoscopy. The manufacturer also 
submitted the VENT pivotal trial 1-year followup data, but requested 
that the data not be disclosed in the proposed rule because it had not 
yet been presented publicly nor published in a peer-reviewed journal.
---------------------------------------------------------------------------

    \21\ Strange, Charlie., et al., Design of the Endobronchial 
Valve for Emphysema Palliation trial (VENT): A Nonsurgical Method of 
Lung Volume Reduction, BMC Pulmonary Medicine. 2007; 7:10.
---------------------------------------------------------------------------

    While CMS recognizes that the Zephyr[supreg] EBV therapy is 
significantly less risky than LVRS and lung transplant, we are 
concerned that the benefits as shown in the VENT pivotal trial may not 
outweigh the risks when compared with medical therapy alone. Further, 
we note that, according to the applicant, the Zephyr[supreg] EBV is 
intended for use in many patients who are ineligible for LVRS and/or 
lung transplant (including those too sick to undergo more invasive 
surgery and those with lower lobe predominant disease distribution), 
but that certain patients (that is, those with upper lobe predominant 
disease distribution) could be eligible for either surgery or the 
Zephyr[supreg] EBV.
    In the FY 2009 IPPS proposed rule, we welcomed comments from the 
public on both the patient population who would be eligible for the 
technology, and whether the Zephyr[supreg] EBV represented a 
substantial clinical improvement in the treatment of patients with 
emphysema.
    Comment: Commenters representing the manufacturer and physicians, 
outlined various reasons why they believed that the Zephyr[supreg] EBV 
represented a substantial clinical improvement over technologies 
currently available to Medicare beneficiaries.
    Response: Because the Zephyr[supreg] EBV has not yet received FDA 
approval, and therefore does not meet the newness criterion, as 
discussed above, it is not eligible for the IPPS new technology add-on 
payments for FY 2009. Therefore, we are not summarizing the details of 
these comments received nor responding to them in this final rule.
    As noted in the proposed rule, we also received written comments 
from the manufacturer and its presenters at the town hall meeting 
clarifying some questions that were raised at the town hall meeting. 
Specifically, these commenters explained that, in general, the target 
population for the Zephyr[supreg] EBV device was the same population 
that could benefit from LVRS, and also includes some patients who were 
too sick to undergo surgery. The commenters also explained that 
patients with emphysema with more heterogeneous lung damage were more 
likely to benefit from the device.
    In the FY 2009 IPPS proposed rule, we welcomed public comments 
regarding where exactly this technology falls in the continuum of care 
of patients with emphysema, and for whom the risk/benefit ratio is most 
favorable.
    Comment: Commenters representing the manufacturer and individual 
physicians addressed issues regarding where the Zephyr[supreg] EBV fell 
in the continuum of care of patients with emphysema and for whom the 
risk/benefit ratio was most favorable.
    Response: Because the Zephyr[supreg] EBV has not yet received FDA 
approval, and therefore does not meet the newness criterion, it is not 
eligible for the IPPS new technology add-on payments for FY 2009. 
Therefore, we are not summarizing the details of these public

[[Page 48559]]

comments nor responding to them in this final rule.
    As we previously stated, because the Zephyr[supreg] EBV has not yet 
received FDA approval, it does not meet the newness criterion. 
Therefore, it cannot be approved for FY 2009 IPPS new technology add-on 
payments.
c. Oxiplex[supreg]
    FzioMed, Inc. submitted an application for new technology add-on 
payments for FY 2009 for Oxiplex[supreg]. Oxiplex[supreg] is an 
absorbable, viscoelastic gel made of carboxymethylcellulose (CMC) and 
polyethylene oxide (PEO) that is intended to be surgically implanted 
during a posterior discectomy, laminotomy, or laminectomy. The 
manufacturer asserted that the gel reduces the potential for 
inflammatory mediators that injure, tether, or antagonize the nerve 
root in the epidural space by creating an acquiescent, semi-permeable 
environment to protect against localized debris. These proinflammatory 
mediators (phospholipase A and nitric oxide), induced or extruded by 
intervertebral discs, may be responsible for increased pain during 
these procedures. The manufacturer also asserted that Oxiplex[supreg] 
is a unique material in that it coats tissue, such as the nerve root in 
the epidural space, to protect the nerve root from the effects of 
inflammatory mediators originating from either the nucleus pulposus, 
from blood derived inflammatory cells, or cytokines during the healing 
process.
    Oxiplex[supreg] indicated to CMS that it was expecting to receive 
premarket approval from the FDA by June 2008. As discussed earlier in 
this section, Oxiplex[supreg] had not received FDA approval prior to 
the development of this final rule. Because the technology had not yet 
received FDA approval at the time the proposed rule was developed, we 
indicated in the proposed rule that we were limiting our discussion of 
this technology to data that the applicant submitted, rather than make 
specific proposals with respect to whether the device would meet the 
new technology add-on payment criteria.
    In the proposed rule, we noted that we were concerned that 
Oxiplex[supreg] may be substantially similar to adhesion barriers that 
have been on the market for several years. We also noted that 
Oxiplex[supreg] has been marketed as an adhesion barrier in other 
countries outside of the United States. The manufacturer maintained 
that Oxiplex[supreg] is different from adhesion barriers in several 
ways, including chemical composition, method of action, surgical 
application (that is, it is applied liberally to the nerve root and 
surrounding neural tissues as opposed to minimally only to nerve 
elements), and tissue response (noninflammatory as opposed to 
inflammatory).
    In the FY 2009 IPPS proposed rule, we welcomed comments from the 
public on this issue.
    Comment: One commenter, the manufacturer, addressed the issue of 
whether Oxiplex[supreg] met the newness criterion. The commenter 
explained that there are no products approved for this indication in 
the spine in the United States. The commenter further explained that 
the indication for use for Oxiplex[supreg] outside the United States 
includes the descriptor ``for the reduction of pain, radiculopathy, 
lower extreme weakness'' and the United State IDE study was designed to 
show that Oxiplex[supreg] reduces back and leg pain and associated 
neurological symptoms following discectomy or laminectomy, in a 
controlled, randomized study. The commenter asserted that this is a new 
and different indication for use in the United States, designated by 
the FDA as a product that fulfills an ``Unmet Medical Need.'' The 
commenter submitted clinical studies to demonstrate that 
Oxiplex[supreg] is substantially different than other adhesion barriers 
in the mode of action, dural healing, wound healing, and local tissue 
response.
    Response: We thank the commenter for its comments on the newness 
criteria. However, because Oxiplex[supreg] has not yet received FDA 
approval, and therefore does not meet the newness criterion, it is not 
eligible for the IPPS new technology add-on payments for FY 2009. 
Therefore, we are responding to these comments in this final rule.
    In an effort to demonstrate that the technology meets the cost 
criterion, as discussed in the proposed rule, the applicant searched 
the FY 2006 MedPAR file for cases with ICD-9-CM procedure codes 03.09 
(Other exploration and decompression of spinal canal) or 80.51 
(Excision of interveterbral disc) that mapped to CMS DRGs 499 and 500 
(CMS DRGs 499 and 500 are crosswalked to MS-DRGs 490 and 491 (Back and 
Neck Procedures except Spinal Fusion with or without CC)). Because 
these cases do not include charges associated with the technology, the 
applicant determined it was necessary to add an additional $7,143 in 
charges to the average standardized charge per case of cases that map 
to MS-DRGs 490 and 491. (To do this, the applicant used a methodology 
of inflating the costs of the technology by the average CCR computed by 
using the average costs and charges for supplies for cases with ICD-9-
CM procedure codes 03.09 and 80.51 that map to MS-DRGs 490 and 491). Of 
the 221,505 cases the applicant found, 95,340 cases (or 43 percent of 
cases) would map to MS-DRG 490, which has an average standardized 
charge of $60,301, and 126,165 cases (or 57 percent of cases) would map 
to MS-DRG 491, which has an average standardized charge per case of 
$43,888. This resulted in a case-weighted average standardized charge 
per case of $50,952. The case-weighted threshold for MS-DRGs 490 and 
491 was $27,481. Because the case-weighted average standardized charge 
per case exceeds the case-weighted threshold in MS-DRGs 490 and 491, 
the applicant maintained that Oxiplex[supreg] would meet the cost 
criterion.
    In the FY 2009 IPPS proposed rule, we invited public comment on 
whether Oxiplex[supreg] met the cost criterion.
    Comment: One commenter, the manufacturer, addressed the issue of 
whether Oxiplex[supreg] met the cost criterion.
    Response: Because Oxiplex[supreg] has not yet received FDA 
approval, and therefore does not meet the newness criterion, we are not 
summarizing this public comment nor responding to it in this final 
rule.
    As discussed in the proposed rule, the manufacturer maintained that 
Oxiplex[supreg] is a substantial clinical improvement because it 
``creates a protective environment around the neural tissue that limits 
nerve root exposure to post-surgical irritants and damage and thus 
reduces adverse outcomes associated with Failed Back Surgery Syndrome 
(FBSS) following surgery.'' The manufacturer also claimed that the 
Oxiplex[supreg] gel reduces leg and back pain after discetomy, 
laminectomy, and laminotomy. The manufacturer also asserted that the 
use of Oxiplex[supreg] is consistent with fewer revision surgeries. 
(During the FDA Investigational Device Exemption (IDE) trial, one 
Oxiplex[supreg] patient required revision surgery compared to six 
control patients.) However, as we noted in the proposed rule, we had 
concerns that Oxiplex[supreg] may be substantially similar to adhesion 
barriers that have been on the market for several years. We also stated 
that we were concerned that even if we were to determine that 
Oxiplex[supreg] is not substantially similar to existing adhesion 
barriers, there may still be insufficient evidence to support the 
manufacturer's claims that Oxiplex[supreg] reduces pain associated with 
spinal surgery. In addition, as discussed in the proposed rule, we have 
found no evidence to support the manufacturer's claims regarding mode 
of action, degree of dural healing, degree of wound

[[Page 48560]]

healing, and local tissue response such as might be shown in animal 
studies.
    We did not receive any written comments or public comments at the 
town hall meeting regarding the substantial clinical improvement 
aspects of this technology. However, in the FY 2009 IPPS proposed rule, 
we welcomed comments from the public regarding whether Oxiplex[supreg] 
represented a substantial clinical improvement.
    Comment: One commenter, the manufacturer, claimed that 
Oxiplex[supreg] represents a substantial clinical improvement over 
technology currently available to Medicare beneficiaries. Other 
commenters representing trade associations and physicians, stated that 
there was not enough evidence to determine whether Oxiplex[supreg] 
represented a substantial clinical improvement because it had not yet 
received FDA approval and there was insufficient peer-reviewed 
published literature to make such a determination.
    Response: Because Oxiplex[supreg] has not yet received FDA 
approval, and therefore does not meet the newness criterion, we are not 
summarizing these public comments nor responding to them in this final 
rule.
    As we previously stated, Oxiplex[supreg] does not meet the newness 
criterion and, therefore, cannot be approved for FY 2009 IPPS new 
technology add-on payments.
d. TherOx Downstream[supreg] System
    TherOx, Inc. submitted an application for new technology add-on 
payments for FY 2009 for the TherOx Downstream[supreg] System 
(Downstream[supreg] System). The TherOx Downstream[supreg] System uses 
SuperSaturatedOxygen Therapy (SSO2) that is designed to limit 
myocardial necrosis by minimizing microvascular damage in acute 
myocardial infarction (AMI) patients following intervention with 
Percutaneous Transluminal Coronary Angioplasty (PTCA), and coronary 
stent placement by perfusing the affected myocardium with blood that 
has been supersaturated with oxygen. SSO2 therapy refers to the 
delivery of superoxygenated arterial blood directly to areas of 
myocardial tissue that have been reperfused using PTCA and stent 
placement, but which may still be at risk. The desired effect of SSO2 
therapy is to reduce infarct size and thus preserve heart muscle and 
function. The TherOx DownStream[supreg] System is the console portion 
of a disposable cartridge-based system that withdraws a small amount of 
the patient's arterial blood, mixes it with a small amount of saline, 
and supersaturates it with oxygen to create highly oxygen-enriched 
blood. The superoxygenated blood is delivered directly to the infarct-
related artery via the TherOx infusion catheter. SSO2 therapy is a 
catheter laboratory-based procedure. Additional time in the catheter 
lab area is an average of 100 minutes. The manufacturer claimed that 
the SSO2 therapy duration lasts 90 minutes and requires an additional 
10 minutes post-procedure preparation for transfer time. The TherOx 
Downstream[supreg] System was not FDA approved at the time that the 
proposed rule was published; however, the manufacturer indicated to CMS 
that it expected to receive FDA approval in the second quarter of 2008. 
Because the technology was not approved by the FDA during the 
development of the proposed rule, we limited our discussion of this 
technology to data that the applicant submitted, rather than make 
specific proposals with respect to whether the device would meet the 
new technology add-on criteria in the proposed rule. At the time of the 
development of this final rule, the TherOx Downstream[supreg] System 
had not yet received FDA approval.
    In an effort to demonstrate that it would meet the cost criterion 
as we discussed in the proposed rule, the applicant submitted two 
analyses. The applicant stated that it believed that cases that would 
be eligible for the Downstream[supreg] System would most frequently 
group to MS-DRGs 246 (Percutaneous Cardiovascular Procedure with Drug-
Eluting Stent with MCC or 4+ Vessels/Stents), 247 (Percutaneous 
Cardiovascular Procedure with Drug-Eluting Stent without MCC), 248 
(Percutaneous Cardiovascular Procedure with Non-Drug-Eluting Stent with 
MCC or 4+ Vessels/Stents), and 249 (Percutaneous Cardiovascular 
Procedure with Non-Drug-Eluting Stent without MCC). The first analysis 
used data based on 83 clinical trial patients from 10 clinical sites. 
Of the 83 cases, 78 were assigned to MS-DRGs 246, 247, 248, or 249. The 
data showed that 32 of these patients were 65 years old or older. There 
were 12 cases (or 15.4 percent of cases) in MS-DRG 246, 56 cases (or 
71.8 percent cases) in MS-DRG 247, 2 cases (or 2.6 percent of cases) in 
MS-DRG 248, and 8 cases (or 10.3 percent of cases) in MS-DRG 249. (The 
remaining five cases grouped to MS-DRGs that the technology would not 
frequently group to and therefore are not included in this analysis.) 
The average standardized charge per case for MS-DRGs 246, 247, 248, and 
249 was $66,730, $53,963, $54,977, and $41,594, respectively. The case-
weighted average standardized charge per case for the four MS-DRGs 
listed above is $54,665. Based on the threshold from Table 10 (72 FR 
66890), the case-weighted threshold for the four MS-DRGs listed above 
was $49,303. The applicant also searched the FY 2006 MedPAR file to 
identify cases that would be eligible for the Downstream[supreg] 
System. The applicant specifically searched for cases with primary ICD-
9-CM diagnosis code 410.00 (Acute myocardial infarction of 
anterolateral wall with episode of care unspecified), 410.01 (Acute 
myocardial infarction of anterolateral wall with initial episode of 
care), 410.10 (Acute myocardial infarction of other anterior wall with 
episode of care unspecified), or 410.11 (Acute myocardial infarction of 
other anterior wall with initial episode of care) in combination with 
ICD-9-CM procedure code of 36.06 (Insertion of non-drug-eluting 
coronary artery stent(s)) or 36.07 (Insertion of drug-eluting coronary 
artery stent(s)). The applicant's search found 13,527 cases within MS-
DRGs 246, 247, 248, and 249 distributed as follows: 2,287 cases (or 
16.9 percent of cases) in MS-DRG 246; 9,691 cases (or 71.6 percent of 
cases) in MS-DRG 247; 402 cases (or 3 percent of cases) in MS-DRG 248; 
and 1,147 cases (or 8.5 percent of cases) in MS-DRG 249. Not including 
the charges associated with the technology, the geometric mean 
standardized charge per case for MS-DRGs 246, 247, 248, and 249 was 
$59,631, $42,357, $49,718 and $37,446, respectively. Therefore, based 
on this analysis, the total case-weighted geometric mean standardized 
charge per case across these MS-DRGs was $45,080. The applicant 
estimated that it was necessary to add an additional $21,620 in charges 
to the total case-weighted geometric mean standardized charge per case. 
In the additional charge amount, the applicant included charges for 
supplies and tests related to the technology, charges for 100 minutes 
of additional procedure time in the catheter laboratory and charges for 
the technology itself. The inclusion of these charges would result in a 
total case-weighted geometric mean standardized charge per case of 
$66,700. The case-weighted threshold for MS-DRGs 246, 247, 248, and 249 
(from Table 10 (72 FR 66889)) was $49,714. Because the total case-
weighted average standardized charge per case from the first analysis 
and the case-weighted geometric mean standardized charge per case from 
the second analysis exceeds the applicable case-weighted threshold, the 
applicant maintained the Downstream[supreg] System would meet the cost 
criterion.
    In the FY 2009 IPPS proposed rule, we invited public comment on 
whether

[[Page 48561]]

Downstream[supreg] System met the cost criterion.
    Comment: One commenter, the manufacturer, addressed the issue of 
whether the TherOx Downstream[supreg] System met the cost criterion. 
Another comment addressed the 100 minutes of additional catheter lab 
time that is required for the therapy and the preparation for transfer 
time.
    Response: Because the TherOx Downstream[supreg] System has not yet 
received FDA approval, and therefore does not meet the newness 
criterion, it is not eligible for the IPPS new technology add-on 
payments for FY 2009. Therefore, we are not summarizing the details of 
these comments nor responding to them in this final rule.
    As discussed in the proposed rule, the applicant asserted that the 
Downstream[supreg] System is a substantial clinical improvement because 
it reduces infarct size in acute AMI where PTCA and stent placement 
have also been performed. Data was submitted from the Acute Myocardial 
Infarction Hyperbaric Oxygen Treatment (AMIHOT) II trial which was 
presented at the October 2007 Transcatheter Cardiovascular Therapeutics 
conference, but has not been published in peer reviewed literature, 
that showed an average of 6.5 percent reduction in infarct size as 
measured with Tc-99m Sestamibi imaging in patients who received 
supersaturated oxygen therapy. We note that those patients also showed 
a significantly higher incidence of bleeding complications. While we 
recognize that a reduction of infarct size may correlate with improved 
clinical outcomes, we question whether the degree of infarct size 
reduction found in the trial represents a substantial clinical 
improvement, particularly in light of the apparent increase in bleeding 
complications.
    As noted in the proposed rule, we received one written comment from 
the manufacturer clarifying questions that were raised at the town hall 
meeting. Specifically, the commenter explained the methodology of Tc-
99m sestamibi scanning and interpretation in the AMIHOT II trial. In 
addition, the commenter explained that the AMIHOT \22\ and AMIHOT II 
trials did not attempt to measure differences in heart failure outcomes 
nor mortality outcomes.
---------------------------------------------------------------------------

    \22\ Oneill, W.W., et al.: Acute Myocardial Infarction with 
Hyperoxemic Therapy (AMIHOT): A Prospective Randomized Trial of 
Intracoronary Hyperoxemic Reperfusion after Percutaneous Coronary 
Intervention. Journal of the American College of Cardiology, Vol. 
50, No. 5, 2007, pp. 397-405.
---------------------------------------------------------------------------

    In the FY 2009 IPPS proposed rule, we welcomed comments from the 
public on this matter.
    Comment: Commenters representing the manufacturer and physicians 
addressed the issue of whether the TherOx Downstream[supreg] System 
meets the substantial clinical improvement criterion.
    Response: Because the TherOx Downstream[supreg] System has not yet 
received FDA approval, and therefore does not meet the newness 
criterion, it is not eligible for the IPPS new technology add-on 
payments for FY 2009. Therefore, we are not summarizing the details of 
this comment nor responding to it in this final rule.
    As we previously stated, because the Downstream[supreg] System does 
not meet the newness criterion, it cannot be approved for FY 2009 IPPS 
new technology add-on payments.
5. Regulatory Changes
    Section 1886(d)(5)(K)(i) of the Act directs us to establish a 
mechanism to recognize the cost of new medical services and 
technologies under the IPPS, with such mechanism established after 
notice and opportunity for public comment. In accordance with this 
authority, we established at Sec.  412.87(b) of our regulations 
criteria that a medical service or technology must meet in order to 
qualify for the additional payment for new medical services and 
technologies. Specifically, we evaluate applications for new medical 
service or technology add-on payment by determining whether they meet 
the criteria of newness, adequacy of payment, and substantial clinical 
improvement.
    As stated in section III.J.1. of the preamble of this final rule, 
Sec.  412.87(b)(2) of our existing regulations provides that a specific 
medical service or technology will be considered new for purposes of 
new medical service or technology add-on payments after the point at 
which data begin to become available reflecting the ICD-9-CM code 
assigned to the new service or technology. The point at which these 
data become available typically begins when the new medical service or 
technology is first introduced on the market, generally on the date 
that the medical service or technology receives FDA approval. 
Accordingly, for purposes of the new medical service or technology add-
on payment, a medical service or technology cannot be considered new 
prior to the date on which FDA approval is granted.
    In addition, as stated in section III.J.1. of the preamble of this 
final rule, Sec.  412.87(b)(3) of our existing regulations provides 
that, to be eligible for the add-on payment for new medical services or 
technologies, the DRG prospective payment rate otherwise applicable to 
the discharge involving the new medical service or technology must be 
assessed for adequacy. Under the cost criterion, to assess the adequacy 
of payment for a new medical service or technology paid under the 
applicable DRG prospective payment rate, we evaluate whether the 
charges for cases involving the new medical service or technology 
exceed certain threshold amounts.
    Section 412.87(b)(1) of our existing regulations provides that, to 
be eligible for the add-on payment for new medical services or 
technologies, the new medical service or technology must represent an 
advance that substantially improves, relative to technologies 
previously available, the diagnosis or treatment of Medicare 
beneficiaries. In addition, Sec.  412.87(b)(1) states that CMS will 
announce its determination as to whether a new medical service or 
technology meets the substantial clinical improvement criteria in the 
Federal Register as part of the annual updates and changes to the IPPS.
    Since the implementation of the policy on add-on payments for new 
medical services and technologies, we accept applications for add-on 
payments for new medical services and technologies on an annual basis 
by a specified deadline. For example, applications for FY 2009 were 
submitted in November 2007. After accepting applications, CMS then 
evaluates them in the annual IPPS proposed and final rules to determine 
whether the medical service or technology is eligible for the new 
medical service or technology add-on payment. If an application meets 
each of the eligibility criteria, the medical service or technology is 
eligible for new medical service or technology add-on payments 
beginning on the first day of the new fiscal year (that is, October 1).
    We have advised prior and potential applicants that we evaluate 
whether a medical service or technology is eligible for the new medical 
service or technology add-on payments prior to publication of the final 
rule setting forth the annual updates and changes to the IPPS, with the 
results of our determination announced in the final rule. We announce 
our results in the final rule for each fiscal year because we believe 
predictability is an important aspect of the IPPS and that it is 
important to apply a consistent payment methodology for new medical 
services

[[Page 48562]]

or technologies throughout the entire fiscal year. For example, 
hospitals must train their billing and other staff after publication of 
the final rule to properly implement the coding and payment changes for 
the upcoming fiscal year set forth in the final rule. In addition, 
hospitals' budgetary process and clinical decisions regarding whether 
to utilize new technologies are based in part on the applicable payment 
rates under the IPPS for the upcoming fiscal year, including whether 
the new medical services or technologies qualify for the new medical 
service or technology add-on payment. If CMS were to make multiple 
payment changes under the IPPS during a fiscal year, these changes 
could adversely affect the decisions hospitals implement at the 
beginning of the fiscal year. As we stated in the proposed rule, for 
these reasons, we believe applications for new medical service or 
technology add-on payments should be evaluated prior to publication of 
the final IPPS rule for each fiscal year. Therefore, if an application 
does not meet the new medical service or technology add-on payment 
criteria prior to publication of the final rule, it will not be 
eligible for the new medical service or technology add-on payments for 
the fiscal year for which it applied for the add-on payments.
    Because we make our determination regarding whether a medical 
service or technology meets the eligibility criteria for the new 
medical service or technology add-on payments prior to publication of 
the final rule, we have advised both past and potential applicants that 
their medical service or technology must receive FDA approval early 
enough in the IPPS rulemaking cycle to allow CMS enough time to fully 
evaluate the application prior to the publication of the IPPS final 
rule. Moreover, because new medical services or technologies that have 
not received FDA approval do not meet the newness criterion, it would 
not be necessary or prudent for us to make a final determination 
regarding whether a new medical service or technology meets the cost 
threshold and substantial clinical improvement criteria prior to the 
medical service or technology receiving FDA approval. In addition, we 
do not believe it is appropriate for CMS to determine whether a medical 
service or technology represents a substantial clinical improvement 
over existing technologies before the FDA makes a determination as to 
whether the medical service or technology is safe and effective. For 
these reasons, we first determine whether a medical service or 
technology meets the newness criteria, and only if so, do we then make 
a determination as to whether the technology meets the cost threshold 
and represents a substantial clinical improvement over existing medical 
services or technologies. For example, even if an application has FDA 
approval, if the medical service or technology is beyond the timeline 
of 2-3 years to be considered new, in the past we have not made a 
determination on the cost threshold and substantial clinical 
improvement. Further, as we have discussed in prior final rules (69 FR 
49018-49019 and 70 FR 47344), it is our past and present practice to 
analyze the new medical service or technology add-on payment criteria 
in the following sequence: Newness, cost threshold, and finally 
substantial clinical improvement.
    In the FY 2009 IPPS proposed rule (73 FR 23616) we proposed to 
continue this practice of analyzing the eligibility criteria in this 
sequence and announce in the annual Federal Register as part of the 
annual updates and changes to the IPPS our determination on whether a 
medical service or technology meets the eligibility criteria in Sec.  
412.87(b). However, in the interest of more clearly defining the 
parameters under which CMS can fully and completely evaluate new 
medical service or technology add-on payment applications, we proposed 
to amend the regulations at Sec.  412.87 by adding a new paragraph (c) 
to codify our current policy and specify that CMS will consider whether 
a new medical service or technology meets the eligibility criteria in 
Sec.  412.87(b) and announce the results in the Federal Register as 
part of the annual updates and changes to the IPPS. As a result, we 
proposed to remove the duplicative text in Sec.  412.87(b)(1) that 
specifies that CMS will determine whether a new medical service or 
technology meets the substantial clinical improvement criteria and 
announce the results of its determination in the Federal Register as 
part of the annual updates and changes to the IPPS. We noted that this 
proposal was not a change to our current policy, as we have always 
given consideration to whether an application meets the new medical 
service or technology eligibility criteria in the annual IPPS proposed 
and final rules. Rather, the proposal was to simply codify our current 
practice of fully evaluating new medical service or technology add-on 
payment applications prior to publication of the final rule in order to 
maintain predictability within the IPPS for the upcoming fiscal year.
    We did not receive any public comments on this proposal. Therefore, 
in this final rule, we are adopting as final our proposal to Sec.  
412.87(b)(1) to remove the duplicative text.
    We also proposed in new paragraph (c) of Sec.  412.87 to set July 1 
of each year as the deadline by which IPPS new medical service or 
technology add-on payment applications must receive FDA approval. This 
deadline would provide us with enough time to fully consider all of the 
new medical service or technology add-on payment criteria for each 
application and maintain predictability in the IPPS for the coming 
fiscal year.
    Finally, under our proposal, applications that have not received 
FDA approval by July 1 would not be considered in the final rule, even 
if they were summarized in the corresponding IPPS proposed rule. 
However, applications that receive FDA approval of the medical service 
or technology after July 1 would be able to reapply for the new medical 
service or technology add-on payment the following year (at which time 
they would be given full consideration in both the IPPS proposed and 
final rules).
    Comment: A few commenters opposed the proposed policy. 
Specifically, the commenters expressed concern that the imposition of 
such a deadline would decrease flexibility in the new technology add-on 
payment approval process because applicants who received FDA approval 
shortly after the deadline would not be able to be considered for new 
technology add-on payments for the corresponding fiscal year and would 
instead have to wait until a subsequent year to apply. One commenter 
suggested that CMS use July 1 as a general guideline for when FDA 
approval would have to be received, but that technologies that received 
FDA approval a day or two after the deadline should also be considered. 
One commenter suggested that the deadline be announced at the annual 
new technology town hall meeting instead of through regulation.
    Response: While we acknowledge that the deadline may decrease 
flexibility in the new technology add-on payment approval process by a 
very marginal degree, we remind the commenters that we have been 
committed to working with applicants very closely throughout the new 
technology application review process and that we have afforded 
applicants an opportunity to supplement their original applications 
with information that we believed might better support their ability to 
demonstrate that they meet the eligibility criteria for the new 
technology add-on payments. Furthermore, we have provided

[[Page 48563]]

flexibility in the new technology add-on application process by 
accepting applications for technologies prior to their approval by the 
FDA, despite the fact that we are unable to approve a technology that 
has not been proven to be ``safe and effective'' for marketing in the 
United States as FDA approval signifies. We note that it is difficult 
to determine whether a technology is a substantial clinical improvement 
over existing (FDA-approved) technologies because there is usually only 
limited clinical data available and because it requires subjective 
judgment, but we have made efforts to analyze data available to us even 
prior to FDA approval. While we prefer that technologies have FDA 
approval at the time that an application for new technology add-on 
payment is submitted, we acknowledge that it is not always feasible for 
a new technology to receive FDA approval prior to the submission 
deadline for new technology add-on payment applications. We believe 
that July 1 of each year provides an appropriate balance between the 
necessity for adequate time to fully evaluate the applications, the 
requirement to publish the IPPS final rule by August 1 of each year, 
and the commenters' concerns that potential new technology applicants 
have some flexibility with respect to when their technology receives 
FDA approval. Finally, we believe that announcing the deadline at the 
annual new technology town hall meeting does not provide a standard as 
predictable as a regulatory standard. In addition, not all interested 
parties are able to attend the town hall meeting and, therefore, may 
not be aware of a deadline that is announced at that meeting.
    Comment: Two commenters supported the proposal. The commenters 
stated that setting a deadline would increase transparency and 
predictability in the IPPS new technology add-on application process. 
One of the commenters noted that setting such a deadline would save 
manufacturers the cost and effort of submitting an application for 
technologies that were not likely to make the deadline and that the 
deadline would also save CMS time from reviewing these applications. 
The commenter also stated that the deadline would bring clarity to the 
new technology application process by helping applicants coordinate the 
timing of their applications with FDA approval.
    Response: We appreciate the commenters' support and agree that both 
transparency and predictability in the new technology add-on payment 
application process will be improved as a result of this regulatory 
change. We also continue to believe that this policy will provide us 
with enough time to fully consider all of the new medical service or 
technology add-on payment criteria for each application without 
imposing additional burden on future applicants that are unable to meet 
this deadline.
    After consideration of the public comments received, we are 
adopting as final our proposal to revise Sec.  412.87 to remove the 
second sentence of (b)(1), thereby codifying our current practice of 
how CMS evaluates new medical service or technology add-on payment 
applications. We are also finalizing our proposal in paragraph (c) of 
Sec.  412.87 which establishes a date of July 1 of each year as the 
deadline by which IPPS new medical service or technology add-on payment 
applications must receive FDA approval in order to be fully evaluated 
in the applicable IPPS final rule each year.

III. Changes to the Hospital Wage Index

A. Background

    Section 1886(d)(3)(E) of the Act requires that, as part of the 
methodology for determining prospective payments to hospitals, the 
Secretary must adjust the standardized amounts ``for area differences 
in hospital wage levels by a factor (established by the Secretary) 
reflecting the relative hospital wage level in the geographic area of 
the hospital compared to the national average hospital wage level.'' In 
accordance with the broad discretion conferred under the Act, we 
currently define hospital labor market areas based on the definitions 
of statistical areas established by the Office of Management and Budget 
(OMB). A discussion of the FY 2009 hospital wage index based on the 
statistical areas, including OMB's revised definitions of Metropolitan 
Areas, appears under section III.C. of this preamble.
    Beginning October 1, 1993, section 1886(d)(3)(E) of the Act 
requires that we update the wage index annually. Furthermore, this 
section provides that the Secretary base the update on a survey of 
wages and wage-related costs of short-term, acute care hospitals. The 
survey must exclude the wages and wage-related costs incurred in 
furnishing skilled nursing services. This provision also requires us to 
make any updates or adjustments to the wage index in a manner that 
ensures that aggregate payments to hospitals are not affected by the 
change in the wage index. The adjustment for FY 2009 is discussed in 
section II.B. of the Addendum to this final rule.
    As discussed below in section III.I. of this preamble, we also take 
into account the geographic reclassification of hospitals in accordance 
with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when calculating 
IPPS payment amounts. Under section 1886(d)(8)(D) of the Act, the 
Secretary is required to adjust the standardized amounts so as to 
ensure that aggregate payments under the IPPS after implementation of 
the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the 
Act are equal to the aggregate prospective payments that would have 
been made absent these provisions. The budget neutrality adjustment for 
FY 2009 is discussed in section II.A.4.b. of the Addendum to this final 
rule.
    Section 1886(d)(3)(E) of the Act also provides for the collection 
of data every 3 years on the occupational mix of employees for short-
term, acute care hospitals participating in the Medicare program, in 
order to construct an occupational mix adjustment to the wage index. A 
discussion of the occupational mix adjustment that we are applying 
beginning October 1, 2008 (the FY 2009 wage index) appears under 
section III.D. of this preamble.
    After the issuance of the FY 2009 IPPS proposed rule, a new law, 
the Medicare Improvements for Patients and Providers Act of 2008 (Pub. 
L. 110-275) was enacted on July 15, 2008. Section 124 of Public Law 
110-275 extended certain hospital wage index reclassifications 
originally provided for under section 508 of Public Law 108-173, as 
well as certain special exceptions, through September 30, 2009 (FY 
2009). A discussion of the provisions of section 124 and its 
implementation in a separate Federal Register notice to be published 
subsequent to this final rule are discussed in section III.I.7. of this 
preamble.

B. Requirements of Section 106 of the MIEA-TRHCA

1. Wage Index Study Required Under the MIEA-TRHCA
a. Legislative Requirement
    Section 106(b)(1) of the MIEA-TRHCA (Pub. L. 109-432) required 
MedPAC to submit to Congress, not later than June 30, 2007, a report on 
the Medicare wage index classification system applied under the 
Medicare IPPS. Section 106(b) of MIEA-TRHCA required the report to 
include any alternatives that MedPAC recommends to the method to 
compute the wage

[[Page 48564]]

index under section 1886(d)(3)(E) of the Act.
    In addition, section 106(b)(2) of the MIEA-TRHCA instructed the 
Secretary of Health and Human Services, taking into account MedPAC's 
recommendations on the Medicare wage index classification system, to 
include in the FY 2009 IPPS proposed rule one or more proposals to 
revise the wage index adjustment applied under section 1886(d)(3)(E) of 
the Act for purposes of the IPPS. The Secretary was also to consider 
each of the following:
     Problems associated with the definition of labor markets 
for the wage index adjustment.
     The modification or elimination of geographic 
reclassifications and other adjustments.
     The use of Bureau of Labor of Statistics (BLS) data or 
other data or methodologies to calculate relative wages for each 
geographic area.
     Minimizing variations in wage index adjustments between 
and within MSAs and statewide rural areas.
     The feasibility of applying all components of CMS' 
proposal to other settings.
     Methods to minimize the volatility of wage index 
adjustments while maintaining the principle of budget neutrality.
     The effect that the implementation of the proposal would 
have on health care providers on each region of the country.
     Methods for implementing the proposal(s), including 
methods to phase in such implementations.
     Issues relating to occupational mix such as staffing 
practices and any evidence on quality of care and patient safety 
including any recommendation for alternative calculations to the 
occupational mix.
b. MedPAC's Recommendations
    In its June 2007 Report to Congress, ``Report to the Congress: 
Promoting Greater Efficiency in Medicare'' (Chapter 6 with Appendix), 
MedPAC made three broad recommendations regarding the wage index:
    (1) Congress should repeal the existing hospital wage index 
statute, including reclassifications and exceptions, and give the 
Secretary authority to establish a new wage index system;
    (2) The Secretary should establish a hospital compensation index 
that--
     Uses wage data from all employers and industry-specific 
occupational weights;
     Is adjusted for geographic differences in the ratio of 
benefits to wages;
     Is adjusted at the county level and smoothes large 
differences between counties; and
     Is implemented so that large changes in wage index values 
are phased in over a transition period; and
    (3) The Secretary should use the hospital compensation index for 
the home health and skilled nursing facility prospective payment 
systems and evaluate its use in the other Medicare fee-for-service 
prospective payment systems.
    The full June 2007 Report to Congress is available at the Web site: 
http://www.medpac.gov/documents/Jun07_EntireReport.pdf).
    In the presentation and analysis of its alternative wage index 
system, MedPAC addressed almost all of the nine points for 
consideration under section 106(b)(2) of Public Law 109-432. Following 
are the highlights of the alternative wage index system recommended by 
MedPAC:
     Although the MedPAC recommended wage index generally 
retains the current labor market definitions, it supplements the 
metropolitan areas with county-level adjustments and eliminates single 
wage index values for rural areas.
     In the MedPAC recommended wage index, the county-level 
adjustments, together with a smoothing process that constrains the 
magnitude of differences between and within contiguous wage areas, 
serve as a replacement for geographical reclassifications.
     The MedPAC recommended wage index uses BLS data instead of 
the CMS hospital wage data collected on the Medicare cost report. 
MedPAC adjusts the BLS data for geographic differences in the ratio of 
benefits to wages using Medicare cost report data.
     The BLS data are collected from a sample of all types of 
employers, not just hospitals. The MedPAC recommended wage index could 
be adapted to other providers such as HHAs and SNFs by replacing 
hospital occupational weights with occupational weights appropriate for 
other types of providers.
     In the MedPAC recommended wage index, volatility over time 
is addressed by the use of BLS data, which is based on a 3-year rolling 
sample design.
     MedPAC recommended a phased implementation for its 
recommended wage index in order to cushion the effect of large wage 
index changes on individual hospitals.
     MedPAC suggested that using BLS data automatically 
addresses occupational mix differences, because the BLS data are 
specific to health care occupations, and national industry-wide 
occupational weights are applied to all geographic areas.
     The MedPAC report does not provide any evidence of the 
impact of its wage index on staffing practices or the quality of care 
and patient safety.
c. CMS Contract for Impact Analysis and Study of Wage Index Reform
    To assist CMS in meeting the requirements of section 106(b)(2) of 
Public Law 109-432, in February 2008, CMS awarded a Task Order to 
Acumen, LLC. The two general responsibilities of the Task Order are to 
(1) conduct a detailed impact analysis that compares the effects of 
MedPAC's recommended wage and hospital compensation indices with the 
CMS wage index and (2) provide analysis and research that assist CMS in 
developing a proposal (or proposals) that addresses the nine points for 
consideration under section 106(b)(2) of Public Law 109-432. 
Specifically, the tasks under the Task Order include, but are not 
limited to, an evaluation of whether differences between the two types 
of wage data (that is, CMS cost report and occupational mix data and 
BLS data) produce significant differences in wage index values among 
labor market areas, a consideration of alternative methods of 
incorporating benefit costs into the construction of the wage index, a 
review of past and current research on alternative labor market area 
definitions, and a consideration of how aspects of the MedPAC 
recommended wage index can be applied to the CMS wage data in 
constructing a new methodology for the wage index. Acumen has completed 
the first phase of its study (that is, a comparative and impact 
analysis of the CMS wage index and the MedPAC recommended wage 
indices). A summary of Acumen's findings is included in section 
III.B.1.e. of the preamble to this final rule. Acumen will post on its 
Web site, subsequent to the publication of this final rule, an interim 
report that includes the full set of findings from this analysis. 
Acumen's Web site is: http://www.acumenllc.com/reports/cms.
d. Public Comments Received on the MedPAC Recommendations and the CMS/
Acumen Wage Index Study and Analysis
    We received many public comments regarding the MedPAC's 
recommendations for reforming the wage index, as well as on CMS' and 
Acumen's study and analysis. The public comments vary greatly, and at 
this time, we are not proposing or finalizing the specific 
recommendations made by MedPAC discussed above. For

[[Page 48565]]

this reason, we are briefly highlighting the public comments according 
to the issues they address. A complete set of the public comments on 
the FY 2009 IPPS proposed rule (CMS-1390-P) is available on the 
Internet at: www.regulations.gov. In developing proposals for 
additional wage index reform (anticipated to be included in the FY 2010 
IPPS proposed rule), we plan to consider all of the public comments on 
the MedPAC recommendations that we received in this rulemaking cycle, 
along with the interim and final reports to be submitted to us by 
Acumen.
    MedPAC Recommendation: Congress should repeal the existing hospital 
wage index statute, including reclassifications and exceptions.
    Public Comment Summaries:
     Wage index reclassifications and exceptions process should 
not be eliminated. Exceptions are necessary for hospitals with labor 
costs that are atypical for their local area but comparable to other 
areas.
     Reclassifications and other wage index exceptions should 
be modified or eliminated. As the MedPAC noted, 40 percent of hospitals 
receive a wage index exception, thereby indicating that the current 
system is broken.
    MedPAC Recommendation: Use BLS data instead of the CMS hospital 
wage data collected on the Medicare cost report to calculate the wage 
index.
    Public Comment Summaries:
     CMS should adopt the MedPAC's recommendations to use BLS 
data. A wage index based on a 3-year average, instead of a single year 
of 4-year-old data, would better reflect hospitals' average hourly 
wages.
     BLS data may be inappropriate to use for the hospital wage 
index because it includes data from all employers, not just short term 
acute hospitals.
     Wages for contract or temporary employees are included in 
BLS data, but they reflect the lower salary paid by the agency to the 
employee and not the higher salary of what the hospital paid the 
agency.
     Unlike CMS's public process for reviewing and correcting 
wage index data at the hospital level, BLS has a strict confidentiality 
policy. Hospitals would be unable to verify any inaccuracies in the BLS 
data. Complete transparency is needed for the entire wage index 
process.
     Every 6 months, BLS surveys 200,000 establishments and 
builds the database to include 1.2 million unique establishments over a 
3-year period. The data are then inflated to a certain month and year 
using a ``single national estimate'' of wage growth for broad 
occupational divisions. This approach fails to account for any 
differences in wage growth between markets over the 3-year period.
     To determine average hourly wages, CMS collects data over 
a 12-month period, while the BLS collects data from 2 payroll periods, 
with each period capturing data from one-sixth of the total number of 
sampled establishments. Integrity in the wage index may be compromised 
using data from only two payroll periods rather than from 12 months of 
data.
     BLS data exclude overtime pay, jury duty pay, and shift 
differentials. Excluding these costs, which are often associated with 
tight labor market areas, could understate areas that have higher 
utilization of these items.
     BLS data do not include employee fringe benefits costs. 
The MedPAC relied on benefit data from the CMS hospital, home health 
agency, and SNF cost reports, which negates the potential benefit of 
eliminating the collection of hospital-specific wage data. There are 
also concerns about mixing data from two sources.
     Full-time and part-time employees are equally weighted in 
the BLS data.
     Estimates from using a sampling methodology like the BLS 
uses are subject to sampling errors and will be less reliable than CMS' 
current methodology of using data from all PPS hospitals.
     CMS data are mandatory while BLS data are voluntary. Data 
that are voluntarily submitted may have less integrity than mandatory 
data.
     BLS imputes data for nonresponsive employers. The use of 
imputed data is inappropriate.
     BLS data do not reflect premiums that hospitals must pay 
for certain workers; for example, premiums for registered nurses with 
additional training and certification in specialties such as critical 
care. Payment premiums for these workers would not be adequately 
reflected in the BLS data because the BLS survey does not capture 
information on nurse specialty areas.
     On the BLS survey, hospitals simply report data for 
occupational categories by average hourly wage ranges. Hospitals do not 
report actual hours worked. BLS' method for weighting the data in 
computing hourly rates is confusing because it does not have hours as a 
basis for the weighting.
    MedPAC Recommendation: Use county-level adjustments, together with 
a smoothing process, to constrain the magnitude of differences between 
and within contiguous wage areas.
    Public Comment Summaries:
     The MedPAC used 2000 census data to establish the 
relationship between counties within a MSA. Using old data may create 
differences in wage indices that are inconsistent with actual 
geographic differences in wages.
     Using counties as the units of analysis may not be 
optimal. Some counties tend to be quite large and topographically 
diverse, while other counties are small and relatively homogeneous.
     CMS' current methodology, with the exception of commuting 
pattern adjustments, assumes there is no interrelationship between 
areas. More refined areas, such as resulting from the MedPAC's 
smoothing methodology, may be more realistic and less arbitrary.
     Smoothing may mask actual variation between labor market 
areas.
     The 10-percent cliffs used in the MedPAC's smoothing 
process are set subjectively and, as the MedPAC noted, a percentage of 
8 or 12 percent could alternatively be used. Depending on the area, 
changing the percentage could cause swings of millions of dollars.
    MedPAC Recommendation: Adopt methods (such as a 3-year rolling 
average) to minimize the volatility of wage index adjustments while 
maintaining the principle of budget neutrality.
    Public Comment Summaries:
     Volatility in hospital wage indices from one year to the 
next makes it difficult for hospitals to estimate Medicare payments for 
budgeting purposes. While the 3-year rolling average used by BLS may 
reduce volatility, alternative approaches should be examined, including 
those that do not rely on BLS data.
     While a rolling average may make the wage data look better 
from a statistical point, it may not result in a fair wage distribution 
tool. As hospitals make adjustments for current market conditions, an 
average will mask the change.
    CMS/Acumen Study and Analysis Plan: As stated earlier, CMS 
contracted with Acumen to conduct an impact analysis and compare the 
effects of MedPAC's recommended wage and hospital compensation indexes 
with the CMS wage index and to provide analysis that assists CMS in 
developing a proposal(s) that address the nine points under section 
106(b)(2) of the MIEA-TRHCA.
    Public Comment Summaries:
     Comments were favorable and supportive of CMS' contract 
with Acumen. One commenter found Acumen's analysis plan ``very 
thorough'' and was pleased with the ``wide variety of options and 
issues

[[Page 48566]]

relating to the wage index'' that were included in the analysis plan. 
(Acumen discussed the plan at CMS' May 20, 2008 special open door forum 
on wage index reform. The full transcript of the forum discussions is 
available at the Web site: http://www.cms.hhs.gov/OpendoorForums/05_ODF_SpecialODF.asp. Acumen's analysis plan will be posted on Acumen's 
Web site subsequent to the publication of this final rule at: http://www.acumenllc.com/reports/cms.) Another commenter expressed 
appreciation for the breadth and complexity of fulfilling CMS' 
statutory obligation under MIEA-TRHCA as well as the ``political 
challenges of this task,'' and commended CMS' engagement of an outside, 
independent contractor to assist CMS in this endeavor.
     The majority of commenters suggested that comprehensive 
wage index reform was necessary as opposed to incremental, interim 
changes. To that end, the commenters strongly urged that CMS make no 
changes to the wage index system until the Acumen study has been 
completed. The commenters also stated that the process to consider 
changes to the existing wage index should be very thorough and include 
a wide range of options beyond MedPAC's recommendations. In addition, 
the commenters recommended that CMS' review include the reasons that 
CMS replaced the BLS data with cost report data in the 1980s.
     Commenters commended CMS for the open door forum on the 
wage index held in May 2008 and believed that, given the importance the 
wage index has on hospital payment and the need for reform, the 
industry and interested stakeholders be given every opportunity for 
input through such open door forums. The commenters recommended 
transparency in the process and that CMS provide ample time for public 
review and comment on the study and any proposals stemming from CMS' 
and Acumen's study results.
     Several commenters suggested alternatives to the MedPAC 
recommendations and CMS proposals. For example, some commenters 
recommended that CMS implement a stop-loss to reduce wage index 
decreases from one year to the next. The commenters explained that a 
stop-loss would reduce volatility and increase predictability within 
the hospital wage index. In addition, many commenters expressed the 
need for a transition period for any changes to the wage index to 
ensure less volatility in the wage index and prevent significant 
reallocation of Medicare funds.
    Response: We appreciate the many comments we received regarding 
MedPAC's recommendations and the CMS/Acumen study and analysis of 
reforming the wage index. At this time, because Acumen has not yet 
completed all of its research and analysis and because we have not 
fully analyzed the MedPAC recommendations, we are neither proposing nor 
finalizing any changes in response to the specific MedPAC 
recommendations. As stated above, as we study wage index reform in 
further depth, we plan to consider all of the public comments on the 
recommendations received during the rulemaking cycle. We plan to 
include our assessment of the MedPAC recommendations, along with any 
additional recommendations for further reforming the wage index, in the 
FY 2010 IPPS proposed rule.
e. Impact Analysis of Using MedPAC's Recommended Wage Index
    Acumen conducted an analysis comparing use of the MedPAC 
recommended wage indices to the current CMS wage index. In the 
following discussion, we use a variety of terminology to refer to the 
wage indices recommended by MedPAC, as well as the wage indices 
currently used by CMS.
     When we refer to MedPAC's ``hospital compensation index'' 
or ``compensation index'', we are discussing the wage index that MedPAC 
developed that includes an adjustment to account for differences in the 
ratio of benefits to wages in different labor market areas. MedPAC 
developed this ratio of benefits using Medicare cost report data.
     When we refer to MedPAC's recommended ``wage index'', we 
are discussing the MedPAC-developed index without any adjustment for 
nonwage benefits. This wage index was developed using BLS data.
     When we refer to CMS' ``pre-reclassification wage index'' 
or ``pre-reclassification, pre-floor wage index'', we are discussing 
the wage index developed by CMS but without any adjustments for 
geographic reclassifications or the rural floor. This wage index also 
does not include any adjustments for outmigration, section 508 
reclassifications, Lugar redesignations, section 401 urban-to-rural 
reclassifications, or for any special exceptions.
     When we refer to CMS' ``final wage index'', we are 
discussing the wage index developed by CMS that is the final wage index 
received by or to be received by a hospital. Thus, this wage index does 
account for all geographic reclassifications as well as the rural 
floor. This final wage index also includes any adjustments as a result 
of outmigration, section 508 reclassifications, Lugar redesignations, 
section 401 urban-to-rural reclassifications, or any other special 
exceptions.
    Acumen analyzed and compared all four of the wage indices discussed 
above. In other words, Acumen compared (A) CMS' pre-reclassification, 
pre-floor wage index for FY 2008 (which was provided by CMS and is 
based on hospital cost reports from FY 2004) and CMS' final wage index 
for FY 2008 with (B) both the MedPAC recommended hospital compensation 
index and wage index for FY 2007. Acumen's comparisons of the CMS wage 
index to the MedPAC recommended indices indicate the effects of various 
components of the alternative wage indices. All of the comparisons 
reflect differences between the CMS and BLS wage data. The comparison 
of the CMS pre-reclassification index to the MedPAC compensation index 
reflects the additional impact of MedPAC's method of using county level 
adjustors to smooth differences in index values among the CMS wage 
areas. The comparison of the CMS pre-reclassification index to the 
MedPAC recommended wage index includes the effect of county-level 
smoothing and indicates the incremental effect of removing the MedPAC 
adjustment for benefits. The comparison of the CMS final wage index to 
the MedPAC recommended wage index adds the incremental effect of 
geographic reclassifications and other wage index exceptions (for 
example, the rural and imputed floors) to the preceding comparison. 
Finally, the comparison of the CMS final wage index to the MedPAC 
recommended compensation index yields the combined effects of all the 
differences between the two indices.
    First, Acumen analyzed the overall impacts of the MedPAC 
recommended indices. Acumen conducted the analysis at two levels: the 
hospital level and the county level. At the hospital level, Acumen 
analyzed all four comparisons described above. However, at the county 
level, Acumen did not include comparisons using the CMS final wage 
index because it includes reclassifications and other changes which are 
granted to hospitals, not counties. As a result, hospitals in the same 
county or wage area can have different final index values. Acumen's 
analysis was based on 3,426 hospitals, for which all four wage index 
values were available (the CMS pre-reclassification wage index, the CMS

[[Page 48567]]

final wage index, the MedPAC recommended hospital wage index, and the 
MedPAC recommended hospital compensation index), and on the 1,595 
counties in which these hospitals are located.
    Second, Acumen estimated the impact for several subgroups of 
hospitals and counties. At the hospital level, Acumen assessed the 
impact by geographic area (for example, urban hospitals and rural 
hospitals), hospital size (number of beds), geographic region, teaching 
status, DSH status, SCH status, RRC status, MDH status, type of 
ownership (government, proprietary, voluntary), and reclassification 
status. At the county level, Acumen presented results for metropolitan 
area counties and rural counties.
    Third, Acumen calculated the change in the wage index that each 
hospital (or county) could expect to experience from adopting the 
MedPAC recommendations and reported statistics on these expected 
differences (mean, median, standard deviation, minimum and maximum). 
Acumen did not model changes in Medicare payments that would result 
from using different wage indices. Instead, Acumen normalized all four 
wage indices by setting their discharge weighted means equal to 1.00. 
Normalization puts all four wage indices on the same scale so that 
differences in wage index values between one index and another index 
are directly comparable. As a result, the wage index differences 
reported by Acumen imply payment differences, but do not precisely 
measure the magnitude of those payment differences.
    The main findings of Acumen's impact analysis are summarized as 
follows:
     Adopting the MedPAC recommendations would reduce the 
differentials between wage index values across geographic areas. Both 
the MedPAC wage and compensation indices are less dispersed than either 
the CMS pre-reclassification wage index or the final wage index.
     Under either of the MedPAC recommended indices, 
differences between the highest and lowest wage index hospitals would 
be reduced. For example, the range or difference that exists from the 
highest wage index hospital to the lowest wage index hospital (the 
``high-low range'') under the MedPAC compensation index (0.752 versus 
1.499, or a difference of 0.747) is roughly 11 percent smaller than the 
high-low range in the CMS final wage index (0.732 versus 1.569, or a 
difference of 0.837). Using the CMS pre-reclassification wage index as 
a comparison (with a high-low range of 0.716 versus 1.600), the MedPAC 
recommended compensation index is roughly 16 percent smaller. The 
minimum value of the MedPAC recommended compensation index (0.752) is 
roughly 5 percent larger than the minimum value of the CMS pre-
reclassification wage index (0.716), and the maximum value of the 
MedPAC recommended compensation index (1.499) is roughly 6 percent less 
than the maximum value of the CMS pre-reclassification index (1.600).
     Adopting the MedPAC recommendations would also lower the 
wage dispersion among both rural and urban hospitals (whether 
classified by geography or payment), among hospitals of all sizes, and 
among all hospitals categorized by teaching status, DSH status, 
ownership status, and Medicare utilization status. These findings are 
generally consistent, regardless of whether the MedPAC recommended 
compensation index is compared to the CMS final wage index or to the 
CMS pre-reclassification wage index.
     Adopting the MedPAC recommendations would have a 
differential impact on urban hospitals across geographic regions of the 
country. In moving from the CMS final wage index to the MedPAC 
compensation index, the largest reduction in standard deviations would 
occur for urban hospitals in the New England region (-19.0 percent), 
the Middle Atlantic region (-27.8 percent), and the Pacific region (-
19.0 percent). However, for urban hospitals in the West North Central 
region, the standard deviation of wage index values would increase by 
11.7 percent.
     Adopting the MedPAC recommendations would decrease the 
standard deviation among hospitals with most types of 
reclassifications. For example, compared to the CMS final wage index, 
the MedPAC compensation index would reduce the standard deviation by 
11.6 percent.
     The adoption of the MedPAC recommended indices would lead 
a substantial number of hospitals to experience a large change in their 
index values in the transition. If the MedPAC compensation index is 
compared to the CMS final wage index, 37 percent of all hospitals would 
see either increases or decreases of more than 5 percent. For 
approximately 34 percent of the reclassified hospitals (or 278 
hospitals), wage index values would decrease by more than 5 percent. 
Reclassified hospitals comprise more than one-half of all hospitals 
that would likely experience wage index decreases greater than 5 
percent in moving from the CMS final wage index to the MedPAC 
compensation index.
     Under a move from the CMS pre-reclassification wage index 
to the MedPAC recommended compensation index, counties in rural areas 
would experience fewer decreases and more increases in their wage index 
compared to counties in urban areas. (As noted above, county level 
comparisons were not performed using the CMS final wage index.)
    The above findings are discussed in more detail in Acumen's interim 
report, which will be available after the publication of this final 
rule, at the Web site: http://www.acumenllc.com/reports/cms.
2. CMS Proposals and Final Policy Changes in Response to Requirements 
Under Section 106(b) of the MIEA-TRHCA
    As discussed in section III.A. of this preamble, the purpose of the 
hospital wage index is to adjust the IPPS standardized payment to 
reflect labor market area differences in wage levels. The geographic 
reclassification system exists in order to assist ``hospitals which are 
disadvantaged by their current geographic classification because they 
compete with hospitals that are located in the geographic area to which 
they seek to be reclassified'' (56 FR 25469). Geographic 
reclassification is established under section 1886(d)(10) of the Act 
and is implemented through 42 CFR part 412, subpart L. (We refer 
readers to section III.I. of this preamble for a detailed discussion of 
the geographic reclassification system and other area wage index 
exceptions.)
    In its June 2007 Report to Congress, MedPAC discussed its findings 
that geographic reclassification, and numerous other area wage index 
exceptions added to the system over the years, have created major 
complexities and ``troubling anomalies'' in the hospital wage index. A 
review of the IPPS final rules reveals a long history of legislative 
changes that have permitted certain hospitals, that otherwise would not 
be able to reclassify under section 1886(d)(10) of the Act, to receive 
a higher wage index than calculated for their geographic area. MedPAC 
reports that more than one-third of hospitals now receive a higher wage 
index due to geographic reclassification or other wage index 
exceptions. We are concerned about the integrity of the current system, 
and agree with MedPAC that the process has become burdensome.
    As noted above, MedPAC recommended the elimination of geographic 
reclassification and other

[[Page 48568]]

wage index exceptions. In addition, the President's FY 2009 Budget 
included a proposal to apply the geographic reclassification budget 
neutrality requirement at the State level rather than by adjusting the 
standardized rate for hospitals nationwide. Given the language in 
section 1886(d)(10) of the Act establishing the MGCRB, we believe a 
statutory change would be required to make these changes. However, we 
do have the authority to make some regulatory changes to the 
reclassification system. These regulatory changes are discussed below. 
We note that these changes do not preclude future consideration of the 
MedPAC recommendations discussed in section III.B.1. of this preamble, 
when the recommendations could be implemented administratively.
a. Proposed and Final Revision of the Reclassification Average Hourly 
Wage Comparison Criteria
    Regulations at 42 CFR 413.230(d)(1) set forth the average hourly 
wage comparison criteria that an individual hospital must meet in order 
for the MGCRB to approve a geographic reclassification application. Our 
current criteria (requiring an urban hospital to demonstrate that its 
average hourly wage is at least 108 percent of the average hourly wage 
of hospitals in the area in which the hospital is located and at least 
84 percent of the average hourly wage of hospitals in the area to which 
it seeks redesignation) were adopted in the FY 1993 IPPS final rule (57 
FR 39825). In that final rule, we explained that the 108 percent 
threshold ``is based on the national average hospital wage as a 
percentage of its area wage (96 percent) plus one standard deviation 
(12 percent).'' We also explained that we would use the 84-percent 
threshold to reflect the average hospital wage of the hospital as a 
percentage of its area wage less one standard deviation. We stated that 
``to qualify for a wage index reclassification, a hospital must have an 
average hourly wage that is more than one national standard deviation 
above its original labor market area and not less than one national 
standard deviation below its new labor market area'' (57 FR 39770). In 
response to numerous public comments we received, we expressed our 
policy and legal justifications for adopting the specific thresholds. 
Among other things, we stated that geographic reclassifications must be 
viewed not just in terms of those hospitals that are reclassifying, but 
also in terms of the nonreclassifying hospitals that, through a budget 
neutrality adjustment, are required to bear a financial burden 
associated with the higher wage indices received by those hospitals 
that reclassify. We also indicated that the Secretary has ample legal 
authority under section 1886(d)(10) of the Act to set the wage 
comparison thresholds and to revise such thresholds upon further 
review. We refer readers to that final rule for a full discussion of 
our justifications for the standards.
    In the FY 2000 IPPS final rule (65 FR 47089 through 47090), the 
wage comparison criteria for rural hospitals seeking individual 
hospital reclassifications were reduced to 82 percent and 106 percent 
to compensate for the historic economic underperformance of rural 
hospitals. The 2-percent drop in both thresholds was determined to 
allow a significant benefit to some hospitals that were close to 
meeting the existing criteria but would not make the reclassification 
standards overly liberal for rural hospitals.
    CMS had not evaluated or recalibrated the average hourly wage 
criteria for geographic reclassification since they were established in 
FY 1993. In consideration of the MIEA-TRHCA requirements and MedPAC's 
finding that over one-third of hospitals are receiving a reclassified 
wage index or other wage index adjustment, we decided to reevaluate the 
average hourly wage criteria for geographic reclassification. We ran 
simulations with more recent wage data to determine what would be the 
appropriate average hourly wage criteria. We found that the average 
hospital average hourly wage as a percentage of its area's wage has 
increased from approximately 96 percent in FY 1993 to closer to 98 
percent over FYs 2006, 2007, and 2008 (97.8, 98.1, and 98.1 percent, 
respectively). We also determined that the standard deviation has been 
reduced from approximately 12 percent in FY 1993 to closer to 10 
percent over the same 3-year period (10.7, 10.3, and 10.1 percent, 
respectively); that is, assuming normal distributions, approximately 68 
percent of all hospitals would have an average hourly wage that 
deviates less than 10 percentage points above or below the mean. This 
assessment indicates that the new baseline criteria for 
reclassification should be set to 88/108 percent. While the 108 
criterion does not require adjustment, the current 84 percent standard 
is too low a threshold to serve the purpose of establishing wage 
comparability with a proximate labor market area.
    To assess the impact that these changes would have had on hospitals 
that reclassified in FY 2008, we ran models that set urban individual 
reclassification standards to 88/108 percent and the county group 
reclassification standard to 88 percent. We retained the 2-percent 
benefit for rural hospitals by setting an 86/106 percent standard. We 
used 3-year average hourly wage figures from the 2005, 2006, and 2007 
wage surveys and compared them to 3-year average hourly wage figures 
for CBSAs over the same 3-year period.
    Of the 295 hospitals that applied for and received individual 
reclassifications in FY 2008, 45 of them (15.3 percent) would not meet 
the proposed 88/86 percent threshold. Of the 66 hospitals that applied 
for and received county group reclassification in FY 2008, 6 hospitals 
(9.1 percent) in 3 groups would not have qualified with the new 
standards. We also ran comparisons for hospitals that reclassified in 
FY 2006 and FY 2007 to determine if they would have been able to 
reclassify in FY 2008, using 3-year averages available in FY 2008. We 
found that, of all hospitals that were reclassified in FY 2008 (that 
is, applications approved for FYs 2006 through 2008), 14.7 percent of 
individual reclassifications and 8.5 percent of county group 
reclassification would not have qualified to reclassify in FY 2008.
    Section 106 of MIEA-TRHCA requires us to propose revisions to the 
hospital wage index system after considering the recommendations of 
MedPAC. To address this requirement, in the FY 2009 IPPS proposed rule 
(73 FR 23620), we proposed that the 84/108 criteria for urban hospital 
reclassifications and the 82/106 criteria for rural hospital 
reclassifications be recalibrated using the methodology published in 
the FY 1993 final rule and more recent wage data (that is, data used in 
computing the FYs 2006, 2007, 2008 wage indices). As we stated in the 
proposed rule, we believe that hospitals that are seeking to reclassify 
to another area should be required to demonstrate more similarity to 
the area than the current criteria permit, and our recent analysis 
demonstrates that those criteria are no longer appropriate. Therefore, 
we proposed to change the criterion for the comparison of a hospital's 
average hourly wage to that of the area to which the hospital seeks 
reclassification to 88 percent for urban hospitals and 86 percent for 
rural hospitals for new reclassifications beginning with the FY 2010 
wage index and, accordingly, revise our regulations at 42 CFR 412.230 
to reflect these changes. The criterion for the comparison of a 
hospital's average hourly wage to that of its geographic area would be 
unchanged

[[Page 48569]]

(108 percent for urban hospitals and 106 percent for rural hospitals). 
We also proposed that, when there are significant changes in labor 
market area definitions, such as CMS' adoption of new OMB CBSA 
definitions based upon the decennial census (69 FR 49027), we would 
again reevaluate and, if warranted, recalibrate these criteria. This 
would allow CMS to consider the effects of periodic changes in labor 
market boundaries and provide a regular timeline for updating and 
validating the reclassification criteria. Finally, we proposed to 
adjust the 85 percent criterion for both urban and rural county group 
reclassifications to be equal to the proposed 88 percent standard for 
urban reclassifications, and to revise the regulations at 42 CFR 
412.232 and 412.234 to reflect the change. The urban and rural county 
group average hourly wage standard has always been equivalent for both 
urban and rural county groups and has always been 1 percent higher than 
the 84 percent urban area individual reclassification standard. We 
proposed to continue the policy of having an equivalent wage comparison 
criterion for both urban and rural county groups, as these groups have 
always used the same wage comparison criteria. We also proposed to use 
the individual urban hospital reclassification standard of 88 percent 
because this threshold would ensure that the hospitals in the county 
group are at least as comparable to the proximate area as are 
individual hospitals within their own areas. In addition, we indicated 
that we do not believe it would be appropriate to have a group 
reclassification standard lower than the individual reclassification 
standards, thus potentially creating a situation where all of the 
hospitals in a county could reclassify, even though no single hospital 
within such county would be able to meet any average hourly wage-
related comparisons for an individual reclassification.
    We considered raising the group reclassification criterion to 89 
percent in order to preserve the historical policy of the standard 
being set at 1 percent higher than the individual reclassification 
standard. However, we determined that making the group standard equal 
to the individual standard would adequately address our stated 
concerns.
    The proposed changes in the reclassification criteria would apply 
only to new reclassifications beginning with the FY 2010 wage index. 
Any hospital or county group that is in the midst of a 3-year 
reclassification in FY 2010 would not be affected by the proposed 
criteria change until they reapply for a geographic reclassification. 
Therefore, we proposed that the effective date for these changes would 
be September 1, 2008, the deadline for hospitals to submit applications 
for reclassification for the FY 2010 wage index.
    Comment: The majority of commenters did not support CMS' proposal 
to revise the average hourly wage criteria because of concern that the 
policy would make achieving geographic reclassification more difficult 
for some providers. Most commenters stated that such proposals should 
be delayed and incorporated into a more comprehensive reform framework. 
The commenters also expressed concerns that such a proposal would 
further destabilize an already highly variable wage index system, and 
would make provider operations and planning more onerous and result in 
detrimental impacts on quality of care. Although some commenters 
supported CMS using more recent data to analyze the reclassification 
criteria, they questioned whether CMS performed appropriate statistical 
analysis. The commenters requested additional study and impact analyses 
to assure that provider-to-CBSA average hourly wage ratios (the basis 
for the reclassification average hourly wage criteria) were indeed 
normally distributed, as was assumed by the original methodology.
    Response: We do not believe that our commitment to examine further 
broad-based reform requires us to postpone specific reclassification 
criteria changes that would enhance labor market integrity under the 
current system. It is not our intention to destabilize the wage index 
system, but to instead implement consistent and meaningful criteria to 
standardize a reclassification process that analysis proves no longer 
accomplishes its stated purpose. The MedPAC report on the Medicare 
hospital wage index reform specifically cited the fact that a large 
percentage of the wage index variation between its proposed 
methodologies and the current system occurred relative to 
reclassifications and other wage index exceptions. This suggests that 
the current reclassification system has a strong causal connection to 
the large variations and inconsistencies that are often observed in the 
Medicare hospital wage index system. Although some hospitals will 
likely no longer be able to reclassify with the new standards, revising 
the reclassification average hourly wage comparison criteria is not 
only well within the authority of CMS under section 1886(d)(10)(D) of 
the Act, but it also reflects what we believe to be a more reasonable 
reclassification threshold based on the most recent data.
    In response to concerns expressed about the assumptions and 
validity of our methodology, we refer to the chart at the end of this 
response. We agree that, in using standard deviations from the mean to 
establish threshold criteria, it is important for the data to be 
normally distributed (for example, a bell-shaped curve). While some 
commenters stated that a mean of 98 percent (versus a mean of 100 
percent or 1.00) shows that the distribution was necessarily skewed, 
using FY 2008 data, we found that the analyzed ratios formed a 
consistent bell-curve and demonstrated only a minor negative skew which 
tested well within the bounds of statistical significance of a normal 
distribution. Rural hospitals show a greater variability and less 
central tendency than urban providers. However, even if the original 
methodology was applied to urban and rural providers separately, the 
mean and standard deviation would support a comparison criterion still 
more restrictive than the proposed 86-percent standard for rural 
providers. Furthermore, additional statistical analysis would suggest 
that the 106-percent standard is not restrictive enough for rural 
providers. Certain outliers are removed from the chart at the end of 
this response to provide a clearer visual representation. Inclusion or 
exclusion of these outliers did not greatly affect the statistical 
significance of the analysis. With the nearly perfectly distributed 
nature of the comparison data, and the additional 2 percent benefit 
that rural providers receive, we are not convinced that an alternative 
methodology would yield a truer representation of typical variations in 
any given labor market area.

[[Page 48570]]

[GRAPHIC] [TIFF OMITTED] TR19AU08.005

    Comment: Some commenters requested CMS to specifically address the 
impact on rural providers and RRCs.
    Response: Rural providers would be more likely to fail to meet 
reclassification standards. More than half of the hospitals currently 
receiving geographic reclassification are located in rural areas, while 
less than one-third of all IPPS hospitals are located in rural CBSAs. 
Therefore, it is to be expected that the proposed criteria change would 
affect a higher proportion of rural providers. However, we cannot fully 
analyze such a specific impact on rural providers because the 35-mile 
reclassification proximity requirement makes it quite possible that 
many rural providers would have additional reclassification 
opportunities, perhaps to more wage appropriate CBSAs. We also note 
that our proposal did not affect benefits currently afforded to RRCs, 
such as waiver of the 106/108 percent standards and limited waiver of 
normal proximity requirements.
    Comment: Other comments cited specific circumstances where 
providers would encounter significant negative impacts not considered 
by CMS when the average hourly wage criteria proposal is implemented in 
conjunction with other wage index proposals. One commenter requested 
that any criteria changes be phased in over the course of multiple 
fiscal years.
    Response: We believe that the overall benefits of maintaining 
appropriate reclassification standards will improve the overall wage 
index payment system. If some hospitals have been benefiting from 
reclassifying to labor market areas which are not statistically 
appropriate on the basis of their average hourly wage data, such 
reclassifications have been at the expense of all other providers 
because of the geographic reclassification budget neutrality 
adjustment.
    After consideration of the public comments we received, we are 
adopting in this final rule the policy to adjust the reclassification 
average hourly wage standard, comparing a reclassifying hospital's (or 
county hospital group's) average hourly wage relative to the average 
hourly wage of the area to which it seeks reclassification. However, we 
will be phasing in the adjustment over two years. For the first 
transitional year, FY 2010, the average hourly wage standards will be 
changed to 86 percent for urban and group reclassifications and to 84 
percent for rural hospitals. In the second year, FY 2011, the average 
hourly wage standards will be changed to 88 percent for urban and group 
reclassifications and to 86 percent for rural hospitals (revised 
Sec. Sec.  412.230, 412.232, and 412.234). The purpose of the wage 
index is to provide, as accurate as possible, a measure of geographic 
labor cost variations. The reclassification process was intended to 
provide hospitals that, due to imperfections in the labor market 
boundaries and/or definitions, compete with hospitals in higher waged 
labor market areas. It is a fundamental flaw in the reclassification 
system if payments are inappropriately redistributed because hospitals 
without statistically comparable labor costs are reclassified to areas 
with higher wage index values. Therefore, for reclassifications 
beginning in FY 2010 (for which the application deadline is September 
2, 2008), the transitional average hourly wage comparison criteria will 
be in effect. For reclassifications beginning in FY 2011, the new 
average hourly wage comparison criteria will be fully in effect.
b. Within-State Budget Neutrality Adjustment for the Rural and Imputed 
Floors
    Section 4410 of the Balanced Budget Act of 1997 (BBA) established 
the rural floor by requiring that the wage index for a hospital in an 
urban area of a State cannot be less than the area wage index received 
by rural hospitals in that State. Section 4410(b) of the BBA imposed 
the budget neutrality requirement and stated that the Secretary shall 
``adjust the area wage index referred to in subsection (a) for 
hospitals not described in such subsection.'' Therefore, in order to 
compensate for the increased wage indices of urban hospitals receiving 
the rural floor, a nationwide budget neutrality adjustment is applied 
to the wage index to account for the additional payment to these 
hospitals. As a result, urban hospitals that qualify for their State's 
rural floor wage index receive enhanced payments at the expense of all 
rural hospitals nationwide and all other urban hospitals that do not 
receive their State's rural floor. Tentatively, for the final wage 
index, we find that 277 hospitals in 28 States would receive the rural 
floor. (Due to the intervening requirements of section 124 of Pub. L. 
110-275, these numbers could change in the final FY 2009 wage index to 
be published in a separate Federal Register notice subsequent to this 
final rule.) The first chart below lists the percentage of total 
payments each State could either

[[Page 48571]]

receive or contribute to fund the current rural floor and imputed floor 
provisions with national budget neutrality adjustments (as indicated in 
the discussion of the imputed floor below in this section III.B.2.b.). 
The second chart below provides a graphical depiction of the tentative 
FY 2009 impacts.

 FY 2009 IPPS Estimated Payments With Transition to Within-State Rural Floor and Imputed Floor Budget Neutrality
----------------------------------------------------------------------------------------------------------------
                                                                                New policy
                                                                              application of
                                                                             rural floor and
                                                           Former policy      imputed rural
                                                           application of    floor with blend
                                                           national rural    of 80% national   Net effect of the
                         State                           floor and imputed    and 20% state-    change in policy
                                                            floor budget     specific budget      for FY 2009
                                                             neutrality         neutrality
                                                                              compared to no
                                                                             rural or imputed
                                                                               rural floor
----------------------------------------------------------------------------------------------------------------
Alabama................................................               -0.2               -0.2                  0
Alaska.................................................                  0                  0                  0
Arizona................................................               -0.2               -0.2                  0
Arkansas...............................................               -0.2               -0.2                  0
California.............................................                0.8                0.7               -0.2
Colorado...............................................                  0                  0                  0
Connecticut............................................                2.1                1.7               -0.4
Delaware...............................................               -0.2               -0.2                  0
Washington, DC.........................................               -0.2               -0.2                  0
Florida................................................               -0.1               -0.1                  0
Georgia................................................               -0.2               -0.2                  0
Hawaii.................................................               -0.2               -0.1                  0
Idaho..................................................               -0.2               -0.1                  0
Illinois...............................................               -0.2               -0.2                  0
Indiana................................................               -0.2               -0.1                  0
Iowa...................................................                  0                  0                  0
Kansas.................................................               -0.2               -0.1                  0
Kentucky...............................................               -0.2               -0.1                  0
Louisiana..............................................               -0.2               -0.1                  0
Maine..................................................               -0.2               -0.1                  0
Massachusetts..........................................               -0.2               -0.2                  0
Michigan...............................................               -0.2               -0.2                  0
Minnesota..............................................               -0.2               -0.2                  0
Mississippi............................................               -0.2               -0.2                  0
Missouri...............................................               -0.2               -0.1                  0
Montana................................................               -0.1               -0.1                  0
Nebraska...............................................               -0.2               -0.1                  0
Nevada.................................................               -0.2               -0.2                  0
New Hampshire..........................................                0.8                0.7               -0.2
New Jersey.............................................                0.7                0.5               -0.2
New Mexico.............................................               -0.1               -0.1                  0
New York...............................................               -0.2               -0.2                  0
North Carolina.........................................               -0.2               -0.2                  0
North Dakota...........................................                0.1                0.1                  0
Ohio...................................................               -0.2               -0.1                  0
Oklahoma...............................................               -0.2               -0.1                  0
Oregon.................................................               -0.2               -0.2                  0
Pennsylvania...........................................               -0.2               -0.1                  0
Puerto Rico............................................               -0.1               -0.1                  0
Rhode Island...........................................               -0.2               -0.2                  0
South Carolina.........................................               -0.1               -0.1                  0
South Dakota...........................................               -0.2               -0.1                  0
Tennessee..............................................               -0.1                  0                  0
Texas..................................................               -0.2               -0.1                  0
Utah...................................................               -0.2               -0.2                  0
Vermont................................................                3.4                2.7               -0.7
Virginia...............................................               -0.2               -0.2                  0
Washington.............................................               -0.1               -0.1                  0
West Virginia..........................................               -0.1               -0.1                  0
Wisconsin..............................................               -0.1               -0.1                  0
Wyoming................................................                  0                  0                  0
----------------------------------------------------------------------------------------------------------------

BILLING CODE 4120-01-P

[[Page 48572]]

[GRAPHIC] [TIFF OMITTED] TR19AU08.006

BILLING CODE 4120-01-C
    The above charts demonstrate how, at a State-by-State level, the 
rural floor is creating a benefit for a minority of States that is then 
funded by a majority of States, including States that are 
overwhelmingly rural in character. The rural floor was established to 
address anomalous occurrences where certain urban areas in a State have 
unusually depressed wages when compared to the State's rural areas. 
However, as we indicated in the proposed rule, because these 
comparisons occur at the State level, we believe it also would be sound 
policy to make the budget neutrality adjustment specific to the State, 
redistributing payments among hospitals within the State, rather than 
adjusting payments to hospitals in other States.
    In addition, we stated in the proposed rule that we believed a 
statewide budget neutrality adjustment would address the situation we 
discussed in the FY 2008 IPPS final rule with comment period (72 FR 
47324) in which rural CAHs were converting to IPPS status, apparently 
to raise the State's rural wage index to a level whereby all urban 
hospitals in the State would receive the rural floor. Medicare payments 
to CAHs are based

[[Page 48573]]

on 101 percent of reasonable costs, while the IPPS pays hospitals a 
fixed rate per discharge. In addition, as a CAH, a hospital is 
guaranteed to recover its costs, while an IPPS hospital is provided 
with incentives to increase efficiency to cover its costs. Thus, we 
stated that the identified CAHs were converting back to IPPS, even 
though the conversion would not directly benefit them. Because these 
hospitals' wage levels are higher than most, if not all, of the urban 
hospitals in the State, the wage indices for most, if not all, of the 
State's urban hospitals would increase as a result of the rural floor 
provision if the CAHs convert to IPPS status. In simulating the effect 
of the hospitals setting the State's rural floor, we estimated that 
payment to hospitals in the State would increase in excess of $220 
million in a single year. The MedPAC, in its June 2007 Report to the 
Congress stated, ``The fact that the movement of one or two CAHs in or 
out of the [I]PPS system can increase (or decrease) Medicare payments 
by $220 million suggests there is a flaw in the design of the wage 
index system.'' (We refer readers to page 131 of the report.)
    For the above reasons, in the FY 2009 IPPS proposed rule (73 FR 
23622), we proposed to apply a State level rural floor budget 
neutrality adjustment to the wage index beginning in FY 2009. We 
proposed that States that have no hospitals receiving a rural floor 
wage index would no longer have a negative budget neutrality adjustment 
applied to their wage indices. Conversely, hospitals in States with 
hospitals receiving a rural floor would have their wage indices 
downwardly adjusted to achieve budget neutrality within the State. We 
proposed that all hospitals within each State would, in effect, be 
responsible for funding the rural floor adjustment applicable within 
that specific State.
    In the FY 2005 IPPS final rule and the FY 2008 IPPS final rule with 
comment period (69 FR 49109 and 72 FR 47321, respectively), we 
temporarily adopted an ``imputed'' floor measure to address a concern 
by some individuals that hospitals in all-urban States were 
disadvantaged by the absence of rural hospitals. Because no rural wage 
index could be calculated, no rural floor could be applied within such 
States. We originally limited application of the policy to FYs 2005 
through 2007 and then extended it one additional year, through FY 2008. 
In the FY 2009 IPPS proposed rule (73 FR 23623), we proposed to extend 
the imputed floor for 3 additional years, through FY 2011, and to 
revise the introductory text of Sec.  412.64(h)(4) of our regulations 
to reflect this extension. For FY 2009, 26 hospitals in New Jersey 
(33.8 percent) would receive the imputed floor. Rhode Island, the only 
other all-urban State, has no hospitals that would receive the imputed 
floor. In past years, we applied a national budget neutrality 
adjustment to the standardized amount to ensure that payments remained 
constant to payments that would have occurred in the absence of the 
imputed floor policy. As a result, payments to all other hospitals in 
the Nation were adjusted downward to subsidize the higher payments to 
New Jersey hospitals receiving the imputed floor. As the intent of the 
imputed floor is to create a protection to all-urban States similar to 
the protection offered to urban-rural mixed States by the rural floor, 
and the effect of the measure is also State-specific like the rural 
floor, we indicated that we believe that the budget neutrality 
adjustments for the imputed floor and the rural floor should be applied 
in the same manner. Therefore, beginning with FY 2009, we also proposed 
to apply the imputed floor budget neutrality adjustment to the wage 
index and at the State level.
    In the proposed rule, we specifically requested public comments 
from national and State hospital associations regarding the proposals, 
particularly the national associations, as they represent member 
hospitals that are both positively and negatively affected by the 
proposed policies, and were, therefore, in the best position to comment 
on the policy merits of the proposals. We indicated that we would view 
the absence of any comments from the national hospital associations as 
a sign that they do not object to our proposed policies.
    Comment: Some commenters supported the proposal to apply the rural 
floor and imputed floor budget neutrality adjustment on a State basis, 
as opposed to making a national adjustment. A few commenters stated 
that it was not appropriate and competitively unfair for a provider 
receiving a wage index lower than the lowest urban providers in another 
State to have its wage index reduced by CMS to increase payments to the 
other higher paid providers. Other commenters supported CMS's efforts 
to protect hospitals from unwarranted reductions in their wage index 
values due to the current rural floor policy. MedPAC expressed its 
support for CMS's proposed statewide budget neutrality adjustments for 
the rural and imputed floors as an interim step in reforming the wage 
index. MedPAC noted that the rural floor policy itself is troubling 
because it is ``built on a false assumption that hospital wage rates in 
all urban labor markets in a (S)tate are always higher than the average 
hospital wage rate in rural areas of the (S)tate.'' MedPAC agreed with 
CMS that the proposed State level budget neutrality adjustment ``would 
improve fairness and reduce opportunities to game the wage index 
system.''
    However, the majority of commenters, including most national and 
State hospital associations, did not support the proposal to apply a 
State level budget neutrality adjustment for the rural and imputed 
floors. Many commenters stated that a major policy initiative should be 
postponed and included in discussions and planning for more broad-based 
wage index reform. They suggested that such a policy decision by CMS 
only makes the Medicare wage index system more variable and unstable, 
creating onerous difficulties for hospital administrators to plan 
operations and potentially harming the quality of care provided. Many 
of the commenters, particularly in States that benefit most from the 
current national budget neutrality adjustment for the rural and imputed 
floors, cited the financial losses that would result from our proposal.
    Some commenters stated that it is inconsistent with prior CMS 
policy to apply any wage index adjustment on a State-by-State basis. 
They suggested that, because the intent of Congress for the rural floor 
was to address ``anomalous'' situations where urban areas may have 
lower wages than nearby rural areas, the adjustment should be shared by 
all hospitals to maximize the benefit of the floor, while minimizing 
the individual costs to fund it. Similarly, the commenters contended 
that, ``budget neutrality must remain a national policy in accordance 
with current practice in order to retain balance and symmetry within a 
complex wage index environment.''
    Response: We continue to believe that, while the majority of wage 
index budget neutrality adjustments have been applied on a nationwide 
basis, the particular nature of the rural and imputed floors, for which 
applicability is determined on a State level basis, is better addressed 
by a within-State adjustment. The current system requires hospitals 
nationwide to fund an adjustment to the Medicare payment system to 
address unrelated situations in a minority of States. The variances 
between urban and rural wage indices within a State have no relevant 
causal connection to the wage indices of another State, and it does not 
follow that such variances should be adjusted

[[Page 48574]]

through a national budget neutrality adjustment.
    Therefore, we have decided to adopt our proposal for State level 
budget neutrality for the rural and imputed floors as final in this 
final rule, to be effective beginning with the FY 2009 wage index. 
However, in response to the public's concerns and taking into account 
the potentially drastic payment cuts that may occur to hospitals in 
some States, we have decided to phase in, over a 3-year period, the 
transition from the national budget neutrality adjustment to the State 
level budget neutrality adjustment. In FY 2009, hospitals will receive 
a blended wage index that is 20 percent of a wage index with the State 
level rural and imputed floor budget neutrality adjustment and 80 
percent of a wage index with the national budget neutrality adjustment. 
In FY 2010, the blended wage index will reflect 50 percent of the State 
level adjustment and 50 percent of the national adjustment. In FY 2011, 
the adjustment will be completely transitioned to the State level 
methodology.
    We are incorporating this final policy in our regulation text at 
new Sec.  412.64(e)(4). Specifically, we are providing that CMS makes 
an adjustment to the wage index to ensure that aggregate payments after 
implementation of the rural floor under section 4410 of the Balanced 
Budget Act of 1997 (Pub. L. 105-33) and the imputed rural floor under 
Sec.  412.64(h)(4) are made in a manner that ensures that aggregate 
payments to hospitals are not affected. Beginning October 1, 2008, such 
adjustments will transition from a nationwide to a statewide 
adjustment, with a statewide adjustment fully in place by October 1, 
2011.
    Comment: While some commenters supported CMS's efforts to address 
the issue of potential gaming of the rural floor, many commenters 
indicated that it should not be the sole impetus for within-State rural 
floor budget neutrality because it would unfairly penalize nongaming 
providers.
    Response: As discussed above, as well as in the FY 2008 final and 
FY 2009 proposed rules (72 FR 47321 and 73 FR 23620, respectively), 
while the gaming issue was an important concern that we sought to 
address, it was neither the only nor the primary justification for 
proposing the within-State budget neutrality adjustment. We believe 
that, for all providers, the within-State budget neutrality policy is 
more equitable than the national adjustment because it concentrates the 
budget neutrality at the State level for a statutory provision that 
applies benefits at the State level. We note that the statute requires 
that total payments with a rural floor do not exceed payments that 
would have been made in the absence of a floor, but does not mandate a 
national adjustment.
    Comment: One commenter stated that adoption of a within-State 
application of budget neutrality will further complicate the 
methodology for calculating the wage index, particularly for hospitals 
in CBSAs that cross State lines, or that reclassify to a CBSA in 
another State. The commenter expressed concern that the proposal will 
lead to less transparency in the wage index calculation and make it 
more difficult for hospitals to evaluate their most beneficial options 
in regard to reclassification and other wage index exceptions.
    Response: Application of the rural floor already requires that, for 
CBSAs that cross State lines, two or more wage indices may need to be 
calculated in order to reflect the reality of a rural floor applying in 
one or more of the States. (We refer readers to Table 4A, to be 
published in a separate Federal Register notice subsequent this final 
rule, to see how State location may affect the wage index within a 
single CBSA.) A State's rural or imputed floor budget neutrality 
adjustment applies to any hospital that is geographically located in 
the State, even when a hospital is reclassified or redesignated to a 
CBSA in another State. We explain in section II.A. of the Addendum to 
this final rule how within-State budget neutrality adjustments for the 
rural and imputed floors are calculated and how the transitional 
blended adjustment will be implemented.
    Comment: Some commenters disagreed with CMS' decision to further 
extend the imputed floor policy through FY 2011. The commenters 
contended that the imputed floor is unnecessary and should never have 
been implemented without Congressional mandate. Other commenters 
supported CMS' proposal to extend the imputed floor policy, but some 
supported the extension only on the condition that CMS applies the 
imputed floor budget neutrality adjustment in the same manner that it 
applies the rural floor adjustment.
    Response: As proposed, we are extending the imputed floor for 3 
additional years, through FY 2011. Beginning with the FY 2009 wage 
index in this final rule, we are also applying budget neutrality for 
the imputed floor in the same manner that we apply budget neutrality 
for the rural floor. (We refer readers to the discussion in section 
III.B.2.b. of this preamble.)
    In the proposed rule, we indicated that based on our impact 
analysis of these proposals for FY 2009, of the 49 States (Maryland is 
excluded because it is under a State waiver), the District of Columbia, 
and Puerto Rico, 39 would see either no change or an increase in total 
Medicare payments as a result of applying a budget neutrality 
adjustment to the wage index for the rural and imputed floors at the 
State level rather than the national level. The total payments of the 
remaining 12 States would decrease 0.1 percent to 3.4 percent compared 
to continuing our prior national adjustment policy. For this final 
rule, the full impact analysis of the final policy is reflected in the 
two charts presented in section III.B.2.b. of the preamble of this 
final rule. Table 4D-1, which will be included in a separate Federal 
Register notice subsequent to this final rule reflects the final FY 
2009 State level budget neutrality adjustments for the rural and 
imputed floors for the first year of the 3-year transition of the 
budget neutrality adjustments for these floors from the national level 
to the State level, as discussed above.
c. Within-State Budget Neutrality Adjustment for Geographic 
Reclassification
    As discussed in the FY 2009 IPPS proposed rule (73 FR 23623), the 
FY 2009 President's Budget includes a legislative proposal to apply 
geographic reclassification budget neutrality at the State level 
(available at the Web site: http://www.hhs.gov/budget/09budget/2009BudgetInBrief.pdf under FY 2009 Medicare Proposals, page 54).
    Comment: A number of commenters objected to the legislative 
proposal we discussed in the proposed rule that would apply budget 
neutrality for geographic reclassification at the State level.
    Response: Our discussion of within-State budget neutrality for 
geographic reclassifications related to a legislative proposal included 
in the FY 2009 President's Budget, and not a new proposed 
administrative policy. If such a measure were enacted by the Congress, 
CMS would comply with the law.

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

    The wage index is calculated and assigned to hospitals on the basis 
of the labor market area in which the hospital is located. In 
accordance with the broad discretion under section 1886(d)(3)(E) of the 
Act, beginning with FY 2005, we define hospital labor market areas 
based on the Core-Based Statistical Areas

[[Page 48575]]

(CBSAs) established by OMB and announced in December 2003 (69 FR 
49027). For a discussion of OMB's revised definitions of CBSAs and our 
implementation of the CBSA definitions, we refer readers to the 
preamble of the FY 2005 IPPS final rule (69 FR 49026 through 49032).
    As with the FY 2008 final rule, in the FY 2009 IPPS proposed rule 
(73 FR 23623), we proposed to provide that hospitals receive 100 
percent of their wage index based upon the CBSA configurations. 
Specifically, for each hospital, we proposed to determine a wage index 
for FY 2009 employing wage index data from hospital cost reports for 
cost reporting periods beginning during FY 2005 and using the CBSA 
labor market definitions. We consider CBSAs that are MSAs to be urban, 
and CBSAs that are Micropolitan Statistical Areas as well as areas 
outside of CBSAs to be rural. In addition, it has been our longstanding 
policy that where an MSA has been divided into Metropolitan Divisions, 
we consider the Metropolitan Division to comprise the labor market 
areas for purposes of calculating the wage index (69 FR 49029). We 
proposed to codify this longstanding policy into our regulations at 
Sec.  412.64(b)(1)(ii)(A).
    Comment: One commenter supported the CMS proposal to codify its 
longstanding policy that a Metropolitan Division of an MSA is treated 
as a labor market area for purposes of calculating the wage index.
    Response: We appreciate the commenter's support of our proposal to 
codify this policy in our regulations. In this final rule, we are 
adopting the proposed change under Sec.  412.64(b)(1)(ii)(A) as final.
    On November 20, 2007, OMB announced the revision of titles for 
eight urban areas (OMB Bulletin No. 08-01). The revised titles are as 
follows:
     Hammonton, New Jersey qualifies as a new principal city of 
the Atlantic City, New Jersey CBSA. The new title is Atlantic City-
Hammonton, New Jersey CBSA;
     New Brunswick, New Jersey, located in the Edison, New 
Jersey Metropolitan Division, qualifies as a new principal city of the 
New York-Northern New Jersey-Long Island, New York, New Jersey, 
Pennsylvania CBSA. The new title for the Metropolitan Division is 
Edison-New Brunswick, New Jersey CBSA;
     Summerville, South Carolina qualifies as a new principal 
city of the Charleston-North Charleston, South Carolina CBSA. The new 
title is Charleston-North Charleston-Summerville, South Carolina;
     Winter Haven, Florida qualifies as a new principal city of 
the Lakeland, Florida CBSA. The new title is Lakeland-Winter Haven, 
Florida;
     Bradenton, Florida replaces Sarasota, Florida as the most 
populous principal city of the Sarasota-Bradenton-Venice, Florida CBSA. 
The new title is Bradenton-Sarasota-Venice, Florida. The new CBSA code 
is 14600;
     Frederick, Maryland replaces Gaithersburg, Maryland as the 
second most populous principal city in the Bethesda-Gaithersburg-
Frederick, Maryland CBSA. The new title is Bethesda-Frederick-
Gaithersburg, Maryland;
     North Myrtle Beach, South Carolina replaces Conway, South 
Carolina as the second most populous principal city of the Myrtle 
Beach-Conway-North Myrtle Beach, South Carolina CBSA. The new title is 
Myrtle Beach-North Myrtle Beach-Conway, South Carolina;
     Pasco, Washington replaces Richland, Washington as the 
second most populous principal city of the Kennewick-Richland-Pasco, 
Washington CBSA. The new title is Kennewick-Pasco-Richland, Washington.
    The OMB bulletin is available on the OMB Web site at https://www.whitehouse.gov/OMB--go to ``Bulletins'' or ``Statistical Programs 
and Standards.'' CMS will apply these changes to the IPPS beginning 
October 1, 2008.

D. Occupational Mix Adjustment to the FY 2009 Wage Index

    As stated earlier, section 1886(d)(3)(E) of the Act provides for 
the collection of data every 3 years on the occupational mix of 
employees for each short-term, acute care hospital participating in the 
Medicare program, in order to construct an occupational mix adjustment 
to the wage index, for application beginning October 1, 2004 (the FY 
2005 wage index). The purpose of the occupational mix adjustment is to 
control for the effect of hospitals' employment choices on the wage 
index. For example, hospitals may choose to employ different 
combinations of registered nurses, licensed practical nurses, nursing 
aides, and medical assistants for the purpose of providing nursing care 
to their patients. The varying labor costs associated with these 
choices reflect hospital management decisions rather than geographic 
differences in the costs of labor.
1. Development of Data for the FY 2009 Occupational Mix Adjustment
    On October 14, 2005, we published a notice in the Federal Register 
(70 FR 60092) proposing to use a new survey, the 2006 Medicare Wage 
Index Occupational Mix Survey (the 2006 survey) to apply an 
occupational mix adjustment to the FY 2008 wage index. In the proposed 
2006 survey, we included several modifications based on the comments 
and recommendations we received on the 2003 survey, including (1) 
allowing hospitals to report their own average hourly wage rather than 
using BLS data; (2) extending the prospective survey period; and (3) 
reducing the number of occupational categories but refining the 
subcategories for registered nurses.
    We made the changes to the occupational categories in response to 
MedPAC comments to the FY 2005 IPPS final rule (69 FR 49036). 
Specifically, MedPAC recommended that CMS assess whether including 
subcategories of registered nurses would result in a more accurate 
occupational mix adjustment. MedPAC believed that including all 
registered nurses in a single category may obscure significant wage 
differences among the subcategories of registered nurses, for example, 
the wages of surgical registered nurses and floor registered nurses may 
differ. Also, to offset additional reporting burden for hospitals, 
MedPAC recommended that CMS should combine the general service 
categories that account for only a small percentage of a hospital's 
total hours with the ``all other occupations'' category because most of 
the occupational mix adjustment is correlated with the nursing general 
service category.
    In addition, in response to the public comments on the October 14, 
2005 notice, we modified the 2006 survey. On February 10, 2006, we 
published a Federal Register notice (71 FR 7047) that solicited 
comments and announced our intent to seek OMB approval on the revised 
occupational mix survey (Form CMS-10079 (2006)). OMB approved the 
survey on April 25, 2006.
    The 2006 survey provided for the collection of hospital-specific 
wages and hours data, a 6-month prospective reporting period (that is, 
January 1, 2006, through June 30, 2006), the transfer of each general 
service category that comprised less than 4 percent of total hospital 
employees in the 2003 survey to the ``all other occupations'' category 
(the revised survey focused only on the mix of nursing occupations), 
additional clarification of the definitions for the occupational 
categories, an expansion of the registered nurse category to include 
functional subcategories, and the exclusion of average hourly rate data 
associated with advance practice nurses.

[[Page 48576]]

    The 2006 survey included only two general occupational categories: 
nursing and ``all other occupations.'' The nursing category has four 
subcategories: Registered nurses, licensed practical nurses, aides, 
orderlies, attendants, and medical assistants. The registered nurse 
subcategory includes two functional subcategories: Management personnel 
and staff nurses or clinicians. As indicated above, the 2006 survey 
provided for a 6-month data collection period, from January 1, 2006 
through June 30, 2006. However, we allowed flexibility for the 
reporting period beginning and ending dates to accommodate some 
hospitals' biweekly payroll and reporting systems. That is, the 6-month 
reporting period had to begin on or after December 25, 2005, and end 
before July 9, 2006.
    As we proposed in the FY 2009 IPPS proposed rule (73 FR 23624), we 
are using the entire 6-month 2006 survey data to calculate the 
occupational mix adjustment for the FY 2009 wage index. The original 
timelines for the collection, review, and correction of the 2006 
occupational mix data were discussed in detail in the FY 2007 IPPS 
final rule (71 FR 48008). The revision and correction process for all 
of the data, including the 2006 occupational mix survey data to be used 
for computing the FY 2009 wage index, is discussed in detail in section 
III.K. of the preamble of this final rule.
2. Calculation of the Occupational Mix Adjustment for FY 2009
    For FY 2009 (as we did for FY 2008), we are calculating the 
occupational mix adjustment factor using the following steps:
    Step 1--For each hospital, determine the percentage of the total 
nursing category attributable to a nursing subcategory by dividing the 
nursing subcategory hours by the total nursing category's hours 
(registered nurse management personnel and registered nurse staff 
nurses or clinicians are treated as separate nursing subcategories). 
Repeat this computation for each of the five nursing subcategories: 
registered nurse management personnel; registered nurse staff nurses or 
clinicians; licensed practical nurses; nursing aides, orderlies, and 
attendants; and medical assistants.
    Step 2--Determine a national average hourly rate for each nursing 
subcategory by dividing a subcategory's total salaries for all 
hospitals in the occupational mix survey database by the subcategory's 
total hours for all hospitals in the occupational mix survey database.
    Step 3--For each hospital, determine an adjusted average hourly 
rate for each nursing subcategory by multiplying the percentage of the 
total nursing category (from Step 1) by the national average hourly 
rate for that nursing subcategory (from Step 2). Repeat this 
calculation for each of the five nursing subcategories.
    Step 4--For each hospital, determine the adjusted average hourly 
rate for the total nursing category by summing the adjusted average 
hourly rate (from Step 3) for each of the nursing subcategories.
    Step 5--Determine the national average hourly rate for the total 
nursing category by dividing total nursing category salaries for all 
hospitals in the occupational mix survey database by total nursing 
category hours for all hospitals in the occupational mix survey 
database.
    Step 6--For each hospital, compute the occupational mix adjustment 
factor for the total nursing category by dividing the national average 
hourly rate for the total nursing category (from Step 5) by the 
hospital's adjusted average hourly rate for the total nursing category 
(from Step 4).
    If the hospital's adjusted average hourly rate is less than the 
national average hourly rate (indicating the hospital employs a less 
costly mix of nursing employees), the occupational mix adjustment 
factor is greater than 1.0000. If the hospital's adjusted average 
hourly rate is greater than the national average hourly rate, the 
occupational mix adjustment factor is less than 1.0000.
    Step 7--For each hospital, calculate the occupational mix adjusted 
salaries and wage-related costs for the total nursing category by 
multiplying the hospital's total salaries and wage-related costs (from 
Step 5 of the unadjusted wage index calculation in section III.G. of 
this preamble) by the percentage of the hospital's total workers 
attributable to the total nursing category (using the occupational mix 
survey data, this percentage is determined by dividing the hospital's 
total nursing category salaries by the hospital's total salaries for 
``nursing and all other'') and by the total nursing category's 
occupational mix adjustment factor (from Step 6 above).
    The remaining portion of the hospital's total salaries and wage-
related costs that is attributable to all other employees of the 
hospital is not adjusted by the occupational mix. A hospital's all 
other portion is determined by subtracting the hospital's nursing 
category percentage from 100 percent.
    Step 8--For each hospital, calculate the total occupational mix 
adjusted salaries and wage-related costs for a hospital by summing the 
occupational mix adjusted salaries and wage-related costs for the total 
nursing category (from Step 7) and the portion of the hospital's 
salaries and wage-related costs for all other employees (from Step 7).
    To compute a hospital's occupational mix adjusted average hourly 
wage, divide the hospital's total occupational mix adjusted salaries 
and wage-related costs by the hospital's total hours (from Step 4 of 
the unadjusted wage index calculation in section III.G. of this 
preamble).
    Step 9--To compute the occupational mix adjusted average hourly 
wage for an urban or rural area, sum the total occupational mix 
adjusted salaries and wage-related costs for all hospitals in the area, 
then sum the total hours for all hospitals in the area. Next, divide 
the area's occupational mix adjusted salaries and wage-related costs by 
the area's hours.
    Step 10--To compute the national occupational mix adjusted average 
hourly wage, sum the total occupational mix adjusted salaries and wage-
related costs for all hospitals in the Nation, then sum the total hours 
for all hospitals in the Nation. Next, divide the national occupational 
mix adjusted salaries and wage-related costs by the national hours. The 
FY 2009 occupational mix adjusted national average hourly wage is 
$32.2449.
    Step 11--To compute the occupational mix adjusted wage index, 
divide each area's occupational mix adjusted average hourly wage (Step 
9) by the national occupational mix adjusted average hourly wage (Step 
10).
    Step 12--To compute the Puerto Rico specific occupational mix 
adjusted wage index, follow Steps 1 through 11 above. The FY 2009 
occupational mix adjusted Puerto Rico specific average hourly wage is 
$13.7851.
    The table below is an illustrative example of the occupational mix 
adjustment.
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    Because the occupational mix adjustment is required by statute, all 
hospitals that are subject to payments under the IPPS, or any hospital 
that would be subject to the IPPS if not granted a waiver, must 
complete the occupational mix survey, unless the hospital has no 
associated cost report wage data that are included in the FY 2009 wage 
index.
    For the FY 2008 wage index, if a hospital did not respond to the 
occupational mix survey, or if we determined that a hospital's 
submitted data were too erroneous to include in the wage index, we 
assigned the hospital the average occupational mix adjustment for the 
labor market area (72 FR 47314). We believed this method had the least 
impact on the wage index for other hospitals in the area. For areas 
where no hospital submitted data for purposes of calculating the 
occupational mix adjustment, we applied the national occupational mix 
factor of 1.0000 in calculating the area's FY 2008 occupational mix 
adjusted wage index. We indicated in the FY 2008 IPPS final rule that 
we reserve the right to apply a different approach in future years, 
including potentially penalizing nonresponsive hospitals (72 FR 47314).
    For the FY 2009 wage index, as we proposed, we are handling the 
data for hospitals that did not respond to the occupational mix survey 
(neither the 1st quarter nor 2nd quarter data) in the same manner as 
discussed above for the FY 2008 wage index. In addition, if a hospital 
submitted survey data for either the 1st quarter or 2nd quarter, but 
not for both quarters, we are using the data the hospital submitted for 
one quarter to calculate the hospital's FY 2009 occupational mix 
adjustment factor. Lastly, if a hospital submitted a survey(s), but 
that survey data can not be used because we determine it to be 
aberrant, we also assigned the hospital the average occupational mix 
adjustment for its labor market area. For example, if a hospital's 
individual nurse category average hourly wages were out of range (that 
is, unusually high or low), and the hospital did not provide sufficient 
documentation to explain the aberrancy, or the hospital did not submit 
any registered nurse staff salaries or hours data, we assigned the 
hospital the average occupational mix adjustment for the labor market 
area in which it is located.
    In calculating the average occupational mix adjustment factor for a 
labor market area, we replicated Steps 1 through 6 of the calculation 
for the occupational mix adjustment. However, instead of performing 
these steps at the hospital level, we aggregated the data at the labor 
market area level. In following these steps, for example, for CBSAs 
that contain providers that did not submit occupational mix survey 
data, the occupational mix adjustment factor ranged from a low of 
0.9060 (CBSA 12020, Athens-Clarke County, GA), to a high of 1.0805 
(CBSA 22500, Florence, SC). Also, in computing a hospital's 
occupational mix adjusted salaries and wage-related costs for nursing 
employees (Step 7 of the calculation), in the absence of occupational 
mix survey data, we multiplied the hospital's total salaries and wage-
related costs by the percentage of the area's total workers 
attributable to the area's total nursing category. For FY 2009, there 
are no CBSAs for which we did not have occupational mix data for any of 
its providers.
    In the FY 2007 IPPS final rule, we also indicated that we would 
give serious consideration to applying a hospital-specific penalty if a 
hospital does not comply with regulations requiring submission of 
occupational mix survey data in future years. We stated that we believe 
that section 1886(d)(5)(I)(i) of the Act provides us with the authority 
to penalize hospitals that do not submit occupational mix survey data. 
That section authorizes us to provide for exceptions and adjustments to 
the payment amounts under IPPS as the Secretary deems appropriate. We 
also indicated that we would address this issue in the FY 2008 IPPS 
proposed rule.
    In the FY 2008 IPPS proposed rule, we solicited comments and 
suggestions for a hospital-specific penalty for hospitals that do not 
submit occupational mix survey data. In response to the FY 2008 IPPS 
proposed rule, some commenters suggested a 1-percent to 2-percent 
reduction in the hospital's wage index value or a set percentage of the 
standardized amount. We noted that any penalty that we would determine 
for nonresponsive hospitals would apply to a future wage index, not the 
FY 2008 wage index.
    In the FY 2008 final rule with comment period, we assigned 
nonresponsive hospitals the average occupational mix adjustment for the 
labor market area. For areas where no hospital submitted survey data, 
we applied the national occupational mix adjustment factor of 1.0000 in 
calculating the area's FY 2008 occupational mix adjusted wage index. We 
appreciate the suggestions we received regarding future penalties for 
hospitals that do not submit occupational mix survey data. We stated in 
the FY 2008 final rule with comment period that we may consider 
proposing a policy to penalize hospitals that do not submit 
occupational mix survey data for FY 2010, the first year of the 
application of the new 2007-2008 occupational mix survey, and that we 
expected that any such penalty would be proposed in the FY 2009 IPPS 
proposed rule so hospitals would be aware of the policy before the 
deadline for submitting the data to the fiscal intermediaries/MAC. 
However, in the FY 2009 IPPS proposed rule, we did not propose a 
penalty for FY 2010. Rather, we reserved the right to propose a penalty 
in the FY 2010 IPPS proposed rule, once we collect and analyze the FY 
2007-2008 occupational mix survey data. Hospitals are still on notice 
that any failure to submit occupational mix data for the FY 2007-2008 
survey year may result in a penalty in FY 2010, thus achieving our 
policy goal of ensuring that hospitals are aware of the consequences of 
failure to submit data in response to the most recent survey.
    Comment: Several commenters reiterated the comment they had 
submitted previously with respect to the FY 2008 wage index (72 FR 
47314) that full participation in the occupational mix survey is 
critical, and urged CMS to develop a methodology that encourages 
hospitals to report occupational mix survey data but does not unfairly 
penalize neighboring hospitals. The commenters also suggested that, if 
CMS decides to adopt a penalty for nonresponsive hospitals, CMS should 
establish an appeal process for hospitals with extenuating 
circumstances.
    Response: We appreciate the commenters' continuous support for a 
policy to penalize hospitals that do not submit occupational mix survey 
data. As discussed above, we will consider proposing a penalty for the 
FY 2010 wage index after we analyze the results of the new 2007-2008 
occupational mix survey, for which the data are due to CMS in the fall 
of 2008. (We refer readers to section III.D.3. of this preamble for a 
discussion of the 2007-2008 survey).
    Comment: One commenter suggested that CMS' methodology for 
computing the occupational mix adjustment skews the results. The 
commenter stated that if CMS had selected a different use of the same 
data, a different and perhaps better adjustment could have resulted. 
However, the commenter offered no alternative methodology for computing 
the adjustment.
    Response: We welcome the commenter to submit to us its 
recommendations for computing the occupational mix adjustment, or to 
identify specific components of our

[[Page 48581]]

methodology that it believes are problematic.
3. 2007-2008 Occupational Mix Survey for the FY 2010 Wage Index
    As stated earlier, section 304(c) of Public Law 106-554 amended 
section 1886(d)(3)(E) of the Act to require CMS to collect data every 3 
years on the occupational mix of employees for each short-term, acute 
care hospital participating in the Medicare program. We used 
occupational mix data collected on the 2006 survey to compute the 
occupational mix adjustment for FY 2009. In the FY 2008 IPPS final rule 
with comment period (72 FR 47315), we discussed how we modified the 
occupational mix survey. The revised 2007-2008 occupational mix survey 
provides for the collection of hospital-specific wages and hours data 
for the 1-year period of July 1, 2007, through June 30, 2008, 
additional clarifications to the survey instructions, the elimination 
of the registered nurse subcategories, some refinements to the 
definitions of the occupational categories, and the inclusion of 
additional cost centers that typically provide nursing services. The 
revised 2007-2008 occupational mix survey will be applied beginning 
with the FY 2010 wage index.
    On February 2, 2007, we published in the Federal Register a notice 
soliciting comments on the proposed revisions to the occupational mix 
survey (72 FR 5055). The comment period for the notice ended on April 
3, 2007. After considering the comments we received, we made a few 
minor editorial changes and published the final 2007-2008 occupational 
mix survey on September 14, 2007 (72 FR 52568). OMB approved the survey 
without change on February 1, 2008 (OMB Control Number 0938-0907). The 
2007-2008 Medicare occupational mix survey (Form CMS-10079 (2008)) is 
available on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage, and through the fiscal 
intermediaries/MAC. Hospitals must submit their completed surveys to 
their fiscal intermediaries/MAC by September 2, 2008. The preliminary, 
unaudited 2007-2008 occupational mix survey data will be released in 
early October 2008, along with the FY 2006 Worksheet S-3 wage data, for 
the FY 2010 wage index review and correction process.

E. Worksheet S-3 Wage Data for the FY 2009 Wage Index

    The FY 2009 wage index values (effective for hospital discharges 
occurring on or after October 1, 2008, and before October 1, 2009, and 
to be published in a separate Federal Register notice subsequent to 
this final rule) will be based on the data collected from the Medicare 
cost reports submitted by hospitals for cost reporting periods 
beginning in FY 2005 (the FY 2008 wage index was based on FY 2004 wage 
data).
1. Included Categories of Costs
    The FY 2009 wage index includes the following categories of data 
associated with costs paid under the IPPS (as well as outpatient 
costs):
     Salaries and hours from short-term, acute care hospitals 
(including paid lunch hours and hours associated with military leave 
and jury duty)
     Home office costs and hours
     Certain contract labor costs and hours (which includes 
direct patient care, certain top management, pharmacy, laboratory, and 
nonteaching physician Part A services, and certain contract indirect 
patient care services (as discussed in the FY 2008 final rule with 
comment period (72 FR 47315))
     Wage-related costs, including pensions and other deferred 
compensation costs. We note that, on March 28, 2008, CMS published a 
technical clarification to the cost reporting instructions for pension 
and deferred compensation costs (sections 2140 through 2142.7 of the 
Provider Reimbursement Manual, Part I). These instructions are used for 
developing pension and deferred compensation costs for purposes of the 
wage index, as discussed in the instructions for Worksheet S-3, Part 
II, Lines 13 through 20 and in the FY 2006 final rule (70 FR 47369).
2. Excluded Categories of Costs
    Consistent with the wage index methodology for FY 2008, the wage 
index for FY 2009 also excludes the direct and overhead salaries and 
hours for services not subject to IPPS payment, such as SNF services, 
home health services, costs related to GME (teaching physicians and 
residents) and certified registered nurse anesthetists (CRNAs), and 
other subprovider components that are not paid under the IPPS. The FY 
2009 wage index also excludes the salaries, hours, and wage-related 
costs of hospital-based rural health clinics (RHCs), and Federally 
qualified health centers (FQHCs) because Medicare pays for these costs 
outside of the IPPS (68 FR 45395). In addition, salaries, hours, and 
wage-related costs of CAHs are excluded from the wage index, for the 
reasons explained in the FY 2004 IPPS final rule (68 FR 45397).
3. Use of Wage Index Data by Providers Other Than Acute Care Hospitals 
under the IPPS
    Data collected for the IPPS wage index are also currently used to 
calculate wage indices applicable to other providers, such as SNFs, 
home health agencies, and hospices. In addition, they are used for 
prospective payments to IRFs, IPFs, and LTCHs, and for hospital 
outpatient services. We note that, in the IPPS rules, we do not address 
comments pertaining to the wage indices for non-IPPS providers. Such 
comments should be made in response to separate proposed rules for 
those providers.

F. Verification of Worksheet S-3 Wage Data

    The wage data for the FY 2009 wage index were obtained from 
Worksheet S-3, Parts II and III of the FY 2005 Medicare cost reports. 
Instructions for completing Worksheet S-3, Parts II and III are in the 
Provider Reimbursement Manual (PRM), Part II, sections 3605.2 and 
3605.3. The data file used to construct the wage index includes FY 2005 
data submitted to us as of February 29, 2008. As in past years, we 
performed an intensive review of the wage data, mostly through the use 
of edits designed to identify aberrant data.
    We asked our fiscal intermediaries/MAC to revise or verify data 
elements that resulted in specific edit failures. For the proposed FY 
2009 wage index, we identified and excluded 37 providers with data that 
was too aberrant to include in the proposed wage index, although we 
stated that if data elements for some of these providers were 
corrected, we intended to include some of these providers in the FY 
2009 final wage index. However, because some unresolved data elements 
were included in the proposed FY 2009 wage index, we instructed fiscal 
intermediaries/MACs to complete their data verification of questionable 
data elements and to transmit any changes to the wage data no later 
than April 14, 2008. While the data for four hospitals were resolved, 
the data for two other hospitals were identified as too aberrant to 
include in the final wage index. Therefore, we determined that the data 
for 35 hospitals should not be included in the FY 2009 final wage 
index.
    In constructing the FY 2009 wage index, we included the wage data 
for facilities that were IPPS hospitals in FY 2005; inclusive of those 
facilities that have since terminated their participation in the 
program as hospitals, as long as those data did not fail any of our 
edits for reasonableness.

[[Page 48582]]

We believe that including the wage data for these hospitals is, in 
general, appropriate to reflect the economic conditions in the various 
labor market areas during the relevant past period and to ensure that 
the current wage index represents the labor market area's current wages 
as compared to the national average of wages. However, we excluded the 
wage data for CAHs as discussed in the FY 2004 IPPS final rule (68 FR 
45397). For this final rule, we removed 22 hospitals that converted to 
CAH status between February 16, 2007, the cut-off date for CAH 
exclusion from the FY 2008 wage index, and February 18, 2008, the cut-
off date for CAH exclusion from the FY 2009 wage index. After removing 
hospitals with aberrant data and hospitals that converted to CAH 
status, the FY 2009 wage index is calculated based on 3,534 hospitals.
1. Wage Data for Multicampus Hospitals
    In the FY 2008 final rule with comment period (72 FR 47317), we 
discussed our policy for allocating a multicampus hospital's wages and 
hours data, by full-time equivalent (FTE) staff, among the different 
labor market areas where its campuses are located. During the FY 2009 
wage index desk review process, we requested fiscal intermediaries/MACs 
to contact multicampus hospitals that had campuses in different labor 
market areas to collect the data for the allocation. The FY 2009 wage 
index in this final rule includes separate wage data for campuses of 
three multicampus hospitals.
    For FY 2009, we are again allowing hospitals to use FTE or 
discharge data for the allocation of a multicampus hospital's wage data 
among the different labor market areas where its campuses are located. 
The Medicare cost report was updated in May 2008 to provide for the 
reporting of FTE data by campus for multicampus hospitals. Because the 
data from cost reporting periods that begin in FY 2008 will not be used 
in calculating the wage index until FY 2012, a multicampus hospital 
will still have the option, through the FY 2011 wage index, to use 
either FTE or discharge data for allocating wage data among its 
campuses by providing the information from the applicable cost 
reporting period to CMS through its fiscal intermediary/MAC. Two of the 
three multicampus hospitals chose to have their wage data allocated by 
their Medicare discharge data for the FY 2009 wage index. One of the 
hospitals provided FTE staff data for the allocation. The average 
hourly wage associated with each geographical location of a multicampus 
hospital is reflected in Table 2 of the Addendum to this final rule.
2. New Orleans' Post-Katrina Wage Index
    Since 2005 when Hurricane Katrina devastated the Gulf States, we 
have received numerous comments suggesting that current Medicare 
payments to hospitals in New Orleans, Louisiana are inadequate, and the 
wage index does not accurately reflect the increase in labor costs 
experienced by the city after the storm. The post-Katrina effects on 
the New Orleans wage index will not be realized in the wage index until 
FY 2010, when the wage index will be based on cost reporting periods 
beginning during FY 2006 (that is, beginning on or after October 1, 
2005 and before October 1, 2006).
    In responding to the health-related needs of people affected by the 
hurricane, the Federal Government, through the Deficit Reduction Act of 
2005 (DRA), appropriated $2 billion in FY 2006. These funds allowed the 
Secretary to make available $160 million in February 2007 to Louisiana, 
Mississippi, and Alabama for payments to hospitals and skilled nursing 
facilities facing financial stress because of changing wage rates not 
yet reflected in Medicare payment methodologies. In March and May 2007, 
the Department provided two additional DRA grants of $15 million and 
$35 million, respectively, to Louisiana for professional health care 
workforce recruitment and sustainability in the greater New Orleans 
area, namely the Orleans, Jefferson, St. Bernard, and Plaquemines 
Parishes. In addition, the Department issued a supplemental award of 
$60 million in provider stabilization grant funding to Louisiana, 
Mississippi, and Alabama to continue to help health care providers meet 
changing wage rates not yet reflected by Medicare's payment policies. 
On July 23, 2007, HHS awarded to Louisiana a new $100 million Primary 
Care Grant to help increase access to primary care in the Greater New 
Orleans area. The resulting stabilization and expansion of the 
community based primary care infrastructure, post Katrina, helps 
provide a viable alternative to local hospital emergency rooms for all 
citizens of New Orleans, especially those who are poor and uninsured. 
In other Department efforts, the OIG has performed an in-depth review 
of the post-Katrina infrastructure of five New Orleans hospitals, 
including the hospitals' staffing levels and wage costs. The OIG's 
final reports and recommendations, which were published in the Spring 
of 2008, are available on the following Web site: http://oig.hhs.gov/oas/cms.html.

G. Method for Computing the FY 2009 Unadjusted Wage Index

    The method used to compute the FY 2009 wage index without an 
occupational mix adjustment follows:
    Step 1--As noted above, we are basing the FY 2009 wage index on 
wage data reported on the FY 2005 Medicare cost reports. We gathered 
data from each of the non-Federal, short-term, acute care hospitals for 
which data were reported on the Worksheet S-3, Parts II and III of the 
Medicare cost report for the hospital's cost reporting period beginning 
on or after October 1, 2004, and before October 1, 2005. In addition, 
we included data from some hospitals that had cost reporting periods 
beginning before October 2004 and reported a cost reporting period 
covering all of FY 2004. These data are included because no other data 
from these hospitals would be available for the cost reporting period 
described above, and because particular labor market areas might be 
affected due to the omission of these hospitals. However, we generally 
describe these wage data as FY 2005 data. We note that, if a hospital 
had more than one cost reporting period beginning during FY 2005 (for 
example, a hospital had two short cost reporting periods beginning on 
or after October 1, 2004, and before October 1, 2005), we included wage 
data from only one of the cost reporting periods, the longer, in the 
wage index calculation. If there was more than one cost reporting 
period and the periods were equal in length, we included the wage data 
from the later period in the wage index calculation.
    Step 2--Salaries--The method used to compute a hospital's average 
hourly wage excludes certain costs that are not paid under the IPPS. 
(We note that, beginning with FY 2008 (72 FR 47315), we include lines 
22.01, 26.01, and 27.01 of Worksheet S-3, Part II for overhead services 
in the wage index. However, we note that the wages and hours on these 
lines are not incorporated into line 101, column 1 of Worksheet A, 
which, through the electronic cost reporting software, flows directly 
to line 1 of Worksheet S-3, Part II. Therefore, the first step in the 
wage index calculation for FY 2009 is to compute a ``revised'' Line 1, 
by adding to the Line 1 on Worksheet S-3, Part II (for wages and hours 
respectively) the amounts on Lines 22.01, 26.01, and 27.01.) In 
calculating a hospital's average salaries plus wage-related costs, we 
subtract from Line 1 (total salaries) the GME and CRNA costs reported 
on Lines 2, 4.01,

[[Page 48583]]

6, and 6.01, the Part B salaries reported on Lines 3, 5 and 5.01, home 
office salaries reported on Line 7, and exclude salaries reported on 
Lines 8 and 8.01 (that is, direct salaries attributable to SNF 
services, home health services, and other subprovider components not 
subject to the IPPS). We also subtract from Line 1 the salaries for 
which no hours were reported. To determine total salaries plus wage-
related costs, we add to the net hospital salaries the costs of 
contract labor for direct patient care, certain top management, 
pharmacy, laboratory, and nonteaching physician Part A services (Lines 
9 and 10), home office salaries and wage-related costs reported by the 
hospital on Lines 11 and 12, and nonexcluded area wage-related costs 
(Lines 13, 14, and 18).
    We note that contract labor and home office salaries for which no 
corresponding hours are reported are not included. In addition, wage-
related costs for nonteaching physician Part A employees (Line 18) are 
excluded if no corresponding salaries are reported for those employees 
on Line 4.
    Step 3--Hours--With the exception of wage-related costs, for which 
there are no associated hours, we compute total hours using the same 
methods as described for salaries in Step 2.
    Step 4--For each hospital reporting both total overhead salaries 
and total overhead hours greater than zero, we then allocate overhead 
costs to areas of the hospital excluded from the wage index 
calculation. First, we determine the ratio of excluded area hours (sum 
of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours 
(Line 1 minus the sum of Part II, Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 
7, and Part III, Line 13 of Worksheet S-3). We then compute the amounts 
of overhead salaries and hours to be allocated to excluded areas by 
multiplying the above ratio by the total overhead salaries and hours 
reported on Line 13 of Worksheet S-3, Part III. Next, we compute the 
amounts of overhead wage-related costs to be allocated to excluded 
areas using three steps: (1) We determine the ratio of overhead hours 
(Part III, Line 13 minus the sum of lines 22.01, 26.01, and 27.01) to 
revised hours excluding the sum of lines 22.01, 26.01, and 27.01 (Line 
1 minus the sum of Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, 8, 8.01, 
22.01, 26.01, and 27.01). (We note that for the FY 2008 and subsequent 
wage index calculations, we are excluding the sum of lines 22.01, 
26.01, and 27.01 from the determination of the ratio of overhead hours 
to revised hours because hospitals typically do not provide fringe 
benefits (wage-related costs) to contract personnel. Therefore, it is 
not necessary for the wage index calculation to exclude overhead wage-
related costs for contract personnel. Further, if a hospital does 
contribute to wage-related costs for contracted personnel, the 
instructions for lines 22.01, 26.01, and 27.01 require that associated 
wage-related costs be combined with wages on the respective contract 
labor lines.); (2) we compute overhead wage-related costs by 
multiplying the overhead hours ratio by wage-related costs reported on 
Part II, Lines 13, 14, and 18; and (3) we multiply the computed 
overhead wage-related costs by the above excluded area hours ratio. 
Finally, we subtract the computed overhead salaries, wage-related 
costs, and hours associated with excluded areas from the total salaries 
(plus wage-related costs) and hours derived in Steps 2 and 3.
    Step 5--For each hospital, we adjust the total salaries plus wage-
related costs to a common period to determine total adjusted salaries 
plus wage-related costs. To make the wage adjustment, we estimate the 
percentage change in the employment cost index (ECI) for compensation 
for each 30-day increment from October 14, 2003, through April 15, 
2005, for private industry hospital workers from the BLS' Compensation 
and Working Conditions. We use the ECI because it reflects the price 
increase associated with total compensation (salaries plus fringes) 
rather than just the increase in salaries. In addition, the ECI 
includes managers as well as other hospital workers. This methodology 
to compute the monthly update factors uses actual quarterly ECI data 
and assures that the update factors match the actual quarterly and 
annual percent changes. We also note that, since April 2006 with the 
publication of March 2006 data, the BLS' ECI uses a different 
classification system, the North American Industrial Classification 
System (NAICS), instead of the Standard Industrial Codes (SICs), which 
no longer exist. We have consistently used the ECI as the data source 
for our wages and salaries and other price proxies in the IPPS market 
basket and did not propos to make any changes to the usage for FY 2009. 
The factors used to adjust the hospital's data were based on the 
midpoint of the cost reporting period, as indicated below.

                    Midpoint of Cost Reporting Period
------------------------------------------------------------------------
                                                              Adjustment
                     After                         Before       factor
------------------------------------------------------------------------
10/14/2004....................................   11/15/2004      1.05390
11/14/2004....................................   12/15/2004      1.05035
12/14/2004....................................   01/15/2005      1.04690
01/14/2005....................................   02/15/2005      1.04342
02/14/2005....................................   03/15/2005      1.03992
03/14/2005....................................   04/15/2005      1.03641
04/14/2005....................................   05/15/2005      1.03291
05/14/2005....................................   06/15/2005      1.02940
06/14/2005....................................   07/15/2005      1.02596
07/14/2005....................................   08/15/2005      1.02264
08/14/2005....................................   09/15/2005      1.01943
09/14/2005....................................   10/15/2005      1.01627
10/14/2005....................................   11/15/2005      1.01308
11/14/2005....................................   12/15/2005      1.00987
12/14/2005....................................   01/15/2006      1.00661
01/14/2006....................................   02/15/2006      1.00333
02/14/2006....................................   03/15/2006      1.00000
03/14/2006....................................   04/15/2006      0.99670
------------------------------------------------------------------------

    For example, the midpoint of a cost reporting period beginning 
January 1, 2005, and ending December 31, 2005, is June 30, 2005. An 
adjustment factor of 1.02596 would be applied to the wages of a 
hospital with such a cost reporting period. In addition, for the data 
for any cost reporting period that began in FY 2005 and covered a 
period of less than 360 days or more than 370 days, we annualize the 
data to reflect a 1-year cost report. Dividing the data by the number 
of days in the cost report and then multiplying the results by 365 
accomplishes annualization.
    Step 6--Each hospital is assigned to its appropriate urban or rural 
labor market area before any reclassifications under section 
1886(d)(8)(B), section 1886(d)(8)(E), or section 1886(d)(10) of the 
Act. Within each urban or rural labor market area, we add the total 
adjusted salaries plus wage-related costs obtained in Step 5 for all 
hospitals in that area to determine the total adjusted salaries plus 
wage-related costs for the labor market area.
    Step 7--We divide the total adjusted salaries plus wage-related 
costs obtained under both methods in Step 6 by the sum of the 
corresponding total hours (from Step 4) for all hospitals in each labor 
market area to determine an average hourly wage for the area.
    Step 8--We add the total adjusted salaries plus wage-related costs 
obtained in Step 5 for all hospitals in the Nation and then divide the 
sum by the national sum of total hours from Step 4 to arrive at a 
national average hourly wage. Using the data as described above, the 
national average hourly wage (unadjusted for occupational mix) is 
$32.2696.
    Step 9--For each urban or rural labor market area, we calculate the 
hospital wage index value, unadjusted for occupational mix, by dividing 
the area average hourly wage obtained in Step 7

[[Page 48584]]

by the national average hourly wage computed in Step 8.
    Step 10--Following the process set forth above, we develop a 
separate Puerto Rico-specific wage index for purposes of adjusting the 
Puerto Rico standardized amounts. (The national Puerto Rico 
standardized amount is adjusted by a wage index calculated for all 
Puerto Rico labor market areas based on the national average hourly 
wage as described above.) We add the total adjusted salaries plus wage-
related costs (as calculated in Step 5) for all hospitals in Puerto 
Rico and divide the sum by the total hours for Puerto Rico (as 
calculated in Step 4) to arrive at an overall average hourly wage 
(unadjusted for occupational mix) of $13.7956 for Puerto Rico. For each 
labor market area in Puerto Rico, we calculate the Puerto Rico-specific 
wage index value by dividing the area average hourly wage (as 
calculated in Step 7) by the overall Puerto Rico average hourly wage.
    Step 11--Section 4410 of Public Law 105-33 provides that, for 
discharges on or after October 1, 1997, the area wage index applicable 
to any hospital that is located in an urban area of a State may not be 
less than the area wage index applicable to hospitals located in rural 
areas in that State. The areas affected by this provision will be 
identified in Table 4D-2 that is to be published in a separate Federal 
Register subsequent to this final rule.
    In the FY 2005 IPPS final rule (69 FR 49109), we adopted the 
``imputed'' floor as a temporary 3-year measure to address a concern by 
some individuals that hospitals in all-urban States were disadvantaged 
by the absence of rural hospitals to set a wage index floor in those 
States. The imputed floor was originally set to expire in FY 2007, but 
we are extending it an additional year in the FY 2008 IPPS final rule 
with comment period (72 FR 47321). As explained in section III.B.2.b. 
of the preamble of this final rule, we are extending the imputed floor 
for an additional 3 years, through FY 2011.

H. Analysis and Implementation of the Occupational Mix Adjustment and 
the FY 2009 Occupational Mix Adjusted Wage Index

    As discussed in section III.D. of this preamble, for FY 2009, we 
apply the occupational mix adjustment to 100 percent of the FY 2009 
wage index. We calculated the occupational mix adjustment using data 
from the 2006 occupational mix survey data, using the methodology 
described in section III.D.3. of this preamble.
    Using the first and second quarter occupational mix survey data and 
applying the occupational mix adjustment to 100 percent of the FY 2009 
wage index results in a national average hourly wage of $32.2449 and a 
Puerto-Rico specific average hourly wage of $13.7851. After excluding 
data of hospitals that either submitted aberrant data that failed 
critical edits, or that do not have FY 2005 Worksheet S-3 cost report 
data for use in calculating the FY 2009 wage index, we calculated the 
FY 2009 wage index using the occupational mix survey data from 3,365 
hospitals. Using the Worksheet S-3 cost report data of 3,534 hospitals 
and occupational mix first and/or second quarter survey data from 3,365 
hospitals represents a 95.2 percent survey response rate. The FY 2009 
national average hourly wages for each occupational mix nursing 
subcategory as calculated in Step 2 of the occupational mix calculation 
are as follows:

------------------------------------------------------------------------
                                                          Average hourly
          Occupational mix nursing subcategory                 wage
------------------------------------------------------------------------
National RN Management..................................        $38.6364
National RN Staff.......................................         33.4698
National LPN............................................         19.2364
National Nurse Aides, Orderlies, and Attendants.........         13.6892
National Medical Assistants.............................         15.7714
National Nurse Category.................................         28.7265
------------------------------------------------------------------------

    The national average hourly wage for the entire nurse category as 
computed in Step 5 of the occupational mix calculation is $28.7265. 
Hospitals with a nurse category average hourly wage (as calculated in 
Step 4) of greater than the national nurse category average hourly wage 
receive an occupational mix adjustment factor (as calculated in Step 6) 
of less than 1.0. Hospitals with a nurse category average hourly wage 
(as calculated in Step 4) of less than the national nurse category 
average hourly wage receive an occupational mix adjustment factor (as 
calculated in Step 6) of greater than 1.0.
    Based on the January through June 2006 occupational mix survey 
data, we determined (in Step 7 of the occupational mix calculation) 
that the national percentage of hospital employees in the Nurse 
category is 42.97 percent, and the national percentage of hospital 
employees in the All Other Occupations category is 57.03 percent. At 
the CBSA level, the percentage of hospital employees in the Nurse 
category ranged from a low of 27.26 percent in one CBSA, to a high of 
85.30 percent in another CBSA.
    The final wage index values for FY 2009 (except those for hospitals 
receiving wage index adjustments under section 1886(d)(13) of the Act) 
will be shown in Tables 4A, 4B, 4C, and 4F that are to be published in 
a separate Federal Register notice subsequent to this final rule.
    Tables 3A and 3B in the Addendum to this final rule list the 3-year 
average hourly wage for each labor market area before the redesignation 
of hospitals based on FYs 2007, 2008, and 2009 cost reporting periods. 
Table 3A lists these data for urban areas and Table 3B lists these data 
for rural areas. In addition, Table 2 in the Addendum to this final 
rule includes the adjusted average hourly wage for each hospital from 
the FY 2003 and FY 2004 cost reporting periods, as well as the FY 2005 
period used to calculate the FY 2009 wage index. The 3-year averages 
are calculated by dividing the sum of the dollars (adjusted to a common 
reporting period using the method described previously) across all 3 
years, by the sum of the hours. If a hospital is missing data for any 
of the previous years, its average hourly wage for the 3-year period is 
calculated based on the data available during that period.
    The wage index values in Tables 4A, 4B, 4C, and 4F (to be published 
in a subsequent Federal Register notice) will include the occupational 
mix adjustment. The average hourly wages in Tables 2, 3A, and 3B in the 
Addendum to this final rule include the occupational mix adjustment. 
The wage index values in Tables 4A, 4B, and 4C in the separate issuance 
also will include the State-specific rural floor and imputed floor 
budget neutrality adjustments that are discussed in section III.B.2. of 
this preamble. The State budget neutrality adjustments for the rural 
and imputed floors will be included in Table 4D-1 in a separate Federal 
Register notice to be published subsequent to this final rule.

I. Revisions to the Wage Index Based on Hospital Redesignations

1. General
    Under section 1886(d)(10) of the Act, the MGCRB considers 
applications by hospitals for geographic reclassification for purposes 
of payment under the IPPS. Hospitals must apply to the MGCRB to 
reclassify 13 months prior to the start of the fiscal year for which 
reclassification is sought (generally by September 1). Generally, 
hospitals must be proximate to the labor market area to which they are 
seeking reclassification and must demonstrate characteristics similar 
to hospitals located in that area. The MGCRB issues its decisions by 
the end of February for reclassifications that become effective for the 
following fiscal year (beginning October 1). The

[[Page 48585]]

regulations applicable to reclassifications by the MGCRB are located in 
42 CFR 412.230 through 412.280.
    Section 1886(d)(10)(D)(v) of the Act provides that, beginning with 
FY 2001, a MGCRB decision on a hospital reclassification for purposes 
of the wage index is effective for 3 fiscal years, unless the hospital 
elects to terminate the reclassification. Section 1886(d)(10)(D)(vi) of 
the Act provides that the MGCRB must use average hourly wage data from 
the 3 most recently published hospital wage surveys in evaluating a 
hospital's reclassification application for FY 2003 and any succeeding 
fiscal year.
    Section 304(b) of Public Law 106-554 provides that the Secretary 
must establish a mechanism under which a statewide entity may apply to 
have all of the geographic areas in the State treated as a single 
geographic area for purposes of computing and applying a single wage 
index, for reclassifications beginning in FY 2003. The implementing 
regulations for this provision are located at 42 CFR 412.235.
    Section 1886(d)(8)(B) of the Act requires the Secretary to treat a 
hospital located in a rural county adjacent to one or more urban areas 
as being located in the MSA to which the greatest number of workers in 
the county commute, if the rural county would otherwise be considered 
part of an urban area under the standards for designating MSAs and if 
the commuting rates used in determining outlying counties were 
determined on the basis of the aggregate number of resident workers who 
commute to (and, if applicable under the standards, from) the central 
county or counties of all contiguous MSAs. In light of the CBSA 
definitions and the Census 2000 data that we implemented for FY 2005 
(69 FR 49027), we undertook to identify those counties meeting these 
criteria. Eligible counties are discussed and identified under section 
III.I.5. of this preamble.
2. Effects of Reclassification/Redesignation
    Section 1886(d)(8)(C) of the Act provides that the application of 
the wage index to redesignated hospitals is dependent on the 
hypothetical impact that the wage data from these hospitals would have 
on the wage index value for the area to which they have been 
redesignated. These requirements for determining the wage index values 
for redesignated hospitals are applicable both to the hospitals deemed 
urban under section 1886(d)(8)(B) of the Act and hospitals that were 
reclassified as a result of the MGCRB decisions under section 
1886(d)(10) of the Act. Therefore, as provided in section 1886(d)(8)(C) 
of the Act, the wage index values were determined by considering the 
following:
     If including the wage data for the redesignated hospitals 
would reduce the wage index value for the area to which the hospitals 
are redesignated by 1 percentage point or less, the area wage index 
value determined exclusive of the wage data for the redesignated 
hospitals applies to the redesignated hospitals.
     If including the wage data for the redesignated hospitals 
reduces the wage index value for the area to which the hospitals are 
redesignated by more than 1 percentage point, the area wage index 
determined inclusive of the wage data for the redesignated hospitals 
(the combined wage index value) applies to the redesignated hospitals.
     If including the wage data for the redesignated hospitals 
increases the wage index value for the urban area to which the 
hospitals are redesignated, both the area and the redesignated 
hospitals receive the combined wage index value. Otherwise, the 
hospitals located in the urban area receive a wage index excluding the 
wage data of hospitals redesignated into the area.
    Rural areas whose wage index values would be reduced by excluding 
the wage data for hospitals that have been redesignated to another area 
continue to have their wage index values calculated as if no 
redesignation had occurred (otherwise, redesignated rural hospitals are 
excluded from the calculation of the rural wage index). The wage index 
value for a redesignated rural hospital cannot be reduced below the 
wage index value for the rural areas of the State in which the hospital 
is located.
    CMS has also adopted the following policies:
     The wage data for a reclassified urban hospital is 
included in both the wage index calculation of the area to which the 
hospital is reclassified (subject to the rules described above) and the 
wage index calculation of the urban area where the hospital is 
physically located.
     In cases where urban hospitals have reclassified to rural 
areas under 42 CFR 412.103, the urban hospital wage data are: (a) 
Included in the rural wage index calculation, unless doing so would 
reduce the rural wage index; and (b) included in the urban area where 
the hospital is physically located.
3. FY 2009 MGCRB Reclassifications
    Under section 1886(d)(10) of the Act, the MGCRB considers 
applications by hospitals for geographic reclassification for purposes 
of payment under the IPPS. The specific procedures and rules that apply 
to the geographic reclassification process are outlined in 42 CFR 
412.230 through 412.280.
    At the time this final rule was constructed, the MGCRB had 
completed its review of FY 2009 reclassification requests. Based on 
such reviews, there were 314 hospitals approved for wage index 
reclassifications by the MGCRB for FY 2009. Because MGCRB wage index 
reclassifications are effective for 3 years, for FY 2009, hospitals 
reclassified during FY 2007 or FY 2008 are eligible to continue to be 
reclassified to a particular labor market area based on such prior 
reclassifications. There were 175 hospitals approved for wage index 
reclassifications in FY 2007 and 324 hospitals approved for wage index 
reclassifications in FY 2008. Of all of the hospitals approved for 
reclassification for FY 2007, FY 2008, and FY 2009, based upon the 
review at the time of the final rule, 813 hospitals are in a 
reclassification status for FY 2009.
    Under 42 CFR 412.273, hospitals that have been reclassified by the 
MGCRB were permitted to withdraw their applications within 45 days of 
the publication of the proposed rule. Generally stated, the request for 
withdrawal of an application for reclassification or termination of an 
existing 3-year reclassification that would be effective in FY 2009 had 
to be received by the MGCRB within 45 days of the publication of the 
proposed rule. (We note that special rules for areas affected by 
section 124 of Pub. L. 110-275 are discussed in section III.I.7. of 
this preamble.) Hospitals may also cancel prior reclassification 
withdrawals or terminations in certain circumstances. For further 
information about withdrawing, terminating, or canceling a previous 
withdrawal or termination of a 3-year reclassification for wage index 
purposes, we refer the reader to 42 CFR 412.273, as well as the August 
1, 2002, IPPS final rule (67 FR 50065), and the August 1, 2001, IPPS 
final rule (66 FR 39887).
    Changes to the wage index that result from withdrawals of requests 
for reclassification, wage index corrections, appeals, and the 
Administrator's review process will be incorporated into the wage index 
values published in a separate Federal Register notice, in response to 
section 124 of Public Law 110-275 (see section III.I.7. of this 
preamble). These changes affect not only the wage index value for 
specific geographic areas, but also the wage index value redesignated 
hospitals receive; that is, whether they receive the wage index that 
includes the data for

[[Page 48586]]

both the hospitals already in the area and the redesignated hospitals. 
Further, the wage index value for the area from which the hospitals are 
redesignated may have been affected.
    Applications for FY 2010 reclassifications are due to the MGCRB by 
September 2, 2008 (the first working day of September 2008). We note 
that this is also the deadline for canceling a previous wage index 
reclassification withdrawal or termination under 42 CFR 412.273(d). 
Applications and other information about MGCRB reclassifications may be 
obtained, beginning in mid-July 2008, via the CMS Internet Web site at: 
http://cms.hhs.gov/providers/prrb/mgcinfo.asp, or by calling the MGCRB 
at (410) 786-1174. The mailing address of the MGCRB is: 2520 Lord 
Baltimore Drive, Suite L, Baltimore, MD 21244-2670.
4. FY 2008 Policy Clarifications and Revisions
    We note below several policies related to geographic 
reclassification that were clarified or revised in the FY 2008 IPPS 
final rule with comment period (72 FR 47333):
     Reinstating Reclassifications--As provided for in 42 CFR 
412.273(b)(2), once a hospital (or hospital group) accepts a newly 
approved reclassification, any previous reclassification is permanently 
terminated.
     Geographic Reclassification for Multicampus Hospitals--
Because campuses of a multicampus hospital can now have their wages and 
hours data allocated by FTEs or discharge data, a hospital campus 
located in a geographic area distinct from the geographic area 
associated with the provider number of the multicampus hospital will 
have official wage data to supplement an individual or group 
reclassification application (Sec.  412.230(d)(2)(v)).
     New England Deemed Counties--Hospitals in New England 
deemed counties are treated the same as Lugar hospitals in calculating 
the wage index. That is, the area is considered rural, but the 
hospitals within the area are deemed to be urban (Sec.  
412.64(b)(3)(ii)).
     ``Fallback'' Reclassifications--A hospital will 
automatically be given its most recently approved reclassification 
(thereby permanently terminating any previously approved 
reclassifications) unless it provides written notice to the MGCRB 
within 45 days of publication of the notice of proposed rulemaking that 
it wishes to withdraw its most recently approved reclassification and 
``fall back'' to either its prior reclassification or its home area 
wage index for the following fiscal year.
5. Redesignations of Hospitals Under Section 1886(d)(8)(B) of the Act
    Section 1886(d)(8)(B) of the Act requires us to treat a hospital 
located in a rural county adjacent to one or more urban areas as being 
located in the MSA if certain criteria are met. Effective beginning FY 
2005, we use OMB's 2000 CBSA standards and the Census 2000 data to 
identify counties in which hospitals qualify under section 
1886(d)(8)(B) of the Act to receive the wage index of the urban area. 
Hospitals located in these counties have been known as ``Lugar'' 
hospitals and the counties themselves are often referred to as 
``Lugar'' counties. We provide the FY 2009 chart below with the listing 
of the rural counties containing the hospitals designated as urban 
under section 1886(d)(8)(B) of the Act. For discharges occurring on or 
after October 1, 2008, hospitals located in the rural county in the 
first column of this chart will be redesignated for purposes of using 
the wage index of the urban area listed in the second column.

 Rural Counties Containing Hospitals Redesignated as Urban under Section
                        1886(d)(8)(B) of the Act
                  [Based on CBSAs and census 2000 data]
------------------------------------------------------------------------
              Rural county                             CBSA
------------------------------------------------------------------------
Cherokee, AL...........................  Rome, GA.
Macon, AL..............................  Auburn-Opelika, AL.
Talladega, AL..........................  Anniston-Oxford, AL.
Hot Springs, AR........................  Hot Springs, AR.
Windham, CT............................  Hartford-West Hartford-East
                                          Hartford, CT.
Bradford, FL...........................  Gainesville, FL.
Hendry, FL.............................  West Palm Beach-Boca Raton-
                                          Boynton, FL.
Levy, FL...............................  Gainesville, FL.
Walton, FL.............................  Fort Walton Beach-Crestview-
                                          Destin, FL.
Banks, GA..............................  Gainesville, GA.
Chattooga, GA..........................  Chattanooga, TN-GA.
Jackson, GA............................  Atlanta-Sandy Springs-Marietta,
                                          GA.
Lumpkin, GA............................  Atlanta-Sandy Springs-Marietta,
                                          GA.
Morgan, GA.............................  Atlanta-Sandy Springs-Marietta,
                                          GA.
Peach, GA..............................  Macon, GA.
Polk, GA...............................  Atlanta-Sandy Springs-Marietta,
                                          GA.
Talbot, GA.............................  Columbus, GA-AL.
Bingham, ID............................  Idaho Falls, ID.
Christian, IL..........................  Springfield, IL.
DeWitt, IL.............................  Bloomington-Normal, IL.
Iroquois, IL...........................  Kankakee-Bradley, IL.
Logan, IL..............................  Springfield, IL.
Mason, IL..............................  Peoria, IL.
Ogle, IL...............................  Rockford, IL.
Clinton, IN............................  Lafayette, IN.
Henry, IN..............................  Indianapolis-Carmel, IN.
Spencer, IN............................  Evansville, IN-KY.
Starke, IN.............................  Gary, IN.
Warren, IN.............................  Lafayette, IN.
Boone, IA..............................  Ames, IA.
Buchanan, IA...........................  Waterloo-Cedar Falls, IA.
Cedar, IA..............................  Iowa City, IA.
Allen, KY..............................  Bowling Green, KY.

[[Page 48587]]

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

    As in the past, hospitals redesignated under section 1886(d)(8)(B) 
of the Act are also eligible to be reclassified to a different area by 
the MGCRB. Affected hospitals are permitted to compare the reclassified 
wage index for the labor

[[Page 48588]]

market area in Table 4C in the Addendum to the proposed rule into which 
they have been reclassified by the MGCRB to the wage index for the area 
to which they are redesignated under section 1886(d)(8)(B) of the Act. 
Hospitals could have withdrawn from an MCGRB reclassification within 45 
days of the publication of the proposed rule. (We refer readers also to 
section III.I.7. of the preamble of this final rule for special 
withdrawal and termination rules that apply to areas affected by 
section 124 of Pub. L. 110-275.)
6. Reclassifications Under Section 1886(d)(8)(B) of the Act
    As discussed in last year's FY 2008 IPPS final rule with comment 
period (72 FR 47336-47337), Lugar hospitals are treated like 
reclassified hospitals for purposes of determining their applicable 
wage index and receive the reclassified wage index (Table 4C in a 
separate notice to be published in the Federal Register subsequent to 
this final rule) for the urban area to which they have been 
redesignated. Because Lugar hospitals are treated like reclassified 
hospitals, when they are seeking reclassification by the MCGRB, they 
are subject to the rural reclassification rules set forth at 42 CFR 
412.230. The procedural rules set forth at Sec.  412.230 list the 
criteria that a hospital must meet in order to reclassify as a rural 
hospital. Lugar hospitals are subject to the proximity criteria and 
payment thresholds that apply to rural hospitals. Specifically, the 
hospital must be no more than 35 miles from the area to which it seeks 
reclassification (Sec.  412.230(b)(1)); and the hospital must show that 
its average hourly wage is at least 106 percent of the average hourly 
wage of all other hospitals in the area in which the hospital is 
located (Sec.  412.230(d)(1)(iii)(C)). As discussed in section 
III.B.2.a. of the preamble of this final rule, beginning with the FY 
2010 wage index we will be phasing in regulatory changes, so that the 
hospital must also demonstrate that its average hourly wage is equal to 
at least 84 percent (in FY 2010) and 86 percent (beginning in FY 2011) 
of the average hourly wage of hospitals in the area to which it seeks 
redesignation (Sec.  412.230(d)(1)(iv)(C)).
    Hospitals not located in a Lugar county seeking reclassification to 
the urban area where the Lugar hospitals have been redesignated are not 
permitted to measure to the Lugar county to demonstrate proximity (no 
more than 15 miles for an urban hospital, and no more than 35 miles for 
a rural hospital or the closest urban or rural area for RRCs or SCHs) 
in order to be reclassified to such urban area. These hospitals must 
measure to the urban area exclusive of the Lugar County to meet the 
proximity or nearest urban or rural area requirement. As discussed in 
the FY 2008 final rule with comment period, we treat New England deemed 
counties in a manner consistent with how we treat Lugar counties. (We 
refer readers to 72 FR 47337 for a discussion of this policy.)
7. Reclassifications Under Section 508 of Public Law 108-173
    On July 15, 2008, the Medicare Improvements for Patients and 
Providers Act of 2008, Public Law 110-275 was enacted. Section 124 of 
Public Law 110-275 extends through FY 2009 wage index reclassifications 
under section 508 of Public Law 108-173 and certain special exceptions 
(for example, those special exceptions contained in the final rule 
promulgated in the Federal Register on August 11, 2004 (69 FR 49105, 
49107)) and extended under section 117 of the MMSEA of 2007 (Pub. L. 
110-173).
    Under section 508 of Public Law 108-173, a qualifying hospital 
could appeal the wage index classification otherwise applicable to the 
hospital and apply for reclassification to another area of the State in 
which the hospital is located (or, at the discretion of the Secretary), 
to an area within a contiguous State. We implemented this process 
through notices published in the Federal Register on January 6, 2004 
(69 FR 661), and February 13, 2004 (69 FR 7340). Such reclassifications 
were applicable to discharges occurring during the 3-year period 
beginning April 1, 2004, and ending March 31, 2007. Section 106(a) of 
the MIEA-TRHCA extended any geographic reclassifications of hospitals 
that were made under section 508 and that would expire on March 31, 
2007. On March 23, 2007, we published a notice in the Federal Register 
(72 FR 13799) that indicated how we were implementing section 106(a) of 
the MIEA-TRHCA through September 30, 2007. Section 117 of the MMSEA 
further extended section 508 reclassifications and special exceptions 
through September 30, 2008. On February 22, 2008, we published a notice 
in the Federal Register (73 FR 9807) regarding our implementation of 
section 117 of the MMSEA.
    Section 124 of Public Law 110-275 has now extended the hospital 
reclassifications provisions of section 508 and certain special 
exceptions through September 30, 2009 (FY 2009). Because of the timing 
of enactment of Public Law 110-275, we are not able to recompute the FY 
2009 wage index values for any hospital that would be reclassified 
under the section 508 and special exceptions provisions in time for 
inclusion in this final rule. Instead, we will issue the final FY 2009 
wage index values and other related tables, as specified in the 
Addendum to this final rule, in a separate Federal Register notice 
implementing this extension that will be published subsequent to this 
final rule. We will analyze the data of hospitals in labor market areas 
affected by this extension, including hospitals with Lugar 
redesignations, and make our best efforts to give those hospitals a 
wage index value that we believe results in the highest FY 2009 wage 
index for which they are eligible. The intervening legislation 
potentially affects only those areas that include the hospitals whose 
reclassifications or special exceptions were extended, as well as areas 
to which such hospitals were reclassified for FY 2009. Therefore, we 
want to make clear that we will not be choosing wage index values for 
hospitals that are reclassified to or located in areas containing no 
hospitals whose reclassifications or exceptions were extended by 
section 124 of Public Law 110-275.
    Hospitals will have 15 days from the date of publication of the 
separate notice to notify us if they wish to revise the decision that 
CMS makes on their behalf. Members of a group reclassification must 
ensure that all members of the group (except hospitals whose 
reclassifications were extended by section 124 of Pub. L. 110-275) have 
signed the revision request. Written requests to revise CMS' wage index 
decision must be received at the following address by no later than 5 
p.m. EST 15 days from the date of publication of the separate notice in 
the Federal Register: Division of Acute Care, Center for Medicare 
Management, C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244, 
Attn: Brian Slater.
    If we do not receive notice from the hospital within this 15-day 
timeframe, the determination made by CMS on behalf of the hospital in 
the separate notice will be deemed final for FY 2009. We will not 
further recalculate the wage indices or standardized amounts based on 
hospitals' decisions that further revise decisions made by CMS on the 
hospitals' behalf. If CMS makes a decision on a hospital's behalf to 
terminate or withdraw a reclassification so that a hospital will 
receive a higher qualifying wage index for FY 2009, and the hospital 
does not reverse or modify CMS' decision within the 15-day timeframe, 
we will deem the hospital's reclassification is withdrawn or terminated 
for FY 2009 only, as section 508 reclassifications and special

[[Page 48589]]

exceptions are only extended through FY 2009. Such hospitals, if there 
is at least one remaining year in their 3-year reclassification, will 
automatically have their MGCRB reclassification reinstated for FY 2010. 
Thus, for example, if we assign a hospital a section 508 
reclassification wage index for FY 2009 and the hospital had been 
previously granted a reclassification by the MGCRB for FY 2008 through 
2010, the hospital's previous reclassification would be automatically 
reinstated for the remaining year, FY 2010. By the same token, if the 
omission of a section 508 or special exception hospital from the 
calculation of the reclassification wage index in Table 4C of the 
separate issuance results in the reclassification wage index decreasing 
to the point that a hospital should have terminated its MGCRB 
reclassification for FYs 2008 through 2010 and accepted its home wage 
index, we will withdraw or terminate the reclassification on the 
hospital's behalf. However, such reclassification will then be 
automatically reinstated for FY 2010. In the case that a hospital had a 
choice for FY 2009 of two overlapping possible MGCRB 3-year 
reclassifications, and one such MGCRB reclassification is assigned to 
the hospital via the process discussed above, then the reclassification 
not accepted would be permanently terminated. Likewise, if the hospital 
with the choice of two overlapping MGCRB reclassifications is a section 
508 or special exception hospital that receives the section 508 or 
special exception wage index for FY 2009, then only the 
reclassification that the hospital had originally chosen for FY 2009 
will be reinstated, and the other reclassification will be permanently 
terminated. In other words, in accordance with our current rules with 
regard to overlapping MGCRB reclassifications, a hospital will not be 
permitted to hold in reserve two possible MGCRB reclassifications 
through these procedures. In addition, if CMS believes that waiving a 
hospital's Lugar redesignation in order for the hospital to receive its 
home area wage index plus its out-migration adjustment results in the 
highest possible wage index for the hospital, and the hospital does not 
notify CMS within the 15-day timeframe to revise CMS' decision, such 
waiver will only apply to the FY 2009 wage index.
    Our special procedural rules for FY 2009 are authorized under 
section 1886(d)(10)(D)(v) of the Act, which requires the Secretary to 
``establish procedures under which a subsection (d) hospital may elect 
to terminate'' a reclassification. While the section authorizes the 
Secretary to establish procedures, it does not dictate the specifics of 
such procedures. Given the intervening legislation for FY 2009, and the 
need to expeditiously engage in a series of recalculations for FY 2009, 
we believe the most reasonable course at this point is for us to make 
our best efforts to give affected hospitals their highest wage index 
values, and then allow hospitals to opt out of such selections.
    The special procedural rules will be effective upon publication and 
supersede conflicting procedures included in 42 CFR 412.273. Because 
these rules are effective only for FY 2009, we are not revising the 
general rules included in the regulation at Sec.  412.273.

J. FY 2009 Wage Index Adjustment Based on Commuting Patterns of 
Hospital Employees

    In accordance with the broad discretion under section 1886(d)(13) 
of the Act, as added by section 505 of Public Law 108-173, beginning 
with FY 2005, we established a process to make adjustments to the 
hospital wage index based on commuting patterns of hospital employees 
(the ``out-migration'' adjustment). The process, outlined in the FY 
2005 IPPS final rule (69 FR 49061), provides for an increase in the 
wage index for hospitals located in certain counties that have a 
relatively high percentage of hospital employees who reside in the 
county but work in a different county (or counties) with a higher wage 
index. Such adjustments to the wage index are effective for 3 years, 
unless a hospital requests to waive the application of the adjustment. 
A county will not lose its status as a qualifying county due to wage 
index changes during the 3-year period, and counties will receive the 
same wage index increase for those 3 years. However, a county that 
qualifies in any given year may no longer qualify after the 3-year 
period, or it may qualify but receive a different adjustment to the 
wage index level. Hospitals that receive this adjustment to their wage 
index are not eligible for reclassification under section 1886(d)(8) or 
section 1886(d)(10) of the Act. Adjustments under this provision are 
not subject to the budget neutrality requirements under section 
1886(d)(3)(E) of the Act.
    Hospitals located in counties that qualify for the wage index 
adjustment are to receive an increase in the wage index that is equal 
to the average of the differences between the wage indices of the labor 
market area(s) with higher wage indices and the wage index of the 
resident county, weighted by the overall percentage of hospital workers 
residing in the qualifying county who are employed in any labor market 
area with a higher wage index. Beginning with the FY 2008 wage index, 
we use post-reclassified wage indices when determining the out-
migration adjustment (72 FR 47339).
    For the FY 2009 wage index, we will calculate the out-migration 
adjustment using the same formula described in the FY 2005 IPPS final 
rule (69 FR 49064), with the addition of using the post-reclassified 
wage indices, to calculate the out-migration adjustment. This 
adjustment is calculated as follows:
    Step 1. Subtract the wage index for the qualifying county from the 
wage index of each of the higher wage area(s) to which hospital workers 
commute.
    Step 2. Divide the number of hospital employees residing in the 
qualifying county who are employed in such higher wage index area by 
the total number of hospital employees residing in the qualifying 
county who are employed in any higher wage index area. For each of the 
higher wage index areas, multiply this result by the result obtained in 
Step 1.
    Step 3. Sum the products resulting from Step 2 (if the qualifying 
county has workers commuting to more than one higher wage index area).
    Step 4. Multiply the result from Step 3 by the percentage of 
hospital employees who are residing in the qualifying county and who 
are employed in any higher wage index area.
    These adjustments will be effective for each county for a period of 
3 fiscal years. For example, hospitals that received the adjustment for 
the first time in FY 2008 will be eligible to retain the adjustment for 
FY 2009. For hospitals in newly qualified counties, adjustments to the 
wage index are effective for 3 years, beginning with discharges 
occurring on or after October 1, 2008.
    Hospitals receiving the wage index adjustment under section 
1886(d)(13)(F) of the Act are not eligible for reclassification under 
sections 1886(d)(8) or (d)(10) of the Act unless they waive the out-
migration adjustment. Consistent with our FY 2005, 2006, 2007, and 2008 
IPPS final rules, we are specifying that hospitals redesignated under 
section 1886(d)(8) of the Act or reclassified under section 1886(d)(10) 
of the Act will be deemed to have chosen to retain their redesignation 
or reclassification. Section 1886(d)(10) hospitals that wish to receive 
the out-migration adjustment, rather than their reclassification, had 
to

[[Page 48590]]

follow the termination/withdrawal procedures specified in 42 CFR 
412.273 and section III.I.3. of the preamble of the proposed rule. 
Otherwise, they were deemed to have waived the out-migration 
adjustment. Hospitals redesignated under section 1886(d)(8) of the Act 
were deemed to have waived the out-migration adjustment, unless they 
explicitly notified CMS within 45 days from the publication of the 
proposed rule that they elected to receive the out-migration adjustment 
instead. (However, we refer readers to section III.I.7. of the preamble 
of this final rule for special rules for hospitals in areas affected by 
section 124 of Pub. L. 110-275.)
    Table 4J in the Addendum to this final rule lists the out-migration 
wage index adjustments for FY 2009. A revised table 4J will be 
published in a separate Federal Register notice, as explained in 
section III.I.7. of this preamble. Hospitals that are not otherwise 
reclassified or redesignated under section 1886(d)(8) or section 
1886(d)(10) of the Act (or who receive certain special 
reclassifications or exceptions under section 124 of Pub. L. 110-275) 
will automatically receive the listed adjustment. In accordance with 
the procedures discussed above, except as discussed in section III.I.7. 
of the preamble of this final rule, redesignated/reclassified hospitals 
are deemed to have waived the out-migration adjustment unless CMS was 
otherwise notified within the necessary timeframe. In addition, 
hospitals eligible to receive the out-migration wage index adjustment 
and that withdrew their application for reclassification should receive 
the wage index adjustment listed in the final Table 4J (a tentative 
Table 4J is included in the Addendum to this final rule but will be 
updated in the separate Federal Register notice discussed in section 
III.I.7. of this preamble).

K. Process for Requests for Wage Index Data Corrections

    The preliminary, unaudited Worksheet S-3 wage data and occupational 
mix survey data files for the FY 2009 wage index were made available on 
October 5, 2007, through the Internet on the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage.
    In the interest of meeting the data needs of the public, beginning 
with the proposed FY 2009 wage index, we posted an additional public 
use file on our Web site that reflects the actual data that are used in 
computing the proposed wage index. The release of this new file did not 
alter the current wage index process or schedule. We notified the 
hospital community of the availability of these data as we do with the 
current public use wage data files through our Hospital Open Door 
forum. We encouraged hospitals to sign up for automatic notifications 
of information about hospital issues and the scheduling of the Hospital 
Open Door forums at: http://www.cms.hhs.gov/OpenDoorForums/.
    In a memorandum dated October 5, 2007, we instructed all fiscal 
intermediaries/MACs to inform the IPPS hospitals they service of the 
availability of the wage index data files and the process and timeframe 
for requesting revisions (including the specific deadlines listed 
below). We also instructed the fiscal intermediaries/MACs to advise 
hospitals that these data were also made available directly through 
their representative hospital organizations.
    If a hospital wished to request a change to its data as shown in 
the October 5, 2007 wage and occupational mix data files, the hospital 
was to submit corrections along with complete, detailed supporting 
documentation to its fiscal intermediary/MAC by December 7, 2007. 
Hospitals were notified of this deadline and of all other possible 
deadlines and requirements, including the requirement to review and 
verify their data as posted on the preliminary wage index data files on 
the Internet, through the October 5, 2007 memorandum referenced above.
    In the October 5, 2007 memorandum, we also specified that a 
hospital requesting revisions to its first and/or second quarter 
occupational mix survey data was to copy its record(s) from the CY 2006 
occupational mix preliminary files posted to our Web site in October, 
highlight the revised cells on its spreadsheet, and submit its 
spreadsheet(s) and complete documentation to its fiscal intermediary/
MAC no later than December 7, 2007.
    The fiscal intermediaries (or, if applicable, the MACs) notified 
the hospitals by mid-February 2008 of any changes to the wage index 
data as a result of the desk reviews and the resolution of the 
hospitals' early-December revision requests. The fiscal intermediaries/
MACs also submitted the revised data to CMS by mid-February 2008. CMS 
published the proposed wage index public use files that included 
hospitals' revised wage index data on February 25, 2008. In a 
memorandum also dated February 25, 2008, we instructed fiscal 
intermediaries/MACs to notify all hospitals regarding the availability 
of the proposed wage index public use files and the criteria and 
process for requesting corrections and revisions to the wage index 
data. Hospitals had until March 11, 2008, to submit requests to the 
fiscal intermediaries/MACs for reconsideration of adjustments made by 
the fiscal intermediaries/MACs as a result of the desk review, and to 
correct errors due to CMS's or the fiscal intermediary's (or, if 
applicable, the MAC's) mishandling of the wage index data. Hospitals 
were also required to submit sufficient documentation to support their 
requests.
    After reviewing requested changes submitted by hospitals, fiscal 
intermediaries/MACs were required to transmit any additional revisions 
resulting from the hospitals' reconsideration requests by April 14, 
2008. The deadline for a hospital to request CMS intervention in cases 
where the hospital disagreed with the fiscal intermediary's (or, if 
applicable, the MAC's) policy interpretations was April 21, 2008.
    Hospitals were given the opportunity to examine Table 2 in the 
Addendum to the proposed rule. Table 2 in the Addendum to the proposed 
rule contained each hospital's adjusted average hourly wage used to 
construct the wage index values for the past 3 years, including the FY 
2005 data used to construct the proposed FY 2009 wage index. We noted 
that the hospital average hourly wages shown in Table 2 only reflected 
changes made to a hospital's data and transmitted to CMS by February 
29, 2008.
    We released the final wage index data public use files in early May 
2008 on the Internet at http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage. The May 2008 public use files were made available 
solely for the limited purpose of identifying any potential errors made 
by CMS or the fiscal intermediary/MAC in the entry of the final wage 
index data that resulted from the correction process described above 
(revisions submitted to CMS by the fiscal intermediaries/MACs by April 
14, 2008). If, after reviewing the May 2008 final files, a hospital 
believed that its wage or occupational mix data were incorrect due to a 
fiscal intermediary/MAC or CMS error in the entry or tabulation of the 
final data, the hospital had to send a letter to both its fiscal 
intermediary/MAC and CMS that outlined why the hospital believed an 
error existed and to provide all supporting information, including 
relevant dates (for example, when it first became aware of the error). 
CMS and the fiscal intermediaries (or, if applicable,

[[Page 48591]]

the MACs) had to receive these requests no later than June 9, 2008.
    Each request also had to be sent to the fiscal intermediary/MAC. 
The fiscal intermediary/MAC reviewed requests upon receipt and 
contacted CMS immediately to discuss any findings.
    At this point in the process, that is, after the release of the May 
2008 wage index data files, changes to the wage and occupational mix 
data were only made only in those very limited situations involving an 
error by the fiscal intermediary/MAC or CMS that the hospital could not 
have known about before its review of the final wage index data files. 
Specifically, neither the fiscal intermediary/MAC nor CMS approved the 
following types of requests:
     Requests for wage index data corrections that were 
submitted too late to be included in the data transmitted to CMS by 
fiscal intermediaries or the MACs on or before April 21, 2008.
     Requests for correction of errors that were not, but could 
have been, identified during the hospital's review of the February 25, 
2008 wage index public use files.
     Requests to revisit factual determinations or policy 
interpretations made by the fiscal intermediary or the MAC or CMS 
during the wage index data correction process.
    Verified corrections to the wage index data received timely by CMS 
and the fiscal intermediaries or the MACs (that is, by June 9, 2008) 
were incorporated into the final wage index in this FY 2009 IPPS final 
rule, which will be effective October 1, 2008.
    We created the processes described above to resolve all substantive 
wage index data correction disputes before we finalize the wage and 
occupational mix data for the FY 2009 payment rates. Accordingly, 
hospitals that did not meet the procedural deadlines set forth above 
will not be afforded a later opportunity to submit wage index data 
corrections or to dispute the fiscal intermediary's (or, if applicable 
the MAC's) decision with respect to requested changes. Specifically, 
our policy is that hospitals that do not meet the procedural deadlines 
set forth above will not be permitted to challenge later, before the 
Provider Reimbursement Review Board, the failure of CMS to make a 
requested data revision. (See W. A. Foote Memorial Hospital v. Shalala, 
No. 99-CV-75202-DT (E.D. Mich. 2001) and Palisades General Hospital v. 
Thompson, No. 99-1230 (D.D.C. 2003).) We refer readers also to the FY 
2000 final rule (64 FR 41513) for a discussion of the parameters for 
appealing to the PRRB for wage index data corrections.
    Again, we believe the wage index data correction process described 
above provides hospitals with sufficient opportunity to bring errors in 
their wage and occupational mix data to the fiscal intermediary's (or, 
if applicable, the MAC's) attention. Moreover, because hospitals had 
access to the final wage index data by early May 2008, they had the 
opportunity to detect any data entry or tabulation errors made by the 
fiscal intermediary or the MAC or CMS before the development and 
publication of the final FY 2009 wage index by August 1, 2008, and the 
implementation of the FY 2009 wage index on October 1, 2008. If 
hospitals availed themselves of the opportunities afforded to provide 
and make corrections to the wage and occupational mix data, the wage 
index implemented on October 1 should be accurate. Nevertheless, in the 
event that errors are identified by hospitals and brought to our 
attention after June 9, 2008, we retain the right to make midyear 
changes to the wage index under very limited circumstances.
    Specifically, in accordance with 42 CFR 412.64(k)(1) of our 
existing regulations, we make midyear corrections to the wage index for 
an area only if a hospital can show that: (1) The fiscal intermediary 
or the MAC or CMS made an error in tabulating its data; and (2) the 
requesting hospital could not have known about the error or did not 
have an opportunity to correct the error, before the beginning of the 
fiscal year. For purposes of this provision, ``before the beginning of 
the fiscal year'' means by the June 9th deadline for making corrections 
to the wage data for the following fiscal year's wage index. This 
provision is not available to a hospital seeking to revise another 
hospital's data that may be affecting the requesting hospital's wage 
index for the labor market area. As indicated earlier, because CMS 
makes the wage index data available to hospitals on the CMS Web site 
prior to publishing both the proposed and final IPPS rules, and the 
fiscal intermediaries or the MAC notify hospitals directly of any wage 
index data changes after completing their desk reviews, we do not 
expect that midyear corrections will be necessary. However, under our 
current policy, if the correction of a data error changes the wage 
index value for an area, the revised wage index value will be effective 
prospectively from the date the correction is made.
    In the FY 2006 IPPS final rule (70 FR 47385), we revised 42 CFR 
412.64(k)(2) to specify that, effective on October 1, 2005, that is 
beginning with the FY 2006 wage index, a change to the wage index can 
be made retroactive to the beginning of the Federal fiscal year only 
when: (1) The fiscal intermediary (or, if applicable, the MAC) or CMS 
made an error in tabulating data used for the wage index calculation; 
(2) the hospital knew about the error and requested that the fiscal 
intermediary (or if applicable the MAC) and CMS correct the error using 
the established process and within the established schedule for 
requesting corrections to the wage index data, before the beginning of 
the fiscal year for the applicable IPPS update (that is, by the June 9, 
2008 deadline for the FY 2009 wage index); and (3) CMS agreed that the 
fiscal intermediary (or if applicable, the MAC) or CMS made an error in 
tabulating the hospital's wage index data and the wage index should be 
corrected.
    In those circumstances where a hospital requested a correction to 
its wage index data before CMS calculates the final wage index (that 
is, by the June 9th deadline), and CMS acknowledges that the error in 
the hospital's wage index data was caused by CMS' or the fiscal 
intermediary's (or, if applicable, the MAC's) mishandling of the data, 
we believe that the hospital should not be penalized by our delay in 
publishing or implementing the correction. As with our current policy, 
we indicated that the provision is not available to a hospital seeking 
to revise another hospital's data. In addition, the provision cannot be 
used to correct prior years' wage index data; and it can only be used 
for the current Federal fiscal year. In other situations where our 
policies would allow midyear corrections, we continue to believe that 
it is appropriate to make prospective-only corrections to the wage 
index.
    We note that, as with prospective changes to the wage index, the 
final retroactive correction will be made irrespective of whether the 
change increases or decreases a hospital's payment rate. In addition, 
we note that the policy of retroactive adjustment will still apply in 
those instances where a judicial decision reverses a CMS denial of a 
hospital's wage index data revision request.

L. Labor-Related Share for the Wage Index for FY 2009

    Section 1886(d)(3)(E) of the Act directs the Secretary to adjust 
the proportion of the national prospective payment system base payment 
rates that are attributable to wages and wage-related costs by a factor 
that reflects the relative differences in labor costs among geographic 
areas. It also directs the Secretary to estimate from time to time the 
proportion of hospital costs that are labor-related: ``The Secretary 
shall

[[Page 48592]]

adjust the proportion (as estimated by the Secretary from time to time) 
of hospitals' costs which are attributable to wages and wage-related 
costs of the DRG prospective payment rates * * *''. We refer to the 
portion of hospital costs attributable to wages and wage-related costs 
as the labor-related share. The labor-related share of the prospective 
payment rate is adjusted by an index of relative labor costs, which is 
referred to as the wage index.
    Section 403 of Public Law 108-173 amended section 1886(d)(3)(E) of 
the Act to provide that the Secretary must employ 62 percent as the 
labor-related share unless this ``would result in lower payments to a 
hospital than would otherwise be made.'' However, this provision of 
Public Law 108-173 did not change the legal requirement that the 
Secretary estimate ``from time to time'' the proportion of hospitals' 
costs that are ``attributable to wages and wage-related costs.'' We 
interpret this to mean that hospitals receive payment based on either a 
62-percent labor-related share, or the labor-related share estimated 
from time to time by the Secretary, depending on which labor-related 
share resulted in a higher payment.
    We have continued our research into the assumptions employed in 
calculating the labor-related share. Our research involves analyzing 
the compensation share separately for urban and rural hospitals, using 
regression analysis to determine the proportion of costs influenced by 
the area wage index, and exploring alternative methodologies to 
determine whether all or only a portion of professional fees and 
nonlabor intensive services should be considered labor-related.
    In the FY 2006 IPPS final rule (70 FR 47392), we presented our 
analysis and conclusions regarding the methodology for updating the 
labor-related share for FY 2006. We also recalculated a labor-related 
share of 69.731 percent, using the FY 2002-based PPS market basket for 
discharges occurring on or after October 1, 2005. In addition, we 
implemented this revised and rebased labor-related share in a budget 
neutral manner, but consistent with section 1886(d)(3)(E) of the Act, 
we did not take into account the additional payments that would be made 
as a result of hospitals with a wage index less than or equal to 1.0 
being paid using a labor-related share lower than the labor-related 
share of hospitals with a wage index greater than 1.0.
    The labor-related share is used to determine the proportion of the 
national PPS base payment rate to which the area wage index is applied. 
In this final rule, as we proposed, we are not making any changes to 
the national average proportion of operating costs that are 
attributable to wages and salaries, fringe benefits, professional fees, 
contract labor, and labor intensive services. Therefore, we are 
continuing to use a labor-related share of 69.731 percent for 
discharges occurring on or after October 1, 2008. Tables 1A and 1B in 
the Addendum to this final rule reflect this labor-related share. 
However, as noted in the Addendum, these figures are tentative only and 
will be revised as a result of section 124 of Public Law 110-275 in a 
separate Federal Register notice to be published subsequent to this 
final rule. We note that section 403 of Public Law 108-173 amended 
sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act to provide that 
the Secretary must employ 62 percent as the labor-related share unless 
this employment ``would result in lower payments to a hospital than 
would otherwise be made.''
    As we proposed, we also are continuing to use a labor-related share 
for the Puerto Rico-specific standardized amounts of 58.7 percent for 
discharges occurring on or after October 1, 2008. Consistent with our 
methodology for determining the national labor-related share, we added 
the Puerto Rico-specific relative weights for wages and salaries, 
fringe benefits, contract labor, nonmedical professional fees, and 
other labor-intensive services to determine the labor-related share. 
Puerto Rico hospitals are paid based on 75 percent of the national 
standardized amounts and 25 percent of the Puerto Rico-specific 
standardized amounts. For Puerto Rico hospitals, the national labor-
related share will always be 62 percent because the wage index for all 
Puerto Rico hospitals is less than 1.0. A Puerto Rico-specific wage 
index is applied to the Puerto Rico-specific portion of payments to the 
hospitals. The labor-related share of a hospital's Puerto Rico-specific 
rate will be either 62 percent or the Puerto Rico-specific labor-
related share depending on which results in higher payments to the 
hospital. If the hospital has a Puerto Rico-specific wage index of 
greater than 1.0, we will set the hospital's rates using a labor-
related share of 62 percent for the 25 percent portion of the 
hospital's payment determined by the Puerto Rico standardized amounts 
because this amount will result in higher payments. Conversely, a 
hospital with a Puerto Rico-specific wage index of less than 1.0 will 
be paid using the Puerto Rico-specific labor-related share of 58.7 
percent of the Puerto Rico-specific rates because the lower labor-
related share will result in higher payments. The Puerto Rico labor-
related share of 58.7 percent for FY 2008 is reflected in the tentative 
Table 1C of the Addendum to this final rule. (As explained in this 
preamble and the Addendum to this final rule, section 124 of Pub. L. 
119-275 will require us to recalculate the final rates and publish such 
rates in a separate Federal Register notice.)

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

A. Changes to the Postacute Care Transfer Policy (Sec.  412.4)

1. Background
    Existing regulations at Sec.  412.4(a) define discharges under the 
IPPS as situations in which a patient is formally released from an 
acute care hospital or dies in the hospital. Section 412.4(b) defines 
transfers from one acute care hospital to another. Section 412.4(c) 
establishes the conditions under which we consider a discharge to be a 
transfer for purposes of our postacute care transfer policy. In 
accordance with Sec.  412.4(f), in transfer situations, the 
transferring hospital is paid based on a per diem rate for each day of 
the stay, not to exceed the full MS-DRG payment that would have been 
made if the patient had been discharged without being transferred.
    The per diem rate paid to a transferring hospital is calculated by 
dividing the full MS-DRG payment by the geometric mean length of stay 
for the MS-DRG. Based on an analysis that showed that the first day of 
hospitalization is the most expensive (60 FR 5804), our policy 
generally provides for payment that is double the per diem amount for 
the first day, with each subsequent day paid at the per diem amount up 
to the full DRG payment (Sec.  412.4(f)(1)). Transfer cases are also 
eligible for outlier payments. The outlier threshold for transfer cases 
is equal to the fixed-loss outlier threshold for nontransfer cases 
(adjusted for geographic variations in costs), divided by the geometric 
mean length of stay for the MS-DRG, multiplied by the length of stay 
for the case plus one day. The purpose of the IPPS postacute care 
transfer payment policy is to avoid providing an incentive for a 
hospital to transfer patients to another hospital, a SNF, or home under 
a written plan of care for home health services early in the patients' 
stay in order to minimize costs while still receiving the full MS-DRG 
payment. The transfer policy adjusts the payments to approximate the 
reduced costs of transfer cases.

[[Page 48593]]

    Beginning with the FY 2006 IPPS, the regulations at Sec.  412.4 
specified that, effective October 1, 2005, a DRG would be subject to 
the postacute care transfer policy if, based on Version 23.0 of the DRG 
Definitions Manual (FY 2006), using data from the March 2005 update of 
FY 2004 MedPAR file, the DRG meets the following criteria:
     The DRG had a geometric mean length of stay of at least 3 
days;
     The DRG had at least 2,050 postacute care transfer cases; 
and
     At least 5.5 percent of the cases in the DRG were 
discharged to postacute care prior to the geometric mean length of stay 
for the DRG.
    In addition, if the DRG was one of a paired set of DRGs based on 
the presence or absence of a CC or major cardiovascular condition 
(MCV), both paired DRGs would be included if either one met the three 
criteria above.
    If a DRG met the above criteria based on the Version 23.0 DRG 
Definitions Manual and FY 2004 MedPAR data, we made the DRG subject to 
the postacute care transfer policy. We noted in the FY 2006 final rule 
that we would not revise the list of DRGs subject to the postacute care 
transfer policy annually unless we made a change to a specific CMS DRG. 
We established this policy to promote certainty and stability in the 
postacute care transfer payment policy. Annual reviews of the list of 
CMS DRGs subject to the policy would likely lead to great volatility in 
the payment methodology with certain DRGs qualifying for the policy in 
one year, deleted the next year, only to be reinstated the following 
year. However, we noted that, over time, as treatment practices change, 
it was possible that some CMS DRGs that qualified for the policy will 
no longer be discharged with great frequency to postacute care. 
Similarly, we explained that there may be other CMS DRGs that at that 
time had a low rate of discharges to postacute care, but which might 
have very high rates in the future.
    The regulations at Sec.  412.4 further specify that if a DRG did 
not exist in Version 23.0 of the DRG Definitions Manual or a DRG 
included in Version 23.0 of the DRG Definitions Manual is revised, the 
DRG will be a qualifying DRG if it meets the following criteria based 
on the version of the DRG Definitions Manual in use when the new or 
revised DRG first became effective, using the most recent complete year 
of MedPAR data:
     The total number of discharges to postacute care in the 
DRG must equal or exceed the 55th percentile for all DRGs; and
     The proportion of short-stay discharges to postacute care 
to total discharges in the DRG exceeds the 55th percentile for all 
DRGs. A short-stay discharge is a discharge before the geometric mean 
length of stay for the DRG.
    A DRG also is a qualifying DRG if it is paired with another DRG 
based on the presence or absence of a CC or MCV that meets either of 
the above two criteria.
    The MS-DRGs that we adopted for FY 2008 were a significant revision 
to the CMS DRG system (72 FR 47141). Because the MS-DRGs were not 
reflected in Version 23.0 of the DRG Definitions Manual, consistent 
with Sec.  412.4, we established policy to recalculate the 55th 
percentile thresholds in order to determine which MS-DRGs would be 
subject to the postacute care transfer policy (72 FR 47186 through 
47188). Further, under the MS-DRGs, the subdivisions within the base 
DRGs are different than those under the previous CMS DRGs. Unlike the 
CMS DRGs, the MS-DRGs are not divided based on the presence or absence 
of a CC or MCV. Rather, the MS-DRGs have up to three subdivisions based 
on: (1) The presence of an MCC; (2) the presence of a CC; or (3) the 
absence of either an MCC or a CC. Consistent with our previous policy 
under which both CMS DRGs in a CC/non-CC pair were qualifying DRGs if 
one of the pair qualified, we established that each MS-DRG that shared 
a base MS-DRG will be a qualifying DRG if one of the MS-DRGs that 
shared the base DRG qualifies. We revised Sec.  412.4(d)(3)(ii) to 
codify this policy.
    Similarly, the adoption of the MS-DRGs also necessitated a revision 
to one of the criteria used in Sec.  412.4(f)(5) of the regulations to 
determine whether a DRG meets the criteria for payment under the 
``special payment methodology.'' Under the special payment methodology, 
a case subject to the special payment methodology that is transferred 
early to a postacute care setting will be paid 50 percent of the total 
IPPS payment (excluding any outlier payments and add-on payments for 
new technology) plus the average per diem for the first day of the 
stay. In addition, the hospital will receive 50 percent of the per diem 
amount for each subsequent day of the stay, up to the full MS-DRG 
payment amount. A CMS DRG was subject to the special payment 
methodology if it met the criteria in the regulations under Sec.  
412.4(f)(5). Section 412.4(f)(5)(iv) specifies that, for discharges 
occurring on or after October 1, 2005, and prior to October 1, 2007, if 
a DRG meets the criteria specified under Sec.  412.4(f)(5)(i) through 
(f)(5)(iii), any DRG that is paired with it based on the presence or 
absence of a CC or MCV is also subject to the special payment 
methodology. Given that this criterion was no longer applicable under 
the MS-DRG system, in the FY 2008 IPPS final rule with comment period, 
we added a new Sec.  412.4(f)(6) (42 FR 47188 and 47410). Section 
412.4(f)(6) provides that, for discharges on or after October 1, 2007, 
if an MS-DRG meets the criteria specified under Sec. Sec.  
412.4(f)(6)(i) through (f)(6)(iii), any other MS-DRG that is part of 
the same MS-DRG group is also subject to the special payment 
methodology. We updated this criterion so that it conformed to the 
changes associated with adopting MS-DRGs for FY 2008. The revision 
makes an MS-DRG subject to the special payment methodology if it shares 
a base MS-DRG with an MS-DRG that meets the criteria for receiving the 
special payment methodology.
    Section 1886(d)(5)(J) of the Act provides that, effective for 
discharges on or after October 1, 1998, a ``qualified discharge'' from 
one of DRGs selected by the Secretary to a postacute care provider 
would be treated as a transfer case. This section required the 
Secretary to define and pay as transfers all cases assigned to one of 
the DRGs selected by the Secretary, if the individuals are discharged 
to one of the following postacute care settings:
     A hospital or hospital unit that is not a subsection 
1886(d) hospital. (Section 1886(d)(1)(B) of the Act identifies the 
hospitals and hospital units that are excluded from the term 
``subsection (d) hospital'' as psychiatric hospitals and units, 
rehabilitation hospitals and units, children's hospitals, long-term 
care hospitals, and cancer hospitals.)
     A skilled nursing facility (as defined at section1819(a) 
of the Act).
     Home health services provided by a home health agency, if 
the services relate to the condition or diagnosis for which the 
individual received inpatient hospital services, and if the home health 
services are provided within an appropriate period (as determined by 
the Secretary). In the FY 1999 IPPS final rule (63 FR 40975 through 
40976 and 40979 through 40981), we specified that a patient discharged 
to home would be considered transferred to postacute care if the 
patient received home health services within 3 days after the date of 
discharge. In addition, in the FY 1999 IPPS final rule, we did not 
include patients transferred to a swing-bed for skilled nursing care in 
the definition of postacute care transfer cases (63 FR 40977).

[[Page 48594]]

2. Policy Change Relating to Transfers to Home with a Written Plan for 
the Provision of Home Health Services
    As noted above, in the FY 1999 IPPS final rule (63 FR 40975 through 
40976 and 40979 through 40981), we determined that 3 days is an 
appropriate period within which home health services should begin 
following a beneficiary's discharge to the home in order for the 
discharge to be considered a ``qualified discharge'' subject to the 
payment adjustment for postacute care transfer cases. In that same 
final rule, we noted that we would monitor whether 3 days would remain 
an appropriate timeframe.
    Section 1886(d)(5)(J)(ii)(III) of the Act provides that the 
discharge of an individual who receives home health services upon 
discharge will be treated as a transfer if ``such services are provided 
within an appropriate period (as determined by the Secretary. * * *''. 
The statute thus confers upon the Secretary the authority to determine 
an appropriate timeframe for the application of the postacute care 
transfer policy in cases where home health services commence subsequent 
to discharge from an acute care hospital. In the FY 1999 final IPPS 
rule, we established the policy that the postacute care transfer policy 
would apply to cases in which the home health care begins within 3 days 
after the date of discharge from an acute care hospital. We noted in 
that rule that we did not believe that it was appropriate to limit the 
transfer definition to cases in which home health care begins on the 
same day as the patient is discharged from the hospital. We observed 
that data indicated that less than 8 percent of discharged patients who 
receive home health care begin receiving those services on the date of 
discharge. We stated that we did not believe that it was reasonable to 
expect that patients who are discharged later in the day would receive 
a home health visit that same day. Furthermore, we believed that the 
financial incentive to delay needed home health care for only a matter 
of hours would be overwhelming if we limited the timeframe to one day. 
At the time of that final rule, we explained that we believed that 3 
days would be a more appropriate timeframe because it would mitigate 
the incentive to delay home health services to avoid the application of 
the postacute care transfer policy, and because a 3-day timeframe was 
consistent with existing patterns of care.
    In that final rule, we also noted that a number of commenters had 
raised issues and questions concerning the proposal to adopt 3 days as 
the appropriate timeframe for the application of the postacute care 
transfer policy in these cases. While most of the commenters advocated 
shorter timeframes, on the grounds that postacute care beginning 3 days 
after a discharge should not be considered a substitute for inpatient 
hospital care, others suggested that a 3-day window might still allow 
for needlessly prolonged hospital care or delayed home health in order 
to avoid the application of the postacute care transfer policy. 
Although MedPAC agreed with the commenters who asserted that home 
health care services furnished after a delay of more than one day may 
not necessarily be regarded as substituting for inpatient acute care, 
they also noted that a 3-day window allows for the fact that most home 
health patients do not receive care every day, as well as for those 
occasions in which there may be a delay in arranging for the provision 
of planned care (for example, an intervening weekend). MedPAC also 
stated that a shorter period may create a stronger incentive to delay 
the provision of necessary care beyond the window so that the hospital 
will receive the full DRG payment. In the light of these comments and, 
in particular, of the concern that a 3-day timeframe still allowed for 
some incentive to delay necessary home health services in order to 
avoid the application of the postacute care transfer policy, we 
indicated that we would continue to monitor this policy in order to 
track any changes in practices that may indicate the need for revising 
the window.
    Since the adoption of this policy in FY 1999, we have continued to 
receive reports that some providers discharge patients prior to the 
geometric mean length of stay but intentionally delay home health 
services beyond 3 days after the acute hospital discharge in order to 
avoid the postacute care transfer payment adjustment policy. These 
reports, and the concerns expressed by some commenters in FY 1999 about 
the adequacy of a 3-day window to reduce such incentives, have prompted 
us to examine the available data concerning the initiation and program 
payments for home health care subsequent to discharge from postacute 
care.
    We merged the FY 2004 MedPAR file with postacute care bill files 
matching beneficiary identification numbers and discharge and admission 
dates and looked at the 10 DRGs that were subject to the postacute care 
transfer policy from FYs 1999 through 2003 (DRG 14 (Intracranial 
Hemorrhage and Stroke with Infarction (formerly ``Specific 
Cerebrovascular Disorders Except Transient Ischemic Attack'')); DRG 113 
(Amputation for Circulatory System Disorders Except Upper Limb and 
Toe); DRG 209 (Major Joint Limb Reattachment Procedures of Lower 
Extremity); DRG 210 (Hip and Femur Procedures Except Major Joint 
Procedures Age <=17 with CC); DRG 211 (Hip and Femur Procedures Except 
Major Joint Procedures Age <=17 without CC); DRG 236 (Fractures of Hip 
and Pelvis); DRG 263 (Skin Graft and/or Debridement for Skin Ulcer or 
Cellulitis with CC); DRG 264 (Skin Graft and/or Debridement for Skin 
Ulcer or Cellulitis without CC); DRG 429 (Organic Disturbances and 
Mental Retardation); and DRG 483 (Tracheostomy with Mechanical 
Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth, and 
Neck Diagnoses (formerly ``Tracheostomy Except for Face, Mouth, and 
Neck Diagnoses'')). We selected the original 10 ``qualified DRGs'' 
because they were the DRGs to which the postacute care transfer policy 
applied for FYs 1999 through 2003 and because we expect that trends 
that we found in the data with those DRGs would be likely to accurately 
reflect provider practices after the inception of the postacute care 
transfer policy. We expect that provider practices for the original 10 
DRGs would be consistent even with the expansion of the DRGs that are 
subject to the postacute care transfer policy. We note that providers 
may have even a greater incentive to delay the initiation of home 
health care in an effort to avoid the postacute care transfer policy 
now that there are more DRGs to which the policy applies. We compared 
data on home health services provided to patients who were discharged 
prior to the geometric mean length of stay to patients who were 
discharged at or beyond the geometric mean length of stay. For purposes 
of this analysis, we assumed that home health was the first discharge 
designation from the acute care hospital setting.
    The data showed that, on average, the Medicare payment per home 
health visit was higher for patients who were discharged prior to the 
geometric mean length of stay (as compared to patients who were 
discharged at or beyond the geometric mean length of stay). 
Specifically, we found that average Medicare payments per home health 
care visit were consistently higher for patients discharged prior to 
the geometric mean length of stay than for patients discharged at or 
after the geometric mean length of stay. The average home health care 
per visit

[[Page 48595]]

payments for patients treated for the relevant DRGs and discharged 
before the geometric mean length of stay are $204 when the initiation 
of home health care began on the second day after discharge, $199 on 
the third day, and $182 on the sixth day, compared to $177, $163, and 
$171, respectively for patients discharged on or after the geometric 
mean length of stay. Furthermore, the ratio of the payments for these 
two groups increased from 1.16 on the third day after discharge to 1.22 
on the fourth day, before falling again to 1.04, 1.07, and 1.08 on the 
fifth, sixth, and seventh days. This suggested to us the possibility 
that home health care for some relatively sicker patients is being 
delayed until just beyond the 3-day window during which the postacute 
care transfer policy applies.
    In the light of these data, we indicated in the FY 2009 IPPS 
proposed rule (73 FR 23641) that we believed it was appropriate to 
propose extending the applicable timeframe in order to reduce the 
incentive for providers to delay home health care when discharging 
patients from the acute care setting. Further examination of the data 
indicated that the average per day Medicare payments for home health 
care for those patients, in the DRGs to which the postacute care 
transfer policy applies, who are discharged from the hospital prior to 
the geometric mean length of stay, stabilizes at a somewhat lower 
amount when the initiation of home health visits begins on the seventh 
and subsequent days after discharge. Specifically, average payments per 
visit for this group fall from $182 when home health services began on 
the sixth day after the acute care hospital discharge to $174 on the 
seventh day, and then remain relatively steady at $171, $177, and $172 
on the eighth, ninth, and tenth days. This suggested to us that a 7-day 
period might be an appropriate point at which to establish a new 
timeframe.
    As a consequence of this analysis, in the proposed rule, we 
proposed to revise the regulations at Sec.  412.4(c)(3) to extend the 
timeframe to within 7 days after the date of discharge to home under a 
written plan for the provision of home health services, effective 
October 1, 2008. We stated that we believed extending the applicable 
timeframe would lessen the incentive for providers to delay the start 
of home health care after discharging patients from the acute care 
hospital setting. We also indicated that during the comment period on 
the proposed rule, we planned to continue to search our data on 
postacute care discharges to home health services. We welcomed comments 
and suggestions on other data analyses that could be performed to 
determine an appropriate timeframe for which the postacute care 
transfer policy would apply.
    In addition to the reasons noted above, we stated that we believed 
that 7 days is currently an appropriate timeframe because we believe 
that it accommodates current practices and it is sufficiently long 
enough to lessen the likelihood that providers would delay the 
initiation of necessary home health services. At the same time, we 
stated that we believed that 7 days is narrow enough that we would 
still expect the majority of the home health services to be related to 
the condition to which the acute inpatient hospital stay was necessary. 
Further, we noted that there may be some cases for which it is not 
clinically appropriate to begin home health services immediately 
following an acute care discharge, and that even when home health 
services are clinically appropriate sooner than within 7 days of acute 
care discharge, home health services may not be immediately available.
    We note that, as we stated in the FY 2000 IPPS final rule (65 FR 
47081), if the hospital's continuing care plan for the patient is not 
related to the purpose of the inpatient hospital admission, a condition 
code 42 must be entered on the claim. In addition, if the proposed 
policy were to be adopted and the continuing care plan is related to 
the purpose of the inpatient hospital admission but begins after 7 days 
after discharge, a condition code 43 would have to be entered on the 
claim. Under the present policy, condition code 43 applies when the 
home health services begin within 3 days after the date of discharge 
from the acute care hospital. The presence of either of these condition 
codes in conjunction with patient status discharge code 06 (Discharged/
Transferred to Home under Care of Organized Home Health Service 
Organization in Anticipation of Covered Skilled Care) will result in 
full payment rather than the transfer payment amount.
    We received many comments on this proposal. The commenters included 
hospitals, hospital industry associations, HHAs, representatives of the 
home health care industry, and MedPAC. The comments were almost 
uniformly opposed to the proposal. As we discuss in more detail below, 
we are not proceeding with finalizing this proposal.
    Comment: Some commenters expressed opposition to the proposal on 
the grounds that the postacute care transfer policy in itself is 
inconsistent with the principles of a PPS. The commenters emphasized 
the nature of a PPS as a system of averages, designed to reward 
hospitals for the efficient provision of services. Under a PPS, they 
asserted, cases with longer-than-average lengths of stay tend to be 
paid less than costs, while cases with shorter-than-average stays tend 
to be paid more than costs. These commenters argued that, in general, 
the postacute care transfer policy penalizes hospitals for the 
efficient treatment of patients. Expansion of the postacute care 
transfer policy, they opined, would thus further undercut the basic 
principles and objectives of a PPS and only penalize hospitals further.
    Response: We disagree that the proposed postacute care transfer 
policy violates the principles of a PPS. The postacute care transfer 
provision is mandated by statute, and in previous rules we have 
thoroughly discussed the sound policy reasons for including such a 
provision within the IPPS. (We refer readers to previous IPPS final 
rules, including the rules at 63 FR 40975 through 40976 and 63 FR 40979 
through 40981, for more details.) Therefore, we do not believe that 
objections to the postacute care transfer policy in general provide any 
rationale for refraining from expansions and revisions to the policy, 
provided those changes are in and of themselves warranted by sound 
policy considerations.
    Comment: Many commenters opposed the proposal for reasons related 
to the merits of the proposal itself. These commenters presented a 
number of arguments against the proposal. Some commenters asserted that 
the data CMS used to support the proposal were outdated and incomplete. 
Other commenters argued that home health care that begins 4 or more 
days after the date of discharge is unlikely to be a continuation of 
acute-level care. Some commenters asserted that it is physicians, not 
hospitals, who typically order home health services for patients. 
Therefore, they contended, hospitals should not be financially 
penalized for decisions made outside of their control. Other commenters 
suggested that physicians be held responsible for those decisions 
through the physician fee schedule instead.
    Response: In response to the comment that we used outdated and 
incomplete data in developing our proposal, we note that, for the years 
for which the analysis was conducted (the data were based on claims 
from FYs 1999 through 2003), there were only 10 DRGs subject to the 
postacute care transfer policy. We continue to believe, as we stated in 
the proposed rule, that the trends we found when there were only 10 
DRGs subject

[[Page 48596]]

to the policy would be consistent with the trends that will be found in 
more recent data. Furthermore, we believe that these trends may be even 
more pronounced in light of the fact that there are now many more MS-
DRGs (273) subject to the postacute care transfer policy.
    We also do not find persuasive the comments arguing that because 
physicians typically order home health care rather than hospitals, 
decisions regarding the commencement of the provision of home health 
care are made outside of the hospital's control. We note that, even 
under the current 3-day policy, physicians, not hospitals, typically 
discharge patients from the acute care hospital setting and that the 
postacute care transfer policy applies when a ``qualified'' discharge 
occurs prior to the geometric mean length of stay and the hospital 
receives a reduced payment even under the current policy. Furthermore, 
because the physician who orders both the early discharge and the 
initiation of home health care for the patient is typically employed, 
contracted, or at least, has privileges at the affected hospital, we 
believe that the hospital has a relationship with the physician and 
should have knowledge of the physician's practices. Therefore, we 
disagree with the contention that the hospital is being inappropriately 
penalized for actions outside its control. Similarly, in response to 
the comment related to reducing physician payments, we note that 
section 1886(d)(5)(J)(ii)(III) of the Act requires that the postacute 
care transfer policy apply to acute care hospital payments under the 
IPPS, and not to physicians under the Medicare PFS. Therefore, we 
disagree with the contention that physician payments under the Medicare 
PFS should be affected by this provision. We also note that it is the 
hospital, not the physician, that stands to gain financially from the 
early discharge of a patient.
    We also note that the commenters who expressed the concern that 
home health care initiated more than 4 days after the discharge would 
be unrelated to the acute care stay failed to mention an important 
feature of the postacute care transfer policy. Specifically, it is 
important to recognize that CMS allows hospitals, through use of a 
condition code on the claim, to bypass the reduced transfer payment for 
home health care that is unrelated to the acute care stay. Therefore, 
we disagree that acute hospitals are financially penalized for 
appropriate transfers to home health that are unrelated to the acute 
care stay.
    Comment: Some commenters claimed that it is administratively 
burdensome for hospitals to track whether patients received home health 
care services up to 7 days after they have been discharged from the 
hospital, particularly for hospitals that submit their claims within 7 
days of discharge. In addition, these and other commenters argued that 
CMS should not implement a change to the postacute care transfer policy 
in light of recent changes made to the home health PPS in CY 2008, and 
in the light of our proposal to implement the CARE tool demonstration 
that will examine differences in costs and outcomes across postacute 
care settings (discussed in section IV.B. of this preamble).
    Response: We have stated in prior Federal Register notices and in 
provider education articles that, in most instances, we would expect 
the provider to be aware of the postacute care that its patient would 
receive. We also note that providers are allowed to adjust claims after 
they have been submitted, including making adjustments for the purpose 
of reflecting any home health services that are provided subsequent to 
the acute care hospital discharge.
    Providers made similar arguments when we adopted the 3-day window 
in FY 1999, which we responded to at that time. We refer readers to the 
FY 1999 IPPS final rule (63 FR 40979 through 40980) for a complete 
discussion. We have not become aware of any widespread pattern of 
providers being unaware of the postacute care received by recently 
discharged patients, although, as we mentioned in the FY 1999 IPPS 
final rule (63 FR 40980), there may be occasional instances in which 
the hospital is unaware that a physician has ordered home health 
services for a recently discharged patient. Therefore, we are not 
persuaded by these comments.
    In response to the comment related to recent changes in the home 
health PPS, we again note that the postacute care transfer policy 
applies to acute IPPS hospital payments, not to home health PPS 
payments. Based on information provided by the commenter (which did not 
point out any specific changes in the home health PPS that could 
potentially have an effect on the postacute care transfer policy), it 
is unclear exactly how changes to home health payments might have an 
effect on payments made under the postacute care transfer policy 
provision. Additionally, the commenter did not provide specific 
information on how the CARE Tool demonstration is related to postacute 
care transfer payments to acute care hospitals, and we see no evidence 
that one should effect the other.
    Comment: One commenter acknowledged that it had received anecdotal 
reports that some hospitals instructed physicians to delay the 
initiation of home health services until after 3 days. However, the 
commenter argued that expansion of the existing policy would not alter 
this behavior. Other commenters argued that there are legitimate 
reasons that the start of home health care services may be delayed, 
including: Patient/family preferences, availability of home health care 
providers, and insurance coverage. Specifically, commenters stated that 
patients may request that their primary care physician (someone other 
than the physician taking care of them while they were in the hospital) 
arrange for home health services. In addition, it is not uncommon for a 
patient to be discharged home from the hospital, then to visit their 
physician a day or two later, only to have the physician order home 
health services that take another day or two to begin--again pushing 
the start of home health services beyond the 3-day window. These 
commenters contended that hospitals should not be ``penalized'' because 
of these legitimate delays.
    Response: We agree that there may be legitimate delays in the 
initiation of home health care services subsequent to an acute care 
hospital discharge. However, the fact that the delays are legitimate 
does not establish that it is inappropriate to adjust payments to 
account for the discharge into postacute care. There may be legitimate 
delays in the initiation of home health care services even under the 3-
day window, but the postacute transfer policy still applies in that 
situation. This is because one of the primary objectives of the 
postacute care transfer policy is to pay providers appropriately for 
services rendered. When the care of a patient is shared between an 
acute care hospital provider and home health care services within 3 
days of the acute care discharge, we believe that it is appropriate to 
pay the acute care hospital a reduced payment because it only provided 
services for a shorter than average amount of time. Therefore, we 
believe that these comments lend support to the continued need to 
monitor the current policy to see if there are trends of delays in the 
initiation of home health services, whether such delays are 
``legitimate'' or not. As we discuss below, we are not proceeding with 
finalizing this proposal. We will continue to consider whether the 3-
day window is appropriate in light of all the relevant data.
    Comment: MedPAC commented that it does not believe that the data 
presented in the proposed rule support an expansion of the policy from 
3 days

[[Page 48597]]

to 7 days. MedPAC conducted its own analysis of 2005 and 2006 data and 
commented that its data do not support an expansion. In particular, 
MedPAC pointed out that its data provide no evidence of a spike in home 
health use 4 days after discharge, which it would have expected to see 
if there was significant gaming under our current 3-day window policy. 
In addition, MedPAC found that the distribution of claims by the number 
of days between hospital discharge and the beginning of home heath care 
is similar between DRGs subject to the postacute care transfer policy 
and those that are not subject to the postacute care transfer policy, 
suggesting that there has not been significant gaming of the system 
under the current 3-day window. MedPAC, therefore, concluded that CMS 
should provide stronger support for why the change is needed. Other 
commenters also suggested that CMS analyze the data more thoroughly and 
make a proposal based on that analysis in FY 2010.
    Response: We have not yet received MedPAC's data analysis in 
support of its conclusion that there is no evidence of a spike in home 
health care services that begin after 4 days of discharge from the 
acute care hospital setting. Similarly, we have not seen the specific 
data indicating that there is no significant difference between the 
number of days between hospital discharge and postacute care between 
those DRGs subject to the postacute care transfer policy. Therefore, we 
are unable to compare their data with our own data, which have shown 
some evidence of a spike in home heath care services 4 days after 
discharge. However, we agree with MedPAC that it would be preferable to 
defer proceeding with this or a similar proposal until stronger 
evidence (that is, data) is available in support of the change. We also 
agree with the other commenters who suggested that it is more prudent 
at this time to continue studying this issue than to proceed with 
finalizing our proposal to extend the current 3-day window to 7 days. 
However, we remain concerned that a relatively brief window, such as 3 
days, may create a strong incentive to delay the provision of necessary 
care beyond the window so that the hospital will receive the full MS-
DRG payment. Therefore, we will continue to monitor this policy in 
order to track any changes in practices that may indicate the need for 
revising the window. We may proceed with this proposal or another 
proposal to address the issue in a subsequent rulemaking cycle.
    After consideration of the public comments received, we are not 
adopting as final our proposed change to the regulations at Sec.  
412.4(c)(3) relating to the proposed 7-day window for postacute care 
transfers to home health care services. As we indicated above, we will 
continue to monitor the existing policy and may address the issue in a 
subsequent rulemaking.
3. Evaluation of MS-DRGs Under Postacute Care Transfer Policy for FY 
2009
    For FY 2009, we did not propose to make any changes to the criteria 
by which an MS-DRG would qualify for inclusion in the postacute care 
transfer policy. However, because we proposed to revise some existing 
MS-DRGs and to add one new MS-DRG (discussed under section II.G. of 
this preamble), we proposed to evaluate those MS-DRGs under our 
existing postacute care transfer criteria in order to determine whether 
any of the revised or new MS-DRGs will meet the postacute care transfer 
criteria for FY 2009. Therefore, we indicated that, for 2009, we were 
evaluating MS-DRGs 001, 002, 215, 245, 901 through 909, 913 through 
923, 955 through 959, and 963 through 965. We noted that any revisions 
made would not constitute a change to the application of the postacute 
care transfer policy. We included a list indicating which MS-DRGs would 
be subject to the postacute care transfer policy for FY 2009 in Table 5 
in the Addendum to the proposed rule.
    We did not receive any public comments on this issue. We completed 
our evaluation of the MS-DRGs listed above against the criteria for 
postacture care transfer payments. Table 5 of this final rule contains 
a complete list of MS-DRGs that are subject to the postacute care 
transfer policy for FY 2009.

B. Reporting of Hospital Quality Data for Annual Hospital Payment 
Update

1. Background
a. Overview
    CMS is transforming the Medicare program from a passive payer to an 
active purchaser of higher quality, more efficient health care. Such 
changes will contribute to the sustainability of the Medicare program, 
encourage the delivery of high quality care while avoiding unnecessary 
costs, and help ensure high value for beneficiaries. To support this 
transformation, CMS has worked with stakeholders to develop and 
implement quality measures, make provider and plan performance public, 
link payment incentives to reporting on measures, and ultimately is 
working to link payment to actual performance on these measures. 
Commonly referred to as value-based purchasing, this policy aligns 
payment incentives with the quality of care as well as the resources 
used to deliver care to encourage the delivery of high-value health 
care.
    The success of this transformation is supported by and dependent 
upon an increasing number of widely-agreed upon quality measures. The 
Medicare program has defined measures of quality in almost every 
setting and measures some aspect of care for almost all Medicare 
beneficiaries. These measures include clinical processes, patient 
perception of their care experience, and, increasingly, outcomes.
    The Medicare program has established mechanisms for collecting 
information on these measures, such as QualityNet, an Internet-based 
process that hospitals use to report all-payer information. Initial 
voluntary efforts were supplemented beginning in FY 2005 by a provision 
in the Medicare Prescription Drug Improvement and Modernization Act 
(MMA), which provided the full annual payment update only to 
``subsection (d) hospitals'' (that is, hospitals paid under the IPPS) 
that successfully reported on a set of widely-agreed upon quality 
measures. Since FY 2007, as required by subsequent legislation (the 
Deficit Reduction Act (DRA)) the number of quality measures and the 
amount of the financial incentive have increased.
    As a result, the great majority of hospitals now report on quality 
measures for heart failure, acute myocardial infarction, pneumonia, and 
surgical care improvement and received the full annual update for FY 
2008. The number of measures has continued to grow and the types of 
measures have grown as well, with the addition of outcomes measures, 
such as heart attack and heart failure mortality measures, and the 
HCAHPS measures of patient satisfaction. In section IV.B.2. of the 
preamble to the FY 2009 IPPS proposed rule, we sought public comments 
on proposed additional quality measures (73 FR 23646). Reporting on 
these measures provides hospitals a greater awareness of the quality of 
care they provide and provides actionable information for consumers to 
make more informed decisions about their health care providers and 
treatments.
    Moving beyond pay for reporting to paying for performance, CMS has 
designed a Hospital Value-Based Purchasing (VBP) Plan that would link 
hospital payments to their actual performance on quality measures. In 
accordance with the DRA, the Plan was submitted to Congress in November

[[Page 48598]]

2007. We discuss the Plan more fully in section IV.C. of this preamble.
    The ongoing CMS Premier Hospital Quality Incentive Demonstration 
project is another effort linking payments to quality performance. 
Launched in 2003, the Premier Hospital Quality Incentive Demonstration 
project promotes measurable improvements in the quality of care, 
examining whether economic incentives to hospitals are effective at 
improving the quality of care. Early evidence from the project 
indicates that linking payments to quality performance is effective. 
This demonstration project is ongoing with a scheduled end date of 
September 2009.
    As required by section 5001(c) the DRA, CMS also has implemented a 
program intended to encourage the prevention of certain avoidable or 
preventable hospital-acquired conditions (HACs), including infections 
that may occur during a hospital stay. Beginning October 1, 2007, CMS 
required hospitals to begin reporting information on Medicare claims 
specifying whether certain diagnoses were present on admission (POA). 
Beginning October 1, 2008, CMS will no longer pay hospitals for a DRG 
using the higher-paying CC or MCC associated with one or more of these 
conditions (if no other condition meeting the higher paying CC or MCC 
criteria is present) unless the condition was POA (that is, not 
acquired during the hospital stay). Linking a payment incentive to 
hospitals' prevention of avoidable or preventable HACs will encourage 
high quality care and the prevention of these HACs. Combating these 
HACs can reduce morbidity and mortality as well as reduce unnecessary 
costs. In the FY 2008 IPPS final rule with comment period (72 FR 
47217), CMS identified eight HACs. In section II.F. of the preamble to 
the FY 2009 IPPS proposed rule, CMS sought comment on additional 
proposed conditions (73 FR 23547).
    CMS is committed to enhancing these value-based purchasing 
programs, in close collaboration with stakeholders, through the 
development and use of new measures for quality reporting, expanded 
public reporting, greater and more widespread incentives in the payment 
system for reporting on quality measures, and ultimately performance on 
those measures. These initiatives hold the potential to transform the 
delivery of health care by rewarding quality of care and delivering 
higher value to Medicare beneficiaries.
    A critical element of value-based purchasing is well-accepted 
measures. Hospitals can then measure their performance relative to 
other hospitals. Further, this information can be posted on the 
Internet for consumers to use to make more informed choices about their 
care. In this section IV.B. of this preamble, we describe past and 
current efforts to make this information available and proposals to 
expand these efforts and make even more useful hospital quality 
information available to the public.
b. Voluntary Hospital Quality Data Reporting
    In December 2002, the Secretary announced a partnership with 
several collaborators intended to promote hospital quality improvement 
and public reporting of hospital quality information. These 
collaborators included the American Hospital Association (AHA), the 
Federation of American Hospitals (FAH), the Association of American 
Medical Colleges (AAMC), the Joint Commission on Accreditation of 
Healthcare Organizations (now called The Joint Commission), the 
National Quality Forum (NQF), the American Medical Association (AMA), 
the Consumer-Purchaser Disclosure Project, the American Association of 
Retired Persons (AARP), the American Federation of Labor-Congress of 
Industrial Organizations (AFL-CIO), the Agency for Healthcare Research 
and Quality (AHRQ), as well as CMS and others. In July 2003, CMS began 
the National Voluntary Hospital Reporting Initiative. This initiative 
is now known as the Hospital Quality Alliance: Improving Care through 
Information (HQA).
    We established the following ``starter set'' of 10 quality measures 
for voluntary reporting as of November 1, 2003:
Heart Attack (Acute Myocardial Infarction or AMI)
     Was aspirin given to the patient upon arrival to the 
hospital?
     Was aspirin prescribed when the patient was discharged?
     Was a beta blocker given to the patient upon arrival to 
the hospital?
     Was a beta blocker prescribed when the patient was 
discharged?
     Was an Angiotensin Converting Enzyme (ACE) Inhibitor given 
for the patient with heart failure?
Heart Failure (HF)
     Did the patient get an assessment of his or her heart 
function?
     Was an ACE Inhibitor given to the patient?
Pneumonia (PN)
     Was an antibiotic given to the patient in a timely way?
     Had the patient received a pneumococcal vaccination?
     Was the patient's oxygen level assessed?
    This starter set of 10 quality measures was endorsed by the NQF. 
The NQF is a voluntary consensus standard-setting organization 
established to standardize health care quality measurement and 
reporting through its consensus development process. In addition, this 
starter set is a subset of measures currently collected for The Joint 
Commission as part of its hospital inpatient certification program.
    We chose these 10 quality measures in order to collect data that 
would: (1) Provide useful and valid information about hospital quality 
to the public; (2) provide hospitals with a sense of predictability 
about public reporting expectations; (3) begin to standardize data and 
data collection mechanisms; and (4) foster hospital quality 
improvement.
    Hospitals submit quality data through the secure portion of the 
QualityNet Web site (formerly known as QualityNet Exchange) (http://www.QualityNet.org). This Web site meets or exceeds all current Health 
Insurance Portability and Accountability Act requirements for security 
of personal health information. Data from this initiative are used to 
populate the Hospital Compare Web site, http://www.hospitalcompare.hhs.gov. This Web site assists beneficiaries and 
the general public by providing information on hospital quality of care 
for consumers who need to select a hospital. It further serves to 
encourage consumers to work with their doctors and hospitals to discuss 
the quality of care hospitals provide to patients, thereby providing an 
additional incentive to improve the quality of care that they furnish.
c. Hospital Quality Data Reporting Under Section 501(b) of Public Law 
108-173
    Section 1886(b)(3)(B)(vii) of the Act, as added by section 501(b) 
of Public Law 108-173, revised the mechanism used to update the 
standardized amount of payment for inpatient hospital operating costs. 
Specifically, the statute provided for a reduction of 0.4 percentage 
points to the update percentage increase (also known as the market 
basket update) for each of FYs 2005 through 2007 for any subsection (d) 
hospital that does not submit data on a set of 10 quality indicators 
established

[[Page 48599]]

by the Secretary as of November 1, 2003. The statute also provided that 
any reduction would apply only to the fiscal year involved, and would 
not be taken into account in computing the applicable percentage 
increase for a subsequent fiscal year. This measure established an 
incentive for IPPS hospitals to submit data on the quality measures 
established by the Secretary.
    We initially implemented section 1886(b)(3)(B)(vii) of the Act in 
the FY 2005 IPPS final rule (69 FR 49078). In addition, we established 
the RHQDAPU program and added 42 CFR 412.64(d)(2) to our regulations. 
We adopted additional requirements under the RHQDAPU program in the FY 
2006 IPPS final rule (70 FR 47420).
d. Hospital Quality Data Reporting Under Section 5001(a) of Public Law 
109-171
    Section 5001(a) of the Deficit Reduction Act of 2005, Public Law 
109-171 (DRA), further amended section 1886(b)(3)(B) of the Act to 
revise the mechanism used to update the standardized amount for payment 
for hospital inpatient operating costs. Specifically, sections 
1886(b)(3)(B)(viii)(I) and (II) of the Act provide that the payment 
update for FY 2007 and each subsequent fiscal year be reduced by 2.0 
percentage points for any subsection (d) hospital that does not submit 
certain quality data in a form and manner, and at a time, specified by 
the Secretary. Section 1886(b)(3)(B)(viii)(III) of the Act requires 
that the Secretary expand the ``starter set'' of 10 quality measures 
that were established by the Secretary as of November 1, 2003, as the 
Secretary determines to be appropriate for the measurement of the 
quality of care furnished by a hospital in inpatient settings. In 
expanding this set of measures, section 1886(b)(3)(B)(viii)(IV) of the 
Act requires that, effective for payments beginning with FY 2007, the 
Secretary begin to adopt the baseline set of performance measures as 
set forth in a December 2005 report issued by the Institute of Medicine 
(IOM) of the National Academy of Sciences under section 238(b) of the 
MMA.\23\
---------------------------------------------------------------------------

    \23\ Institute of Medicine, ``Performance Measurement: 
Accelerating Improvement,'' December 1, 2005, available at: http://www.iom.edu/CMS/3809/19805/31310.aspx.
---------------------------------------------------------------------------

    The IOM measures include: 21 HQA quality measures (including the 
``starter set'' of 10 quality measures); the HCAHPS patient experience 
of care survey; and 3 structural measures. The structural measures are: 
(1) Implementation of computerized provider order entry for 
prescriptions; (2) staffing of intensive care units with intensivists; 
and (3) evidence-based hospital referrals. These structural measures 
constitute the Leapfrog Group's original ``three leaps,'' and are part 
of the NQF's 30 Safe Practices for Better Healthcare.
    Sections 1886(b)(3)(B)(viii)(V) and (VI) of the Act require that, 
effective for payments beginning with FY 2008, the Secretary add other 
quality measures that reflect consensus among affected parties, and to 
the extent feasible and practicable, have been set forth by one or more 
national consensus building entities, and provide the Secretary with 
the discretion to replace any quality measures or indicators in 
appropriate cases, such as where all hospitals are effectively in 
compliance with a measure, or the measures or indicators have been 
subsequently shown to not represent the best clinical practice. Thus, 
the Secretary is granted broad discretion to replace measures that are 
no longer appropriate for the RHQDAPU program.
    Section 1886(b)(3)(B)(viii)(VII) of the Act requires that the 
Secretary establish procedures for making quality data available to the 
public after ensuring that a hospital would have the opportunity to 
review its data before these data are made public. In addition, this 
section requires that the Secretary report quality measures of process, 
structure, outcome, patients' perspective of care, efficiency, and 
costs of care that relate to services furnished in inpatient settings 
on the CMS Web site.
    Section 1886(b)(3)(B)(viii)(I) of the Act also provides that any 
reduction in a hospital's payment update will apply only with respect 
to the fiscal year involved, and will not be taken into account for 
computing the applicable percentage increase for a subsequent fiscal 
year.
    In the FY 2007 IPPS final rule (71 FR 48045), we amended our 
regulations at 42 CFR 412.64(d)(2) to reflect the 2.0 percentage point 
reduction in the payment update for FY 2007 and subsequent fiscal years 
for subsection (d) hospitals that do not comply with requirements for 
reporting quality data, as provided for under section 
1886(b)(3)(B)(viii) of the Act. In the FY 2007 IPPS final rule, we also 
added 11 additional quality measures to the 10-measure starter set to 
establish an expanded set of 21 quality measures (71 FR 48033 through 
48037).
    Commenters on the FY 2007 IPPS proposed rule requested that we 
notify the public as far in advance as possible of any proposed 
expansions of the measure set and program procedures in order to 
encourage broad collaboration and to give hospitals time to prepare for 
any anticipated change. Taking these concerns into account, in the CY 
2007 OPPS/ASC final rule (71 FR 68201), we adopted six additional 
quality measures for the FY 2008 IPPS update, for a total of 27 
measures. The measure set that we adopted for the FY 2008 payment 
determination was as follows:

------------------------------------------------------------------------
                 Topic                           Quality measure
------------------------------------------------------------------------
Heart Attack (Acute Myocardial            Aspirin at arrival.*
 Infarction).
                                          Aspirin prescribed at
                                          discharge.*
                                          Angiotensin Converting
                                          Enzyme Inhibitor (ACE-I) or
                                          Angiotensin II Receptor
                                          Blocker (ARB) for left
                                          ventricular systolic
                                          dysfunction.*
                                          Beta blocker at
                                          arrival.*
                                          Beta blocker
                                          prescribed at discharge.*
                                          Fibrinolytic
                                          (thrombolytic) agent received
                                          within 30 minutes of hospital
                                          arrival.**
                                          Percutaneous Coronary
                                          Intervention (PCI) received
                                          within 120 minutes of hospital
                                          arrival.**
                                          Adult smoking
                                          cessation advice/counseling.**
Heart Failure (HF).....................   Left ventricular
                                          function assessment.*
                                          Angiotensin Converting
                                          Enzyme Inhibitor (ACE-I) or
                                          Angiotensin II Receptor
                                          Blocker (ARB) for left
                                          ventricular systolic
                                          dysfunction.
                                          Discharge
                                          instructions.**
                                          Adult smoking
                                          cessation advice/counseling.**
Pneumonia (PN).........................   Initial antibiotic
                                          received within 4 hours of
                                          hospital arrival.*

[[Page 48600]]

 
                                          Oxygenation
                                          assessment.*
                                          Pneumococcal
                                          vaccination status.*
                                          Blood culture
                                          performed before first
                                          antibiotic received in
                                          hospital.**
                                          Adult smoking
                                          cessation advice/counseling.**
                                          Appropriate initial
                                          antibiotic selection.**
                                          Influenza vaccination
                                          status.**
Surgical Care Improvement Project         Prophylactic
 (SCIP)--named SIP for discharges prior   antibiotic received within 1
 to July 2006 (3Q06).                     hour prior to surgical
                                          incision.**
                                          Prophylactic
                                          antibiotics discontinued
                                          within 24 hours after surgery
                                          end time.**
                                          SCIP-VTE-1: Venous
                                          thromboembolism (VTE)
                                          prophylaxis ordered for
                                          surgery patients.***
                                          SCIP-VTE-2: VTE
                                          prophylaxis within 24 hours
                                          pre/post surgery.***
                                          SCIP Infection 2:
                                          Prophylactic antibiotic
                                          selection for surgical
                                          patients.***
Mortality Measures (Medicare patients).   Acute Myocardial
                                          Infarction 30-day mortality
                                          Medicare patients.***
                                          Heart Failure 30-day
                                          mortality Medicare
                                          patients.***
Patients' Experience of Care...........   HCAHPS patient
                                          survey.***
------------------------------------------------------------------------
* Measure included in 10 measure starter set.
** Measure included in 21 measure expanded set.
*** Measure added in CY 2007 OPPS/ASC final rule with comment period
  (data submission required as of January 2007 for three additional SCIP
  measures).

    For FY 2008, hospitals were required to submit data on 25 of the 27 
measures. No data submission was required for the two mortality outcome 
measures (30-Day Risk Standardized Mortality Rates for Heart Failure 
and AMI), because they were calculated using existing administrative 
Medicare claims data. The measures used for the payment determination 
included, for the first time, the HCAHPS patient experience of care 
survey as well as two outcome measures. These measures expanded the 
types of measures available for public reporting as required under 
section 1886(b)(3)(B)(viii)(VII) of the Act. In addition, the outcome 
measures, which are claims-based measures, did not increase the data 
submission requirements for hospitals, thereby reducing the burden 
associated with collection of data for quality reporting.
    In the FY 2008 IPPS proposed rule (72 FR 24805), we proposed to add 
1 outcome measure and 4 process measures to the existing 27-measure set 
to establish a new set of 32 quality measures to be used under the 
RHQDAPU program for the FY 2009 IPPS annual payment determination. We 
proposed to add the following five measures for the FY 2009 IPPS annual 
payment determination:
 PN 30-day mortality measure (Medicare patients)
 SCIP Infection 4: Cardiac Surgery Patients with Controlled 6AM 
Postoperative Serum Glucose
 SCIP Infection 6: Surgery Patients with Appropriate Hair 
Removal
 SCIP Infection 7: Colorectal Patients with Immediate 
Postoperative Normothermia
 SCIP Cardiovascular 2: Surgery Patients on a Beta Blocker 
Prior to Arrival Who Received a Beta Blocker During the Perioperative 
Period

    We stated that we planned to formally adopt these measures a year 
in advance in order to provide time for hospitals to prepare for 
changes related to the RHQDAPU program. We also stated that we 
anticipated that the proposed measures would be endorsed by the NQF. 
Finally, we stated that any proposed measure that was not endorsed by 
the NQF by the time that we published the FY 2008 IPPS final rule with 
comment period would not be finalized in that final rule.
    At the time we published the FY 2008 IPPS final rule with comment 
period, only the PN 30-day mortality measure had been endorsed by the 
NQF. Therefore, we finalized only that measure as part of the FY 2009 
IPPS measure set and stated that we would further address adding 
additional measures in the CY 2008 OPPS/ASC final rule and, if 
necessary, in the FY 2009 IPPS proposed and final rules. We also 
responded to comments we had received on the five proposed measures (72 
FR 47348 through 47351).
    In the CY 2008 OPPS/ASC final rule with comment period (72 FR 
66875), we noted that the NQF had endorsed the following additional 
process measures that we had proposed to include in the FY 2009 RHQDAPU 
program measure set:

 SCIP Infection 4: Cardiac Surgery Patients with Controlled 6AM 
Postoperative Serum Glucose
 SCIP Infection 6: Surgery Patients with Appropriate Hair 
Removal

    As we stated in the FY 2008 IPPS proposed rule (72 FR 24805), these 
measures reflect our continuing commitment to quality improvement in 
both clinical care and quality. These quality measures reflect 
consensus among affected parties as demonstrated by endorsement by a 
national consensus building entity. The addition of these two measures 
for the FY 2009 measure set bring the total number of measures in that 
measure set to 30 (72 FR 66876).
    The measure set to be used for FY 2009 annual payment determination 
is as follows:

------------------------------------------------------------------------
                 Topic                           Quality measure
------------------------------------------------------------------------
Heart Attack (Acute Myocardial            Aspirin at arrival.*
 Infarction).
                                          Aspirin prescribed at
                                          discharge.*
                                          Angiotensin Converting
                                          Enzyme Inhibitor (ACE-I) or
                                          Angiotensin II Receptor
                                          Blocker (ARB) for left
                                          ventricular systolic
                                          dysfunction.*
                                          Beta blocker at
                                          arrival.*
                                          Beta blocker
                                          prescribed at discharge.*
                                          Fibrinolytic
                                          (thrombolytic) agent received
                                          within 30 minutes of hospital
                                          arrival.**

[[Page 48601]]

 
                                          Primary Percutaneous
                                          Coronary Intervention (PCI)
                                          received within 120 minutes of
                                          hospital arrival.**
                                          Adult smoking
                                          cessation advice/counseling.**
Heart Failure (HF).....................   Left ventricular
                                          function assessment.*
                                          Angiotensin Converting
                                          Enzyme Inhibitor (ACE-I) or
                                          Angiotensin II Receptor
                                          Blocker (ARB) for left
                                          ventricular systolic
                                          dysfunction.*
                                          Discharge
                                          instructions.**
                                          Adult smoking
                                          cessation advice/counseling.**
Pneumonia (PN).........................   Initial antibiotic
                                          received within 4 hours of
                                          hospital arrival.*
                                          Oxygenation
                                          assessment.*
                                          Pneumococcal
                                          vaccination status.*
                                          Blood culture
                                          performed before first
                                          antibiotic received in
                                          hospital.**
                                          Adult smoking
                                          cessation advice/counseling.**
                                          Appropriate initial
                                          antibiotic selection.**
                                          Influenza vaccination
                                          status.**
Surgical Care Improvement Project         Prophylactic
 (SCIP)--named SIP for discharges prior   antibiotic received within 1
 to July 2006 (3Q06).                     hour prior to surgical
                                          incision.**
                                          Prophylactic
                                          antibiotics discontinued
                                          within 24 hours after surgery
                                          end time.**
                                          SCIP-VTE-1: Venous
                                          thromboembolism (VTE)
                                          prophylaxis ordered for
                                          surgery patients.***
                                          SCIP-VTE-2: VTE
                                          prophylaxis within 24 hours
                                          pre/post surgery.***
                                          SCIP Infection 2:
                                          Prophylactic antibiotic
                                          selection for surgical
                                          patients.***
                                          SCIP-Infection 4:
                                          Cardiac Surgery Patients with
                                          Controlled 6AM Postoperative
                                          Serum Glucose.*****
                                          SCIP Infection 6:
                                          Surgery Patients with
                                          Appropriate Hair Removal.*****
Mortality Measures (Medicare patients).   Acute Myocardial
                                          Infarction 30-day mortality
                                          Medicare patients.***
                                          Heart Failure 30-day
                                          mortality Medicare
                                          patients.***
                                          Pneumonia 30-day
                                          mortality Medicare
                                          patients.****
Patients' Experience of Care...........   HCAHPS patient
                                          survey.***
------------------------------------------------------------------------
* Measure included in 10 measure starter set.
** Measure included in 21 measure expanded set.
*** Measure added in CY 2007 OPPS/ASC final rule with comment period.
**** Measure added in FY 2008 IPPS final rule with comment period.
***** Measure added in CY 2008 OPPS/ASC final rule with comment period
  (data submission required effective with discharges starting January
  1, 2008).

    We also stated in the FY 2008 IPPS final rule with comment period 
and the CY 2008 OPPS/ASC final rule with comment period that the 
RHQDAPU program participation requirements for the FY 2009 program 
would apply to additional measures we adopt for the FY 2009 program (72 
FR 47361; 72 FR 66877).
    Therefore, hospitals are required to start submitting data for SCIP 
Infection 4 and SCIP Infection 6 starting with first quarter calendar 
year 2008 discharges and subsequent quarters until further notice. 
Hospitals must submit their aggregate population and sample size counts 
for Medicare and non-Medicare patients. These requirements are 
consistent with the requirements for the other AMI, HF, PN, and SCIP 
process measures included in the FY 2009 measure set. The complete list 
of procedures for participating in the RHQDAPU program for FY 2009 are 
provided in the FY 2008 IPPS final rule with comment period (72 FR 
47359 through 47361).
    Because SCIP Cardiovascular 2 and SCIP Infection 7 had not been 
endorsed by a national consensus building entity by the publishing 
deadline for the CY 2008 OPPS/ASC final rule with comment period, we 
did not adopt these measures as part of the FY 2009 IPPS measure set.
    In the FY 2008 IPPS proposed rule, we also solicited public 
comments on 18 measures included within 8 categories of measure sets 
that could be selected for future inclusion in the RHQDAPU program (72 
FR 24805). These measures and measure sets highlight our interest in 
improving patient safety and outcomes of care, with a particular focus 
on the quality of surgical care and patient outcomes. In order to 
engender a broad review of potential performance measures, the list 
included measures that have not yet received endorsement by a national 
consensus review process for public reporting. The list also included 
measures developed by organizations other than CMS as well as measures 
that can be calculated using administrative data (such as claims).
    We solicited public comment not only on the measures and measure 
sets that were listed, but also on whether there were any critical gaps 
or ``missing'' measures or measure sets. We specifically requested 
input concerning the following issues:
     Which of the measures or measure sets should be included 
in the FY 2009 RHQDAPU program or in subsequent years?
     What challenges for data collection and reporting are 
posed by the identified measures and measure sets?
     What improvements could be made to data collection or 
reporting that might offset or otherwise address those challenges?
    In the FY 2008 IPPS final rule with comment period (72 FR 47351), 
after consideration of the public comments received, we decided not to 
adopt any of these measures or measure sets for FY 2009. We indicated 
that we will continue to consider some of these measures and measure 
sets for subsequent years.

[[Page 48602]]

2. Quality Measures for the FY 2010 Payment Determination and 
Subsequent Years
a. Quality Measures for the FY 2010 Payment Determination
    In the FY 2009 IPPS proposed rule, for the FY 2010 payment 
determination, we proposed to require continued hospital submission of 
data on 26 of the 30 existing AMI, Heart Failure, Pneumonia, HCAHPS, 
and SCIP measures adopted for FY 2009, and to remove the chart-
abstracted Pneumonia Oxygenation Assessment measure from the FY 2010 
measure set (73 FR 23646). As noted above, the three outcome measures 
do not require hospitals to submit data.
    Under section 1886(b)(3)(B)(viii)(III) of the Act, the Secretary 
shall expand the RHQDAPU program measures beyond the measures specified 
as of November 1, 2003. Under section 1886(b)(3)(B)(viii)(V) of the 
Act, these measures, to the extent feasible and practicable, shall 
include measures set forth by one or more national consensus building 
entities.
    In the FY 2009 IPPS proposed rule (73 FR 23647), we proposed to 
adopt the following 72 measures for the FY 2010 payment determination:

------------------------------------------------------------------------
                 Topic                           Quality Measure
------------------------------------------------------------------------
Heart Attack (Acute Myocardial            AMI-1 Aspirin at
 Infarction).                             arrival.*
                                          AMI-2 Aspirin
                                          prescribed at discharge.*
                                          AMI-3 Angiotensin
                                          Converting Enzyme Inhibitor
                                          (ACE-I) or Angiotensin II
                                          Receptor Blocker (ARB) for
                                          left ventricular systolic
                                          dysfunction.*
                                          AMI 6 Beta blocker at
                                          arrival.*
                                          AMI-5 Beta blocker
                                          prescribed at discharge.*
                                          AMI-7a Fibrinolytic
                                          (thrombolytic) agent received
                                          within 30 minutes of hospital
                                          arrival.**
                                          AMI-4 Adult smoking
                                          cessation advice/counseling.**
                                          AMI-8a Timing of
                                          Receipt of Primary
                                          Percutaneous Coronary
                                          Intervention (PCI).
Heart Failure (HF).....................   HF-2 Left ventricular
                                          function assessment.*
                                          HF-3 Angiotensin
                                          Converting Enzyme Inhibitor
                                          (ACE-I) or Angiotensin II
                                          Receptor Blocker (ARB) for
                                          left ventricular systolic
                                          dysfunction.*
                                          HF-1 Discharge
                                          instructions.**
                                          HF-4 Adult smoking
                                          cessation advice/counseling.**
Pneumonia (PN).........................   PN-2 Pneumococcal
                                          vaccination status.*
                                          PN-3b Blood culture
                                          performed before first
                                          antibiotic received in
                                          hospital.**
                                          PN-4 Adult smoking
                                          cessation advice/counseling.**
                                          PN-6 Appropriate
                                          initial antibiotic
                                          selection.**
                                          PN-7 Influenza
                                          vaccination status.**
                                          PN-5c Timing of
                                          Receipt of Initial Antibiotic
                                          following hospital
                                          arrival.******
Surgical Care Improvement Project         SCIP-1 Prophylactic
 (SCIP)--named SIP for discharges prior   antibiotic received within 1
 to July 2006 (3Q06).                     hour prior to surgical
                                          incision.**
                                          SCIP-3 Prophylactic
                                          antibiotics discontinued
                                          within 24 hours after surgery
                                          end time.**
                                          SCIP-VTE-1: Venous
                                          thromboembolism (VTE)
                                          prophylaxis ordered for
                                          surgery patients.***
                                          SCIP-VTE-2: VTE
                                          prophylaxis--within 24 hours
                                          pre/post surgery.***
                                          SCIP Infection 2:
                                          Prophylactic antibiotic
                                          selection for surgical
                                          patients.***
                                          SCIP-Infection 4:
                                          Cardiac Surgery Patients with
                                          Controlled 6AM Postoperative
                                          Serum Glucose.*****
                                          SCIP Infection 6:
                                          Surgery Patients with
                                          Appropriate Hair Removal.*****
                                          SCIP Cardiovascular 2:
                                          Surgery Patients on a Beta
                                          Blocker Prior to Arrival Who
                                          Received a Beta Blocker During
                                          the Perioperative
                                          Period.******
Mortality Measures (Medicare patients).   MORT-30-AMI Acute
                                          Myocardial Infarction 30-day
                                          mortality Medicare
                                          patients.***
                                          MORT-30-HF Heart
                                          Failure 30-day mortality
                                          Medicare patients.***
                                          MORT-30-PN Pneumonia
                                          30-day mortality Medicare
                                          patients.****
Patients' Experience of Care...........   HCAHPS patient
                                          survey.***
Readmission Measures (Medicare            Heart Attack (AMI) 30-
 patients).                               Day Risk Standardized
                                          Readmission Measure (Medicare
                                          patients).******
                                          Heart Failure (HF) 30-
                                          Day Risk Standardized
                                          Readmission Measure (Medicare
                                          patients).******
                                          Pneumonia (PN) 30-Day
                                          Risk Standardized Readmission
                                          Measure (Medicare
                                          patients).******
Inpatient Stroke Care..................   STK-1 DVT
                                          Prophylaxis.******
                                          STK-2 Discharged on
                                          Antithrombotic Therapy.******
                                          STK-3 Patients with
                                          Atrial Fibrillation Receiving
                                          Anticoagulation Therapy.******
                                          STK-5 Antithrombotic
                                          Medication By End of Hospital
                                          Day Two.******
                                          STK-7 Dysphasia
                                          Screening.******
Venous Thromboembolic Care.............   VTE-1: VTE
                                          Prophylaxis.******
                                          VTE-2: VTE Prophylaxis
                                          in the ICU.******

[[Page 48603]]

 
                                          VTE-4: Patients with
                                          overlap in anticoagulation
                                          therapy.******
                                          VTE-5/6: (as combined
                                          measure) patients with UFH
                                          dosages who have platelet
                                          count monitoring and
                                          adjustment of medication per
                                          protocol or nomagram.******
                                          VTE-7: Discharge
                                          instructions to address:
                                          follow-up monitoring,
                                          compliance, dietary
                                          restrictions, and adverse drug
                                          reactions/interactions.******
                                          VTE-8: Incidence of
                                          preventable VTE.******
AHRQ Patient Safety Indicators.........   Death among surgical
                                          patients with treatable
                                          serious complications.******
                                          Iatrogenic
                                          pneumothorax, adult.******
                                          Postoperative wound
                                          dehiscence.******
                                          Accidental puncture or
                                          laceration.******
AHRQ Inpatient Quality Indicators (IQI)   Abdominal aortic
                                          aneurysm (AAA) mortality rate
                                          (with or without
                                          volume).******
                                          Hip fracture mortality
                                          rate.******
AHRQ IQI Composite Measures............   Mortality for selected
                                          surgical procedures
                                          (composite).******
                                          Complication/patient
                                          safety for selected indicators
                                          (composite).******
                                          Mortality for selected
                                          medical conditions
                                          (composite).******
Nursing Sensitive Measures.............   Failure to
                                          Rescue.******
                                          Pressure Ulcer
                                          Prevalence and Incidence by
                                          Severity.******
                                          Patient Falls
                                          Prevalence.******
                                          Patient Falls with
                                          Injury.******
Cardiac Surgery Measures...............   Participation in a
                                          Systematic Database for
                                          Cardiac Surgery.******
                                          Pre-operative Beta
                                          Blockade.******
                                          Prolonged
                                          Intubation.******
                                          Deep Sternal Wound
                                          Infection Rate.******
                                          Stroke/CVA.******
                                          Post-operative Renal
                                          Insufficiency.******
                                          Surgical
                                          Reexploration.******
                                          Anti-platelet
                                          Medication at Discharge.******
                                          Beta Blockade Therapy
                                          at Discharge.******
                                          Anti-lipid Treatment
                                          at Discharge.******
                                          Risk-Adjusted
                                          Operative Mortality for
                                          CABG.******
                                          Risk-Adjusted
                                          Operative Mortality for Aortic
                                          Valve Replacement.******
                                          Risk-Adjusted
                                          Operative Mortality for Mitral
                                          Valve Replacement/
                                          Repair.******
                                          Risk-Adjusted
                                          Mortality for Mitral Valve
                                          Replacement and CABG
                                          Surgery.******
                                          Risk-Adjusted
                                          Mortality for Aortic Valve
                                          Replacement and CABG
                                          Surgery.******
------------------------------------------------------------------------
* Measure included in 10 measure starter set.
** Measure included in 21 measure expanded set.
*** Measure added in CY 2007 OPPS/ASC final rule with comment period.
**** Measure added in FY 2008 IPPS final rule with comment period.
***** Measure added in CY 2008 OPPS/ASC final rule with comment period.
****** Measure proposed in FY 2009 IPPS proposed rule.

(1) Pneumonia Oxygenation Assessment Measure Removal and Measure 
Retirement Generally
    CMS proposed to remove the Pneumonia Oxygenation Assessment measure 
from the RHQDAPU program measure set. We proposed to discontinue 
requiring hospitals to submit data on the Pneumonia Oxygenation 
Assessment measure, effective with discharges beginning January 1, 
2009. Section 1886(b)(3)(B)(viii)(VI) of the Act provides the Secretary 
with the discretion to replace any quality measures or indicators in 
appropriate cases, such as where all hospitals are effectively in 
compliance with a measure. We interpret this to authorize the Secretary 
to remove or retire measures from the RHQDAPU program.
    In the case of the Pneumonia Oxygenation Assessment measure, the 
vast majority of hospitals are performing near 100 percent. In 
addition, oxygenation assessment is routinely performed by hospitals 
for admitted patients without regard to the specific diagnosis. Thus, 
the measure is topped out so completely across virtually all hospitals 
as to provide no significant opportunity for improvement. We believe 
that the burden to hospitals to abstract and report these data 
outweighs the benefit in publicly reporting hospital level data with 
very little variation among hospitals. We do not expect that the 
retirement of the Pneumonia Oxygenation Assessment measure will result 
in the deterioration of care. However, if we determine otherwise, we 
may seek to reintroduce the measure.
    The proposed removal of the Pneumonia Oxygenation Assessment 
measure represents the first instance of retiring a measure. We intend 
to review other existing chart-abstracted measures recognizing the 
significant burden to hospitals that chart abstraction requires. In 
this way, we seek to maximize the value of the RHQDAPU program to 
promote quality improvement by hospitals and to report information that 
the public will find beneficial in choosing inpatient hospital 
services. In the FY 2009 IPPS proposed rule, we invited comment on the 
retirement of the Pneumonia Oxygenation Assessment measure (73 FR 
23647). In addition, we invited comment on other measures that may be 
suitable for retirement from the RHQDAPU program measure set. Finally, 
we invited comment on the following general

[[Page 48604]]

considerations relevant to retiring measures:
     Should CMS retire a RHQDAPU program measure when hospital 
performance on the measure has reached a high threshold (that is, 
performance on the measure has topped out) even if the measure still 
reflects best practice?
     Are there reasons to consider retiring a measure other 
than high overall performance?
     When a measure is retired on the basis of substantially 
complete compliance by hospitals, should data collection on the measure 
again be required after 1 or 2 years to assure that high compliance 
level remains, or should some other way of monitoring continued 
hospital compliance be used?
    Comment: A number of commenters supported CMS' proposal to retire 
the Pneumonia Oxygenation Assessment measure because the commenters 
believed that the measure did not appear to present a significant 
opportunity for improvement. In addition, some commenters suggested the 
retirement of AMI-1 and AMI-2 as the commenters believed that these 
measures are topped out as well.
    Response: We appreciate the comments received on the topic of 
retirement. At this time, we are finalizing the retirement of the 
Pneumonia Oxygenation Assessment measure and hospitals will no longer 
have to report on this measure effective with January 1, 2009 
discharges. We did not propose to retire any other measures but we will 
consider the retirement of other topped off measures (those with very 
high performance levels) such as AMI-1 and AMI-2.
    Comment: Many commenters suggested that hospitals continue to 
submit data regarding the Pneumonia Oxygenation Assessment measure for 
several years. In addition, several other commenters indicated that CMS 
should remove topped off measures from the Hospital Compare Web site, 
but continue to conduct monitoring activities to ensure that 
``backsliding'' does not take place.
    Response: We interpret backsliding to mean a reduction in 
performance if a measure is no longer reported by hospitals. We agree 
that continued collection even for topped off measures may be warranted 
if backsliding is expected. However, we do not believe that this would 
occur for the Pneumonia Oxygenation Assessment measure, which has 
become a routine assessment for essentially all admitted hospitalized 
patients without regard to diagnosis.
    After consideration of the comments received, CMS will retire the 
Pneumonia Oxygenation measure. Hospitals will no longer be required to 
submit data on this measure beginning with January 1, 2009 discharges.
(2) Updating Measures
    The specifications for two of the existing measures have been 
updated by the NQF, effective May 2007, with respect to the applicable 
timing interval. For the measures previously identified as:
     AMI--Primary Percutaneous Coronary Intervention (PCI) 
received within 120 minutes of hospital arrival, the NQF has revised 
its endorsement of the specifications to reflect that the timing 
interval has been changed to PCI within 90 minutes of arrival.
     Pneumonia--Initial antibiotic received within 4 hours of 
hospital arrival, the NQF has revised its endorsement of the 
specifications to reflect that the initial antibiotic must be received 
within 6 hours of arrival.
    In the FY 2009 IPPS proposed rule, because the NQF is now endorsing 
different timing intervals with respect to these measures, we proposed 
to also update these measures for the purposes of the FY 2010 RHQDAPU 
program (73 FR 23647). The updated measures are as follows:
     AMI--Timing of Receipt of Primary Percutaneous Coronary 
Intervention (PCI); and
     Pneumonia--Timing of receipt of initial antibiotic 
following hospital arrival.
    We note that the technical specifications for these measures will 
not change, and hospitals will continue to submit the same data that 
they currently submit. However, beginning with discharges on or after 
January 1, 2009, CMS will calculate the measures using the updated 
timing intervals.
    The NQF updated these two measures to reflect the most current 
consensus standards effective May 2007. Because this was after we 
issued the FY 2008 IPPS proposed rule, we could not adopt the updated 
measures in the FY 2008 IPPS final rule with comment period or CY 2008 
OPPS/ASC final rule with comment period. Instead, we allowed hospitals 
to suppress the public reporting of the quality data for the two 
measures for hospital discharges starting with April 1, 2007 
discharges. This was the case so that hospitals would not be held to 
out-of-date consensus standards for public reporting pending the next 
regulatory cycle.
    We proposed using a subregulatory process to act upon updates made 
to existing RHQDAPU program measures by a consensus building entity 
such as the NQF. We stated that we believe this is necessary to be able 
to utilize the most up-to-date consensus standards in the RHQDAPU 
program, and to recognize that neither scientific advances nor 
consensus building entity standard updates are linked to the timing of 
regulatory actions. We proposed to implement updates to existing 
RHQDAPU program measures and provide notification through the 
QualityNet Web site, and additionally in the Specifications Manual 
where data collection and measure specifications changes are necessary 
(73 FR 23647). We invited comment on this proposal.
    Comment: Numerous commenters indicated that they would prefer that 
any changes to existing measures be made through the regulatory 
process, which allows for public comment, and that no changes should be 
made to existing measures through a subregulatory process, as proposed 
in the FY 2009 IPPS proposed rule.
    Response: After consideration of comments received, we have decided 
not to adopt a separate subregulatory process to implement measure 
updates made to existing measures by consensus building entities. 
Instead, as we currently do, we will continue to update technical 
specifications for each of the measures in the Specifications Manual. 
Substantive changes to existing measures will be made through the 
rulemaking process.
    Comment: Several commenters recommended that CMS not revise the 
pneumococcal and influenza vaccination measures without consulting the 
HQA or seeking public input. In certain instances where a change in 
science or an implementation issue has occurred, such as with past 
influenza vaccine shortages, the commenters noted that it may be 
necessary to temporarily suspend measure reporting. However, commenters 
urged that all permanent changes to existing measures be made through 
the regulatory process to allow for public input.
    Response: As discussed previously, we will not finalize our 
proposal to implement a subregulatory process to update existing 
RHQDAPU program measures that have been updated by a consensus building 
entity. We also recognize that the temporary suppression of public 
reporting on measures might be necessary under certain circumstances, 
such as when clinical practices change or implementation issues occur, 
until we can formally update those measures through the rulemaking 
process.
    Comment: Some commenters expressed concerns that some of the 
proposed measures were not actionable

[[Page 48605]]

for quality improvement, and were heavily reliant upon provider 
documentation. In addition, some commenters stated that the adoption of 
measures such as failure to rescue, patient falls with injury, and 
pressure ulcer prevalence and incidence by severity will create higher 
legal risks for providers.
    Response: We disagree with the comment that the measures we 
proposed are not actionable for quality improvement. All finalized 
measures have gone through an extensive development process and have 
achieved NQF endorsement for accountability and public reporting. NQF 
endorsement occurs after thorough review of the measures, public 
comment, and consensus agreement as to their importance, scientific 
acceptability, feasibility and usability. As part of its review for 
scientific acceptability, the NQF considers the validity of the measure 
as a measure of quality. Evaluation of the usability of a measure 
considers the use of the measure for continued quality improvement. We 
are uncertain what legal risk that the commenters contemplate, but we 
believe that outcomes such as failure to rescue, falls with injury and 
pressure ulcers are important measures of outcome.
    In the FY 2009 IPPS proposed rule we noted that, for the purposes 
of proposing the FY 2010 RHQDAPU program measure set, we believe that 
NQF endorsement of a measure represents a standard for consensus among 
affected parties as specified in section 1886(b)(3)(B)(viii)(V) of the 
Act (73 FR 23647-48). The NQF is an independent health care quality 
endorsement organization with a diverse representation of consumer, 
purchaser, provider, academic, clinical, and other health care 
stakeholder organizations.
    Comment: Numerous commenters encouraged CMS to work through the HQA 
to identify measures for public reporting. Because CMS chose to propose 
some measures that represented a ``consensus among affected 
stakeholders'' but that were not endorsed by the NQF and adopted by the 
HQA, many commenters believed that the FY 2009 IPPS proposed rule did 
not follow the DRA requirement. Specifically, the commenters noted that 
only 10 of the proposed measures have been adopted by the HQA, 
including 3 of the 9 proposed AHRQ indicators, the surgical care 
measure, and the 6 venous thromboembolism measures. The commenters also 
noted that the proposed stroke measures and the AMI/Pneumonia 
readmission measures have not been endorsed by the NQF nor adopted by 
the HQA, and that the heart failure readmission measure has not been 
adopted by the HQA, and thus should not be included in the FY 2010 
payment determination. Some of the commenters concluded that any 
measures added to the RHQDAPU program should first go through the 
rigorous, consensus-based assessment processes of both the NQF and HQA.
    Response: Section 1886(b)(3)(B)(viii)(V) of the Act, as added by 
section 5001(a) of the DRA, provides that measures must reflect 
consensus among affected parties and, to the extent feasible and 
practicable, must include measures set forth by one or more national 
consensus building entities. Thus, the Secretary is not required to 
limit measures to those endorsed or adopted by any particular consensus 
organization or quality alliance, as long as the statutory standard has 
been met. The NQF is a voluntary consensus standards organization that 
meets the requirements of the National Technology Transfer and 
Advancement Act (NTTAA); and we believe that measures that are NQF 
endorsed meet the statutory requirement. Indeed, all of the measures 
that we finalize for the FY 2010 IPPS payment determination will be NQF 
endorsed.
    Comment: A number of commenters indicated that CMS should adopt 
certain measures that were not proposed, but which have been adopted by 
HQA, including surgical site infection, central line catheter-
associated blood stream infection, and measures on the care provided in 
pediatric intensive care units as well as the care provided to 
maternity patients.
    Response: We did not propose for FY 2010 payment determination to 
adopt the suggested infection rate measures, pediatric intensive care 
measures, or maternity care measures mentioned by the commenters. We 
are unable to finalize measures that were not proposed for which the 
public at large did not have the opportunity to provide comments. We 
also note that the suggested infection measures were developed by the 
CDC for public health surveillance purposes only, rather than for 
hospital quality assessment. Therefore, we do not believe, as currently 
specified, these infection rate measures are appropriate for use in the 
RHQDAPU program. Further, CDC is currently working with the NQF 
Hospital Acquired Infection committee to better define the measures. 
Although these two infection measures are not ready for our use in the 
RHQDAPU program, infection measures are a high priority for CMS. We may 
consider adding these measures in the future when specifications are 
further developed and the NQF has further considered them.
(3) SCIP Cardiovascular 2 Measure for the FY 2010 Payment Determination
    In November 2007, the NQF endorsed SCIP Cardiovascular 2. CMS 
believes that this measure targets an important process of care, beta 
blocker administration for noncardiac surgery patients. Therefore, in 
the FY 2009 IPPS proposed rule, we proposed to add SCIP Cardiovascular 
2 to the RHQDAPU program measures for the FY 2010 payment determination 
(73 FR 23648). The specifications and data collection tools are 
currently available through the QualityNet Web site and in the 
Specifications Manual for hospitals to utilize and submit data for this 
measure. In this final rule, we are adopting this proposal. Hospitals 
will be required to submit data on the SCIP Cardiovascular 2 measure 
for discharges occurring on or after January 1, 2009. The initial data 
submission deadline for this measure will be August 15, 2009.
    We received no comments specific to this measure. We did receive 
general comments on the burden associated with chart-abstracted 
measures and the burden associated with adopting large numbers of 
measures at once. Those comments are discussed below.
(4) Nursing Sensitive Measures for the FY 2010 Payment Determination
    In the FY 2009 IPPS proposed rule, we proposed to add four nursing 
sensitive measures to the RHQDAPU program measure set for the FY 2010 
payment determination (73 FR 23648). The four proposed measures were:

 Failure to Rescue
 Pressure Ulcer Prevalence and Incidence by Severity (Joint 
Commission developed measure; all patient data from chart abstraction)
 Patient Falls Prevalence
 Patient Falls with Injury

    We stated that these measures broaden the ability of the RHQDAPU 
program measure set to assess care generally associated with nursing 
staff. In addition, we stated that these measures are directed toward 
outcomes that are underrepresented among the RHQDAPU program measures. 
These measures apply to the vast majority of inpatient stays and 
provide a great deal of critical information about hospital quality to 
consumers and stakeholders. We stated that the specifications and data 
collection tools are scheduled to be available in the specifications 
manual

[[Page 48606]]

by December 2008 for hospitals to utilize and submit data for these 
measures. We also proposed that hospitals be required to submit data on 
these four measures effective with discharges beginning April 1, 2009. 
We noted that these measures have been endorsed by the NQF; however, 
The Joint Commission has initiated rigorous field testing of the 
measures, which will not be completed until late 2008. Therefore, it 
was possible that the endorsement status of these measures might change 
in the next several months. We stated that if this rigorous field 
testing resulted in uncertainty as to the NQF endorsement status at the 
time we issue the FY 2009 IPPS final rule, we would defer our final 
decision on whether to require these measures for the RHQDAPU program 
for FY 2010 until we published the CY 2009 OPPS/ASC final rule with 
comment period.
    Comment: Many commenters indicated that it is inappropriate to 
include the nursing sensitive measures if they are still undergoing 
field testing, and there is no mechanism specified to collect data on 
the nursing sensitive measures. The commenters also noted that while 
many of the measures are used by the National Database of Nursing 
Quality Indicators (NDNQI), not all organizations participate in this 
database and there may be discrepancies in data definitions if 
different information systems are used.
    Response: We appreciate these comments and are aware of the ongoing 
testing of the nursing sensitive measures. This testing involves the 
feasibility of calculating these measures based on patient-level data, 
and we recognize that this testing should be completed prior to 
adopting any of these measures, insofar as there is no alternative but 
to calculate them based on hospital submitted patient-level data. 
However, claims based measures can be implemented without requiring 
additional data submission by hospitals beyond existing claims data. 
Therefore, in this final rule we are adopting only one Nursing 
Sensitive measure: Failure to Rescue for the FY 2010 payment 
determination. We believe there is no uncertainty regarding the NQF 
endorsement status of this measure because it can be calculated using 
Medicare claims data only, as opposed to using patient-level data 
submitted by hospitals. We intend to propose the remaining NQF nursing 
sensitive measures during the FY 2010 IPPS rulemaking cycle as 
requirements for the FY 2011 payment determination.
    Comment: Many commenters indicated that the addition of a number of 
chart-abstracted measures would be overly burdensome to implement in FY 
2009 for use in the FY 2010 payment determination.
    Response: We recognize the additional burden that would result if 
many chart-abstracted measures were required on such an aggressive 
timeframe. Therefore, we are finalizing only the failure to rescue 
measure at this time, in part, because it can be calculated using 
Medicare claims data instead of using data culled from patient charts. 
This alternative means of measure calculation cannot be used for the 
three other proposed nursing sensitive measures, and for this reason 
and the other reason stated above, we are not finalizing those measures 
at this time. We believe that this decision will help to lessen the 
overall burden on hospitals by reducing their obligation to submit 
patient-level data on too large a number of new chart-abstracted 
measures at the same time. We plan to use the same claims data for the 
failure to rescue measure that we use for other RHQDAPU program 
measures that are based solely on Medicare claims. The claims data that 
will be used to calculate this measure, as well as all the Medicare 
claims based measures for the FY 2010 payment determination, will be 
from July 1, 2007 through June 30, 2008 (3rd quarter 2007 discharges 
through 2nd quarter 2008 discharges). We discuss these dates more fully 
below.
(5) Readmission Measures for the FY 2010 Payment Determination
    In the FY 2009 IPPS proposed rule, we proposed to adopt three 
readmission measures for the FY 2010 payment determination that will be 
calculated using Medicare claims data (73 FR 23648). The proposed 
measures were:

 Pneumonia (PN) 30-Day Risk Standardized Readmission Measure 
(Medicare patients)
 Heart Attack (AMI) 30-Day Risk Standardized Readmission 
Measure (Medicare patients)
 Heart Failure (HF) 30-Day Risk Standardized Readmission 
Measure (Medicare patients)

    These readmission measures assess both quality of care and 
efficiency of care. They also promote coordination of care among 
hospitals and other providers. They compliment the existing 30-Day Risk 
Standardized Mortality Measures for Pneumonia, Heart Attack, and Heart 
Failure. These measures require no additional data collection from 
hospitals. The measures are risk adjusted to account for differences 
between hospitals in the characteristics of their patient populations.
    Since the time we issued the proposed rule, the HF readmission 
measure has received NQF endorsement. Therefore, we are adopting the HF 
readmission measure as a RHQDAPU program requirement for the FY 2010 
payment determination in this final rule. The AMI and PN readmission 
measures are still pending endorsement by the NQF. We intend to 
finalize the AMI and PN readmission measures for the FY 2010 payment 
determination in the CY 2009 OPPS/ASC final rule with comment period, 
contingent upon endorsement from a national consensus-based entity such 
as the NQF. As we stated in the FY 2009 IPPS proposed rule, this is 
consistent with our measure expansion during the past 2 years, when we 
finalized some RHQDAPU program measures in the annual OPPS/ASC final 
rule with comment periods. CMS will calculate the rates of the HF 
readmission measure using Medicare claims only. The claims data will be 
for dates July 1, 2007 through June 30, 2008 (3rd quarter 2007 through 
2nd quarter 2008 discharges). This is the same time frame as for the 
other Medicare claims data based measures.
    Comment: Commenters noted that the AMI and Pneumonia readmissions 
measures are not endorsed by the NQF.
    Response: We recognize that the AMI and Pneumonia readmissions 
measures are not yet endorsed by the NQF, and we are only finalizing 
the Heart Failure readmission measure in this final rule. We intend to 
adopt the AMI and PN readmission measures for the FY 2010 payment 
determination in the CY 2009 OPPS/ASC final rule with comment period, 
contingent upon endorsement from a national consensus-based entity such 
as the NQF.
    Comment: Several commenters disagreed with having staggered start 
dates and submission time frames for the RHQDAPU required measures and 
stated that this would add unnecessary confusion and additional 
complexity. Commenters urged CMS to adopt one consistent submission 
time frame.
    Response: We acknowledge that we sometimes implement different time 
frames to commence chart abstraction data submission. However, in the 
context of chart-abstracted measures we believe that this is necessary 
and desirable given the burden of chart abstraction and the ongoing 
phase-in of infrastructure capabilities. Furthermore, the chart-
abstracted measures are recalculated quarterly on a rolling basis and 
data that is publicly reported is refreshed quarterly. On the other 
hand, for our claims based measures, our calculations are done 
annually. We

[[Page 48607]]

believe that consistency of time frame for the annual calculation of 
Medicare claims based measures is important for comparison purposes 
because we can then rely on a single year-long or multiple year data 
set. We will use the same annual data time frame for the payment 
determination for FY 2010 (July 2007 through June 2008 discharges) for 
all Medicare claims based measures that we used for the FY 2009 
program. This will apply to the AHRQ measures, the Nursing Sensitive 
Failure to Rescue measure, the 30 day mortality measures for Heart 
Failure, Pneumonia, and AMI, and the 30 day readmission measure for 
Heart Failure.
(6) Venous Thromboembolism (VTE) Measures for the FY 2010 Payment 
Determination
    In the FY 2009 IPPS proposed rule, we also proposed to add six 
Venous Thromboembolism (VTE) measures for the FY 2010 payment 
determination (73 FR 23648). These measures comprehensively address a 
major cause of morbidity and mortality among hospitalized patients.

 VTE-1: VTE Prophylaxis
 VTE-2: VTE Prophylaxis in the ICU
 VTE-4: Patients with overlap in anticoagulation therapy
 VTE-5/6: (as combined measure) Patients with UFH dosages who 
have platelet count monitoring and adjustment of medication per 
protocol or nomogram
 VTE-7: Discharge instructions to address: follow-up 
monitoring, compliance, dietary restrictions and adverse drug 
reactions/interactions
 VTE-8: Incidence of preventable VTE

    Since the time we issued the proposed rule, these VTE measures have 
received NQF endorsement. However, these measures would require 
submission of chart-abstracted data for which current submission 
mechanisms will not be available for use for the FY 2010 payment 
determination. Therefore, we are not adopting these proposed measures 
for the FY 2010 payment determination. We intend to propose these 
measures during the FY 2010 IPPS rulemaking cycle for the FY 2011 
payment determination. In addition, we intend to explore whether data 
needed to calculate these measures could be submitted using electronic 
health records (EHRs).
    Comment: Commenters were generally supportive of the VTE measures 
proposed by CMS.
    Response: The VTE measures comprehensively address a major cause of 
morbidity and mortality among hospitalized patients, and we believe 
that their inclusion in the RHQDAPU program will promote quality in 
these areas. However, we are not finalizing the VTE measures at this 
time for two reasons: (1) We are sensitive to the concerns of 
commenters that we proposed to add a large number of chart-abstracted 
measures all at once and wish to decrease the immediate burden on 
hospitals to implement such a large number of these measures; and (2) 
the additional infrastructure needed to collect this data is not yet 
available for our use. We intend to propose these measures in future 
rulemaking.
    Comment: Some commenters suggested that CMS implement additional 
surgical care measures (continuity of beta blocker therapy, post-op 
wound dehiscence) and VTE measures (prevention, appropriate treatments, 
readmissions, discharge instructions).
    Response: We appreciate the suggestions that we implement 
additional surgical care and VTE measures. We will consider these types 
of measures for future implementation.
(7) Stroke Measures for the FY 2010 Payment Determination
    In the FY 2009 IPPS proposed rule, we also proposed to add five 
stroke measures which will apply only to certain identified groups 
under specific ICD-9-CM codes as specified in the Specifications Manual 
(73 FR 23648). These measures comprehensively address an important 
condition not currently covered by the RHQDAPU program that is 
associated with significant morbidity and mortality.

 STK-1 DVT Prophylaxis
 STK-2 Discharged on Antithrombotic Therapy
 STK-3 Patients with Atrial Fibrillation Receiving 
Anticoagulation Therapy
 STK-5 Antithrombotic Medication By End of Hospital Day Two
 STK-7 Dysphasia Screening

    These stroke measures are pending NQF endorsement. Due to the lack 
of endorsement from a national consensus building entity, we have 
decided not to adopt these measures for the FY 2010 payment 
determination. CMS intends to propose these measures during the FY 2010 
IPPS rulemaking cycle for the FY 2011 payment determination.
    Comment: One commenter commended CMS on its proposal to include 
stroke quality data among the quality measures adopted in the FY 2009 
IPPS rulemaking. However, the commenter believed that an important 
quality measurement was missing from the list; the administration of 
thrombolytic therapy.
    Response: We appreciate this comment. While the stroke measures 
would add a topic area that is important to Medicare beneficiaries, we 
will not be implementing stroke measures for the FY 2010 payment 
determination because they have not yet received endorsement from a 
consensus building entity such as the NQF. We intend to propose the 
stroke measure set during the FY 2010 IPPS rulemaking process for 
inclusion in the FY 2011 RHQDAPU program measure set and we will 
consider whether to include the administration of thrombolytic therapy 
as part of that proposal.
    Comment: Commenters indicated that new chart-abstracted measures 
such as the stroke measures proposed by CMS would be overly burdensome 
to implement in FY 2009 for use in the FY 2010 payment determination.
    Response: As previously stated, we recognize the additional burden 
that would result if many chart-abstracted measures were required on 
such an aggressive timeframe. We are not finalizing the stroke 
measures, which would require additional chart abstraction burden, at 
this time. We intend to propose these measures in future rulemaking.
(8) AHRQ Measures for the FY 2010 Payment Determination
    In the FY 2009 IPPS proposed rule (73 FR 23649), we proposed to add 
the following nine AHRQ Patient Safety Indicators (PSIs) and Inpatient 
Quality Indicators (IQIs) that have been endorsed by the NQF:

 Patient Safety Indicator (PSI) 4--Death among surgical 
patients with treatable serious complications
 PSI 6--Iatrogenic pneumothorax, adult
 PSI 14--Postoperative wound dehiscence
 PSI 15--Accidental puncture or laceration
 Inpatient Quality Indicator (IQI) 4 and 11--Abdominal aortic 
aneurysm (AAA) mortality rate (with or without volume)
 IQI 19--Hip fracture mortality rate
 IQI Mortality for selected medical conditions (composite)
 IQI Mortality for selected surgical procedures (composite)
 IQI Complication/patient safety for selected indicators 
(composite)

    These are claims-based outcome measures. They are important 
additional measures that can be calculated for hospital inpatients 
without the burden of additional chart abstraction. Hospitals currently 
collect and submit these data to CMS and other insurers for

[[Page 48608]]

reimbursement. These measures will be calculated using all-payer claims 
data those hospitals currently collect with respect to each patient 
discharge. We proposed to require hospitals to submit to CMS the all-
payer claims data that we specify in the technical Specifications 
Manual as necessary to calculate the AHRQ PSI/IQI measures. We proposed 
that hospitals begin submitting data on a quarterly basis on these 
measures to CMS by April 1, 2010 beginning with October 1, 2009 
discharges. However, we are aware that a large number of hospitals 
already submit these data on a voluntary basis to third party data 
aggregators such as State health agencies or State hospital 
associations. We solicited comments on whether a hospital that already 
submits the data necessary to calculate these measures to such entities 
should be permitted to authorize such an entity to transmit these data 
to CMS, in accordance with applicable confidentiality laws, on their 
behalf. This would relieve the hospital of the burden of having to 
submit the same data directly to CMS via the QIO Clinical Warehouse. As 
an alternative to requiring that hospitals submit all-payer claims data 
for purposes of calculating the AHRQ PSI/IQI measures, CMS considered 
whether it should initially calculate the AHRQ PSI/IQI measures using 
Medicare claims data only, and at a subsequent date require submission 
of all-payer claims data. We also sought comment on this alternative.
    As explained below, in this final rule we are adopting these 
measures, and will calculate these measures using Medicare claims only 
for the FY 2010 payment determination.
    Comment: We received many comments supporting the use of the AHRQ 
measures. For reporting the nine AHRQ IQIs and PSIs, several commenters 
recommended using existing State or other third party collection 
entities to acquire ``all payer'' data, rather than requiring hospitals 
to duplicate the same information for CMS. Other commenters recommended 
identifying the key data elements needed for the specific measures and 
requesting those States and other third party entities to only submit 
those specific data elements, rather than entire datasets, and that 
compensation for recoding should also be considered. Several commenters 
noted the burden of submitting additional data. Some commenters 
indicated that they did not favor using only Medicare claims for 
calculation of the AHRQ indicators because artificial skewing of the 
data may occur. Many of the commenters recommended inclusion of PSI-9 
(Postoperative Bleeding/Hemorrhage), as recent evidence indicates that 
PCI patients with bleeding are more likely to die within one year than 
patients without bleeding. Some commenters further recommended that CMS 
extensively test whether the AHRQ PSIs and IQIs should be considered 
ready for implementation in the RHQDAPU program because the commenters 
believed that these measures lack the sensitivity required for use as 
publicly reported measures.
    Response: After considering the comments, and more general comments 
regarding the burden of additional chart abstraction and the large 
number of proposed measures, we will adopt the 9 AHRQ measures but 
initially calculate them based on existing Medicare claims data. We 
will use the same Medicare claims data set that we will use to 
calculate the 30-day HF readmission measure, as well as the three 
mortality measures. Consistent with the practice that we adopted for 
the FY 2009 payment determination for other measures calculated using 
existing Medicare claims data only, we will use existing claims data 
for index hospitalizations from July 1, 2007 through June 30, 2008 (3rd 
quarter 2007 through 2nd quarter 2008 discharges) for purposes of 
calculating the measures for the FY 2010 payment determination.
    While the distribution of the rates may be different when 
calculated using Medicare claims only, we believe that these 
calculations will be sufficient to account for performance in our 
population of interest because Medicare claims make up a substantial 
portion of the overall inpatient claims to which these measures apply. 
However, we remain interested in collecting all-payer claims and may 
propose to collect such data in the future.
    Because PSI-9 has not yet been endorsed by a consensus building 
entity such as the NQF, we did not propose to adopt it for the RHQDAPU 
program.
    Comment: Many commenters recommended that CMS adopt the AHRQ IQI 
AAA mortality measure and AHRQ's stroke mortality measure.
    Response: We agree with the suggestion to adopt the AAA mortality 
measure. In this final rule, we are adopting this measure and will 
consider the other measure for implementation in a future rulemaking.
(9) Cardiac Surgery Measures for the FY 2010 Payment Determination
    In the FY 2009 IPPS proposed rule, we proposed to add 15 cardiac 
surgery measures for the FY 2010 payment determination (73 FR 23649). 
Cardiac surgical procedures carry a significant risk of morbidity and 
mortality. We believe that the nationwide public reporting of these 
cardiac surgery measures would provide highly meaningful information 
for the public. Currently, over 85 percent of hospitals with a cardiac 
surgery program submit data on the proposed cardiac surgery measures 
listed below to the Society of Thoracic Surgeons (STS) Cardiac Surgery 
Clinical Data Registry. We proposed to accept these data from the STS 
registry beginning on July 1, 2009, on a quarterly basis for discharges 
on or after January 1, 2009. Hospitals that participate in the RHQDAPU 
program, but do not submit data on the proposed cardiac surgery 
measures to the STS registry for discharges on or after January 1, 
2009, would need to submit such data to CMS. Although we would accept 
cardiac surgery data from other clinical data registries, we are 
unaware of any other registries that collect all of the data necessary 
to support calculation of the cardiac surgery measures. Hospitals and 
CMS would need to establish appropriate legal arrangements, to the 
extent such arrangements are necessary, to ensure that the transfer of 
these data from the STS registry to CMS complies with all applicable 
laws. By accepting these registry-based data, only hospitals with 
cardiac surgery programs that do not already collect such data to 
submit to the STS registry will have additional data submission burden. 
All of the proposed measures are currently NQF-endorsed. We proposed 
that hospitals begin submitting data by July 1, 2009, on a quarterly 
basis on the following 15 cardiac surgery measures to the STS data 
registry or CMS for 1st quarter calendar year 2009 discharges:

 Participation in a Systematic Database for Cardiac Surgery
 Pre-Operative Beta Blockade
 Prolonged Intubation
 Deep Sternal Wound Infection Rate
 Stroke/CVA
 Post-Operative Renal Insufficiency
 Surgical Reexploration
 Anti-Platelet Medication at Discharge
 Beta Blockade Therapy at Discharge
 Anti-Lipid Treatment at Discharge
 Risk-Adjusted Operative Mortality for CABG
 Risk-Adjusted Operative Mortality for Aortic Valve Replacement
 Risk-Adjusted Operative Mortality for Mitral Valve 
Replacement/Repair
 Risk-Adjusted Mortality for Mitral Valve Replacement and CABG 
Surgery
 Risk-Adjusted Mortality for Aortic Valve Replacement and CABG 
Surgery

    As discussed below, for the FY 2010 payment determination, we are 
adopting

[[Page 48609]]

only one of these proposed measures: Participation in a Systematic 
Database for Cardiac Surgery. This is an NQF-endorsed measure. The data 
submission window for this measure will be from July 1, 2009 to August 
15, 2009. Specifications for the measure will be posted on QualityNet 
and hospitals will submit data for this measure using QualityNet. This 
measure does not require the hospital to participate in a registry, 
rather, it only measures whether the hospital participates in a cardiac 
surgery registry. CMS intends to propose the other 14 cardiac surgery 
measures during the FY 2010 IPPS rulemaking cycle for the FY 2011 
payment determination.
    Comment: A few commenters suggested that CMS add the NQF-endorsed 
measure ``Anti-Platelet medications at discharge for Cardiac Surgery'' 
to the hospital data reporting requirements for FY 2009, noting that 
this measure corresponds to a PQRI measure.
    Response: We appreciate this comment, and will review the measure 
in question for possible inclusion in the RHQDAPU program in future 
years.
    Comment: Many commenters provided a number of reasons why the 
cardiac surgery measures should not be included in the RHQDAPU program; 
the measures have not yet been adopted by the HQA, the third-party 
collecting data on these measures does not require any type of 
validation for data submitted to them, and the methodology of risk 
adjustment used by the third party is not transparent.
    A few commenters believed it was inappropriate for CMS to institute 
a data reporting requirement under the RHQDAPU program that would 
require hospitals to pay money to participate in a specific registry 
(the Society of Thoracic Surgeons (STS) Cardiac Surgery Clinical Data 
Registry). Other commenters were concerned that ``participation in a 
systematic database for cardiac surgery'' could be viewed as serving 
the financial interests of a third-party organization.
    Some commenters stated that while they were not opposed to using 
the STS registry to submit the proposed cardiac surgery measures, 
hospitals currently not submitting data to this registry may have 
trouble meeting the upcoming submission deadline, and suggested that 
CMS postpone the date of discharge for reporting data on the 15 cardiac 
surgery measures from January 1, 2009, to July 1, 2009.
    Response: While HQA provides informative input regarding measure 
selection the ultimate responsibility of the measures' selection for 
the RHQDAPU program is at the discretion of the Secretary. We believe 
that cardiac surgery measures should be part of the RHQDAPU program 
because cardiac procedures are commonly performed on Medicare patients 
and that the public reporting of those processes of care will benefit 
Medicare beneficiaries. However, based on our consideration of the 
comments received, in this final rule we are only adopting one of the 
cardiac surgery measures. We will collect data regarding whether 
hospitals are participating in a registry for cardiac surgery. The 
window for submission of these data (which requires little more than a 
hospital saying ``yes'' or ``no'' as to whether it participates in a 
cardiac surgery registry) for FY 2010 will be between July 1, 2009 
(when the ability to receive the data submission by CMS will be 
available) and August 15, 2009. This is a structural measure which 
requires reporting whether the hospital participates in a registry for 
cardiac surgery but does not require that hospitals actually 
participate in a registry. Therefore, hospitals that do not currently 
report to a registry will not be required to do so, and will not be 
penalized for not participating in a registry. Currently, we believe 
that over 85 percent of cardiac surgery programs already report data to 
the STS. Reporting of the structural measure will provide further 
information regarding the extent of participation. In addition, it will 
provide valuable information for the Medicare beneficiary. We believe 
that participation in a cardiac surgery registry provides participants 
valuable ongoing quality improvement information and demonstrates a 
commitment to improvement.
    We are collecting this information directly from hospitals rather 
than STS because hospitals may be participating in registries other 
than STS. We are not finalizing the other 14 process and outcome 
measures that we proposed to collect from STS due to hospitals' concern 
about the perceived requirement to participate specifically in the STS 
registry, and because we have not yet established the infrastructure to 
collect these measures directly from hospitals. We will consider the 
best alternative for data collection for the other STS measures and 
whether the data should be received from the STS registry as proposed 
in the proposed rule or submitted directly to CMS. We intend to propose 
the other 14 cardiac surgery measures during the FY 2010 IPPS 
rulemaking cycle for the FY 2011 payment determination.
(10) Summary of Measures for the FY 2010 Payment Determination Adopted 
in This Final Rule
    In this final rule, one of the 30 current measures is being retired 
and 13 new measures are being added into the RHQDAPU program for the FY 
2010 payment determination. The 13 new measures are being added into 
the RHQDAPU program in this final rule are:
 Surgical Care Improvement Project (SCIP)
     SCIP Cardiovascular 2 Surgery Patients on a Beta-Blocker 
prior to arrival who received beta blocker during the perioperative 
period
 Nursing Sensitive Measures
     Failure to Rescue
 Readmission measures
     Heart Failure readmission (Medicare only)
 AHRQ Quality Indicators: Inpatient Quality Indicators and 
Patient Safety Indicators
     Death among surgical patients with treatable serious 
complications
     Iatrogenic pneumothorax, adult
     Postoperative wound dehiscence
     Accidental puncture or laceration
     Abdominal aortic aneurysm (AAA) mortality rate (with or 
without volume)
     Hip fracture mortality rate
     Mortality for selected medical conditions (composite)
     Mortality for selected surgical procedures (composite)
     Complication/patient safety for selected indicators 
(composite)
 Cardiac Surgery Measures
     Participation in a systematic database for cardiac surgery

    The following table lists the 42 RHQDAPU program quality measures 
that will be used for the FY 2010 payment determination

------------------------------------------------------------------------
                                           Quality measures for the FY
                 Topic                      2010 payment determination
------------------------------------------------------------------------
Acute Myocardial Infarction (AMI)......   AMI-1 Aspirin at
                                          arrival.*
                                          AMI-2 Aspirin
                                          prescribed at discharge.*

[[Page 48610]]

 
                                          AMI-3 Angiotensin
                                          Converting Enzyme Inhibitor
                                          (ACE-I) or Angiotensin II
                                          Receptor Blocker (ARB) for
                                          left ventricular systolic
                                          dysfunction.*
                                          AMI-6 Beta blocker at
                                          arrival.*
                                          AMI-5 Beta blocker
                                          prescribed at discharge.*
                                          AMI-7a Fibrinolytic
                                          (thrombolytic) agent received
                                          within 30 minutes of hospital
                                          arrival.**
                                          AMI-4 Adult smoking
                                          cessation advice/counseling.**
                                          AMI-8a Timing of
                                          Receipt of Primary
                                          Percutaneous Coronary
                                          Intervention (PCI).*******
Heart Failure (HF).....................   HF-2 Left ventricular
                                          function assessment.*
                                          HF-3 Angiotensin
                                          Converting Enzyme Inhibitor
                                          (ACE-I) or Angiotensin II
                                          Receptor Blocker (ARB) for
                                          left ventricular systolic
                                          dysfunction.*
                                          HF-1 Discharge
                                          instructions.**
                                          HF-4 Adult smoking
                                          cessation advice/counseling.**
Pneumonia (PN).........................   PN-2 Pneumococcal
                                          vaccination status.*
                                          PN-3b Blood culture
                                          performed before first
                                          antibiotic received in
                                          hospital.**
                                          PN-4 Adult smoking
                                          cessation advice/counseling.**
                                          PN-6 Appropriate
                                          initial antibiotic
                                          selection.**
                                          PN-7 Influenza
                                          vaccination status.**
                                          PN-5c Timing of
                                          receipt of initial antibiotic
                                          following hospital
                                          arrival.*******
Surgical Care Improvement Project         SCIP-1 Prophylactic
 (SCIP)--named SIP for discharges prior   antibiotic received within 1
 to July 2006 (3Q06).                     hour prior to surgical
                                          incision.**
                                          SCIP-3 Prophylactic
                                          antibiotics discontinued
                                          within 24 hours after surgery
                                          end time.**
                                          SCIP-VTE-1: Venous
                                          thromboembolism (VTE)
                                          prophylaxis ordered for
                                          surgery patients.***
                                          SCIP-VTE-2: VTE
                                          prophylaxis within 24 hours
                                          pre/post surgery.***
                                          SCIP Infection 2:
                                          Prophylactic antibiotic
                                          selection for surgical
                                          patients.***
                                          SCIP Infection 4:
                                          Cardiac Surgery Patients with
                                          Controlled 6AM Postoperative
                                          Serum Glucose.*****
                                          SCIP Infection 6:
                                          Surgery Patients with
                                          Appropriate Hair Removal.*****
                                          SCIP Cardiovascular 2:
                                          Surgery Patients on a Beta
                                          Blocker Prior to Arrival Who
                                          Received a Beta Blocker During
                                          the Perioperative
                                          Period.******
Mortality Measures (Medicare Patients).   MORT-30-AMI Acute
                                          Myocardial Infarction 30-day
                                          mortality--Medicare
                                          patients.***
                                          MORT-30-HF Heart
                                          Failure 30-day mortality
                                          Medicare patients.***
                                          MORT-30-PN Pneumonia
                                          30-day mortality-Medicare
                                          patients.****
Patients' Experience of Care...........   HCAHPS patient
                                          survey.***
Readmission Measure (Medicare Patients)   Heart Failure (HF) 30-
                                          Day Risk Standardized
                                          Readmission Measure (Medicare
                                          patients).******
AHRQ Patient Safety Indicators (PSI),     Death among surgical
 Inpatient Quality Indicators (IQI0 and   patients with treatable
 Composite Measures.                      serious complications.******
                                          Iatrogenic
                                          pneumothorax, adult.******
                                          Postoperative wound
                                          dehiscence.******
                                          Accidental puncture or
                                          laceration.******
                                          Abdominal aortic
                                          aneurysm (AAA) mortality rate
                                          (with or without
                                          volume).******
                                          Hip fracture mortality
                                          rate.******
                                          Mortality for selected
                                          surgical procedures
                                          (composite).******
                                          Complication/patient
                                          safety for selected indicators
                                          (composite).******
                                          Mortality for selected
                                          medical conditions
                                          (composite).******
Nursing Sensitive......................   Failure to Rescue
                                          (Medicare claims only).*****
Cardiac Surgery........................   Participation in a
                                          Systematic Database for
                                          Cardiac Surgery.******
------------------------------------------------------------------------
* Measure included in 10 measure starter set.
** Measure included in 21 measure expanded set.
*** Measure added in CY 2007 OPPS/ASC final rule with comment period.
**** Measure added in FY 2008 IPPS final rule with comment period.
***** Measure title proposed to be replaced for FY 2009 with the Timing
  of receipt of Primary Percutaneous Coronary Intervention (PCI).
****** Measure title proposed to be replaced for FY 2009 with Timing of
  initial antibiotic following hospital arrival.
******* Measure updated in FY 2009 IPPS final rule.

    In this final rule, we are increasing the RHQDAPU program measures 
from 30 measures for FY 2009 to a total of 42 measures for the FY 2010 
payment determination. The following table lists the increase in the 
RHQDAPU program measure set since the program's inception:

[[Page 48611]]



 
------------------------------------------------------------------------
                                    Number of
       IPPS payment year         RHQDAPU  program      Topics covered
                                quality  measures
------------------------------------------------------------------------
2005-2006.....................                 10  AMI, HF, PN.
2007..........................                 21  AMI, HF, PN, SCIP.
2008..........................                 27  AMI, HF, PN, SCIP,
                                                    Mortality, HCAHPS.
2009..........................                 30  AMI, HF, PN, SCIP,
                                                    Mortality, HCAHPS.
2010..........................                 42  AMI, HF, PN, SCIP,
                                                    Mortality, HCAHPS,
                                                    Nursing Sensitive,
                                                    Readmission, AHRQ
                                                    IQI/PSI measures and
                                                    composites, Cardiac
                                                    Surgery.
------------------------------------------------------------------------

The above measures reflect our continuing commitment to quality 
improvement in both clinical care and patient safety. These additional 
measures also demonstrate our commitment to include in the RHQDAPU 
program only those quality measures that reflect consensus among the 
affected parties and that have been reviewed by a consensus building 
process.
(11) Additional Measures for the FY 2010 Payment Determination That May 
Be Finalized in the CY 2009 OPPS/ASC Final Rule With Comment Period
    In the FY 2009 IPPS proposed rule we noted that, to the extent that 
the proposed measures had not already been endorsed by a consensus 
building entity such as the NQF, we anticipated that they would be 
endorsed prior to the time that we issued this final rule (73 FR 
23651). We stated that we intended to finalize the FY 2010 RHQDAPU 
program measure set for the FY 2010 payment determination in this final 
rule, contingent upon the endorsement status of the proposed measures. 
However, we stated that, if a measure had not received NQF endorsement 
by the time we issued this final rule, we intended to adopt that 
measure for the RHQDAPU program measure set in the CY 2009 OPPS/ASC 
final rule with comment period if the measure received endorsement 
prior to the time we issued the CY 2009 OPPS/ASC final rule with 
comment period. We requested public comment on these measures. Set out 
below are the measures which have not yet received NQF endorsement, and 
that we intend to adopt for the FY 2010 RHQDAPU program measure set in 
the CY 2009 OPPS/ASC final rule with comment period if the measures 
receive endorsement from a national consensus-based entity such as NQF:

------------------------------------------------------------------------
                                          Proposed quality measure to be
                                          finalized in the CY 2009 OPPS/
                 Topic                     ASC final rule contingent on
                                             national consensus-based
                                                   endorsement
------------------------------------------------------------------------
Readmission Measures (Medicare            AMI 30-Day Risk
 Patients).                               Standardized Readmission
                                          Measure (Medicare patients).
                                          Pneumonia (PN) 30-Day
                                          Risk Standardized Readmission
                                          Measure (Medicare patients).
------------------------------------------------------------------------

b. Possible New Quality Measures, Measure Sets, and Program 
Requirements for the FY 2011 Payment Determination and Subsequent Years
    In the FY 2009 IPPS proposed rule, we included the following table 
which describes possible quality measures and measure sets from which 
additional quality measures could be selected for inclusion in the 
RHQDAPU program for the FY 2011 payment determination and subsequent 
years (73 FR 23651). The table includes measures and measure sets that 
highlight CMS' interest in improving patient safety and outcomes of 
care, with a particular focus on the quality of surgical care and 
patient outcomes. In order to engender a broad review of potential 
performance measures, the list includes measures that have not yet been 
considered for approval by the HQA or endorsed by a consensus review 
process such as the NQF. The table also includes measures developed by 
organizations other than CMS as well as measures that are to be derived 
from administrative data (such as claims) that may need to be modified 
for specific use by the Medicare program if implemented under the 
RHQDAPU program.
    We solicited public comment on the following measure sets for 
consideration in the FY 2011 payment determination and subsequent 
years:

 Possible Measures and Measure Sets for the RHQDAPU Program for FY 2011
                          and Subsequent Years
------------------------------------------------------------------------
                 Topic                           Quality measure
------------------------------------------------------------------------
Chronic Pulmonary Obstructive Disease
 Measures.
Complications of Vascular Surgery......   AAA stratified by open
                                          and endovascular methods.
                                          Carotid
                                          Endarterectomy.
                                          Lower extremity
                                          bypass.
Inpatient Diabetes Care Measures.......
Healthcare Associated Infection........   Central Line-
                                          Associated Blood Stream
                                          Infections.
                                          Surgical Site
                                          Infections.
Timeliness of Emergency Care Measures,    Median Time from ED
 including Timeliness.                    Arrival to ED Departure for
                                          Admitted ED Patients.
                                          Median Time from ED
                                          Arrival to ED Departure for
                                          Discharged ED Patients.

[[Page 48612]]

 
                                          Admit Decision Time to
                                          ED Departure Time for Admitted
                                          Patients.
Surgical Care Improvement Project         SCIP Infection 8--
 (SCIP)--named SIP for discharges prior   Short Half-life Prophylactic
 to July 2006 (3Q06).                     Administered Preoperatively
                                          Redosed Within 4 Hours After
                                          Preoperative Dose.
                                          SCIP Cardiovascular 3--
                                          Surgery Patients on a Beta
                                          Blocker Prior to Arrival
                                          Receiving a Beta Blocker on
                                          Postoperative Days 1 and 2.
Complication Measures (Medicare
 patients).
Healthcare Acquired Conditions.........   Serious reportable
                                          events in health care (never
                                          events).
                                          Pressure ulcer
                                          prevalence and incidence by
                                          severity.
                                          Catheter-associated
                                          UTI.
Hospital Inpatient Cancer Care Measures   Patients with early
                                          stage breast cancer who have
                                          evaluation of the axilla.
                                          College of American
                                          Pathologists breast cancer
                                          protocol.
                                          Surgical resection
                                          includes at least 12 nodes.
                                          College of American
                                          Pathologists colon and rectum
                                          protocol.
                                          Completeness of
                                          pathologic reporting.
Serious Reportable Events in Healthcare   Surgery performed on
 (``Never Events'').                      the wrong body part.
                                          Surgery performed on
                                          the wrong patient.
                                          Wrong surgical
                                          procedure on a patient.
                                          Retention of a foreign
                                          object in a patient after
                                          surgery or other procedure.
                                          Intraoperative or
                                          immediately post-operative
                                          death in a normal health
                                          patient (defined as a Class 1
                                          patient for purposes of the
                                          American Society of
                                          Anesthesiologists patient
                                          safety initiative).
                                          Patient death or
                                          serious disability associated
                                          with the use of contaminated
                                          drugs, devices, or biologics
                                          provided by the health care
                                          facility.
                                          Patient death or
                                          serious disability associated
                                          with the use or function of a
                                          device in patient care in
                                          which the device is used or
                                          functions other than as
                                          intended.
                                          Patient death or
                                          serious disability associated
                                          with intravascular air
                                          embolism that occurs while
                                          being cared for in a health
                                          care facility.
                                          Patient death or
                                          serious disability associated
                                          with patient elopement
                                          (disappearance) for more than
                                          four hours.
                                          Patient suicide, or
                                          attempted suicide resulting in
                                          serious disability, while
                                          being cared for in a health
                                          care facility.
                                          Patient death or
                                          serious disability associated
                                          with a medication error (e.g.,
                                          error involving the wrong
                                          drug, wrong dose, wrong
                                          patient, wrong time, wrong
                                          rate, wrong preparation, or
                                          wrong route of
                                          administration).
                                          Patient death or
                                          serious disability associated
                                          with a hemolytic reaction due
                                          to the administration of ABO-
                                          incompatible blood or blood
                                          products.
                                          Patient death or
                                          serious disability associated
                                          with hypoglycemia, the onset
                                          of which occurs while the
                                          patient is being cared for in
                                          a health care facility.
                                          Stage 3 or 4 pressure
                                          ulcers acquired after
                                          admission to a health care
                                          facility.
                                          Patient death or
                                          serious disability due to
                                          spinal manipulative therapy.
                                          Patient death or
                                          serious disability associated
                                          with an electric shock while
                                          being cared for in a health
                                          care facility.
                                          Any incident in which
                                          a line designated for oxygen
                                          or other gas to be delivered
                                          to a patient contains the
                                          wrong gas or is contaminated
                                          by toxic substances.
                                          Patient death or
                                          serious disability associated
                                          with a burn incurred from any
                                          source while being cared for
                                          in a health care facility.
                                          Patient death
                                          associated with a fall while
                                          being cared for in a health
                                          care facility.
                                          Patient death or
                                          serious disability associated
                                          with the use of restraints or
                                          bedrails while being cared for
                                          in a health care facility.
                                          Any instance of care
                                          ordered by or provided by
                                          someone impersonating a
                                          physician, nurse, pharmacist,
                                          or other licensed health care
                                          provider.
                                          Abduction of a patient
                                          of any age.
                                          Sexual assault on a
                                          patient within or on the
                                          grounds of a health care
                                          facility.
                                          Death or significant
                                          injury of a patient or staff
                                          member resulting from a
                                          physical assault (i.e.,
                                          battery) that occurs within or
                                          on the grounds of a health
                                          care facility.
Average Length of Stay Coupled with
 Global Readmission Measure.
Preventable Hospital-Acquired             Catheter-Associated
 Conditions (HACs).                       Urinary Tract Infection (UTI).
                                          Vascular Catheter-
                                          Associated Infection.

[[Page 48613]]

 
                                          Surgical Site
                                          Infections--Mediastinitis
                                          after Coronary Artery Bypass
                                          Graft (CABG).
                                          Surgical Site
                                          Infections following Elective
                                          Procedures--Total Knee
                                          Replacement, Laparoscopic
                                          Gastric Bypass, Ligation and
                                          Stripping of Varicose Veins.
                                          Legionnaires' Disease.
                                          Glycemic Control--
                                          Diabetic Ketoacidosis,
                                          Nonketotic Hypersmolar Coma,
                                          Hypoglycemic Coma.
                                          Iatrogenic
                                          pneumothorax.
                                          Delirium.
                                          Ventilator-Associated
                                          Pneumonia (VAP).
                                          Deep Vein Thrombosis
                                          (DVT)/Pulmonary Embolism (PE).
                                          Staphylococcus aureus
                                          Septicemia.
                                          Clostridium-Difficile
                                          Associated Disease (CDAD).
                                          Methicillin-Resistant
                                          Staphylococcus aureus (MRSA).
------------------------------------------------------------------------

    Comment: Because only 37 percent of colon cancer patients receive 
adequate lymph node evaluation of at least 12 nodes, many commenters 
recommended that CMS adopt the Hospital Inpatient Cancer Care measure--
Surgical resection includes at least 12 nodes.
    Response: We appreciate the commenters' recommendation. We are 
developing cancer care measures for future implementation. Cancer is a 
prevalent diagnosis among Medicare beneficiaries, and warrants further 
measurement.
    Comment: Many commenters supported the development and 
implementation of care coordination measures, and additional glycemic 
control measures.
    Response: In the future, we will consider adopting additional 
glycemic control measures endorsed by a consensus building entity such 
as the NQF based on our assessment of whether they are appropriate for 
inclusion in the RHQDAPU program. We will also consider these comments 
as we continue to develop care coordination measures.
    Comment: Some commenters suggested that CMS review existing 
measures related to AMI in order to ensure that they represent the most 
current information that exists, and consider deeming participation in 
a heart registry a sufficient criterion to meet AMI data reporting 
requirements. Another commenter requested that CMS display the 
reporting methodology for AMI measures and exclude those cases with the 
non-diagnostic presentations.
    Response: We agree that it is imperative for us to ensure that the 
RHQDAPU program measures reflect the most current information. 
Therefore, it is our practice to utilize the most current science and 
the guidance of technical experts in the respective fields when 
selecting measures for inclusion in the program. As set out in the 
Specification Manual, the AMI measures rely upon principal diagnosis 
codes, and not on presentation to determine inclusion and exclusion. We 
view participation in a registry as a structural measure of quality. 
However, it is not a substitute for reporting data on clinical 
processes and outcomes of care.
c. Considerations in Expanding and Updating Quality Measures Under the 
RHQDAPU Program
    The RHQDAPU program has significantly expanded from an initial set 
of 10 measures to 30 measures for the FY 2009 payment determination. 
Initially, the conditions covered by the RHQDAPU program measures were 
limited to Acute Myocardial Infarction, Heart Failure, and Pneumonia, 
three high-cost and high-volume conditions. In expanding the process 
measures, Surgical Infection Prevention was the first additional focus, 
now supplemented by the two SCIP Venous Thromboembolism measures, SCIP 
VTE-1, and SCIP VTE-2, for surgical patients. Of the 30 current 
measures, 27 require data collection from chart abstraction and 
surveying patients as well as submission of detailed data elements.
    In looking forward to further expansion of the RHQDAPU program, we 
believe it is important to take several goals into consideration. These 
include: (a) Expanding the types of measures beyond process of care 
measures to include an increased number of outcome measures, efficiency 
measures, and experience-of-care measures; (b) expanding the scope of 
hospital services to which the measures apply; (c) considering the 
burden on hospitals in collecting chart-abstracted data; (d) 
harmonizing the measures used in the RHQDAPU program with other CMS 
quality programs to align incentives and promote coordinated efforts to 
improve quality; (e) seeking to use measures based on alternative 
sources of data that do not require chart abstraction or that utilize 
data already being broadly reported by hospitals, such as clinical data 
registries or all-payer claims data bases; and (f) weighing the 
meaningfulness and utility of the measures compared to the burden on 
hospitals in submitting data under the RHQDAPU program.
    In the FY 2009 IPPS proposed rule, we requested comments on how to 
reduce the burden on the hospitals participating in the RHQDAPU program 
(73 FR 23653). We also requested comment about which measures would be 
most useful while minimizing burden. We realize that our decisions in 
this final rule to expand the RHQDAPU program measure set from 
submission of 30 measures in FY 2009 to 42 measures for the FY 2010 
payment determination is potentially burdensome. However, to minimize 
the hospitals' burden, 11 of the 13 additional measures adopted in this 
final rule, as well as the 2 additional measures we intend to adopt in 
the CY 2009 OPPS/ASC final rule with comment period (if these measures 
receive NQF endorsement) for the FY 2010 payment determination use 
Medicare claims data. We also note that we are retiring a measure 
(Pneumonia Oxygenation Assessment) that requires chart abstraction.
    Comment: Several commenters supported including composite measures 
such as mortality for selected medical conditions, mortality for 
selected surgical procedures, and complication/patient safety as part 
of the RHQDAPU program measure set.

[[Page 48614]]

    Response: We appreciate the commenters' support for the proposal to 
include the inclusion of composite measures such as mortality for 
selected medical conditions, mortality for selected surgical 
procedures, and complication/patient safety in the RHQDAPU program 
measure set. We are implementing some of these composite measures in 
this final rule. Specifically, we are adopting the 3 AHRQ composite 
measures for mortality for selected surgical procedures, complication/
patient safety for selected indicators, and mortality for selected 
medical conditions.
    Comment: Many commenters asked that CMS make its risk adjustment 
model public so that others may assess its validity. In addition, 
several commenters expressed concerns that the rates must be acuity 
adjusted and must allow for random variation around the mean for the 
AMI, Heart Failure, and Pneumonia readmission measures.
    Response: In an effort to provide the public access to the reports 
on our risk adjustment models, we have made reports from the measures 
developers available on the QualityNet Web site (http://www.QualityNet.org) since June 2006. These reports, which contain risk 
adjustment methodologies for claims based measures that require risk 
adjustment, will continue to be made available on QualityNet. The HF 
readmission measure that we are finalizing in this final rule will be 
risk adjusted by taking into account the patient comorbidities 
reflected from the patient claims across all care settings one year 
prior to the index hospitalization. The claims-based risk adjustment 
model does not include patient vital signs as predictors, but this 
model is validated against a chart-based model that includes patient 
vital signs and lab test results. We use hierarchical modeling to 
calculate the hospital Risk Standardized Readmission Rate (RSRR) and 
the interval estimate (like confidence interval) around the RSRR. 
Hospitals will be presented with the RSRR together with their 
respective interval estimate to show the random variation. This risk 
adjustment model will be used for the Heart Failure, AMI, and Pneumonia 
readmission measures.
    Comment: Several commenters expressed concerns that increasing the 
amount of information publicly reported on Hospital Compare by the 
number of measures proposed only make it more of a challenge for the 
public to understand, make the Web site cumbersome to navigate, and 
discourage public interest in the site. Many commenters supported the 
development and use of composite measures for evaluating hospitals on 
Hospital Compare, as they provide useful indices to consumers and 
others when comparing hospital performance. The commenters also 
suggested that CMS pursue alternative strategies and methods for 
reporting differences among hospitals, including ranking of hospitals 
in an area, providing information to consumers on low performers rather 
than on just the high performers, and beginning to include cost and 
resource use measures in public reporting initiatives. One commenter 
questioned whether or not an on-going process or plan was in place to 
survey the Medicare beneficiaries after implementation of additional 
measures to evaluate whether publicly reporting the measures meets the 
intended goals and has perceived value to beneficiaries.
    Response: Regarding the Hospital Compare Web site, we agree that it 
is important that information be displayed in a way that is most 
useful, beneficial, and understandable to the consumer. We appreciate 
the comments on ways to enhance the Hospital Compare Web site and 
recognize the valuable feedback that a survey would provide. CMS uses 
focus groups to test all of the RHQDAPU program measures on Hospital 
Compare and will continue to do so when revising the Hospital Compare 
Web site. We are finalizing three composite measures in this rule and 
are working toward including more composite measures on Hospital 
Compare.
(1) Expanding the Types of Measures
    Section 1886(b)(3)(B)(viii)(III) of the Act requires the Secretary 
to add other quality measures that the Secretary determines to be 
appropriate for the measurement of the quality of care furnished by 
hospitals in inpatient settings. We intend to expand outcome measures 
such as mortality measures and measures of complications. For the FY 
2010 RHQDAPU program, the proposed measure set includes:
     Patient Experience of Care. HCAHPS collects data regarding 
a patient's experience of care in the hospital and provides a very 
meaningful perspective from the patient standpoint.
     Efficiency. Efficiency is a Quality Domain, as defined by 
the IOM that relates Quality and Cost. The three proposed readmission 
measures address hospital efficiency.

(As discussed above, we are adopting one of these readmission measures 
in this final rule and intend to adopt the other two in the OPPS/ASC 
final rule with comment period if they receive NQF endorsement by the 
time that final rule is issued.) These are considered efficiency 
measures because higher hospital readmission rates are linked to higher 
costs and also to lower quality of care received during hospitalization 
and after the initial hospital stay. We are also seeking additional 
ways in which to address efficiency.

     Outcomes. The three 30-day mortality measures, the cardiac 
surgery measure, the AHRQ PSI/IQI measures, and the outcome-related 
nursing sensitive measure represent significant expansion of the 
RHQDAPU program outcome measures because these measures allow us to 
report more comprehensive information on outcomes and the results of 
treatment to consumers. Additional outcome measures are provided in the 
list under consideration for inclusion in the RHQDAPU program for FY 
2011 and beyond.
(2) Expanding the Scope of Hospital Services To Which Measures Apply
    Many of the most common and high-cost Medicare DRGs were posted on 
the Hospital Compare Web site in March 2008 as part of the President's 
transparency initiative. We have assessed these DRGs and have found 
that the FY 2009 RHQDAPU program measure set does not capture data 
regarding care in important areas such as Inpatient Diabetes Care, 
Chronic Obstructive Pulmonary Disease (COPD), and Chest Pain. These are 
areas for which we currently do not have quality measures but which 
constitute a significant portion of the top paying DRGs for Medicare 
beneficiaries. We intend to develop measures in these areas in order to 
provide additional quality information on the most common and high-cost 
conditions that affect Medicare beneficiaries.
(3) Considering the Burden on Hospitals in Collecting Chart-Abstracted 
Data for Measures
    In the FY 2009 IPPS proposed rule, we proposed to add 15 additional 
chart-abstracted measures. In this final rule, we have retired one 
measure (Pneumonia Oxygenation Assessment) that required chart 
abstraction and added only 1 additional chart-abstracted measure (SCIP 
Cardiovascular 2) for the FY 2010 payment determination. While the 
cardiac surgery registry participation indicator requires submission of 
information by hospitals, it does not require chart abstraction, and 
does not significantly increase the burden on hospitals to submit data. 
We also intend to work to simplify the data abstraction specifications 
that add to the burden of data collection and to explore mechanisms for 
data submission using electronic health records.

[[Page 48615]]

(4) Harmonizing With Other CMS Programs
    We intend to harmonize measures across settings and other CMS 
programs as evidenced by the implementation of the readmission 
measures, not only for the RHQDAPU program, but also for the Quality 
Improvement Organizations' (QIOs') 9th Scope of Work (SOW) Patient 
Pathways/Care Transitions Theme, which also uses the 30-Day Readmission 
Measures and will provide assistance to engage hospitals in improving 
care. The 9th SOW also focuses on disparities in health care, which is 
another important area of interest for CMS. We plan to analyze current 
RHQDAPU program measures to identify particular measures needed to 
evaluate the existence of health care disparities, to require data 
elements that would support better identification of health care 
disparities, and to find more efficient ways to ascertain this 
information from claims data. In addition, some of the CY 2008 
Physician Quality Reporting Initiative (PQRI) measures align with the 
current RHQDAPU program, for example, AMI and SCIP measures reported 
data starting with the FY 2007 RHQDAPU program measure set. In other 
words, there are financial incentives that cover the same clinical 
processes of care across different providers and settings. Other 
examples are the RHQDAPU program measure Aspirin for Heart Attack which 
corresponds to PQRI measure number 28, and the RHQDAPU program measure 
Surgical Infection Antibiotic Timing which corresponds to PQRI measure 
number 20. Outpatient quality measures under the Hospital Outpatient 
Data Quality Data Reporting Program (HOP QDRP) are also aligned with 
the RHQDAPU program measures. For example, the HOP QDRP addresses Acute 
Myocardial Infarction treatment for transferred patients and surgical 
infection prevention for outpatient surgery.
(5) Use of Data Collected by State Data Organizations, State Hospital 
Associations, Federal Entities, and/or Other Data Warehouses
    We are actively pursuing alternative data sources, including data 
sources that are electronically maintained. Alternative data submission 
methodologies that we proposed in the FY 2009 IPPS proposed rule 
include:
     Use of registry-collected clinical data for which there is 
broad existing hospital participation as previously described with the 
STS registry.
     Use of data collected by State data organizations, State 
hospital associations, Federal entities such as AHRQ, and/or other data 
warehouses.
    In addition, we are considering adopting the following methods of 
data collection in the future and requested comments on these methods:
     Use of the CMS Continuity Assessment Record & Evaluation 
(CARE) tool, a standardized data collection instrument, which would 
allow data to be transmitted in ``real time.'' This recently developed, 
Internet-based, quality data collection tool was developed as a part of 
the Post Acute Care Reform Demonstration Program mandated by section 
5008 of the DRA. The CARE tool consists of a core set of assessment 
items, common to all patients and all care settings (meeting criteria 
of being predictive of cost, utilization, outcomes, among others), 
organized under five major domains: Medical, Functional, Social, 
Environmental, and Cognitive--Continuity of Care. The Internet-based 
CARE tool will communicate critical information across settings 
accurately, quickly, and efficiently with reduced time burden to 
providers and is intended to enhance beneficiaries' safe transitions 
between settings to prevent avoidable, costly events such as 
unnecessary rehospitalizations or medication errors. We believe that 
the CARE tool may provide a vehicle for collection of data elements to 
be used for calculating RHQDAPU program quality measures. CMS is 
considering utilizing the CARE tool in this manner. The Care tool is 
available at: http://www.cms.hhs.gov/PaperworkReductionActof1995/PRAL/list.asp#TopOfPage. (Viewers should select ``Show only items with the 
word 10243,'' click on show items, select CMS-10243, click on 
downloads, and open Appendices A & B, pdf files.)
    In the FY 2009 IPPS proposed rule, we indicated that we were 
particularly interested in receiving public comment on this tool (73 FR 
23654). Our goal is to have a standardized, efficient, effective, 
interoperable, common assessment tool to capture key patient 
characteristics that will help CMS capture information related to 
resource utilization; expected costs as well as clinical outcomes; and 
post-discharge disposition. The CARE tool will also be useful for 
guiding payment and quality policies. Specifically, we indicated that 
we were interested in receiving public comments on how CARE might 
advance the use of health information technology in automating the 
process for collecting and submitting quality data.
     Submission of data derived from electronic versions of 
laboratory test reports that are issued by the laboratory in accordance 
with CLIA to the ordering provider and maintained by the hospital as 
part of the patient's medical record during and after the patient's 
course of treatment at the hospital. We are considering using these 
data to support risk adjustment for claims-based outcome measures (for 
example, mortality measures) and to develop other outcomes measures. 
This would support use of electronically maintained data and our goal 
of reducing manual data collection burden on hospitals.
     Submission of data currently being collected by clinical 
data registries in addition to the STS registry. This would support and 
leverage existing clinical data registries and existing voluntary 
clinical data collection efforts, such as:

 American College of Cardiology (ACC) data registry for Cardiac 
Measures
 ACC data registry for ICD
 ACC data registry for Carotid Stents
 Vascular Surgery Registry for Vascular Surgical Procedures
 ACC-sponsored ``Get with the Guidelines'' registry for Stroke 
Care

    Comment: Several commenters expressed concern about using the CARE 
tool. The commenters perceived the tool as time consuming (taking up to 
20 minutes per patient) and increased facility burden. These commenters 
stated that the tool should not be used until it has been fully tested, 
and can be made interoperable with provider systems.
    Response: We did not propose to implement the CARE tool in the FY 
2009 IPPS proposed rule. Before we can consider implementation of the 
CARE tool, we agree that the CARE tool must be fully tested and that 
data collection issues must be addressed. We will continue development 
of the CARE tool so that it can be used to efficiently capture valuable 
information regarding care coordination for Medicare beneficiaries.
    Comment: Some commenters recommended that CMS work with other 
agencies to foster better alignment of quality improvement and health 
information technology (Health IT) initiatives. The commenters 
encouraged more intense collaboration with standard-setting and 
certification bodies to provide an interoperable environment for 
hospitals to automate data submission in a reliable and cost-effective 
way, and encouraged CMS to support payment policies to facilitate and 
encourage adoption of Health IT.
    Response: We agree with these comments and support the adoption of 
Health IT to facilitate the effective and efficient administration of 
quality patient care, monitoring, care

[[Page 48616]]

coordination, data reporting and performance improvement. We intend to 
pursue electronic data submission based on Health IT standards as an 
alternative to manual chart abstraction.
(6) Weighing the Meaningfulness and Utility of the Measures Compared to 
the Burden on Hospitals in Submitting Data Under the RHQDAPU Program
    In the FY 2009 IPPS proposed rule, we proposed to retire one 
measure from the RHQDAPU program for the FY 2010 payment determination 
because we have determined that the burden on hospitals in abstracting 
the data outweighs the meaningful benefit that we can ascertain from 
the measure (73 FR 23655). In this final rule, we are adopting the 
proposal to retire one measure. As we explained in the FY 2009 IPPS 
proposed rule, we sought comments on the applicability to the RHQDAPU 
program of criteria currently described in the Hospital VBP Issues 
Paper for inclusion and retirement of measures. The Hospital VBP Issues 
Paper is located on the CMS Web site at the following location: http://www.cms.hhs.gov/AcuteInpatientPPS/downloads/hospital_VBP_plan_issues_paper.pdf.
3. Form and Manner and Timing of Quality Data Submission
    In the FY 2007 IPPS final rule (71 FR 48031 through 48045), we set 
out RHQDAPU program procedures for data submission, program withdrawal, 
data validation, attestation, public display of hospitals' quality 
data, and reconsiderations. Section 1886(b)(3)(B)(viii)(I) of the Act 
requires that subsection (d) hospitals submit data on measures selected 
under that clause with respect to the applicable fiscal year. In 
addition, section 1886(b)(3)(B)(viii)(II) of the Act requires that each 
subsection (d) hospital submit data on measures selected under that 
clause to the Secretary in a form and manner, and at a time, specified 
by the Secretary. The technical specifications for each RHQDAPU program 
measure are listed in the Specifications Manual. We update this Manual 
semiannually, or more frequently in unusual cases, and include detailed 
instructions and calculation algorithms for hospitals to collect and 
submit the data for the required measures.
    The maintenance of the specifications for the measures selected by 
the Secretary occurs through publication of the Specifications Manual. 
Thus, measure selection by the Secretary occurs through the rulemaking 
process; whereas the maintenance of the technical specifications for 
the selected measures occurs through a subregulatory process so as to 
best maintain the specifications consistent with current science and 
consensus. The data submission, Specifications Manual, and submission 
deadlines are posted on the QualityNet Web site at http://www.QualityNet.org. CMS requires that hospitals submit data in 
accordance with the specifications for the appropriate discharge 
periods. When measure the specifications were updated, we proposed in 
the FY 2009 IPPS proposed rule to require that hospitals submit all of 
the data required to calculate the required measures as currently 
outlined in the Specifications Manual as of the patient discharge date 
(73 FR 23655).
4. RHQDAPU Program Procedures for FY 2009 and FY 2010
a. RHQDAPU Program Procedures for FY 2009
    In the FY 2008 IPPS final rule with comment period, we stated that 
the requirements for FY 2008 would continue to apply for FY 2009 (72 FR 
47361). The ``Reporting Hospital Quality Data for Annual Payment Update 
Reference Checklist'' section of the QualityNet Web site contains all 
of the forms to be completed by hospitals participating in the RHQDAPU 
program.
    Under these requirements hospitals must--
     Register with QualityNet, before participating hospitals 
initially begin reporting data, regardless of the method used for 
submitting data.

--Identify a QualityNet Administrator who follows the registration 
process located on the QualityNet Web site (http://www.QualityNet.org).
--Complete the revised RHQDAPU program Notice of Participation form 
(only for hospitals that did not submit a form prior to August 15, 
2007). For hospitals that share the same CMS Certification Number (CCN) 
(formerly Medicare Provider Number), report the name and address of 
each hospital campus on this form.
--Collect and report data for each of the required measures except the 
Medicare mortality measures (AMI, HF, and PN 30-day Mortality for 
Medicare Patients). Hospitals must continuously report these data. 
Hospitals must submit the data to the QIO Clinical Warehouse using the 
CMS Abstraction & Reporting Tool (CART), The Joint Commission 
ORYX[supreg] Core Measures Performance Measurement System, or another 
third-party vendor tool that has met the measurement specification 
requirements for data transmission to QualityNet. All submissions will 
be executed through QualityNet. Because the information in the QIO 
Clinical Warehouse is considered QIO information, it is subject to the 
stringent QIO confidentiality regulations in 42 CFR Part 480. The QIO 
Clinical Warehouse will submit the data to CMS on behalf of the 
hospitals.

     Submit complete data regarding the quality measures in 
accordance with the joint CMS/Joint Commission sampling requirements 
located on the QualityNet Web site for each quality measure that 
requires hospitals to collect and report data. These requirements 
specify that hospitals must submit a random sample or complete 
population of cases for each of the topics covered by the quality 
measures. Hospitals must meet the sampling requirements for these 
quality measures for discharges in each quarter.
     Submit to CMS on a quarterly basis aggregate population 
and sample size counts for Medicare and non-Medicare discharges for the 
four topic areas (AMI, HF, PN, and SCIP).
     Continuously collect and submit HCAHPS data in accordance 
with the HCAHPS Quality Assurance Guidelines, V3.0, located at the Web 
site http://www.hcahpsonline.org. The QIO Clinical Warehouse has been 
modified to accept zero HCAHPS-eligible discharges. We remind the 
public to refer to the QualityNet Web site for any questions about how 
to submit ``zero cases'' information.
    For the AMI 30-day, HF 30-day, and PN 30-day mortality measures, 
CMS uses Part A and Part B claims for Medicare fee-for-service patients 
to calculate the mortality measures. For FY 2009, hospital inpatient 
claims (Part A) from July 1, 2006 to June 30, 2007, will be used to 
identify the relevant patients and the index hospitalizations. 
Inpatient claims for the index hospitalizations and Part A and Part B 
claims for all inpatient, outpatient, and physician services received 
one year prior to the index hospitalizations are used to determine 
patient comorbidity, which is used in the risk adjustment calculation. 
(For more information, we refer readers to the Web site: http://www.QualityNet.org/dcs/ContentServer?cid=1163010398556&pagename=QnetPublic%2FPage%2FQnetTier2&c=Page.) No other hospital data submission is required to calculate the 
mortality rates.
b. RHQDAPU Program Procedures for FY 2010
    In the FY 2009 IPPS proposed rule (73 FR 23656), we proposed to 
continue

[[Page 48617]]

requiring the FY 2009 RHQDAPU program procedures for FY 2010 for 
hospitals participating in the RHQDAPU program, with the following 
modifications:
     Notice of Participation. New subsection (d) hospitals and 
existing hospitals that wish to participate in the RHQDAPU program for 
the first time must complete a revised ``Reporting Hospital Quality 
Data for Annual Payment Update Notice of Participation'' that includes 
the name and address of each hospital campus that shares the same CCN.
     Data Submission. In order to reduce the burden on 
hospitals that treat a low number of patients who are covered by the 
submission requirements, we proposed the following:

--AMI. In the FY 2009 IPPS proposed rule, we proposed that a hospital 
that has five or fewer AMI discharges (both Medicare and non-Medicare 
combined) in a quarter will not be required to submit AMI patient level 
data for that quarter (73 FR 23656). We proposed to begin implementing 
this requirement with discharges on or after January 1, 2009. However, 
the hospital must still submit its aggregate AMI population and sample 
size counts to CMS for that quarter as part of its quarterly RHQDAPU 
program data submission.
--HCAHPS. In the FY 2009 IPPS proposed rule, we proposed that a 
hospital that has five or fewer HCAHPS-eligible discharges in any month 
will not be required to submit HCAHPS surveys for that month (73 FR 
23656). However, the hospital must still submit its total number of 
HCAHPS-eligible cases for that month as part of its quarterly HCAHPS 
data submission. We proposed to begin implementing this requirement 
with discharges on or after January 1, 2009.
--HF. In the FY 2009 IPPS proposed rule, we proposed that a hospital 
that has five or fewer HF discharges (both Medicare and non-Medicare 
combined) in a quarter will not be required to submit HF patient level 
data for that quarter (73 FR 23656). However, the hospital must still 
submit its aggregate HF population and sample size counts to CMS for 
that quarter as part of its quarterly RHQDAPU program data submission. 
We proposed to begin implementing this requirement with discharges on 
or after January 1, 2009.
--PN. In the FY 2009 IPPS proposed rule, we proposed that a hospital 
that has five or fewer PN discharges (both Medicare and non-Medicare 
combined) in a quarter will not be required to submit PN patient level 
data for that quarter (73 FR 23656). However, the hospital must still 
submit its aggregate PN population and sample size counts to CMS for 
that quarter as part of its quarterly RHQDAPU program data submission. 
We proposed to begin implementing this requirement with discharges on 
or after January 1, 2009.
--SCIP. In the FY 2009 IPPS proposed rule, we proposed that a hospital 
that has five or fewer SCIP discharges (both Medicare and non-Medicare 
combined) in a quarter will not be required to submit SCIP patient 
level data for that quarter (73 FR 23656). However, the hospital must 
still submit its aggregate SCIP population and sample size counts to 
CMS for that quarter as part of its quarterly RHQDAPU program data 
submission. We proposed to begin implementing this requirement with 
discharges on or after January 1, 2009.

    Comment: Several commenters supported CMS' proposal to allow 
hospitals that have five or fewer HCAHPS-eligible patients in a month, 
or five or fewer heart attack, heart failure, pneumonia or surgical 
care patients in a calendar quarter to not submit HCAHPS survey or 
quality measure data for those patients beginning in FY 2010. The 
commenters supported this approach because it is a sensible way to 
reduce the reporting burden on hospitals with a very small number of 
cases; however, the commenters believed that hospitals should always be 
able to voluntarily report on quality measures if they want to do so.
    Response: We appreciate the commenters' support. This proposal 
strives to minimize the reporting burden for hospitals with small 
patient caseloads. We welcome hospitals with smaller than the required 
minimum number of cases to submit data voluntarily.
    Comment: One commenter asked CMS to provide the statistical 
rationale for its proposal to allow hospitals that have five or fewer 
heart attack, heart failure, pneumonia or surgical care patients in a 
calendar quarter to not submit quality measures data for those patients 
beginning in FY 2010.
    Response: We selected more than five cases per quarter as the 
minimum threshold to ensure that the vast majority of hospitals with 
sufficient caseload would be required to submit data, while easing the 
burden on hospitals whose patient counts were too small to reliably 
predict hospital performance. We believe that hospital level 
performance can be reliably estimated with 20 to 30 cases reported 
annually, consistent with commonly used statistical sampling practice. 
We also chose the more than five cases minimum quarterly threshold as a 
fair, consistent, and easily understandable requirement that would not 
reduce the amount of reliable publicly reported data posted on the 
Hospital Compare Web site. It is likely that the vast majority of 
hospitals affected by this requirement would not have sufficient annual 
caseload for CMS to publicly report reliable hospital level estimates 
for RHQDAPU program measures. We believe that the relative burden on 
hospitals treating these small patient caseloads outweighs the improved 
reliability from increased measure denominators of a few cases. We 
believe that this proposal does not adversely impact quality data for 
smaller and specialty hospitals treating five or fewer heart attack, 
heart failure, pneumonia or surgical care patients in a calendar 
quarter.
    In the FY 2009 IPPS proposed rule, we proposed the following 
quarterly deadlines for hospitals to submit the FY 2010 AMI, HF, SCIP, 
PN, Stroke, VTE, and nursing sensitive measure data:
     The data submission deadline for hospitals to submit the 
patient level measure data for 1st calendar quarter of 2009 discharges 
would be August 15, 2009. Data must be submitted for each of these 
measures 4.5 months after the end of the preceding quarter. The 
specific deadlines will be listed on the QualityNet Web site.
     Even though data on applicable measures will not be due 
until 4.5 months after the end of the preceding quarter, hospitals must 
submit their aggregate population and sample size counts no later than 
4 months after the end of the preceding quarter (the exact dates will 
be posted on the QualityNet Web site). This deadline falls 
approximately 15 days before the data submission deadline for the 
clinical process measures, and we proposed it so that we can inform 
hospitals about their data submission status for the quarter before the 
4.5 month clinical process measure deadline. We have found from past 
experience that hospitals need sufficient time to submit additional 
data when their counts differ from Medicare claims counts generated by 
CMS. We will provide hospitals with these Medicare claims counts and 
submitted patient level data counts on the QualityNet Web site 
approximately 2 weeks before the quarterly submission deadline. We plan 
to use the aggregate population and sample size data to assess 
submission completeness and

[[Page 48618]]

adherence to sampling requirements for Medicare and non-Medicare 
patients.
    As discussed above in our responses to previous commenters, we 
decided not to adopt all of our proposed measures. Therefore, these 
requirements will only apply with respect to the SCIP, HF, AMI, and PN 
chart-abstracted measures that we are adopting in this final rule.
    Comment: Several commenters addressed the CMS data resubmission 
policy which allows resubmission of data up to, but not after, the 
quarterly deadline. The commenters noted that the FY 2009 IPPS proposed 
rule did not address the issue of data resubmission when a hospital or 
its vendor becomes aware of an error in the data that was sent for 
posting on Hospital Compare, and that the proposed rule also did not 
address the issue of appealing to resubmit data after the submission 
deadline. These commenters urged CMS to immediately adopt an effective 
mechanism for allowing hospitals and their vendors to resubmit quality 
measure data if they discover errors.
    Response: We believe that the current data submission deadlines for 
the chart-abstracted measures are sufficient to allow hospitals time to 
submit accurate and complete data before the submission deadline. Our 
past experience has indicated that the vast majority of hospitals 
submit accurate data in a timely manner before the quarterly submission 
deadline. We encourage hospitals to submit their data as early as 
possible to correct data through resubmissions before the submission 
deadline. We believe that data submission after the quarterly deadline 
would result in delays in the quarterly CDAC validation processing, and 
would adversely impact our ability to deliver timely validation results 
to hospitals.
    We will consider allowing future resubmissions of data after the 
submission deadline has elapsed for public reporting purposes only. 
This resubmission would not adversely impact our CDAC validation 
processing, but would allow hospitals to correct errors that would 
impact their publicly reported RHQDAPU program measures.
    Comment: One commenter requested that CMS provide 30 days between 
the final count of Medicare claims currently provided by CMS to the 
hospitals and the submission deadline. This extension of time would 
provide hospitals and vendors with the necessary time to reabstract and 
submit the necessary cases to comply with the submission requirement.
    Response: We provide the final claims counts to hospitals 
approximately 15 days before the quarterly submission deadline of 4.5 
months following the last quarterly discharge date. We believe that 
providing additional time to provide a final claims count would result 
in an incomplete count of Medicare claims for hospitals lagging in 
their claims submissions to Medicare. In the future, our goal is to 
utilize the hospital submitted aggregate population and sample counts 
to replace these Medicare claims counts. We believe that hospital 
submitted aggregated population and sample counts will provide a 
complete and accurate assessment of the entire list of patients treated 
by hospitals. These counts include both Medicare and non-Medicare 
patients, including Medicare fee-for-service and Medicare Advantage 
patients. The current claims counts we provide include only Medicare 
fee-for-service patients, so they are limited in assisting hospitals to 
assessment submission completeness.
    Comment: Some commenters objected to the proposed requirement for 
hospitals to submit aggregate patient population counts for Medicare 
and non-Medicare patients. The commenters stated that the requirement 
was burdensome and duplicative of Medicare claims counts provided by 
CMS to hospitals.
    Response: We do not currently possess any patient population counts 
for non-Medicare patients. Since we do not possess patient population 
counts for non-Medicare patients, this information is necessary for us 
to better assess the completeness of hospital submitted RHQDAPU program 
data for all treated patients, Medicare and non-Medicare. The RHQDAPU 
program measures are intended to provide the public with information on 
all patients treated by hospitals, including Medicare and non-Medicare 
patients. We require hospitals to comply with the CMS/Joint Commission 
sampling requirements for submitting data. These requirements require 
hospitals to submit a random sample or a population of their caseloads 
for RHQDAPU program measures for both Medicare and non-Medicare 
patients. We are actively educating hospitals and data vendors to 
utilize billing and other information to compile a list of patients. We 
encourage hospitals and data vendors to collaborate on minimizing the 
burden and ensuring that the data reported on Hospital Compare are 
representative of their entire list of patients.
    Comment: One commenter commented on potential problems that may 
occur when CMS uses unvalidated aggregate population count numbers 
submitted by hospitals to assess submission completeness.
    Response: We believe that we can adequately validate the aggregate 
population count numbers submitted by hospitals, but are looking at the 
issue raised by the commenter. We also plan to assess the accuracy of 
non-Medicare aggregate population counts using existing all-payer data 
sources, including State lists of patients. Based on this assessment, 
we will consider approaches in future years designed to ensure that 
hospitals are reporting accurate population counts for all Medicare and 
non-Medicare patients. These approaches should also factor in the 
burden on the hospitals.
    Comment: Some commenters wrote that the CMS Abstraction & Reporting 
Tool (CART) used by hospitals to abstract quality data should be 
modified to include all required RHQDAPU program measures.
    Response: The CMS CART includes all the RHQDAPU program required 
chart-abstracted measures that we are adopting for the FY 2010 payment 
determination. It is not necessary to include the claims-based 
measures, since hospitals are not required to submit any additional 
data to us for these measures.
    After careful consideration of the public comments received, we are 
adopting as final the aggregate population and sample size submission 
requirements we proposed. We are establishing submission deadlines as 
set out below. We believe that these requirements greatly improve our 
ability to ensure the accuracy and completeness of hospital reported 
quality data for the RHQDAPU program.
     Data must be submitted for these measures on the 
QualityNet Web site.
     The window for submission for the participation in a 
cardiac surgery registry measure will be between July 1, 2009 (when the 
ability to receive the data submission by CMS will be available) and 
August 15, 2009. Data must be submitted for this measure on the 
QualityNet Web site.
     The data submission deadline for hospitals to submit 
patient level data for the 26 SCIP, AMI, HF, PN measures for 1st 
calendar quarter of 2009 discharges will be August 15, 2009.
     The data submission deadline for hospitals to submit 
aggregate population and sample size count data for SCIP, AMI, HF, PN 
for 1st calendar quarter of 2009 discharges will be August 1, 2009.
    The following RHQDAPU program measures will be calculated using 
Medicare claims with no additional data submitted by hospitals:

[[Page 48619]]



------------------------------------------------------------------------
                 Topic                           Quality measure
------------------------------------------------------------------------
Mortality Measures (Medicare Patients).   MORT-30-AMI Acute
                                          Myocardial Infarction 30-day
                                          mortality Medicare patients.
                                          MORT-30-HF Heart
                                          Failure 30-day mortality
                                          Medicare patients.
                                          MORT-30-PN Pneumonia
                                          30-day mortality Medicare
                                          patients.
Readmission Measure (Medicare Patients)   Heart Failure (HF) 30-
                                          Day Risk Standardized
                                          Readmission Measure (Medicare
                                          patients).
AHRQ Patient Safety Indicators (PSI),     Death among surgical
 Inpatient Quality Indicators (IQI) and   patients with treatable
 Composite Measures.                      serious complications.
                                          Iatrogenic
                                          pneumothorax, adult.
                                          Postoperative wound
                                          dehiscence.
                                          Accidental puncture or
                                          laceration.
                                          Abdominal aortic
                                          aneurysm (AAA) mortality rate
                                          (with or without volume).
                                          Hip fracture mortality
                                          rate.
                                          Mortality for selected
                                          surgical procedures
                                          (composite).
                                          Complication/patient
                                          safety for selected indicators
                                          (composite).
                                          Mortality for selected
                                          medical conditions
                                          (composite).
Nursing Sensitive......................   Failure to Rescue
                                          (Medicare claims only).
------------------------------------------------------------------------

    Consistent with the practice that we adopted for the FY 2009 
payment determination for measures calculated using existing Medicare 
claims data only, we will calculate these measures for FY 2010 by using 
existing claims data for hospitalizations from July 1, 2007, through 
June 30, 2008 (3rd quarter 2007 through 2nd quarter 2008 discharges).
5. HCAHPS Requirements for FY 2009 and FY 2010
a. FY 2009 HCAHPS Requirements
    For FY 2009, hospitals must continuously collect and submit HCAHPS 
data to the QIO Clinical Warehouse by the data submission deadlines 
posted on the Web site at: http://www.hcahpsonline.org. The data 
submission deadline for first quarter CY 2008 (January through March) 
discharges is July 16, 2008. To collect HCAHPS data, a hospital can 
either contract with an approved HCAHPS survey vendor that will conduct 
the survey and submit data on the hospital's behalf to the QIO Clinical 
Warehouse, or a hospital can self-administer the survey without using a 
survey vendor, provided that the hospital meets Minimum Survey 
Requirements as specified on the Web site at: http://www.hcahpsonline.org. A current list of approved HCAHPS survey vendors 
can be found on the Web site at: http://www.hcahpsonline.org.
    Every hospital choosing to contract with a survey vendor should 
provide the sample frame of hospital-eligible discharges to its survey 
vendor with sufficient time to allow the survey vendor to begin 
contacting each sampled patient within 6 weeks of discharge from the 
hospital (we refer readers to the Quality Assurance Guidelines for 
details about HCAHPS eligibility and sample frame creation) and must 
authorize the survey vendor to submit data via QualityNet on the 
hospital's behalf. CMS strongly recommends that the hospitals employing 
a survey vendor promptly review the two HCAHPS Feedback Reports (the 
Provider Survey Status Summary Report and the Data Submission Detail 
Report) that are available after the survey vendor submits the data to 
the QIO Clinical Warehouse. These reports enable a hospital to ensure 
that its survey vendor has submitted the data on time and it has been 
accepted into the Warehouse.
    In the FY 2008 IPPS final rule with comment period (72 FR 47362), 
we stated that hospitals and survey vendors must participate in a 
quality oversight process conducted by the HCAHPS project team. 
Starting in July 2007, we began asking hospitals/survey vendors to 
correct any problems that were found and provide follow-up 
documentation of corrections for review within a defined time period. 
If the HCAHPS project team finds that the hospital has not made these 
corrections, CMS may determine that the hospital is not submitting 
HCAHPS data that meet the requirements for the RHQDAPU program. As part 
of these activities, HCAHPS project staff reviews and discusses with 
survey vendors and hospitals self-administering the survey their 
specific Quality Assurance Plans, survey management procedures, 
sampling and data collection protocols, and data preparation and 
submission procedures.
b. FY 2010 HCAHPS Requirements
    In the FY 2009 IPPS proposed rule, for FY 2010, we proposed 
continuous collection of HCAHPS in accordance with the Quality 
Assurance Guidelines located at the Web site: http://www.hcahpsonline.org, by the quarterly data submission deadlines posted 
on the Web site: http://www.hcahpsonline.org (73 FR 23657). As stated 
above, starting with January 1, 2009, discharges, we proposed that 
hospitals that have five or fewer HCAHPS-eligible discharges in a month 
would not be required to submit HCAHPS patient-level data for that 
month as part of the quarterly data submission that includes that 
month, but they would still be required to submit the number of HCAHPS-
eligible cases for that month as part of their HCAHPS quarterly data 
submission.
    With respect to HCAHPS oversight, we proposed that the HCAHPS 
Project Team would continue to conduct site visits and/or conference 
calls with hospitals/survey vendors to ensure the hospitals' compliance 
with the HCAHPS requirements. During the onsite visit or conference 
call, the HCAHPS Project Team will review the hospital's/survey 
vendor's survey systems and will assess protocols based upon the most 
recent Quality Assurance Guidelines. All materials relevant to survey 
administration will be subject to review. The systems and program 
review includes, but it is not necessarily limited to: (a) Survey 
management and data systems; (b) printing and mailing materials and 
facilities; (c) telephone/IVR materials and facilities; (d) data 
receipt, entry and storage facilities; and (e) written documentation of 
survey processes. Organizations will be given a defined time period in 
which to correct any problems and provide follow-up documentation of 
corrections for review. Hospitals/survey vendors will be subject to 
follow-up site visits and/or conference calls, as needed. If CMS 
determines that a hospital is noncompliant with HCAHPS program 
requirements, CMS may determine that the hospital is not submitting 
HCAHPS data that meet the requirements of the RHQDAPU program.

[[Page 48620]]

    Comment: One commenter expressed concern about hospitals having 
sufficient warning if they or their vendors were not complying with the 
HCAHPS protocols as determined through a site visit review as part of 
the oversight process.
    Response: We strongly encourage hospitals that choose to use a 
survey vendor to be fully appraised of the methods and actions of their 
survey vendors--especially the survey vendors' full compliance with 
HCAHPS Quality Assurance Guidelines--and to carefully inspect all data 
warehouse reports in a timely manner. If a hospital is using a survey 
vendor and we find a problem at the survey vendor in its survey 
operations, a request to fix the issue(s) will be initially directed to 
the survey vendor. If the problem is one that could potentially impact 
whether the hospital client(s) meet the RHQDAPU program requirements, 
we would, within seven calendar days of determining that the problem 
could impact whether the hospital meets the RHQDAPU requirements, 
notify the affected hospital(s). The client hospital(s) would also be 
notified, within seven calendar days of determining that the problem 
could impact whether the hospital(s) meets the RHQDAPU program 
requirements, should their survey vendor fail to fix any issue(s) 
identified through the oversight process. Examples of problems or 
practices that could jeopardize a hospital's meeting the HCAHPS 
requirement for the RHQDAPU program include but are not limited to the 
following: Administering the HCAHPS survey at patient discharge rather 
than two days to six weeks following discharge; using a mode of survey 
administration other than the four approved survey modes; creating and 
using a translation of the HCAHPS survey other than the approved survey 
translations; consistently surveying patients after the six week time 
limit; or consistently failing to include in the sampling frame the 
entire population of HCAHPS-eligible discharges. Detailed information 
on HCAHPS survey administration protocols can be found in the HCAHPS 
Quality Assurance Guidelines.
    If reasonable attempts (which normally include a review of survey 
vendor's Quality Assurance Plan, an on-site visit, correspondence and 
conference calls, and review of the vendor's plan to correct any issues 
identified) to bring the survey vendor into compliance are not 
successful, then we will within seven calendar days of determining that 
the problem could impact whether the hospital meets the RHQDAPU 
requirements, notify all affected client hospitals so that they can 
engage an alternative survey vendor if they so choose.
    If we determine that a hospital's non-compliance with HCAHPS 
requirements is the fault of the hospital rather than its survey 
vendor, we will notify the hospital within seven calendar days and 
consult with it on how to achieve and maintain compliance. If the 
hospital fails to achieve compliance, it may be at risk of not meeting 
RHQDAPU program requirements.
    Comment: One commenter expressed concern regarding penalizing 
hospitals that use telephone mode.
    Response: We do not ``penalize'' hospitals based on the mode in 
which they choose to administer the HCAHPS survey. We have developed 
and consistently apply survey mode and patient-mix adjustments to 
HCAHPS results in order to allow fair comparisons to be made across 
hospitals for public reporting, irrespective of the mix of patients 
they serve or the survey mode they employ. Because research has found 
that patient responses differ systematically by mode of survey 
administration, we believe it is necessary to adjust for survey mode. 
When reporting the data, the mode adjustment approach assures no net 
advantage on average for any choice of survey mode. The adjustments 
counteract advantages or disadvantages that would otherwise accrue on 
the basis of survey mode.
    We conducted a large-scale, randomized Mode Experiment in order to 
develop adjustments for the effects of survey mode on responses to 
HCAHPS. The HCAHPS Mode Experiment was based on a nationwide random 
sample of short-term acute care hospitals. Hospitals from each of our 
ten geographic regions participated in the Mode Experiment. A 
hospital's probability of being selected for the sample was 
proportional to its volume of discharges, which guaranteed that each 
patient would have an equal probability of being sampled for the 
experiment. The participating hospitals contributed patient discharges 
from a four-month period: February, March, April, and May 2006. Within 
each hospital, an equal number of patients were randomly assigned to 
each of the four modes of survey administration. A randomized mode 
experiment of 27,229 discharges from 45 hospitals was used to develop 
adjustments for the effects of survey mode (Mail Only, Telephone Only, 
Mixed mode, or Active Interactive Voice Response) on responses to the 
HCAHPS survey.
    In general, patients randomized to the Telephone Only and Active 
Interactive Voice Response modes provided more positive evaluations 
than patients randomized to Mail Only and Mixed (Mail with Telephone 
follow-up) modes. Established research on surveys demonstrates that 
patients responding to a survey conducted over the telephone, as 
opposed to a mail survey, tend to provide more favorable responses. 
This is commonly known as ``social desirability bias.'' If the modes in 
which the HCAHPS survey was conducted (there are four available 
options) were not taken into account through the mode adjustment, then 
hospitals choosing to use the telephone methodology would receive 
artificially high HCAHPS results, which would undermine the 
comparability of HCAHPS results across hospitals. The mode and patient-
mix adjustments are applied to ensure that fair comparisons of HCAHPS 
results can be made across hospitals, irrespective of the survey 
methodology that hospitals employ or the mix of patients that hospitals 
serve. Detailed information on mode and patient-mix adjustments may be 
found in ``Mode and Patient-mix Adjustment of the CAHPS[supreg] 
Hospital Survey (HCAHPS),'' located at http://www.hcahpsonline.org/modeadjustment.aspx.
    Comment: Another commenter noted that it was a challenge for small 
hospitals that do not have HCAHPS-eligible discharges every day to 
conduct daily follow-up with discharges.
    Response: The commenter erroneously believes that patients must be 
sampled every day for the HCAHPS survey. We are aware that not all 
hospitals participating in the HCAHPS survey will have HCAHPS-eligible 
discharges every day. HCAHPS requires survey vendors or hospitals to 
take a random sample of eligible discharges over a month. Daily follow-
up with discharges is not required. Hospitals, or their survey vendor 
if they use one, may either sample their HCAHPS-eligible discharges at 
one time at the end of each month, or sample continuously throughout 
each month. If a hospital is using a survey vendor, the hospital must 
assure that its sample frame or the sample itself is delivered to the 
survey vendor in sufficient time to allow the survey vendor to contact 
patients within the timeframe established in the HCAHPS protocols. See 
Quality Assurance Guidelines, V3.0, pp. 33-46 for details regarding 
sampling protocols.
    Comment: One commenter believed that underlying patient 
demographics such as socioeconomic status (SES) and psychiatric 
comorbidities affect scores and that additional analysis should be 
conducted.

[[Page 48621]]

    Response: Certain patient characteristics that are beyond the 
control of hospitals have been found to influence how patients respond 
to the HCAHPS survey. One such characteristic is the patient's level of 
education, which can be seen as a proxy for SES.
    Because different hospitals serve different mixes of patients, we 
adjust for the influence of these patient-level characteristics on 
HCAHPS results. Doing so allows fair comparisons of HCAHPS results to 
be made across hospitals. The particular characteristics included in 
patient-mix adjustment were identified by AHRQ in previous Consumer 
Assessment of Healthcare Providers and Systems (CAHPS) surveys, then 
tested in the HCAHPS Three-State Pilot Study, and re-examined in the 
HCAHPS Mode Experiment, described above. One characteristic included in 
the patient-mix adjustment is patient's level of education. This is 
considered to be the best and most stable single indicator of SES for 
adults of all ages. More details of this and other patient-mix 
adjustments may be found in ``Mode and Patient-mix Adjustment of the 
CAHPS[supreg] Hospital Survey (HCAHPS),'' located at http://www.hcahpsonline.org/modeadjustment.aspx.
    With respect to the effect of psychiatric comorbidities on HCAHPS 
scores, the patient-level data record of the administrative section of 
the HCAHPS survey requires that the hospital report only the principal 
service line (medical, surgical or maternity care) in which the patient 
was admitted. Requiring hospitals to collect information on co-
morbidities would constitute an additional burden on them. In addition, 
because the HCAHPS survey is not deemed suitable for patients admitted 
primarily for psychiatric care, such patients are ineligible for the 
survey; psychiatric hospitals are excluded as well. More details about 
patient eligibility for HCAHPS may be found in Quality Assurance 
Guidelines, V3.0, pp. 33-36.
    If, in the future, we reassess the content of the HCAHPS survey, 
notice will be taken of requests to add or alter survey items. A self-
rated mental health status item, perhaps something similar to the 
current self-rated health status item, might be considered at that 
time. However, we do not plan to alter the HCAHPS survey for several 
years in order to allow hospitals and survey vendors to become 
accustomed to its content and methodology.
    After careful consideration of the public comments received, we are 
finalizing the proposed HCAHPS measure requirements in their entirety.
6. Chart Validation Requirements for FY 2009 and FY 2010
a. Chart Validation Requirements for FY 2009
    In the FY 2008 IPPS final rule with comment period (72 FR 47361), 
we stated that, until further notice, we would continue to require that 
hospitals meet the chart validation requirements that we implemented in 
the FY 2006 IPPS final rule (70 FR 47421 and 47422). These 
requirements, as well as additional information on validation 
requirements, continue and are being placed on the QualityNet Web site.
    We also stated in the FY 2008 IPPS final rule with comment period 
that, until further notice, hospitals must pass our validation 
requirement that requires a minimum of 80-percent reliability, based 
upon our chart-audit validation process (72 FR 47361).
    In the FY 2008 IPPS final rule with comment period (72 FR 47362), 
we indicated that, for the FY 2009 update, all FY 2008 validation 
requirements would apply, except for the following modifications. We 
would modify the validation requirement to pool the quarterly 
validation estimates for 4th quarter CY 2006 through 3rd quarter 2007 
discharges. We would also expand the list of validated measures in the 
FY 2009 update to add SCIP Infection-2, SCIP VTE-1, and SCIP VTE-2 
(starting with 4th quarter CY 2006 discharges). We would also drop the 
current two-step process to determine if the hospital is submitting 
validated data. For the FY 2009 update, we stated that we will pool 
validation estimates covering the four quarters (4th quarter CY 2006 
discharges through 3rd quarter 2007 discharges) in a similar manner to 
the current 3rd quarter pooled confidence interval.
    In summary, the following chart validation requirements apply for 
the FY 2009 RHQDAPU program:
     The 21-measure expanded set will be validated using 4th 
quarter CY 2006 (4Q06) through 3rd quarter CY 2007 (3Q07) discharges.
     SCIP VTE-1, VTE-2, and SCIP Infection 2 will be validated 
using 2nd quarter CY 2007 and 3rd quarter CY 2007 discharges.
     SCIP Infection 4 and SCIP Infection 6 must be submitted 
starting with 1st quarter CY 2008 discharges but will not be validated.
     HCAHPS data must continuously be submitted and will be 
reviewed as discussed above.
     AMI, HF, and PN 30-day mortality measures will be 
calculated as discussed below.
    In the FY 2008 IPPS final rule with comment period (72 FR 47364), 
we stated that, for the FY 2008 update and in subsequent years, we 
would revise and post up-to-date confidence interval information on the 
QualityNet Web site explaining the application of the confidence 
interval to the overall validation results. The data are being 
validated at several levels. There are consistency and internal edit 
checks to ensure the integrity of the submitted data; there are 
external edit checks to verify expectations about the volume of the 
data received.
b. Chart Validation Requirements for FY 2010
    In the FY 2009 IPPS proposed rule (73 FR 23658), for FY 2010, we 
proposed the following chart validation requirements:
     The following 21 measures from the FY 2009 RHQDAPU program 
measure set would be validated using data from 4th quarter 2007 through 
3rd quarter 2008 discharges.

------------------------------------------------------------------------
                                          Quality measure validated from
                 Topic                     4th quarter 2007 through 3rd
                                             quarter 2008 discharges
------------------------------------------------------------------------
Heart Attack (Acute Myocardial            Aspirin at arrival.
 Infarction or AMI).
                                          Aspirin prescribed at
                                          discharge.
                                          Angiotensin Converting
                                          Enzyme Inhibitor (ACE-I) or
                                          Angiotensin II Receptor
                                          Blocker (ARB) for left
                                          ventricular systolic
                                          dysfunction.
                                          Beta blocker at
                                          arrival.
                                          Beta blocker
                                          prescribed at discharge.
                                          Fibrinolytic
                                          (thrombolytic) agent received
                                          within 30 minutes of hospital
                                          arrival.
                                          Adult smoking
                                          cessation advice/counseling.
Heart Failure (HF).....................   Left ventricular
                                          function assessment.

[[Page 48622]]

 
                                          Angiotensin Converting
                                          Enzyme Inhibitor (ACE-I) or
                                          Angiotensin II Receptor
                                          Blocker (ARB) for left
                                          ventricular systolic
                                          dysfunction.
                                          Discharge
                                          instructions.
                                          Adult smoking
                                          cessation advice/counseling.
Pneumonia (PN).........................   Pneumococcal
                                          vaccination status.
                                          Blood culture
                                          performed before first
                                          antibiotic received in
                                          hospital.
                                          Adult smoking
                                          cessation advice/counseling.
                                          Appropriate initial
                                          antibiotic selection.
                                          Influenza vaccination
                                          status.
Surgical Care Improvement Project         Prophylactic
 (SCIP)--named SIP for discharges prior   antibiotic received within 1
 to July 2006 (3Q06).                     hour prior to surgical
                                          incision.
                                          SCIP-VTE-1: Venous
                                          thromboembolism (VTE)
                                          prophylaxis ordered for
                                          surgery patients.***
                                          SCIP-VTE-2: VTE
                                          prophylaxis within 24 hours
                                          pre/post surgery.***
                                          SCIP Infection 2:
                                          Prophylactic antibiotic
                                          selection for surgical
                                          patients.***
                                          SCIP-Infection 3:
                                          Prophylactic antibiotics
                                          discontinued within 24 hours
                                          after surgery end time.
------------------------------------------------------------------------

     SCIP Infection 4 and Infection 6 would be validated using 
data from 2nd and 3rd quarter CY 2008 discharges.
    In addition, we proposed to include the following three measures in 
the FY 2010 RHQDAPU program validation process that are included the FY 
2009 RHQDAPU program measure set but have been updated or deleted for 
the FY 2010 measure set:
     Pneumonia antibiotic prophylaxis timing within 4 hours 
would be validated using data from 4th quarter 2007 through 3rd quarter 
2008 discharges.
     Percutaneous Coronary Intervention (PCI) Timing within 120 
minutes would be validated using data from 4th quarter 2007 through 3rd 
quarter 2008 discharges.
     Pneumonia Oxygenation Assessment would be validated using 
data from 4th quarter through 3rd quarter 2008 discharges.
    These measures would be submitted by hospitals during 2008 and 
early 2009, and are available to be validated by CMS in time for the FY 
2010 RHQDAPU program payment eligibility determination.
    As explained above, we will also revise and post up-to-date 
confidence interval information on the QualityNet Web site explaining 
the application of the confidence interval to the overall validation 
results.
    Comment: One commenter proposed not validating SCIP Infection 4 and 
6 for 2nd and 3rd quarter 2008 discharges, because hospitals would not 
possess sufficient time to educate themselves about the abstraction 
instructions.
    Response: We believe that adding these measures to the validation 
requirement is a reasonable approach to ensure accurately submitted 
data. We initially published abstraction instructions for these 
measures in the Specifications Manual located on the QualityNet Web 
site in 2006, and voluntary data submission for these measures began 
with July 2006 discharges. We believe that this time frame has been 
sufficient for hospitals to educate themselves regarding the 
abstraction instructions for these measures. In addition, to the extent 
we need to update the technical specifications for these measures, we 
do so on a semiannual basis at least six months in advance of the 
initial discharge date to which the updates apply.
    After careful consideration of the public comments received, we are 
adopting as final the FY 2010 RHQDAPU program chart validation 
requirements we proposed.
c. Chart Validation Methods and Requirements Under Consideration for FY 
2011 and Subsequent Years
    Under the current and proposed RHQDAPU program chart validation 
process, we validate measures by reabstracting on a quarterly basis a 
random sample of five patient records for each hospital. This quarterly 
sample results in an annual combined sample of 20 patient records 
across 4 calendar quarters, but because the samples are random, they do 
not necessarily include patient records covering each of the clinical 
topics.
    We anticipate that the proposed expansion of the RHQDAPU program 
measure set to include additional clinical topics will decrease the 
percentage of RHQDAPU program clinical topics, as well as the total 
number of measures, covered in many hospitals' annual chart validation.
    However, in the FY 2009 IPPS proposed rule, we noted that we are 
considering whether registries and other external parties that may be 
collecting data on proposed RHQDAPU program measures could validate the 
accuracy of those measures beginning in FY 2011 (73 FR 23658). In 
addition, we noted that the proposed readmission measures are 
calculated using Medicare claims information and do not require chart 
validation.
    In the FY 2009 IPPS proposed rule, we stated that we were 
interested in receiving public comments from a broad set of 
stakeholders on the impact of adding measures to the validation 
process, as well as modifications to the current validation process 
that could improve the reliability and validity of the methodology (73 
FR 23658). We specifically requested input concerning the following:
     Which of the measures or measure sets should be included 
in the FY 2010 RHQDAPU program chart validation process or in the chart 
validation process for subsequent years?
     What validation challenges are posed by the RHQDAPU 
program measures and measure sets? What improvements could be made to 
validation or reporting that might offset or otherwise address those 
challenges?
     Should CMS switch from its current quarterly validation 
sample of five charts per hospital to randomly selecting a sample of 
hospitals, and selecting more charts on an annual basis to improve 
reliability of hospital level validation estimates?
     Should CMS select the validation sample by clinical topic 
to ensure that all publicly reported measures are covered by the 
validation sample?
    Comment: Many commenters requested that improvements be made to the 
current validation process. The commenters noted that many hospitals

[[Page 48623]]

have been notified that there have been problems validating the data 
they submitted and argued that in several instances, these validation 
problems have been due to inconsistencies in the definitions of 
variables used by the contractors that are reabstracting patient-level 
data and comparing it to the data submitted by the hospitals. The 
commenters stated that, in other instances, discrepancies between 
single data elements unrelated to the quality of care provided by a 
hospital, such as the patient's birth date, have caused hospitals to 
fail validation. The commenters believed that reabstraction of five 
charts per quarter for each hospital is insufficient to ensure the 
reliability of the data and that a more resilient and less resource-
intensive method of validation is needed. The commenters believed that 
the ideas for reforming the data validation process that were put 
forward by CMS in its VBP Report to Congress hold promise as an 
improved approach toward data validation. The commenters were 
disappointed that CMS did not propose similar changes for the RHQDAPU 
program in the FY 2009 IPPS proposed rule and urged CMS to propose an 
alternative data validation process for the RHQDAPU program as soon as 
possible.
    Response: We appreciate these comments. We have used a single CDAC 
contractor to abstract the validation data since the inception of the 
RHQDAPU program, and are currently using a single CDAC contractor for 
validation abstraction. The current validation approach was originally 
designed several years ago to provide a reliable estimate of data 
element accuracy, and to provide feedback to all hospitals about their 
abstraction accuracy. We wanted all participating hospitals with 
sufficient patient size to receive quarterly feedback about data 
accuracy during the initial years of the RHQDAPU program. We believe 
that the current approach is adequate to assess overall accuracy for 
submitted data. Our experience in validating RHQDAPU program data has 
demonstrated that the vast majority of hospitals have submitted 
accurate data. Indeed, 99.5 percent of hospitals met the FY 2008 
RHQDAPU program validation requirements. The majority of the 0.5 
percent of hospitals that did not pass the FY 2008 RHQDAPU program 
validation requirements failed to return at least one entire quarterly 
sample of five medical records to the CDAC contractor in a timely 
manner.
    For the future, we are considering alternative validation 
approaches that minimize the burden on hospitals while ensuring that 
accurate data continue to be submitted.
    Comment: One commenter opposed selecting more charts from a random 
sample of hospitals, because it increases the burden that hospitals 
already must incur to track down, copy, and return requested validation 
charts. The commenter believed that hospitals would be more likely to 
not return charts, and consequently fail validation.
    Response: We will consider this issue of burden as we continue to 
assess future validation approaches. However, we remind hospitals that 
under the current validation methodology, this burden is necessary in 
order for us to adequately assess whether the hospital has submitted 
accurate data for the year in question.
    Comment: One commenter was concerned that CMS is validating data 
elements that have no bearing on the actual RHQDAPU quality measures, 
including antibiotic timing. Some elements, such as antibiotic route, 
are not required for calculating all RHQDAPU program quality measures 
related to antibiotic administration.
    Response: We validate only data elements that are used to calculate 
at least one RHQDAPU measure. For example, documentation of antibiotic 
route is required to calculate all of the SCIP and PN antibiotic timing 
and administration measures. We utilize a single antibiotic 
administration route data element to provide consistent instructions 
that are applicable to all of the SCIP and PN antibiotics measures.
    Comment: Many commenters supported keeping the current validation 
process, which involves five charts per quarter, and argued that in 
light of the proposed increases in measure data elements to be 
collected, changing the validation process this year would only add 
more chaos to the system. The commenters argued that randomly selecting 
a sample of hospitals for validation does not appear to work with a 
required threshold for payment. The commenters suggested that in the 
absence of documented evidence that the current validation process is 
unworkable, a thorough review with all stakeholders should be done to 
determine the best sampling methodology. One commenter recommended that 
CMS keep the number of requested validation charts to be reviewed small 
in order to minimize the burden on hospitals to print paper 
documentation from electronic medical records.
    Response: We appreciate the concern that changing the current 
system would require sufficient time to educate hospitals about the new 
process. Any changes to the current validation process in future years 
would be proposed through the rulemaking process, so hospitals and 
other stakeholders would be able to review and comment on the best 
sampling methodology and other proposed validation requirements.
    However, we believe that the current approach is adequate to assess 
overall accuracy for submitted data because our experience in 
validating RHQDAPU program data has demonstrated that the vast majority 
of hospitals have submitted accurate data.
    Comment: One commenter supported CMS validating RHQDAPU program 
data, as opposed to registry or other external party validation.
    Response: While ensuring the accuracy of the data, we are 
considering utilizing third party sources to validate RHQDAPU program 
data to minimize burden. We believe the STS and other organizations are 
validating by utilizing third party vendors to validate measures 
currently under consideration in the RHQDAPU program. We will consider 
this comment when proposing the validation approaches for future years.
    Comment: One commenter supported stratified validation samples and 
targeting additional samples when the hospital scores less than 80 
percent as an annual validation score.
    Response: We appreciate the comment and will consider approaches 
such as selected separate stratified validation samples by clinical 
topic area (for example, AMI, Heart Failure, Pneumonia, and SCIP), 
increasing the validation sample size for randomly selected hospitals, 
and criteria for targeted validation in the future. These suggested 
approaches are potentially useful to ensure that all measure sets are 
validated, and that a sufficient sample is selected that represents the 
entire RHQDAPU program measure set.
    Comment: A commenter agreed with the methodology of selecting an 
annual random sample of hospitals for validation each year, but raised 
the issue of whether this approach would increase the possibility that 
hospitals that are not selected for validation in a given year would 
not submit accurate data. Hospitals not selected for the annual random 
sample would know early in the submission year that they were not 
selected in the random sample of hospitals.
    Response: We strive to ensure that accurate data is submitted by 
all hospitals each year. One possible approach in future years to 
ensure accuracy is to use submitted data as targeting criteria for 
validating a hospital's data. For example, hospitals

[[Page 48624]]

submitting a very high percentage of cases excluded from RHQDAPU 
program measures might be targeted for validation of their data to 
ensure that they are not improperly excluding cases in order to 
minimize their abstraction burden or limit the amount of their data 
that will be publicly reported. This approach might be used in 
conjunction with selecting an annual random sample of hospitals for 
validation to ensure accurate data submission.
    Comment: Some commenters supported random sampling as a way to 
minimize the validation burden on hospitals. The commenters stated that 
sample selection by clinical topic is preferable, as long as a maximum 
quarterly limit per topic is set.
    Response: We agree that random sampling of hospitals would 
eliminate annual recordkeeping and copying burden for the majority of 
hospitals. Sample selection by topic can be beneficial to ensure that 
all RHQDAPU measures are validated, but requires sufficient sample size 
per hospital to ensure that all topics are reliably sampled. We must 
consider the need to ensure accurate data, while minimizing burden when 
considering approaches in future years.
    Comment: Several commenters recommended decreasing validation 
reviews for specific measures in which individual hospitals continually 
demonstrate consistent patterns and high validation rates.
    Response: We appreciate this thoughtful recommendation for 
targeting the validation process and will consider it for future 
improvements to our process.
    Comment: A commenter noted that as long as hospital medical records 
continue to reside in a paper-based format or non-electronic formats 
and do not allow for the necessary data capture and architecture to 
permit uniform automated reporting, the validation process will remain 
labor intensive. During this interim period before a substantial number 
of hospitals have implemented electronic health records (EHRs), the 
commenter recommended that CMS consider a process for accepting 
electronic copies of medical records from early EHR adopter hospitals.
    Response: We will consider this recommendation in our plans to 
improve our validation process. We must design a process that will be 
consistent with the information practices of these leading-edge 
hospitals, while ensuring that hospitals still utilizing paper 
documentation are not adversely impacted by our process.
    Comment: One commenter suggested that CMS propose to implement a 
validation process for all of the proposed measures and that it would 
be prudent for CMS to entertain a formal relationship with The Joint 
Commission to utilize the Joint Commission's existing auditing and 
validation process, and increase the power to validate RHQDAPU 
measures.
    Response: We believe that the current approach is adequate to 
assess overall accuracy for submitted data. Our experience in 
validating RHQDAPU program data has demonstrated that the vast majority 
of hospitals have submitted accurate data. Indeed, 99.5 percent of 
hospitals met the FY 2008 RHQDAPU program validation requirements. We 
will consider this idea in our future plans for validating RHQDAPU 
program data as our RHQDAPU program measure set evolves.
    Comment: One commenter strongly encouraged CMS to modify its CDAC 
review process to follow CMS specifications and incorporate skip logic. 
The commenter believed that this would reduce the abstraction burden on 
hospitals and prevent hospitals from being unfairly penalized when a 
parent question is incorrect.
    Response: We interpret the commenter's term ``parent question'' to 
mean data elements occurring earlier in the RHQDAPU program measure's 
flow. If a parent question is answered ``no'' by the hospital, then no 
additional data elements occurring later in the measure's flow are used 
to calculate the measure for that patient stay. The CDAC follows the 
Specifications Manual's instructions when it abstracts validation data 
elements. The primary purpose of the current RHQDAPU program chart 
validation process is to assess the accuracy of hospitals' submitted 
data elements, compared to an independent abstraction using the 
hospitals' submitted paper medical record documentation. The CDAC 
abstracts each data element that is part of the measure being validated 
and compares that data element to the hospital's electronically 
submitted data element for the same patient case. If the data elements 
in a hospital's submitted RHQDAPU program measure do not match the 
CDAC's abstracted data elements, then the data elements are classified 
as mismatches counting against the hospital's validation score. We do 
not count any element not abstracted by the CDAC in the hospital's 
validation score.
    The use of skip logic by hospitals is optional and not required 
under the RHQDAPU program. Hospitals should be aware the potential 
impact of skip logic on data quality, abstraction burden, and CMS chart 
audit validation scores. Hospitals utilizing skip logic should closely 
monitor the accuracy rate of abstracted data elements, particularly 
data elements placed higher in the algorithm flow.
    We will consider the issues raised by these commenters if we decide 
to make changes to the RHQDAPU program chart validation methodology for 
future years. Any changes we make to this process will be through 
rulemaking.
7. Data Attestation Requirements for FY 2009 and FY 2010
a. Data Attestation Requirements for FY 2009
    In the FY 2008 IPPS final rule with comment period (72 FR 47364), 
we stated that we would require for FY 2008 and subsequent years that 
hospitals attest each quarter to the completeness and accuracy of their 
data, including the volume of data, submitted to the QIO Clinical 
Warehouse in order to improve aspects of the validation checks. We 
stated that we would provide additional information to explain this 
attestation requirement, as well as provide the relevant form to be 
completed on the QualityNet Web site, at the same time as the 
publication of the FY 2008 IPPS final rule with comment period.
    In the FY 2009 IPPS proposed rule, we proposed to defer the 
requirement in FY 2009 for hospitals to separately attest to the 
accuracy and completeness of their submitted data due to the burden 
placed on hospitals to report paper attestation forms on a quarterly 
basis (73 FR 23659). We continue to expect that hospitals will submit 
quality data that are accurate to the best of their knowledge and 
ability. We received many comments in support of the proposed deferral 
of this requirement for FY 2009.
    Comment: Many commenters supported the proposed plan for hospitals 
to defer attestation for FY 2009 and to electronically attest to 
completeness and accuracy of their submitted data when all hospitals 
possess electronic medical records. One commenter opposed the quarterly 
attestation requirement, and stated that the requirement is unnecessary 
and added no value.
    Response: We agree with the commenters that quarterly attestation 
is more burdensome than annual attestation, and will consider this 
approach in future years. We must consider the relative burden on the 
hospitals to attest, relative to the need

[[Page 48625]]

to ensure accurate and complete data. The hospital is ultimately 
responsible for ensuring the accuracy and completeness of its RHQDAPU 
program data.
    After careful consideration of the public comments received, we are 
deferring the attestation requirement for FY 2009, and will consider 
this information as we consider proposed attestation requirements for 
future years.
b. Data Attestation Requirements for FY 2010
    In the FY 2009 IPPS proposed rule, for FY 2010 and subsequent 
years, we solicited public comment on the electronic implementation of 
the attestation requirement at the point of data submission to the QIO 
Clinical Warehouse (73 FR 23659). Hospitals would electronically pledge 
to CMS that their submitted data are accurate and complete to the best 
of their knowledge. Hospitals would be required to designate an 
authorized contact to CMS for attestation in their patient-level data 
submission.
    Resubmissions would continue to be allowed before the quarterly 
submission deadline, and hospitals would be required to electronically 
update their pledges about data accuracy at the time of resubmission. 
We welcomed comments on this approach.
    Comment: One commenter requested that CMS change the frequency of 
attestation to an annual requirement for FY 2010 and future years, or 
once on the initial participation form and argued that the burden of 
quarterly attestation is too high for hospitals. The commenter also 
supported electronic attestation.
    Response: We appreciate this comment, and must weigh the options of 
reducing burden through annual submission of attestation or an initial 
attestation on the Notice of Participation form against the need to 
ensure data quality by requiring attestation during every quarterly 
data submission. We agree that annual or one-time initial attestation 
would minimize burden to hospitals.
    We will also consider the option to allow hospitals to 
electronically submit their attestation to CMS at the point of 
submission. We believe that requiring hospitals to electronically 
attest when submitting data accomplishes the intended program goal, to 
ensure accurate and complete data while minimizing hospital burden.
8. Public Display Requirements
    Section 1886(b)(3)(B)(viii)(VII) of the Act provides that the 
Secretary shall establish procedures for making data submitted under 
the RHQDAPU program available to the public. The RHQDAPU program 
quality measures are posted on the Hospital Compare Web site (http://www.hospitalcompare.hhs.gov). CMS requires that hospitals sign a 
``Reporting Hospital Quality Data for Annual Payment Update Notice of 
Participation'' form when they first register to participate in the 
RHQDAPU program. Once a hospital has submitted a form, the hospital is 
considered to be an active RHQDAPU program participant until such time 
as the hospital submits a withdrawal form to CMS (72 FR 47360). 
Hospitals signing this form agree that they will allow CMS to publicly 
report the quality measures as required in the applicable year's 
RHQDAPU program requirements.
    In the FY 2009 IPPS proposed rule, we proposed to continue to 
display quality information for public viewing as required by section 
1886(b)(3)(B)(viii)(VII) of the Act (73 FR 23659). Before we display 
this information, hospitals will be permitted to review their 
information as recorded in the QIO Clinical Warehouse.
    Currently, hospital campuses that share the same CCN must combine 
data collection and submission across their multiple campuses (for both 
clinical measures and for HCAHPS). These measures are then publicly 
reported as if they apply to a single hospital. We estimate that 
approximately 5 to 10 percent of the hospitals reported on the Hospital 
Compare Web site share CCNs. Beginning with the FY 2008 RHQDAPU 
program, hospitals must report the name and address of each hospital 
campus that shares the same CCN. This information will be gathered 
through the RHQDAPU program Notice of Participation form for new 
hospitals participating in the RHQDAPU program. To increase 
transparency in public reporting and improve the usefulness of the 
Hospital Compare Web site, we will note on the Web site where publicly 
reported measures combine results from two or more hospital campuses.
    Comment: Several commenters stated that they wanted data displayed 
on Hospital Compare at the campus level rather than by CCN.
    Response: We appreciate these comments and are exploring this 
issue. Currently, we are still gathering data from individual hospitals 
as to whether they share a CCN across campuses. The first step will be 
to note this on Hospital Compare. The next step will be to determine 
the feasibility of collecting data at the campus level.
    Comment: One commenter urged CMS to ensure that the Hospital 
Compare Web site is user-friendly, especially with the addition of 
multiple measures.
    Response: As explained earlier in this section, we use focus groups 
to test all measures before we publicly post them on Hospital Compare. 
We also test the usability of computer screens and language Hospital 
Compare Web site with consumers to make enhancements to ensure that the 
site is easy to use and is understandable. Through this testing, draft 
language and draft Web site displays are revised based on feedback.
9. Reconsideration and Appeal Procedures
    In the FY 2009 IPPS proposed rule, for FY 2009, we proposed to 
continue the current RHQDAPU program reconsideration and appeal 
procedures finalized in the FY 2008 IPPS final rule with comment period 
(73 FR 23659). The deadline for submitting a request for 
reconsideration in connection with the FY 2009 payment determination is 
November 1, 2008. We also proposed to use the same procedural rules 
finalized in the FY 2008 IPPS final rule with comment period (72 FR 
47365). We posted these rules on the QualityNet Web site for the FY 
2008 RHQDAPU program reconsideration process.
    Under the procedural rules, in order to receive reconsideration for 
FY 2009, the hospital must--
     Submit to CMS, via QualityNet, a Reconsideration Request 
form (available on the QualityNet Web site) containing the following 
information:

Hospital Medicare ID number
--Hospital Name
--CMS-identified reason for failure (as provided in the CMS 
notification of failure letter to the hospital)
--Hospital basis for requesting reconsideration. (This must identify 
the hospital's specific reason(s) for believing it met the RHQDAPU 
program requirements and should receive the full FY 2009 IPPS annual 
payment update.)
--CEO contact information, including name, e-mail address, telephone 
number, and mailing address (must include physical address, not just 
the post office box)

--QualityNet System Administrator contact information, including name, 
e-mail address, telephone number, and mailing address (must include 
physical address, not just the post office box)

     The request must be signed by the hospital's CEO.
    Following receipt of a request for reconsideration, CMS will--
     Provide an e-mail acknowledgement, using the contact

[[Page 48626]]

information provided in the reconsideration request, to the CEO and the 
QualityNet Administrator that the letter has been received.
     Provide a formal response to the hospital CEO, using the 
contact information provided in the reconsideration request, notifying 
the facility of the outcome of the reconsideration process. CMS expects 
the process to take 60 to 90 days from the due date of November 1, 
2008.
    If a hospital is dissatisfied with the result of a RHQDAPU program 
reconsideration decision, the hospital may file a claim under 42 CFR 
Part 405, Subpart R (a Provider Reimbursement Review Board (PRRB) 
appeal).
    Comment: Several commenters stated that hospitals should have clear 
guidance on how to submit their appeals, and CMS should provide timely 
appeals decisions. In the FY 2009 IPPS proposed rule, CMS stated that 
it would provide hospitals with a decision within 60 to 90 days of 
their appeals. The commenters believed that this time period is 
burdensome to hospitals and unnecessary. In addition, because CMS 
decreases a hospital's payments during the appeals process, the 
commenters believed that it may cause unnecessary cash flow problems 
for hospitals whose validation results are later overturned and that 
this could be particularly harmful for hospitals serving large numbers 
of uninsured patients. The commenters noted that in FY 2008, CMS 
processed all appeals within 60 days and argued that there is no reason 
why this timeline should be expanded to 90 days for FY 2009. The 
commenters noted that in the Department's VBP Report to Congress, the 
Department outlines an appeals process through which hospitals that 
initially fail validation will not receive lower payment while their 
appeals are ongoing; instead, only after a final decision is reached 
would any payment adjustments be made. The commenters believed that 
this logical process should be established now in the RHQDAPU program. 
One commenter suggested that CMS implement an approach for withholding 
the 2.0 percentage points from the annual payment update similar to 
Medicare's process for recouping overpayments. The commenter stated 
that the recoupment process prohibits Medicare contractors from 
recouping funds during the first two levels of an appeal.
    Response: We believe that the commenters are referring to the 
proposed 60 to 90 day timeframe for the RHQDAPU program reconsideration 
process. We agree that hospitals need to know the results of this 
process as quickly as possible. The commenter is confused about the 
nature of recoupment and has raised an issue that does not apply here. 
Recoupment is a defined term in CMS regulations (42 CFR 405.370) and 
refers to the recovery of outstanding Medicare debt by reducing present 
or future Medicare payments and applying the amount withheld to the 
indebtedness. This is not the same as a downward adjustment of a 
hospital's payment update and does not concern any ``debt'' owed to 
Medicare. The ``limitation on recoupment'' policy the commenter 
discusses would not apply to CMS' decision to adjust downward a 
hospital's annual payment update by 2.0 percentage points based on the 
hospital failing to meet RHQDAPU program requirements.
    After careful consideration of the public comments received, we are 
adopting as final the RHQDAPU program reconsideration and appeals 
requirements we proposed. We believe that the FY 2009 RHQDAPU program 
reconsideration review will require 60 to 90 days for completion, based 
on last year's workload. This time frame is necessary to ensure 
thorough and complete review of all hospitals' submitted 
reconsideration requests. We will communicate all determinations within 
60 to 90 days following the deadline for requesting reconsideration. We 
will strive to provide hospitals with a clear and prompt process for 
reconsideration.
10. RHQDAPU Program Withdrawal Deadlines for FY 2009 and FY 2010
    In the FY 2009 IPPS proposed rule, we proposed to accept RHQDAPU 
program withdrawal forms for FY 2009 from hospitals through August 15, 
2008 (73 FR 23660). We proposed this deadline to provide CMS with 
sufficient time to update the FY 2009 payment to hospitals starting on 
October 1, 2008. If a hospital withdraws from the program for FY 2009, 
it will receive a 2.0 percentage point reduction in its FY 2009 annual 
payment update.
    We also proposed to accept RHQDAPU program withdrawal forms for FY 
2010 from hospitals through August 15, 2009. If a hospital withdraws 
from the program for FY 2010, it will receive a 2.0 percentage point 
reduction in its FY 2010 annual payment update.
    We received no comments on this proposed requirement, and we are 
adopting as final the RHQDAPU program withdrawal deadlines we proposed 
for FY 2009 and FY 2010.
11. Requirements for New Hospitals
    In the FY 2008 IPPS final rule with comment period (72 FR 47366), 
we stated that a new hospital that receives a CCN (formerly called 
Medicare provider number) on or after October 1 of each year (beginning 
with October 1, 2007) will be required to report RHQDAPU program data 
beginning with the first day of the quarter following the date the 
hospital registers to participate in the RHQDAPU program. For example, 
a hospital that receives its CCN on October 2, 2008, and signs up to 
participate in the RHQDAPU program on November 1, 2008, will be 
expected to meet all of the data submission requirements for discharges 
on or after January 1, 2009.
    In addition, we strongly recommended that each new hospital 
participate in an HCAHPS dry run, if feasible, prior to beginning to 
collect HCAHPS data on an ongoing basis to meet RHQDAPU program 
requirements. We refer readers to the Web site at http://www.hcahpsonline.org for a schedule of upcoming dry runs. The dry run 
will give newly participating hospitals the opportunity to gain first-
hand experience collecting and transmitting HCAHPS data without the 
public reporting of results. Using the official survey instrument and 
the approved modes of administration and data collection protocols, 
hospitals/survey vendors will collect HCAHPS data and submit the data 
to QualityNet.
12. Electronic Health Records
    In the FY 2006 IPPS final rule, we encouraged hospitals to take 
steps toward the adoption of electronic health records (EHRs) (also 
referred to in this preamble and in previous rulemaking documents as 
electronic medical records) that will allow for reporting of clinical 
quality data from the EHRs directly to a CMS data repository (70 FR 
47420). We intend to begin working toward creating measures' 
specifications, and a system or mechanism, or both, that will accept 
the data directly without requiring the transfer of the raw data into 
an XML file as is currently done. The Department continues to work 
cooperatively with other Federal agencies through our participation in 
the Healthcare Information Technology Standards Panel (HITSP)--a 
public/private partnership--to advance the harmonization of 
interoperability standards for electronic health information exchange. 
We encouraged hospitals that are developing systems to conform them to 
industry standards, and in particular to Secretary

[[Page 48627]]

recognized interoperability standards, where applicable, taking 
measures to ensure that the data necessary for quality measures are 
captured. Ideally, such systems will also provide point-of-care 
decision support that enables detection of high levels of performance 
on the measures. Hospitals using EHRs to produce data on quality 
measures will be held to the same performance expectations as hospitals 
not using EHRs.
    Due to the low volume of comments we received on this issue in 
response to the FY 2006 proposed IPPS rule, in the FY 2007 IPPS 
proposed (71 FR 24095), we again invited public comment on these 
requirements and related options. In the FY 2007 IPPS final rule (71 FR 
48045), we summarized and addressed the additional comments we 
received. In the FY 2008 IPPS proposed rule (72 FR 24809), we noted 
that we would welcome additional comments on this issue.
    In the FY 2008 IPPS final rule with comment period (72 FR 47366), 
we responded to the additional comments we received and noted that CMS 
plans to continue participating in the American Health Information 
Community (AHIC) workgroups and other entities to explore processes 
through which an EHR could speed the collection and minimize the 
resources necessary for quality reporting. (The AHIC is a Federal 
advisory body, chartered in 2005 to make recommendations to the 
Secretary on how to accelerate the development and adoption of health 
information technology.) In addition, we noted that we will continue to 
participate in appropriate HHS studies and workgroups, as mentioned by 
a GAO report (GAO-07-320) about hospital quality data and the use of 
information technology. As appropriate, CMS will inform interested 
parties regarding progress in the implementation of HIT for the 
collection and submission of hospital quality data as specific steps, 
including timeframes and milestones, are identified. Current mechanisms 
include publication in the Federal Register as well as ongoing 
collaboration with external stakeholders such as the HQA, the AHA, the 
FAH, the AAMC and The Joint Commission. We further anticipate that as 
HIT is implemented, a formal plan, including training, will be 
developed to assist providers in understanding and utilizing HIT in 
reporting quality data. In addition, we will assess the effectiveness 
of our communications with providers and stakeholders as it relates to 
all information dissemination pertinent to collecting hospital quality 
data as part of an independent and comprehensive external evaluation of 
the RHQDAPU program.
    In the FY 2009 IPPS proposed rule, we again solicited comments on 
the issues and challenges associated with EHRs (73 FR 23660). 
Specifically, we invited comment on our proposed changes to our data 
submission requirements to be more aligned with currently implemented 
HIT systems, including data collection from registries and laboratory 
data.
    We recognize the potential burden on hospitals of increased data 
reporting requirements for process measures that require chart 
abstraction. In FY 2007 IPPS rulemaking, we listed a variety of 
additional possible measures for future years. The measures included 
and emphasized additional outcomes measures. Additional measures were 
included for which the data sources are claims. For these, no 
additional data abstraction or submission would be required for 
reporting hospitals beyond the claims data. In proposing measures for 
FY 2010, we sought to emphasize outcome measures and to minimize any 
additional data collection burden. In addition, as provided in section 
1886(b)(3)(B)(viii)(VI) and discussed in section IV.B.2.a. of the FY 
2009 IPPS proposed rule, we proposed to retire one measure where there 
is no meaningful difference among hospitals as a means of reducing data 
collection burden.
    Comment: Several commenters stated that the current Specifications 
Manual is very complex, burdensome, and difficult for hospitals to 
understand.
    Response: We appreciate the comments and understand that 
abstracting information from medical record documentation is burdensome 
and complex. We strive to improve the quality and clarity of the 
abstraction instructions by regularly updating them on a semiannual 
basis. We currently provide hospitals with updated instructions six 
months prior to the first effective discharge date to which the updated 
instructions apply, and actively educate hospitals on the 
specifications through our QIOs. These updates strive to improve the 
clarity and conciseness of the specifications, while attempting to 
minimize unnecessary updates.
    We will actively work to further simplify our specifications in the 
future, and develop new measures that are less burdensome and more 
easily utilize electronic medical records.
    Comment: One commenter expressed concern about priority source 
document guidelines in RHQDAPU program measure specification 
abstraction instructions. The commenter stated that these guidelines do 
not necessarily align with the practices and documentation of hospitals 
using electronic medical records.
    Response: We believe that the priority source document guidelines 
in RHQDAPU program measure specification abstraction instructions 
currently align with the practices and documentation of the vast 
majority of hospitals. We strive to align our measures specifications 
with current recordkeeping practices of hospitals. We constantly review 
feedback from hospitals to improve our current specifications through 
our semiannual updates to the Specifications Manual.
    Comment: One commenter stated that measures developed outside the 
sphere of joint development by CMS and The Joint Commission must be 
identified as such and published and maintained outside of the 
Specifications Manual.
    Response: We understand that many of the 43 additional RHQDAPU 
program measures we proposed for the FY 2010 payment determination were 
not developed by CMS or The Joint Commission. These measures are 
currently posted on many different Web sites, including the AHRQ Web 
site for AHRQ PSI and IQI measures. In the near future, we plan to 
display RHQDAPU program measures developed outside the sphere of joint 
development by CMS and The Joint Commission on the QualityNet Web site.
    Comment: Two commenters encouraged CMS to implement payment 
policies, like incentives, add-ons, or bonuses to current payments, to 
facilitate and encourage the effective use of information technology 
that includes electronic health records. The commenters believed that 
smaller and rural hospitals would particularly benefit from this 
recommendation.
    Response: We appreciate the comments. Generally, the Federal 
government supports the adoption of health information technology as 
the normal cost of doing business. However, we believe that add-ons and 
bonuses of this nature would require legislative mandate to modify the 
payment system.
    Comment: One commenter urged CMS to support interoperable standards 
for collecting, transmitting, and reporting information and urged CMS 
to work with the private sector to begin embedding requirements for 
performance measurement into the design of medical and healthcare 
record systems.
    Response: We will consider these suggestions in our plans for 
measure development for the RHQDAPU program in future years. We will 
also strive to update current measures to more closely align with 
current

[[Page 48628]]

electronic medical records in use such as utilizing data element 
instructions that are utilized by current electronic medical records.
    Comment: One commenter stated that uniform data content standards 
are crucial to the effort to reduce the burden on hospitals and 
recommended that CMS promote the development and adoption of data 
content and information technology standards that will support 
automated data collection and reporting of clinical data from EHR 
systems.
    Response: We appreciate this comment and will consider whether it 
is appropriate to develop and adopt the standards suggested by the 
commenter. We will also consider this suggestion in our plans for 
measure development in future years. As we explained more fully above, 
we will also strive to update current measures to more closely align 
with current electronic medical records in use.
13. RHQDAPU Program Data Infrastructure
    In addition to the specific comments on data submission 
requirements discussed in section IV.B.4.b. of this preamble, we 
received many general comments about the RHQDAPU program data 
infrastructure related to current submissions and its capability to 
handle the proposed expanded measure set.
    Comment: Some commenters identified what they believed to be 
infrastructure problems at the QIO Clinical Warehouse that receives 
hospital submitted RHQDAPU program quality data. Other commenters 
conveyed the difficulty associated with using QualityNet Web site 
applications, including QNet Quest and My QualityNet. The commenters 
urged CMS to devote more resources to the data infrastructure and to 
seek comment through the regulatory process for what changes should be 
made most urgently.
    Response: We have made recent improvements to the infrastructure to 
process the increased data volume submitted by hospitals for the 
RHQDAPU program, such as procuring additional bandwidth to accommodate 
the increased data flow into the QIO Clinical Warehouse. We also are 
working to improve the QNet Quest question and answer application for 
hospitals to submit technical and measures questions. This application 
is located on the QualityNet Web site. We also are working to improve 
other applications used by hospitals in support of the RHQDAPU program. 
We will consider these comments when planning further infrastructure 
improvements to keep pace with the evolution of the RHQDAPU program 
measure set.
    Comment: Some commenters supported the use of a single data 
repository for all hospital quality data.
    Response: We must consider many factors about this approach, and 
its impact on CMS programmatic needs, hospital burden, and other 
issues. We must consider our programmatic needs to own the RHQDAPU 
program data and infrastructure in order to ensure accurate publicly 
reported data and to support the Medicare IPPS in determining annual 
payment update eligibility. We understand that a single Federal/non-
Federal quality data repository would reduce burden and provide more 
research capabilities to non-Federal researchers. However, we must also 
abide by Federal statutes and rules for sharing the RHQDAPU program 
patient-level data with non-QIO users.

C. Medicare Hospital Value-Based Purchasing (VBP) Plan

1. Medicare Hospital VBP Plan Report to Congress
    Through section 5001(b) of the Deficit Reduction Act of 2005 (DRA), 
Congress required the development of a plan to implement value-based 
purchasing (VBP) for IPPS hospital services beginning FY 2009. By 
statute, the plan must address: (a) The ongoing development, selection, 
and modification process for measures of quality and efficiency in 
hospital inpatient settings; (b) reporting, collection, and validation 
of quality data; (c) the structure, size, and source of value-based 
payment adjustments; and (d) public disclosure of hospital performance 
data. The Report was submitted to Congress on November 21, 2007.
    The Medicare Hospital VBP Plan builds on the foundation of 
Medicare's current RHQDAPU program (discussed in section IV.B. of the 
preamble of this final rule), which, since FY 2005, has provided 
differential payments to hospitals that report their performance on a 
defined set of inpatient measures for public posting on the Hospital 
Compare Web site. If authorized by Congress, the VBP Plan would include 
both public reporting and new financial incentives to drive 
improvements in clinical quality, patient-centeredness, and efficiency.
    The proposed Plan contains the following key components: (a) A 
performance assessment model that incorporates measures from different 
quality domains (that is, clinical process of care, patient experience 
of care, and others, when developed) to calculate a hospital's total 
performance score; (b) options for translating this score into an 
incentive payment that would make a portion of the hospital's base DRG 
payment contingent on its total performance score; (c) criteria for 
selecting performance measures for the financial incentive and 
candidate measures for FY 2009 and beyond; (d) a phased approach for 
transitioning from the RHQDAPU program to the VBP Plan; (e) proposed 
enhancements to the current data transmission and validation 
infrastructure to support VBP program requirements; (f) refinements to 
the Hospital Compare Web site to support expanded public reporting; and 
(g) an approach to monitoring VBP impacts.
    The Medicare Hospital VBP Plan Report to Congress is available on 
the CMS Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/downloads/HospitalVBPPlanRTCFINALSUBMITTED2007.pdf.
2. Testing and Further Development of the Medicare Hospital VBP Plan
    A Hospital VBP Workgroup has undertaken testing of the VBP Plan. 
This ``dry run'' or ``simulation'' of the Plan is using the most recent 
clinical process-of-care and HCAHPS measurement data available from the 
RHQDAPU program. New information generated by the VBP Plan testing will 
include: (a) Performance scores by domain; (b) total performance 
scores; and (c) financial impacts. Following a process similar to that 
used in developing the Plan, CMS will analyze this information by each 
individual IPPS hospital, by segment of the hospital industry (that is, 
geographic location, size, teaching status, among others), and in 
aggregate for all IPPS hospitals.
    The results of VBP Plan testing will be used to further develop the 
Plan. Priorities for Plan completion include addressing the small 
numbers issue (described on pages 74 and 75 of the Hospital VBP Plan 
Report to Congress) and developing a scoring methodology for the 
outcomes domain (pages 57-58 of the Hospital VBP Plan Report to 
Congress), which will become an additional aspect of the performance 
model. After completion, the Plan will be retested.
    In the FY 2009 IPPS proposed rule (73 FR 23661), we sought public 
comments on how to take full advantage of the new information generated 
through this testing and further Plan development. For example: Should 
the testing and retesting results be publicly posted? If the testing 
results were to be posted, would the best location be the Hospital

[[Page 48629]]

Compare Web site or the CMS Web site at: http://www.cms.hhs.gov? In 
what format would public posting be most useful to potential audiences? 
At what level would the data be posted--individual hospital or some 
higher level? Which data elements from the testing results would be 
most useful to share?
    We received 65 public comments regarding this section of the 
proposed rule. These public comments are summarized below.
    Comment: Overall, the commenters agreed that testing will provide 
valuable information for understanding the range of performance results 
under the Hospital VBP Plan and could provide a useful planning tool 
for individual hospitals. The comments are categorized here into eight 
themes, the first three of which are directly responsive to questions 
posed in the proposed rule.
 What Testing Results Should Be Posted
    Commenters were generally opposed to publicly posting performance 
information at the individual hospital level. The commenters noted that 
the VBP Plan has not yet been authorized by Congress, that the 
methodology might be changed during authorization, and that the impacts 
of the current methodology on different types of hospitals are still 
being evaluated. The commenters were particularly concerned that 
Medicare beneficiaries and others might use premature testing results 
to inform healthcare decisions. Several commenters emphasized that, if 
results are to be posted at the individual hospital level, each 
hospital should be given access to its preliminary results prior to 
publication, be given sufficient time to evaluate the results, and have 
the option to appeal to CMS for modifications.
 Where Testing Results Should Be Posted
    Most commenters recommended not posting testing results on Hospital 
Compare because of concerns that posting on Hospital Compare would be 
confusing for beneficiaries who use the Web site to make comparisons of 
hospital quality. Alternatively, several commenters suggested posting 
testing results on the CMS Web site at: http://www.cms.hhs.gov. 
Irrespective of which Web site, the commenters urged CMS to state 
clearly in any posting that VBP has not yet been authorized by 
Congress, that the results are from Plan testing, and that the testing 
results should not be used to compare hospital quality. The commenters 
suggested that CMS instead note that the results have been posted as 
part of testing the proposed VBP Plan methodology and are intended to 
promote feedback for refining the methodology.
 At What Level Testing Results Should Be Posted
    Many commenters supported publicly posting aggregate-level 
performance results without individual hospital identification, such as 
at the National and State levels and by different hospital 
characteristics such as urban vs. rural, teaching status, bed size, and 
geographic location. The commenters indicated that this information 
could help various stakeholder groups understand how the VBP Plan would 
work and its potential impacts on improving quality of care for 
Medicare beneficiaries.
 Sharing Results With Individual Hospitals
    Although most commenters opposed posting individual hospital data, 
nearly all of the commenters favored sharing testing results with each 
individual hospital. In addition, the commenters requested that CMS 
create opportunities for hospital leaders to ask questions and provide 
feedback regarding their hospitals' results. One commenter suggested 
that CMS use MyQualityNet (formerly QualityNet Exchange) to share 
testing results confidentially, enabling hospitals to verify the scores 
and also to see the financial implications of the VBP methodology.
 Application of Incentives
    Many commenters, particularly hospitals, expressed concern about 
how incentives would be distributed under the VBP Plan. Several 
commenters stressed that the VBP financial incentive should not be used 
to generate Medicare program savings, urging instead that any at-risk 
funds should be returned to hospitals as incentives. Several commenters 
expressed concern that some hospitals, especially safety net and under-
performing hospitals, could be disadvantaged if top-performing 
hospitals were to earn a majority of the incentives. One commenter 
suggested that CMS withhold a portion of the incentive pool to create a 
funding source for quality improvement grants to under-performing 
hospitals.
 Sensitivity to Hospital Burden
    A majority of commenters urged CMS to be sensitive to the limited 
resources of hospitals, especially safety net hospitals, and expressed 
concern that the VBP Plan could significantly increase the reporting 
burden for hospitals. Some commenters suggested that if VBP were to 
incorporate too many different quality domains, hospitals' attention 
could be diffused and patient care resources further stretched.
 Convening a Technical Advisory Panel
    Following the lead of a national hospital association, 
approximately half of the commenters on this section in the proposed 
rule requested that CMS bring together a technical advisory panel to 
review the VBP Plan testing results. The commenters indicated that this 
advisory panel could help CMS assess the impact of VBP Plan design 
choices and could suggest refinements to the Plan. Other commenters 
suggested using focus groups to vet the results from testing the VBP 
incentive methodology to assess the usefulness and clarity of this 
information.
 Nursing-Specific Issues
    Several commenters proposed including nursing-based performance 
measures in VBP.
    Response: We appreciate the thoughtful public comments that were 
submitted on this topic and will consider the commenters' input as we 
undertake further testing and refinement of the Hospital VBP Plan.

D. Sole Community Hospitals (SCHs) and Medicare-Dependent, Small Rural 
Hospitals (MDHs) (Sec. Sec.  412.78, 412.92, 412.108, and 412.109)

1. Background
    Under the IPPS, special payment protections are provided to a sole 
community hospital (SCH). Section 1886(d)(5)(D)(iii) of the Act defines 
an SCH as a hospital that, by reason of factors such as isolated 
location, weather conditions, travel conditions, or absence of other 
like hospitals (as determined by the Secretary) is the sole source of 
inpatient hospital services reasonably available to Medicare 
beneficiaries. The regulations that set forth the criteria that a 
hospital must meet to be classified as an SCH are located in 42 CFR 
412.92 of the regulations. Our regulations at Sec.  412.109 also 
provide that certain essential access community hospitals (EACHs) will 
be treated as an SCH for payment purposes.
    Under the IPPS, separate special payment protections also are 
provided to a Medicare-dependent, small rural hospital (MDH). Section 
1886(d)(5)(G)(iv) of the Act defines an MDH as a hospital that is 
located in a rural area, has not more than 100 beds, is not an SCH, and 
has a high percentage of Medicare discharges (not

[[Page 48630]]

less than 60 percent of its inpatient days or discharges in its 1987 
cost reporting year or in two of its most recent three settled Medicare 
cost reporting years). The regulations that set forth the criteria that 
a hospital must meet to be classified as an MDH are located in 42 CFR 
412.108.
    Although SCHs and MDHs are paid under special payment 
methodologies, they are hospitals that are paid under section 1886(d) 
of the Act. Like all IPPS hospitals paid under section 1886(d) of the 
Act, SCHs and MDHs are paid for their discharges based on the DRG 
weights calculated under section 1886(d)(4) of the Act.
    For SCHs, effective with hospital cost reporting periods beginning 
on or after October 1, 2000, and before January 1, 2009, section 
1886(d)(5)(D)(i) of the Act (as amended by section 6003(e) of Pub. L. 
101-239) and section 1886(b)(3)(I) of the Act (as added by section 405 
of Pub. L. 106-113 and further amended by section 213 of Pub. L. 106-
554) provide that SCHs are paid based on whichever of the following 
rates yields the greatest aggregate payment to the hospital for the 
cost reporting period:
     The Federal rate applicable to the hospital;
     The updated hospital-specific rate based on FY 1982 costs 
per discharge;
     The updated hospital-specific rate based on FY 1987 costs 
per discharge; or
     The updated hospital-specific rate based on FY 1996 costs 
per discharge.
    For purposes of payment to SCHs for which the FY 1996 hospital-
specific rate yields the greatest aggregate payment, payments for 
discharges during FYs 2001, 2002, and 2003 were based on a blend of the 
FY 1996 hospital-specific rate and the greater of the Federal rate or 
the updated FY 1982 or FY 1987 hospital-specific rate. For discharges 
during FY 2004 and subsequent fiscal years, payments based on the FY 
1996 hospital-specific rate are based on 100 percent of the updated FY 
1996 hospital-specific rate.
    As discussed in detail in section IV.D.2. of this preamble, the 
recently enacted Medicare Improvements for Patients and Providers Act 
of 2008 (Pub. L. 110-275), contains a provision under section 122 that 
changes the provisions for rebasing the payments for SCHs, effective 
for cost reporting periods beginning on or after January 1, 2009.
    Through and including FY 2006, under section 1886(d)(5)(G) of the 
Act, MDHs are paid based on the Federal rate or, if higher, the Federal 
rate plus 50 percent of the difference between the Federal rate and the 
updated hospital-specific rate based on FY 1982 or FY 1987 costs per 
discharge, whichever is higher. However, section 5003 of Public Law 
109-171 (DRA) modified these rules for discharges occurring on or after 
October 1, 2006. Section 5003(c) changed the 50 percent adjustment to 
75 percent. Section 5003(b) also requires using the FY 2002 costs per 
discharge (that is, the FY 2002 updated hospital-specific rate) if that 
results in a higher payment. MDHs do not have the option to use their 
FY 1996 hospital-specific rate.
    For each cost reporting period, the fiscal intermediary/MAC 
determines which of the payment options will yield the highest 
aggregate payment. Interim payments are automatically made at the 
highest rate using the best data available at the time the fiscal 
intermediary/MAC makes the determination. However, it may not be 
possible for the fiscal intermediary/MAC to determine in advance 
precisely which of the rates will yield the highest aggregate payment 
by year's end. In many instances, it is not possible to forecast the 
outlier payments, or the amount of the DSH adjustment or the IME 
adjustment, all of which are applicable only to payments based on the 
Federal rate and not to payments based on the hospital-specific rate. 
The fiscal intermediary/MAC makes a final adjustment at the close of 
the cost reporting period after it determines precisely which of the 
payment rates would yield the highest aggregate payment to the 
hospital.
    If a hospital disagrees with the fiscal intermediary's or MAC's 
determination regarding the final amount of program payment to which it 
is entitled, it has the right to appeal the fiscal intermediary's or 
MAC's decision in accordance with the procedures set forth in 42 CFR 
Part 405, Subpart R, which concern provider payment determinations and 
appeals.
2. Rebasing of Payments to SCHs
    Since the issuance of the FY 2009 IPPS proposed rule, a new law has 
been enacted that changed the rebasing provisions for payments to SCHs, 
effective with cost reporting periods beginning on or after January 1, 
2009. Section 122 of the Medicare Improvements for Patients and 
Providers Act of 2008 (Pub. L. 110-275) provides that, for cost 
reporting periods beginning on or after January 1, 2009, SCHs will be 
paid based on a FY 2006 hospital-specific rate (that is, based on their 
updated costs per discharge from their 12-month cost reporting period 
beginning during Federal fiscal year 2006), if this results in the 
greatest payment to the SCH. Therefore, effective with cost reporting 
periods beginning on or after January 1, 2009, SCHs will be paid based 
on the rate that results in the greatest aggregate payment using either 
the Federal rate or their hospital-specific rate based on their 1982, 
1987, 1996, or 2006 costs per discharge.
    Because this statutory provision is self-implementing, in this 
final rule, we are incorporating the provision in our regulations. 
Specifically, we are adding a new Sec.  412.77A to include the 
provisions of the law and revising Sec.  412.92 to make a conforming 
technical change.
3. Volume Decrease Adjustment for SCHs and MDHs: Data Sources for 
Determining Core Staff Values
    Section 1886(d)(5)(D)(ii) of the Act requires that the Secretary 
make a payment adjustment to an SCH that experiences a decrease of more 
than 5 percent in its total number of inpatient discharges from one 
cost reporting period to the next, if the circumstances leading to the 
decline in discharges were beyond the SCH's control. Section 
1886(d)(5)(G)(iii) of the Act requires that the Secretary also make a 
payment adjustment to an MDH that experiences a decrease of more than 5 
percent in its total number of inpatient discharges from one cost 
reporting period to the next, if the circumstances leading to the 
decline in discharges were beyond the MDH's control. These adjustments 
were designed to compensate an SCH or MDH for the fixed costs it incurs 
in the year in which the reduction in discharges occurred, which it may 
be unable to reduce. Such costs include the maintenance of necessary 
core staff and services. Our records indicate that less than 10 SCHs/
MDHs request and receive this payment adjustment each year.
    We believe that not all staff costs can be considered fixed costs. 
Using a specified standardized formula, the SCH or MDH must demonstrate 
that it appropriately adjusted the number of staff in inpatient areas 
of the hospital based on the decrease in the number of inpatient days. 
This formula examines nursing staff in particular. If an SCH or MDH has 
an excess number of nursing staff, the cost of maintaining those staff 
members is deducted from the total adjustment. One exception to this 
policy is that no SCH or MDH may reduce its number of staff to a level 
below what is required by State or local law. In other words, an SCH or 
MDH will not be penalized for maintaining a level of staff that is 
consistent with State or local requirements.
    The process for determining the amount of the volume decrease

[[Page 48631]]

adjustment can be found in Section 2810.1 of the Provider Reimbursement 
Manual, Part 1 (PRM-1). Fiscal intermediaries/MACs are responsible for 
establishing whether an SCH or MDH is eligible for a volume decrease 
adjustment and, if so, the amount of the adjustment. To qualify for 
this adjustment, the SCH or MDH must demonstrate that: (a) A decrease 
of more than 5 percent in the total number of inpatient discharges as 
compared to the prior cost reporting period has occurred; and (b) the 
circumstances that caused the decrease in discharges were beyond the 
control of the hospital. Once the fiscal intermediary/MAC has 
established that the SCH or MDH satisfies these two requirements, it 
will calculate the adjustment. The adjustment amount is determined by 
subtracting the second year's MS-DRG payment from the lesser of: (a) 
The second year's costs minus any adjustment for excess staff; or (b) 
the previous year's costs multiplied by the appropriate IPPS update 
factor minus any adjustment for excess staff. The SCH or MDH receives 
the difference in a lump-sum payment.
    In order to determine whether or not the hospital's nurse staffing 
level is appropriate, the fiscal intermediary/MAC compares the 
hospital's actual number of nursing staff in each area with the 
staffing of like-size hospitals in the same census region. If a 
hospital employs more than the reported average number of nurses for 
hospitals of its size and census region, the fiscal intermediary/MAC 
reduces the amount of the adjustment by the cost of maintaining the 
additional staff. The amount of the reduction is calculated by 
multiplying the actual number of nursing staff above the reported 
average by the average nurse salary for that hospital as reported on 
the hospital's Medicare cost report. The complete process for 
determining the amount of the adjustment can be found at Section 2810.1 
of the PRM-1.
    Prior to FY 2007, our policy was for fiscal intermediaries/MACs to 
obtain average nurse staffing data from the AHA HAS/Monitrend Data 
Book. However, in light of concerns that the Data Book had been 
published in 1989 and is no longer updated, in the FY 2007 IPPS rules, 
we proposed and finalized our policy to update the data sources and 
methodology used to determine the core staffing factors (that is, the 
average nursing staff for similar bed size and census region) for 
purposes of calculating the volume decrease adjustment (71 FR 48056 
through 48060). We specified that for adjustment requests for decreases 
in discharges beginning with FY 2007 (that is, a decrease in discharges 
in FY 2007 as compared to FY 2006), an SCH or MDH could opt to use one 
of two data sources: the AHA Annual Survey or the Occupational Mix 
Survey, but could not use the HAS/Monitrend Data Book. (For any open 
adjustment requests prior to FY 2007, we allowed SCHs and MDHs the 
option of using the results of any of three sources: (1) The 2006 
Occupational Mix Survey for cost reporting periods beginning in FY 
2006; (2) the AHA Annual Survey (where available); or (3) the AHA HAS/
Monitrend Data Book.) We also specified a methodology for calculating 
those core staffing factors. For purposes of explaining the 
methodology, we applied it to the 2003 Occupational Mix Survey data. In 
our explanation, we recognized that some of the 2003 data seemed 
anomalous, and we solicited comments on a possible alternative 
methodology. However, there were no suggested alternative methodologies 
from the commenters. We also explained that, while we used the 2003 
Occupational Mix Survey data ``for purposes of describing how we would 
implement this methodology,'' the final policy was to use FY 2006 
Occupational Mix Survey data going forward. At the time we published 
the proposed and final rules, however, we had not yet processed the FY 
2006 data, and could not present the core staffing figures that 
resulted from such data. In the FY 2007 IPPS final rule (71 FY 48057), 
we stated that because the occupational mix survey is conducted once 
every 3 years, we would update the data set every 3 years.
    We have now processed the 2006 Occupational Mix Survey data using 
the methodology specified in the FY 2007 IPPS final rule and continue 
to see some results that cause us to believe that the methodology for 
calculating the core staffing factors should be slightly revised from 
the methodology discussed in the FY 2007 IPPS final rule (71 FR 48056 
through 48060). The new methodology uses a revised formula to remove 
statistical outliers from the core staffing values.
a. Occupational Mix Survey
    In the FY 2007 IPPS final rule (71 FR 48055), we explained the 
methodology we would use for calculating core staffing values from the 
Occupational Mix Survey. We stated that we would calculate the nursing 
hours per patient day for each SCH or MDH by dividing the number of 
paid nursing hours (for registered nurses, licensed practical nurses 
and nursing aides) reported on the Occupational Mix Survey by the 
number of patients days reported on the Medicare cost report. The 
results would be grouped in the same bed-size groups and census regions 
as were used in the HAS/Monitrend Data Book.
    We indicated that we would publish the mean number of nursing hours 
per patient day for each census region and bed-size group in the 
Federal Register and on the CMS Web site. For purposes of the volume 
decrease adjustment, the published data would be utilized in the same 
way as the HAS/Monitrend data: The fiscal intermediary/MAC would 
multiply the SCH's and MDH's number of patient days by the applicable 
published hours per patient day. This figure would be divided by the 
average number of worked hours per year per nurse (for example, 2,080 
for a standard 40-hour week). The result would be the target number of 
core nursing staff for the particular SCH or MDH. If necessary, the 
cost of any excess staff (number of FTEs that exceed the published 
number) would be removed from the second year's costs or, if 
applicable, the previous year's costs multiplied by the IPPS update 
factor when determining the volume decrease adjustment.
    In the FY 2007 IPPS final rule, to illustrate how we would 
calculate the average number of nursing hours per patient day by bed 
size and region, we first merged the FY 2003 Occupational Mix Survey 
data with the FY 2003 Medicare cost report file. We eliminated all 
observations for non-IPPS providers, providers who failed to complete 
the occupational mix survey, and the providers for which provider 
numbers, bed counts, and/or days counts were missing.
    For each provider in the pool, we calculated the number of nursing 
hours by adding the number of registered nurses, licensed practical 
nurses, and nursing aide hours reported on the Occupational Mix Survey. 
We divided the result of this calculation by the total number of 
inpatient days reported on the cost report to determine the number of 
nursing hours per patient day. For purposes of calculating the census 
regional averages for the various bed-size groups, we finalized our 
rule to only include observations that fell within 3 standard 
deviations of the mean of all observations, thus removing potential 
outliers in the data.
    When the FY 2006 Occupational Mix Survey data became available, our 
analysis of the results indicated that the methodology for computing 
core staffing factors should be further revised in order to further 
eliminate outlier data.
    After consulting with the Office of the Actuary on appropriate 
statistical

[[Page 48632]]

methods to remove outlier data, in the FY 2009 IPPS proposed rule (73 
FR 23663), we proposed to modify our methodology for calculating the 
average nursing hours per patient day using the FY 2006 Occupational 
Mix Survey data and FY 2006 Medicare cost report data. Similar to what 
was finalized in the FY 2007 IPPS final rule, we proposed to merge the 
FY 2006 Occupational Mix Survey data with the FY 2006 Medicare cost 
report file. We proposed to then eliminate all observations for non-
IPPS providers, providers with hospital-based SNFs, providers who 
failed to complete the occupational mix survey, and the providers for 
which provider numbers, bed counts and/or days counts were missing. We 
proposed to annualize the results so that the nursing hours from the 
Occupational Mix Survey and the patient days reported on the Medicare 
cost report are representative of one year.
    For each provider in the pool, we proposed to calculate the number 
of nursing hours by adding the number of registered nurses, licensed 
practical nurses, and nursing aide hours reported on the Occupational 
Mix Survey. We proposed to divide the result of this calculation by the 
total number of patient days reported on line 12 on Worksheet S-3, Part 
I, Column 6 of the Medicare cost report. This includes patient days in 
the general acute care area and the intensive care unit area. The 
result is the number of nursing hours per patient day.
    For purposes of calculating the census regional averages for the 
various bed-size groups, we proposed a different method to remove 
outliers in the data. First, we proposed to calculate the difference 
between the observations in the 75th percentile and the 25th 
percentile, which is the inter-quartile range. We would then remove 
observations that are greater than the 75th percentile plus 1.5 times 
the inter-quartile range and less than the 25th percentile minus 1.5 
times the inter-quartile range. This methodology, proposed by Tukey in 
the mid-1970's, also has been used by the Office of the Actuary to trim 
data outliers. Under the standard deviation method described in the FY 
2007 IPPS final rule, the mean and standard deviation can be influenced 
by extreme values (because the standard deviation is increased by the 
very observations that would otherwise be discarded from the analysis). 
Our proposed methodology is a more robust technique because it uses the 
quartile values instead of variance to describe the spread of the data, 
and quartiles are less influenced by extreme outlier values that may be 
present in the data.
    Comment: One commenter requested that CMS indicate what data it 
used in the Occupational Mix Survey to calculate the average nursing 
staff levels. In particular, the commenter wanted to know what type of 
staff was used to determine average nursing hours per inpatient day.
    Response: As discussed in the FY 2007 IPPS final rule (71 FR 48057) 
and reiterated in this final rule, the 2006 Occupational Mix Survey 
includes nursing hours for the following categories: (1) Registered 
nurses; (2) licensed practical nurses; and (3) nursing aides, 
orderlies, and attendants. (We note that we are not including the hours 
associated with medical assistants--a fourth category of hours 
collected by the Occupational Mix Survey.) The registered nurse 
category is divided into two subcategories: management personnel; and 
staff nurses or clinicians. We are finalizing our proposed methodology 
so that the average nursing hours per inpatient day includes the hours 
of registered nurses, licensed practical nurses, and nursing aides 
(which includes the nursing aides, orderlies and attendants) as 
reported on the FY 2006 Occupational Mix Survey (we are not including 
hours for medical assistants). The FY 2006 Occupational Mix Survey data 
are available on the CMS Web site (http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage).
    Comment: One commenter stated that there was an inconsistency in 
the Medicare Cost Report data that CMS was using to determine patient 
days because CMS used line 12 of Worksheet S-3, Part I, Column 6 that 
includes nursery days. The commenter did not believe nursery days 
should be included in the adjustment because it is inconsistent with 
the PRM that states that ``Core nursing staff is determined by 
comparing full-time equivalent (FTE) staffing in the Adults and 
Pediatrics and Intensive Care Unit cost centers to FTE staffing in the 
prior year and FTE staffing in peer hospitals.''
    Response: The guidance in the PRM on how the core nursing staff is 
determined is based on the use of the HAS/Monitrend data, which provide 
average staffing levels by census region and bed size for the ICU and 
Adult and Pediatric areas. However, with our updated data sources, we 
cannot isolate nursing hour per patient day to only the ICU and Routine 
Care areas. As we stated in the FY 2007 IPPS final rule (71 FR 48059), 
the Occupational Mix Survey data collects data on both the inpatient 
and outpatient areas of the hospital, including the nursery area. In 
addition, it is our understanding that nursing staff may, and often do, 
rotate between the inpatient and outpatient areas of the hospital as 
necessary. Further, inpatients often utilize services in the outpatient 
(or ancillary) areas of the hospital. As a result, we believe that the 
total nursing hours derived from the Occupational Mix Survey should be 
divided by total inpatient days, or line 12 of Worksheet S-3, Part I, 
Column 6. We plan to update the guidance in the PRM to reflect the use 
of our updated data sources to determine the core nursing staff levels.
    As we stated in the FY 2009 IPPS proposed rule, we believe the 
revised method would prevent the mean from being influenced by extreme 
observations and assumes that the middle 50 percent of the data has no 
outlier observations. Therefore, we are finalizing our methodology, and 
the results of the average nursing hours per patient day by bed size 
and region using the FY 2006 Occupational Mix Survey Data and the March 
2008 update to the FY 2006 hospital cost report data are shown in the 
table below. The application of this methodology results in a pool of 
approximately 2,969 providers. Each census region and bed group 
category required at least three providers in order for their average 
to be published. As stated in the FY 2007 IPPS final rule (71 FR 
48059), the results of the FY 2006 Occupational Mix Survey may be used 
for the volume decrease adjustment calculations for decreases in 
discharges occurring in cost reporting periods beginning in FYs 2006, 
2007, and 2008.
    Comment: Another commenter asked if fiscal intermediaries/MAC must 
recalculate completed volume adjustment calculations for this period 
(FYs 2006, 2007 and 2008) to apply the FY 2006 Occupational Mix Survey 
data in cases where the volume adjustment has already been determined 
using the HAS Monitrend data.
    Response: As stated in the FY 2007 IPPS final rule (71 FR 48059) 
and in the FY 2009 IPPS proposed rule (73 FR 23664), the results of the 
FY 2006 Occupational Mix Survey may be used for the volume decrease 
adjustment calculations for decreases in discharges occurring in cost 
reporting periods beginning in FYs 2006, 2007, and 2008. If the 
provider believes it would benefit from a recalculation of its volume 
decrease adjustment using the 2006 Occupational Mix Survey data rather 
than the HAS Monitrend data, it may submit a request for such a 
recalculation including the prior determination by the fiscal 
intermediary/MAC and the

[[Page 48633]]

documentation required to make a determination based on the 
Occupational Mix data, including staffing levels reported consistent 
with the Occupational Mix Survey instructions.

                                                           Paid Nursing Hours per Patient Day
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Census region
                                                      --------------------------------------------------------------------------------------------------
                    Number of beds                                                         East       East       West       West
                                                          New       Middle     South      North      South      North      South     Mountain   Pacific
                                                        England    Atlantic   Atlantic   Central    Central    Central    Central
                                                             (1)        (2)        (3)        (4)        (5)        (6)        (7)        (8)        (9)
--------------------------------------------------------------------------------------------------------------------------------------------------------
0-49.................................................      25.47      20.60      20.61      24.42      20.30      25.96      22.22      24.01      20.99
50-99................................................      21.17      18.60      20.61      23.16      18.58      22.40      20.58      21.89      19.14
100-199..............................................      18.28      16.25      17.24      19.04      17.08      19.77      16.90      18.22      16.50
200-399..............................................      16.91      13.87      16.02      17.89      15.55      18.94      14.88      17.06      16.57
400+.................................................      17.52      14.51      16.70      18.31      14.84      16.67      16.05      15.50      18.09
--------------------------------------------------------------------------------------------------------------------------------------------------------

    After consideration of the public comments received, we are 
finalizing our proposal to calculate the staff adjustment for the SCH 
and MDH low volume adjustment using the 2006 Occupational Mix Survey 
data based on the methodology described above.
b. AHA Annual Survey
    In the FY 2007 IPPS final rule (71 FR 48058), we also allowed SCHs 
or MDHs that experienced a greater than 5 percent reduction in the 
number of discharges during a cost reporting period the option of using 
the AHA Annual Survey results, where available, to compare the number 
of hospital's core staff with other like-sized hospitals in its 
geographic area. Our methodology for calculating the nursing hours per 
patient day using the AHA Annual Survey data and the Medicare hospital 
cost report data was similar to the methodology using the Occupational 
Mix Survey data (eliminating outliers outside of three standard 
deviations from the mean). For this reason, as with the occupational 
mix data, both standard deviations and the mean could be influenced by 
extreme values. Therefore, in the FY 2009 IPPS proposed rule (73 FR 
23664), we proposed to refine our methodology to calculate the core 
staffing factors using the AHA Annual Survey data as well. The AHA 
Annual Survey contains FTE counts for registered nurses, practical and 
vocational nurses, nursing assistive personnel, and other personnel in 
both inpatient and outpatient areas of the hospital. This is consistent 
with the Occupational Mix Survey data which includes data on both the 
inpatient and outpatient areas of the hospital.
    In the FY 2007 IPPS final rule, we stated that we would calculate 
the nursing hours per patient day using the AHA Annual Survey data in a 
similar method to the Occupational Mix Survey. Consistent with the HAS/
Monitrend Data book, we proposed to calculate the average number of 
nursing staff for a bed-size/census group if there are data available 
for three or more hospitals. First, we proposed to merge the AHA Annual 
Survey Data with the corresponding Medicare cost report data. We would 
then eliminate all observations for non-IPPS providers, providers with 
hospital-based SNFs, and the providers for which provider numbers, bed 
counts, and/or days counts were missing. We proposed to multiply the 
sum of nurse, licensed practical nurse, and nursing aide FTEs reported 
on the AHA Annual Survey by 2,080 hours to derive the number of nursing 
hours per year (based on a 40-hour work week). We would then divide 
this number by the total number of patient days reported on line 12 on 
Worksheet S-3, Part I, Column 6 of the Medicare cost report. In the FY 
2007 IPPS final rule (71 FR 48060), we had stated that we would 
eliminate all providers with results beyond three standard deviations 
from the mean. However, to be consistent with our methodology with the 
Occupational Mix Survey data, in the FY 2009 IPPS proposed rule, we 
proposed to remove outliers from the AHA Annual Survey data by 
calculating the difference between the observations in the 75th 
percentile and the 25th percentile, which is the inter-quartile range. 
We then proposed to remove observations that are greater than the 75th 
percentile plus 1.5 times the inter-quartile range and less than the 
25th percentile minus 1.5 times the inter-quartile range. After 
removing the outliers, we proposed to group the hospitals by bed size 
and census area to calculate the average number of nursing hours per 
patient day for each category. In this final rule, we also have updated 
our results of the nursing hours per patient day using the 2006 AHA 
Annual Survey data and the March 2008 Medicare cost report data, which 
is shown below. Using the 2006 AHA Annual Survey data, this would 
result in a pool of approximately 1,423 providers. We proposed to use 
the 2006 Survey for the volume decrease adjustment calculations for 
decreases in discharges occurring during cost reporting periods 
beginning in FY 2006. As we stated in the FY 2007 IPPS final rule, for 
other years, the corresponding AHA Annual Survey would be used for the 
year in which the decrease occurred.

                                                           Paid Nursing Hours per Patient Day
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                 Census region
                                                      --------------------------------------------------------------------------------------------------
                    Number of beds                                                         East       East       West       West
                                                          New       Middle     South      North      South      North      South     Mountain   Pacific
                                                        England    Atlantic   Atlantic   Central    Central    Central    Central
                                                             (1)        (2)        (3)        (4)        (5)        (6)        (7)        (8)        (9)
--------------------------------------------------------------------------------------------------------------------------------------------------------
0-49.................................................      26.59      24.17      22.32      28.08      19.29      29.29      25.24      27.10      25.52
50-99................................................      22.13      20.35      22.31      24.40      22.68      24.00      21.17      19.37      20.36
100-199..............................................      19.30      17.09      18.34      19.77      19.05      20.32      19.55      18.99      18.71

[[Page 48634]]

 
200-399..............................................      18.84      15.04      15.67      17.10      15.62      20.35      16.17      18.96      18.43
400+.................................................      18.98      16.58      17.65      21.46      16.73      18.23      16.06      17.76      21.82
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Comment: One commenter asked for clarification on which peer group 
of data a provider experiencing a volume decrease should use to 
determine whether it meets the allowable staffing requirement.
    Response: Providers have been using HAS/Monitrend data to determine 
the staffing adjustment. The HAS/Monitrend data may be used as a source 
only for open adjustment requests. Beginning in FY 2007, only the AHA 
Annual Survey data and the Occupational Mix Survey data can be used to 
determine the amount of the volume decrease adjustment. Therefore, an 
SCH or MDH that has experienced a decrease in discharges in 2007 as 
compared to 2006 will no longer be permitted to use the HAS/Monitrend 
databook results to calculate the amount of the volume decrease 
adjustment. The staffing levels based on both data sources will be 
available on the CMS Web site.
    The HAS/Monitrend data had separated staffing levels by intensive 
care unit and routine care. However, the data based on both the AHA 
Annual Survey and the Occupational Mix Survey provide only one number 
representing the average nursing hours per patient day aggregating the 
intensive care area and the routine care area. For an SCH or MDH 
seeking a volume decrease adjustment, the fiscal intermediary/MAC will 
determine the SCH or MDH's total hospital nursing staff per inpatient 
day for the year of the volume decrease and compare that figure to the 
number published for the hospital's census area and bed-size division 
in either the Occupational Mix Survey or AHA Annual Survey.
    Comment: Several commenters encouraged CMS to clarify which data 
should be used for which fiscal year. In addition, the commenters 
requested that CMS explain what data source should be used for MDHs and 
SCHs seeking a volume decrease adjustment for years prior to FY 2006. 
Some commenters wanted to be able to use 2006 Occupational Mix Survey 
data or AHA Annual Survey data for open volume adjustment requests 
prior to FY 2006.
    Response: In the FY 2007 IPPS final rule, we stated that open 
adjustment requests prior to FY 2007 would allow SCHs and MDHs the 
option of using the results of any of three sources: (1) The 2006 
Occupational Mix Survey for cost reporting period beginning during FY 
2006 through 2008; (2) the AHA Annual Survey (where available); or (3) 
the HAS/Monitrend Databook. The FY 2006 Occupational Mix Survey data 
and the 2006 AHA Annual Survey data cannot be used for open volume 
adjustment requests prior to FY 2006.
    The Occupational Mix Survey data is updated every 3 years. The 
results of the FY 2006 Occupational Mix Survey can be used for volume 
decrease adjustment calculations for decreases in discharges occurring 
during the FY 2006, FY 2007, and FY 2008 cost reporting periods. The 
results of the FY 2009 Occupational Mix Survey will be used to update 
the data for volume decrease adjustment calculations for decreases in 
discharges occurring during the FY 2009, FY 2010, and FY 2011 cost 
reporting periods.
    MDHs and SCHs will also have the option to use the AHA Annual 
Survey data. The AHA Annual Survey data is updated annually. The core 
staffing levels based on the FY 2006 AHA Annual Survey data are 
published in this final rule and will also be available on the CMS Web 
site. The fiscal intermediary/MAC will use the survey results from the 
year in which the decrease occurred. For example, if a hospital 
experiences a decrease between its 2006 and 2007 cost reporting 
periods, the fiscal intermediary/MAC will compare the hospital's 2007 
staffing with the results of the FY 2007 AHA Annual Survey.
    Comment: Commenters urged CMS to release the FY 2006 core staff 
data based on the Occupational Mix Survey and the AHA Annual Survey as 
soon as possible. The commenters asked if CMS does not publish the 
finalized core staff data with the final rule, that CMS allow interim 
volume adjustment payments to be made based on the data published in 
the FY 2009 IPPS proposed rule.
    Response: This FY 2009 IPPS final rule includes two charts of core 
staffing levels by bed-size and census region for FY 2006 based on the 
Occupational Mix Survey and the AHA Annual Survey. These data will also 
be posted on the CMS Web site. The data can be used to determine if a 
volume decrease adjustment is necessary. The FY 2006 AHA Annual Survey 
data can be used for FY 2006 adjustments, and the FY 2006 Occupational 
Mix Survey data can be used for adjustments for FY 2006, FY 2007, and 
FY 2008. Currently, the AHA Annual Survey data for 2007 is not 
available. Core staff levels for FY 2007 will be available later this 
year on the CMS Web site.
    Comment: A few commenters believed that a hospital's capital costs 
should be included in the determination of a qualifying hospital's 
additional payment.
    Response: Sections 1886(d)(5)(D)(ii) and 1886(d)(5)(G)(iii) of the 
Act provide that ``the Secretary shall provide for such an adjustment 
to the payment amounts under this subsection [* * *]'' (emphasis 
added). Section 1886(d) of the Act governs the amount of payment for 
the operating costs of inpatient hospital services under the Medicare 
program, that is, payments under the operating IPPS. The authority for 
the development and implementation of a PPS for the capital-related 
costs of inpatient acute hospital services under the Medicare program 
(that is, the capital IPPS) is provided for in section 1886(g) of the 
Act. Because the respective statutory authority for the additional 
payment to SCHs and MDHs that experience a significant volume decrease 
specify that an adjustment will be made under section 1886(d) of the 
Act, which governs payments for operating costs, we believe it would be 
inconsistent with the statute to include a hospital's capital costs in 
the determination of a qualifying SCH's or MDH's additional payment 
under 1886(d)(5)(D)(ii) and 1886(d)(5)(G)(iii) of the Act. Therefore, 
we are not adopting the commenters' suggestions.

[[Page 48635]]

    Comment: One commenter stated that updated data from the 
Occupational Mix Survey and the AHA Annual Survey are acceptable 
starting points, but that two additional factors are required to make 
the updated staffing factors meaningful. The two factors named were a 
case-mix measurement factor to recognize the differences in case-mix 
between the volume adjustment applicant versus the average case-mix 
score of the peer group hospitals, and a factor to recognize the 
variance in inpatient versus outpatient mix between the volume 
adjustment applicant and the peer group average.
    Response: The current volume decrease adjustment calculation, using 
the HAS Monitrend data, does not include a factor to account for 
differences in the case-mix of the applicant provider and its peer 
group. We did not propose any changes to the methodology for the 
adjustment calculation. The only issue addressed in our proposal was 
the database to be used to determine staffing levels, given the fact 
that the HAS/Monitrend data are no longer a viable source. We believe 
that the staffing factors based on the more current Occupational Mix 
Survey and AHA Annual Survey data are a useful update. Regarding an 
adjustment for a case-mix index factor or for variance in inpatient and 
outpatient mix, we did not propose any changes to the methodology and 
we believe that additional adjustments would add complexity without 
necessarily providing a benefit. However, we may consider these 
recommendations in future rulemakings.
    Comment: Several commenters supported the proposed changes. Other 
commenters who supported the proposed changes noted that, compared to 
the previously used Monitrend data, both the Occupational Mix Survey 
and the AHA Survey include information on nurses in other areas of the 
hospital besides the inpatient nursing units and requested that CMS 
clarify that the use of these data for future payment adjustment 
requests will require hospitals to analyze their nurse-staffing levels 
in the current and previous year using the same instructions used to 
complete the Occupational Mix Survey or the AHA Survey, or both.
    The commenters also noted that the AHA Survey changed in 2006, and 
the same nursing data are not necessarily available from AHA for years 
prior to 2006. Likewise, the Occupational Mix Survey data are based on 
2006 data. The commenters requested that CMS authorize the use of the 
2006 Occupational Mix Survey data and AHA Survey data for payment 
adjustments for volume decreases in years prior to 2006, at the 
hospital's option. They also requested clarification as to when the 
2007 and 2008 AHA survey data would be made available.
    Response: We understand the 2007 AHA Annual Survey data will be 
made available to CMS sometime between September and November 2008. We 
expect to have the staffing factors based on the 2007 survey calculated 
and posted on the CMS Web site during the first quarter of FY 2009. We 
expect the 2008 AHA Annual Survey data to become available a year 
later, in autumn 2009, and to be posted on the CMS Web site the first 
quarter of FY 2010.
    Regarding the application of the staffing factors based on the 2006 
AHA Annual Survey data, those staffing factors should only be applied 
to hospital cost reporting periods beginning in FY 2006. It is not 
appropriate to use that data for periods prior to 2006. For example, if 
a hospital believes it experienced, in its cost reporting period 
beginning in FY 2008, a decrease of more than 5 percent in its number 
of inpatient discharges, compared to its immediately preceding cost 
reporting period (its cost reporting period beginning in FY 2007), the 
hospital would request a volume decrease adjustment for its FY 2008 
cost reporting period, and include its FY 2007 and FY 2008 cost report 
information.
    The 2007 AHA Annual Survey data will be available to CMS by the 
first quarter of FY 2009 and the staffing factors based on that data 
will also be posted on the CMS Web site in the first quarter of FY 
2009. If the hospital opts to use the staffing factors based on the 
Occupational Mix Survey for its volume decrease adjustment, it would 
apply the staffing factors based on the 2006 Occupational Mix Survey to 
its FY 2007 cost report data.
    After consideration of the public comments received, we are 
finalizing our methodology to calculate the average nursing hours per 
patient day using AHA Annual Survey data and the Medicare Cost Report 
as described above.

E. Rural Referral Centers (RRCs) (Sec.  412.96)

    Under the authority of section 1886(d)(5)(C)(i) of the Act, the 
regulations at Sec.  412.96 set forth the criteria that a hospital must 
meet in order to qualify under the IPPS as an RRC. For discharges 
occurring before October 1, 1994, RRCs received the benefit of payment 
based on the other urban standardized amount rather than the rural 
standardized amount. Although the other urban and rural standardized 
amounts are the same for discharges occurring on or after October 1, 
1994, RRCs continue to receive special treatment under both the DSH 
payment adjustment and the criteria for geographic reclassification.
    Section 402 of Public Law 108-173 raised the DSH adjustment for 
other rural hospitals with less than 500 beds and RRCs. Other rural 
hospitals with less than 500 beds are subject to a 12-percent cap on 
DSH payments. RRCs are not subject to the 12-percent cap on DSH 
payments that is applicable to other rural hospitals (with the 
exception of rural hospitals with 500 or more beds). RRCs are not 
subject to the proximity criteria when applying for geographic 
reclassification, and they do not have to meet the requirement that a 
hospital's average hourly wage must exceed the average hourly wage of 
the labor market area where the hospital is located by a certain 
percentage (106/108 percent in FY 2008).
    Section 4202(b) of Public Law 105-33 states, in part, ``[a]ny 
hospital classified as an RRC by the Secretary * * * for fiscal year 
1991 shall be classified as such an RRC for fiscal year 1998 and each 
subsequent year.'' In the August 29, 1997 final rule with comment 
period (62 FR 45999), we reinstated RRC status for all hospitals that 
lost the status due to triennial review or MGCRB reclassification, but 
did not reinstate the status of hospitals that lost RRC status because 
they were now urban for all purposes because of the OMB designation of 
their geographic area as urban. However, subsequently, in the August 1, 
2000 final rule (65 FR 47089), we indicated that we were revisiting 
that decision. Specifically, we stated that we would permit hospitals 
that previously qualified as an RRC and lost their status due to OMB 
redesignation of the county in which they are located from rural to 
urban to be reinstated as an RRC. Otherwise, a hospital seeking RRC 
status must satisfy the applicable criteria. We used the definitions of 
``urban'' and ``rural'' specified in Subpart D of 42 CFR Part 412.
    One of the criteria under which a hospital may qualify as a RRC is 
to have 275 or more beds available for use (Sec.  412.96(b)(1)(ii)). A 
rural hospital that does not meet the bed size requirement can qualify 
as an RRC if the hospital meets two mandatory prerequisites (a minimum 
CMI and a minimum number of discharges), and at least one of three 
optional criteria (relating to specialty composition of medical staff, 
source of inpatients, or referral volume) (Sec.  412.96(c)(1) through 
(c)(5) and the

[[Page 48636]]

September 30, 1988 Federal Register (53 FR 38513)). With respect to the 
two mandatory prerequisites, a hospital may be classified as an RRC 
if--
     The hospital's CMI is at least equal to the lower of the 
median CMI for urban hospitals in its census region, excluding 
hospitals with approved teaching programs, or the median CMI for all 
urban hospitals nationally; and
     The hospital's number of discharges is at least 5,000 per 
year, or, if fewer, the median number of discharges for urban hospitals 
in the census region in which the hospital is located. (The number of 
discharges criterion for an osteopathic hospital is at least 3,000 
discharges per year, as specified in section 1886(d)(5)(C)(i) of the 
Act.)
1. Case-Mix Index
    Section 412.96(c)(1) provides that CMS establish updated national 
and regional CMI values in each year's annual notice of prospective 
payment rates for purposes of determining RRC status. The methodology 
we used to determine the national and regional CMI values is set forth 
in the regulations at Sec.  412.96(c)(1)(ii). The national median CMI 
value for FY 2009 includes all urban hospitals nationwide, and the 
regional values for FY 2009 are the median CMI values of urban 
hospitals within each census region, excluding those hospitals with 
approved teaching programs (that is, those hospitals that train 
residents in an approved GME program as provided in Sec.  413.75). 
These values are based on discharges occurring during FY 2007 (October 
1, 2006 through September 30, 2007), and include bills posted to CMS' 
records through March 2008.
    In the FY 2009 IPPS proposed rule (73 FR 23665), we proposed that, 
in addition to meeting other criteria, if rural hospitals with fewer 
than 275 beds are to qualify for initial RRC status for cost reporting 
periods beginning on or after October 1, 2008, they must have a CMI 
value for FY 2007 that is at least--
     1.4285; or
     The median CMI value (not transfer-adjusted) for urban 
hospitals (excluding hospitals with approved teaching programs as 
identified in Sec.  413.75) calculated by CMS for the census region in 
which the hospital is located.
    Based on the latest available data (FY 2007 bills received through 
March 2008), in addition to meeting other criteria, if rural hospitals 
with fewer than 275 beds are to qualify for initial RRC status for cost 
reporting periods beginning on or after October 1, 2008, they must have 
a CMI value for FY 2007 that is at least--
     1.4270; or
     The median CMI value (not transfer-adjusted) for urban 
hospitals (excluding hospitals with approved teaching programs as 
identified in Sec.  413.75) calculated by CMS for the census region in 
which the hospital is located.
    The final median CMI values by region are set forth in the 
following table:

------------------------------------------------------------------------
                                                          Case-mix index
                         Region                                value
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT).................          1.2532
2. Middle Atlantic (PA, NJ, NY).........................          1.2661
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)..          1.3588
4. East North Central (IL, IN, MI, OH, WI)..............          1.3579
5. East South Central (AL, KY, MS, TN)..................          1.3051
6. West North Central (IA, KS, MN, MO, NE, ND, SD)......          1.3571
7. West South Central (AR, LA, OK, TX)..................          1.4208
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)............          1.4669
9. Pacific (AK, CA, HI, OR, WA).........................          1.3945
------------------------------------------------------------------------

    Hospitals seeking to qualify as RRCs or those wishing to know how 
their CMI value compares to the criteria should obtain hospital-
specific CMI values (not transfer-adjusted) from their fiscal 
intermediaries/MACs. Data are available on the Provider Statistical and 
Reimbursement (PS&R) System. In keeping with our policy on discharges, 
these CMI values are computed based on all Medicare patient discharges 
subject to the IPPS DRG-based payment.
2. Discharges
    Section 412.96(c)(2)(i) provides that CMS set forth the national 
and regional numbers of discharges in each year's annual notice of 
prospective payment rates for purposes of determining RRC status. As 
specified in section 1886(d)(5)(C)(ii) of the Act, the national 
standard is set at 5,000 discharges. In the FY 2009 IPPS proposed rule 
(73 FR 23666), we proposed to update the regional standards based on 
discharges for urban hospitals' cost reporting periods that began 
during FY 2006 (that is, October 1, 2005 through September 30, 2006), 
which was the latest cost report data available at that time.
    Therefore, in the FY 2009 IPPS proposed rule (73 FR 23666), we 
proposed that, in addition to meeting other criteria, a hospital, if it 
is to qualify for initial RRC status for cost reporting periods 
beginning on or after October 1, 2008, must have as the number of 
discharges for its cost reporting period that began during FY 2006 a 
figure that is at least--
     5,000 (3,000 for an osteopathic hospital); or
     The median number of discharges for urban hospitals in the 
census region in which the hospital is located. (We refer readers to 
the table set forth in the FY 2009 IPPS proposed rule at 73 FR 23666.)
    Based on the latest discharge data available at this time, that is, 
for cost reporting periods that began during FY 2006, the final median 
number of discharges for urban hospitals by census region are set forth 
in the following table.

------------------------------------------------------------------------
                                                             Number of
                         Region                             discharges
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT).................           8,158
2. Middle Atlantic (PA, NJ, NY).........................          10,659
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV)..          10,982
4. East North Central (IL, IN, MI, OH, WI)..............           9,290
5. East South Central (AL, KY, MS, TN)..................           7,927
6. West North Central (IA, KS, MN, MO, NE, ND, SD)......           8,206
7. West South Central (AR, LA, OK, TX)..................           6,589
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)............           9,738
9. Pacific (AK, CA, HI, OR, WA).........................           8,620
------------------------------------------------------------------------

    We note that the median number of discharges for hospitals in each 
census region is greater than the national standard of 5,000 
discharges. Therefore, 5,000 discharges is the minimum criterion for 
all hospitals.
    We reiterate that, if an osteopathic hospital is to qualify for RRC 
status for cost reporting periods beginning on or after October 1, 
2008, the hospital would be required to have at least 3,000 discharges 
for its cost reporting period that began during FY 2006.

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

1. Background
    Section 1886(d)(5)(B) of the Act provides for an additional payment 
amount under the IPPS for hospitals that have residents in an approved 
graduate medical education (GME) program in order to reflect the higher 
indirect patient care costs of teaching hospitals relative to 
nonteaching hospitals. The regulations regarding the calculation of 
this additional payment, known as the indirect medical

[[Page 48637]]

education (IME) adjustment, are located at Sec.  412.105.
    The Balanced Budget Act of 1997 (Pub. L. 105-33) established a 
limit on the number of allopathic and osteopathic residents that a 
hospital may include in its full-time equivalent (FTE) resident count 
for direct GME and IME payment purposes. Under section 1886(h)(4)(F) of 
the Act, for cost reporting periods beginning on or after October 1, 
1997, a hospital's unweighted FTE count of residents for purposes of 
direct GME may not exceed the hospital's unweighted FTE count for its 
most recent cost reporting period ending on or before December 31, 
1996. Under section 1886(d)(5)(B)(v) of the Act, a similar limit on the 
FTE resident count for IME purposes is effective for discharges 
occurring on or after October 1, 1997.
2. IME Adjustment Factor for FY 2009
    The IME adjustment to the MS-DRG payment is based in part on the 
applicable IME adjustment factor. The IME adjustment factor is 
calculated by using a hospital's ratio of residents to beds, which is 
represented as r, and a formula multiplier, which is represented as c, 
in the following equation: c x [{1 + r{time}  \.405\ - 1]. The formula 
is traditionally described in terms of a certain percentage increase in 
payment for every 10-percent increase in the resident-to-bed ratio.
    Section 502(a) of Public Law 108-173 modified the formula 
multiplier (c) to be used in the calculation of the IME adjustment. 
Prior to the enactment of Public Law 108-173, the formula multiplier 
was fixed at 1.35 for discharges occurring during FY 2003 and 
thereafter. In the FY 2005 IPPS final rule, we announced the schedule 
of formula multipliers to be used in the calculation of the IME 
adjustment and incorporated the schedule in our regulations at Sec.  
412.105(d)(3)(viii) through (d)(3)(xii). Section 502(a) modifies the 
formula multiplier beginning midway through FY 2004 and provides for a 
new schedule of formula multipliers for FYs 2005 and thereafter as 
follows:
     For discharges occurring on or after April 1, 2004, and 
before October 1, 2004, the formula multiplier is 1.47.
     For discharges occurring during FY 2005, the formula 
multiplier is 1.42.
     For discharges occurring during FY 2006, the formula 
multiplier is 1.37.
     For discharges occurring during FY 2007, the formula 
multiplier is 1.32.
     For discharges occurring during FY 2008 and fiscal years 
thereafter, the formula multiplier is 1.35.
    Accordingly, for discharges occurring during FY 2009, the formula 
multiplier is 1.35. We estimate that application of this formula 
multiplier for FY 2009 IME adjustment will result in an increase in IME 
payment of 5.5 percent for every approximately 10-percent increase in 
the hospital's resident-to-bed ratio.

G. Payments for Direct Graduate Medical Education (GME) (Sec. Sec.  
413.75 and 413.79)

1. Background
    Section 1886(h) of the Act, as implemented in regulations at Sec.  
413.75 through Sec.  413.83, establishes a methodology for determining 
payments to hospitals for the direct costs of approved graduate medical 
education (GME) programs. Section 1886(h)(2) of the Act sets forth a 
methodology for the determination of a hospital-specific, base-period 
per resident amount (PRA) that is calculated by dividing a hospital's 
allowable direct costs of GME for a base period by its number of 
residents in the base period. The base period is, for most hospitals, 
the hospital's cost reporting period beginning in FY 1984 (that is, the 
period between October 1, 1983, through September 30, 1984). Medicare 
direct GME payments are calculated by multiplying the PRA times the 
weighted number of full-time equivalent (FTE) residents working in all 
areas of the hospital complex (and nonhospital sites, when applicable), 
and the hospital's Medicare share of total inpatient days. The base 
year PRA is updated annually for inflation.
    Section 1886(h)(4)(F) of the Act established caps on the number of 
allopathic and osteopathic residents that hospitals may count for 
purposes of calculating direct GME payments. For most hospitals, the 
caps were the number of allopathic and osteopathic FTE residents 
training in the hospital's most recent cost reporting period ending on 
or before December 31, 1996. Section 422 of Public Law 108-173 added 
section 1886(h)(7) of the Act, which provided for a reduction to the 
resident caps of teaching hospitals that were training a number of FTE 
residents below their cap in a reference period, and authorized a 
``redistribution'' of those FTE resident slots to hospitals that could 
demonstrate a likelihood of using the additional resident slots within 
the first three cost reporting periods beginning on or after July 1, 
2005.
2. Medicare GME Affiliation Provisions for Teaching Hospitals in 
Certain Emergency Situations
a. Legislative Authority
    The stated purposes of section 1135 of the Act are (1) ``to enable 
the Secretary to ensure to the maximum extent feasible, in any 
emergency area and during an emergency period, * * * that sufficient 
health care items and services are available to meet the needs of 
individuals enrolled in the programs under titles XVIII, XIX, and XXI 
[that is, Medicare, Medicaid, and the State Children's Health Insurance 
Program (SCHIP)]; and (2) that health care providers * * * that furnish 
such items and services in good faith, but that are unable to comply 
with one or more requirements * * * may be reimbursed for such items 
and services and exempted from sanctions for such noncompliance, absent 
any determination of fraud or abuse.'' Specifically, section 1135 of 
the Act authorizes the Secretary, to the extent necessary to accomplish 
the statutory purpose, to temporarily waive or modify the application 
of certain types of statutory and regulatory provisions (such as 
conditions of participation or other certification requirements, 
program participation or similar requirements, or preapproval 
requirements) with respect to health care items and services furnished 
by health care provider(s) in an emergency area during an emergency 
period.
    The Secretary's authority under section 1135 of the Act arises in 
the event there is an ``emergency area'' and continues during an 
``emergency period'' as those terms are defined in the statute. Under 
section 1135(g) of the Act, an emergency area is a geographic area in 
which there exists an emergency or disaster that is declared by the 
President according to the National Emergencies Act or the Robert T. 
Stafford Disaster Relief and Emergency Assistance Act, and a public 
health emergency declared by the Secretary according to section 319 of 
the Public Health Service Act. (Section 319 of the Public Health 
Service Act authorizes the Secretary to declare a public health 
emergency and take the appropriate action to respond to the emergency, 
consistent with existing authorities.) Throughout the remainder of this 
discussion, we will refer to such emergency areas and emergency periods 
as ``section 1135'' emergency areas and emergency periods.
    Furthermore, under section 1135 of the Act, ``a waiver or 
modification of requirements pursuant to this section may, at the 
Secretary's discretion, be

[[Page 48638]]

made retroactive to the beginning of the emergency period or any 
subsequent date in such period specified by the Secretary.'' Section 
1135 of the Act further states that ``a waiver or modification of 
requirements pursuant to this section terminates upon--(A) the 
termination of the applicable declaration of emergency or disaster * * 
*; (B) the termination of the applicable declaration of public health 
emergency * * *; or (C) * * * the termination of a period of 60 days 
from the date the waiver or modification is first published (or, if 
applicable, the date of extension of the waiver or modification. * * 
*)''
    As noted previously, sections 1886(h)(4)(F) and 1886(d)(5)(B)(v) of 
the Act establish limits on the number of allopathic and osteopathic 
residents that hospitals may count for purposes of calculating direct 
GME payments and the IME adjustment, respectively, establishing 
hospital-specific direct GME and IME FTE resident caps. Under the 
authority of section 1886(h)(4)(H)(ii) of the Act, the Secretary issued 
rules to allow institutions that are members of the same affiliated 
group to apply their direct GME and IME FTE resident caps on an 
aggregate basis through a Medicare GME affiliation agreement. The 
Medicare regulations at Sec. Sec.  413.75 and 413.79 permit hospitals, 
through a Medicare GME affiliation agreement, to adjust IME and direct 
GME FTE resident caps to reflect the rotation of residents among 
affiliated hospitals.
    Section 1886(d)(5)(B)(vi) of the Act specifies the application of 
an intern and resident-to-bed (IRB) ratio cap, stating that the IRB 
ratio ``may not exceed the ratio of the number of interns and 
residents, subject to the limit under clause (v), with respect to the 
hospital for its most recent cost reporting period to the hospital's 
available beds * * * during that cost reporting period.'' As specified 
under the regulations at Sec.  412.105(a)(1)(i), an IRB ratio is 
calculated for a hospital based generally on the ratio of FTE residents 
(as limited by the regulation at Sec.  412.105(f)) in the numerator to 
the number of available beds (which is described at Sec.  
412.105(1)(b)) in the denominator. Furthermore, section 
1886(d)(5)(B)(viii) of the Act specifies that rules similar to the 
rules under section 1886(h)(4)(H) of the Act (special rules for new 
teaching programs and affiliations) shall apply for purposes of the IME 
FTE cap and the IRB ratio.
b. Regulatory Changes Issued in 2006 To Address Certain Emergency 
Situations
    As explained above, the Secretary's authority under section 1135 of 
the Act is prompted by the occurrence of an emergency or disaster that 
leads to designation of a section 1135 emergency area, and continues 
throughout a section 1135 emergency period. For example, when Hurricane 
Katrina occurred on August 29, 2005, disrupting health care operations 
and medical residency training programs at teaching hospitals in New 
Orleans and the surrounding area, the conditions were met for the 
Secretary to establish an emergency area and emergency period under 
section 1135(g) of the Act, which he did for the Gulf Coast region on 
August 31, 2005. Shortly after Hurricane Katrina occurred, CMS was 
informed by hospitals in New Orleans that the training programs at many 
teaching hospitals in the city were closed as a result of the disaster 
and that the displaced residents were being transferred to training 
programs at hospitals in other parts of the country. At the time, the 
existing regulations did not adequately address the Medicare GME 
payment issues faced by hospitals located in a section 1135 emergency 
area that were affected by the disaster, and by hospitals that trained 
displaced residents from a section 1135 emergency area.
    Specifically, the medical residency training programs at many 
teaching hospitals in New Orleans and surrounding areas were 
temporarily closed (either partially or completely) in the aftermath of 
Hurricane Katrina. Hurricane Rita, which followed Katrina by less than 
a month, further exacerbated the disaster conditions along the Gulf 
Coast. As a result, the displaced residents from the section 1135 
emergency area were transferred to other hospitals (which included 
hospitals located in States outside of the emergency area) to continue 
their medical residency training. Hospitals in the section 1135 
emergency area also informed CMS that, while many residents would be 
able to return to their original programs to complete residency 
training as these hospitals gradually rebuild their programs after the 
hurricanes, some residents may need to remain at other hospitals for an 
extended period of time.
    In developing a policy to provide hospitals flexibility in 
responding to a disaster, we have stated that we must balance two 
priorities. First, we believe that in disaster situations, to the 
extent permitted under the statute, the policy should facilitate the 
continuity of GME, minimizing the disruption of residency training. 
Second, the policy should take into account that the training programs 
at certain hospitals located in a section 1135 emergency area may have 
been severely disrupted by a disaster and that these hospitals will 
usually want to rebuild their GME programs as soon as possible. 
Accordingly, we amended the Medicare regulations on April 12, 2006, in 
an interim final rule with comment period published in the Federal 
Register (71 FR 18654). Specifically, we revised Sec.  413.75(b) to 
include definitions of home hospital, host hospital, section 1135 
emergency area, section 1135 emergency period, and emergency Medicare 
GME affiliated group. We also revised Sec.  413.79(f) to set forth the 
requirements of an emergency Medicare GME affiliation agreement. The 
existing regulation at Sec.  413.75(b) specifies that hospitals may 
only form a Medicare GME affiliated group (that is, a regular, not an 
emergency, Medicare GME affiliated group) with other hospitals if they 
are in the same or contiguous urban or rural areas, if they are under 
common ownership, or if they are jointly listed as program sponsors or 
major participating institutions in the same program. The provisions 
for a regular Medicare GME affiliation at Sec.  413.79(f) permit 
participating teaching hospitals to aggregate and ``share'' FTE caps 
during a specified academic year. The Medicare GME affiliation 
regulations allow hospitals that need to either decrease or increase 
their FTE resident counts to reflect the normal movement of residents 
among affiliated hospitals to do so for the agreed-upon training years. 
Hospitals that affiliate must submit a Medicare GME affiliation 
agreement, as specified at Sec.  413.75(b), to their CMS fiscal 
intermediary or MAC and to CMS no later than July 1 of the relevant 
academic year. Each hospital in the Medicare GME affiliated group must 
have a shared rotational arrangement with at least one other hospital 
within the Medicare GME affiliated group, and all of the hospitals 
within the Medicare GME affiliated group must be connected by a series 
of shared rotational arrangements. The net effect of the adjustments to 
hospitals' FTE resident caps, whether positive or negative on a 
hospital-specific basis, in the aggregate must not exceed zero. While 
additional hospitals may not be added to the Medicare GME affiliated 
group after July 1 of a year, amendments to the affiliation agreement 
to adjust the distribution of the number of FTE residents in the 
original Medicare GME affiliation among the hospitals that are part of 
the Medicare GME affiliated group can be made through June 30 of the 
academic year for which they are effective.
    The April 12, 2006 interim final rule with comment period (70 FR 
18654

[[Page 48639]]

through 18667) modified the regulations at Sec.  413.75(b) and Sec.  
413.79(f) and provided the flexibility for hospitals whose medical 
residency programs have been disrupted in a section 1135 emergency area 
to enter into emergency Medicare GME affiliation agreements with other 
hospitals where the hospitals may not meet the regulatory requirements 
for regular Medicare GME affiliations. Under an emergency affiliation, 
hospitals training displaced residents from a section 1135 emergency 
area can specify temporary adjustments to their FTE resident caps to 
permit them to receive Medicare direct and indirect GME payments 
relating to the displaced residents, even as the hospitals affected by 
the emergency event are rebuilding their training programs. The April 
12, 2006 interim final rule with comment period (70 FR 18654 through 
18667) defined the hospitals that would be permitted to enter into 
emergency Medicare GME affiliation agreements. First, we defined a home 
hospital as a hospital that meets all of the following: (1) Is located 
in a section 1135 emergency area; (2) had its inpatient bed occupancy 
decreased by 20 percent or more as the result of a section 1135 
emergency period so that it is unable to train the number of residents 
it originally intended to train in that academic year; and (3) needs to 
send the displaced residents to train at a host hospital. Second, we 
defined a host hospital as a hospital training residents displaced from 
a home hospital.
    In the April 12, 2006 interim final rule with comment period (70 FR 
18654 through 18667), we specified that the emergency Medicare GME 
affiliation agreement must be written, signed, and dated by responsible 
representatives of each participating hospital and must: (1) List each 
participating hospital and its provider number, and specify whether the 
hospital is a home or host hospital; (2) specify the effective period 
of the emergency Medicare GME affiliation agreement (which must, in any 
event, terminate no later than at the conclusion of 2 academic years 
following the academic year in which the section 1135 emergency period 
began); (3) list each participating hospital's IME and direct GME FTE 
caps in effect for the current academic year before the emergency 
Medicare GME affiliation (that is, if the hospital was already a member 
of a regular Medicare GME affiliated group before entering into the 
emergency Medicare GME affiliation, the emergency Medicare GME 
affiliation must be premised on the FTE caps of the hospital as 
adjusted per the regular Medicare GME affiliation agreement, and not 
include any slots gained under section 422 of the MMA); and (4) specify 
the total adjustment to each hospital's FTE caps in each year that the 
emergency Medicare GME affiliation agreement is in effect, for both 
direct GME and IME, that reflects a positive adjustment to the host 
hospital's (or hospitals') direct and/or indirect FTE caps that is 
offset by a negative adjustment to the home hospital's (or hospitals') 
direct and/or indirect FTE caps of at least the same amount. The sum 
total of participating hospitals' FTE caps under the emergency Medicare 
GME affiliation agreement may not exceed the aggregate adjusted caps of 
the hospitals participating in the emergency Medicare GME affiliated 
group before entering into an emergency affiliation. A home hospital's 
IME and direct GME FTE cap reduction under an emergency Medicare GME 
affiliation agreement is limited to the home hospital's IME and direct 
GME FTE resident caps in effect for the academic year, in accordance 
with regulations at Sec.  413.79(c) or Sec.  413.79(f)(1) through 
(f)(5), that is, the hospital's base year FTE resident caps as adjusted 
by any and all existing regular Medicare GME affiliation agreements. 
Finally, as we stated in the April 12, 2006 interim final rule with 
comment period, amendments to the emergency Medicare GME affiliation 
agreement to adjust the distribution of the number of FTE residents in 
the original emergency Medicare GME affiliation among the hospitals 
that are part of the emergency Medicare GME affiliated group can be 
made through June 30 of the academic year for which it is effective (71 
FR 18662).
    In summary, the April 12, 2006 interim final rule with comment 
period made changes as follows:
     To allow host hospitals to count displaced residents for 
IME and direct GME payment purposes, host hospitals and home hospitals 
were permitted to enter into emergency Medicare GME affiliation 
agreements effective retroactive to the date of the first day of the 
section 1135 emergency period.
     Through emergency Medicare GME affiliation agreements, 
home hospitals were permitted to affiliate with host hospitals anywhere 
in the country. That is, a host hospital may be located in any State 
and may receive a temporary adjustment to its FTE caps to reflect 
displaced residents (subject to the aggregate home and host hospitals' 
FTE resident caps).
     Emergency Medicare GME affiliation agreements were 
required to be submitted to CMS with a copy to the CMS fiscal 
intermediary or MAC by the later of 180 days after the section 1135 
emergency period begins or by July 1 of the academic year in which the 
emergency Medicare GME affiliation agreement is effective. However, for 
hospitals affected by Hurricanes Katrina and Rita, the deadline was 
subsequently extended to October 9, 2006. (We refer readers to the 
final rule published in the Federal Register on July 6, 2006, for a 
detailed discussion (71 FR 38264 through 38266)).
     The effective period of the emergency Medicare GME 
affiliation agreement was permitted to begin on or after the first day 
of a section 1135 emergency period, and must terminate no later than at 
the conclusion of 2 academic years following the academic year during 
which the section 1135 emergency period began. (We note that in a 
subsequent interim final rule with comment period, published in the 
Federal Register on November 27, 2007, the effective period was 
subsequently extended by 2 additional years (72 FR 66893 through 
66898).) We summarize the changes addressed in the November 27, 2007 
interim final rule with comment period in the section that follows.
     During the effective period of the emergency Medicare GME 
affiliation agreement, hospitals in the emergency Medicare GME 
affiliated group were not required to participate in a shared 
rotational arrangement (as they would be under a regular Medicare GME 
affiliation agreement).
     Host hospitals were allowed an exception from the 
otherwise applicable rolling average resident count for FTE residents 
added as a result of an emergency Medicare GME affiliation agreement, 
but only during the period from August 29, 2005 to June 30, 2006.
     Due to the infrastructure damage and continued disruption 
of operations experienced by medical facilities, and the consequent 
disruption in residency training caused by Hurricanes Katrina and Rita 
in 2005, there was an urgent need for emergency Medicare GME 
affiliation agreements to be effective retroactive to the date of the 
hurricanes. Section 1871(e)(1)(A) of the Act, as amended by section 
903(a)(1) of the MMA, generally prohibits the Secretary from making 
retroactive substantive changes in policy unless retroactive 
application of the change is necessary to comply with statutory 
requirements, or failure to apply the change retroactively would be 
contrary to the public interest. Because existing regulations did not 
adequately address the issues faced by hospitals that are located in 
the section 1135 emergency area, or hospitals that

[[Page 48640]]

assisted by training displaced residents from the section 1135 
emergency area, and because we believed hospitals affected by 
Hurricanes Katrina and Rita would otherwise have faced dramatic 
financial hardship and the recovery of graduate medical education 
programs in the emergency area would have been impeded, we found that 
failure to apply retroactively the regulatory changes contained in the 
April 12, 2006 interim final rule with comment period would be contrary 
to the public interest. Thus, the provisions of the April 12, 2006 
interim final rule with comment period were made effective 
retroactively as of August 29, 2005.
    For a detailed discussion on each of the above emergency Medicare 
GME affiliation provisions, we refer readers to the April 12, 2006 
interim final rule with comment period (71 FR 18654 through 18667).
c. Additional Regulatory Changes Issued in 2007 To Address GME Issues 
in Emergency Situations
    After the establishment of the emergency Medicare GME affiliation 
provisions in the April 12, 2006 interim final rule with comment 
period, we monitored the application of the emergency Medicare GME 
affiliation agreement rules in order to assess whether those regulatory 
changes appropriately addressed the needs of hospitals located in the 
section 1135 emergency area in the aftermath of Hurricanes Katrina and 
Rita. We understand that GME programs in the affected area were finding 
it necessary to continue to adjust the location of resident training, 
both within the emergency area and in other States, as hospitals 
located within the section 1135 emergency area continued to reopen beds 
at different rates, and as feedback from accreditation surveys 
warranted educational adjustments. Furthermore, stakeholders in 
Louisiana informed CMS that they believed fluidity in GME programs 
would continue for several more years, and the training of residents in 
the area is not likely to reach stability until permanent replacement 
facilities are established and functioning in the emergency area. As a 
result, we believed the provisions first established in the April 12, 
2006 interim final rule with comment period needed to be further 
modified to meet the two priorities stated earlier. That is, we 
believed that the policy should facilitate the continuity of GME by 
minimizing the disruption of residency training and also enable home 
hospitals to rebuild their GME programs as soon as possible.
    Therefore, we issued a second interim final rule with comment 
period in the Federal Register on November 27, 2007 (72 FR 66893). In 
that second interim final rule with comment period, we modified the 
regulations for emergency Medicare GME affiliated groups at Sec.  
413.79(f)(6) to extend relief to home and host hospitals affected by 
disruptions in residency programs in the section 1135 emergency area 
declared after Hurricanes Katrina and Rita, as well as to provide 
relief for similar challenges in any future emergency situation. We 
noted that we had received a number of comments on the interim final 
rule with comment period issued on April 12, 2006. However, we believed 
it was beneficial to provide the public with the opportunity to submit 
formal comments on these latest changes in the context of the current 
training situation in the area affected by Hurricanes Katrina and Rita, 
and to respond to all comments in a subsequent final rule.
    In summary, the November 27, 2007 interim final rule with comment 
period made changes as follows:
(1) Extension of the Effective Period of Emergency Medicare GME 
Affiliation Agreements
    In the November 27, 2007 interim final rule with comment period (72 
FR 66893 through 66898), we further modified the regulations at Sec.  
413.75(b) and Sec.  413.79(f) to allow hospitals to enter into 
emergency Medicare GME affiliation agreements with increased 
flexibility. First, for emergency Medicare GME affiliation agreements 
involving a host hospital located in a different State from the home 
hospital (hereinafter, an ``out-of-State host hospital''), the 
permissible effective period for such agreements was extended from up 
to 3 years (that is, the year in which the section 1135 emergency 
period began plus 2 subsequent academic years) to up to 5 years (that 
is, the year in which the section 1135 emergency period began plus 4 
subsequent academic years). However, emergency Medicare GME affiliation 
agreements involving out-of-State host hospitals during these two 
additional periods may only apply with respect to the actual residents 
that were displaced from training in a hospital located in the section 
1135 emergency area. By ``actual residents that were displaced from 
training in a hospital located in the section 1135 emergency area,'' we 
indicated that we meant residents in an approved medical residency 
training program at a home hospital at the time of the disaster that 
were either actually training at the home hospital or were scheduled to 
rotate to the home hospital during the training program. For emergency 
Medicare GME affiliation agreements involving a host hospital located 
in the same State as the home hospital (hereinafter, an ``in-State host 
hospital''), the permissible effective period for such agreements was 
extended from up to 3 years to up to 5 years for any resident (even 
those not displaced from training in a hospital located in the 1135 
emergency area). We provided that emergency Medicare GME affiliation 
agreements involving in-State host hospitals during these additional 2 
academic years need not be limited to only the actual residents that 
were displaced immediately following the disaster. In other words, such 
agreements may apply with respect to residents that were actually 
displaced as a result of the disaster, as well as to new residents that 
were not training in the program at the time the disaster occurred. 
With the 2-year extension described above, the effective period of an 
emergency Medicare GME affiliation agreement may begin with the first 
day of a section 1135 emergency period, and must terminate no later 
than at the end of the fourth academic year following the academic year 
during which the section 1135 emergency period began (for Hurricanes 
Katrina and Rita, this would be June 30, 2010). As home hospitals 
recover the ability to train residents after a disaster, the effective 
period for emergency Medicare GME affiliation agreements is intended to 
allow home hospitals to balance their desire to return residents to 
their original training sites, with their need to be given the 
opportunity to rebuild their programs incrementally. We believed 
extending the applicability of emergency affiliations for out-of-State 
host hospitals for 2 years (for a total of up to 5 years) only for the 
actual residents displaced from home hospitals allows such displaced 
residents to complete their training outside the affected area while 
providing an incentive for home hospitals to begin training new 
incoming residents locally (or closer to the home hospital), increasing 
the likelihood for the residents to stay and practice in the area after 
their training is completed. Affected hospitals in the New Orleans area 
have informed CMS that the majority of residents will tend to remain in 
the same State to practice where they had trained. We believe this 
makes intuitive sense and the policy established in the November 27, 
2007 interim final rule with comment period provides additional impetus 
for residents to return to the State where

[[Page 48641]]

their ``home hospital'' is located, increasing the likelihood that the 
physicians will stay and practice there, and encouraging rebuilding of 
the health care infrastructure affected by the section 1135 emergency. 
In the interim final rule with comment period, we noted that this is 
consistent with needs expressed by affected hospitals in the New 
Orleans area for more physicians to replace the large numbers that left 
immediately after the hurricanes. Furthermore, after the expiration of 
the initial 3 years of the emergency Medicare GME affiliation agreement 
effective period, we believe it would be appropriate to begin bringing 
emergency Medicare GME affiliation rules into accord with regular 
Medicare GME affiliation rules which specify geographical limits. That 
is, regular Medicare GME affiliation rules limit hospitals 
geographically to affiliations with other hospitals that are located in 
the same urban or rural area (as those terms are defined under Sec.  
412.62(f)) or in a contiguous area.
(2) Provisions To Allow Hospitals To Count Displaced Residents Training 
in Nonhospital Sites
    In the November 27, 2007 interim final rule with comment period, we 
noted that it had come to our attention that in the wake of Hurricanes 
Katrina and Rita, host hospitals, many of which received large numbers 
of displaced residents, were hard pressed to find training sites for 
these unanticipated residents (72 FR 66893 through 66898). Many host 
hospitals called upon community physician practices, clinics, and other 
nonhospital settings to supplement existing training locations and 
accommodate the displaced residents. Some of the host hospitals that 
took in displaced residents had never before had any residency training 
programs, and therefore were new to Medicare rules regarding graduate 
medical education. In the haste and confusion surrounding this 
unprecedented displacement of residents, many host hospitals arranged 
for displaced residents to begin training in nonhospital sites without 
first establishing a written agreement, as specified in Sec.  
413.78(e), between the hospital and nonhospital site. Similarly, home 
hospitals that may have sent some of their residents away to train at 
host hospitals, while continuing to train a reduced number of residents 
in the home hospital program, may have found that the usual nonhospital 
sites for the residents in that program had also been negatively 
affected by the disaster. Consequently, home hospitals may have hastily 
arranged for displaced residents to begin training in alternative 
nonhospital sites and, due to the reduced administrative capability in 
the aftermath of the disaster, home hospitals may not have been able to 
establish a written agreement, as specified in Sec.  413.78(e), with 
the nonhospital site before residents started training in the 
nonhospital site. Also, during the unusual circumstances following the 
disaster, many hospitals did not actually incur all or substantially 
all of the costs of the training program in the nonhospital site in 
accordance with our regulations at Sec.  413.78(e)(3)(i) or (f)(3)(i).
    The November 27, 2007 interim final rule with comment period 
provided hospitals that are participating in emergency Medicare GME 
affiliation agreements with increased flexibility in submitting written 
agreements relating to training that occurs in nonhospital sites (72 FR 
66893 through 66898). Home or host hospitals with valid emergency 
Medicare GME affiliation agreements training displaced residents in a 
nonhospital site may submit a copy of the written agreement, as 
specified under Sec.  413.78(e)(iii) and (f)(iii) as applicable, to the 
CMS contractor servicing the hospital by 180 days after the first day 
the resident began training at the nonhospital site. We noted that, as 
with the existing rules for written agreements specified at Sec.  
413.78(f), amendments to the written agreement can be made through June 
30 of the academic year for which it is effective.
    Furthermore, under current rules, hospitals that are training 
residents at nonhospital sites have two options as specified by the 
regulations at Sec.  413.78(e) and Sec.  413.78(f). That is, hospitals 
must either have a written agreement in place before the training 
occurs or they must pay ``all or substantially all'' of the costs for 
the training program in the nonhospital setting attributable to 
training that occurs during a month by the end of the third month 
following the month in which the training in the nonhospital site 
occurred. In the November 27, 2007 interim final rule with comment 
period, we provided additional flexibility in the ``concurrent 
payment'' option for home or host hospitals that have emergency 
Medicare GME affiliation agreements and are training displaced 
residents in nonhospital sites by extending the time allowable for 
``concurrent payment'' from 3 months to 6 months (72 FR 66893 through 
66898). That is, we permitted a home or host hospital with a valid 
emergency Medicare GME affiliation agreement to incur ``all or 
substantially all'' of the costs for the training program in the 
nonhospital setting attributable to training that occurs during a month 
by the end of the sixth month following the month in which the training 
in the nonhospital site occurred.
    In the case of the section 1135 emergency resulting from Hurricanes 
Katrina and Rita, we noted that the time limit we adopted to submit 
written agreements or to meet the ``concurrent payment'' requirement 
may have already passed. Therefore, we provided that, for residents 
training in nonhospital sites during the period of August 29, 2005, to 
November 1, 2007, home or host hospitals with valid emergency Medicare 
GME affiliation agreements could submit written agreements or incur 
``all or substantially all'' of the costs of the training program (that 
is, the ``concurrent payment'' option) to cover those specific 
residents by April 29, 2008.
    For a detailed discussion of the emergency Medicare GME affiliation 
provisions addressed in this section, we refer readers to the November 
27, 2007 interim final rule with comment period (72 FR 66893 through 
66898).
d. Public Comments Received on the April 12, 2006 and November 27, 2007 
Interim Final Rules With Comment Period
    In the April 12, 2006 and November 27, 2007 interim final rules 
with comment period, we revised the regulations at Sec.  413.79(f) to 
provide for more flexibility than would have been possible under 
regular Medicare GME affiliations to allow home hospitals to 
efficiently find training sites for displaced residents. Under the 
flexibility provided by the emergency Medicare GME affiliated group 
provisions as specified at Sec.  413.79(f)(6), decisions regarding the 
temporary transfers of FTE resident cap slots, including how to 
distribute slots in situations where the home hospital was training a 
number of residents in excess of its cap before the disaster, as well 
as the tracking of those FTE resident slots, were left to the home and 
host hospitals to work out among themselves. However, the home and host 
hospitals were required to include much of this information in their 
emergency Medicare GME affiliation agreements submitted both to CMS and 
the CMS contractor, as specified under Sec.  413.79(f)(6). Furthermore, 
because hospitals were permitted to amend their emergency Medicare GME 
affiliation agreements (on or before June 30 of the relevant academic 
year) to reflect the actual training situation among the hospitals 
participating in the emergency Medicare GME affiliated group, hospitals 
were provided with a great

[[Page 48642]]

degree of flexibility to accommodate any change in residency training 
circumstances within the emergency Medicare GME affiliated group. We 
note that the emergency Medicare GME affiliation provisions are 
intended to enable and facilitate the continued training of residents 
displaced from a section 1135 emergency area. These provisions are not 
intended to provide increased flexibility to shift FTE resident cap 
slots to other hospitals in the country simply to maximize Medicare IME 
and direct GME payments.
    We received a number of comments on the interim final rules issued 
on April 12, 2006 and November 27, 2007 (71 FR 18654 through 18667 and 
72 FR 66893 through 66898, respectively). We noted in the November 27, 
2007 interim final rule with comment period that we believed it would 
be beneficial to provide the public with the opportunity to submit 
formal comments to the latest changes implemented in the November 27, 
2007 interim final rule, in the context of the ongoing training 
situation in the area affected by Hurricanes Katrina and Rita, and that 
we would respond to comments submitted and finalize our policies 
relating to both the April 12, 2006 and the November 27, 2007 interim 
final rules in a subsequent final rule. A summary of those public 
comments and our responses follow.
    Comment: Commenting on the April 12, 2006 interim final rule, one 
commenter noted that the interim final rule providing for emergency 
Medicare GME affiliation agreements would have been unnecessary if the 
Medicare FTE resident caps were lifted. The commenter expressed 
appreciation for CMS' efforts to use its regulatory authority to work 
within the statutory framework for GME. However, the commenter noted 
that the Medicare FTE resident caps, implemented a number of years ago 
by the BBA of 1997, have generated significant problems for teaching 
hospitals and medical schools that sponsor residency programs, and have 
been detrimental to their educational policies and decisions. 
Specifically, the commenter noted that, to the extent a home hospital 
is training residents in excess of its FTE resident caps at the time a 
disaster occurs, there would not be enough cap slots to distribute to 
host hospitals through an affiliation agreement after an emergency. 
Furthermore, the commenter stated that, ``In other areas, decisions to 
impose a `freeze' are temporary in nature. In health care and in 
Medicare in particular, we are unaware of policies that have not 
factored in the need for modifications after a certain period of 
time.'' The commenter believed it is time to reconsider FTE resident 
caps and urged CMS to work with Congress to address this policy.
    Response: The Conference Report for the BBA of 1997 indicated that 
``the Secretary's flexibility is limited by the conference agreement 
that the aggregate number of FTE residents should not increase over 
current levels.'' (H. Conf. Rept. No. 105-217, p. 822.) That is, among 
the GME reforms included in the BBA of 1997 was a limit that was placed 
on the number of allopathic and osteopathic FTE residents that can be 
included in a hospital's direct GME and IME FTE resident counts for 
Medicare payment purposes. Because there was an implicit incentive for 
hospitals to train more FTE residents (the more FTEs, the greater the 
payment), the direct GME and IME resident caps were implemented to 
limit the potential for increases in GME spending. While the commenter 
asserted that the FTE resident caps adopted by the BBA of 1997 have 
been detrimental to hospitals' and medical schools' educational 
policies and decisions, the FTE cap policy was intended to address 
concerns that the system of payment to hospitals for GME was 
encouraging an oversupply of physicians, a maldistribution of 
physicians across the country (for example, not enough physicians in 
rural areas), and a narrow focus on training residents in inpatient 
settings. In general, the BBA of 1997 sought to limit the growth of 
training programs at existing teaching hospitals in urban areas, while 
providing flexibility in order to encourage residency training programs 
to grow in rural areas. Dental and podiatric residents were, and still 
are, exempt from the caps as the concerns about an oversupply of 
practitioners did not apply to dentistry and podiatry.
    Although the commenter believed that other Medicare policies 
recognize the need for modifications over time and that the imposition 
of a permanent ``freeze'' on the number of resident slots that Medicare 
would recognize for purposes of direct and indirect GME payments was 
inconsistent with that general practice, language in the Conference 
Report for the BBA of 1997 indicated that Congress anticipated the need 
for proper flexibility to respond to changing needs, especially given 
the sizeable number of urban hospitals that were not teaching hospitals 
at the time the direct GME and IME FTE resident caps were implemented, 
and that might elect to initiate new training programs in the future 
(H. Conf. Rept. No. 105-217, pp. 821-822). Accordingly, the statute 
allows non-teaching hospitals to become teaching hospitals and to 
receive direct GME and IME FTE resident caps if these hospitals 
participate in training residents in new programs that are accredited 
for the first time on or after January 1, 1995. In addition, rural 
hospitals, even those with existing teaching programs, may receive 
increases to their IME and direct GME FTE resident caps for training 
residents in new programs that are accredited for the first time on or 
after January 1, 1999.
    The BBA of 1997 also provided flexibility for hospitals that cross-
train residents to share their respective FTE resident caps. The 
statute authorized the Secretary to adopt rules under which hospitals 
could apply the FTE resident caps in the aggregate, and the Secretary 
adopted such rules. By entering into ``Medicare GME affiliation 
agreements,'' hospitals may combine their individual FTE resident caps 
to create ``aggregate caps'' for direct GME and IME, respectively. In 
this situation, the number of FTE residents that a particular hospital 
is permitted to count for direct GME and IME payment purposes may vary 
from the individual hospital's original FTE resident caps. However, the 
aggregate total number of FTE residents counted by all the hospitals 
participating in a Medicare GME affiliation agreement cannot exceed the 
aggregate total of the hospitals' direct GME and IME FTE resident caps. 
Consistent with the statute, in emergency situations, the emergency 
Medicare GME affiliation agreement provisions allow home hospitals the 
flexibility to temporarily transfer a portion or all of their FTE 
resident caps to host hospitals that are training the home hospitals' 
displaced residents. In contrast to the regular Medicare GME 
affiliation rules, for emergency Medicare GME affiliations, there is no 
requirement that the hospitals are ``cross-training'' residents.
    In recent years, members of the GME community have asserted that, 
in general and on a national basis, an oversupply of physicians is no 
longer a pressing issue, although concerns that there is a 
maldistribution of physicians across the country (for example, not 
enough physicians in rural areas) and a narrow focus on training 
residents in inpatient settings still continue. In 2005, Congress took 
action to provide some relief to hospitals that were in need of 
additional FTE resident cap slots. Section 422 of the MMA authorized 
the one-time redistribution of FTE resident cap slots from hospitals 
that were not fully utilizing those positions to hospitals that 
demonstrated the

[[Page 48643]]

likelihood that they could use the FTE resident slots in order to 
expand or create new programs or to permit them to count FTE residents 
they were already training in excess of their existing FTE resident 
caps, with priority given to rural hospitals. This redistribution of 
FTE resident slots to support new or existing programs facilitated a 
more effective use of Medicare GME funding. In addition, we are aware 
that, even though a number of hospitals currently are training a number 
of residents in excess of their FTE resident caps, and are not 
permitted to count those FTE residents for purposes of Medicare direct 
and indirect GME payments, the hospitals are nonetheless effectively 
training residents at levels above their BBA FTE resident caps either 
because alternative sources for GME funding have been identified to 
support the training or because the hospitals have determined that even 
without Medicare funding relating to those slots, the benefits the 
hospitals gain from training those additional residents exceed the cost 
to the hospitals. We note that if the statutory provisions adopted in 
the BBA of 1997 and the MMA of 2003 are revised, we would modify our 
policies accordingly.
    Comment: A number of commenters expressed concern that the 
application of a 3-year rolling average FTE resident count is 
detrimental to home hospitals. Some commenters disagreed with CMS that 
a home hospital could benefit from the 3-year rolling average because, 
the commenters argued, when a hospital abruptly closes, it has no 
Medicare patient load and thus cannot receive GME reimbursement. The 
commenters suggested that CMS allow home hospitals to count FTE 
residents in a fashion similar to the way hospitals are permitted to 
count residents in a new program so that home hospitals would not be 
subject to the 3-year rolling average FTE resident count for a preset 
number of years while they rebuild their GME programs.
    Response: Section 1886(d)(5)(B)(vi)(II) of the Act for IME and 
section 1886(h)(4)(G) of the Act for direct GME require that a 
hospital's count of FTE residents in the current year be based on a 3-
year ``rolling average'' count of FTE residents, that is, the average 
of the number of residents in the current year and the 2 immediate 
prior years. This is a statutory requirement we believe is intended to 
distribute the impact of increasing or decreasing the number of 
residents at a hospital over a 3-year period. Thus, if a hospital 
increases or decreases the number of FTE residents in a given year, the 
hospital's FTE resident count and consequent direct or indirect GME 
payment is impacted by only one-third of the change in FTEs in that 
year, two-thirds in the second, and all of the change only in the third 
year. We note that the 3-year rolling average can work to home 
hospitals' advantage because the effect from the decrease in the number 
of FTE residents a home hospital is training after an emergency event 
is spread out over 3 years and the home hospitals will be paid based 
upon a higher number of FTE residents than they actually train for 
several years after the emergency event. However, we agree that, in 
order for the home hospital to benefit from the nature of the 3-year 
rolling average, the home hospital must be operating sufficiently to 
provide inpatient care for Medicare beneficiaries. We note that 
Medicare GME payments (both direct GME and IME) are dependent on a 
hospital's Medicare patient load because the payments are intended to 
reimburse the hospital for Medicare's share of GME costs. We note that 
even if a hospital receives little or no Medicare funding for its GME 
programs due to low or no Medicare inpatient utilization, a hospital 
typically supports its training programs though a number of funding 
sources which may include universities, schools of medicines, and other 
Federal, State, and local grant programs.
    We appreciate the commenter's concern that after an emergency 
event, there is a critical need for home hospitals to continue to 
receive GME funding in order to engage in the rebuilding of their 
programs. However, the statutory provisions regarding the 3-year 
rolling average still apply. In response to the commenter that 
suggested we allow home hospitals to count FTE residents that return to 
the home hospital's program (whether they are the transferred residents 
returning home from host hospitals or ``new'' residents starting to 
train in the hospital's existing programs), without subjecting those 
FTE residents to the 3-year rolling average, the statute does not 
provide for such an exception to the 3-year rolling average for 
residents training in an existing program. However, we note that 
following an emergency event, home hospitals may be eligible for non-
Medicare emergency relief funds that are specifically appropriated and 
intended to provide relief to hospitals for losses incurred due to the 
emergency event.
    Comment: Commenters expressed appreciation for the exception from 
the otherwise applicable 3-year rolling average resident count for FTE 
residents added as a result of an emergency Medicare GME affiliation 
agreement during the period from August 29, 2005, to June 30, 2006. The 
commenters urged CMS to extend the exception to the 3-year rolling 
average in the final rule so that host hospitals training displaced 
residents could count and thus receive payments relating to those FTE 
residents in the same year, rather than incrementally over 3 years. The 
commenters believed that host hospitals should not be penalized for 
taking in displaced residents, nor should they be discouraged from 
accepting these residents because they will not receive timely 
payments. The commenters also noted that the current ``closed program'' 
regulations at Sec.  413.79(h) provide for an exception to the 3-year 
rolling average for hospitals that take in residents from a closed 
program. The majority of commenters recommended that CMS should extend 
the 3-year rolling average exception, that is, permit host hospitals to 
count displaced residents in full for as long as the emergency Medicare 
GME affiliations are effective. Alternatively, another commenter 
suggested that CMS extend the exception to the 3-year rolling average 
but with an annual reevaluation for its necessity as a financial 
incentive for hospitals to keep training displaced residents.
    Response: As we stated in the April 12, 2006 interim final rule (70 
FR 18654 through 18667), CMS was aware that, based on initial guidance 
from Qs & As posted on the CMS Web site shortly after Hurricane 
Katrina, many host hospitals took in displaced residents under the 
belief that, under the ``closed program'' regulations, they would not 
be subject to the 3-year rolling average rule for training displaced 
residents after Hurricanes Katrina and Rita. In fact, because many of 
the training programs in the section 1135 emergency area were 
incrementally reopened in the aftermath of Hurricanes Katrina and Rita, 
the ``closed program'' regulations could no longer be used. In 
response, we developed the policy for emergency Medicare GME 
affiliation agreements and established the regulations in an interim 
final rule with comment period on April 12, 2006. Therefore, between 
August 29, 2005 (when Hurricane Katrina occurred) and April 12, 2006, 
it is understandable that hospitals might have assumed that, based on 
the ``closed program'' regulations, they would not be subject to the 3-
year rolling average rule for training displaced residents. Because we 
recognized that, as a result of the limited options under existing 
regulations and our initial guidance immediately following the Gulf 
Coast hurricanes, many host hospitals would have expected the 
application of the

[[Page 48644]]

``closed program'' regulations, under which the 3-year rolling average 
rules do not apply, we provided for a narrow, time-limited exception to 
the 3-year rolling average rule for host hospitals that trained 
displaced residents from August 29, 2005, to June 30, 2006 (pursuant to 
a valid emergency Medicare GME affiliation agreement). The April 12, 
2006 interim final rule with comment period allowed host hospitals with 
valid emergency Medicare GME affiliation agreements to initially 
exclude the displaced FTE residents training at the host hospital from 
August 29, 2005 to June 30, 2006, from their regular 3-year rolling 
average calculation, and instead, to immediately add those displaced 
FTE residents to the hospital's 3-year rolling average FTE resident 
count, with the effect that the host hospital could receive GME 
payments relating to the displaced FTE residents in the first year 
rather than having them spread over 3 years.
    In response to the commenters who requested that the exception to 
the 3-year rolling average be extended past June 30, 2006, we note that 
CMS provided for the narrow, time-limited exception from the 3-year 
rolling average rules because we recognized that host hospitals may 
have taken on displaced residents with the reasonable expectation, 
based on our guidance, that the displaced residents would be counted 
pursuant to the ``closed program'' regulations, under which the 3-year 
rolling average rules do not apply. We do not believe it would be 
appropriate, consistent with the statute, to extend the exception 
beyond the period immediately following the disaster during which there 
was a change in the rules regarding the treatment of displaced 
residents. We note that, in the case of the host hospital, application 
of the 3-year rolling average rule for periods after June 30, 2006, 
will result in 2 years of residual increases in the hospitals' FTE 
resident counts, permitting them to continue to receive increased GME 
payments relating to displaced residents even after the residents leave 
the host hospital.
    Comment: Some commenters requested that, in the event an emergency 
situation causes a hospital or program to close permanently, CMS should 
grant host hospitals an automatic increase in their FTE resident caps 
to allow the residents displaced from the closed hospital or program to 
complete their training without requiring additional documentation 
requirements. That is, the commenters believed that in cases of 
hospital or program closure due to an emergency event, any hospital 
training displaced residents from these closed hospitals or programs 
would not need to submit any further documentation as currently 
required by either the emergency Medicare GME affiliation agreement 
provisions at Sec.  413.79(f) or the closed program regulations at 
Sec.  413.79(h) in order to increase their FTE resident caps to be paid 
for the training of the displaced residents.
    Response: In the case where a hospital or program is closed 
permanently, the existing ``closed program'' and ``closed hospital'' 
regulations apply. We originally established the existing regulations 
at Sec.  413.79(h) because hospitals indicated a reluctance to accept 
additional residents from a closed hospital when they would not be 
permitted to count them for purposes of Medicare GME payments without a 
temporary adjustment to their caps. The regulations at Sec.  413.79(h) 
allow a temporary adjustment to a hospital's FTE resident cap if the 
following criteria are met: (a) The hospital is training additional 
residents from a hospital that closed or from a program that closed on 
or after July 1, 1996 (if the hospital with the closed program agrees, 
in a written statement, to temporarily reduce its FTE resident cap to 
offset the displaced residents trained by the receiving hospital); and 
(b) the hospital that is training the additional residents from the 
closed hospital or closed program submits a request to its fiscal 
intermediary/MAC at least 60 days after the hospital begins to train 
the residents for a temporary adjustment to its FTE cap. The hospital 
must also document that it is eligible for this temporary adjustment to 
its FTE cap by identifying the residents who have come from the closed 
hospital or closed program and have caused the hospital to exceed its 
cap, and specify the length of time that the adjustment is needed. 
After the displaced residents leave the hospital's training program or 
complete their residency program, the temporary cap adjustment expires 
for the hospital that received displaced residents, and the cap slots 
would either revert back to the original hospital with the closed 
program or, in the case of a closed hospital, the cap slots permanently 
expire. Accordingly, after an emergency event, in the case of a 
hospital closure as defined at Sec.  413.79(h)(1)(i), any hospital that 
trains displaced residents from the closed hospital may be permitted to 
use the ``closed hospital'' regulations at Sec.  413.79(h)(2) as 
described above. Moreover, in cases where a hospital's program is 
completely closed, as defined at Sec.  413.79(h)(1)(ii), any hospital 
that trains displaced residents from the closed program may be 
permitted to use the ``closed program'' regulations at Sec.  
413.79(h)(3). Alternatively, if a section 1135 emergency area has been 
declared, then hospitals may be permitted to use emergency Medicare GME 
affiliation agreement regulations as specified at Sec.  413.79(f). We 
believe it is necessary to require that hospitals training displaced 
residents from closed hospitals and closed programs provide 
documentation as specified in the above regulations in order to ensure 
that Medicare payments are being paid appropriately and not in excess 
of the FTE caps.
    Comment: Several commenters noted that, in the month immediately 
following Hurricane Katrina, many residents were not training anywhere. 
That is, while home hospitals were incurring significant training costs 
associated with the residents, arrangements had not yet been made for 
residents to continue their training at any hospital. Therefore, 
neither home hospitals nor host hospitals were counting these residents 
for Medicare GME payment purposes during this timeframe. Several 
commenters requested that home hospitals be allowed to annualize their 
11-month FTE resident counts to 12 months, or alternatively, to 
attribute the August 2005 FTE resident counts to September 2005 as 
well, so that home hospitals could be paid as if residents had been 
training at the home hospital in September.
    Response: While we understand that resident salaries and other 
costs may continue to be incurred even when the residents are prevented 
from training, as is the case after an emergency event that closes down 
their training sites, the Medicare statute provides for direct and 
indirect GME payments to hospitals only based on the actual time 
(counted in FTEs) that residents spend training at hospitals or, under 
certain circumstances, at nonhospital sites. We note that, as a result 
of an emergency event, hospitals may receive grants and other non-
Medicare types of relief payments from other authorities to address the 
hospitals' needs to cover losses due to a cessation of operations.
    Comment: Following the April 12, 2006 interim final rule with 
comment period, commenters urged CMS to address the situation where, in 
the confusion after the emergency events, home and host hospitals may 
have hastily arranged for displaced residents to begin training in 
nonhospital sites without first establishing a written agreement, as 
specified in Sec.  413.78(e), between the hospital and nonhospital

[[Page 48645]]

site. In addition, the commenters indicated that, in the confusion and 
haste under which arrangements were made for displaced residents to 
train in nonhospital sites, hospitals may not have actually incurred 
all or substantially all of the costs of the training program in the 
nonhospital site in a timely fashion in accordance with our regulations 
at Sec.  413.78(e)(3)(i) or (f)(3)(i). The commenters suggested CMS 
make accommodations for this period of confusion and modify the 
regulations at Sec.  413.78 to allow home and host hospitals additional 
time to comply with the written agreement and payment requirements 
required for hospitals to count residents training at nonhospital 
sites.
    Response: We acknowledged the commenters' concerns regarding the 
training of displaced residents in nonhospital sites after an emergency 
event and addressed this issue in the November 27, 2007 interim final 
rule with comment period (72 FR 66893 through 66898). As we discussed 
above, the November 27, 2007 interim final rule with comment period 
provided hospitals that are participating in emergency Medicare GME 
affiliation agreements with increased flexibility in submitting written 
agreements relating to training that occurs in nonhospital sites. Home 
or host hospitals with valid emergency Medicare GME affiliation 
agreements training displaced residents in a nonhospital site may 
submit a copy of the written agreement, as specified under Sec.  
413.78(e)(3)(iii) and (f)(3)(iii) as applicable, to the CMS contractor 
servicing the hospital by 180 days after the first day the resident 
began training at the nonhospital site.
    Furthermore, because the regulations at Sec.  413.78(f) specify two 
options: (1) That hospitals must either have a written agreement in 
place before the training occurs or (2) they must pay ``all or 
substantially all'' of the costs for the training program in the 
nonhospital setting attributable to training that occurs during a month 
by the end of the third month following the month in which the training 
in the nonhospital site occurred, we provided additional flexibility in 
the ``concurrent payment'' option for home or host hospitals that have 
emergency Medicare GME affiliation agreements and are training 
displaced residents in nonhospital sites by extending the time 
allowable for ``concurrent payment'' from 3 months to 6 months. That 
is, we permit a home or host hospital with a valid emergency Medicare 
GME affiliation agreement to incur ``all or substantially all'' of the 
costs for the training program in the nonhospital setting attributable 
to training that occurs during a month by the end of the sixth month 
following the month in which the training in the nonhospital site 
occurred.
    Finally, in the case of Hurricanes Katrina and Rita, we noted that 
the time limit we adopted to submit written agreements or to meet the 
``concurrent payment'' requirement may have already passed. Therefore, 
we extended the deadline so that for residents training in nonhospital 
sites during the period of August 29, 2005, to November 1, 2007, home 
or host hospitals with valid emergency Medicare GME affiliation 
agreements could submit written agreements or incur ``all or 
substantially all'' of the costs of the training program (that is, the 
``concurrent payment'' option) to cover those specific residents by 
April 29, 2008.
    We did not receive any comments in response to our modifications of 
the regulations at Sec.  413.78(e) and (f) as specified in the November 
27, 2007 interim final rule.
    Comment: The majority of commenters also responded to the April 12, 
2006 interim final rule with a strong recommendation that CMS allow 
emergency Medicare GME affiliation agreements to continue past the 
maximum of 3 academic years as we originally specified in the April 12, 
2006 interim final rule with comment period. The commenters stated that 
a residency program can take up to 5 years to complete, that fluidity 
in GME programs in the emergency area could continue for more than 3 
years, and that GME programs are not likely to reach stability until 
permanent replacement facilities are established and functioning in the 
emergency area. The commenters recommended that CMS extend the 
effective period of emergency Medicare GME affiliation agreements from 
up to 3 years to up to 5 years.
    Response: We agreed with the commenters' reasons for the necessity 
of extending the effective period of emergency Medicare GME affiliation 
agreements from up to 3 years to up to 5 years, and have already 
addressed this issue in the November 27, 2007 interim final rule with 
comment period (72 FR 66893 through 66898). In the November 27, 2007 
interim final rule with comment period, we extended the permissible 
effective period for emergency Medicare GME affiliations from up to 3 
years to up to 5 years, beginning with the first day of a section 1135 
emergency period, and terminating no later than at the end of the 
fourth academic year following the academic year during which the 
section 1135 emergency period began. However, we specified that for an 
out-of-State host hospital (that is, a host hospital located in a 
different state from the home hospital), FTE cap adjustments during the 
additional 2 years could apply only for the actual residents that were 
displaced immediately following the disaster. For host hospitals 
located in the same state as the home hospital, the FTE cap adjustments 
under the emergency Medicare GME affiliation agreement can apply to new 
residents that were not training in the home hospital's program at the 
time the disaster began. We stated that the extension of the 
permissible effective period for emergency Medicare GME affiliation 
agreements is intended to allow home hospitals to balance their desire 
to return residents to their original training sites as they recover 
the ability to train residents after a disaster, with their need to be 
given the opportunity to rebuild their programs incrementally. We 
explained that we believed extending the permissible effective period 
for emergency Medicare GME affiliation agreements with out-of-State 
host hospitals for 2 years (for a total of up to 5 years), but limiting 
such agreements to residents that were displaced from home hospitals 
immediately following a disaster, would allow the displaced residents 
to complete their training, while providing an incentive for home 
hospitals to begin training new incoming residents locally, increasing 
the likelihood that the residents would stay and practice in the area 
after their training is completed.
    We did not receive any public comments in response to the 
modification of the effective period for emergency Medicare GME 
affiliation agreements as specified in the November 27, 2007 interim 
final rule with comment period.
    Comment: The majority of commenters requested that CMS reconsider 
the deadline for submission of emergency Medicare GME affiliation 
agreements, stating that the deadline CMS originally required in the 
April 12, 2006 interim final rule with comment period was unmanageable.
    Response: In the April 12, 2006 interim final rule with comment 
period (70 FR 18654 through 18667), we required emergency Medicare GME 
affiliation agreements to be submitted to CMS with a copy to the CMS 
fiscal intermediary or MAC by the later of 180 days after the section 
1135 emergency period begins or by July 1 of the academic year in which 
the emergency Medicare GME affiliation agreement is effective. However, 
in response to commenters' immediate request for an extension, we 
issued a final rule on July

[[Page 48646]]

6, 2006, to address this concern and extended the deadline for 
hospitals affected by Hurricanes Katrina and Rita to October 9, 2006. 
Upon further reflection and in response to comments from hospitals 
affected by Hurricanes Katrina and Rita, we are further modifying the 
deadlines for the submission of emergency Medicare GME affiliation 
agreements to apply to all future emergency events that result in a 
declaration of an 1135 emergency area (Sec.  413.79(f)(6)(ii)). 
Effective for emergency Medicare GME affiliation agreements that would 
otherwise be required to be submitted on or after October 1, 2008, home 
and host hospitals are permitted to submit emergency Medicare GME 
affiliation agreements by 180 days after the end of the academic year 
in which the emergency event occurs; for the second academic year, by 
180 days after the end of the next academic year following the academic 
year in which the section 1135 emergency was declared; and for 
subsequent academic years, by July 1 of each academic year. That is, 
for example, if a section 1135 emergency area is declared for an 
emergency event that occurred on March 1, 2009, hospitals are permitted 
to submit an emergency Medicare GME affiliation agreement for the 
period from March 1, 2009, to June 30, 2009 (the first relevant 
academic year) by August 28, 2009. Additionally, for an emergency 
Medicare GME affiliation agreement for the period from July 1, 2009, to 
June 30, 2010 (the second relevant academic year), hospitals are 
permitted to submit the emergency Medicare GME affiliation agreement by 
August 28, 2010. For the remaining 3 academic years in which home and 
host hospitals are permitted to execute emergency Medicare GME 
affiliation agreements, hospitals are required to submit emergency 
Medicare GME affiliation agreements on or before July 1 of the relevant 
academic year. That is, in this example, for an emergency Medicare GME 
affiliation agreement for the period from July 1, 2010, to June 30, 
2011 (the third relevant academic year), hospitals must submit the 
emergency Medicare GME affiliation agreement on or before July 1, 2010. 
We believe these revised deadlines will permit home and host hospitals 
sufficient time to respond and make adjustments to their GME training 
plans in the immediate aftermath of a disaster, and to prepare and 
submit the necessary emergency GME affiliation agreements.
    Comment: One commenter on the November 27, 2007 interim final rule 
with comment period expressed appreciation ``for the efforts made by 
the Agency to deal with the continuing situation of displaced residents 
as a result of Hurricanes Katrina and Rita, as well as any future 
emergency situations.'' However, the commenter believed strongly that 
neither the residents nor the host hospitals that take them on should 
be penalized by not receiving direct GME or IME payments because the 
home hospitals may have been training a number of FTE residents in 
excess of their caps prior to the emergency event. The commenter urged 
CMS to work with Congress to address this issue if CMS could not 
resolve it administratively.
    Response: Emergency Medicare GME affiliation agreements provide 
home hospitals with the flexibility to temporarily transfer their FTE 
cap slots to other hospitals around the country in order to allow host 
hospitals to receive direct GME and IME payments relating to training 
displaced residents from the home hospital. However, even though 
Congress granted the Secretary authority to provide for rules allowing 
hospital groups to affiliate and apply their FTE resident caps on an 
aggregate basis, the BBA of 1997 established a fixed limit on the 
number of allopathic and osteopathic FTE residents that can be included 
in the hospitals' direct GME and IME FTE resident counts for Medicare 
payment purposes. Therefore, hospitals, even under the permissible 
affiliation rules, are not permitted to receive direct GME or IME 
payments in excess of the FTE resident caps.
    Comment: Several commenters expressed concern with the definition 
of a home hospital. Specifically, the commenters were concerned with 
the requirement that a home hospital experience a decrease in inpatient 
bed occupancy of 20 percent. One commenter stated it is not appropriate 
to ``test'' whether a hospital located in the section 1135 emergency 
area qualifies as a home hospital. Several commenters noted it would 
not be appropriate to review occupancy rates because the hospital may 
actually experience an increase in inpatient occupancy. One commenter 
stated that despite an increase in occupancy, a hospital may determine 
``* * * that its physician residents are better served in being placed 
in another teaching hospital for a period of time or the duration of 
the residents' training.'' The commenter stated that the complexity 
associated in dealing with an emergency situation should not be 
encumbered by such administrative rules which are inappropriate in 
extraordinary circumstances. The commenter recommended CMS clearly 
state that any teaching hospital located in a section 1135 emergency 
area can be considered a home hospital under the regulations. Another 
commenter noted a hospital that remains open may consider it 
appropriate to relocate its residents due to a variety of reasons 
including structural damage or lack of other local services. Some 
commenters noted that adding the additional requirement that a home 
hospital see a decrease in inpatient volume of 20 percent ``* * * is 
unnecessary and could be detrimental.'' Several commenters noted it 
should be sufficient to use a nationally declared emergency as a 
trigger for the Medicare GME emergency affiliation agreement 
regulations. The commenters further stated that a volume reduction 
requirement would contradict the flexibility that CMS is trying to 
provide through the regulations. One commenter stated the timeframe 
provided in the April 12, 2006 interim final rule with comment period 
(71 FR 18658) is not a sufficient amount of time because hospitals may 
have difficulty obtaining documentation to support their occupancy 
rates. The commenter recommended that CMS be flexible in terms of the 
time periods used to calculate a decrease in inpatient occupancy. For 
example, the commenter suggested that if records had been lost, the 
provider could use its last cost report submitted to the fiscal 
intermediary/MAC as evidence of the occupancy rate prior to the 
disaster.
    Response: In the April 12, 2006 interim final rule with comment 
period (71 FR 18658), we stated that, in determining whether a hospital 
in a section 1135 emergency area qualifies as a home hospital, we 
believe it is appropriate to compare the inpatient bed occupancy of the 
hospital 1 week before the earlier of the date the section 1135 
emergency period begins, or the date on which the hospital began any 
evacuation efforts in anticipation of an event that results in the 
declaration of a section 1135 emergency area, as compared to the 
inpatient bed occupancy of the hospital 1 week after the section 1135 
emergency period begins. If the inpatient bed occupancy decreases by 20 
percent or more between these two comparison timeframes, we believe 
that the significant drop in occupancy can be assumed to be the result 
of the event that led to the declaration of a section 1135 emergency 
period. We stated that in order to be considered a home hospital, a 
hospital would be required to experience a decrease in inpatient bed 
occupancy of 20 percent or more as a

[[Page 48647]]

result of a section 1135 emergency period so that it is unable to train 
the number of residents it originally intended to train in that 
academic year. We did consider instituting a higher threshold to 
determine whether a hospital can be considered a home hospital. 
However, in consideration of hospitals that had not been as severely 
damaged but still needed to move residents, we determined that a 
decrease in inpatient occupancy of 20 percent would be an appropriate 
threshold. Furthermore, we believe that if we had allowed any hospital 
in the section 1135 area to be a home hospital, such a policy could 
have been detrimental to the attempts to preserve residency training 
within the emergency area. If there was no damage threshold established 
for a hospital to be considered a home hospital, a higher number of 
``displaced residents'' would have been permitted to relocate their 
residency training out of state. Furthermore, we note that not all 
hospitals in the section 1135 emergency area experienced physical and 
structural interruptions necessitating the relocation of residency 
training to other facilities. We note that the increased flexibility 
provided by emergency Medicare GME affiliation agreements is intended 
to specifically help home hospitals that are experiencing extraordinary 
and dire conditions that necessitate the relocation of residency 
training.
    In response to the comment that hospitals may not have the 
documentation available to calculate occupancy rates before and after 
the disaster, if hospitals do not have this information available, we 
will work the hospitals on an individual basis so that a determination 
can be made.
    Comment: One commenter proposed that CMS assign sponsoring 
organizations the responsibility of coordinating between home and host 
hospitals, and require that hospitals participating in a Medicare GME 
emergency affiliation agreement obtain approval from the sponsoring 
organization before any cap transfers are made. The commenter noted 
that involving sponsoring institutions ``* * * will help ensure that 
the GME funds provided by CMS will be used for their intended use--to 
make certain medical residents receive high-quality training and are, 
therefore, able to provide high-quality care to program 
beneficiaries.'' The commenter stated that although hospitals affected 
by Hurricanes Katrina and Rita are making efforts at rebuilding, there 
is no guarantee that qualified personnel are available to mentor and 
teach the residents. The commenter further noted that although a 
hospital may be ready to resume residency training, the resident may 
not be adequately prepared to return to his or her training at that 
specific hospital. The commenter stated medical residencies are very 
structured and rigorous and that residents learn and master skills in a 
specific order. The commenter asserted that the resident's sponsoring 
program director is the only individual in a position to evaluate a 
resident's specific skills and needs and must participate in the 
decision to transfer residents between facilities.
    Response: We appreciate the commenter's dedication towards ensuring 
that residents are prepared and able to receive a quality education 
both during a disaster and the rebuilding process. Although we agree 
that it is important for the various individuals involved in a 
resident's GME training program to be fully aware of the resident's 
prior and current training and skill level, we do not believe it would 
be appropriate for CMS to require that sponsoring institutions serve as 
the formal coordinator between the home and host hospitals that are 
involved in the organization of a resident's residency training 
program. By statute, CMS only reimburses hospitals for GME and 
therefore the regulations can only address hospitals' requirements. 
However, we encourage sponsoring institutions to work closely with 
hospitals to provide the residents with the most appropriate training 
experience both during and after a disaster.
    Comment: Several commenters had questions concerning new teaching 
hospitals created after the date of onset of the emergency/disaster, 
that is, teaching hospitals that were nonteaching hospitals prior to 
training displaced residents. Two commenters stated they appreciated 
CMS' recognition that, during emergency periods, it may be necessary 
for a home hospital to send its residents to nonteaching hospitals to 
continue their training. The commenters stated that because the 
nonteaching hospitals do not have caps, they are reimbursed for direct 
GME and IME based on a temporary cap which they receive from the home 
hospital through an emergency Medicare GME affiliation agreement. The 
commenters requested CMS confirm ``* * * that, like nonteaching 
hospitals that enter into affiliation agreements in nonemergency 
situations, nonteaching hospitals that participate in emergency GME 
affiliation agreements do not lose their ``nonteaching'' status for 
purposes of obtaining their own, permanent resident cap at some point 
in the future if they choose to start new residency training 
programs.'' One commenter asked CMS to clarify the impact on a 
nonteaching hospital's base year calculation for direct GME payment 
purposes for a nonteaching hospital which is part of an emergency 
Medicare GME affiliation agreement. Another commenter expressed concern 
about several sections of the interim final rule with comment period 
and current GME regulations which have a direct impact on a specific 
hospital that became a teaching hospital effective July 1, 2006. The 
commenter stated that CMS' discussion in the interim final rule with 
comment period on the necessity for new teaching hospitals to incur 
teaching costs for purposes of establishing their PRAs was helpful. 
However, the commenter noted that new teaching hospitals have 
additional responsibilities of which they may be unaware. The commenter 
emphasized teaching hospitals that become new teaching hospitals once 
they begin to train displaced residents may be particularly uninformed 
on the rules relating to training at nonhospital sites. The commenter 
provided a review of the regulations addressing training at nonhospital 
sites and noted that if a hospital wishes to count residents training 
at a nonhospital site, the hospital and nonhospital site(s) must enter 
into a written agreement prior to the training taking place. The 
commenter asserted that hospitals failed to enter into written 
agreements prior to the training at the nonhospital site taking place. 
The commenter stated that the hospital was unaware of the requirements 
and even if the hospital had been aware, circumstances were such that 
it would not have been possible to secure written agreement prior to 
services being provided. The commenter requested that CMS make a 
special exception for the requirements at Sec.  413.78 (regulations 
relating to the training at a nonhospital site). The commenter 
requested the regulations be modified to allow new teaching hospitals 
to enter into written agreements with nonhospital sites retroactive to 
the time when the services were provided, if the agreements are entered 
into within one year of the provision of services. The commenter 
believed that making theses changes to the regulations would not 
unfairly penalize new teaching hospitals for their unfamiliarity with 
the GME rules particularly during the ``confusing state of affairs.'' 
One commenter asked CMS to add a regulatory definition of ``new host 
teaching hospital.'' The commenter noted that, as discussed on page 
18661

[[Page 48648]]

of the April 12, 2006 interim final rule with comment period (71 FR 
18661), new host teaching hospitals were previously nonteaching 
hospitals that will become new teaching hospitals once they begin to 
train displaced residents from home hospitals as part of an approved 
medical residency program.
    Response: We agree with the commenters that it is essential for 
hospitals to be aware of applicable regulations pertaining to GME if 
they are becoming or plan to become a new teaching hospital. In the 
April 12, 2006 interim final rule with comment period (71 FR 18661), we 
discussed policies pertaining to new teaching hospitals. We stated that 
when displaced residents are sent to train at hospitals that were not 
previously teaching hospitals, these hospitals will become new teaching 
hospitals once they begin to train residents from the home hospital as 
part of an approved medical resident training program. The following 
text is an excerpt from CMS' discussion on provisions effecting new 
teaching hospitals found on page 18661 of the April 12, 2006 interim 
final rule with comment period (71 FR 18661):
    ``As a new teaching hospital, such a hospital initially will have 
IME and direct GME FTE resident caps of zero (based on the number of 
residents training in the 1996 base year for FTE resident caps). 
However, the new teaching hospital, by participating in an emergency 
Medicare GME affiliation agreement, can receive a temporary cap 
increase in order to count the displaced FTE residents for purposes of 
IME and direct GME payments.
    As a new teaching hospital, the hospital will not have an existing 
per resident amount for direct GME payment purposes. The per resident 
amounts for these hospitals will be established as specified at Sec.  
413.77(e) (just as any other new teaching hospital would have its per 
resident amount established). The new teaching hospital's per resident 
amount is established based on the lower of the hospital's direct GME 
costs per resident in its base year, or the updated weighted mean value 
of the per resident amounts of all hospitals located in the same 
geographic wage area as specified in the regulations at Sec.  413.77. 
Therefore, it is very important for a new teaching host hospital to 
incur direct GME costs in its base year and to document all of the 
direct GME costs it incurs (for example, the residents' salaries, 
fringe benefits, any portion of the teaching physician salaries 
attributable to GME, and other direct GME costs) for the displaced 
residents it is training; otherwise the host hospital risks being 
assigned a very low permanent per resident amount in accordance with 
our regulations. If the host, new teaching hospital incurs no GME costs 
in the relevant base year, its per resident amount would be zero 
dollars. We advise hospitals to refer to the regulations at Sec.  
413.77(e) for the rules concerning the establishment of a new teaching 
hospital's per resident amount. In accordance with section 1886(h) of 
the Act and our regulations, once the base year per resident amount is 
established, it is fixed and not subject to adjustment to reflect costs 
incurred in years subsequent to the base year that might be associated 
with new programs or additional residents.''
    The commenters are not entirely correct in stating that 
``nonteaching hospitals that participate in emergency GME affiliation 
agreements do not lose their `nonteaching' status for purposes of 
obtaining their own, permanent resident cap at some point in the future 
if they choose to start new residency training programs.'' Once a 
hospital begins training residents, even if it is training residents as 
part of a Medicare GME affiliation agreement, that hospital will become 
a teaching hospital and it will have a PRA established based on the 
costs it incurs in training those residents. Therefore, as we stated in 
the proposed rule, it is important that a new teaching hospital incur 
costs in training residents so the hospital is not assigned a very low 
or zero PRA. The commenters are correct that host hospitals that were 
not previously teaching hospitals, which become new teaching hospitals 
by virtue of training displaced residents, receive a temporary cap 
adjustment based upon the displaced FTE residents they are training. 
The cap adjustment is temporary because it is obtained by virtue of the 
fact that the host hospital is participating in a Medicare GME 
emergency affiliation agreement. A new teaching hospital could receive 
a permanent adjustment to the hospital's FTE resident caps only if it 
begins training residents in a newly approved program. The regulations 
pertaining to the establishment of a permanent cap adjustment can be 
found at Sec.  413.79(e). A hospital's cap is adjusted for new programs 
based on the product of the highest number of residents in any program 
year during the third year of the first program's existence for all new 
residency training programs and the minimum number of years in which 
residents are expected to complete the program based on the accredited 
length for the type of program. A hospital's adjusted cap is applied 
beginning with the fourth year of its first new residency training 
program. We also note that direct GME payment is based on a rolling 
average which is calculated based on a hospital's FTE resident counts 
from the current year, and the prior two years. However, FTE residents 
training in new teaching hospitals and in new residency training 
programs at existing teaching hospitals are excluded from the rolling 
average for the minimum accredited length of the program (dental and 
podiatry residents are always exempt from the rolling average).
    Regarding the commenter's concerns about the regulations governing 
residency training at nonhospital sites, we addressed these concerns, 
providing greater flexibility for hospitals to meet the written 
agreement or concurrent payment requirements, in the November 27, 2007 
interim final rule with comment period (72 FR 66898). In response to 
the commenter who requested CMS to add a regulatory definition of ``new 
host teaching hospital,'' we do not believe that a regulatory 
definition is necessary because the regulations at Sec.  413.75(b) 
already contain a definition of host hospital, which as defined ``means 
a hospital training residents displaced from a home hospital.'' Our 
policy has always been that once a hospital begins training residents, 
the hospital is considered a teaching hospital. We urge hospitals to 
contact their fiscal intermediary/MAC and CMS if they have questions as 
to how GME regulations are applied to hospitals that become teaching 
hospitals as a result of training displaced residents.
    Comment: A number of commenters were concerned about the effects of 
the decreased number of FTE residents training after an emergency 
event, on the potential for a home hospital to reopen and receive 
adequate payments. Specifically, some commenters were concerned that 
when a home hospital has trained a substantially reduced number of FTE 
residents following a disaster, the cap on the interns and residents-
to-beds (IRB ratio cap), which limits the IRB ratio used to calculate a 
hospital's IME payment calculation to the lesser of either the current 
year's IRB ratio based on the 3-year rolling average FTE count subject 
to the cap or the previous year's IRB ratio, would be either zero or 
very low. This could adversely affect a home hospital when it reopens 
operations. One commenter presented an example in which the IRB ratio 
cap for a home hospital that has no FTEs in FYs 2006 or 2007 would 
prevent the hospital from receiving any IME reimbursement in FYs 2006, 
2007,

[[Page 48649]]

or 2008 because the current year IRB ratio is always limited to the 
lesser of the current year or the prior year. The commenters suggested 
that CMS allow home hospitals to use the higher IRB ratio from a year 
previous to the emergency event in order to prevent the situation where 
home hospitals would not be paid for IME due to an IRB ratio cap of 
zero. One commenter also indicated that host hospitals would be 
negatively impacted by the application of the IRB ratio cap which would 
result in a delay in receiving IME payments for the training of 
displaced residents in any given year.
    Response: As specified under the regulations at Sec.  
412.105(1)(a)(i), an IRB ratio is calculated for a hospital based 
generally on the ratio of FTE residents in the numerator to the number 
of available beds (as described at Sec.  412.105(1)(b)) in the 
denominator. Section 1886(d)(5)(B)(vi)(I) of the Act specifies the 
application of an IRB ratio cap, stating that the IRB ratio ``may not 
exceed the ratio of the number of interns and residents, subject to the 
limit under clause (v), with respect to the hospital for its most 
recent cost reporting period to the hospital's available beds * * * 
during that cost reporting period * * *''. Following an emergency 
event, a home hospital's IRB ratio could be affected by a decrease in 
the numerator or denominator, or both. We would expect that home 
hospitals that experience a decrease in their patient load or close 
completely could document the number of ``available'' beds (as 
described at Sec.  412.105(b)) to reflect the actual circumstances of 
the home hospital. Depending on the actual number of FTE residents that 
remain and the number of beds (if any) available for inpatient use, 
decreases in the number of beds in the denominator could counterbalance 
decreases in the FTE resident count in the numerator in calculating the 
IRB ratio, producing an IRB ratio and an IRB ratio cap that are not out 
of line with the previous years.
    From the comments that we received regarding the application of the 
IRB ratio cap, we believe some of the commenters may have been confused 
about the difference between the IRB ratio calculations for the current 
and prior years and the application of the IRB ratio cap based on the 
comparison of the current and prior years' IRB ratios. In accordance 
with section 1886(d)(5)(B)(vi)(II) of the Act, for the current year's 
IRB ratio, the numerator is based on the 3-year rolling average FTE 
resident count. In contrast, in accordance with section 
1886(d)(5)(B)(vi)(I) of the Act, to determine the numerator of the 
prior year's ratio for purposes of the IRB ratio cap, the prior year's 
actual FTE resident count (subject to the FTE resident limit) is used 
(that is, the rolling average is not used to determine the numerator of 
the prior year's ratio for purposes of establishing the IRB ratio cap). 
The IRB ratio cap prescribes that the IRB ratio used for to calculate 
IME payments in the current year is the lesser of either the current 
year IRB ratio or the prior year IRB ratio as calculated in the manner 
described above. Accordingly, in the example presented by the commenter 
in which the home hospital is training no residents in FYs 2006 and 
2007, although the commenter stated that IME payments would not be 
possible in FY 2006, in fact the hospital could receive IME payment in 
FY 2006 (assuming the hospital was training residents in FY 2005). That 
is, the numerator of the FY 2006 IRB ratio would be based on a rolling 
average count of the zero FTEs in FY 2006, and the number of FTEs 
training in FYs 2005 and 2004. For purposes of applying the IRB ratio 
cap, the numerator of the FY 2005 IRB ratio would be based on the 
actual number of FTE residents training in FY 2005 (subject to the FTE 
resident limit). Therefore, the hospital would receive IME payment in 
FY 2006.
    The commenter also expressed concern that when home hospitals 
reopen or rebuild their GME programs after several years of training no 
or relatively few residents would be adversely affected by the IRB 
ratio cap. To continue the example discussed previously, if in FY 2008, 
the home hospital trains residents again after 2 years (2006 and 2007) 
in which there were no residents training at the hospital (that is, 
zero FTEs in the numerator of the IRB ratio of the prior year), the 
application of the IRB ratio cap would prevent the home hospital from 
receiving IME payment in FY 2008. We note that because the IRB ratio 
for the current year is based on a rolling average FTE count, while the 
IRB ratio for the prior year is based on the actual FTE count (subject 
to the FTE resident limit) for that year, the adverse effect of the 
application of the IRB ratio cap is limited to 1 year, assuming the 
hospital continues to train residents in the following years. We 
appreciate the commenter's concern that as home hospitals resume their 
training of FTE residents, they may be severely disadvantaged because 
of the 1-year lag in IME payments produced by application of the IRB 
ratio cap. We agree that after an emergency event, home hospitals could 
face a significant barrier in reopening or resuming previous levels of 
training in their GME programs due to the application of the IRB ratio 
cap, at a time when the home hospitals can least afford to have 
Medicare payments reduced. We also acknowledge that a host hospital 
that trains displaced residents through an emergency Medicare GME 
affiliation agreement could also be adversely affected by the 
application of the IRB ratio cap. Since the statute allows for an 
exception in the application of the IRB ratio cap for the special 
circumstances for Medicare GME affiliated groups and new programs, we 
are providing for home and host hospitals with valid emergency Medicare 
GME affiliation agreements an exemption from the application of the IRB 
ratio cap. Specifically, we are revising Sec.  412.105(f)(1)(vi) of the 
regulations to specify that effective October 1, 2008, IME payments for 
home and host hospitals with valid emergency Medicare GME affiliation 
agreements will be calculated using the current year's IRB ratio 
without application of the IRB ratio cap. For example, a home hospital 
that has a valid emergency Medicare GME affiliation agreement and 
trains 60 FTE residents in FY 2008 after training no residents in FYs 
2007 and 2006. If the IRB ratio cap is applied, the IRB ratio cap for 
FY 2008 would be zero (because the hospital trained no residents in FY 
2007 so the IRB ratio for the prior year is zero). However, because of 
this exception to the application of the IRB ratio cap, the home 
hospital's FY 2008 IRB ratio would be based on 20 FTEs in the numerator 
((60+0+0)/3=20). Accordingly, the IME payment for the home hospital 
would be based on 20 FTEs in the numerator of the 2008 IRB ratio rather 
than zero. We note that this provision is meant to allow home and host 
hospitals additional flexibility in the application of the IRB ratio 
cap, as provided for under section 1886(d)(5)(B)(viii) of the Act. 
However, we note that the 3-year rolling average FTE resident count 
(used in the numerator of the current year's IRB ratio) would still 
apply. We also note that, in accordance with section 
1886(d)(5)((B)(vi)(I) of the Act, no adjustment to the IRB ratio is 
made for an increase in dental or podiatry residents during the cost 
reporting period in which an increase occurs because dental and 
podiatry residents are not included for purposes of calculating the IRB 
ratio.
    Finally, we note that it has been several years since the section 
1135 emergency areas were declared due to Hurricanes Katrina and Rita. 
While

[[Page 48650]]

some hospitals in these section 1135 emergency areas are still using 
emergency Medicare GME affiliation agreements in order to facilitate 
training of residents in programs that were affected by the hurricanes, 
other hospitals may have decided that they could meet the shared 
rotational arrangement and other requirements for regular Medicare GME 
affiliation agreements and have consequently elected enter into regular 
Medicare GME affiliation agreements rather than emergency Medicare GME 
affiliation agreements even though CMS has permitted the use of 
emergency Medicare GME affiliation agreements for up to 5 academic 
years (in this case, until June 30, 2010). In other cases, hospitals 
have informed us that they are waiting for the April 12, 2005 and the 
November 27, 2007 interim final rules with comment period to be 
finalized and, in order to preserve their ability to respond to any 
changes we make to the emergency Medicare GME affiliation or other 
provisions in the final rule, these hospitals have elected to have in 
place both a regular Medicare GME affiliation agreement and an 
emergency Medicare GME affiliation agreement. Because we recognize that 
home and host hospitals (both previous and current) will want to 
structure their Medicare GME affiliations in order to make best use of 
our final rules, we are permitting hospitals, for the remaining 
academic years for which emergency Medicare GME affiliations are 
authorized as a result of the section 1135 emergency relating to 
Hurricanes Katrina and Rita (that is, until June 30, 2010), to amend an 
existing regular Medicare GME affiliation agreement by June 30 of the 
relevant academic year in order to convert it into an emergency 
Medicare GME affiliation agreement if the hospitals submit the amended 
agreements to CMS and their fiscal intermediary/MAC by June 30 of the 
relevant academic year. For example, if hospitals have a regular 
Medicare GME affiliation agreement in effect for the current academic 
year, July 1, 2008, through June 30, 2009, they may amend the agreement 
to convert it to an emergency Medicare GME affiliation agreement by 
June 30, 2009.
e. Provisions of the Final Rule
    Except for the modifications as noted below, we are adopting as 
final the policies included in the April 12, 2006 and November 27, 2007 
interim final rules with comment period without further changes. The 
modifications to the April 12, 2006 and November 27, 2007 interim final 
rules that we are adopting as final policies include the following:
    We are further modifying the deadline for the submission of 
emergency Medicare GME affiliation agreements in Sec.  413.79(f)(6)(ii) 
to apply to all future emergency events that result in a declaration of 
an 1135 emergency area. Effective for emergency Medicare GME 
affiliation agreements required to be submitted on or after October 1, 
2008, home and host hospitals must submit emergency Medicare GME 
affiliation agreements by 180 days after the end of the academic year 
in which the emergency event occurs and for the next academic year 
following the emergency event. For the remaining 3 academic years in 
which home and host hospitals are permitted to execute emergency 
Medicare GME affiliation agreements, hospitals are required to submit 
emergency Medicare GME affiliation agreements on or before July 1 of 
the relevant academic year.
    We note that we had previously modified the submission deadline in 
the July 6, 2006 final rule (71 FR 38264 through 38266). The July 6, 
2006 final rule permitted an extension in the submission deadlines only 
for home and host hospitals affected by Hurricanes Katrina and Rita. 
For emergency Medicare GME affiliation agreements that would otherwise 
be due on or before July 1, 2006, the deadline was subsequently 
extended to October 9, 2006.
    For home and host hospitals with valid emergency Medicare GME 
affiliation agreements, we are providing for an exemption from 
application of the IRB ratio cap. Specifically, IME payments for home 
and host hospitals with valid emergency Medicare GME affiliation 
agreements are calculated based on the current year's IRB ratio 
(subject to the 3-year rolling average FTE resident provision and the 
hospital's Medicare IME cap.
f. Technical Correction
    In the April 12, 2006 interim final rule with comment period (70 FR 
18654 through 18667), we revised Sec.  413.79(f) by adding a paragraph 
(6) to provide more flexibility in emergency Medicare GME affiliations 
for home hospitals located in section 1135 emergency areas to allow the 
home hospital to efficiently find training sites for displaced 
residents. We have discovered that, under Sec.  413.79(f)(6)(iv), in 
our provision on the host hospital exception from the rolling average 
for the period from August 29, 2005, to June 30, 2006, we included an 
incorrect cross-reference to the rolling average requirements for 
direct GME as ``Sec.  413.75(d)''. The correct cross-reference to the 
rolling average requirement for direct GME is Sec.  413.79(d). As we 
proposed in the FY 2009 IPPS proposed rule (73 FR 23667), we are 
correcting the cross-reference under Sec.  413.79(f)(6)(iv) to read 
``paragraph (d) of this section''.

H. Payments to Medicare Advantage Organizations: Collection of Risk 
Adjustment Data (Sec.  422.310)

    Section 1853 of the Act requires CMS to make advance monthly 
payments to a Medicare Advantage (MA) organization for each beneficiary 
enrolled in an MA plan offered by the organization for coverage of 
Medicare Part A and Part B benefits. Section 1853(a)(1)(C) of the Act 
requires CMS to adjust the monthly payment amount for each enrollee to 
take into account the health status of the MA plan's enrollees. Under 
the CMS-Hierarchical Condition Category (HCC) risk adjustment payment 
methodology, CMS determines risk scores for MA enrollees for a year and 
adjusts the monthly payment amount using the appropriate enrollee risk 
score.
    Under section 1853(a)(3)(B) of the Act, MA organizations are 
required to ``submit data regarding inpatient hospital services * * * 
and data regarding other services and other information as the 
Secretary deems necessary'' in order to implement a methodology for 
``risk adjusting'' payments made to MA organizations. Risk adjustments 
to payments are made in order to take into account ``variations in per 
capita costs based on [the] health status'' of the Medicare 
beneficiaries enrolled in an MA plan offered by the organization. 
Submission of data on inpatient hospital services has been required 
with respect to services beginning on or after July 1, 1997. Submission 
of data on other services has been required since July 1, 1998.
    While we initially required the submission of comprehensive data 
regarding services provided by MA organizations, including 
comprehensive inpatient hospital encounter data, we subsequently 
permitted MA organizations to submit an ``abbreviated'' set of data. 
Our regulations at 42 CFR 422.310(d)(1) currently explicitly provide MA 
organizations with the option of submitting an abbreviated data set. 
Under this provision, we currently collect limited risk adjustment data 
from MA organizations, primarily diagnosis data.
    From calendar years 2000 through 2006, application of risk 
adjustment to MA payments was ``phased in'' with an increasing 
percentage of the monthly

[[Page 48651]]

capitation payment subjected to risk adjustment. Beginning with 
calendar year 2007, 100 percent of payments to MA organizations are 
risk-adjusted. Given the increased importance of the accuracy of our 
risk adjustment methodology, in the FY 2009 IPPS proposed rule (73 FR 
23667), we proposed to amend Sec.  422.310 to provide that CMS will 
collect data from MA organizations regarding each item and service 
provided to an MA plan enrollee. This will allow us to include 
utilization data and other factors that CMS can use in developing the 
CMS-HCC risk adjustment models in order to reflect patterns of 
diagnoses and expenditures in the MA program.
    Specifically, we proposed to revise Sec.  422.310(a) to clarify 
that risk adjustment data are data used not only in the application of 
risk adjustment to MA payments, but also in the development of risk 
adjustment models. For example, once encounter data for MA enrollees 
are available, CMS would have beneficiary-specific information on the 
utilization of services by MA plan enrollees. These data could be used 
to calibrate the CMS-HCC risk adjustment models using MA patterns of 
diagnoses and expenditures.
    We proposed to revise Sec. Sec.  422.310(b), (c), (d)(3), and (g) 
to clarify that the term ``services'' includes items and services.
    We proposed to revise Sec.  422.310(d) to clarify that CMS has the 
authority to require MA organizations to submit encounter data for each 
item and service provided to an MA plan enrollee. The proposed revision 
also would clarify that CMS will determine the formats for submitting 
encounter data, which may be more abbreviated than those used for the 
fee-for-service claims data submission process.
    We proposed to revise Sec.  422.310(f) to clarify that one of the 
``other'' purposes for which CMS may use risk adjustment data collected 
under this section would be to update risk adjustment models with data 
from MA enrollees. In addition, when providing that CMS may use risk 
adjustment data for purposes other than adjusting payments as described 
at Sec. Sec.  422.304(a) and (c), we proposed to delete the phrase 
``except for medical records data'' from paragraph (f). Any use of 
medical records data collected under paragraph (e) of Sec.  422.310 is 
governed by the Privacy Act and the privacy provisions in the HIPAA. 
Furthermore, there may be occasions when we learn from analysis of 
medical record review data that some organizations have misunderstood 
our guidance on how to implement an operational instruction. We want to 
be able to provide improved guidance to MA organizations based on any 
insights that may emerge during analysis of the medical record review 
data.
    In addition, we proposed a technical correction to Sec.  422.310(f) 
to clarify that risk adjustment data are used not only to adjust 
payments to plans described at Sec. Sec.  422.301(a)(1), (a)(2), and 
(a)(3) (which refer to coordinated care plans and private fee-for-
service plans), but also to adjust payments for ESRD enrollees and 
payments to MSA plans and Religious Fraternal Benefit society plans, as 
described at Sec.  422.301(c).
    Under Sec.  422.310(g), we would continue to provide that data that 
CMS receives after the final deadline for a payment year will not be 
accepted for purposes of the reconciliation. However, we proposed to 
revise paragraph (g)(2) of Sec.  422.310 to change the deadline from 
``December 31'' of the payment year to ``January 31'' of the year 
following the payment year. We also proposed to add language to provide 
that CMS may adjust deadlines as appropriate.
    Comment: One commenter recognized CMS' interest in modifying the 
types of data collected from MA organization, and another commenter 
supported CMS' efforts to increase payment accuracy. Two commenters 
were pleased with CMS' plan to collect data on each item and service 
provided to MA plan enrollees, and supported the goal of more 
accurately paying MA organizations, monitoring the quality of care 
provided by MA organizations, and the benefits actually received by 
Medicare beneficiaries in these plans.
    Response: We appreciate the commenters' support for our efforts to 
collect encounter data for services and items provided to MA enrollees.
    Comment: Several commenters acknowledged CMS' interest in modifying 
the types of data collected from MA organizations in order to refine 
and improve the risk adjustment model and risk-adjusted payment, 
supported in principle the goal of improving the risk adjustment models 
to reflect patterns of diagnoses and expenditures in the MA program, 
supported CMS' efforts to increase payment accuracy, and understood 
CMS' need to be able to respond to Congressional inquiries, especially 
with respect to use of supplemental benefits.
    Response: We appreciate the understanding of commenters regarding 
the advantages of our collection of encounter data.
    Comment: Commenters expressed concern that collection of encounter 
data would have significant administrative and resources costs for 
plans and providers, even in an abbreviated form, because of the time 
and information technology investments needed to modify existing MA 
organization and CMS systems. The commenters cited challenges that they 
identified as being inherent in the collection of encounter data, 
including systems design, testing, and implementation, training for 
staff and providers, and sustained initiatives to collect, submit, 
correct, and resubmit data, which have been highly labor intensive. One 
commenter contended that reporting supplemental services, durable 
medical equipment, and home health services to comply with Sec.  
422.310(b) ``each item and service provided * * *'' would significantly 
increase the data reporting burden on both providers and plans. Another 
commenter argued that, if CMS required the submission of data elements 
such as dental services, vision services, optical services, fitness 
benefits, reporting on these items and services would be a challenge 
and would result in extensive new data collection that might not now 
exist with providers of some of these services. One commenter believed 
that the rule would impose a particular burden on prepaid delivery 
systems that have historically operated on a capitated payment model, 
to the extent that this proposed requirement effectively requires these 
plans to code every service as if they were preparing a bill, and 
argued that this could fundamentally alter the way they deliver care. 
One commenter believed that renegotiations of provider contracts may 
have downstream implications in terms of the MA organizations ability 
to maintain premium levels. Another commenter reported that, while the 
commenter might have utilization data on services rendered, it did not 
have it in an encounter data or claim format.
    Response: We understand that reporting encounter data will be an 
expansion of MA organizations current effort to report diagnoses as 
part of their Risk Adjustment Processing System (RAPS) submissions and 
that this expanded effort may increase the administrative resources and 
costs that MA organizations need to commit to their reporting efforts. 
As we develop our plans for the fields to be collected, the submission 
process, and how we will use the data, we are committed to having 
discussions with MA organizations and other stakeholders to obtain 
feedback regarding the effort involved in implementation of encounter 
data collection.
    Comment: Commenters cited problems from earlier CMS efforts to 
collect encounter data, including the adaptation of the claims 
submission

[[Page 48652]]

platform to accommodate MA risk adjustment data, which required 
numerous complex changes; some data elements, such as Medicare hospital 
provider numbers, that proved extremely difficult to submit 
successfully; and errors that do not exist in RAPS.
    Response: We will take into account the concerns of industry, 
including those based on previous experience, when planning our 
collection efforts.
    Comment: One commenter suggested that the burden of reporting was 
undoubtedly taken into account by Congress in the process of 
considering, and ultimately adopting, the statutory language giving CMS 
broad authority to require reporting of both inpatient and outpatient 
encounter data. Because information about the numbers and costs of 
items and services provided is already collected by MA organizations in 
the course of their internal accounting, reporting such information to 
CMS cannot be a significant additional burden on them.
    Response: While we understand that plans will need to allocate 
additional resources to collect and report encounter data, we agree 
with the commenter that Congress recognized the advantages of having 
these data.
    Comment: Commenters contended that the value provided by encounter 
data reporting would be significantly outweighed by the burden the new 
requirements would impose and that, without a compelling reason, 
managed care organizations should not need to produce data at the level 
of detail called for by the proposed regulation.
    Response: We recognize that MA organizations will need to devote 
additional resources to the effort of reporting encounter data. Because 
we have not yet identified the scope of data to be submitted or the 
process for collecting encounter data, we have not yet determined how 
much additional effort will be required. In determining the scope of 
encounter data to be submitted, we will work closely with external 
stakeholders to ensure that administrative costs are minimized to the 
extent possible.
    Comment: One commenter stated that providers have experienced 
burdensome disruptions in its practices as a result of MA plans or its 
contractors reviewing medical records in its offices and recommended 
that CMS clarify in the final rule and any relevant guidance that, if 
an MA plan must review patient records, CMS should require the MA 
organization to reimburse the physician for the time and expense 
involved in any such review.
    Response: Under the MA program, payment arrangements between MA 
organizations and physicians in their provider network are governed by 
the contracts negotiated between the parties. To the extent providers 
believe such payments are appropriate, they can seek to have them 
provided for under their contract. In the case of nonnetwork providers, 
they are entitled to the same payment from an MA organization that they 
would receive from Original Medicare for a beneficiary not enrolled in 
an MA plan. To the extent that a provider already submits claims under 
Original Medicare, we do not see a requirement to submit encounter data 
as necessarily burdensome to providers, because they would be 
submitting similar data to MA organizations as they do to fiscal 
intermediaries/MAC.
    Comment: Commenters were concerned that the collection of encounter 
data would have the potential to create significant administrative 
burden and costs for CMS, and such a process is likely to be difficult 
for CMS to replicate concurrently with the ongoing work to refine the 
systems infrastructure for the Medicare Part D Prescription Drug 
Benefit Program without a major new investment in staffing and systems 
development.
    Response: We appreciate the concerns expressed by the commenters 
regarding the administrative burden of implementing the collection and 
use of encounter data. As we develop the schedule for developing and 
implementing the collection of encounter data, we will take into 
account the resources of both the MA organizations and CMS.
    Comment: Commenters requested that CMS allow for sufficient lead 
time for plan implementation of any needed changes, including time to 
analyze detailed specifications for any new requirements, plan for 
systems modifications, allocate sufficient resources to support the 
resulting changes, thoroughly test all of the changes, and make 
appropriate staff adjustments, including training and hiring before 
changes are fully implemented. The commenters requested that CMS 
coordinate the implementation of encounter data collection with other 
major initiatives, such as the transition from ICD-9-CM to ICD-10, so 
that organizations can incorporate planning for infrastructure changes 
into a comprehensive plan. One commenter estimated that, given the 
implementation of UB04, the implementation of encounter data reporting 
could take months for its IS department to develop and recode the 
current programs followed by a further period of months for a testing 
phase. Based on its past experience, the commenter offered that the 
revamping of encounter data to RAPS implementation took about 4 months. 
Another commenter noted that plans will need time to renegotiate 
provider contracts. Another commenter requested that CMS consider a 
phased-in approach to implementing changes.
    Response: We recognize that MA organizations will need sufficient 
time to schedule system changes needed to collect and report encounter 
data, and may need to coordinate the implementation of encounter data 
reporting with other initiatives. We will consider the scheduling needs 
of MA organizations in our implementation timeline for encounter data.
    Comment: Many commenters requested that CMS clarify how operational 
and methodological guidance will be released. The commenters asked that 
detailed information regarding analyses, use of data, and collection 
requirements for encounter data be shared and discussed early and not 
just through the annual ``Advance Notice of Methodological Changes'' 
process.
    Response: We have not determined how we will conduct ongoing 
written communication with health plans, although we do not plan to 
rely solely on the annual Advance Notices of Methodological Change and 
annual Announcements. We anticipate that we will develop a method of 
regular written communication with stakeholders, in addition to 
discussion, in order to share and discuss details of our plans for data 
collection requirements and uses of the encounter data.
    Comment: Many commenters asked CMS to clarify for what ``other 
purposes'' it might use the data. One commenter believed that CMS' 
proposal to use the data for ``other purposes'' is inappropriately 
broad. Some commenters requested that CMS modify the regulatory 
language in order to limit the use of the data to the calculation of 
the risk adjustment factors and the updating of risk adjustment models. 
One commenter believed that it would be inappropriate for CMS to 
compare plan bid submissions and resulting payment rates against actual 
experience in order to assess the legitimacy of bid submissions. Other 
commenters supported the use of encounter data to conduct analyses, 
either by CMS itself or by external entities, comparing MA 
organizations to each other and to traditional Medicare. These 
commenters noted that the collection of beneficiary-specific 
information on the utilization of services within MA plans has the

[[Page 48653]]

potential to provide valuable insight to the needs and health of MA 
plan enrollees.
    Response: In response to industry concern regarding the use of the 
encounter data that will be collected under this regulatory authority, 
and specifically to the suggestion that CMS clarify for what ``other 
purposes'' data would be used, in this final rule, we are revising the 
proposed regulatory text at Sec.  422.310(f) to clarify that we will 
use the data for the calculation of risk scores, updating risk 
adjustment models, calculating Medicare DSH percentages (the DSH 
percentage methodology incorporates hospital days for MA plan 
enrollees), Medicare coverage purposes (that is, the determination of 
whether day limits have been exhausted and, if so, how many such days), 
and quality review and improvement activities. As part of the design of 
our data collection efforts, we will clarify how we will use the 
encounter data that we collect for these purposes.
    Comment: One commenter argued that the Social Security Act only 
authorizes CMS to collect of risk adjustment data for risk adjustment 
purposes. Other commenters also questioned CMS' authority to use 
encounter data for purposes other than the establishment or maintenance 
of the risk adjustment model.
    Response: Section 1853(a)(3)(B) of the Act obligates MA 
organizations to submit inpatient and outpatient encounter data for 
purposes of use in implementing a risk adjustment methodology. We fully 
intend to use the data collected for these purposes. Unlike the case of 
information collected under section 1860D-15 of the Act, however, which 
the statute restricts to being used solely for purposes of implementing 
that section (see section 1860D-15(d)(2)(B) and (f)(2) of the Act), 
section 1853(a)(3)(B) of the Act does not impose any restrictions on 
other legitimate uses of the encounter data collected. We believe that 
uses of such data to determine the proper amount of payments to MA 
plans to improve the calculation of Medicare DSH percentages, to 
determine what benefits are covered for a Medicare beneficiary, and to 
monitor and improve the quality of services provided to Medicare 
beneficiaries are all legitimate uses of encounter data that are 
collected for purposes of risk adjustment. As noted above, in response 
to comments, we are revising the regulation text to expressly limit the 
use of encounter data to these purposes.
    Comment: Many commenters asked which items and services CMS was 
planning to collect encounter data on; the commenters noted that the 
proposed rule does not clarify whether encounter data for supplemental 
services, DME, and home health services would be collected pursuant to 
Sec.  422.310(b), which refers to data on ``each item and service 
provided.'' The commenters asked if CMS planned to collect encounter 
data for non-Medicare services, certain supplemental services, or for 
services offered by providers from whom CMS does not currently collect 
data. Another commenter urged that, because CMS does not currently 
collect encounter data for services furnished by providers and 
suppliers such as SNFs, DME suppliers, and HHAs, CMS should explain 
whether or how the agency proposes to utilize these data for risk 
adjustment purposes, if CMS requires their submission. The commenters 
noted that requiring encounter data for some items would potentially 
require data submissions from providers who are not currently required 
to submit detailed encounter data, such as ancillary providers, 
facilities, DME providers.
    Response: The intent of the proposed regulatory change was to 
restore CMS' previous authority to collect comprehensive encounter 
data; CMS has not yet determined for which items and services it will 
collect such data.
    Comment: Some commenters asked CMS to define a core data set that 
would be collected and limit any new required data elements to only 
those needed for development of the CMS-HCC risk adjustment model. One 
commenter stated that data pertaining to rewards and incentives, 
optional supplemental benefits, or over-the-counter benefits have no 
bearing on health status and were not useful for calibrating the risk 
adjustment model, and therefore are beyond the scope of the authority 
provided by section 1853(a) of the Act. The commenters urged that these 
benefits be specifically carved out of the definition at Sec.  
422.310(d). Another commenter contended that the collection of 
encounter data for every item and service provided to Medicare 
beneficiaries is unnecessary for maintaining and updating the risk 
adjustment model and is redundant insofar as it covers data that CMS 
already gathers under the traditional fee-for-service program.
    Response: We are still in the process of determining which items 
and services we need in order to calibrate the risk adjustment model. 
In designing our data collection efforts, we also will be sharing with 
stakeholders how we will use the encounter data for the other purposes 
that are now stated in regulation: Calculating Medicare DSH 
percentages, conducting quality review and improvement activities, and 
for Medicare coverage purposes.
    Comment: Many industry commenters objected entirely to changing the 
regulations to restore CMS' previous authority to collect encounter 
data, and a number of them offered alternatives to the collection of 
encounter data or suggested further dialog with the industry in order 
to identify and evaluate alternative approaches. One commenter urged 
CMS to work with the industry to find a mutually acceptable reporting 
mechanism outside of the risk adjustment operational framework in order 
to find ways of collecting information on benefits that are not needed 
for risk adjustment, but that CMS needs for responding to inquiries 
from Congress. Some commenters indicated that they could support a 
requirement to submit aggregate utilization data on a plan-wide basis 
at the time when bids are due. Two commenters suggested a probe study 
and another commenter proposed that each MA organization submit a 5 
percent to 10 percent sample of certain encounter data to CMS and/or an 
outside contractor who would aggregate the data for purposes of 
reflecting MA utilization data for adjustments to the MA payment 
methodology. Another commenter suggested that CMS consider a pilot 
project, rather than an immediate implementation, in order to develop a 
functioning operational framework for the collection and utilization of 
these data. One commenter stated that data from traditional Medicare 
should be an adequate reflection of the diagnosis, procedures, and 
services provided in the MA program.
    Response: While we appreciate the suggestions offered by commenters 
regarding alternatives to the collection of beneficiary-level encounter 
data, we note that aggregate level data would not be useful in 
calibrating the risk adjustment model. Having the MA program's relative 
cost patterns is essential to CMS in order to improve the accuracy of 
payment to MA plans: these program-specific cost patterns will allow 
CMS to reflect appropriate relative costs in the risk adjustment model 
by calculating MA-specific risk adjustment factors. Regarding the 
sample approach to the reporting of encounter data, submission of a 
subset of data would restrict CMS' use of the data for other purposes, 
particularly calculation of Medicare DSH percentages. Claims from fee-
for-service Medicare, which CMS currently uses to calibrate the risk 
adjustment model, are inadequate to the extent that MA cost

[[Page 48654]]

and coding patterns differ from fee-for-service cost patterns.
    Comment: Commenters expressed concern that CMS has not adequately 
addressed the issue of protecting proprietary data in the proposed rule 
and urged CMS to build regulatory and procedural protections 
prohibiting the release of MA encounter data that could undermine the 
competitive nature of the MA program. One commenter stated that the 
commercially sensitive nature of MA encounter data is similar to that 
of Medicare Part D claims data.
    Response: We appreciate the commenters' concerns regarding data 
privacy. To the extent that encounter data submissions contain any 
proprietary information, this information would be protected from 
disclosure under the Trade Secrets Act. Beneficiary specific 
information is also protected under the Privacy Act, and HIPAA, as well 
as the Federal Information Security Management Act (FISMA). As we 
develop our policies regarding data usage, we will provide opportunity 
for stakeholder feedback.
    Comment: Many commenters asked for additional information regarding 
operational and methodological issues, such as what formats CMS plans 
to use to collect encounter data, whether CMS will modify RAPS or 
replace it with a new encounter data submission format, and how 
encounter data would be used to calibrate the CMS-HCC risk adjustment 
model.
    Response: The purpose of the proposed regulatory changes was to 
affirm CMS' authority to collect encounter data only and was not 
intended to address operational or methodological issues. Further, we 
have not yet developed the requirements for collecting encounter data. 
As part of our discussions and requests for feedback from stakeholders, 
we will be presenting details of how we propose to collect the data and 
how we will incorporate encounter data into the calibration of the risk 
model.
    Comment: One commenter requested clarification that the retention 
of the already existing regulatory language regarding ``functional 
limitations'' is not indicative of a change in how we collect such 
data. The commenter asked if CMS planned to continue to collect data 
pertinent to ``functional limitations'' through the Health Outcomes 
Survey (HOS). Another commenter asked if it was CMS' intent to 
implement the existing provisions under Sec.  422.310(b) regarding the 
characterization of functional limitations. The commenter believed that 
the retention of this language seems contrary to the phase out of the 
frailty adjustor as it is applied to PACE organizations.
    Response: The extant regulatory language at Sec.  422.310(b) is 
intended support CMS authority to collect various data for use in 
developing and implementing the risk model used in the MA program in 
order to calculate as accurate payments as possible. Any changes that 
we would propose to make to data collection and methodology regarding 
functional limitations would be, at minimum, described in an annual 
Advance Notice of Methodological Change in order to provide 
stakeholders with an opportunity for comment.
    Comment: A number of commenters were concerned about the impact of 
encounter data collection on PACE organizations. The commenters were 
concerned about the administrative impact of encounter data reporting 
on PACE programs, as few PACE centers code the procedures provided to 
enrollees since payment is made to salaried providers and is not based 
on the specific type or number of procedures provided and the delivery 
of medical care at a PACE facility does not comprise discrete visits or 
units of care. The commenters were concerned about the impact of 
encounter data reporting on our PACE programs' processes of care and 
requested that CMS exempt PACE organizations from reporting procedure 
codes for services provided by PACE organization staff.
    Response: We appreciate the input of PACE organizations regarding 
the implementation of encounter data reporting. We will work with PACE 
organizations, as with all stakeholders, to obtain their feedback and 
understand better how we can design the encounter data collection 
requirements in a way that minimizes the administrative costs and 
operational changes required by plans.
    Comment: Some commenters were concerned that encounter data 
reporting will not capture the full level of scope of services provided 
by PACE organizations because of differences between PACE and MA in 
terms of their statutory authorization, size, population served, care 
delivery model, the requirement to provide non-Medicare services. The 
commenters stated that there were services that were not reimbursed by 
Medicare, although the provision of these services substantially 
reduces participants' utilization of Medicare-covered services. The 
commenters were concerned that PACE programs will be disadvantaged if 
payment is based on the utilization of MA patterns of diagnoses and 
expenditures that do not take into account consideration the 
differences between MA and PACE organizations.
    Response: We understand that PACE organizations operate under 
separate statutory authority and have a different model of care and 
provide a varied range of benefits to its enrolled population. However, 
we also recognize that PACE programs are paid for Medicare Part A and 
Part B services under section 1853 of the Act, along with MA plans, and 
we are required under section 1853(a)(3)(D) of the Act to apply risk 
adjustment uniformly. We are committed to working with all stakeholders 
to discuss and clarify how any changes in the methodology for 
calibrating the risk adjustment model will affect their organization.
    After consideration of the public comments received, we are 
finalizing the proposed changes in policies under Sec.  422.310, with 
one modification. Under Sec.  422.310(f), we are identifying the uses 
of the encounter data that we will collect. Specifically, we will use 
the encounter data for calculating risk factors, updating risk 
adjustment models, calculating Medicare DSH percentages, conducting 
quality review and improvement activities, and for Medicare coverage 
purposes.

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

1. Background
    Sections 1866(a)(1)(I), 1866(a)(1)(N), and 1867 of the Act impose 
specific obligations on certain Medicare-participating hospitals and 
CAHs. (Throughout this section of this final rule, when we reference 
the obligation of a ``hospital'' under these sections of the Act and in 
our regulations, we mean to include CAHs as well.) These obligations 
concern individuals who come to a hospital emergency department and 
request examination or treatment for a medical condition, and apply to 
all of these individuals, regardless of whether they are beneficiaries 
of any program under the Act.
    The statutory provisions cited above are frequently referred to as 
the Emergency Medical Treatment and Labor Act (EMTALA), also known as 
the patient antidumping statute. EMTALA was passed in 1986 as part of 
the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), 
Public Law 99-272. Congress incorporated these antidumping provisions 
within the Social Security Act to ensure that individuals with 
emergency medical conditions are not denied essential lifesaving 
services. Under section 1866(a)(1)(I)(i) of the Act,

[[Page 48655]]

a hospital that fails to fulfill its EMTALA obligations under these 
provisions may be subject to termination of its Medicare provider 
agreement, which would result in loss of all Medicare and Medicaid 
payments.
    Section 1867 of the Act sets forth requirements for medical 
screening examinations for individuals who come to the hospital and 
request examination or treatment for a medical condition. The section 
further provides that if a hospital finds that such an individual has 
an emergency medical condition, it is obligated to provide that 
individual with either necessary stabilizing treatment or an 
appropriate transfer to another medical facility where stabilization 
can occur.
    The EMTALA statute also outlines the obligation of hospitals to 
receive appropriate transfers from other hospitals. Section 1867(g) of 
the Act states that a participating hospital that has specialized 
capabilities or facilities (such as burn units, shock-trauma units, 
neonatal intensive care units, or, with respect to rural areas, 
regional referral centers as identified by the Secretary in regulation) 
shall not refuse to accept an appropriate transfer of an individual who 
requires these specialized capabilities or facilities if the hospital 
has the capacity to treat the individual. The regulations implementing 
section 1867 of the Act are found at 42 CFR 489.24. The regulations at 
42 CFR 489.20(l), (m), (q), and (r) also refer to certain EMTALA 
requirements outlined in section 1866 of the Act. The Interpretive 
Guidelines concerning EMTALA are found at Appendix V of the CMS State 
Operations Manual.
2. EMTALA Technical Advisory Group (TAG) Recommendations
    Section 945 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA), Public Law 108-173, required the 
Secretary to establish a Technical Advisory Group (TAG) to advise the 
Secretary on issues related to the regulations and implementation of 
EMTALA. The MMA specified that the EMTALA TAG be composed of 19 
members, including the Administrator of CMS, the Inspector General of 
HHS, hospital representatives and physicians representing specific 
specialties, patient representatives, and representatives of 
organizations involved in EMTALA enforcement.
    The EMTALA TAG's functions, as identified in the charter for the 
EMTALA TAG, were as follows: (1) Review EMTALA regulations; (2) provide 
advice and recommendations to the Secretary concerning these 
regulations and their application to hospitals and physicians; (3) 
solicit comments and recommendations from hospitals, physicians, and 
the public regarding the implementation of such regulations; and (4) 
disseminate information concerning the application of these regulations 
to hospitals, physicians, and the public. The TAG met 7 times during 
its 30-month term, which ended on September 30, 2007. At its meetings, 
the TAG heard testimony from representatives of physician groups, 
hospital associations, and others regarding EMTALA issues and concerns. 
During each meeting, the three subcommittees established by the TAG 
(the On-Call Subcommittee, the Action Subcommittee, and the Framework 
Subcommittee) developed recommendations, which were then discussed and 
voted on by members of the TAG. In total, the TAG submitted 55 
recommendations to the Secretary. If implemented, some of the 
recommendations would require regulatory changes. Of the 55 
recommendations developed by the TAG, 5 have already been implemented 
by CMS. A complete list of TAG recommendations is available in the 
Emergency Medical Treatment and Labor Act Technical Advisory Group 
final report available at the Web site: http://www.cms.hhs.gov/FACA/07_emtalatag.asp. The following recommendations have already been 
implemented by CMS:
     That CMS revise, in the EMTALA regulations [42 CFR 
489.24(b)], the following sentence contained in the definition of 
``labor'': ``A woman experiencing contractions is in true labor unless 
a physician certifies that, after a reasonable time of observation, the 
woman is in false labor.''
    We revised the definition of ``labor'' in the regulations at Sec.  
489.24(b) to permit a physician, certified nurse-midwife, or other 
qualified medical person, acting within his or her scope of practice in 
accordance with State law and hospital bylaws, to certify that a woman 
is experiencing false labor. This recommendation was adopted with 
modification in the FY 2007 IPPS final rule (71 FR 48143). We issued 
Survey and Certification Letter S&C-06-32 on September 29, 2006, to 
clarify the regulation change. (The Survey and Certification Letter can 
be found at the following Web site: http://www.cms.hhs.gov/SurveyCertificationGenInfo/PMSR/list.asp).
     That hospitals with specialized capabilities (as defined 
in the EMTALA regulations) that do not have a dedicated emergency 
department be bound by the same responsibilities under EMTALA to accept 
appropriate transfers as hospitals with specialized capabilities that 
do have a dedicated emergency department.
    This recommendation was adopted in the FY 2007 IPPS final rule (71 
FR 48143). We added language at Sec.  489.24(f) that makes explicit the 
current policy that all Medicare-participating providers with 
specialized capabilities are required to accept an appropriate transfer 
if they have the capacity to treat an individual in need of specialized 
care. We issued Survey and Certification Letter S&C-06-32 on September 
29, 2006, to further clarify the regulation change. (The Survey and 
Certification Letter can be found at the following Web site: http://www.cms.hhs.gov/SurveyCertificationGenInfo/PMSR/list.asp).
     That CMS clarify the intent of regulations regarding 
hospital obligations under EMTALA to receive individuals who arrive by 
ambulance. Specifically, the TAG recommended that CMS revise a letter 
of guidance that had been issued by the agency to clarify its position 
on the practice of delaying the transfer of an individual from an 
emergency medical service provider's stretcher to a bed in a hospital's 
emergency department.
    This recommendation was adopted with modification by CMS in Survey 
and Certification Letter S&C-07-20, which was released on April 27, 
2007. (The Survey and Certification Letter can be found at the 
following Web site: http://www.cms.hhs.gov/SurveyCertificationGenInfo/PMSR/list.asp.)
     That CMS clarify that a hospital may not refuse to accept 
an individual appropriately transferred under EMTALA on the grounds 
that it (the receiving hospital) does not approve the method of 
transfer arranged by the attending physician at the sending hospital 
(for example, a receiving hospital may not require the sending hospital 
to use an ambulance transport designated by the receiving hospital). In 
addition, CMS should improve its communication of such clarifications 
with its regional offices.
    This recommendation was adopted and implemented by CMS in Survey 
and Certification Letter S&C-07-20, which was released on April 27, 
2007. (The Survey and Certification Letter can be found at the 
following Web site: http://www.cms.hhs.gov/SurveyCertificationGenInfo/PMSR/list.asp.)
     That CMS strike the language in the Interpretive 
Guidelines (CMS State

[[Page 48656]]

Operations Manual, Appendix V) that addresses telehealth/telemedicine 
(relating to the regulations at Sec.  489.24(j)(1)) and replace it with 
language that clarifies that the treating physician ultimately 
determines whether an on-call physician should come to the emergency 
department and that the treating physician may use a variety of methods 
to communicate with the on-call physician. A potential violation occurs 
only if the treating physician requests that the on-call physician come 
to the emergency department and the on-call physician refuses.
    This recommendation was adopted and implemented by CMS in Survey 
and Certification Letter S&C-07-23, which was released on June 22, 
2007. (The Survey and Certification Letter can be found at the 
following Web site: http://www.cms.hhs.gov/SurveyCertificationGenInfo/PMSR/list.asp.)
    We are considering the remaining recommendations of the EMTALA TAG 
and may address them through future changes to or clarifications of the 
existing regulations or the Interpretive Guidelines, or both.
    At the end of its term, the EMTALA TAG compiled a final report to 
the Secretary. This report includes, among other materials, minutes 
from each TAG meeting as well as a comprehensive list of all of the 
TAG's recommendations. The final report is available at the following 
Web site: http://www.cms.hhs.gov/FACA/07_emtalatag.asp.
3. Changes Relating to Applicability of EMTALA Requirements to Hospital 
Inpatients
    While many issues pertaining to EMTALA involve individuals 
presenting to a hospital's dedicated emergency department, questions 
have been raised regarding the applicability of the EMTALA requirements 
to inpatients. We have previously discussed the applicability of the 
EMTALA requirements to hospital inpatients in both the May 9, 2002 IPPS 
proposed rule (67 FR 31475) and the September 9, 2003 stand alone final 
rule on EMTALA (68 FR 53243). As we stated in both of the 
aforementioned rules, in 1999, the United States Supreme Court 
considered a case (Roberts v. Galen of Virginia, 525 U.S. 249 (1999)) 
that involved, in part, the question of whether EMTALA applies to 
inpatients in a hospital. In the context of that case, the United 
States Solicitor General advised the Court that HHS would develop a 
regulation clarifying its position on that issue. In the 2003 final 
rule, CMS took the position that a hospital's obligation under EMTALA 
ends when that hospital, in good faith, admits an individual with an 
unstable emergency medical condition as an inpatient to that hospital. 
In that rule, CMS noted that other patient safeguards protected 
inpatients, including the CoPs as well as State malpractice law. 
However, in the 2003 final rule, CMS did not directly address the 
question of whether EMTALA's ``specialized care'' requirements (section 
1867(g) of the Act) applied to inpatients.
    As noted in section IV.I.2. of this preamble, the EMTALA TAG has 
developed a set of recommendations to the Secretary. One of those 
recommendations calls for CMS to revise its regulations to address the 
situation of an individual who: (1) Presents to a hospital that has a 
dedicated emergency department and is determined to have an 
unstabilized emergency medical condition; (2) is admitted to the 
hospital as an inpatient; and (3) the hospital subsequently determines 
that stabilizing the individual's emergency medical condition requires 
specialized care only available at another hospital.
    We stated in the proposed rule that we believed that the obligation 
of EMTALA did not end for all hospitals once an individual had been 
admitted as an inpatient to the hospital where the individual first 
presented with a medical condition that was determined to be an 
emergency medical condition. Rather, once the individual was admitted, 
admission only impacted the EMTALA obligation of the hospital where the 
individual first presented. (Throughout this section of the preamble of 
this final rule, we refer to the hospital where the individual first 
presented as the ``admitting hospital.'') Section 1867(g) of the Act 
states: ``Nondiscrimination--A participating hospital that has 
specialized capabilities or facilities (such as burn units, shock-
trauma units, neonatal intensive care units, or (with respect to rural 
areas) regional referral centers as identified by the Secretary in 
regulation) shall not refuse to accept an appropriate transfer of an 
individual who requires such specialized capabilities or facilities if 
the hospital has the capacity to treat the individual.'' In the 
proposed rule we suggested that section 1867(g) of the Act requires a 
receiving hospital with specialized capabilities to accept a request to 
transfer an individual with an unstable emergency medical condition as 
long as the hospital has the capacity to treat that individual, 
regardless of whether the individual had been an inpatient at the 
admitting hospital. Our suggestion was supported by the September 9, 
2003 final rule (68 FR 53263), in which we amended the regulations at 
Sec.  489.24(d)(2)(i) to state that: ``If a hospital has screened an 
individual under paragraph (a) of this section and found the individual 
to have an emergency medical condition, and admits that individual in 
good faith in order to stabilize the emergency medical condition, the 
hospital has satisfied its special responsibilities under this section 
with respect to that individual'' (emphasis added). In the proposed 
rule we stated that we believed that permitting inpatient admission at 
the admitting hospital to end EMTALA obligations for another hospital 
to which an unstabilized individual was being appropriately transferred 
to receive specialized care would seemingly contradict the intent of 
section 1867(g) of the Act to ensure that hospitals with specialized 
capabilities provide medical treatment to individuals with emergency 
medical conditions in order to stabilize those conditions.
    We also noted in the proposed rule that, as discussed in the 
preamble of the September 9, 2003 stand-alone final rule, 
notwithstanding any EMTALA protections, a hospital inpatient is 
protected under the Medicare CoPs and may also have additional 
protections under State law. A hospital that fails to provide necessary 
treatment to such individuals could face termination of its Medicare 
provider agreement for a violation of the CoPs. We stated in the 
proposed rule that we believe it is consistent with the intent of 
EMTALA to limit its protections to individuals who need them most; for 
example, individuals who present to a hospital but may not have been 
formally admitted as patients and thus are not covered by other 
protections applicable to patients of the hospital. We believe that, in 
the case of inpatients, there is no need or requirement to also 
supplement the hospital's obligation to its patients under the CoPs in 
order to further the objectives of EMTALA. However, the obligations of 
a hospital under the CoPs apply only to that hospital's patients; they 
do not apply to individuals who are not patients. Further, there is no 
CoP that requires a hospital to accept the transfer of a patient from 
another facility. Thus, a hospital with specialized capabilities has no 
obligations under the CoPs to any nonpatients. On the other hand, the 
EMTALA statute, in section 1867(g) of the Act, does create an 
obligation for such hospitals to accept appropriate transfers of 
nonpatient individuals if it

[[Page 48657]]

has the capacity to treat the individuals. Therefore, in our proposal, 
in order to ensure an individual the protections intended by the EMTALA 
statute, we indicated in the FY 2009 IPPS proposed rule (73 FR 23669) 
that we believed it was appropriate to propose to clarify that section 
1867(g) of the Act (obligating a hospital with specialized capabilities 
to accept an appropriate transferred individual if it has the capacity 
to treat the individual) continues to apply so as to protect even an 
individual who has been admitted as an inpatient to an admitting 
hospital despite not being stabilized since becoming an inpatient. We 
stated that we believed that this clarification was necessary to ensure 
that EMTALA protections are continued for individuals who were not 
otherwise protected by the hospital CoPs (with respect to the 
obligation of other hospitals to those individuals). (We noted that 
this proposed clarification was consistent with the EMTALA TAG's 
recommendation that EMTALA does not apply when an individual is 
admitted to the hospital for an elective procedure and subsequently 
develops an emergency medical condition.)
    We recognized that the proposed clarification that the obligation 
to accept an appropriate transfer under EMTALA applied to a hospital 
with specialized capabilities when an inpatient (who presented to the 
admitting hospital under EMTALA) was in need of specialized care to 
stabilize his or her emergency medical condition may have raised 
concerns among the provider community that such a clarification in 
policy could hypothetically result in an increase in the number of 
transfers. However, we stated that the intention of this proposed 
clarification was not to encourage patient dumping to hospitals with 
specialized capabilities. Rather, even if the hospital with specialized 
capabilities had an EMTALA obligation to accept an individual who was 
an inpatient at the admitting hospital, the admitting hospital 
transferring the individual should take all steps necessary to ensure 
that it has provided needed treatment within its capabilities prior to 
transferring the individual. This meant that an individual with an 
unstabilized emergency medical condition should only be transferred 
when the capabilities of the admitting hospital were exceeded.
    Accordingly, we proposed to revise Sec.  489.24(f) by adding to the 
existing text a provision that specifies that paragraph (f) also 
applies to an individual who has been admitted under paragraph 
(d)(2)(i) of the section and who has not been stabilized.
    While we did not include the following in our proposed 
clarification, we sought public comments on whether the EMTALA 
obligation imposed on hospitals with specialized capabilities to accept 
appropriate transfers should apply to a hospital with specialized 
capabilities in the case of an individual who had a period of stability 
during his or her stay at the admitting hospital and is in need of 
specialized care available at the hospital with specialized 
capabilities. CMS takes seriously its duty to protect patients with 
emergency medical conditions as required by EMTALA. Thus, we sought 
public comments as to whether, with respect to the EMTALA obligation on 
the hospital with specialized capabilities, it should or should not 
matter if an individual who currently has an unstabilized emergency 
medical condition (which is beyond the capability of the admitting 
hospital) (1) remained unstable after coming to the hospital emergency 
department or (2) subsequently had a period of stability after coming 
to the hospital emergency department.
    In summary, to implement the recommendation by the EMTALA TAG and 
clarify our policy regarding the applicability of EMTALA to hospital 
inpatients, we proposed to amend Sec.  489.24(f) to add a provision to 
state that when an individual covered by EMTALA was admitted as an 
inpatient and remains unstabilized with an emergency medical condition, 
a receiving hospital with specialized capabilities has an EMTALA 
obligation to accept that individual, assuming that the transfer of the 
individual is an appropriate transfer and the participating hospital 
with specialized capabilities has the capacity to treat the individual.
    Comment: Numerous commenters opposed the proposal in the FY 2009 
proposed rule regarding the applicability of EMTALA to hospital 
inpatients. Many commenters asserted that, rather than being a 
clarification of current regulations, CMS' proposal represents a 
significant change in policy which runs counter to CMS' policy 
expressed in the September 9, 2003 Federal Register (68 FR 53222). 
Commenters stated that the current regulations at Sec.  489.24(d)(2)(i) 
provide a ``bright-line'' test for EMTALA, which ``* * * clearly states 
that once an individual presenting to the hospital's emergency 
department has been screened and admitted as an inpatient in good faith 
in order to stabilize the emergency medical condition, the hospital has 
satisfied its EMTALA obligations for that individual, and EMTALA no 
longer applies to a subsequent transfer.'' Commenters stated they 
believe the proposed rule re-opens EMTALA for the admitting hospital. 
They noted the admitting hospital, after it has admitted the 
individual, would then be required to abide by the regulations 
governing an appropriate transfer when it transfers the inpatient to 
the hospital with specialized capabilities.
    Many commenters questioned whether such a change in policy was 
necessary since it is unlikely that a hospital would knowingly admit an 
individual with an unstabilized emergency medical condition who they 
did not have the capability or capacity to stabilize. One commenter 
noted that all hospitals which have emergency departments should be 
capable of evaluating an individual who presents to the emergency 
department and if the hospital does not have the capability to 
appropriately care for the individual, the hospital should transfer, 
rather than admit the individual. Another commenter stated it was not 
the intent of EMTALA for a hospital to be able to transfer any 
individual whose condition worsens after admission. Commenters asserted 
that the proposed rule is unnecessary because current statutory and 
regulatory requirements provide extensive legal protections separate 
and apart from EMTALA. One commenter stated that, in addition to 
hospital CoPs, the Arkansas Rules and Regulations for Hospitals and 
Related Institutions as well as the Rules and Regulations for Critical 
Access Hospitals contain hundreds of pages of requirements concerning 
hospitals' care and treatment for all patients.
    Commenters asserted that CMS is relying on a recommendation of the 
EMTALA TAG to make its policy change and the actions of the TAG do not 
justify a need for a change in policy. One commenter noted that the TAG 
vote in favor of the recommendation to apply EMTALA to hospital 
inpatients was 10 to 8 and that 5 of the votes in favor of the 
recommendation came from the U.S. Department of Health and Human 
Services. The commenter also noted that the vote was taken twice and 
that the recommendation was voted as a ``low'' priority by the TAG. 
Commenters stated that a discussion of the contentious nature of the 
TAG's recommendation was not included in the preamble to the proposed 
rule. Specifically, the commenters noted that CMS failed to state that 
the recommendation was only passed by a slim majority with most of the 
physician and hospital representatives opposing the recommendation. 
Commenters noted that after the TAG meeting, members of

[[Page 48658]]

the TAG sent the TAG chairman letters indicating their concern that if 
implemented, the recommendation would adversely affect patient care and 
could increase the number of unnecessary patient transfers. 
Furthermore, the commenters stated that two physicians who had voted in 
favor of the recommendation subsequently sent a letter expressing their 
concern that the recommendation could have a potential for abuse, 
namely patient dumping, and that they ``* * * fear that the potentially 
unintended consequence may be the transfer of EMTALA patients for 
reasons other than those related to emergency care of the problem for 
which the patient was originally admitted when these services could 
have been provided at the sending hospital.''
    Many commenters were concerned that the proposed rule would 
facilitate patient dumping at hospitals with specialized capabilities. 
Commenters were concerned the admitting hospital would not initially 
pay sufficient attention to the EMTALA requirements by not adequately 
assessing whether it actually has the capabilities necessary to treat 
an individual who presents under EMTALA. The commenter stated that 
there is no clear mechanism outlined in the proposed rule for reporting 
a hospital that fails to treat individuals adequately or fails to 
utilize all available resources before transferring an individual. One 
commenter suggested that CMS require admitting hospitals, which are 
part of a larger hospital system, to look to other system hospitals 
within the geographic area for specialized capabilities before 
transferring an individual to a hospital located outside of the system 
(assuming it is in the best interests for the patient to be 
transferred). The commenter stated such a policy would dissuade 
hospitals from making transfers for financial rather than patient care 
reasons. One commenter asked CMS to clarify whether it intends for the 
proposed rule to apply to any individual with an emergency medical 
condition, regardless of whether or not the individual actually goes to 
the emergency department. The commenter stated, ``Some patients with an 
emergency medical condition may have been a direct admission to the 
hospital by a local physician but never cared for initially by the ER; 
the patient simply came through the ER as a direct admission. We 
request CMS clarify whether these patients also will be covered by 
EMTALA.'' Another commenter stated that in addition to being 
overwhelmed by transfer requests, a receiving hospital will have to 
determine: (1) Whether the inpatient originally presented to the 
requesting hospital's emergency department; (2) whether the patient has 
ever been stable; and (3) whether the patient requires specialized 
services not offered at the requesting hospital.
    Commenters expressed their concern that tertiary care hospitals, 
urban safety net, and teaching hospitals that are already providing 
care to the indigent and uninsured patients, may become further 
overburdened by the proposed rule. Commenters stated that a sending 
hospital, acting in bad faith, could choose to only transfer medically 
complex patients requiring extensive lengths of stay, patients who are 
uninsured, and patients who have been subject to a medical error. One 
commenter stated that physicians expect that transfer requests of 
unresolved emergency medical conditions will come on weekends and 
holidays as a convenience measure and not a necessity. Another 
commenter stated that it treats more than 80,000 patients annually at 
its facility, which is the region's only Level I trauma center. The 
commenter stated it will always accept critically ill patients who are 
unable to be stabilized at another facility. The commenter stated that, 
under the proposed rule, it would now be obligated to accept the 
patient even though it has no ability to weigh in on the 
appropriateness of the transfer, which may not be in the best interest 
of the patient.
    Commenters also expressed their concern on how the proposed rule 
would affect the care and treatment of patients. Commenters were 
especially concerned about the consequences to patient health (both 
physical and psychological) and safety due to a potential increase in 
inappropriate/unnecessary transfers and over-triaging. One commenter 
asserted that the proposed policy will worsen the increase of 
inappropriate transfers and that already too few seriously ill patients 
are receiving appropriate initial evaluations at Level I and II trauma 
centers, while too many patients with non serious injuries, are 
presenting to or being transferred to those centers. One commenter 
noted that if the policy is finalized as proposed, the referring 
hospital may transfer patients who deteriorate following admission, 
thereby risking the life of the patient. The commenter further noted 
that patients without health insurance may be given an incentive to 
bypass their closest emergency department and go to larger medical 
centers offering indigent care. The commenter noted that the proposed 
rule would discourage ``savvy'' patients from seeking care at the 
nearest available emergency department and encourage them to go to the 
most sophisticated emergency department to avoid the possibility of 
being admitted to a hospital lacking the necessary capabilities and the 
possibility of eventually being transferred. The commenter noted 
``Unless and until CMS recognizes the magnitude of the problem of some 
hospitals avoiding their EMTALA obligations, no EMTALA policy can ever 
be adequate to the task of protecting the interests of patients.''
    Commenters expressed their concern with the definition of 
``stable'' and ``unstable'' and how the interpretation of these terms 
could be affected by the proposed rule. One commenter highlighted the 
applicability of the proposed rule to the state of Idaho, stating that 
Idaho contains many small hospitals that may only employ one general 
surgeon or orthopedic surgeon. The commenter noted that, when 
individuals require transfer, often what makes the receiving hospital 
``the hospital with specialized capabilities'' is that it has an on-
call specialist. One commenter stated that hospitals will have the 
incentive to stretch the definition of ``specialized'' to make the 
determination that some component of care for a particular patient is 
beyond its capability.
    One commenter stated that CMS lacks the legal authority to apply 
EMTALA to an inpatient who presented to the admitting hospital under 
EMTALA. The commenter stated that the 2003 rule established a ``bright 
line'' for EMTALA, which also made a distinction between 
``individuals'' and ``patients,'' (the primary distinction being that 
individuals, not patients, are protected by EMTALA.) The commenter 
recommended CMS withdraw the proposed rule as not authorized under the 
limited scope of the EMTALA statute. Additionally, the commenter stated 
that the preamble to the proposed rule does not provide sufficient 
reason as to why EMTALA should be expanded to apply to inpatients. The 
commenter stated that both the EMTALA interpretive guidelines and 
judicial decisions emphasize that EMTALA is anti-discrimination and 
designed to ensure that all patients with similar signs and symptoms 
are treated the same as recipients of emergency care services. The 
commenter argued that the proposed rule is the antithesis of the intent 
of the EMTALA statute and creates a dual standard of care for patients 
who require the same level of care by permitting inpatients who present 
to the hospital under EMTALA

[[Page 48659]]

special privileges. The commenter stated it would be difficult for a 
hospital to determine what type of inpatient it is dealing with, one 
with or without residual EMTALA rights. The commenter noted that 
hospitals and physicians are already puzzled by the inexact language of 
EMTALA, including the terms ``stabilization,'' ``resolved'' (as used in 
the IGs), ``stable,'' and what is meant by a higher level of care. The 
commenter recommended CMS provide greater ``specificity'' and 
``clarity'' as to when a patient's condition is considered stabilized. 
The commenter further stated `` * * * there is no guidance as to what 
is an `appropriate transfer' of an inpatient with residual EMTALA 
rights that triggers the obligation of a receiving hospital to accept 
the inpatient transfer.'' The commenter stated EMTALA is only triggered 
for the accepting hospital, if the transferring hospital participates 
in an ``appropriate transfer'' of an individual.
    Another commenter recommended that the rule address requirements 
for the admitting hospital to take all steps necessary to ensure that 
it is providing required treatment within its capabilities prior to 
engaging in a transfer. The commenter stated that the proposed rule 
treats hospitals unequally because it does not impose sanctions on the 
transferring hospital for making an inappropriate transfer of an 
individual with residual EMTALA rights. The commenter stated that ``If 
receiving hospitals are subject to EMTALA sanctions for refusing an 
appropriate transfer of an inpatient with residual EMTALA rights, then 
sending hospitals and physicians should have the equivalent exposure to 
sanctions for making an improper transfer of an inpatient with residual 
EMTALA rights.''
    Response: We thank the commenters for expressing their concerns 
regarding our proposal. We agree with the commenters that finalizing 
the proposed rule may result in hospitals with specialized capabilities 
experiencing an increase in inappropriate transfers. We understand that 
medical institutions such as academic medical centers, tertiary care 
centers, and public safety net hospitals are already facing significant 
and growing challenges in providing emergency services. After 
consideration of the comments, we believe that finalizing the policy as 
proposed may negatively impact patient care, due to an increase in 
inappropriate transfers which could be detrimental to the physical and 
psychological health and well-being of patients. We are concerned that 
finalizing our proposed rule could further burden the emergency 
services system and may force hospitals providing emergency care to 
limit their services or close, reducing access to emergency care.
    We agree with the commenters' concerns that some hospitals might 
abuse the proposed policy by not providing patients with the necessary 
screening examination required under EMTALA to determine the nature and 
extent of their emergency medical condition. We believe that, in the 
case where an individual is admitted and later found to be in need of 
specialized care not available at the admitting hospital, hospitals 
with specialized capabilities generally do accept the transfer, even in 
the absence of a legal requirement to do so. Furthermore, as one 
commenter pointed out by referencing the Arkansas Rules and Regulations 
for Hospitals and Related Institutions as well as the Rules and 
Regulations for Critical Access Hospitals, some States have 
requirements in addition to the hospital CoPs that provide for further 
protections for patients.
    We are very concerned about the possible disparate treatment of 
inpatients under the proposed policy. Specifically, under the proposed 
policy, an individual who presented to the hospital under EMTALA may 
have different transfer rights than an inpatient who was admitted for 
an elective procedure. This situation also creates operational 
challenges for hospital staff to differentiate which inpatient is 
afforded which transfer rights. Determining which individuals are 
covered by transfer rights under EMTALA may tie up a hospital's already 
strained resources. Furthermore, we believe that if we finalized the 
proposed rule, the admitting hospital may encounter challenges in 
determining whether or not an individual has ever been stable, as that 
term is defined in the EMTALA statute, because if the individual had 
any period of stability, EMTALA would not require acceptance of the 
transfer by the hospital with specialized capabilities. We recognize 
that the EMTALA definition of ``stable'' differs from clinical usage of 
this term.
    We support in principle the commenter's suggestion that hospitals 
that are part of a larger hospital system should transfer an individual 
to a system hospital with the required specialized capabilities within 
the same geographic area, so long as doing so would not result in a 
significantly longer transport for the individual than would transfer 
to a nonsystem hospital. However, we cannot mandate that individuals 
only be transferred to certain hospitals within a specific geographic 
region. In response to the commenter who asked that we clarify (in the 
context of the proposed rule) whether EMTALA would apply to an 
individual with an emergency medical condition, regardless of whether 
or not the individual went to the emergency department, we would like 
to clarify when EMTALA applies. In addition to EMTALA applying when an 
individual presents to a hospital emergency department and requests 
examination or treatment for a medical condition, or has a request made 
on his or her behalf, EMTALA applies when an individual presents on 
hospital property (as defined at Sec.  489.24(b)) and requests 
examination or treatment for an emergency medical condition, or has a 
request made on his or her behalf.
    We recognize the concern of the commenters that the recommendation 
provided by the TAG to apply EMTALA to hospital inpatients was accepted 
by the TAG on the narrowest of margins and that the majority of 
hospital representatives serving on the TAG were opposed to the 
recommendation. The discussion of the TAG's recommendation is provided 
on the CMS Web site under the meeting reports link, or link to the 
EMTALA TAG final report at : http://www.cms.hhs.gov/FACA/07_emtalatag.asp. Therefore, in this final rule, due to the concerns noted 
above, we are clarifying our policy on the EMTALA obligation of a 
hospital with specialized capabilities, by stating that if an 
individual presents to the admitting hospital that has a dedicated 
emergency department, is provided an appropriate medical screening 
examination and is found to have an emergency medical condition, and is 
admitted as an inpatient in good faith for stabilizing treatment of an 
emergency medical condition, then the admitting hospital has met its 
EMTALA obligation to that individual, even if the individual remains 
unstable. Furthermore, in such a case, a hospital with specialized 
capabilities does not have an obligation under EMTALA to accept a 
transfer of that individual from the referring hospital. Accordingly, 
we have revised the regulation at Sec.  489.24(f) to state that it does 
not apply to an individual who has been admitted under Sec.  489.24 
(d)(2)(i).
    Due to the many concerns that the commenters raised which are noted 
above, we believe it is appropriate to finalize a policy to state that 
if an individual with an unstable emergency medical condition is 
admitted, the EMTALA obligation has ended for the admitting hospital 
and even if the individual's emergency medical

[[Page 48660]]

condition remains unstabilized and the individual requires special 
services only available at another hospital, the hospital with 
specialized capabilities does not have an EMTALA obligation to accept 
an appropriate transfer of that individual. However, we would like to 
emphasize that if an individual presents to a hospital with a dedicated 
emergency department and is found to have an emergency medical 
condition that requires stabilizing treatment which requires 
specialized treatment not available at the hospital where the 
individual presented, and has not been admitted as an inpatient, then 
another Medicare-participating hospital with the requisite specialized 
capabilities is obligated under EMTALA to accept the appropriate 
transfer of this individual so long as it has the capacity to treat the 
individual.
    Comment: Several commenters supported the proposal to apply EMTALA 
to hospital inpatients who present under EMTALA, continue to have an 
unstable emergency medical condition, and are found to require 
treatment or services only available at another hospital with 
specialized capabilities. Commenters stated the proposed policy is 
necessary to protect individuals who are not otherwise protected by 
hospital CoPs. One commenter stated that hospitals with specialized 
capabilities should not be exempt from accepting the transfer of an 
unstable patient from a hospital that lacks the specialized 
capabilities to treat that patient. However, the commenter stated that 
the regulation needs to be specific in order to minimize the potential 
for multiple interpretations and the actual process should be monitored 
for abuse, for example, excessive transfers from a hospital. One 
commenter believed hospitals are already routinely following the policy 
expressed in the proposed rule. Therefore, the commenter believed the 
proposed requirement will only formalize existing practice. Another 
commenter stated that the proposal was especially important for 
individuals living in rural areas because those individuals are 
routinely denied transfer to a regional facility for definitive care 
based on the conclusion that the individuals are already at a 
``hospital.'' The commenter noted this scenario has been experienced 
multiple times by CAHs.
    Commenters stated that the proposal would effectively treat the 
hospitalized inpatient as an individual who comes to the hospital with 
specialized capabilities seeking emergency care, when the hospital with 
specialized capabilities falls within the conditions described under 
section 1867(g) of the Act. The commenter took issue with CMS' 2003 
final rule and stated that the proposed policy corrects the problem 
introduced by CMS' 2003 final rule, when the agency decided that 
inpatient admission would end EMTALA unless a subterfuge can be proven. 
One commenter asserted that the fact of whether or not an individual 
was admitted is irrelevant in determining whether the individual has an 
emergency medical condition or whether the admitting hospital has the 
capability to provide the necessary care. Instead, the commenter 
mentioned the aforementioned criteria are ``* * * the only operative 
criteria to whether the transfer is justified under EMTALA.'' The 
commenter stated that EMTALA was conceived because Congress recognized 
that patients needing transfers were being denied access to higher 
levels of care. The commenter urged CMS to go forward with the proposed 
changes and requested that clarifying language be included to establish 
that ``* * * CMS recognizes no provisions in paragraph G anti-
discrimination provisions that would allow a receiving hospital to deny 
any patient on the basis of their admission status or physical location 
at the sending facility.''
    Another commenter stated that CMS' proposal is in the best 
interests of patient care and should be implemented. The commenter 
claimed that without clarification, a hospital with specialized 
capabilities could legitimately decline a transfer, asserting that 
hospitals' EMTALA obligations and rights end upon admission of an 
individual to a hospital. The commenter stated that ``CMS should 
monitor closely the actual experience of inpatient emergency transfer 
to specialized care facilities for the first two years and then, if 
warranted, consider an appropriate DRG reimbursement adjustment for the 
initial admitting hospital's abbreviated admission that resulted in an 
emergent transfer to a specialized acute care facility.''
    Response: We appreciate the commenters' emphasis on patient care 
and would like to reinforce that the intent of EMTALA was not to 
provide hospitals with a clear indication of the point at which their 
legal responsibility towards an individual ends, but rather the intent 
of EMTALA was to provide access to emergency care to all individuals 
who present to an emergency department and are determined to have an 
emergency medical condition, including the uninsured. In response to 
the commenter who believed that the policy expressed in the proposed 
rule is already routine practice, we also agree, as stated previously, 
that generally hospitals with specialized capabilities would accept the 
transfer of an inpatient with an unstable emergency medical condition, 
even if there was no legal requirement under EMTALA to do so. In 
response to the commenter who suggested that CMS monitor inpatient 
transfers to hospitals with specialized capabilities for the first 2 
years and consider appropriate DRG reimbursement for the initial 
hospital's admission, EMTALA requirements are separate from Medicare 
payment policy for covered services provided to Medicare beneficiaries. 
Existing policy already addresses payment in cases of transfer of a 
beneficiary who is an inpatient to another hospital. In addition, 
although commenters expressed concerns regarding hospitals experiencing 
difficulties transferring patients (which we believe may exist), we are 
concerned with the potential for overcrowding that could result at 
academic medical centers, tertiary care centers, and public safety net 
hospitals if we were to finalize the proposed policy. Furthermore, we 
would like to emphasize that it is essential that the hospital to which 
the individual originally presents employ all available resources in 
its attempts to either stabilize the individual or transfer him/her, 
under an appropriate transfer. Not only is it a potential EMTALA 
violation for a hospital to provide an individual with insufficient 
medical screening or an inappropriate transfer when the hospital 
actually has the capability to treat the individual a potential EMTALA 
violation, it may prove to be more costly to society because the 
individual's emergency medical condition was not initially treated to 
the extent that it could have been, potentially risking the life of the 
individual. We would also like to make sure that individuals are aware 
of their resources if they believe they have been witness to an EMTALA 
violation. In addition to the investigation of EMTALA complaints 
conducted by CMS, individuals should be aware that the OIG also 
enforces EMTALA and may levy civil and monetary penalties against a 
physician and/or hospital for an EMTALA violation. The law also permits 
individuals to file a private right of action. Furthermore, the Act 
provides for whistleblower protection for hospital personnel. Section 
1867(i) of the Act states ``A participating hospital may not penalize 
or take adverse action against a qualified

[[Page 48661]]

medical person described in subsection (c)(1)(A)(iii) or a physician 
because the person or physician refuses to authorize the transfer of an 
individual with an emergency medical condition that has not been 
stabilized or against any hospital employee because the employee 
reports a violation of the requirement of this section.''
    Finally, as stated previously, due to the concerns that commenters 
raised, we are not finalizing the proposed policy. Rather, we are 
finalizing a policy that a hospital with specialized capabilities is 
not required under EMTALA to accept the transfer of a hospital 
inpatient. Although we believe that the language of section 1867(g) of 
the Act can be interpreted as either applying or not applying to 
inpatients, after reviewing the comments raised by many commenters, we 
have serious concerns about the impact the proposed policy would have 
had on patient care and the possibility that it may overburden many 
hospitals that are currently having difficulties providing sufficient 
emergency care.
    Comment: We did not receive any public comments in support of our 
request in the proposed rule for comment on whether the EMTALA 
obligation imposed on hospitals with specialized capabilities to accept 
appropriate transfers should apply to a hospital with specialized 
capabilities in the case of an individual who had a period of stability 
during his or her stay at the admitting hospital and is in need of 
specialized care available at the hospital with specialized 
capabilities. Commenters were concerned that such an application would 
provide for further potential for abuse. One commenter stated that a 
period of stability followed by instability should not be a reason to 
impose EMTALA obligations on a hospital with specialized capabilities. 
Another commenter stated that CMS' request for comment was based on a 
concept not even contemplated by the TAG's controversial comment. One 
commenter stated that such a policy may encourage hospitals to dump 
patients when they receive an especially difficult case study.
    Response: We thank the commenters for their responses to our 
question on whether EMTALA should apply when an individual had a period 
of stability.
    Comment: Commenters included information regarding recent 
publications which communicate the dire circumstances facing emergency 
care. Several commenters mentioned the 2006 Institute of Medicine (IOM) 
reports focused on the future of emergency care. One commenter 
mentioned a report recently issued by the House Oversight and 
Government Reform Committee titled: ``Hospital Emergency Surge 
Capacity: Not Ready for the Predictable Surprise.'' The commenter also 
cited a testimony made before the Committee by J. Wayne Meredith, MD, 
Professor and Chairman of General Surgery, Wake Forest University 
Baptist Hospital. One commenter stated that it wished to commend the 
work of the EMTALA TAG and stated that most of the TAG's 
recommendations will help clarify current interpretations of EMTALA and 
help improve the delivery of emergency medical services. The commenter 
wished to take the opportunity to highlight several of the TAG's 
recommendations, and urged CMS to adopt the following recommendations 
as soon as possible: 1, 8, 9, 11, 13, 14, 19, 27, 52, and 53. (Note: 
the number of the recommendation refers to the corresponding number 
found in final report of the EMTALA TAG. The final report can be found 
at the following Web site: http://www.cms.hhs.gov/FACA/07_emtalatag.asp). The commenter also discussed a survey of neurosurgeons 
conducted by the American Association of Neurological Surgeons (AANS) 
and Congress of Neurological Surgeons (CNS) in 2004, which concluded 
that 45 percent of neurosurgeons practicing at either an academic 
health center or Level I or II trauma center, experienced an increase 
in the number of neurosurgical emergency cases in the previous 2 years. 
Another commenter stated that it supported number 53 of the TAG's 
recommendation, which recommends the statute be modified to create a 
funding mechanism for EMTALA.
    Response: We thank the commenters for the information on the IOM 
reports and testimony which address the current crisis in emergency 
care as well as their support of the TAG and several of its 
recommendations. Although these comments pertain to EMTALA, they do not 
directly address the proposed rule. Therefore, we are not responding to 
them at this time.
    As stated previously, in this final rule, rather than adopting the 
proposed regulation language, we are clarifying the EMTALA regulations 
at Sec.  489.24(f) with respect to hospital inpatients by stating that 
once an individual is admitted in good faith by the admitting hospital, 
the admitting hospital has satisfied its EMTALA obligation with respect 
to that individual even if the individual remains unstabilized and a 
hospital with specialized capabilities does not have an EMTALA 
obligation to accept an appropriate transfer of that individual. We 
encourage the public to make CMS aware if this interpretation of 
section 1867(g) of the Act should result in harmful refusals by 
hospitals with specialized capabilities to accept the transfer of 
inpatients whose emergency medical condition remains unstabilized, or 
any other unintended consequences.
4. Changes to the EMTALA Physician On-Call Requirements
a. Relocation of Regulatory Provisions
    During its term, the EMTALA TAG dedicated a significant portion of 
its discussion to a hospital's physician on-call obligations under 
EMTALA and made several recommendations to the Secretary regarding 
physician on-call requirements that are included in its final report 
(available at the Web site: http://www.cms.hhs.gov/FACA/07_emtalatag.asp). As one recommendation, the TAG recommended that CMS 
move the regulation discussing the obligation to maintain an on-call 
list from the EMTALA regulations at Sec.  489.24(j)(1) to the 
regulations implementing provider agreements at Sec.  489.20(r)(2). As 
we stated in the proposed rule, we agree with the TAG's recommendation. 
The requirement to maintain an on-call list is found at section 
1866(a)(1)(I)(iii) of the Act, the section of the Act that refers to 
provider agreements. Section 1867 of the Act, which outlines the EMTALA 
requirements, makes no mention of the requirement to maintain an on-
call list.
    To implement the EMTALA TAG's recommendation, in the FY 2009 IPPS 
proposed rule, we proposed to delete the provision relating to 
maintaining a list of on-call physicians from Sec.  489.24(j)(1). We 
noted that a provision for an on-call physician list is already 
included in the regulations as a hospital provider agreement 
requirement at Sec.  489.20(r)(2). We proposed to incorporate the 
language of Sec.  489.24(j)(1) as replacement language for the existing 
Sec.  489.20(r)(2) and amend the regulatory language to make it more 
consistent with the statutory language found at section 
1866(a)(1)(I)(iii) of the Act. We proposed that revised Sec.  
489.20(r)(2) would read: ``An on-call list of physicians on its medical 
staff available to provide treatment necessary after the initial 
examination to stabilize individuals with emergency medical conditions 
who are receiving services required under Sec.  489.24 in accordance 
with the resources available to the hospital.''
    The EMTALA TAG made additional recommendations regarding how a 
hospital would satisfy its on-call list obligations, including calling 
for an annual plan by the hospital and medical staff for on-call 
coverage that would

[[Page 48662]]

include an assessment of factors such as the hospital's capabilities 
and services, community need for emergency department services as 
indicated by emergency department visits, emergent transfers, physician 
resources, and past performance of previous on-call plans. The TAG also 
recommended that a hospital have a backup plan for viable patient care 
options when an on-call physician is not available, including such 
factors as telemedicine, other staff physicians, transfer agreements, 
and regional or community call arrangements. While community call 
arrangements are discussed below, we intend to address the remainder of 
the TAG recommendations at a later date.
    Comment: Several commenters supported our proposal to move and 
amend the regulations text relating to maintaining a list of on-call 
physicians. However, the commenters requested that CMS explain why the 
language ``in a manner that best meets the needs of the hospital's 
patients'' was deleted. The commenters stated that this explanation is 
important so that ``* * * the change is not misconstrued as undermining 
the ability of hospitals to set expectations for physicians agreeing to 
serve on-call to the hospital emergency department.'' Two commenters 
suggested that the entire language of Sec.  489.24(j) be moved to Sec.  
489.20(r) of the regulations. One commenter stated that moving the 
entire language of Sec.  489.24(j) would conform the regulations to the 
statute and that consolidating all of the on-call requirements under a 
single regulation, would help hospitals more easily identify and comply 
with all applicable EMTALA on-call requirements.
    Response: We proposed moving the regulatory text because we believe 
the change would make the regulations consistent with the statutory 
language. Furthermore, we deleted the ``best meets the needs'' language 
because we believe that the phrase has caused confusion among the 
provider community as to its meaning. We believe the language ``in 
accordance with the resources available to the hospital'' provides 
clarification that the hospital should provide on-call services based 
on the resources it has available, including the availability of 
specialists. We did not intend to suggest that removing the ``best 
meets the needs'' language would limit, in any way, a hospital's 
ability to set expectations that physicians be on call. It is crucial 
that hospitals are aware of their responsibility to ensure that they 
are providing sufficient on-call services to meet the needs of their 
community in accordance with the resources they have available. A 
hospital should strive to provide adequate specialty on-call coverage 
consistent with the services provided at the hospital and the resources 
the hospital has available. We are aware that providing specialty on-
call coverage can be challenging for a hospital because of the limited 
availability of specialty physicians who are willing or able to take 
call. Physicians should not perceive the change in regulations text as 
confirmation that they should limit their on-call availability. In 
addition, we believe the community call provision discussed below will 
help hospitals diversify their on-call coverage and ease the burden on 
those physicians who are providing continuous on-call coverage. 
Finally, we note that the TAG made additional recommendations related 
to on-call coverage that remain under consideration by CMS. We may, in 
the future, in response to these recommendations, engage in additional 
rulemaking or revise our interpretative guidelines to the EMTALA and 
related regulations in 42 CFR part 489.
    In response to the commenters who suggested moving all of the 
language currently at Sec.  489.24(j) to Sec.  489.20(r), the proposed 
regulations regarding community call and the existing regulations that 
permit on-call physicians to serve simultaneous call and schedule 
elective surgery while on-call provide hospitals and physicians 
flexibility in meeting the requirement that when an emergency room 
physician requests the appearance of an on-call physician, that on-call 
physician is required to appear under EMTALA. We believe that the 
provisions included under Sec.  489.24(j) should continue to be 
included under the EMTALA regulations and should not be moved to the 
provider agreement regulations at Sec.  489.20(r).
    We are adding the phrase ``who are on the hospital's medical staff, 
or who have privileges at the hospital, or who are on staff or have 
privileges at another hospital participating in a formal community call 
plan in accordance with Sec.  489.24(j)(2)(iii)'' to the regulation 
text to make the regulation text consistent with our policy on 
community call plans. The finalized regulation text at Sec.  
489.20(r)(2) reads: ``An on-call list of physicians who are on the 
hospital's medical staff, or who have privileges at the hospital, or 
who are on staff or have privileges at another hospital participating 
in a formal community call plan in accordance with Sec.  
489.24(j)(2)(iii) available to provide treatment necessary after the 
initial examination to stabilize individuals with emergency medical 
conditions who are receiving services required under Sec.  489.24 in 
accordance with the resources available to the hospital.''
b. Shared/Community Call
    As noted in the previous section, section 1866(a)(1)(I)(iii) of the 
Act states, as a requirement for participation in the Medicare program, 
that a hospital must keep a list of physicians who are on call for duty 
after the initial examination to provide treatment necessary to 
stabilize an individual with an emergency medical condition. If a 
physician on the list is called by a hospital to provide stabilizing 
treatment and either fails or refuses to appear within a reasonable 
period of time, the hospital and that physician may be in violation of 
EMTALA as provided for under section 1867(d)(1)(C) of the Act. Thus, 
hospitals are required to maintain a list of on-call physicians, and 
physicians or hospitals, or both, may be held responsible under the 
EMTALA statute if a physician who is on call fails or refuses to appear 
within a reasonable period of time.
    In the May 9, 2002 proposed rule (67 FR 31471), we stated that we 
were aware of hospitals' increasing concerns regarding their physician 
on-call requirements. Specifically, we noted that we were aware of 
reports of physicians, particularly specialty physicians, severing 
their relationships with hospitals because of on-call obligations, 
especially when those physicians belong to more than one hospital 
medical staff. We further noted that physician attrition from these 
medical staffs could result in hospitals having no specialty physician 
service coverage for their patients. In the September 9, 2003 final 
rule (68 FR 53264), we clarified the regulations at Sec.  489.24(j) to 
permit on-call physicians to schedule elective surgery during the time 
that they are on call and to permit on-call physicians to have 
simultaneous on-call duties. We also specified that physicians, 
including specialists and subspecialists, are not required to be on 
call at all times, and that the hospital must have policies and 
procedures to be followed when a particular specialty is not available 
or the on-call physician cannot respond because of situations beyond 
his or her control. We expected these clarifications to help improve 
access to physician services for all hospital patients by permitting 
hospitals flexibility to determine how best to maximize their available 
physician resources. Furthermore, we expected that these clarifications 
would permit hospitals to continue to attract physicians to serve on 
their medical staffs, thereby continuing to provide services to all 
patients, including those

[[Page 48663]]

individuals who are covered by EMTALA.
    As part of its recommendations concerning physician on-call 
requirements, the EMTALA TAG recommended that hospitals be permitted to 
participate in ``community call.'' Specifically, the language of the 
recommendation states: ``The TAG recommends that CMS clarify its 
position regarding shared or community call: That such community call 
arrangements are acceptable if the hospitals involved have formal 
agreements recognized in their policies and procedures, as well as 
backup plans. It should also be clarified that a community call 
arrangement does not remove a hospital's obligation to perform an MSE 
[medical screening examination].'' The TAG also recommended in a 
subsequent recommendation that ``A hospital may satisfy its on-call 
coverage obligation by participation in an approved community/regional 
call coverage program (CMS to determine appropriate approval 
process).''
    We believe that community call (as described below) would afford 
additional flexibility to hospitals providing on-call services and 
improve access to specialty physician services for individuals in an 
emergency department. Therefore, in the FY 2009 IPPS proposed rule, we 
proposed to amend our regulations at Sec.  489.24(j) to provide that 
hospitals may comply with the on-call list requirement specified at 
Sec.  489.20(r)(2) (under our proposed revision), by participating in a 
formal community call plan so long as the plan meets the elements 
outlined below. We further proposed to revise the regulations to state 
that, notwithstanding participation in a community call plan, hospitals 
are still required to perform medical screening examinations on 
individuals who present seeking treatment and to provide for transfer 
when appropriate.
    We proposed ``community call'' to be a formal on-call plan that 
permits a specific hospital in a region to be designated as the on-call 
facility for a specific time period, or for a specific service, or 
both. For example, if there are two hospitals that choose to 
participate in community call, Hospital A could be designated as the 
on-call facility for the first 15 days of each month and Hospital B 
could be designated as the on-call facility for the remaining days of 
each month. Alternatively, Hospital A could be designated as on-call 
for cases requiring specialized interventional cardiac care, while 
Hospital B could be designated as on-call for neurosurgical cases. 
Based on the proposal, we anticipated that hospitals and their 
communities would have the flexibility to develop a plan that reflects 
their local resources and needs. Such a community on-call plan would 
allow various physicians in a certain specialty in the aggregate to be 
on continuous call (24 hours a day, 7 days a week), without putting a 
continuous call obligation on any one physician. We note that, 
generally, if an individual arrives at a hospital other than the 
designated on-call facility, is determined to have an unstabilized 
emergency medical condition, and requires the services of an on-call 
specialist, the individual would be transferred to the designated on-
call facility in accordance with the community call plan.
    As noted above, we proposed that a community call plan must be a 
formal plan among the participating hospitals. While we do not believe 
it is necessary for the formal community call plan to be subject to 
preapproval by CMS, if an EMTALA complaint investigation is initiated, 
the plan will be subject to review by CMS. We proposed that, at a 
minimum, hospitals must include the following elements when devising a 
formal community call plan:
     The community call plan would include a clear delineation 
of on-call coverage responsibilities, that is, when each hospital 
participating in the plan is responsible for on-call coverage.
     The community call plan would define the specific 
geographic area to which the plan applies.
     The community call plan would be signed by an appropriate 
representative of each hospital participating in the plan.
     The community call plan would ensure that any local and 
regional EMS system protocol formally includes information on community 
on-call arrangements.
     Hospitals participating in the community call plan would 
engage in an analysis of the specialty on-call needs of the community 
for which the plan is effective.
     The community call plan would include a statement 
specifying that even if an individual arrives at the hospital that is 
not designated as the on-call hospital, that hospital still has an 
EMTALA obligation to provide a medical screening examination and 
stabilizing treatment within its capability, and hospitals 
participating in community call must abide by the EMTALA regulations 
governing appropriate transfers.
     There would be an annual reassessment of the community 
call plan by the participating hospitals.
    We proposed that revised Sec.  489.24(j) would read ``Availability 
of on-call physicians. In accordance with the on-call list requirements 
specified in Sec.  489.20(r)(2), a hospital must have written policies 
and procedures in place--(1) To respond to situations in which a 
particular specialty is not available or the on-call physician cannot 
respond because of circumstances beyond the physician's control; and 
(2) To provide that emergency services are available to meet the needs 
of individuals with emergency medical conditions if a hospital elects 
to--(i) Permit on-call physicians to schedule elective surgery during 
the time that they are on call; (ii) Permit on-call physicians to have 
simultaneous on-call duties; and (iii) Participate in a formal 
community call plan. Notwithstanding participation in a community call 
plan, hospitals are still required to perform medical screening 
examinations on individuals who present seeking treatment and to 
conduct appropriate transfers. The formal community call plan must 
include the following elements: [proposed elements noted above in the 
bullets are included in regulations text].''
    We welcomed public comments on the proposed elements of the formal 
community call plan noted above. We also solicited public comments on 
whether individuals believe it is important that, in situations where 
there is a governing State or local agency that would have authority 
over the development of a formal community call plan, the plan be 
approved by that agency. In summary, we proposed that, as part of the 
obligation to have an on-call list, hospitals may choose to participate 
in community call, provided that the formal community call plan 
includes, at a minimum, the elements noted in bullets above. In 
addition, we proposed that each hospital participating in the community 
call plan must have written policies and procedures in place to respond 
to situations in which the on-call physician is unable to respond due 
to situations beyond his or her control. We further proposed that a 
hospital would still be responsible for performing medical screening 
examinations on individuals who present to the hospital seeking 
treatment and conducting appropriate transfers, regardless of which 
hospital has on-call responsibilities on a particular day.
    Comment: The majority of commenters supported our proposal to 
permit hospitals to use participation in a community call plan as a 
means of meeting their on-call obligation. The commenters stated that 
such an

[[Page 48664]]

approach would allow communities to provide for access to specialty 
care in a more reasoned, expedited and efficient manner as well as 
relieve specialists from on-call 24 hours a day, 7 days a week, 
eliminate the need for duplicative coverage of nearby hospitals, 
increase physician retention of specialists, and regionalize scarce 
resources. Another commenter stated that community call, along with 
telemedicine, is one of the few ways limited resources can be used 
efficiently. The commenter noted that participation in community call 
is a necessary response to the workforce crisis in the emergency 
department.
    In addition, some commenters stated that the community call 
proposal would be particularly important to rural areas where 
physicians are in short supply. One commenter specifically addressed 
concerns about on-call coverage for the field of neurosurgery. The 
commenter stated that there are approximately 3,100 board certified 
neurosurgeons actively practicing in the country and about 5,000 
hospitals with emergency departments. The commenter stated it is, 
therefore, impossible to have neurosurgical on-call coverage for every 
emergency department 24 hours a day, 7 days a week, 365 days a year. 
The commenter noted that, in an effort to provide as much on-call 
coverage as possible, more than half of the country's neurosurgeons 
take simultaneous call at more than 1 hospital, 28 percent of 
neurosurgeons cover 2 hospitals, 13 percent cover 3 hospitals, and 10 
percent cover 4 or more hospitals. The commenter stated that the 
Institute of Medicine's (IOM's) series of reports on the future of 
emergency care addressed the shortage of on-call specialists. The 
commenter noted that an IOM committee studying the issue of on-call 
specialists identified regionalization of specialty services as an 
approach that warrants special consideration. The commenter included in 
its comment some language from the IOM committee and stated that while 
not exactly the same as regionalization, the idea of community call 
addresses a number of the same challenges that hospitals and on-call 
specialists face in their attempt to provide on-call coverage. The 
commenter stated that the IOM committee also noted that current EMTALA 
rules may be hampering the adoption of regional or community call; the 
commenter included language from the IOM committee which stated 
``uncertainty surrounding the interpretation and enforcement of EMTALA 
remains a damper to the development of coordinated, integrated 
emergency care systems.'' The commenter noted that the IOM recommended 
``that the Department of Health and Human Services adopt regulatory 
changes to the Emergency Medical Treatment and Active Labor Act 
(EMTALA) * * * so that the original goals of the law are preserved but 
integrated systems may further develop.'' The commenter stated that 
[they] are hopeful that because CMS has embraced the concept of 
community call and in essence removed the EMTALA barrier to organize 
such plans, patient access to timely emergency neurosurgical care will 
improve.
    The commenters cautioned CMS against being too prescriptive in the 
requirements imposed on hospitals that choose to participate in a 
community call arrangement. In particular, the commenters recommended 
that CMS delete the requirement in the proposed Sec.  
489.24(j)(2)(iii)(E) requiring ``evidence of engagement of the 
hospitals participating in the community call plan in an analysis of 
the specialty on-call needs of the community for which the plan is 
effective.'' One commenter encouraged CMS to work with other Federal 
agencies to remove legal and financial barriers to facilitate the 
proposed rule. The commenter noted that recent efforts to develop a 
community call plan in one county in Florida have been promising, 
although complex. The commenter urged CMS to provide for as much 
flexibility as possible to ``* * * support models for other communities 
to emulate.''
    Several commenters stated that CMS should not require approval of 
community call plans by public agencies. Another commenter stated that 
while the development of a community call plan is a worthwhile goal, 
developing that plan may be challenging, especially in communities 
where there is competition between hospitals and hospital systems. The 
commenter supported the proposal that the community call remain 
voluntary. Another commenter believed that the use of community call 
plans will provide relief to hospitals that are struggling to meet 
their EMTALA obligations. The commenter suggested CMS consider 
requiring medical staff to take call as a condition of holding 
privileges at a hospital. The commenter stated that legally requiring 
hospitals to maintain a call schedule, but placing no legal obligation 
on medical staff to participate in on-call, has led to staff members 
refusing to participate, participating only if paid, or changing their 
status from ``active'' to ``courtesy'' or ``consulting'' (categories 
which the commenter noted, traditionally, do not require a physician to 
take call).
    One commenter supported the proposal to formalize in regulation 
previous subregulatory guidance related to unavailability of certain 
specialists, scheduling elective surgery while taking call, and 
simultaneous on-call duties. In addition, the commenter ``* * * 
enthusiastically supports any initiative that fosters communication and 
cooperation among the hospitals in a community.'' The commenter stated 
that while the proposed regulations on community call fall under the 
EMTALA regulations, they are in line with The Joint Commission 
standards for emergency management that involve community partners in 
the development of emergency management plans as well as communication 
with community emergency response agencies and directives for timely 
communication with other hospitals during an emergency.
    One commenter stated the preamble indicated that a community call 
plan, which would qualify under the proposed rule, should have in the 
aggregate physicians on continuous call (24 hours a day, 7 days a week) 
and that this requirement is too restrictive and should be made more 
flexible. The commenter stated that this requirement does not appear to 
be consistent with the current regulatory standard that allows 
hospitals to maintain an on-call list in accordance with the hospital's 
resources.
    Response: We appreciate the commenters' support of the proposal to 
allow hospitals to participate in community call arrangements in order 
to meet their on-call obligations. We believe that providing hospitals 
with flexibility in maintaining on-call will allow for, as well as 
encourage, more specialists to participate in on-call for hospitals. We 
agree with the commenters that this proposal is especially important to 
rural hospitals that may have previously had difficulty obtaining 
specialty coverage for their emergency departments. We also appreciate 
the commenter's shared concerns regarding the field of neurosurgery and 
believe that community call plans will provide individuals with greater 
access to many specialties, such as neurosurgery.
    In response to the commenter who requested CMS provide models of 
community call plans for other communities to emulate, we stated in the 
proposed rule that we do not believe a community call plan needs 
preapproval from CMS. We continue to believe that a community call plan 
does not require authorization from CMS prior to taking effect. 
However, we encourage hospitals that believe they

[[Page 48665]]

have an effective community call plan to communicate such a plan to 
other hospitals that are interested in developing such a plan. We also 
emphasize that participation in a community call plan is strictly 
voluntary because the proposed regulations at Sec.  489.24(j)(2)(iii) 
do not require hospitals to participate in a community call 
arrangement. Rather, our proposal was intended to provide hospitals 
with a tool to use to promote an increase in the availability of 
specialty on-call physicians.
    In response to the commenter who suggested CMS require medical 
staff to take call as a condition of holding privileges at a hospital, 
we believe that would be an overly broad and inflexible approach to 
developing specific on-call arrangements for each hospital. Hospitals 
can, if they choose, make taking a call a requirement for physicians 
granted privileges at their hospital. In response to the commenter who 
supported ``the proposal'' to formalize the subregulatory guidance 
permitting simultaneous call and scheduling of elective surgery while 
on-call, we are clarifying that CMS previously finalized these 
regulations in the September 9, 2003 final rule (68 FR 53264). We did 
not propose any changes to those provisions in the FY 2009 IPPS 
proposed rule. We stated in the proposed rule that we believe a 
community call plan will allow various physicians in a certain 
specialty, in the aggregate, to be on continuous call (24 hours a day, 
7 days a week) without putting a continuous call obligation on any one 
physician. While we are not at this time mandating that hospitals 
maintain 24/7 on-call coverage, hospitals should carefully consider 
whether they are providing sufficient on-call services in line with 
their available resources. In the event of an investigation related to 
the compliance of a hospital with regard to an on-call list, whether 
accomplished through a community call plan or not, the determination, 
as at present, will be based on the specific circumstances of that 
hospital and, if applicable, the community call plan. We also note that 
the TAG made additional recommendations on the topic of on-call 
requirements which remain under consideration by CMS, and which may be 
the subject of future rulemaking or revisions of interpretative 
guidelines.
    With regard to the elements that we proposed that must be included 
in a formal community call plan, we agree with the commenters that it 
is not necessary for a community call plan to include the following 
proposed requirement in proposed Sec.  489.24(j)(2)(iii)(E): ``Evidence 
of engagement of the hospitals participating in the community call plan 
in an analysis of the specialty on-call needs of the community for 
which the plan is effective.'' We believe this requirement is covered 
under proposed paragraph (G) of Sec.  489.24(j)(2)(iii), which 
requires: ``An annual reassessment of the community call plan by the 
participating hospitals.'' Therefore, we are finalizing the community 
call regulation as proposed, with one modification. We are deleting the 
requirement under paragraph (E) of the proposed Sec.  
489.24(j)(2)(iii).
    Comment: Several commenters were concerned with potential 
liabilities under the Sherman Anti-Trust Act if they were to engage in 
a multihospital community call plan. Two commenters stated ``If a group 
of hospitals were to jointly formulate a community call plan, it is 
conceivable that the hospitals may, as a group, choose to contract with 
a physician group for coverage of certain emergency services. This 
could be regarded as collusion under certain interpretations of 
Sherman.'' One commenter stated that hospitals are presently reluctant 
to establish community call arrangements due to ``* * * potential 
Federal or State antitrust liability related to unlawful market 
division.'' The commenter recommended CMS support efforts to establish 
antitrust exemptions for community call arrangements. Another commenter 
expressed concern that, without an arrangement that is approved by the 
Antitrust Division of the Department of Justice, competitor hospitals 
could be investigated for anticompetitive activities related to the 
division of markets, resulting from either a timeframe or service-line 
division of responsibility. The commenter recommended that CMS obtain 
guidance from Justice on the additional checks and balances that might 
be needed to ensure hospitals can safely avail themselves of this added 
flexibility.
    Another commenter requested clarification of the application of the 
HIPAA to the proposed policy. The commenter asked whether, because 
protected health information of patients who may need the services of 
on-call physicians would not be in existence at the time of the 
community call agreement, the community call agreement would be 
classified under health care operations, an organized health care 
organization, or a business relationship. The commenters also requested 
clarification of the proposed policy if one or several hospitals that 
were part of a proposed community call plan decided not to participate 
in the plan. The commenters requested that CMS respond to the following 
questions regarding hospital participation: (1) Does nonparticipation 
of all providers invalidate the plans? (2) Is there a threshold for 
participation that must be met? (3) Does the presence of a community 
call plan in an area with nonparticipating providers partially or fully 
meet the nonparticipating hospital's EMTALA obligation?
    Response: In response to commenters' concerns pertaining to 
potential antitrust liabilities, we suggest that antitrust concerns be 
directed to the U.S. Department of Justice Antitrust Division for 
further review under the business review process. As mentioned 
previously, participation in a community call plan is strictly 
voluntary. Therefore, there is no threshold for participation in a 
community call plan, nor does nonparticipation of one or more hospitals 
invalidate the plan. In the event of an investigation related to the 
compliance of a hospital with the on-call requirements outlined in 
Sec.  489.20(r)(2), the determination, as at present, will be based on 
a review of the specific circumstances of that hospital, including, as 
applicable, the provisions of any community call plan in which it 
participates.
    In response to the commenter who expressed concerns about the 
applicability of the HIPAA Privacy Rule to the proposed community call 
provisions, the Office for Civil Rights (OCR) in the U.S. Department of 
Health and Human Services provides technical guidance and enforces the 
HIPAA Privacy Rule. OCR has explained that hospitals and other covered 
health care providers with a direct treatment relationship with 
individuals are not required to provide their notices to patients at 
the time they are providing emergency treatment. In these situations, 
the HIPAA Privacy Rule requires only that providers give patients a 
notice when it is practical to do so after the emergency situation has 
ended. In addition, where notice is delayed by an emergency treatment 
situation, the Privacy Rule does not require that providers make a good 
faith effort to obtain the patient's written acknowledgment of receipt 
of the notice. Any questions concerning the application of the HIPAA 
Privacy Rule to patients with emergency medical conditions should be 
directed to OCR.
    Comment: Several commenters expressed specific concerns regarding 
CMS's community call proposal. A few commenters were concerned that a 
community call plan could actually

[[Page 48666]]

reduce the amount of specialty services provided by a hospital, if 
hospitals were to contract with each other and transfer the burden of 
providing specialty on-call services to public safety net hospitals. 
One commenter urged CMS to closely monitor the implementation of 
community call plans as well as changes in patterns of on-call 
coverage. The commenter expressed concern that ``* * * groups of 
hospitals may misuse community call by improperly decreasing their 
community's access to specialty on-call coverage.'' The commenter 
provided an example in which two private hospitals that currently 
provide specialty on-call services would enter into a community call 
plan and decrease the amount of coverage so that the amount of coverage 
they provide together to the community is less than the coverage that 
was provided prior to the plan being in effect. The commenter stated 
that, in this case, the community call plan would become a tool whereby 
private and other nonprofit hospitals coordinate decreasing their on-
call coverage at the expense of safety net hospitals.
    One commenter requested further research on the impact of the 
proposed rule and suggested pilot testing in representative communities 
to determine the impact. Another commenter stated that while it does 
appear that community call arrangements would encourage physicians to 
take call at specific hospitals, in most cases there are not enough 
tertiary care hospitals with specialized capabilities to manage all of 
the transfer requests. The commenter stated that from her experience, a 
community call plan does not stop abuse of EMTALA and stated ``It 
should not surprise CMS, and it is an unspoken truth, that specialty 
physicians prefer insured patients.'' The commenter noted a difference 
in the treatment of individuals who are uninsured versus those who are 
insured and stated that if an individual is uninsured a specialty 
physician may refuse to see that individual. The commenter asserted 
that, in such a case, the hospital would need to transfer the 
individual because no physician will see him or her and the hospital 
would not be paid for admitting the individual. The commenter stated 
that it is very difficult for a receiving hospital to charge the 
transferring hospital with an EMTALA violation because ``* * * we must 
take them at their professional word that the hospital does not have a 
physician on call for the needs of the patient.'' The commenter 
provided several examples that illustrate abuse of EMTALA requirements 
and recommended that, to avoid abuse of the community call plan, 
hospitals be ``* * * required to report the results of the on-call 
annual plan and the patients that the on-call physician accepts on 
subsequent days, but was not on call or available for the day the 
patient came to the ER.'' In addition, the commenter requested that CMS 
address that commenter's suggestion that local emergency rooms should 
make every effort to arrange the transportation of an individual to a 
nearby facility before turning to tertiary and quaternary care centers. 
One commenter stated that hospitals' annual on-call plans should be 
made available to the public and should include an assessment of 
whether the plan was adequate. The commenter also suggested the 
hospitals' backup plans be made available.
    Another commenter stated that the proposed policies would have a 
negative impact on patients. The commenter stated that a community call 
arrangement, such as the one outlined in the proposed rule could ``* * 
* erode an emergency department physician's ability to consult a 
specialist and may require a patient transfer to the hospital that the 
on-call specialist is covering.'' The commenter stated that it is 
unfair and unsafe to transport an individual only for the convenience 
of the on-call specialist. The commenter also noted that moving the 
individual to the on-call specialist could delay treatment and increase 
the staffing burden on an already-taxed emergency care system because 
it is likely that advanced life support as well as a registered nurse 
would be required to accompany the individual. Instead of the proposal, 
the commenter urged CMS to adopt the recommendation provided by the IOM 
(included in Hospital-Based Emergency Care at the Breaking Point 2006), 
which reads: ``The Department of Health and Human Services and the 
National Highway Traffic Safety Administration, in partnership with 
professional organizations, convene a panel of individuals with 
multidisciplinary expertise to develop evidence-based categorization 
systems for emergency medical services, emergency departments, and 
trauma centers based on adult and pediatric services capabilities.''
    Response: We agree with the commenters that a community call plan 
should improve patient care by providing greater access to specialists 
rather than potentially risking an individual's life by engaging in an 
unnecessary transfer. Furthermore, we agree that a hospital that makes 
an appropriate transfer in accordance with EMTALA requirements should 
attempt to avoid transporting individuals long distances when a shorter 
transport to a hospital with the appropriate specialized capabilities 
and capacity is possible. We also remind hospitals and medical staff 
that EMTALA requires a hospital to treat an individual regardless of 
his or her insurance status. Therefore, if there is evidence of 
disparate treatment based on an individual's insurance coverage, the 
hospital or physician, or both, may be subject to penalties for an 
EMTALA violation. Moreover, a hospital that believes it has been the 
recipient of an inappropriate transfer of an individual with an 
unstable emergency medical condition who is protected under EMTALA is 
obligated to report this to CMS. In response to the commenters who 
suggested the effect of community call will be to allow certain 
hospitals to get together to reduce their on-call capacity and in 
effect dump individuals on other hospitals in their area, we remind 
hospitals that CMS will continue to investigate complaints about 
hospitals' compliance with EMTALA and related requirements, including 
compliance with on-call requirements.
    In response to the commenter who suggested that hospitals be ``* * 
* required to report the results of the on-call annual plan and the 
patients that the on-call physician accepts on subsequent days, but was 
not on call or available for the day the patient came to the ER,'' we 
stated in the regulations proposed at Sec.  489.24(j)(2)(iii)(G) that 
there must be an ``Annual assessment of the community call plan by the 
participating hospitals.'' However, we believe that a requirement for 
hospitals to report the results of their community call plans on an 
annual basis to CMS may be too burdensome. Therefore, we are not 
instituting a mandatory reporting requirement at this time.
    In response to the commenters who suggested further research and 
adoption of the IOM recommendation, we anticipate that we will continue 
to present proposals concerning various on-call issues in future 
rulemaking and will consider the commenters' suggestions at that time.
    Comment: One commenter stated that the health care district of its 
county has been working for several years with the hospital and 
physician community to address the shortage of specialty physicians 
providing on-call coverage in the county's hospital emergency 
departments. The commenter requested that CMS consider the following 
comments and questions:
    (1) Will the final regulation address whether the shared/community 
call

[[Page 48667]]

plan can contain a financial arrangement to address how participating 
physicians and/or hospitals can be compensated for serving as the 
designated on-call facility during an established period of time?
    (2) What parameters will be allowed to define the specific 
geographic area? For example, does it have to be set up to include an 
entire county, or could it be as small as a city or sub-county region?
    (3) Do all hospitals within the defined geographic area have to 
participate in the community call plan?
    (4) Will CMS place any safeguards into the regulation to prevent 
hospitals from other counties or areas outside the defined geographic 
area from taking advantage of the new community call plan by 
transporting patients to the designated on-call facility absent a 
transfer agreement?
    (5) Will any entity grant authority to community call plans?
    (6) Will the community call plan regulation provide any guidance on 
the financial/payer arrangements for patients outside the Medicare and 
Medicaid system and the implication of patients being transferred to a 
hospital that may not accept their insurance?
    (7) The development of community call plans should not impose a 
disproportionate and uncompensated obligation on tertiary hospitals 
that have a broader representation of medical specialties in limited 
supply on their medical staffs.
    Response: We appreciate the commenter's questions and comments 
regarding the community call plan. In response to the question 
regarding compensation for serving as the designated on-call facility 
during an established period of time, the financial arrangements made 
between an on-call physician and a hospital are between that physician 
and that hospital. CMS is not in a position to participate in any sort 
of contractual relationship between a physician and a hospital. We do 
not believe any sort of financial agreement needs to be included in the 
community call plan. However, if hospitals choose to, they are welcome 
to include this information in their community call plans.
    In response to the commenters request for clarification on defining 
the geographic boundaries of a community call plan, we did not specify 
in the proposed rule any geographic parameters that a community call 
plan must adhere to; that is, we did not specify whether a community 
call plan must cover a city, region, or State, or other area because we 
intended to promote flexibility for hospitals in the development of 
community call plans. Therefore, we would like to clarify that there 
are no geographic rules that hospitals must follow as participants of a 
community call plan. Similarly, not all hospitals within a defined 
geographic area need to participate in the community call plan. For 
example, if four hospitals are located in a specific county and only 
three of those hospitals choose to participate in the community call 
plan, the plan will not be invalidated due to lack of participation of 
the fourth hospital in the community call plan.
    In response to the commenter's question as to whether CMS will 
place any safeguards into the regulation to prevent hospitals not 
participating in the plan from transporting individuals to the on-call 
facility without a transfer agreement, we specified in the proposed 
regulation text at Sec.  489.24(j)(2)(iii) that: ``Notwithstanding 
participation in a community call plan, hospitals are still required to 
perform medical screening examinations on individuals who present 
seeking treatment and to conduct appropriate transfers'' (emphasis 
added). Therefore, if an individual presents to a hospital and requests 
treatment for a medical condition and it is determined the individual 
has an emergency medical condition, the hospital must provide 
stabilizing treatment within its capability and capacity, and may make 
an appropriate transfer, consistent with the EMTALA regulations 
governing transfer. This obligation remains, regardless of whether or 
not the hospital to which the individual presented is either 
participating in the community call plan or is designated as the on-
call facility. If CMS determines through an investigation that a 
hospital, whether or not it is participating in a community call plan, 
engaged in an inappropriate transfer of an individual with an unstable 
emergency medical condition who was protected under EMTALA, that 
hospital would be in violation of EMTALA and subject to enforcement 
action. All Medicare-participating hospitals with dedicated emergency 
departments, including hospitals that are outside a particular 
geographic region or not participating in a formal community call plan, 
can still seek to transfer individuals to hospitals that are 
participating in a formal community call plan, via an appropriate 
transfer, notwithstanding the absence or presence of a transfer 
agreement and regardless of whether the transferring hospital is 
participating in a formal community call plan. Neither the current 
EMTALA regulations nor the proposed regulations require a hospital to 
have a transfer agreement in place prior to seeking to transfer an 
individual to another hospital that is capable of providing stabilizing 
care.
    In the proposed rule, we did not propose, but solicited comment, on 
whether community call plans should be approved by State or local 
agencies. We did not receive any comments supporting preapproval of a 
community call plan by a local or State agency, or both. Therefore, at 
this time, we are not requiring local, State, or Federal agencies to 
approve a community call plan.
    In response to the commenter's request for guidance as to whether 
the regulations would give guidance on financial/payer arrangements to 
provide for individuals not covered by Medicare or Medicaid and the 
implication of individuals being transferred to a hospital that may not 
accept their insurance, we note that the intent of EMTALA is to ensure 
that an individual presenting to a hospital with a dedicated emergency 
department receives an appropriate medical screening examination to 
determine whether the individual has an emergency medical condition 
and, if necessary, receives stabilizing treatment or providing for an 
appropriate transfer to another facility, regardless of the 
individual's method of payment or insurance status. Thus, we do not see 
the relevance of providing any guidance on financial/payer arrangements 
outside of the EMTALA context. Together with the OIG, we issued a 
Special Advisory Bulletin on the Patient Anti-Dumping Statute that 
addresses hospital obligations toward individuals under EMTALA, 
including individuals covered under managed care plans (64 FR 61353). 
We continue to stand by that guidance.
    In summary, after consideration of the public comments we received, 
we are finalizing the community call provision at Sec.  
489.24(j)(2)(iii) as proposed, with one modification. We are deleting 
the requirement at proposed paragraph (j)(2)(iii)(E) ``Evidence of 
engagement of the hospitals participating in the community call plan in 
an analysis of the specialty on-call needs of the community for which 
the plan is effective.''
5. Technical Change to Regulations
    In the FY 2008 IPPS final rule with comment period (72 FR 47413), 
we revised Sec.  489.24(a)(2) (which refers to the nonapplicability of 
certain EMTALA provisions in an emergency area during an emergency 
period) to conform it to the changes made to section 1135 of the

[[Page 48668]]

Act by the Pandemic and All-Hazards Preparedness Act. When we made the 
change to the regulations, we inadvertently left out language 
consistent with the following statutory language found in section 1135: 
``pursuant to an appropriate State emergency preparedness plan; or in 
the case of a public health emergency described in subsection (g)(1)(B) 
that involves a pandemic infectious disease, pursuant to a State 
pandemic preparedness plan or a plan referred to in clause (i), 
whichever is applicable in the State.'' We also inadvertently left out 
the phrase in section 1135 ``during an emergency period'' when we state 
the nonapplicability of the sanctions in an emergency area. As we 
proposed, we are revising the language at Sec.  489.24(a)(2) to include 
the aforementioned language to conform the regulation text to the 
statutory language. Proposed revised Sec.  489.24(a)(2) would read as 
follows: ``Nonapplicability of provisions of this section. Sanctions 
under this section for an inappropriate transfer during a national 
emergency or for the direction or relocation of an individual to 
receive medical screening at an alternate location pursuant to an 
appropriate State emergency preparedness plan or, in the case of a 
public health emergency that involves a pandemic infectious disease, 
pursuant to a State pandemic preparedness plan do not apply to a 
hospital with a dedicated emergency department located in an emergency 
area during an emergency period, as specified in section 1135(g)(1) of 
the Act. A waiver of these sanctions is limited to a 72-hour period 
beginning upon the implementation of a hospital disaster protocol, 
except that, if a public health emergency involves a pandemic 
infectious disease (such as pandemic influenza), the waiver will 
continue in effect until the termination of the applicable declaration 
of a public health emergency, as provided for by section 1135(e)(1)(B) 
of the Act.''
    Comment: Several commenters addressed our proposal to amend the 
regulations at Sec.  489.24(r)(2) so that the regulations conform to 
the statute and to the changes made to section 1135 of the Act by the 
Pandemic and All-Hazards Preparedness Act. The commenters supported the 
change because it makes the regulations consistent with the 
requirements of the statute and allows hospitals to provide appropriate 
care in a timely manner during a disaster without fear of EMTALA 
sanctions.
    Response: We appreciate the commenters' support of our proposed 
technical change. We are finalizing the technical change to Sec.  
489.24(a)(2) as proposed.

J. Application of Incentives To Reduce Avoidable Readmissions to 
Hospitals

1. Overview
    In the FY 2009 IPPS proposed rule (73 FR 23673), we discussed the 
development and application of evidence-based best practices meant to 
reduce the incidence of avoidable hospital readmissions. We note that 
we are not adopting policy in this final rule. Rather, we are providing 
a summary of the public comments received on this topic.
    A significant portion of Medicare spending--$15 billion each year--
is related to hospital readmissions. According to a 2005 MedPAC 
report,\24\ nearly 18 percent of beneficiaries who are discharged from 
the hospital are readmitted within 30 days, resulting in approximately 
2 million readmissions each year. MedPAC's analysis concluded that over 
13 percent of 30-day hospital readmissions and an associated $12 
billion in spending (\4/5\ of all Medicare spending for readmissions) 
are potentially avoidable through the application of evidence-based 
best practices.
---------------------------------------------------------------------------

    \24\ Medicare Payment Advisory Commission: Report to Congress: 
Promoting Greater Efficiency in Medicare. June 2007, Chapter 5, p. 
103.
---------------------------------------------------------------------------

    The FY 2009 IPPS proposed rule (73 FR 23673) did not propose any 
specific policy regarding readmissions but instead highlighted issues 
related to measurement, accountability, and value-based purchasing 
(VBP) incentives. Specifically, we presented three VBP options to 
reduce costs and improve quality related to readmissions: (1) Direct 
adjustments to hospital payments; (2) adjustments to hospital payments 
through a performance-based payment methodology; and (3) public 
reporting of readmission rates.
    Of the approximately 1,150 comments received on the FY 2009 IPPS 
proposed rule, 65 (5.6 percent) addressed readmissions to hospitals. 
Hospital associations and hospitals submitted over 70 percent of the 
relevant public comments, with medical specialty societies comprising 
the next largest group of commenters. A summary of these public 
comments are included under the subject topics.
2. Measurement
    In the FY 2009 IPPS proposed rule, we noted certain prerequisites 
for initiatives intended to reduce hospital readmission rates, 
including the recognition that routine, valid, and reliable 
measurements are important to encourage trust and to engage 
stakeholders. Moreover, measurement data should be meaningful and 
actionable for hospitals.
    Risk adjustment is one method for achieving more accurate 
measurement of preventable readmissions. The proposed rule stated that 
a zero percent readmission rate may not be an appropriate goal, as 
extremely low readmission rates could indicate restricted access to 
necessary medical services rather than quality health care delivery. 
However, risk adjustment could help define expected readmission rates 
for a given patient or patient population.
    Informative readmission measurement also requires an appropriate 
timeframe between discharge and readmission on which to base measures 
of avoidable readmissions. For example, a 30-day window is used for 
readmission measures in the RHQDAPU program and the 9th Scope of Work 
for Medicare Quality Improvement Organizations (QIOs).
    One commenter suggested that CMS use QIO data to conduct research 
and develop a knowledge base to help answer readmission measure 
specification questions of this type. However, the commenter did not 
specifically address the appropriateness of the 30-day window.
    In the proposed rule, we also solicited comments concerning the 
appropriate scope of readmissions measures, querying whether to focus 
on all readmissions or to spotlight higher cost, more easily 
preventable, or most frequently occurring readmissions.
    Most commenters urged CMS to exclude certain categories of 
readmissions when measuring and calculating rates. One commenter stated 
that CMS should not penalize hospitals for readmissions that occur if a 
patient returns from a postacute care setting or if a readmission is 
not clearly related to the initial admission. Other commenters 
described cases in which readmissions are not only foreseeable but 
planned occurrences. For example, if a patient has an acute episode 
just prior to elective surgery, the attending physician may discharge a 
patient for a few days to ensure that the patient is hydrated and 
infection free before surgery.
3. Shared Accountability
    In the FY 2009 IPPS proposed rule (73 FR 23673), we discussed that 
hospitals are accountable for the quality of care delivered during 
hospitalization, which may also affect health care quality post-
discharges. However, hospitals are not the only providers that affect 
the occurrence of readmissions. Other

[[Page 48669]]

health care entities (such as SNFs, IRFs, HHAs, ESRD facilities, and 
health care providers), as well as Medicare beneficiaries and their 
caregivers share responsibility for quality health care delivery and 
play important roles in preventing readmissions.
    To improve accountability, many commenters recommended expanding 
financial accountability to additional stakeholders. For example, one 
commenter advocated increasing accountability by holding physicians 
financially responsible for high rates of risk-adjusted readmissions. 
In addition, many commenters advocated for the development of accurate 
methods to attribute accountability.
    Shared accountability makes accurate measurement difficult without 
alignment of quality measures across care settings. Commenters 
addressed how health care alignment and infrastructure impact 
readmission rates. Citing a MedPAC report, one commenter noted that 
hospitals rarely follow up with patients after hospital discharge and 
that other health care providers have not adequately invested in their 
responsibility to provide effective transitional care.
4. VBP Incentives
    CMS is increasingly promoting quality and efficiency of care 
through the application of VBP tools. The VBP methodology is meant to 
promote adherence to evidence-based best practices by rewarding high-
achievement. In the context of readmissions, we presented in the FY 
2009 IPPS proposed rule three potential uses of incentives to encourage 
prevention of avoidable hospital readmissions.
    All of the commenters supported efforts to reduce avoidable 
readmissions. However, their comments were mixed about the 
appropriateness of payment-focused interventions. Commenters 
representing hospital associations asked CMS to answer the following 
three questions before advancing any particular readmission policy:
     To what extent is it possible to identify avoidable 
readmissions?
     Are there effective strategies for reducing or eliminating 
these avoidable readmissions?
     What is the likelihood that each approach will promote and 
encourage the use of those effective strategies while avoiding 
undesirable consequences?
    One commenter urged CMS to focus on auditing 30-day readmission 
outlier facilities rather than pursuing payment incentive policies to 
determine if clinical interventions and targeted readmission denials 
improve readmission rates.
    Other commenters also emphasized that reducing readmission rates 
requires more than simple payment incentive strategies because of 
structural limitations inherent to the U.S. health care system, 
including the lack of coordinated chronic care services and the use of 
hospitals as primary care providers. One commenter questioned whether 
readmission data would be meaningful or actionable to either CMS or 
hospitals. This commenter asserted that readmission rates should not be 
tied to hospital reimbursement because such rates more accurately 
measure physician resource use.
5. Direct Payment Adjustment
    As stated in the FY 2009 IPPS proposed rule (73 FR 23674), direct 
payment adjustment for readmissions could range from total denial to 
incremental adjustment. The magnitude of the payment adjustment could 
be based on patient-specific risk factors or on the shared 
accountability among the involved entities. A variation of this 
approach could be adjustment of all hospital payments for readmissions, 
nationwide or by some regional designation, based on aggregate 
information about avoidable readmissions for the relevant Medicare 
population (national or regional) under typical circumstances. Under 
this approach, hospitals would receive less Medicare payment for 
readmissions for conditions with lower than expected rates of 
readmission and less shared responsibility.
    Many commenters favored various forms of direct payment adjustment 
to reduce avoidable hospital readmissions. Given the number of care 
settings and patient-specific factors that affect hospital readmission 
rates, many commenters favored direct payment adjustments based on 
degrees of accountability and foreseeable risk. Numerous commenters 
suggested that direct payment adjustments should account for patient-
specific risk factors, including age, disease severity, and the 
presence of comorbidities. Commenters also noted that a lack of 
prescription drug coverage can reduce patient compliance, raising the 
risk of readmission.
    Not all of the public comments that addressed direct payment 
adjustments were favorable. None of the commenters supported using an 
all-or-nothing approach like the current HAC payment provision. The 
commenters stated that this strategy unfairly punishes hospitals for 
readmissions that will occur despite strict adherence to best 
practices. Commenters noted that direct payment adjustments cannot 
adequately correct for all contributing factors to readmission rates. 
One commenter also argued against direct payment adjustments in cases 
where hospitals already receive reduced payments for transfer patients.
6. Performance-Based Payment Adjustment
    Performance-based adjustments could be based on a payment 
methodology such as the Medicare Hospital VBP Plan discussed in section 
IV.C. of the proposed rule and this final rule. The payment adjustment 
could reflect a comparison between an individual hospital's actual and 
expected readmission rates.
    Many commenters supported some form of performance-based payment 
adjustment for readmissions. A number of commenters stated that 
readmission quality and cost reduction measures should be part of the 
broader picture of value-based purchasing. In contrast, one commenter 
suggested that CMS continue to work through QIOs on education-based 
reduction strategies before adopting performance-based payment 
adjustments for readmissions.
7. Public Reporting of Readmission Rates
    The third VBP incentive that we presented for public comment in the 
FY 2009 IPPS proposed rule (73 FR 23675) was public reporting of 
hospital-specific, risk-adjusted readmission rates. The 
Administration's Value-Driven Health Care Initiative, which stems from 
the President's Executive Order Promoting Quality and Efficient Health 
Care in Federal Government Health Care Programs, instructed federal 
agencies to increase transparency of healthcare quality and costs. 
Using the Hospital Compare Web site explained in section IV.B. of the 
proposed rule and this final rule, patients can compare the quality of 
care provided by hospitals. The information supports improve consumer 
decision making through better access to healthcare information.
    Many commenters supported public reporting of readmission data. All 
of the commenters who were in favor of public reporting supported using 
only the Hospital Compare Web site for postings. However, many 
commenters only supported public reporting of measures endorsed by the 
NQF and adopted by the HQA. Some commenters suggested that readmission 
data remain confidential for a period to allow health care providers to 
adjust to collecting and reporting readmission measures,

[[Page 48670]]

which would give hospitals time to analyze their data and develop 
programs to improve readmission rates.
8. Potential Unintended Consequences of VBP Incentives
    Some commenters identified potential unintended consequences for 
readmission-related VBP incentives. A few commenters stated that 
payments tied to readmission rates might lead hospitals to direct 
previous patients to other institutions for follow-up care, frustrating 
continuity of care.
    Other commenters addressed the potential for increased health care 
costs. One commenter expressed concern that linking readmission rates 
to payment would create an incentive for hospitals to lengthen costly 
inpatient stays to avoid related readmissions later and expose patients 
to increased hospital-related risks without improving quality of care. 
However, another commenter noted that Medicare IPPS gives hospitals a 
balancing incentive to not prolong length of stay.
    We appreciate all of the public comments that we received in 
response to our solicitation. We will take them into consideration in 
any future rulemaking efforts that we determine may be necessary.

K. Rural Community Hospital Demonstration Program

    In accordance with the requirements of section 410A(a) of Public 
Law 108-173, the Secretary has established a 5-year demonstration 
program (beginning with selected hospitals' first cost reporting period 
beginning on or after October 1, 2004) to test the feasibility and 
advisability of establishing ``rural community hospitals'' for Medicare 
payment purposes for covered inpatient hospital services furnished to 
Medicare beneficiaries. A rural community hospital, as defined in 
section 410A(f)(1), is a hospital that--
     Is located in a rural area (as defined in section 
1886(d)(2)(D) of the Act) or is treated as being located in a rural 
area under section 1886(d)(8)(E) of the Act;
     Has fewer than 51 beds (excluding beds in a distinct part 
psychiatric or rehabilitation unit) as reported in its most recent cost 
report;
     Provides 24-hour emergency care services; and
     Is not designated or eligible for designation as a CAH.
    Section 410A(a)(4) of Public Law 108-173 states that no more than 
15 such hospitals may participate in the demonstration program.
    As we indicated in the FY 2005 IPPS final rule (69 FR 49078), in 
accordance with sections 410A(a)(2) and (a)(4) of Public Law 108-173 
and using 2002 data from the U.S. Census Bureau, we identified 10 
States with the lowest population density from which to select 
hospitals: Alaska, Idaho, Montana, Nebraska, Nevada, New Mexico, North 
Dakota, South Dakota, Utah, and Wyoming (Source: U.S. Census Bureau 
Statistical Abstract of the United States: 2003). Nine rural community 
hospitals located within these States are currently participating in 
the demonstration program. (Of the 13 hospitals that participated in 
the first 2 years of the demonstration program, 4 hospitals located in 
Nebraska have become CAHs and have withdrawn from the program.)
    In a notice published in the Federal Register on February 6, 2008 
(73 FR 6971 through 6973), we announced a solicitation for up to six 
additional hospitals to participate in the demonstration program. Four 
additional hospitals were selected to participate under this 
solicitation. We are planning for each of these hospitals to begin 
under the demonstration payment methodology with its first cost report 
year starting on or after July 1, 2008. The end date of participation 
for these hospitals is September 30, 2010. The February 6, 2008 notice 
specifies the eligibility requirements for the demonstration program.
    Under the demonstration program, participating hospitals are paid 
the reasonable costs of providing covered inpatient hospital services 
(other than services furnished by a psychiatric or rehabilitation unit 
of a hospital that is a distinct part), applicable for discharges 
occurring in the first cost reporting period beginning on or after the 
October 1, 2004 implementation date of the demonstration program (or 
the July 1, 2008 date for the newly selected hospitals). Payments to 
the participating hospitals will be the lesser amount of the reasonable 
cost or a target amount in subsequent cost reporting periods. The 
target amount in the second cost reporting period is defined as the 
reasonable costs of providing covered inpatient hospital services in 
the first cost reporting period, increased by the inpatient prospective 
payment update factor (as defined in section 1886(b)(3)(B) of the Act) 
for that particular cost reporting period. The target amount in 
subsequent cost reporting periods is defined as the preceding cost 
reporting period's target amount, increased by the inpatient 
prospective payment update factor (as defined in section 1886(b)(3)(B) 
of the Act) for that particular cost reporting period.
    Covered inpatient hospital services are inpatient hospital services 
(defined in section 1861(b) of the Act), and include extended care 
services furnished under an agreement under section 1883 of the Act.
    Section 410A of Public Law 108-173 requires that, ``in conducting 
the demonstration program under this section, the Secretary shall 
ensure that the aggregate payments made by the Secretary do not exceed 
the amount which the Secretary would have paid if the demonstration 
program under this section was not implemented.'' Generally, when CMS 
implements a demonstration program on a budget neutral basis, the 
demonstration program is budget neutral in its own terms; in other 
words, the aggregate payments to the participating providers do not 
exceed the amount that would be paid to those same providers in the 
absence of the demonstration program. This form of budget neutrality is 
viable when, by changing payments or aligning incentives to improve 
overall efficiency, or both, a demonstration program may reduce the use 
of some services or eliminate the need for others, resulting in reduced 
expenditures for the demonstration program's participants. These 
reduced expenditures offset increased payments elsewhere under the 
demonstration program, thus ensuring that the demonstration program as 
a whole is budget neutral or yields savings. However, the small scale 
of this demonstration program, in conjunction with the payment 
methodology, makes it extremely unlikely that this demonstration 
program could be viable under the usual form of budget neutrality. 
Specifically, cost-based payments to participating small rural 
hospitals are likely to increase Medicare outlays without producing any 
offsetting reduction in Medicare expenditures elsewhere. Therefore, a 
rural community hospital's participation in this demonstration program 
is unlikely to yield benefits to the participant if budget neutrality 
were to be implemented by reducing other payments for these providers.
    In order to achieve budget neutrality for this demonstration 
program for FY 2009, as we proposed in the FY 2009 IPPS proposed rule, 
we are adjusting the national inpatient PPS rates by an amount 
sufficient to account for the added costs of this demonstration 
program. We are applying budget neutrality across the payment system as 
a whole rather than merely across the participants in this 
demonstration program. As we discussed in the FY 2005, FY 2006, FY 2007 
and FY 2008 IPPS final rules (69 FR 49183; 70 FR 47462; 71 FR 48100; 
and 72 FR 47392), we believe that the language of the

[[Page 48671]]

statutory budget neutrality requirements permits the agency to 
implement the budget neutrality provision in this manner. For FY 2009, 
using data from the cost reports from each of the nine currently 
participating hospitals' first year of participation in the 
demonstration program, that is, cost reports for years beginning in CY 
2005, and estimating the cost of four additional hospitals selected 
based on cost report periods that include CY 2006, we estimate that the 
additional cost will be $22,790,388. This estimated adjusted amount 
reflects the estimated difference between the participating hospitals' 
costs and the IPPS payment based on data from the hospitals' cost 
reports. We discuss the payment rate adjustment that is required to 
ensure the budget neutrality of the demonstration program for FY 2009 
in section II.A.4. of the Addendum to this final rule.

V. Changes to the IPPS for Capital-Related Costs

A. Background

    Section 1886(g) of the Act requires the Secretary to pay for the 
capital-related costs of inpatient acute hospital services ``in 
accordance with a prospective payment system established by the 
Secretary.'' Under the statute, the Secretary has broad authority in 
establishing and implementing the IPPS for acute care hospital 
inpatient capital-related costs. We initially implemented the IPPS for 
capital-related costs in the Federal fiscal year (FY) 1992 IPPS final 
rule (56 FR 43358), in which we established a 10-year transition period 
to change the payment methodology for Medicare hospital inpatient 
capital-related costs from a reasonable cost-based methodology to a 
prospective methodology (based fully on the Federal rate).
    FY 2001 was the last year of the 10-year transition period 
established to phase in the IPPS for hospital inpatient capital-related 
costs. For cost reporting periods beginning in FY 2002, capital IPPS 
payments are based solely on the Federal rate for almost all acute care 
hospitals (other than hospitals receiving certain exception payments 
and certain new hospitals). The basic methodology for determining 
capital prospective payments using the Federal rate is set forth in 
Sec.  412.312 of the regulations. For the purpose of calculating 
payments for each discharge, the standard Federal rate is adjusted as 
follows:
    (Standard Federal Rate) x (DRG Weight) x (Geographic Adjustment 
Factor (GAF)) x (COLA for hospitals located in Alaska and Hawaii) x (1 
+ Capital DSH Adjustment Factor + Capital IME Adjustment Factor, if 
applicable).
    Hospitals also may receive outlier payments for those cases that 
qualify under the threshold established for each fiscal year as 
specified in Sec.  412.312(c) of the regulations.
1. Exception Payments
    The regulations at Sec.  412.348(f) provide that a hospital may 
request an additional payment if the hospital incurs unanticipated 
capital expenditures in excess of $5 million due to extraordinary 
circumstances beyond the hospital's control. This policy was originally 
established for hospitals during the 10-year transition period, but as 
we discussed in the FY 2003 IPPS final rule (67 FR 50102), we revised 
the regulations at Sec.  412.312 to specify that payments for 
extraordinary circumstances are also made for cost reporting periods 
after the transition period (that is, cost reporting periods beginning 
on or after October 1, 2001). Additional information on the exception 
payment for extraordinary circumstances in Sec.  412.348(f) can be 
found in the FY 2005 IPPS final rule (69 FR 49185 and 49186).
    During the transition period, under Sec. Sec.  412.348(b) through 
(e), eligible hospitals could receive regular exception payments. These 
exception payments guaranteed a hospital a minimum payment percentage 
of its Medicare allowable capital-related costs depending on the class 
of the hospital (Sec.  412.348(c)), but were available only during the 
10-year transition period. After the end of the transition period, 
eligible hospitals can no longer receive this exception payment. 
However, even after the transition period, eligible hospitals receive 
additional payments under the special exceptions provisions at Sec.  
412.348(g), which guarantees all eligible hospitals a minimum payment 
of 70 percent of its Medicare allowable capital-related costs provided 
that special exceptions payments do not exceed 10 percent of total 
capital IPPS payments. Special exceptions payments may be made only for 
the 10 years from the cost reporting year in which the hospital 
completes its qualifying project, and the hospital must have completed 
the project no later than the hospital's cost reporting period 
beginning before October 1, 2001. Thus, an eligible hospital may 
receive special exceptions payments for up to 10 years beyond the end 
of the capital IPPS transition period. Hospitals eligible for special 
exceptions payments are required to submit documentation to the 
intermediary indicating the completion date of their project. (For more 
detailed information regarding the special exceptions policy under 
Sec.  412.348(g), we refer readers to the FY 2002 IPPS final rule (66 
FR 39911 through 39914) and the FY 2003 IPPS final rule (67 FR 50102).)
2. New Hospitals
    Under the IPPS for capital-related costs, Sec.  412.300(b) of the 
regulations defines a new hospital as a hospital that has operated 
(under current or previous ownership) for less than 2 years. For more 
detailed information, we refer readers to the FY 1992 IPPS final rule 
(56 FR 43418). During the 10-year transition period, a new hospital was 
exempt from the capital IPPS for its first 2 years of operation and was 
paid 85 percent of its reasonable costs during that period. Originally, 
this provision was effective only through the transition period and, 
therefore, ended with cost reporting periods beginning in FY 2002. 
Because, as discussed in the FY 2003 IPPS final rule (67 FR 50101), we 
believe that special protection to new hospitals is also appropriate 
even after the transition period, we revised the regulations at Sec.  
412.304(c)(2) to provide that, for cost reporting periods beginning on 
or after October 1, 2002, a new hospital (defined under Sec.  
412.300(b)) is paid 85 percent of its Medicare allowable capital-
related costs through its first 2 years of operation, unless the new 
hospital elects to receive fully prospective payment based on 100 
percent of the Federal rate. (We refer readers to the FY 2002 IPPS 
final rule (66 FR 39910) for a detailed discussion of the statutory 
basis for the system, the development and evolution of the system, the 
methodology used to determine capital-related payments to hospitals 
both during and after the transition period, and the policy for 
providing exception payments.)
3. Hospitals Located in Puerto Rico
    Section 412.374 of the regulations provides for the use of a 
blended payment amount for prospective payments for capital-related 
costs to hospitals located in Puerto Rico. Accordingly, under the 
capital IPPS, we compute a separate payment rate specific to Puerto 
Rico hospitals using the same methodology used to compute the national 
Federal rate for capital-related costs. In general, hospitals located 
in Puerto Rico are paid a blend of the applicable capital IPPS Puerto 
Rico rate and the applicable capital IPPS Federal rate.
    Prior to FY 1998, hospitals in Puerto Rico were paid a blended 
capital IPPS rate that consisted of 75 percent of the capital IPPS 
Puerto Rico specific rate

[[Page 48672]]

and 25 percent of the capital IPPS Federal rate. However, effective 
October 1, 1997 (FY 1998), in conjunction with the change to the 
operating IPPS blend percentage for hospitals located in Puerto Rico 
required by section 4406 of Public Law 105-33, we revised the 
methodology for computing capital IPPS payments to hospitals in Puerto 
Rico to be based on a blend of 50 percent of the capital IPPS Puerto 
Rico rate and 50 percent of the capital IPPS Federal rate. Similarly, 
in conjunction with the change in operating IPPS payments to hospitals 
located in Puerto Rico for FY 2005 required by section 504 of Public 
Law 108-173, we again revised the methodology for computing capital 
IPPS payments to hospitals located in Puerto Rico to be based on a 
blend of 25 percent of the capital IPPS Puerto Rico rate and 75 percent 
of the capital IPPS Federal rate effective for discharges occurring on 
or after October 1, 2004.

B. Revisions to the Capital IPPS Based on Data on Hospital Medicare 
Capital Margins

    As noted above, under the Secretary's broad authority under the 
statute in establishing and implementing the IPPS for hospital 
inpatient capital-related costs, we have established a standard Federal 
payment rate for capital-related costs, as well as the mechanism for 
updating that rate each year. For FY 1992, we computed the standard 
Federal payment rate for capital-related costs under the IPPS by 
updating the FY 1989 Medicare inpatient capital cost per case by an 
actuarial estimate of the increase in Medicare inpatient capital costs 
per case. Each year after FY 1992, we update the capital standard 
Federal rate, as provided at Sec.  412.308(c)(1), to account for 
capital input price increases and other factors. Section 412.308(c)(2) 
provides that the capital Federal rate is adjusted annually by a factor 
equal to the estimated proportion of outlier payments under the capital 
Federal rate to total capital payments under the capital Federal rate. 
In addition, Sec.  412.308(c)(3) requires that the capital Federal rate 
be reduced by an adjustment factor equal to the estimated proportion of 
payments for (regular and special) exceptions under Sec.  412.348. 
Section 412.308(c)(4)(ii) requires that the capital standard Federal 
rate be adjusted so that the effects of the annual DRG reclassification 
and the recalibration of DRG weights, and changes in the geographic 
adjustment factor are budget neutral.
    In the FY 2008 IPPS final rule with comment period (72 FR 47398 
through 47401), based on our analysis of data on inpatient hospital 
Medicare capital margins that we obtained through our monitoring and 
comprehensive review of the adequacy of the standard Federal payment 
rate for capital-related costs and the updates provided under the 
existing regulations, we made changes in the payment structure under 
the capital IPPS beginning with FY 2008. We summarize these changes 
below. We refer readers to section V.B. of the preamble of the FY 2008 
final rule with comment period (72 FR 47393 through 47401) for a 
detailed discussion of the data used as a basis for these changes. 
These data showed that hospital inpatient Medicare capital margins were 
very high across all hospitals during the period from FY 1996 through 
FY 2004.
    In the FY 2008 IPPS final rule with comment period, as background, 
we noted that, in general, under a PPS, standard payment rates should 
reflect the costs that an average, efficient provider would bear to 
provide the services required for quality patient care. Payment rate 
updates should also account for the changes necessary to continue 
providing such services. Updates should reflect, for example, the 
increased costs that are necessary to provide for the introduction of 
new technology that improves patient care. Updates should also take 
into account the productivity gains that, over time, allow providers to 
realize the same, or even improved, quality outcomes with reduced 
inputs and lower costs. Hospital margins, the difference between the 
costs of actually providing services and the payments received under a 
particular system, thus provide some evidence concerning whether 
payment rates have been established and updated at an appropriate level 
over time for efficient providers to provide necessary services. All 
other factors being equal, sustained substantial positive margins 
demonstrate that payment rates and updates have exceeded what is 
required to provide those services. Under a PPS, it is expected that 
highly efficient providers might regularly realize positive margins, 
while less efficient providers might regularly realize negative 
margins. However, a PPS that is correctly calibrated should not 
necessarily experience sustained periods in which providers generally 
realize substantial positive Medicare margins. Under the capital IPPS 
in particular, it seems especially appropriate that there should not be 
sustained significant positive margins across the system as a whole. 
Prior to the implementation of the capital IPPS, Congress mandated that 
the Medicare program pay only 85 percent of hospitals' inpatient 
Medicare capital costs. During the first 5 years of the capital IPPS, 
Congress also mandated a budget neutrality adjustment, under which the 
standard Federal capital rate was set each year so that payments under 
the system as a whole equaled 90 percent of estimated hospitals' 
inpatient Medicare capital costs for the year. Finally, Congress has 
twice adjusted the standard Federal capital rate (a 7.4 percent 
reduction beginning in FY 1994, followed by a 17.78 percent reduction 
beginning in FY 1998). On the second occasion in particular, the 
specific congressional mandate was ``to apply the budget neutrality 
factor used to determine the Federal capital payment rate in effect on 
September 30, 1995 * * * to the unadjusted standard Federal capital 
payment rate'' for FY 1998 and beyond. (The designated budget 
neutrality factor constituted a 17.78 percent reduction.) This 
statutory language indicates that Congress considered the payment 
levels in effect during FYs 1992 through 1995, established under the 
budget neutrality provision to pay 90 percent of hospitals' inpatient 
Medicare capital costs in the aggregate, appropriate for the capital 
IPPS. The statutory history of the capital IPPS thus suggests that the 
system in the aggregate should not provide for continuous, large 
positive margins.
    As we also discussed in the FY 2008 IPPS final rule with comment 
period, we believed that there could be a number of reasons for the 
relatively high margins that most IPPS hospitals have realized under 
the capital IPPS. One possibility is that the updates to the capital 
IPPS rates have been higher than the actual increases in Medicare 
inpatient capital costs that hospitals have experienced in recent 
years. Another possible reason for the relatively high margins of most 
capital IPPS hospitals may be that the payment adjustments provided 
under the system are too high, or perhaps even unnecessary. 
Specifically, the adjustments for teaching hospitals, disproportionate 
share hospitals, and large urban hospitals appear to be contributing to 
excessive payment levels for these classes of hospitals. Since the 
inception of the capital IPPS in FY 1992, the system has provided 
adjustments for teaching hospitals (the IME adjustment factor, under 
Sec.  412.322 of the regulations), disproportionate share hospitals 
(the DSH adjustment factor, under Sec.  412.320), and large urban 
hospitals (the large urban location adjustment factor, under Sec.  
412.316(b)). The classes of hospitals eligible for these adjustments 
have been realizing much higher margins than other

[[Page 48673]]

hospitals under the system. Specifically, at the time of the FY 2008 
IPPS final rule with comment period, teaching hospitals (11.6 percent 
for FYs 1998 through 2004), disproportionate share hospitals (8.4 
percent), and urban hospitals (8.3 percent) had significant positive 
margins. Other classes of hospitals had experienced much lower margins, 
especially rural hospitals (0.3 percent for FYs 1998 through 2004) and 
nonteaching hospitals (1.3 percent). The three groups of hospitals that 
had been realizing especially high margins under the capital IPPS are, 
therefore, classes of hospitals that are eligible to receive one or 
more specific payment adjustment under the system. We believed that the 
evidence indicates that these adjustments have been contributing to the 
significantly large positive margins experienced by the classes of 
hospitals eligible for these adjustments. (We discuss our updated 
margin analysis below.)
    Therefore, in the FY 2008 IPPS final rule with comment period, we 
made two changes to the structure of payments under the capital IPPS, 
as discussed under items 1 and 2 below.
1. Elimination of the Large Add-On Payment Adjustment
    In the FY 2008 IPPS final rule with comment period, we determined 
that the data we had gathered on inpatient hospital Medicare capital 
margins provided sufficient evidence to warrant elimination of the 
large urban add-on payment adjustment starting in FY 2008 under the 
capital IPPS. Therefore, for FYs 2008 and beyond, we discontinued the 
3.0 percent additional payment that had been provided to hospitals 
located in large urban areas (72 FR 24822). This decision was supported 
by comments from MedPAC.
2. Changes to the Capital IME Adjustment
a. Background and Changes Made for FY 2008
    In the FY 2008 IPPS proposed rule, we noted that margin analysis 
indicated that several classes of hospitals had experienced continuous, 
significant positive margins. The analysis indicated that the existing 
payment adjustments for teaching hospitals and disproportionate share 
hospitals were contributing to excessive payment levels for these 
classes of hospitals. Therefore, we stated that it may be appropriate 
to reduce these adjustments significantly, or even to eliminate them 
altogether, within the capital IPPS. These payment adjustments, unlike 
parallel adjustments under the operating IPPS, were not mandated by the 
Act. Rather, they were included within the original design of the 
capital IPPS under the Secretary's broad authority in section 
1886(g)(1) of the Act to include appropriate adjustments and exceptions 
within a capital IPPS.
    In the FY 2008 final rule with comment period, we also noted a 
MedPAC recommendation that we seriously reexamine the appropriateness 
of the existing capital IME adjustment, that the margin analysis 
indicated such adjustment may be too high, and that MedPAC's previous 
analysis also suggested the adjustment may be too high. In light of 
MedPAC's recommendation, we extended the margin analysis discussed in 
the FY 2008 IPPS proposed rule in order to distinguish the experience 
of teaching hospitals from the experience of urban and rural hospitals 
generally. Specifically, we isolated the margins of urban, large urban, 
and rural teaching hospitals, as opposed to urban, large urban, and 
rural nonteaching hospitals. In conducting this analysis, we employed 
updated cost report information, which allowed us to incorporate the 
margins for an additional year, FY 2005, into the analysis. The data on 
the experience of urban, large urban, and rural teaching hospitals as 
opposed to nonteaching hospitals provided significant new information. 
As the analysis demonstrated, teaching hospitals in each class (urban, 
large urban, and rural) performed significantly better than comparable 
nonteaching hospitals. For the period covering FYs 1998 through 2005, 
urban teaching hospitals realized aggregate positive margins of 11.9 
percent, compared to a positive margin of 0.9 percent for urban 
nonteaching hospitals. Similarly, large urban teaching hospitals 
realized an aggregate positive margin of 12.8 percent during that 
period, while large urban nonteaching hospitals had an aggregate 
positive margin of only 2.9 percent. Finally, rural teaching hospitals 
experienced an aggregate positive margin of 4.5 percent, as compared to 
a negative 1.3 percent margin for nonteaching rural hospitals. We noted 
that the positive margins for teaching hospitals did not exhibit a 
decline to the same degree as the margins for all hospitals. For 
example, the positive margins for all IPPS hospitals declined from 8.7 
percent in FY 2002 to 5.3 percent in FY 2004 and 3.7 percent in FY 
2005. For urban hospitals, aggregate margins decreased from 10.3 
percent in FY 2002 to 6.4 percent in FY 2004 and 4.8 percent in FY 
2005. Rural hospitals experienced a decrease from 1.5 percent in FY 
2001 to a negative margin of -4.2 percent in FY 2005. In comparison, 
the aggregate margin for teaching hospitals was 12.1 percent in FY 2001 
and 10.6 percent in FY 2005. For urban teaching hospitals, margins were 
12.5 percent in FY 2001, 14.0 percent in FY 2002, 13.6 percent in FY 
2003, 11.9 percent in FY 2004, and 10.9 percent in FY 2005. Rural 
teaching hospital margins were more variable, but did not exhibit a 
pattern of significant decline. In FY 2001, rural teaching hospitals 
had a positive margin of 3.2 percent; in FY 2002, 8.2 percent; in FY 
2003, 4.7 percent; in FY 2004, 5.7 percent; and in FY 2005, 4.0 
percent. We are reprinting below the table found in the FY 2008 IPPS 
final rule with comment period showing our analysis (72 FR 47400).
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    As we indicated in the FY 2008 IPPS final rule with comment period 
(72 FR 47401), the statutory history of the capital IPPS suggests that 
the system in the aggregate should not provide for continuous, large 
positive margins. As we also indicated, a possible reason for the 
relatively high margins of many capital IPPS hospitals may be that the 
payment adjustments provided under the system are too high, or perhaps 
even unnecessary. We agreed with MedPAC's recommendation and reexamined 
the appropriateness of the teaching adjustment. We concluded that the 
record of relatively high and persistent positive margins for teaching 
hospitals under the capital IPPS indicated that the teaching adjustment 
is unnecessary, and that it was therefore appropriate to exercise our 
discretion under the capital IPPS to eliminate this adjustment. At the 
same time, we believed that we should mitigate abrupt changes in 
payment policy and that we should provide time for hospitals to adjust 
to changes in the payments that they can expect under the program.
    Therefore, in the FY 2008 IPPS final rule with comment period, we 
adopted a policy to phase out the capital teaching adjustment over a 3-
year period beginning in FY 2008. Specifically, we maintained the 
adjustment for FY 2008, in order to give teaching hospitals an 
opportunity to plan and make adjustments to the change. During the 
second year of the transition, FY 2009, the formula for determining the 
amount of the teaching adjustment was revised so that adjustment 
amounts will be half of the amounts provided under the current formula. 
For FY 2010 and after, hospitals will no longer receive an adjustment 
for teaching activity under the capital IPPS.
b. Public Comments Received on Phase Out of Capital IPPS Teaching 
Adjustment Provisions Included in the FY 2008 IPPS Final Rule With 
Comment Period and on the FY 2009 IPPS Proposed Rule
    As indicated above, in the FY 2008 IPPS final rule with comment 
period, we formally adopted as final policy a phase out of the capital 
IPPS teaching adjustment over a 3-year period, maintaining the current 
adjustment for FY 2008, making a 50-percent reduction in FY 2009, and 
eliminating the adjustment for FY 2010 and subsequent years. However, 
because we concluded that this change to the structure of payments 
under the capital IPPS was significant, we provided the public with an 
opportunity for further comment on these provisions through a 90-day 
comment period after publication of the FY 2008 IPPS final rule with 
comment period (72 FR 47401). In addition, as we indicated in that 
final rule with comment period, to provide a more than adequate 
opportunity for hospitals, associations, and other interested parties 
to raise issues and concerns related to our policy, we would provide 
additional opportunity for public comment during the FY 2009 proposed 
rulemaking cycle for the IPPS (73 FR 23679).
    We received numerous timely pieces of correspondence that commented 
on the policy of phasing out the capital IPPS teaching adjustment as 
described in the FY 2008 IPPS final rule with comment period. We also 
received a number of public comments on this policy during the comment 
period for the FY 2009 IPPS proposed rule. A summary of the public 
comments received on both documents and our responses follow.
    Comment: A number of commenters objected that the proposed 
elimination of the capital IME adjustment would have an excessive 
financial impact on hospitals. Many commenters cited estimates of 
payment reductions that could be expected for individual hospitals or 
various groups of hospitals. Some of these commenters pointed out that 
teaching hospitals maintain high levels of advanced services and 
require adequate levels of payment to acquire and maintain the new 
technologies required to support these services. Some commenters also 
contended that operating and capital IME adjustments assist teaching 
hospitals in maintaining underfunded services such as inpatient 
services for the uninsured and other kinds of uncompensated care. In 
addition, some commenters contended that elimination of the IME 
adjustment would make it much more difficult for hospitals to undertake 
the capital improvements required by various state mandates, as well as 
the adoption of the information technologies encouraged by various 
Federal initiatives.
    Response: Our margin analysis continues to show that teaching 
hospitals are realizing significant positive margins under the capital 
IPPS. As noted above, in the aggregate, teaching hospitals experienced 
capital IPPS margins of 12.1 percent in FY 2001, 13.8 percent in FY 
2002, 13.2 percent in FY 2003, 11.5 percent in FY 2004, 10.8 percent in 
FY 2005, and 8.4 percent in FY 2006. For urban teaching hospitals, 
margins were 12.5 percent in FY 2001, 14.0 percent in FY 2002, 13.6 
percent in FY 2003, 11.7 percent in FY 2004, 11.0 percent in FY 2005, 
and 8.6

[[Page 48676]]

percent in FY 2006. Rural teaching hospital margins were more variable, 
but did not exhibit a pattern of significant decline. In FY 2001, rural 
teaching hospitals had a positive margin of 3.2 percent. The margins 
for rural teaching hospitals were 8.2 percent in FY 2002, 4.7 percent 
in FY 2003, 6.4 percent in FY 2004, 4.9 percent in FY 2005, and 3.1 
percent in FY 2006. In contrast, the margins for nonteaching hospitals 
were 2.6 percent in FY 2001, 1.7 percent in FY 2002, 0.0 percent in FY 
2003, -3.1 percent in FY 2004, -5.5 percent in FY 2005, and -9.1 
percent in FY 2006. The updated margin analysis continues to suggest 
that the capital IPPS has been providing more than adequate funding for 
the capital needs of teaching hospitals. We anticipate that teaching 
hospitals will continue to have adequate funding even in the absence of 
the IME adjustment. Our estimate is that, even if the teaching 
adjustment had been eliminated for FYs 2004, 2005, and 2006, teaching 
hospitals would continue to experience positive capital IPPS margins of 
3.9 percent, 3.2 percent, and 0.4 percent, respectively. Our current 
margin analysis is reflected in the table below:
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    Finally, MedPAC's March 2007 report found little evidence to 
support the contention that the operating and capital IME adjustments 
help hospitals that have large shares of uncompensated care. 
Specifically, the report found that ``it appears that the hospitals 
most involved in teaching * * * are not, by and large, the ones that 
devote the most resources to treating patients who are unable to pay 
their bills'' (Report to the Congress: Medicare Payment Policy, March 
2007, page 79). In any event, IME payments (operating and capital) were 
never intended to subsidize services for the uninsured and other 
uncompensated care.
    Comment: Many commenters contended that total Medicare inpatient 
margins, rather than Medicare inpatient capital margins, should be 
employed as the basis for evaluating the appropriateness of the capital 
IPPS IME and other payment IPPS payment adjustments. Other commenters 
objected to employing of margin analysis at all as a basis for 
determining whether the payment adjustments are warranted. Some 
commenters noted that cost regression analysis was originally employed 
to determine whether an IME adjustment was warranted under the capital 
IPPS. Most of these commenters contended that revisions to the payment 
adjustments should not be considered without updating these original 
regression analyses. Furthermore, these commenters emphasized that it 
would only be appropriate to employ total cost regressions, as opposed 
to capital cost-only regressions, in these analyses. Commenters 
advocated using total cost regressions on the grounds that doing so 
would follow precedent (the analysis that supported the original 
establishment of the adjustments employed total cost regressions), and 
would be consistent with treating the capital IPPS as intrinsically 
part of a broader IPPS embracing both capital and operating payments. 
One commenter interpreted the proposal to eliminate the capital IPPS 
IME adjustment to represent an attempt to wring excess IME payments out 
of the operating PPS. The commenter indicated that CMS has no authority 
to change operating IPPS payment parameters. MedPAC noted that 
``analysis over the past decade has consistently shown that capital and 
operating IME adjustments have been set substantially above what can be 
empirically justified, leading to large disparities in financial 
performance under Medicare between teaching and nonteaching hospitals. 
The Commission in its March 2007 and 2008 reports to the Congress 
recommended that the operating IME adjustment be reduced from 5.5 
percent to 4.5 percent per 10 percent increment in teaching intensity 
and that the funds obtained from reducing the IME adjustment be used to 
fund a quality incentive payment program.''
    Response: We do not agree with many of the criticisms of our 
analysis and the conclusions that we drew from that analysis. A basic 
principle of prospective payment systems is that efficient providers 
should be able to realize positive margins from the payment structure. 
However, prospective payment systems are generally designed to pay at 
rates reflecting the costs of hospitals at average levels of 
efficiency. Under such a system, hospitals of above average efficiency 
would be expected to realize positive margins, while hospitals of less 
than average efficiency would be expected to realize negative margins. 
Therefore, the continuation of significant positive margins across a 
prospective payment system (or across classes of hospitals that receive 
specific adjustments) is an indication that the payment rates (or the 
adjustments to the rates) may be set at a level higher than necessary 
to cover the costs of efficient operation. Under such circumstances, we 
believe that it is appropriate to revise basic payment rates or payment 
adjustments, or both, to account for such evidence.
    We also do not agree that it is necessary either to base our 
determination at this time about the appropriateness of continuing the 
capital IPPS IME adjustment on updated regression analysis, or to 
employ a total cost regression analysis in doing so. We adopted 
approaches on several issues in the initial development of the capital 
IPPS that were based on the premise that the capital and operating IPPS 
might eventually be merged into one system. The two systems have now 
operated separately for 15 years without any apparent prospect of 
integration in the near future. Therefore, we believe that it is 
appropriate under the current design of the capital and operating IPPSs 
to base proposals for payment policies under the capital IPPS on 
analysis that is confined to the data regarding the capital IPPS alone, 
and that total IPPS margins should not be the controlling factor in the 
analysis that we are now conducting. For this same reason, we do not 
agree with commenters who urged us to employ updated versions of the 
total cost regressions that were originally used to establish the 
payment adjustments under the capital IPPS. In the long run, we believe 
that it makes sense to base capital payment adjustments on total cost 
variations only if similar adjustments under the operating IPPS are 
also based on total cost regression analysis. We do not agree that, in 
the context of the current payment system, the capital IPPS should be 
treated as a component of a larger system embracing both the capital 
and operating IPPSs.
    Another reason that we do not believe it to be necessary to 
replicate the original total cost regression analysis is that MedPAC 
has, in fact, recently conducted such an analysis. Regression analyses 
conducted by MedPAC over the last decade have shown that capital and 
operating IME adjustments have been set substantially above what can be 
empirically justified, leading to large disparities in financial 
performance under Medicare between teaching and nonteaching hospitals. 
In its March 2007 and 2008 reports to the Congress, MedPAC recommended 
that the operating IME adjustment be reduced from 5.5 percent to 4.5 
percent per 10 percent increment in teaching intensity. In developing 
our proposal to eliminate the capital IPPS IME adjustment over a 3-year 
transition period, we did not take into account total Medicare IPPS 
margins, Medicare operating IPPS margins, or the relationship between 
the statutory operating IPPS IME adjustment and the empirically 
justifiable level of operating IPPS IME adjustment. As we have 
previously stated, we believe that it is appropriate under the current 
design of the capital and operating IPPS to base proposals for payment 
policies under the capital IPPS on analysis that is confined to the 
data regarding the capital IPPS alone. However, we also believe that it 
is difficult, in the light of the MedPAC analysis, to argue on the 
basis of a total cost regression analysis for the continuation of a 
capital IPPS IME adjustment. As we have previously observed, MedPAC 
noted in its comment on the proposed rule that its ``analysis over the 
past decade has consistently shown that capital and operating IME 
adjustments have been set substantially above what can be empirically 
justified, leading to large disparities in financial performance under 
Medicare between teaching and nonteaching hospitals. MedPAC also 
observed in its comment on our proposal to eliminate the capital IPPS 
IME adjustment, ``the reduction in IME payments from eliminating the 
capital IME adjustment would be smaller than the effect of the 
Commission's recommendation'' to reduce the operating IPPS IME 
adjustment.
    Comment: Some commenters contended that, if CMS proceeds with

[[Page 48680]]

the elimination of the IME adjustment, reductions in hospital capital 
payments for teaching hospitals should be implemented in a budget 
neutral fashion, returning the funds to all hospitals as a group. Most 
of these commenters cited the recent record of negative overall 
Medicare inpatient margins as evidence that the proposed elimination of 
the capital IME adjustment is unwarranted. Some commenters also noted 
that overall capital IPPS margins have been declining and that several 
classes of hospitals have had significant negative capital IPPS margins 
in recent years, including nonteaching hospitals and rural hospitals. 
One commenter wondered how low capital IPPS margins must go before CMS 
concludes that capital payments are marginally justified. This 
commenter opposed not only the elimination of the capital IME 
adjustment, but also eliminating the adjustment without restoring the 
IME costs to the base rate.
    Response: We believe that the evidence continues to support 
eliminating the capital IPPS IME adjustment in a way that provides 
savings for the Medicare program. It is the case that overall capital 
IPPS margins have declined somewhat in recent years, from 7.6 percent 
in FY 2003 to 5.3 percent in FY 2004, 3.9 percent in FY 2005, and 0.9 
percent in FY 2006. It is also true that rural hospitals (-4.0 percent 
in FY 2005 and -9.3 percent in FY 2006) and nonteaching hospitals (-5.5 
percent in FY 2005 and -9.1 percent in FY 2006) have experienced 
negative margins in recent years. However, over the period from 1998 
through 2006, overall hospital margins have been a healthy 6.1 percent. 
Over the same period, rural hospitals and nonteaching hospitals have 
experienced capital IPPS margins that are only slightly negative: -1.3 
percent and -0.8 percent, respectively. We believe that this experience 
indicates that the capital IPPS will remain adequately funded without 
redistributing the payments made under the IME adjustment to all 
hospitals, especially in the light of the legislative history that we 
have previously cited. Prior to the implementation of the capital IPPS, 
Congress mandated that the Medicare program pay only 85 percent of 
hospitals' inpatient Medicare capital costs. During the first 5 years 
of the capital IPPS, Congress also mandated a budget neutrality 
adjustment, under which the standard Federal capital rate was set each 
year so that payments under the system as a whole equaled 90 percent of 
estimated hospitals' inpatient Medicare capital costs for the year. 
Finally, Congress has twice adjusted the standard Federal capital rate 
(a 7.4 percent reduction beginning in FY 1994, followed by a 17.78 
percent reduction beginning in FY 1998). On the second occasion in 
particular, the specific congressional mandate was ``to apply the 
budget neutrality factor used to determine the Federal capital payment 
rate in effect on September 30, 1995 * * * to the unadjusted standard 
Federal capital payment rate'' for FY 1998 and beyond. (The designated 
budget neutrality factor constituted a 17.78 percent reduction.) This 
statutory language indicates that Congress considered the payment 
levels in effect during FYs 1992 through 1995, established under the 
budget neutrality provision to pay 90 percent of hospitals' inpatient 
Medicare capital costs in the aggregate, appropriate for the capital 
IPPS. This statutory history thus suggests that the reduced margins 
experienced in recent years under the capital IPPS are not unwarranted. 
Therefore, we are maintaining our policy of eliminating the capital 
IPPS IME adjustment without increasing the capital IPPS rate to account 
for this change.
    Comment: Many of the commenters further contended that the 
proposals do not take sufficient account of the cyclical nature of 
capital spending. These commenters pointed out that, under the design 
of the capital IPPS, hospitals were expected to reserve capital funds 
in anticipation of future capital needs, similar to how funded 
depreciation reserves had been used under the prior cost reimbursement 
system. These funds would permit future capital investment to be funded 
in part with equity financing rather than borrowing. Thus, it is only 
to be expected that hospitals would run positive margins during one 
phase of the capital cycle. Some regional hospital associations 
provided evidence intended to demonstrate that their hospitals have 
been experiencing positive margins because they are in a low-spending 
phase of their capital cycles. For example, one association 
representing a major metropolitan area submitted an extensive analysis, 
including data on margins and changes in unit cost and price, 
suggesting that its member hospitals are in a lower-spending phase of 
their capital cycle than other hospitals may be. Other commenters 
contended that, in order to account adequately for the capital spending 
cycle, it would be necessary to conduct an analysis over a much longer 
period, such as 20 years.
    Response: We agree with commenters that the capital spending of 
hospitals tends to occur in cycles, with periods of higher capital 
investment followed by periods in which capital spending tends to be 
lower. As some of the commenters noted, we devoted considerable 
attention to the potential implications of this capital cycle in 
developing the original design of the capital IPPS. At that time, we 
decided not to build any specific feature into the system to account 
for capital cycles, on the grounds that hospitals ought to be able to 
manage their spending on the basis of the predetermined rates and 
adjustments under the capital IPPS, conserving funds during lower 
spending portions of the cycle in order to prepare for necessary 
capital expenditures later. We do not agree with those commenters who 
suggested that the existence of a capital spending cycle accounts for 
the persistently high margins for some classes of hospitals that we 
have observed over the period 1996 through 2006 nationally. There is no 
reason to suppose that there would be uniformity or regularity among 
hospitals in the length of time between major capital expenditures or 
the overall pattern of capital spending. To the degree that a capital 
cycle exists, it reflects the pattern of spending in individual 
hospitals or, in some cases, groups of hospitals where the pattern of 
spending is determined by factors such as common ownership, local 
regulation, or other factors. There is no uniform or regular capital 
cycle across IPPS hospitals generally or large classes of hospitals 
(for example, teaching hospitals) nationally. In any given year, the 
margins of hospitals generally, and of large classes of hospitals 
defined nationally, would reflect the experience of many hospitals in 
the lower spending portions of their capital cycles, and many other 
hospitals in the higher spending portions of their capital cycles. 
Therefore, the existence of the persistent positive margins that we 
identified cannot be explained on the basis of a ``capital cycle.'' For 
the same reasons, we do not believe that it is necessary to conduct an 
analysis of a period of 20 or more years, as suggested by some 
commenters, in order to account fully for the existence of a capital 
cycle. Our analysis covers almost half the 20-year period cited by some 
commenters, and we have no reason to believe that it is not a 
representative period in which hospitals across the system are at 
various phases of their capital cycles.
    Comment: One commenter contended that the elimination of the loss 
on

[[Page 48681]]

recapture amount by the BBA of 1997 is skewing the calculation of the 
capital margins, which therefore should not be the basis for our 
proposals.
    Response: We also do not agree with the commenter who suggested 
that the margins are skewed by the elimination of the provision to 
recognize losses or gains on sales. Prior to the BBA of 1997, the 
Medicare program recognized losses or gains on sales of capital assets 
in relation to the depreciation that the program for which the program 
paid under the cost-based payment system. Depreciation payments for the 
years prior to a sale were accordingly adjusted in the cost report 
submitted for the year of the sale: an additional payment was made for 
Medicare's portion of the depreciation on the asset if the hospital 
experienced a loss on the sale (indicating that prior payments for 
depreciation had been too low). Conversely, a portion of Medicare's 
payments for the depreciation of the asset was recaptured (by means of 
reducing payments to the hospital) in case of a gain on the sale 
(indicating that prior payments for depreciation had been too high). 
The BBA of 1997 eliminated recognition of such gains and losses on 
sales under Medicare's cost accounting rules, effective December 1, 
1997. In light of the congressional elimination of this provision, we 
do not believe that it would be appropriate (even if it were possible) 
to take any account of the possible effects of this provision on the 
margin data that we have analyzed. However, it is worth noting that 
elimination of the provision to account for gains and losses on sales 
does not necessarily ``skew'' the margin data in the manner suggested 
by the commenter. Because the provision operated both to increase 
payments to account for losses on sales, and to decrease payments to 
account for gains on sales, the overall effect of the provision would 
not necessarily be (as implied by the commenter) to reduce the positive 
margins that are evident in the data.

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

A. Payments to Excluded Hospitals and Hospital Units

    Historically, hospitals and hospital units excluded from the 
prospective payment system received payment for inpatient hospital 
services they furnished on the basis of reasonable costs, subject to a 
rate-of-increase ceiling. An annual per discharge limit (the target 
amount as defined in Sec.  413.40(a)) was set for each hospital or 
hospital unit based on the hospital's own cost experience in its base 
year. The target amount was multiplied by the Medicare discharges and 
applied as an aggregate upper limit (the ceiling as defined in Sec.  
413.40(a)) on total inpatient operating costs for a hospital's cost 
reporting period. Prior to October 1, 1997, these payment provisions 
applied consistently to all categories of excluded providers, which 
included rehabilitation hospitals and units (now referred to as IRFs), 
psychiatric hospitals and units (now referred to as IPFs), LTCHs, 
children's hospitals, and cancer hospitals.
    Payment for children's hospitals and cancer hospitals that are 
excluded from the IPPS continues to be subject to the rate-of-increase 
ceiling based on the hospital's own historical cost experience. (We 
note that, in accordance with Sec.  403.752(a) of the regulations, 
RNHCIs are also subject to the rate-of-increase limits established 
under Sec.  413.40 of the regulations.)
    In the FY 2009 IPPS proposed rule, we proposed that the percentage 
increase in the rate-of-increase limits for cancer and children's 
hospitals and RNHCIs would be the percentage increase in the FY 2009 
IPPS operating market basket, which was estimated to be 3.0 percent. 
Consistent with our historical approach, we proposed that if more 
recent data was available for the final rule, we would use the most 
recent data to calculate the IPPS operating market basket for FY 2009. 
For cancer and children's hospitals and RNHCIs, the FY 2009 rate-of-
increase percentage that is applied to FY 2008 target amounts in order 
to calculate FY 2009 target amounts is 3.6 percent, based on Global 
Insight, Inc.'s 2008 second quarter forecast of the IPPS operating 
market basket increase, in accordance with the applicable regulations 
in 42 CFR 413.40.
    IRFs, IPFs, and LTCHs were paid previously under the reasonable 
cost methodology. However, the statute was amended to provide for the 
implementation of prospective payment systems for IRFs, IPFs, and 
LTCHs. In general, the prospective payment systems for IRFs, IPFs, and 
LTCHs provided transition periods of varying lengths during which time 
a portion of the prospective payment was based on cost-based 
reimbursement rules under Part 413 (certain providers do not receive a 
transition period or may elect to bypass the transition period as 
applicable under 42 CFR Part 412, Subparts N, O, and P). We note that 
the various transition periods provided for under the IRF PPS, the IPF 
PPS, and the LTCH PPS have ended.
    For cost reporting periods beginning on or after October 1, 2002, 
all IRFs are paid 100 percent of the adjusted Federal rate under the 
IRF PPS. Therefore, for cost reporting periods beginning on or after 
October 1, 2002, no portion of an IRF PPS payment is subject to 42 CFR 
Part 413. Similarly, for cost reporting periods beginning on or after 
October 1, 2006, all LTCHs are paid 100 percent of the adjusted Federal 
prospective payment rate under the LTCH PPS. Therefore, for cost 
reporting periods beginning on or after October 1, 2006, no portion of 
the LTCH PPS payment is subject to 42 CFR Part 413. Likewise, for cost 
reporting periods beginning on or after January 1, 2008, all IPFs are 
paid 100 percent of the Federal per diem amount under the IPF PPS. 
Therefore, for cost reporting periods beginning on or after January 1, 
2008, no portion of an IPF PPS payment is subject to 42 CFR Part 413.

B. IRF PPS

    Section 1886(j) of the Act, as added by section 4421(a) of Public 
Law 105-33, provided for a phase-in of a case-mix adjusted PPS for 
inpatient hospital services furnished by IRFs for cost reporting 
periods beginning on or after October 1, 2000, and before October 1, 
2002, with payments based entirely on the adjusted Federal prospective 
payment for cost reporting periods beginning on or after October 1, 
2002. Section 1886(j) of the Act was amended by section 125 of Public 
Law 106-113 to require the Secretary to use a discharge as the payment 
unit for services furnished under the PPS for inpatient rehabilitation 
hospitals and inpatient rehabilitation units of hospitals (referred to 
as IRFs), and to establish classes of patient discharges by functional-
related groups. Section 305 of Public Law 106-554 further amended 
section 1886(j) of the Act to allow IRFs, subject to the blended 
methodology, to elect to be paid the full Federal prospective payment 
rather than the transitional period payments specified in the Act.
    On August 7, 2001, we issued a final rule in the Federal Register 
(66 FR 41316) establishing the PPS for IRFs, effective for cost 
reporting periods beginning on or after January 1, 2002. There was a 
transition period for cost reporting periods beginning on or after 
January 1, 2002, and ending before October 1, 2002. For cost reporting 
periods beginning on or after October 1, 2002, payments are based 
entirely on the adjusted Federal prospective payment rate determined 
under the IRF PPS.

[[Page 48682]]

C. LTCH PPS

    On August 30, 2002, we issued a final rule in the Federal Register 
(67 FR 55954) establishing the PPS for LTCHs, effective for cost 
reporting periods beginning on or after October 1, 2002. Except for a 
LTCH that made an election under Sec.  412.533(c) or a LTCH that is 
defined as new under Sec.  412.23(e)(4), there was a transition period 
under Sec.  412.533(a) for LTCHs. For cost reporting periods beginning 
on or after October 1, 2006, all LTCHs are paid 100 percent of the 
adjusted Federal prospective payment rate.

D. IPF PPS

    In accordance with section 124 of Public Law 106-113 and section 
405(g)(2) of Public Law 108-173, we established a PPS for inpatient 
hospital services furnished in IPFs. On November 15, 2004, we issued in 
the Federal Register a final rule (69 FR 66922) that established the 
IPF PPS, effective for IPF cost reporting periods beginning on or after 
January 1, 2005. Under the requirements of that final rule, we computed 
a Federal per diem base rate to be paid to all IPFs for inpatient 
psychiatric services based on the sum of the average routine operating, 
ancillary, and capital costs for each patient day of psychiatric care 
in an IPF, adjusted for budget neutrality. The Federal per diem base 
rate is adjusted to reflect certain patient characteristics, including 
age, specified DRGs, selected high-cost comorbidities, days of the 
stay, and certain facility characteristics, including a wage index 
adjustment, rural location, indirect teaching costs, the presence of a 
full-service emergency department, and COLAs for IPFs located in Alaska 
and Hawaii.
    We established a 3-year transition period during which IPFs whose 
cost reporting periods began on or after January 1, 2005, and before 
January 1, 2008, would be paid a PPS payment, a portion of which was 
based on reasonable cost principles and a portion of which was the 
Federal per diem payment amount. For cost reporting periods beginning 
on or after January 1, 2008, all IPFs are paid 100 percent of the 
Federal per diem payment amount.

E. Determining LTCH Cost-to-Charge Ratios (CCRs) Under the LTCH PPS

    In general, we use a LTCH's overall CCR, which is computed based on 
either the most recently settled cost report or the most recent 
tentatively settled cost report, whichever is from the latest cost 
reporting period, in accordance with Sec.  412.525(a)(4)(iv)(B) and 
Sec.  412.529(c)(4)(iv)(B) for high cost outliers and short-stay 
outliers, respectively. (We note that, in some instances, we use an 
alternative CCR, such as the statewide average CCR in accordance with 
the regulations at Sec.  412.525(a)(4)(iv)(C) and Sec.  
412.529(c)(4)(iv)(C), or a CCR that is specified by CMS or that is 
requested by the hospital under the provisions of the regulations at 
Sec.  412.525(a)(4)(iv)(A) and Sec.  412.529(c)(4)(iv)(A).) Under the 
LTCH PPS, a single prospective payment per discharge is made for both 
inpatient operating and capital-related costs. Therefore, we compute a 
single ``overall'' or ``total'' LTCH-specific CCR based on the sum of 
LTCH operating and capital costs (as described in Chapter 3, section 
150.24, of the Medicare Claims Processing Manual (CMS Pub. 100-4)) as 
compared to total charges. Specifically, a LTCH's CCR is calculated by 
dividing a LTCH's total Medicare costs (that is, the sum of its 
operating and capital inpatient routine and ancillary costs) by its 
total Medicare charges (that is, the sum of its operating and capital 
inpatient routine and ancillary charges).
    Generally, a LTCH is assigned the applicable statewide average CCR 
if, among other things, a LTCH's CCR is found to be in excess of the 
applicable maximum CCR threshold (that is, the LTCH CCR ceiling). This 
is because CCRs above this threshold are most likely due to faulty data 
reporting or entry, and, therefore, these CCRs should not be used to 
identify and make payments for outlier cases. Such data are clearly 
errors and should not be relied upon. Thus, under our established 
policy, generally, if a LTCH's calculated CCR is above the applicable 
ceiling, the applicable LTCH PPS statewide average CCR is assigned to 
the LTCH instead of the CCR computed from its most recent (settled or 
tentatively settled) cost report data.
    In the FY 2008 IPPS final rule with comment period, in accordance 
with Sec.  412.525(a)(4)(iv)(C)(2) for high-cost outliers and Sec.  
412.529(c)(4)(iv)(C)(2) for short-stay outliers, using our established 
methodology for determining the LTCH total CCR ceiling, based on IPPS 
total CCR data from the March 2007 update to the Provider-Specific File 
(PSF), we established a total CCR ceiling of 1.284 under the LTCH PPS 
effective October 1, 2007, through September 30, 2008. (For further 
detail on our methodology for annually determining the LTCH total CCR 
ceiling, we refer readers to the FY 2007 IPPS final rule (71 FR 48117 
through 48121) and the FY 2008 IPPS final rule with comment period (72 
FR 47403 through 47404).)
    Our general methodology established for determining the statewide 
average CCRs used under the LTCH PPS is similar to our established 
methodology for determining the LTCH total CCR ceiling (described 
above) because it is based on ``total'' IPPS CCR data. Under the LTCH 
PPS high-cost outlier policy at Sec.  412.525(a)(4)(iv)(C) and the 
short-stay outlier policy at Sec.  412.529(c)(4)(iv)(C), the fiscal 
intermediary (or MAC) may use a statewide average CCR, which is 
established annually by CMS, if it is unable to determine an accurate 
CCR for a LTCH in one of the following circumstances: (1) A new LTCH 
that has not yet submitted its first Medicare cost report (for this 
purpose, a new LTCH is defined as an entity that has not accepted 
assignment of an existing hospital's provider agreement in accordance 
with Sec.  489.18); (2) a LTCH whose CCR is in excess of the LTCH CCR 
ceiling (as discussed above); and (3) any other LTCH for whom data with 
which to calculate a CCR are not available (for example, missing or 
faulty data). (Other sources of data that the fiscal intermediary (or 
MAC) may consider in determining a LTCH's CCR include data from a 
different cost reporting period for the LTCH, data from the cost 
reporting period preceding the period in which the hospital began to be 
paid as a LTCH (that is, the period of at least 6 months that it was 
paid as a short-term acute care hospital), or data from other 
comparable LTCHs, such as LTCHs in the same chain or in the same 
region.)
    In the FY 2009 IPPS proposed rule (73 FR 23681), in accordance with 
Sec.  412.525(a)(4)(iv)(C)(2) for high-cost outliers and Sec.  
412.529(c)(4)(iv)(C)(2) for short-stay outliers, using our established 
methodology for determining the LTCH total CCR ceiling (described 
above), based on IPPS total CCR data from the December 2007 update to 
the PSF, we proposed establishing a total CCR ceiling of 1.262 under 
the LTCH PPS, effective for discharges occurring on or after October 1, 
2008, and before October 1, 2009. In Table 8C of that same proposed 
rule, we presented the proposed LTCH PPS statewide average total CCRs 
for urban and rural hospitals that would be effective for discharges 
occurring on or after October 1, 2008, and before October 1, 2009. In 
the proposed rule, we stated that if more data became available before 
publication of the final rule, we would use such data to determine the 
final statewide average total CCRs for urban and rural hospitals under 
the LTCH PPS for FY 2009 using our established methodology described 
above.

[[Page 48683]]

    In this final rule, in accordance with Sec.  
412.525(a)(4)(iv)(C)(2) for high-cost outliers and Sec.  
412.529(c)(4)(iv)(C)(2) for short-stay outliers, we are finalizing our 
proposal to use our established methodology to determine the LTCH total 
CCR ceiling (described above), based on the most recent complete IPPS 
total CCR data. Specifically, using data from the March 2008 update of 
the PSF, we are establishing a total CCR ceiling of 1.242 under the 
LTCH PPS, effective for discharges occurring on or after October 1, 
2008, and before October 1, 2009.
    In addition, in this FY 2009 IPPS final rule, in accordance with 
Sec.  412.525(a)(4)(iv)(C) for high-cost outliers and Sec.  
412.529(c)(4)(iv)(C) for short-stay outliers, using our established 
methodology for determining the LTCH statewide average CCRs (described 
above), based on the most recent complete IPPS total CCR data from the 
March 2008 update of the PSF, we are establishing the LTCH PPS 
statewide average total CCRs for urban and rural hospitals that are 
effective for discharges occurring on or after October 1, 2008, and 
before October 1, 2009, presented in Table 8C of the Addendum to this 
final rule.
    We note that, for this final rule, as we proposed and as we 
established when we revised our methodology for determining the 
applicable LTCH statewide average CCRs in the FY 2007 IPPS final rule 
(71 FR 48119 through 48121), and as is the case under the IPPS, all 
areas in the District of Columbia, New Jersey, Puerto Rico, and Rhode 
Island are classified as urban, and, therefore, there are no rural 
statewide average total CCRs listed for those jurisdictions in Table 8C 
of the Addendum to this final rule. In addition, as we proposed and as 
we established when we revised our methodology for determining the 
applicable LTCH statewide average CCRs in that same final rule, and as 
is the case under the IPPS, although Massachusetts has areas that are 
designated as rural, there were no short-term acute care IPPS hospitals 
or LTCHs located in those areas as of March 2008. Therefore, for this 
final rule, there is no rural statewide average total CCR listed for 
rural Massachusetts in Table 8C of the Addendum to this final rule. As 
we also proposed and as we established when we revised our methodology 
for determining the applicable LTCH statewide average CCRs in the FY 
2007 IPPS final rule (71 FR 48120 through 48121), in determining the 
urban and rural statewide average total CCRs for Maryland LTCHs paid 
under the LTCH PPS, we use, as a proxy, the national average total CCR 
for urban IPPS hospitals and the national average total CCR for rural 
IPPS hospitals, respectively. We use this proxy because we believe that 
the CCR data on the PSF for Maryland hospitals may not be accurate (as 
discussed in greater detail in that same final rule (71 FR 48120)).

F. Change to the Regulations Governing Hospitals-Within-Hospitals

    On September 1, 1994, we published hospital-within-hospital (HwH) 
regulations to address inappropriate Medicare payments to LTCHs that 
were effectively units of other hospitals (59 FR 45330). There was 
concern that the LTCH HwH model was being used by some acute care 
hospitals paid under the IPPS as a way of inappropriately receiving 
higher payments for a subset of their cases. Moreover, IPPS-exclusion 
of long-term care ``units'' was and remains inconsistent with the 
statute.
    Therefore, we codified the HwH regulations at 42 CFR 412.23 
(currently at Sec.  412.22(e)) for a LTCH HwH that is co-located with 
another hospital. A co-located hospital is a hospital that occupies 
space in a building also used by another hospital or in one or more 
separate buildings located on the same campus as buildings used by 
another hospital. The regulations at Sec.  412.23(e) required that, to 
be excluded from the IPPS, long-term care HwHs must have a separate 
governing body, chief medical officer, medical staff, and chief 
executive officer from that of the hospital with which it is co-
located. In addition, the HwH must meet either of the following two 
criteria: the HwH must perform certain specified basic hospital 
functions on its own and not receive them from the host hospital or a 
third entity that controls both hospitals; or the HwH must receive at 
least 75 percent of its inpatients from sources other than the co-
located hospital. A third option was added to the regulations on 
September 1, 1995 (60 FR 45778) that allowed HwHs to demonstrate their 
separateness by showing that the cost of the services that the hospital 
obtains under contracts or other agreements with the co-located 
hospital or a third entity that controls both hospitals is no more than 
15 percent of the hospital's total inpatient operating cost. In 1997, 
we extended application of the HwH rules at Sec.  412.22 to all classes 
of IPPS excluded hospitals. Therefore, effective for cost reporting 
periods beginning on or after October 1, 1997, psychiatric, 
rehabilitation, cancer, and children's hospitals that are co-located 
with another hospital are also required to meet the ``separateness'' 
criteria at Sec.  412.22(e). Various other changes to the HwH 
regulations have been made over the years.
    In addition, a ``grandfathering'' provision was added to the 
regulations at Sec.  412.22(f), as provided for under section 4417 of 
the Balanced Budget Act (BBA) of 1997 (Pub. L. 105-33). This provision 
of the regulations allowed a LTCH that was excluded from the IPPS on or 
before September 30, 1995, and was a HwH, to retain its IPPS-excluded 
status even if the HwH criteria at Sec.  412.22(e) could not be met, as 
long as the hospital continued to operate under the same terms and 
conditions as were in effect on September 30, 1995. Consistent with the 
grandfathering provision under the BBA, which applied to LTCHs, we 
extended the application of the grandfathering rule to the other 
classes of IPPS-excluded hospitals that are HwHs but did not meet the 
criteria at Sec.  412.22(e). (We subsequently expanded this provision 
to allow for a grandfathered hospital to make specified changes during 
particular timeframes.)
    As we explained in the FY 2009 IPPS proposed rule (73 FR 23682), 
despite extending the grandfathering provision to all classes of IPPS-
excluded hospitals and allowing other changes within that provision, it 
appears that there may be a gap in our regulations. There remain 
certain HwHs that may be unnecessarily restricted from expanding their 
bed size under current rules. These HwHs were IPPS-excluded State-owned 
hospitals that were co-located with a State-owned hospital and were 
both under the same State governance at the time the criteria at Sec.  
412.22(e) were implemented. These HwHs remain State-owned hospitals 
operating within a State-owned hospital and because of State law 
requirements, both hospitals remain under State governance. The HwH has 
retained the IPPS-excluded status by virtue of the grandfathering 
provision at Sec.  412.22(f) that precludes changes in the terms and 
conditions under which they operate except under specific 
circumstances.
    Where a State law defines the structure and authority of the 
State's agencies and institutions, and the State hospital is co-located 
with another hospital that is under State governance, each hospital may 
have control over the day-to-day operations of its respective facility 
and have separate management, patient intake, and billing systems and 
medical staff, as well as a governing board. However, State law may 
require that the legal accountability for the budgets and activities of 
entities operating within a State-run institution rests with the State. 
Therefore, the co-located State hospitals may also be governed by a 
common governing body.

[[Page 48684]]

Because of State law requirements, these HwHs cannot meet the existing 
HwH criteria at Sec.  412.22(e)(1)(i) that requires the governing body 
of a co-located hospital to be separate from the governing body of the 
hospital with which it shares space. Under the HwH rules, a HwH's 
governing body may not be under the control of the hospital occupying 
space in the same building or on the same campus, or of any third 
entity that controls both hospitals.
    Currently, there are State HwHs in these types of arrangements that 
have been able to retain their IPPS-excluded status solely because of 
the grandfathering provision in Sec.  412.22(f). These HwHs were IPPS-
excluded even before the HwH criteria were implemented and remain IPPS-
excluded HwHs only as long as they continue to meet the requirements 
specified under Sec.  412.22(f)(1), (f)(2), and (f)(3), which means 
that these HwHs cannot increase their bed size without losing their 
IPPS-excluded status under the grandfathering provisions (Sec.  
412.22(f)). Moreover, if a grandfathered State-run HwH increased its 
bed size, it would be unable to qualify as an IPPS-excluded HwH under 
Sec.  412.22(e) because it cannot meet the HwH criteria at Sec.  
412.22(e)(1)(i) as a result of State law requirements regarding its 
organizational structure and governance. These HwHs are precluded from 
the flexibility to expand their bed size, which is available to other 
HwHs whose organizational structure is not bound by State law.
    As stated above, the organizational arrangements for these HwHs 
were in place even before the HwH regulations were adopted. To the 
extent the arrangements are required by State law, we believe they do 
not reflect attempts by entities to establish a nominal hospital and, 
in turn, seek inappropriate exclusions. As explained in the FY 2009 
proposed rule, we also believe it is unnecessary to prevent State 
hospitals that were created before the HwH requirements, and that 
because of State statutory requirements cannot meet the subsequently 
issued separate governing body requirements, from being excluded from 
the IPPS if they exercised the same flexibility available to other 
IPPS-excluded HwHs to increase their bed capacity. Accordingly, as 
stated in the FY 2009 IPPS proposed rule, we proposed adding a 
provision to the regulations that would apply only to State hospitals 
that were already in existence when the HwH regulations were 
established. This provision would not apply to other State hospitals 
that would like to open as a HwH subsequent to the establishment of the 
HwH regulations in FY 1994, under an organizational structure the same 
as or similar to the one described in this section because these 
hospitals know, in advance of becoming a HwH, the requirements that 
must be met in order to be an IPPS-excluded HwH, unlike those hospitals 
that existed before the HwH regulations were established. Instead of 
opening the IPPS-excluded hospital co-located with another State 
hospital, it can open at another site in a manner that is consistent 
with the HwH regulations.
    Accordingly, as proposed, we are adding a new paragraph (e)(1)(vi) 
to Sec.  412.22 to provide that if a hospital cannot meet the criteria 
in Sec.  412.22(e)(1)(i) solely because it is a State hospital 
occupying space with another State hospital, the HwH can nevertheless 
qualify for an exclusion from the IPPS if that hospital meets the other 
applicable criteria in Sec.  412.22(e) and-
     Both State hospitals share the same building or same 
campus and have been continuously owned and operated by the State since 
October 1, 1995;
     Is required by State law to be subject to the governing 
authority of the State hospital with which it shares space or the 
governing authority of a third entity that controls both hospitals; and
     Was excluded from the inpatient prospective payment system 
before October 1, 1995, and continues to be excluded from the IPPS 
through September 30, 2008.
    We believe the criteria capture the segment of State-operated HwHs 
that were in existence prior to the HwH regulations and that are unable 
to meet the current HwH rules because of State law regarding 
governance. These HwHs were therefore in existence prior to the HwH 
regulations. We emphasize that we proposed allowing an exception to the 
criteria in Sec.  412.22(e)(1)(i) only if the hospital that meets the 
criteria above cannot meet the separate governing body requirement 
because of State law. We are not providing similar treatment for 
hospitals that are not subject to State statutory requirements 
regarding governance but instead chose to organize in a manner that 
would not allow them to be an IPPS-excluded hospital that meets the HwH 
criteria at Sec.  412.22(e)(1)(i) but were co-located prior to October 
1, 1995, because these hospitals can revise the way they are organized 
to ensure that they meet the governance regulations at Sec.  412.22(e).
    Comment: All commenters, with the exception of one organization, 
strongly supported our proposal to allow HwHs that meet specific 
criteria to obtain their IPPS-excluded status if they are precluded 
from meeting the separate governing body criteria of the HwH 
regulations because of State law, but meet all other HwH requirements 
at Sec.  412.22(e). However, two commenters requested that CMS also 
revise the rules governing satellite facilities of IPPS-excluded cancer 
hospitals that preclude bed-size expansion. The commenters believed 
that the same rationale that CMS provided for exempting children's 
hospitals from the expansion limitation for satellite facilities could 
be applied to cancer hospitals, and viewed the time it took for CMS to 
explain its rationale for not including cancer hospitals as evidence 
that belies the soundness of this decision. The commenters also 
contended that the provider-based rules that apply to satellite 
facilities would protect against inappropriate utilization, and that 
any financial effect on Medicare costs from removing the expansion 
restrictions for IPPS-excluded cancer hospitals would be negligible 
because there are only 11 IPPS-excluded cancer hospitals.
    Response: We appreciate the support of the commenters for the HwH 
proposal. Regarding their request that we remove the expansion 
restrictions for satellite facilities of IPPS-excluded cancer 
hospitals, we thank the commenters for bringing their concerns to our 
attention. However, we did not propose any changes to the regulations 
for satellite facilities at Sec.  .22(h) and these comments are beyond 
the scope of our rule. Therefore, we are not addressing those 
particular comments. We refer the commenters to our FY 2007 IPPS final 
rule, appearing in the August 18, 2006 Federal Register (71 FR 48106 
through 48115), that provides detailed comments and responses regarding 
our policy with respect to satellite facilities.
    Comment: One commenter suggested an alternative approach to our 
proposal that would permanently grandfather IPPS-excluded cancer HwHs, 
allowing them to increase their bed size regardless of ownership and 
still retain their IPPS-excluded status. The commenter believed this 
would be more reflective of congressional intent regarding payment to 
IPPS-excluded cancer hospitals because Congress did not impose bed size 
limitations on these hospitals and that it would represent sound 
Medicare policy. The commenter also believed this approach would level 
the playing field for all IPPS-excluded cancer hospitals.
    Response: Our proposal is only with respect to the HwH regulations 
at Sec.  412.22(e) and not to the grandfathered provision at Sec.  
412.22(f). This comment is beyond the scope of our proposal.

[[Page 48685]]

Therefore, we are not responding to the comment in this rule.
    Comment: One commenter had numerous objections to our proposal for 
State-operated HwHs. The commenter believed CMS was providing special 
treatment to a subset of grandfathered HwHs by allowing them to retain 
their grandfathered status, yet increase their bed size, which is 
contrary to its past actions regarding grandfathered HwHs; that there 
is no basis for our proposal; and that it is inconsistent with the 
legislative intent of the grandfathering provisions. The commenter also 
pointed out that all grandfathered HwHs could experience the need to 
add beds, not just State-owned HwHs. Furthermore, the commenter 
contended that States have the ability to create or change ownership 
arrangements in order to meet the HwH criteria.
    Response: The commenter has misunderstood our proposal. A 
grandfathered State-owned HwH that is precluded from meeting the 
separate governance criteria in Sec.  412.22(e) of the regulations 
because of State statutory requirements would lose its grandfathered 
status (in other words, it would no longer be exempt from the 
``separateness and control'' criteria in Sec.  412.22(e) if it added 
beds). However, under the proposal and our final policy, such a 
hospital could remain an HwH if it met all of the applicable HwH 
criteria in Sec.  412.22(e) except for the separate governance 
requirement in Sec.  412.22(e)(1)(i). This policy is consistent with 
our longstanding policy that grandfathered HwHs cannot add beds and 
remain grandfathered. However, HwHs have always remained, and continue 
to remain, free to add beds if they meet the applicable HwH criteria in 
Sec.  412.22(e). Furthermore, we are not singling out a particular type 
of HwH such as an LTCH HwH. Rather, we proposed to allow any type of 
HwH that was in existence prior to the HwH regulations and that is 
precluded by State law from meeting the separate governance criteria if 
it is State-owned along with the hospital with which it is co-located, 
to be an HwH so long as it meets the remaining applicable HwH criteria 
in Sec.  412.22(e). With respect to the commenter's point that all 
grandfathered HwHs, not just State-owned HwHs, could experience the 
need to add beds, as discussed above, we believe the commenter has 
misunderstood our proposed (and thus final policy) to mean that a 
State-owned grandfathered HwH is being given special treatment under 
our regulations to add beds and remain grandfathered. As explained 
previously, this is not the case, as these hospitals will lose their 
grandfathered status to the extent they add beds. In general, under our 
final policy, we are merely providing a very narrow exception so that 
hospitals that were in existence prior to the HwH regulations and that 
are operating under specific arrangements required by State law that 
prevent the hospitals from complying with the separate governance 
requirement in Sec.  412.22(e) can continue to be HwHs so long as they 
meet the other ``separateness and control'' policies set forth in the 
regulations. Under this particular circumstance, we do not believe the 
hospitals are acting as nominal hospitals and therefore IPPS exclusion 
remains appropriate. Furthermore, just as we have broad authority under 
sections 1102 and 1871 of the Act to create the HwH regulations, we 
equally have broad authority under those provisions of the statute to 
create exceptions within those regulations as appropriate.
    Comment: One commenter contended that being a State-owned provider 
is not an insurmountable obstacle to the separate governance criteria 
because States have the latitude to create or change governance rules 
to conform to the HwH criteria and that this is no more burdensome than 
promulgating regulations is to CMS. The commenter also stated that 
compliance with the HwH rules would be impossible for grandfathered 
HwHs and the hospital with which it shares space if they are commonly 
owned by religious organizations. The commenter indicated that these 
HwHs would not be able to change their organizational and governance 
structures to comply with the HwH provision because they would not be 
able to change the religion of the organizations of which they are a 
part.
    Response: We disagree that religious organizations are precluded 
from complying with the separate governance criteria. In this type of 
situation, separate financial control could be created without changing 
religious control.
    While not unequivocally disputing the commenter's assertion that 
States have the ability to change governance arrangements in order to 
comply with the HwH separateness criteria, we do know that the 
processes required to do so could involve a lengthy legislative process 
at the State level and be far more onerous than making an exception to 
one of the HwH criteria for a handful of HwHs through the rulemaking 
process. We believe that the time required for a State to make the 
changes that would allow State-owned facilities to meet the HwH 
criteria could be measured in terms of years rather than months. 
Furthermore, there are clearly situations, such as a State-run HwH co-
located with a State-run university hospital, where it is to the 
benefit of all affected parties, including Medicare beneficiaries, to 
continue the relationship as it exists. This kind of co-located status 
provides a venue for training medical students and residents, as well 
as attracting physician scientists and promoting research efforts. 
Unlike the scenarios that prompted CMS to develop the HwH regulations, 
we see no deleterious effects occurring to the Medicare program from 
the adoption of our proposal. Therefore, after consideration of the 
public comments received and for the reasons explained previously 
throughout this section, we are adopting as final our proposal without 
change.

G. Report of Adjustment (Exceptions) Payment

    Section 4419(b) of Public Law 105-33 requires the Secretary to 
publish annually in the Federal Register a report describing the total 
amount of adjustment payments made to excluded hospitals and units, by 
reason of section 1886(b)(4) of the Act, during the previous fiscal 
year.
    The process of requesting, adjudicating, and awarding an adjustment 
payment is likely to occur over a 2-year period or longer. First, 
generally, an excluded hospital or excluded unit of a hospital must 
file its cost report for a fiscal year in accordance with Sec.  
413.24(f)(2). The fiscal intermediary reviews the cost report and 
issues a Notice of Program Reimbursement (NPR). Once the hospital 
receives the NPR, if its operating costs are in excess of the ceiling, 
the hospital may file a request for an adjustment payment. After the 
fiscal intermediary receives the hospital's request in accordance with 
applicable regulations, the fiscal intermediary or CMS, depending on 
the type of adjustment requested, reviews the request and determines if 
an adjustment payment is warranted. This determination is sometimes not 
made until more than 6 months after the date the request is filed 
because there are times when the applications are incomplete and 
additional information must be requested in order to have a completed 
application. However, in an attempt to provide interested parties with 
data on the most recent adjustments for which we do have data, we are 
publishing data on adjustment payments that were processed by the 
fiscal intermediary or CMS during FY 2007.
    The table below includes the most recent data available from the 
fiscal

[[Page 48686]]

intermediaries and CMS on adjustment payments that were adjudicated 
during FY 2007. As indicated above, the adjustments made during FY 2007 
only pertain to cost reporting periods ending in years prior to FY 
2006. Total adjustment payments given to excluded hospitals and units 
during FY 2007 are $9,862,685. The table depicts for each class of 
hospitals, in the aggregate, the number of adjustment requests 
adjudicated, the excess operating cost over ceiling, and the amount of 
the adjustment payments.

----------------------------------------------------------------------------------------------------------------
                                                                                    Excess cost     Adjustment
                        Class of hospital                             Number       over ceiling      payments
----------------------------------------------------------------------------------------------------------------
Psychiatric.....................................................              13      $8,223,003      $3,756,831
Long-Term Care..................................................               1       4,962,747         584,150
Children's......................................................               2       1,082,666         824,308
Cancer..........................................................               2       7,168,945       3,186,072
Religious Nonmedical Health.....................................  ..............  ..............  ..............
Care Institution................................................              11       3,619,026       1,511,324
                                                                 -----------------------------------------------
    Total.......................................................  ..............  ..............       9,862,685
----------------------------------------------------------------------------------------------------------------

VII. Disclosure Required of Certain Hospitals and Critical Access 
Hospitals (CAHs) Regarding Physician Ownership (Sec.  489.2(u) and (v))

    Section 1866 of the Act states that any provider of services 
(except a fund designated for purposes of sections 1814(g) and 1835(e) 
of the Act) shall be qualified to participate in the Medicare program 
and shall be eligible for Medicare payments if it files with the 
Secretary a Medicare provider agreement and abides by the requirements 
applicable to Medicare provider agreements. These requirements are 
incorporated into our regulations in 42 CFR part 489, subparts A and B.
    In the FY 2008 IPPS final rule with comment period, we revised our 
regulations governing Medicare provider agreements, specifically Sec.  
489.20(u), to require a hospital to disclose to all patients whether it 
is physician-owned and, if so, the names of its physician owners (72 FR 
47385 through 47387). In addition, we added a definition of physician-
owned hospital at Sec.  489.3. (Because the definition of physician-
owned hospital at Sec.  489.3 includes a critical access hospital, for 
ease of reference and readability, the term ``hospital,'' when used in 
the context of a physician-owned hospital, is intended to include a 
CAH.) The disclosure requirement in current Sec.  489.20(u), as amended 
by the FY 2008 IPPS final rule with comment period, is applicable only 
to those hospitals with physician ownership; we neglected to include 
those hospitals in which no physician held an ownership or investment 
interest, but in which an immediate family member of a referring 
physician held an ownership or investment interest. However, it was 
always our intent to have consistency between the disclosure 
requirements and the physician self-referral statute and regulations. 
The physician self-referral statute and regulations, which recognize 
the potential for program and patient abuse where a financial 
relationship exists, are applicable to both a physician and the 
immediate family member of the physician. Therefore, in the FY 2009 
IPPS proposed rule, we proposed to revise the language in Sec.  489.3 
to define a ``physician-owned hospital'' as a participating hospital in 
which a physician, or an immediate family member of a physician (as 
defined at Sec.  411.351), has an ownership or investment interest in 
the hospital (73 FR 23683). In this final rule, we are finalizing our 
proposal. We believe that it is necessary to revise our definition of 
physician-owned hospital because a physician's potential conflict of 
interest occurs not only in those instances where he or she has a 
financial relationship in the form of an ownership or investment 
interest, but also where his or her immediate family member has a 
similar interest, and patients should be informed of this as part of 
making an informed decision concerning treatment.
    Following publication of the FY 2008 IPPS final rule with comment 
period, we became aware that some physician-owned hospitals have no 
physician owners who refer patients to the hospital (for example, in 
the case of a hospital whose physician-owners have retired from the 
practice of medicine). In the FY 2009 IPPS proposed rule, we proposed 
to include in Sec.  489.20(v) new language to provide for an exception 
to the disclosure requirements for a physician-owned hospital (as 
defined at Sec.  489.3) that does not have any physician owners who 
refer patients to the hospital (and that has no referring physicians 
(as defined at Sec.  411.351) who have an immediate family member with 
an ownership or investment interest in the hospital), provided that the 
hospital attests, in writing, to that effect and maintains such 
attestation in its files for review by State and Federal surveyors or 
other government officials (73 FR 23683). In this final rule, we are 
finalizing our proposal. We believe that requiring a hospital with no 
referring physician owners to disclose to all patients that it is 
physician-owned and to provide the patients with a list of the 
(nonreferring) physician owners would be an unnecessary burden on the 
hospital and of no value in assisting a patient in making an informed 
decision as to where to seek treatment. Similarly, we do not believe 
that it is useful to require a hospital to make such disclosures when 
no referring physician has an immediate family member who has an 
ownership or investment interest in the hospital.
    In the FY 2009 IPPS proposed rule, we proposed to revise Sec.  
489.20(u) to specify that a physician-owned hospital must furnish to 
patients the list of owners and investors who are physicians (or 
immediate family members of physicians) at the time the list is 
requested by or on behalf of the patient (73 FR 23683). (Currently, 
Sec.  489.20(u) provides that a physician-owned hospital must provide a 
list of its owners and investors to patients but does not specify when 
the list must be provided.) In this final rule, we are finalizing our 
proposal. We believe that it is critical that the patient receives the 
list of names of the relevant owners or investors at the time the 
request is made by or on behalf of the patient so that the patient may 
make a determination as to whether his or her admitting or referring 
physician has a potential conflict of interest. Also, furnishing the 
list at the time the request is made by the patient or on behalf of the 
patient is crucial to affording the patient an opportunity to make an 
informed decision before treatment is furnished at the physician-owned 
hospital.

[[Page 48687]]

    In addition, we proposed to add new Sec.  489.20(u)(2) to require a 
physician-owned hospital to require all physicians who are members of 
the hospital's medical staff to agree, as a condition of continued 
medical staff membership or admitting privileges, to disclose in 
writing to all patients whom they refer to the hospital any ownership 
or investment interest in the hospital held by themselves or by an 
immediate family member (73 FR 23684). We proposed to require that 
physicians agree to make such disclosures at the time they refer 
patients to the hospital. In this final rule, we are finalizing our 
proposal. We believe that early notification of physician ownership or 
investment in the hospital is beneficial to the patient's decision-
making concerning his or her treatment. Requiring a physician to notify 
patients of his or her ownership or investment interest at the time of 
the referral will afford patients the opportunity to discuss the 
physician's ownership or investment interest in the hospital and make a 
more informed decision.
    In the FY 2009 IPPS proposed rule, we also proposed to revise Sec.  
489.53 to permit CMS to terminate the Medicare provider agreement if a 
physician-owned hospital fails to comply with the provisions of 
proposed Sec.  489.20(u), discussed above, or if a hospital or CAH 
fails to comply with the requirements set forth in Sec.  489.20(v) 
(which we proposed to redesignate as Sec.  489.20(w) (73 FR 23684 
through 23685). (In the FY 2008 IPPS final rule with comment period, we 
added a new provision at Sec.  489.20(v) to require that hospitals and 
CAHs: (1) Furnish all patients written notice at the beginning of their 
inpatient hospital stay or outpatient service if a doctor of medicine 
or a doctor of osteopathy is not present in the hospital 24 hours per 
day, 7 days per week; and (2) describe how the hospital or CAH will 
meet the medical needs of any patient who develops an emergency medical 
condition at a time when no physician is present in the hospital or CAH 
(72 FR 47387).) In this final rule, we are finalizing these proposals. 
We believe that these revisions are necessary to enforce the disclosure 
requirements set forth in Sec.  489.20(v) and redesignated Sec.  
489.20(w).
    We received approximately 20 public comments, most of which were 
supportive of our proposals. After consideration of the public comments 
received, we are adopting, with some modification, our proposals as 
final. The new provisions are codified in revised Sec. Sec.  489.3, 
489.20(u), (v), and (w), and 489.53. We stated in our proposal with 
respect to redesignated Sec.  489.20(w), that we were proposing to 
revise Sec.  489.53 to permit CMS to terminate the Medicare provider 
agreement of any hospital or CAH that fails to comply with the 
requirements set forth in proposed redesignated Sec.  489.20(w) (73 FR 
23684). This proposal was consistent with the current rule's 
application to all hospitals and CAHs that do not have a physician on-
site 24 hours per day, 7 days per week. However, our proposed revisions 
to the regulatory text inadvertently were worded so as to imply that 
this enforcement action could be taken only in the case of a violation 
by a physician-owned hospital. In this final rule, we are amending the 
proposed regulatory text of Sec.  489.53(c) by adding language so that 
the provision of paragraph (c) applies to all hospitals and CAHs (and 
not just physician-owned hospitals and CAHs) covered by redesignated 
Sec.  489.20(w). In response to our solicitation of comments regarding 
whether hospitals and CAHs should educate patients about the 
availability of information regarding physician ownership under the 
proposed disclosure requirements, we are not adopting any such 
requirement at this time.
    Comment: Most commenters strongly supported our proposals to: (1) 
Revise the definition of a physician-owned hospital to include 
hospitals in which an ownership interest is held by a physician or his 
or her immediate family member; (2) require hospitals to provide to the 
patient at the time the list is requested, by or on behalf of the 
patient, the names of each physician and immediate family member with 
an ownership interest in the hospital; (3) create an exception to the 
disclosure requirements for a physician-owned hospital (as defined at 
revised Sec.  489.3) that does not have any physician owners who refer 
patients to the hospital (and that has no referring physicians (as 
defined at Sec.  411.351) who have an immediate family member with an 
ownership or investment interest in the hospital); and (4) terminate 
the Medicare provider agreement of a hospital that does not comply with 
the disclosure requirements set forth in revised Sec. Sec.  
489.20(u)(1) and (u)(2), and redesignated Sec.  489.20(w). One 
commenter contended that receiving the list of physician owners after 
admission occurs or even at the point of registration is too late to 
provide a meaningful period of discussion and reflection, and an 
opportunity for the patient to make a choice. The commenter asserted 
that the amendments and enhancements in the proposed rule will enable 
informed patient decisions and strengthen transparency in physician 
financial relationships that may conflict with a patient's best 
interest.
    Response: We are adopting our proposals as final for the reasons 
stated above (see Sec. Sec.  489.3, 489.20(u)(1) and (u)(2), (v), and 
(w), and 489.53).
    Comment: One commenter, supportive of the proposed revisions 
regarding disclosure of a physician's, or his or her immediate family 
member's, ownership or investment interest in a hospital, recommended 
that we state in the final rule that physician financial interests in 
hospitals to which they refer patients is viewed positively by patients 
and that such interests should not be presumed to be improper or 
inappropriate.
    Response: We are not adopting the language suggested by the 
commenter because we do not want to take any position as to whether or 
not patients are generally satisfied with physician ownership. With 
respect to the commenter's suggestion that we state affirmatively that 
physician ownership should not be presumed to be improper or 
inappropriate, we cannot adopt such language. As we stated in the FY 
2008 IPPS final rule with comment period (72 FR 47388), we believe that 
the physician ownership disclosure requirement would permit an 
individual to make more informed decisions regarding his or her 
treatment and to evaluate whether the existence of a financial 
relationship, in the form of an ownership interest, suggests a conflict 
of interest that is not in the patient's best interest. We believe that 
our preamble language is consistent with the statute and there is no 
basis for incorporating the language recommended by the commenter. We 
believe patients will be able to make appropriate use of information 
disclosed by hospitals regarding ownership by physicians or their 
immediate family members. However, disclosure to patients, standing 
alone, does not adequately protect against inappropriate referrals by 
health care providers and practitioners.
    Comment: Several commenters requested that we revisit our 
requirement in Sec.  489.20(v) (now redesignated as Sec.  489.20(w)) 
that a hospital that does not have a physician on the hospital premises 
24 hours per day, 7 days per week, disclose this fact to all patients 
and describe how the hospital would treat patients with an emergency 
medical condition. The commenters suggested that the requirement be 
limited to inpatient admissions only and those outpatient visits that 
include surgery, other

[[Page 48688]]

invasive procedures, use of general anesthesia or other high-risk 
treatment. In addition, the commenters recommended that emergency 
department services be excluded. One commenter contended that the 
intended focus of the requirement was on physician-owned specialty 
hospitals, arguing that full-service community hospitals are part of a 
network of care and that there is no need for them to be subject to 
this requirement. Two commenters objected to the patient notification 
requirements on the basis that they are particularly burdensome to CAHs 
and small rural hospitals.
    Response: The issues raised, and the suggestions made, by the 
commenters are outside the scope of the provisions of the proposed 
rule, as we did not propose to make any changes to the patient 
notification requirements in redesignated Sec.  489.20(w). We will take 
into consideration, for purposes of possible future rulemaking, the 
comments that the notification requirements be limited to inpatient 
admissions only and certain outpatient visits, and that emergency 
department services be excluded. We note that we do not agree with the 
commenters who asserted that this requirement should be applied only to 
physician-owned specialty hospitals, for the reasons that we stated in 
the FY 2008 IPPS final rule with comment period (72 FR 47388), nor do 
we agree with the commenter that suggested the notification 
requirements should not apply to CAHs and small rural hospitals. It is 
important for consumers to be informed whether or not a physician is 
always on site, and how emergency medical conditions will be handled 
when no physician is available. In this regard, we note that there are 
no restrictions on the types of services CAHs and small rural hospitals 
may provide, as compared to other types of hospitals. Moreover, we do 
not believe the patient notification requirements are onerous for any 
type or size of hospital.
    Comment: One commenter concurred that proposed enforcement through 
the possibility of termination of the individual physician's Medicare 
provider agreement for noncompliance is appropriate. A second commenter 
recommended that we provide clarification of what form of investigative 
and administrative procedures CMS will follow in order to provide 
hospitals and CAHs ``due process'' prior to terminating a Medicare 
provider agreement. A third commenter requested clarification of CMS' 
enforcement mechanism, and urged CMS to implement a progressive 
discipline system with termination of the Medicare provider agreement 
as the final, rather than the only, step.
    Response: We believe that the commenters misunderstood either our 
proposal or our procedures for terminating Medicare provider 
agreements. We did not propose to take action against individual 
physicians as a result of violations of Sec.  489.20(u) and 
redesignated Sec.  489.20(w). (We note that physicians do not enter 
into Medicare provider agreements.) The requirements in Sec.  489.20(u) 
and redesignated Sec.  489.20 (w) apply to hospitals and CAHs and, 
thus, the termination action provided for in Sec.  489.53(c) also 
applies to hospitals and CAHs. When CMS takes enforcement action 
pursuant to Sec.  489.53, it follows the procedures described in 
section 3030 of the State Operations Manual. In brief, the CMS Regional 
Office will base its termination action on documentation that supports 
a finding that the hospital or CAH is not complying with the terms of 
the Medicare provider agreement, in this case Sec.  489.20(u)(1) or 
(u)(2), or Sec.  489.20(w). The CMS Regional Office provides a 
preliminary notice of termination to the hospital or CAH by letter, 
giving it time to correct the deficiency and come into compliance. If 
the hospital or CAH provides credible evidence in a timely manner that 
the cause for termination has been removed, CMS does not proceed with 
formal termination action. CMS may or may not require a survey of the 
hospital or CAH to confirm the correction of the deficient practice. If 
the hospital or CAH fails to come into compliance within the allotted 
timeframe, the CMS Regional Office issues a formal termination notice 
to the provider. The public is also provided advance notice of CMS' 
intent to terminate the Medicare provider agreement. The notice to the 
provider includes details of the hospital or CAH's appeal rights and 
information about where to file an appeal. This process is generally 
the same one used when CMS determines that a hospital or CAH fails to 
comply with a Medicare CoP, or with the requirements of the EMTALA.
    Comment: Several commenters responded to our solicitation of 
comments regarding whether hospitals and CAHs should educate patients 
about the availability of information regarding physician ownership 
under the proposed disclosure requirements. One commenter questioned 
the utility of mandating additional signage or other educational 
materials. The commenter asserted that patients are already confronted 
with visual ``clutter'' in waiting/admitting rooms, and stated that any 
additional requirements to educate patients on ownership interests are 
redundant in light of the other disclosure proposals included in the FY 
2009 IPPS proposed rule. A second commenter also expressed opposition 
to the proposal that hospitals educate patients about the availability 
of information regarding physician ownership. The commenter opposed the 
education requirement ``due to the lack of research that a patient's 
knowledge of physician ownership of a hospital affects a patient's 
choice of hospital,'' and asserted that the proposal would represent an 
unnecessary burden.
    Response: At this time, we are not adopting a requirement that 
hospitals educate patients regarding physician ownership in hospitals. 
We believe that the provisions in Sec. Sec.  489.20(u)(1) and (u)(2) 
will provide patients with prompt and sufficient notification of a 
physician's or immediate family member's ownership or investment 
interest in the hospital.

VIII. Physician Self-Referral Provisions (Sec. Sec.  411.351, 411.352, 
and 411.354)

A. General Overview

1. Statutory Framework and Regulatory History
    Section 1877 of the Social Security Act (the Act), also known as 
the physician self-referral law: (1) Prohibits a physician from making 
referrals for certain ``designated health services'' (DHS) payable by 
Medicare to an entity with which he or she (or an immediate family 
member) has a financial relationship (ownership or compensation), 
unless an exception applies; and (2) prohibits the entity from filing 
claims with Medicare (or billing another individual, entity, or third 
party payer) for those DHS rendered as a result of a prohibited 
referral. The statute establishes a number of specific exceptions and 
grants the Secretary the authority to create regulatory exceptions for 
financial relationships that pose no risk of program or patient abuse. 
The current version of section 1877 of the Act, which applies to 
referrals for 11 DHS, has been in effect and subject to enforcement 
since January 1, 1995. The following is a chronology of relevant 
physician self-referral rules published in the Federal Register.

 January 9, 1998--Proposed rule (63 FR 1659)
 January 4, 2001--Phase I of the final rulemaking--(Phase I)--
Final rule with comment period; effective January 4, 2002 (66 FR 856)
 March 26, 2004--Phase II of the final rulemaking--(Phase II)--
Interim final rule with comment period; effective July 26, 2004 (69 FR 
16054)

[[Page 48689]]

 July 12, 2007--CY 2008 Physician Fee Schedule (PFS)--Proposed 
rule (72 FR 38122, 38179). This proposed rule included the proposals 
regarding the following issues, which are finalized in this FY 2009 
IPPS final rule:
     Alternative Criteria for Satisfying Certain Exceptions
     Percentage-Based Compensation Formulae
     Unit-of-Service (Per-Click) Payments in Space and 
Equipment Leases
     Services Furnished ``Under Arrangements''
     Obstetrical Malpractice Insurance Subsidies
     Burden of Proof
     Ownership or Investment Interest in Retirement Plans
 September 5, 2007--Phase III of the final rulemaking--(Phase 
III)--Final rule; effective December 4, 2007 (72 FR 51012)
 November 15, 2007--Final Rule delaying effective date of 
``stand in the shoes'' provisions for certain compensation arrangements 
(72 FR 64161)
 April 30, 2008--FY 2009 Inpatient Prospective Payment System--
Proposed rule (73 FR 23683). Proposals regarding the following issues 
were included in the FY 2009 IPPS proposed rule and are finalized in 
this FY 2009 IPPS final rule:
     ``Stand in the Shoes'' Provisions (physician ``stand in 
the shoes'' provisions were proposed for the first time in the FY 2009 
IPPS proposed rule; entity ``stand in the shoes'' provisions were re-
proposed from the CY 2008 PFS proposed rule)
     Period of Disallowance
     Disclosure of Financial Relationships Report (DFRR)
2. Physician Self-Referral Provisions Finalized in This FY 2009 IPPS 
Final Rule
    In this final rule, we make various revisions to the physician 
self-referral regulations. Some of the revisions were proposed in the 
CY 2008 PFS proposed rule (72 FR 38122, 38179) and some of the 
revisions were proposed in the FY 2009 IPPS proposed rule (73 FR 23528, 
23683). (We note that one of the proposals from the CY 2008 PFS 
proposed rule, our proposal to consider a DHS entity to stand in the 
shoes of an entity that it wholly owns or controls, was re-proposed in 
the FY 2009 IPPS proposed rule to require a DHS entity to stand in the 
shoes of an organization in which it holds a 100 percent ownership 
interest. We are not finalizing either proposal regarding the DHS 
entity ``stand in the shoes'' provisions, as discussed below in section 
VIII.B. of this preamble.) We are finalizing the proposals from the CY 
2008 PFS proposed rule in this FY 2009 IPPS final rule. Many of the 
proposals from the two proposed rules are related, and finalizing them 
in one rulemaking will assist the public in understanding the final 
revisions to the regulations and analyzing their integrated application 
to financial relationships between DHS entities and referring 
physicians. For example, in the CY 2008 PFS proposed rule, we proposed 
an alternative method for compliance with certain provisions of certain 
exceptions. In the FY 2009 IPPS proposed rule, we proposed to specify 
an outside limit on the period of disallowance for certain noncompliant 
financial relationships. Together, as finalized, these regulations 
provide guidance to parties to a financial arrangement who have failed 
to obtain a required signature on a written agreement. (See sections 
VIII.C. and VIII.D. of this preamble.)
    In response to our proposals in the CY 2008 PFS proposed rule, 
several commenters asserted that we should further contemplate the 
issues with which we noted concern and propose revised regulatory 
provisions in the CY 2009 PFS proposed rule if we continue to believe 
that such revisions are necessary. We responded in the CY 2008 PFS 
final rule that we were not inclined to follow the commenters' 
suggestion regarding reproposal of the physician self-referral 
provisions in the CY 2009 PFS proposed rule. We expressed confidence 
that we have sufficient information, both from the commenters and our 
independent research, to finalize revisions to the physician self-
referral regulations without the need for new proposals and additional 
public comment. However, given the number of physician self-referral 
proposals, the significance of the provisions both individually and in 
concert with each other, and the volume of public comments, in the 
interest of prudence, we did not finalize any of the proposals in the 
CY 2008 PFS final rule with comment period (except for the proposal for 
anti-markup provisions for diagnostic tests). We stated our intent to 
publish a final rule that addresses the following proposals: (1) Burden 
of proof; (2) obstetrical malpractice insurance subsidies; (3) unit-of-
service (per-click) payments in lease arrangements; (4) the period of 
disallowance for noncompliant financial relationships; (5) ownership or 
investment interests in retirement plans; (6) ``set in advance'' and 
percentage-based compensation arrangements; (7) DHS entity ``stand in 
the shoes'' provisions; (8) alternative criteria for satisfying certain 
exceptions; and (9) services furnished ``under arrangements.'' We 
stated further that a measured, thoughtful approach to the final 
physician self-referral rules is critical, and that the future 
rulemaking would address the public comments and present a coordinated, 
comprehensive approach to accomplishing the goals described in the 
proposed rule, namely, minimizing the threat of program and patient 
abuse while providing sufficient flexibility to enable those who are 
parties to financial relationships to satisfy the requirements of, and 
remain in compliance with, the physician self-referral law and the 
exceptions thereto. Finalizing together the proposals from the CY 2008 
PFS and the FY 2009 IPPS proposed rules is consistent with our outlined 
approach.
    The following chart identifies the revisions to the physician self-
referral regulations included in this final rule and indicates the rule 
in which the revisions were proposed.

----------------------------------------------------------------------------------------------------------------
    FY 2009 IPPS final rule section            Issue/final rule                 Rulemaking where proposed
----------------------------------------------------------------------------------------------------------------
VIII.B................................  ``Stand in the Shoes''          Physician ``stand in the shoes''
                                         Provisions.                     provisions--FY 2009 IPPS proposed rule
                                                                         DHS Entity ``stand in the shoes''
                                                                         provisions--CY 2008 PFS proposed rule;
                                                                         re-proposed in FY 2009 IPPS proposed
                                                                         rule.
VIII.C................................  Period of Disallowance........  Solicitation of comments in CY 2008 PFS
                                                                         proposed rule; Proposal in FY 2009 IPPS
                                                                         proposed rule.
VIII.D................................  Alternative Method for          CY 2008 PFS proposed rule.
                                         Compliance with Certain
                                         Exceptions.
VIII.E................................  Percentage-based Compensation   CY 2008 PFS proposed rule.
                                         Formulae.

[[Page 48690]]

 
VIII.F................................  Unit-of-service (``Per-         CY 2008 PFS proposed rule.
                                         click'') Payments in Lease
                                         Arrangements.
VIII.G................................  Services Provided ``Under       CY 2008 PFS proposed rule.
                                         Arrangements''.
VIII.H................................  Exception for Obstetrical       CY 2008 PFS proposed rule.
                                         Malpractice Insurance
                                         Subsidies.
VIII.I................................  Ownership or Investment         CY 2008 PFS proposed rule.
                                         Interest in Retirement Plans.
VIII.J................................  Burden of Proof...............  CY 2008 PFS proposed rule.
----------------------------------------------------------------------------------------------------------------

    In reviewing and analyzing public comments, and revising the 
physician self-referral rules, we carefully consider the history and 
structure of section 1877 of the Act. We address in this final rule 
many of the industry's primary concerns, and believe that the 
regulatory revisions finalized here are consistent with the statute's 
goals and directives, and protect beneficiaries of Federal health care 
programs. We have endeavored to simplify the rules where possible and 
provide additional guidance in response to comments, as well as to 
reduce the burden on the regulated community by modifying exceptions 
created using the Secretary's authority under section 1877(b)(4) of the 
Act. Detailed descriptions of the proposals and regulatory revisions 
included in this final rule are found in sections VIII.B. through 
VIII.J. of this preamble and are not repeated in this general overview. 
However, we note the following issues of significance that are included 
in this final rule:
     The provisions regarding ownership or investment interests 
in retirement plans, burden of proof, and period of disallowance are 
finalized and effective October 1, 2008.
     Revisions to the physician ``stand in the shoes'' 
provisions require owners (other than titular owners) and permit non-
owner physicians (and titular owners) to stand in the shoes of their 
physician organizations and address the application of the rules to the 
AMC exception. These regulations are effective October 1, 2008.
     We are not finalizing the DHS entity ``stand in the 
shoes'' provisions at this time.
     The proposal for an alternative method for compliance is 
finalized with a modified, narrow scope of application for missing 
signature requirements only, effective October 1, 2008.
     Percentage-based compensation formulae prohibitions are 
finalized with a narrower scope, specifically addressing the exceptions 
applicable to office space and equipment lease arrangements, with a 
delayed effective date of October 1, 2009.
     We are finalizing the proposal prohibiting certain unit-
of-service (``per-click'') payments in lease agreements with a delayed 
effective date of October 1, 2009.
     Revisions to the definition of ``entity'' are finalized 
with a delayed effective date of October 1, 2009 (this proposal was 
referred to as ``services provided `under arrangements' '').
     Revisions to the exception for obstetrical malpractice 
insurance subsidies permit parties to either comply with the anti-
kickback statute safe harbor, or comply with revised requirements of 
Sec.  411.357(r). The effective date of the revised exception is 
October 1, 2008.
3. Solicitations of Comments in the CY 2008 PFS and FY 2009 IPPS 
Proposed Rules
    In the CY 2008 PFS proposed rule, we solicited comments regarding 
the necessity or appropriateness of revisions to the exception in Sec.  
411.355(b) for in-office ancillary services. We received hundreds of 
comments in response. We made no proposals regarding revisions to this 
exception in either the CY 2008 PFS or FY 2009 IPPS proposed rules; 
therefore, we are not finalizing revisions to the exception in this 
final rule. In the CY 2008 PFS proposed rule, we solicited public 
comments regarding the period of disallowance for noncompliant 
financial relationships and noted in the CY 2008 PFS final rule with 
comment period our intent to finalize it in a future rulemaking. We 
included a proposal on this issue in the FY 2009 IPPS proposed rule. We 
also included two solicitations of comments in the FY 2009 IPPS 
proposed rule--one requesting comments regarding the need for and 
possible structures for an exception to the physician self-referral 
prohibition for gainsharing arrangements, and one requesting comments 
regarding the applicability of the physician self-referral rules to 
physician-owned medical device and other companies and any revisions to 
the rules that might be necessary to address program integrity 
concerns. Because these were only solicitations of comments, we are not 
finalizing revisions to the physician self-referral regulations related 
to these solicitations, nor do we discuss here the comments that we 
received in response to the solicitations. We note that, following the 
close of the comment period for the FY 2009 IPPS proposed rule, in the 
CY 2009 PFS proposed rule, we proposed to establish an exception to the 
physician self-referral law for incentive payment and shared savings 
programs. We refer the reader to 73 FR 38548 for more information 
regarding the proposed exception.

B. ``Stand in the Shoes'' Provisions

1. Background
    In the FY 2009 IPPS proposed rule, we proposed to revisit the 
``stand in the shoes'' provisions issued in Phase III due to the 
potential widespread impact of the provisions, as well as the 
considerable industry interest in their application (73 FR 23685). As 
we stated there, we believe that a more refined approach to the ``stand 
in the shoes'' provisions would simplify the analysis of many financial 
arrangements and reduce program abuse by bringing more financial 
relationships within the scope of the physician self-referral law (such 
as certain potentially abusive arrangements between DHS entities and 
physician organizations that may not have met the definition of an 
``indirect compensation arrangement''). In addition, we proposed to 
take a global approach to the ``stand in the shoes'' provisions, and 
considered whether to establish rules that deem a DHS entity to stand 
in the shoes of an organization in which it has an ownership interest 
or over which it exerts control.
a. Regulatory History of the Physician ``Stand in the Shoes'' Rules
    The Phase III ``stand in the shoes'' rules included provisions 
under which referring physicians are treated as standing in the shoes 
of their physician organizations for purposes of applying the rules 
that describe direct and indirect compensation arrangements in

[[Page 48691]]

Sec.  411.354 (72 FR 51026 through 51030). In Phase III, a ``physician 
organization'' was defined at Sec.  411.351 as ``a physician (including 
a professional corporation of which the physician is the sole owner), a 
physician practice, or a group practice that complies with the 
requirements of Sec.  411.352.'' Therefore, under this definition, when 
determining whether a direct or indirect compensation arrangement 
exists between a physician and an entity to which the physician refers 
Medicare patients for DHS under the Phase III provisions, the referring 
physician stands in the shoes of: (1) Another physician who employs the 
referring physician; (2) his or her wholly-owned professional 
corporation (``PC''); (3) a physician practice (that is, a medical 
practice) that employs or contracts with the referring physician or in 
which the physician has an ownership interest; or (4) a group practice 
of which the referring physician is a member or independent contractor. 
The referring physician is considered to have the same compensation 
arrangements (with the same parties and on the same terms) as the 
physician organization in whose shoes the referring physician stands.
    The industry responded to the ``stand in the shoes'' provisions of 
Phase III with concern as to how the provisions would apply to certain 
stakeholders. Academic medical centers (``AMCs''), integrated tax-
exempt health care delivery systems, and their representatives, 
expressed concern about compensation arrangements involving ``mission 
support payments'' and ``similar payments'' (``support payments''). The 
stakeholders asserted their view that certain payments did not 
previously trigger application of the physician self-referral law but, 
after Phase III, needed to satisfy the requirements of an exception. 
According to these stakeholders, support payments previously were 
analyzed under the rules regarding indirect compensation arrangements 
and, in their view, would have been permitted. After Phase III, in 
their view, it is unlikely that support payments could satisfy the 
requirements of an available exception, given the nature of support 
payments; that is, support payments usually are not tied to specific 
items or services provided by the faculty practice plan (FPP) (or group 
practice within an integrated health care delivery system), but rather 
are intended to support the overall mission of the AMC or maintain 
operations in an integrated health care delivery system. For this 
reason, they asserted that support payments likely would not satisfy 
the requirement, present in many exceptions, that the compensation be 
fair market value for items or services provided. Similarly, some 
stakeholders raised concerns about support payments made from FPPs to 
AMC components. We noted that, although AMCs are free to use the 
exception for services provided by an AMC in Sec.  411.355(e) (which 
would protect support payments made among AMC components if all of the 
conditions of the exception are met), industry stakeholders explained 
that many AMCs do not use the exception, preferring instead to rely on 
other available exceptions and the rules regarding indirect 
compensation arrangements (especially prior to Phase III).
    Following publication of the Phase III final rule, in order to have 
time to consider these concerns and develop a comprehensive response, 
we issued a final rule entitled ``Medicare Program; Delay of the Date 
of Applicability for Certain Provisions of Physicians' Referrals to 
Health Care Entities With Which They Have Financial Relationships 
(Phase III)'' (72 FR 64164) (``November 15, 2007 final rule'') that 
delayed the effective date of the provisions in Sec.  
411.354(c)(1)(ii), Sec.  411.354(c)(2)(iv), and Sec.  411.354(c)(3) for 
12 months after the effective date of Phase III (that is, until 
December 4, 2008). That final rule was applicable only to certain 
compensation arrangements between physician organizations and entities. 
These arrangements included: (1) With respect to an AMC as described in 
Sec.  411.355(e)(2), compensation arrangements between a faculty 
practice plan and another component of the same AMC; and (2) with 
respect to an integrated section 501(c)(3) health care system, 
compensation arrangements between an affiliated DHS entity and an 
affiliated physician practice in the same integrated section 501(c)(3) 
health care system. Shortly after the publication of the November 15, 
2007 final rule, other industry stakeholders asserted that, in addition 
to section 501(c)(3) health care systems, most integrated health care 
delivery systems, including ones involving for-profit entities, make 
support payments. These stakeholders urged that any approach to 
addressing the impact of the Phase III ``stand in the shoes'' 
provisions on support payments and other monetary transfers within 
integrated health care delivery systems should have universal 
applicability that is not dependent on whether the system meets the 
definition of an AMC or has a particular status under the rules of the 
Internal Revenue Service.
    In the FY 2009 IPPS proposed rule, we proposed two alternative ways 
to address the ``stand in the shoes'' issues described above. The first 
proposal offered a multi-faceted approach for revising the existing 
physician ``stand in the shoes'' rules in Sec.  411.354(c), and 
provided two options for certain proposed elements. The second proposal 
involved leaving the Phase III ``stand in the shoes'' provisions as 
promulgated and creating a new exception using our authority under 
section 1877(b)(4) of the Act for nonabusive arrangements that warrant 
protection not available under existing exceptions. In this final rule, 
we are finalizing one of our physician ``stand in the shoes'' proposals 
with modification, but are not finalizing our proposals regarding the 
DHS entity ``stand in the shoes'' provisions or the conventions for 
applying the physician ``stand in the shoes'' provisions in concert 
with the DHS entity ``stand in the shoes'' provisions.
b. Summary of Proposed Revisions to the Physician ``Stand in the 
Shoes'' Rules
(1). Alternative 1: Amend the Phase III Physician ``Stand in the 
Shoes'' Provisions
    Our first proposal included two options for revising the physicians 
``stand in the shoes'' provisions. The first option under this proposal 
would have revised Sec.  411.354(c)(2)(iv) to provide that a physician 
would be deemed not to stand in the shoes of his or physician 
organization if the compensation arrangement between the physician 
organization and the physician satisfies the requirements of the 
exception in Sec.  411.357(c) (for bona fide employment relationships), 
the exception in Sec.  411.357(d) (for personal service arrangements), 
or the exception in Sec.  411.357(l) (for fair market value 
compensation). The first step in the analysis focused on the 
compensation that a referring physician receives from his or her 
physician organization. If the compensation arrangement satisfied the 
requirements of Sec.  411.357(c), (d), or (l), the referring physician 
would be deemed not to stand in the shoes of the physician organization 
for purposes of applying the definitions of and provisions related to 
direct and indirect compensation arrangements in Sec.  411.354(c). 
Arrangements between DHS entities and physician organizations whose 
physicians do not stand in their shoes could still create indirect 
compensation arrangements that would need to satisfy the requirements 
of the exception for

[[Page 48692]]

indirect compensation arrangements in Sec.  411.357(p).
    The second option under the proposal to revise the physician 
``stand in the shoes'' provisions would have deemed physician owners of 
a physician organization to stand in the shoes of the physician 
organization. We solicited public comments on whether considering all 
physician owners of (or physician investors in) a physician 
organization to stand in the shoes of the physician organization, as 
they currently do under the Phase III ``stand in the shoes'' 
provisions, might be over-inclusive. We were concerned that a physician 
owner of a captive or ``friendly'' PC who has no right to the 
distribution of profits and similarly situated physician owners would 
have to stand in the shoes of their physician organizations even when 
their ownership interest is merely nominal (or titular) in nature and 
their compensation arrangement with the physician organization 
satisfies the requirements of one of the exceptions in Sec.  
411.357(c), (d), or (l). We also solicited comments on an approach 
under which only owners of a physician organization would stand in the 
shoes of that physician organization (in which case, a physician would 
not stand in the shoes of a physician organization unless he or she 
holds an ownership or investment interest; under this approach, whether 
a physician ``stands in the shoes'' would not depend on whether the 
physician's compensation arrangement with the physician organization 
satisfies the requirements of Sec.  411.357(c), (d), or (l)).
    Under the first proposal, we also proposed to revise Sec.  
411.354(c)(3)(ii) to clarify that the provisions of Sec. Sec.  
411.354(c)(1)(ii) and (c)(2)(iv) do not apply when the requirements of 
Sec.  411.355(e) are satisfied; that is, a physician would not stand in 
the shoes of his or her physician organization (for example, a faculty 
practice plan) when his or her referral for DHS is protected under the 
exception in Sec.  411.355(e) for services provided by an AMC. We also 
proposed a specific revision to the regulation in Sec.  
411.354(c)(2)(iv) (when a physician is deemed to ``stand in the 
shoes'') and sought public comment as to whether this policy related to 
AMCs is better achieved by revising Sec.  411.354(c)(3) to delete the 
reference to applying the exceptions in Sec.  411.355, and thereby 
providing that the ``stand in the shoes'' provisions do not apply where 
the prohibition on referrals is not applicable because all of the 
requirements of any of the exceptions in Sec.  411.355 are satisfied. 
Finally, we proposed to revise Sec.  411.354(c)(3)(ii) to provide that 
the provisions of Sec.  411.354(c)(1)(ii) and (c)(2)(iv) do not apply 
when compensation is provided by a component of an AMC to a physician 
organization affiliated with that AMC through a written contract to 
provide services required to satisfy the AMC's obligations under the 
Medicare GME rules where the contract is limited to services necessary 
to fulfill the GME obligations as set forth in 42 CFR Part 413, Subpart 
F. We stated in the proposed rule that we may provide additional 
guidance on the application of the three elements of the definition of 
``indirect compensation arrangement'' in the FY 2009 IPPS final rule. 
We solicited comments regarding ways in which we could ensure that the 
full range of potentially abusive arrangements between DHS entities and 
physician organizations are appropriately addressed in situations where 
physicians do not stand in the shoes of their physician organizations.
(2). Alternative 2: New Exception for ``Mission Support'' Payments; No 
Change to Phase III Physician ``Stand in the Shoes'' Provisions
    The alternative proposal in the FY 2009 IPPS proposed rule that 
addressed the Phase III physician ``stand in the shoes'' provisions was 
to make no revisions to existing Sec. Sec.  411.354(c)(1)(ii), 
(c)(2)(iv), and (c)(3) and, to the extent necessary to protect 
nonabusive arrangements, promulgate a separate exception using our 
authority under section 1877(b)(4) of the Act to create exceptions for 
arrangements that do not pose a risk of program or patient abuse. We 
solicited comments about this proposal, including whether such an 
exception should be limited to ``mission support'' payments, whether 
other specific types of payments or compensation arrangements should be 
eligible for such an exception, the types of parties that should be 
permitted to use the exception (for example, AMC components, physician 
practices), and the conditions that should apply to such an exception 
to ensure that a protected compensation arrangement poses no risk of 
program or patient abuse. We recognized that the term ``integrated 
health care delivery system'' is loosely used in the industry to 
describe a wide variety of systems, with varying degrees of actual 
integration, and that it may prove infeasible to craft a sufficiently 
bounded definition. Due to our concern that, in many circumstances, 
payment arrangements between components of ``integrated health care 
delivery systems,'' as well as payments from ``integrated health care 
delivery systems'' to physicians affiliated with those systems are 
susceptible to fraud and abuse, we sought public comment about defining 
a fully integrated health care delivery system, what types of 
compensation arrangements should be protected (for example, support 
payments), and what conditions should be included in an exception that 
would ensure no risk of program or patient abuse.
c. Summary of Proposed DHS Entity ``Stand in the Shoes'' Rules
    In the CY 2008 PFS proposed rule (72 FR 38122), we proposed a 
corollary provision to the Phase III physician ``stand in the shoes'' 
provisions that addressed the DHS entity side of physician-DHS entity 
financial relationships. Specifically, we proposed to amend Sec.  
411.354(c) to provide that, where a DHS entity owns or controls an 
entity to which a physician refers Medicare patients for DHS, the DHS 
entity would stand in the shoes of the entity that it owns or controls 
and would be deemed to have the same compensation arrangements with the 
same parties and on the same terms as does the entity that it owns or 
controls. We solicited public comments as to whether and how we would 
employ a ``stand in the shoes'' approach for these types of 
relationships, as well as for other types of financial relationships. 
We did not finalize the DHS entity ``stand in the shoes'' provisions in 
the CY 2008 PFS final rule published in the Federal Register on 
November 27, 2007 (72 FR 66222, 66306). Ultimately, as explained in the 
FY 2009 IPPS proposed rule, we wanted to undertake a comprehensive 
approach to the ``stand in the shoes'' provisions that addresses both 
physicians and physician organizations, as well as DHS entities and 
other entities that they own or control.
    In the FY 2009 IPPS proposed rule, we proposed a revision to Sec.  
411.354(a) to provide that an entity that furnishes DHS would be deemed 
to stand in the shoes of an organization in which it has a 100 percent 
ownership interest and would be deemed to have the same compensation 
arrangements with the same parties and on the same terms as does the 
organization that it owns. We sought public comments specifically as to 
whether we should consider a DHS entity to stand in the shoes of 
another organization in which the DHS entity holds less than a 100 
percent ownership interest and, if so, what amount of ownership should 
trigger application of the DHS entity ``stand in the shoes'' 
provisions. We also sought comments as to whether we should deem a DHS 
entity to stand in the shoes of an organization that it controls (for

[[Page 48693]]

example, an entity would stand in the shoes of a nonprofit organization 
of which it is the sole member), noting that we would consider a DHS 
entity to control an organization if the DHS entity has the power, 
directly or indirectly, significantly to influence or direct the 
actions or policies of the organization. Finally, we solicited comment 
as to what level of control should trigger the application of the 
entity ``stand in the shoes'' provisions.
    We also proposed provisions outlining the conventions to use when 
applying both the physician ``stand in the shoes'' provisions and the 
DHS entity ``stand in the shoes'' provisions to a chain of financial 
relationships between a physician and a DHS entity. The proposed 
conventions were intended to ensure that at least one compensation 
arrangement remains between the DHS entity and the referring physician 
for purposes of analyzing the chain of relationships under the 
physician self-referral rules. No regulation text was proposed at the 
time regarding application of the physician and DHS entity ``stand in 
the shoes'' provisions.
2. Physician ``Stand in the Shoes'' Provisions
    Although we received a few comment letters suggesting that we not 
finalize any of our proposals related to the physician ``stand in the 
shoes'' provisions, the majority of commenters supported our proposal 
to revise the existing provisions in Sec.  411.354(c), which were 
finalized in Phase III (72 FR 51012). Some commenters supported 
finalizing both our proposed revisions to Sec.  411.354(c) and a new 
exception to the physician self-referral prohibition for mission 
support payments. A few commenters urged us to abandon the Phase III 
``stand in the shoes'' provisions and instead revise the definition of 
``indirect compensation arrangement'' and the exception for indirect 
compensation arrangements in Sec.  411.357(p) to address the concerns 
noted in Phase III and the FY 2009 IPPS proposed rule (72 FR 51028; 73 
FR 23686 through 23687). In this final rule, we are finalizing 
revisions to the physician ``stand in the shoes'' provisions to deem a 
physician who has an ownership or investment interest in a physician 
organization to stand in the shoes of that physician organization. 
Physicians with only a titular ownership interest (that is, physicians 
without the ability or right to receive the financial benefits of 
ownership or investment, including, but not limited to, the 
distribution of profits, dividends, proceeds of sale, or similar 
returns on investment) are not required to stand in the shoes of their 
physician organizations. In addition, we are permitting non-owner 
physicians (and titular owners) to stand in the shoes of their 
physician organizations and we are also clarifying that the physician 
``stand in the shoes'' provisions in Sec.  411.354(c) do not apply to 
an arrangement that satisfies the requirements of the exception in 
Sec.  411.355(e) for AMCs. We are not finalizing our proposal regarding 
compensation arrangements between physician organizations and AMC 
components for the provision of services required to satisfy the AMC's 
obligations under the Medicare GME rules in 42 CFR Part 413, Subpart F. 
We address below the specific comments that we received in response to 
our proposals in the FY 2009 IPPS proposed rule.
    Comment: The majority of commenters urged us to finalize simple, 
bright line rules for analyzing financial relationships involving DHS 
entities, physician organizations and the physicians that comprise 
those physician organizations. Although a large hospital association 
and those commenters adopting that association's comments asserted that 
the proposals were inconsistent with our stated goal of simplification, 
all of the commenters agreed that any final physician ``stand in the 
shoes'' rule should be guided by simplicity.
    Response: We are finalizing revisions to the physician ``stand in 
the shoes'' provisions in Sec.  411.354(c) that require only physician 
owners of a physician organization to stand in the shoes of that 
physician organization. Physicians with an ownership or investment 
interest that is titular in nature would not be deemed to stand in the 
shoes of their physician organizations. (We describe what we mean by 
``titular'' ownership below.) We believe that this approach offers the 
best option for achieving our goal in this rulemaking of simplifying 
the analysis of many financial arrangements. We are also permitting, 
but not requiring, non-owner physicians (including titular owners) to 
stand in the shoes of their physician organizations. We discuss in more 
detail below the application of the physician ``stand in the shoes'' 
provisions included in this final rule.
    Comment: One commenter suggested that we withdraw its proposals 
regarding the physician and DHS entity ``stand in the shoes'' 
provisions and issue a separate proposed rule that provides greater 
clarity and detail regarding appropriate financial arrangements between 
physicians and academic medical centers (AMCs) and integrated health 
care delivery systems regarding mission services that benefit all 
patients. Several other commenters submitted identical comments urging 
us to review all of our outstanding proposals and develop one 
integrated package of proposals in the future.
    Response: We are not, as the first commenter suggested, withdrawing 
the proposals contained in the FY 2009 IPPS proposed rule and issuing a 
separate proposed rule regarding the application of the ``stand in the 
shoes'' rules with respect to mission support payments. As we stated in 
the FY 2009 IPPS proposed rule, we proposed and solicited comments 
regarding revisions to the physician ``stand in the shoes'' rules in 
order to revisit, with public input, the physician ``stand in the 
shoes'' regulatory scheme (73 FR 23685). Our intent was not merely to 
address the alleged problems that result from the application of the 
physician ``stand in the shoes'' rules to mission support payments. 
Further, it is not our intention, now or in the future, to regulate 
financial relationships between DHS entities and referring physicians 
by making exceptions to rules or exceptions within existing exceptions 
simply in response to the complaints or concerns of the industry. With 
respect to the other commenters' suggestions, we note that, with the 
exception of our proposal in the CY 2009 PFS proposed rule for a new 
exception for incentive payment and shared savings programs (73 FR 
38548), we have considered all of the outstanding proposals for this 
final rule, both standing alone and in concert with each other, and we 
are finalizing a set of rules that are well-integrated and designed to 
be consistent.
    Comment: Some commenters urged us not to finalize any of the 
proposals and, instead, ``plot out a more comprehensive approach to the 
larger issue of compliant physician relationships.''
    Response: As noted above, we are finalizing with modification our 
proposal regarding the physician ``stand in the shoes'' provisions in 
Sec.  411.354(c). We continually review our regulations to ensure that 
they serve to protect the Medicare program and its beneficiaries from 
program or patient abuse, and may, in a future rulemaking subject to 
notice and public comment, propose further revisions to our regulations 
to address program integrity concerns as they arise.
    Comment: Many commenters supported the proposal to revise the 
physician ``stand in the shoes'' provisions to deem only physician 
owners of a physician organization to stand in the shoes of the 
physician organization. Most of these commenters

[[Page 48694]]

also urged us to not deem a physician to stand in the shoes of his or 
her physician organization if the physician's ownership interest is 
titular only. Commenters asserted that: (1) This approach is the most 
straightforward, least intrusive approach, and provides the clearest 
standard for analysis; (2) because non-owners generally have no control 
over the financial relationships between their employers and providers 
of DHS, it would be inappropriate to hold them accountable for 
financial relationships that may violate the physician self-referral 
prohibition; and (3) an ownership interest that is truly titular only 
will not result in any of the financial risks or rewards to the 
physician (for example, dividends, tax benefits, proceeds of sale, and 
other returns on investment) typically associated with ownership and 
investment interests. One commenter contended that a physician 
organization's non-owner physician employees and contractors are likely 
to have compensation arrangements based on fair market value and are 
highly unlikely, if ever, to benefit from the infusion of capital into 
(or a mission support payment to) the physician organization.
    Response: We agree that the best approach for our physician ``stand 
in the shoes'' rules is to require a physician with an ownership or 
investment interest in his or her physician organization to stand in 
the shoes of the physician organization, excluding from the application 
of the rule any physician whose ownership interest is merely titular in 
nature. (We describe in the response to the next comment what we mean 
by a ``titular'' ownership interest.) We are permitting non-owner 
physicians (and titular owners) to stand in the shoes of their 
physician organizations. We do not agree with the last commenter's 
assertions that a physician organization's non-owner (and titular-
owner) physician employees and contractors necessarily are likely to 
have compensation arrangements based on fair market value and that they 
are highly unlikely, if ever, to benefit from the infusion of capital 
into (or a mission support payment to) the physician organization. To 
the contrary, we are aware of situations where non-owner physician 
employees and contractors have compensation arrangements that are not 
based on fair market value and benefit from payments made to their 
physician organizations from entities to which the physician employees 
and contractors refer patients for DHS. We remain concerned about such 
compensation arrangements. (We note that the rules regarding indirect 
compensation arrangements would apply to these arrangements.) In 
addition, depending on the circumstances, non-fair market value 
compensation arrangements potentially implicate the Federal anti-
kickback statute (section 1128B(b) of the Act) (the ``anti-kickback 
statute'') and False Claims Act.
    Comment: Most commenters asserted that a physician whose ownership 
or investment interest in a physician organization is merely titular in 
nature should not be deemed to stand in the shoes of his or her 
physician organization. Some of these commenters added the caveat that 
the titular owner should not stand in the shoes of his or her physician 
organization only where his or her compensation arrangements with the 
physician organization satisfy the requirements of an applicable 
exception. One commenter suggested that nominal, or titular, ownership 
would include any situation in which a physician's ownership interest 
does not afford the physician any ``material'' right to receive profits 
from the physician organization's compensation arrangement with the DHS 
entity.
    Response: We are revising Sec.  411.354(c)(1)(ii) and (c)(2)(iv) to 
specify that we do not deem a physician to stand in the shoes of his or 
her physician organization if the physician's ownership interest in 
that physician organization is titular in nature, as described in Sec.  
411.354(c)(3)(ii)(C). We consider an ownership or investment interest 
to be titular where the physician is not able or entitled to receive 
any of the financial benefits of ownership or investment, including, 
but not limited to, the distribution of profits, dividends, proceeds of 
sale, or similar returns on investment. We do not believe that 
``nominal'' or ``titular'' ownership should be decided based on whether 
a physician has a ``material'' right to receive profits from the 
physician organization's compensation arrangement with the DHS entity, 
but rather any right to the financial benefits through ownership or 
investment. In the interest of establishing a bright-line rule 
regarding when a physician stands in the shoes of a physician 
organization, we are not finalizing, as some commenters suggested, a 
requirement that the compensation from a physician organization to a 
titular owner of that physician organization must satisfy the 
requirements of an applicable exception to avoid application of the 
physician ``stand in the shoes'' rules in Sec.  411.354(c). Titular 
owners are not required to stand in the shoes of their physician 
organizations.
    Comment: Many commenters expressed concern regarding the 
application, if finalized, of our proposal that all physicians would 
stand in the shoes of their physician organizations except a physician 
whose total compensation from his or her physician organization for the 
provision of professional physician services satisfied the requirements 
of the exceptions in Sec.  411.357(c), (d) or (l). Commenters noted 
that it is difficult for DHS entities to know of ``downstream'' 
financial relationships between physician organizations and physicians. 
Moreover, hospitals and other DHS entities have no control over such 
relationships. To address these concerns, one commenter urged us to 
permit a DHS entity to rely on information provided by the physician 
organization or physician regarding the status of physicians as owners, 
titular owners, or employees or contractors. Another commenter urged us 
to not require the DHS entity to investigate the relationships between 
the physician organization and its physicians if the arrangement 
between the DHS entity and the physician organization satisfies the 
requirements of a direct exception.
    One commenter argued that the final physician ``stand in the 
shoes'' provisions should permit DHS entities to assess the 
availability of an exception by considering the compensation payable by 
the DHS entity, rather than make the availability of an exception 
dependent on internal compensation decisions made by a physician group 
of which the DHS entity may have some knowledge, but over which the DHS 
entity has no control. This commenter suggested that we permit a DHS 
entity to assume that the physician organization has physician owners, 
essentially permitting a DHS entity to ``opt into'' the application of 
the physician ``stand in the shoes'' rules, even if the rules would not 
actually apply to the compensation arrangement between the DHS entity 
and the physician organization. A different commenter suggested that we 
make the direct exceptions applicable where a physician organization 
has a financial relationship with a DHS entity, similar to the manner 
in which direct exceptions are applicable where a physician's immediate 
family member has a financial relationship with a DHS entity.
    Response: We recognize the limitations described by the commenters 
in regard to the proposed alternative approach. As discussed above, we 
are not finalizing this

[[Page 48695]]

approach. Rather, we are finalizing an approach in which physician 
owners stand in the shoes of their physician organizations (with a 
narrow exception for titular owners). We believe that this approach 
comports with the commonsense understanding of physician relationships 
and is easier to apply in practice. It furthers our goal of addressing 
potential abuses and offers a clear, bright line rule. To further our 
goal of simplifying the analysis of compensation arrangements, we are 
also finalizing a provision that permits a physician who is not an 
owner or investor in his or her physician organization to stand in the 
shoes of the physician organization for purposes of applying the 
compensation exceptions. In essence, we are modifying the Phase III 
``stand in the shoes'' provisions to permit, but not require, such 
physicians to stand in the shoes of their physician organizations. 
Thus, for example, employees and contractors may stand in the shoes of 
their physician organizations for purposes of applying the rules 
regarding direct and indirect compensation arrangements. If parties 
treat a physician as standing in the shoes of the physician 
organization, they would be required to satisfy the requirements of one 
of the exceptions for direct compensation arrangements, which generally 
contain additional or stricter requirements, such as a minimum 1-year 
term and compensation that is ``set in advance.'' Under Sec.  
411.354(c)(3)(i), a physician who stands in the shoes of his or her 
physician organization is deemed to have the same compensation 
arrangements (with the same parties and on the same terms) as the 
physician organization. Therefore, in order to satisfy the requirements 
of an exception in Sec.  411.357 for direct compensation arrangements, 
the parties would consider whether the referrals between the DHS entity 
and the physician satisfy the applicable requirements of an exception. 
This approach is consistent with our longstanding view that parties are 
entitled to use any available exception of which they satisfy all of 
the applicable requirements. We believe that compliance with an 
exception for direct compensation arrangements, as opposed to 
compliance with the exception for indirect compensation arrangements or 
no exception at all if the arrangement did not meet the definition of 
``indirect compensation arrangement,'' would safeguard against program 
and patient abuse. We have revised Sec.  411.354(c)(3)(ii), 
accordingly.
    Although not raised by this commenter, we recognize that many 
arrangements that, prior to Phase III, would have met the definition of 
``indirect compensation arrangement'' and been required to satisfy the 
requirements of the exception in Sec.  411.357(p) have been 
restructured (or initially structured) to comply with an exception for 
direct compensation arrangements in Sec.  411.355 or Sec.  411.357 as 
required under the Phase III ``stand in the shoes'' provisions that 
went into effect on December 4, 2007. Arrangements that were not direct 
compensation arrangements and that would not have been indirect 
compensation arrangements under the provisions in Sec.  411.354(c) 
prior to Phase III have similarly been restructured to comply with an 
exception for direct compensation arrangements as required under Phase 
III. The revisions to Sec.  411.354(c)(3)(iii) make it clear that such 
arrangements do not need to be restructured to comply with the revised 
physician ``stand in the shoes'' rules finalized in this rulemaking. In 
addition, the new ``stand in the shoes'' provisions in Sec.  
411.354(c)(1)(iii) and (c)(2)(iv)(B) that permit non-owners to stand in 
the shoes of their physician organizations should also address 
situations in which non-owner physicians have been standing in the 
shoes of their physician organizations pursuant to the Phase III 
``stand in the shoes'' provisions. They may continue to do so.
    Comment: A few commenters suggested that we adopt more than one of 
our proposals. One of these commenters suggested that doing so would 
permit the parties to a compensation arrangement to structure their 
arrangement to fit into the best option available under applicable 
State laws and existing corporate structures. Another commenter argued 
that, because, in its opinion, each proposal has its benefits, but also 
its limitations, we should adopt both and permit parties to choose 
their method for complying with the physician self-referral statute. We 
assume that, by stating ``each proposal,'' this commenter was urging us 
to revise Sec.  411.354(c) and also issue a new exception for mission 
support payments.
    Response: We believe that finalizing more than one proposal, or 
revising Sec.  411.354(c) and issuing an exception for mission support 
payments, would add complexity and uncertainty, rather than simplify 
the physician ``stand in the shoes'' rules, and we decline to adopt 
these commenters' suggestions.
    Comment: Three commenters suggested that, if we finalize revisions 
to Sec.  411.354(c) to exempt a physician from standing in the shoes of 
his or her physician organization if his or her total compensation from 
that physician organization satisfies the requirements of Sec.  
4111.357(c), (d) or (l), we expand the list of exceptions to all 
compensation exceptions. Another commenter suggested that we include in 
this ``carveout'' (or list of exceptions, compliance with which would 
not require a physician to stand in the shoes of his or her physician 
organization) the exception for in-office ancillary services in Sec.  
411.355(b).
    Response: We are not finalizing this proposal and, in light of our 
final rule, the commenters' concerns as we understand them are moot.
    Comment: One commenter suggested an adjunct proposal to our 
proposal that a physician would not stand in the shoes of a physician 
organization if the physician's compensation arrangement satisfies the 
requirements of an exception in Sec.  411.357(c), (d) or (l). 
Specifically, the commenter suggested that we not deem a physician to 
stand in the shoes of his or her physician organization if: (1) The 
physician is an employee or contractor of a group practice that 
satisfies the conditions of Sec.  411.352 (the group practice rules) 
and the physician's referrals to the group practice are protected under 
the exception for in-office ancillary services in Sec.  411.355(b); and 
(2) the physician's compensation from the group practice is fair market 
value for the services provided to the group practice.
    Response: As discussed above, we are not finalizing the proposal on 
which the commenter's suggestions are based. We believe that this final 
rule addresses the commenter's concerns, albeit in a different manner 
than requested by the commenter.
    Comment: One commenter urged us to revise the AMC rules in Sec.  
411.355(e) to allow faculty practice plans (FPPs) to share profits with 
their physicians in the same manner that group practices are permitted 
under Sec.  411.352. The commenter asserted that, without such a 
revision, if a FPP shares profits, in addition to or in lieu of 
providing a productivity bonus to the physicians in the FPP (as could a 
group practice), the exception in Sec.  411.355(e) for AMCs cannot be 
satisfied because the compensation to the FPP physicians would take 
into account the volume or value of referrals or other business 
generated by the referring physician within the AMC. The commenter 
asserted that an alternative under which a physician would stand in the 
shoes of his or her physician organization unless the physician's total 
compensation from that physician organization satisfies the 
requirements of Sec.  411.357(c), (d) or (l)

[[Page 48696]]

would have the effect of prohibiting FPPs from compensating their 
physicians like group practices.
    Response: The commenter's suggestion that we revise Sec.  
411.355(e) is outside the scope of this rulemaking. We do not believe 
that revisions to the exception in Sec.  411.355(e) for AMCs are 
warranted or necessary, and we decline to adopt the commenter's 
recommendation. As discussed below, we are finalizing our proposal not 
to apply the physician ``stand in the shoes'' provisions within the 
context of the exception in Sec.  411.355(e). Therefore, FPP physicians 
are not required to stand in the shoes of the FPP if the requirements 
of Sec.  411.355(e) are satisfied. If a FPP elects to compensate its 
physicians in such a way as to preclude compliance with the exception 
for AMCs, the FPP should be treated like any other group practice under 
Sec.  411.352 and would not be afforded the special protection for 
physician referrals within an AMC that is provided under Sec.  
411.355(e).
    Comment: A few commenters suggested that we make permanent the 
current ``moratorium'' on the physician ``stand in the shoes'' rules 
included in the November 15, 2007 final rule. Some of these commenters 
suggested revisions or expansions to the scope of the ``moratorium.''
    Response: Given our decision to finalize revisions to the physician 
``stand in the shoes'' rules in this final rule, which will be 
effective October 1, 2008, it is unnecessary to continue or to make 
permanent the delay in effective date of the Phase III physician 
``stand in the shoes'' provisions or to expand the delay in effective 
date to additional compensation arrangements. We believe that, taken in 
concert, the revisions we are finalizing address most, if not all, of 
the concerns brought to our attention by industry stakeholders and 
which the November 15, 2007 final rule was intended to address. This 
final rule does not affect the continued applicability of the November 
15, 2007 final rule. The delay in effective date of the Phase III 
physician ``stand in the shoes'' provisions is through December 4, 
2008. The provisions of this final rule are effective October 1, 2008 
and, on that date, except as provided in Sec.  411.354(c)(3)(iii), 
compensation arrangements must comply with the requirements of the 
revised regulations set forth in this final rule.
    Comment: Two commenters asserted that a new exception for mission 
support payments holds the most promise for solving the problem of 
mission support payments. A few commenters provided specific 
suggestions for requirements that we should include in such an 
exception. Other commenters opposed the issuance of an exception for 
mission support payments, noting that establishing an accurate 
definition for ``mission support payments'' would be extremely 
challenging and may well result in complexities that will defeat the 
purpose of developing a simplified regulatory scheme, such an exception 
would be unworkable, and it is unlikely that an exception could be 
crafted to permit the appropriate range of nonabusive arrangements. 
Another commenter noted that an attempt to define the universe of 
nonabusive arrangements would be limiting and quickly obsolete.
    Response: We agree with the commenters that opposed the issuance of 
an exception for mission support payments, as well as with the reasons 
stated by those commenters regarding the difficulty in crafting a 
useful exception that is easy to understand and apply and that does not 
pose a risk of program or patient abuse. We are not finalizing a 
separate exception for compensation arrangements involving ``mission 
support'' or similar payments.
    Comment: A few commenters recommended that, instead of finalizing 
revisions to the physician ``stand in the shoes'' rules, we revise the 
rules regarding indirect compensation arrangements, as this would 
address perceived problems in States that enforce a prohibition on the 
corporate practice of medicine. One of these commenters suggested that 
we define ``indirect compensation arrangement'' to include arrangements 
between a DHS entity and an entity with which the physician has a 
direct financial relationship (the ``intervening entity'') that provide 
for a fixed amount of compensation in excess of fair market value 
compensation for the items and services provided by the intervening 
entity. Another commenter suggested that we revise the definition of 
``indirect compensation arrangement'' to establish an objective test 
for whether compensation takes into account the volume or value of 
referrals or other business generated for a DHS entity; that is, the 
intent of the parties should not be used as a basis for finding that 
the arrangement took referrals into account.
    Response: We decline to revise the definition of ``indirect 
compensation arrangement'' as suggested by these commenters. Specific 
proposals and regulatory text for revisions to our rules regarding 
indirect compensation arrangements (other than revisions to the 
physician ``stand in the shoes'' provisions proposed in the FY 2009 
IPPS proposed rule and subject to public comment), were not included in 
the FY 2009 IPPS proposed rule, and we believe that any such revisions 
would benefit from appropriate vetting through notice and public 
comment. With respect to the specific comment regarding above-fair 
market value compensation arrangements, we note that the suggested 
approach does not resolve the perceived problems brought to our 
attention following the publication of Phase III and the original 
physician ``stand in the shoes'' rules. The last commenter's suggestion 
that we revise the definition of ``indirect compensation arrangement'' 
to incorporate a test for whether compensation takes into account the 
volume or value of referrals or other business generated for a DHS 
entity is outside the scope of this rulemaking.
    Comment: One commenter urged us to repeal the physician ``stand in 
the shoes'' provisions made final in Phase III and, instead, revise the 
definition of ``indirect compensation arrangement'' to address program 
integrity concerns. (The commenter did not provide suggested regulatory 
text or language for a revised definition.) The commenter asserted that 
revisions to the definition of ``indirect compensation arrangement'' 
could bring within the coverage of the physician self-referral rules 
those compensation arrangements that do not qualify as direct 
compensation arrangements and that previously may not have met the 
definition of ``indirect compensation arrangement,'' yet would not 
force indirect relationships to satisfy the more rigid requirements of 
the personal service arrangements exception (or, presumably, other 
exceptions for direct compensation arrangements). According to the 
commenter, this would be beneficial because indirect compensation 
arrangements, including those covered under a revised definition of 
``indirect compensation arrangement,'' would need to satisfy the 
requirements of the exception in Sec.  411.357(p), but would not be 
subject to the strict 1-year term and ``set in advance'' requirements 
in the exceptions for direct compensation arrangements. The commenter 
contended that the 1-year term and ``set in advance'' requirements are 
unworkable for contracts between DHS entities and large physician 
groups because compensation formulae employed in such arrangements 
require adjustments that cannot be anticipated at the commencement of 
the arrangement due to evolving patient care and community needs. The 
commenter offered suggestions for

[[Page 48697]]

revising the definition of ``set in advance.'' A second commenter 
echoed the concern regarding the impact on financial arrangements 
between DHS entities and physician organizations of the requirement in 
the direct compensation arrangement exceptions that compensation be 
``set in advance.'' The second commenter urged us to permit parties to 
modify a compensation arrangement between a DHS entity and a physician 
organization prospectively for the balance of the existing term of the 
arrangement to reflect a change in services provided by the physician 
organization and its physicians if the change in compensation is 
limited to the modified services, represents fair market value for the 
actual change in services, and does not take into account the volume or 
value of referrals or other business generated between the parties.
    Response: We decline to adopt the first commenter's suggestions 
regarding revisions to the definition of ``set in advance'' at 
411.354(d)(1). However, we have reconsidered the position we stated in 
the Phase III final rule regarding our interpretation of the ``set in 
advance'' rules with respect to modification of the rental charges in 
an agreement for the lease of office space or equipment (and the 
compensation terms in an agreement for a physician's personal services) 
(72 FR 51044). There, in response to a comment seeking clarification 
whether the parties to an agreement for the rental of office space or 
equipment may amend the agreement during the first year of its term, we 
stated that

    Because rental charges, including the methodology used to 
calculate rental charges, must be `set in advance,' as defined at 
Sec.  411.354(d)(1), parties may not change the rental charges at 
any time during the term of an agreement. Parties wishing to change 
the rental charges must terminate the agreement and enter into a new 
agreement with different rental charges and/or other terms; however, 
the new agreement may be entered into only after the first year of 
the original lease term (regardless of the length of the original 
term). In addition, the new lease must be for a term of at least 1 
year and must comply with all other criteria in the relevant rental 
exception.

    (We noted also that personal service agreements may be amended in 
the same manner as agreements for the rental of office space or 
equipment (72 FR 51047).) We agree with the commenter that requiring 
compliance with an exception for direct compensation arrangements (as 
would be the case where a compensation arrangement exists between a DHS 
entity and a physician who stands in the shoes of his or her physician 
organization) imposes upon parties requirements not present in the 
exception for indirect compensation arrangements, including the 1-year 
term and ``set in advance'' requirements. We are sympathetic to the 
concerns of the commenter with respect to arrangements between DHS 
entities and physician groups that may require modification during the 
term of the arrangement. Moreover, in light of the revisions we are 
finalizing with respect to the use of percentage-based and per-click 
compensation formulae for determining rental charges for office space 
and equipment leases (see sections VIII.E. and VIII.F. of this 
preamble), we believe that an interpretation that permits amendments to 
an agreement between a DHS entity and a physician (or physician 
organization) during the term of the agreement is consistent with our 
mandate to safeguard against program or patient abuse and is consistent 
with our rules regarding compensation that is ``set in advance,'' 
provided that: (1) All of the requirements of an applicable exception 
are satisfied; (2) the amended rental charges or other compensation (or 
the formula for the amended rental charges or other compensation) is 
determined before the amendment is implemented and the formula is 
sufficiently detailed so that it can be verified objectively; (3) the 
formula for the amended rental charges does not take into account the 
volume or value of referrals or other business generated by the 
referring physician; and (4) the amended rental charges or compensation 
(or the formula for the new rental charges or compensation) remain in 
place for at least 1 year from the date of the amendment. We are taking 
the opportunity here to clarify that the rule regarding the amendment 
of arrangements between DHS entities and physicians (or physician 
organizations) applies to all of the exceptions for compensation 
arrangements in 42 CFR, Subpart J that include a 1-year term 
requirement for satisfying the exception.
    Comment: Several commenters suggested that we repeal the existing 
physician ``stand in the shoes'' provisions, arguing that they are 
unnecessary. One commenter argued that the exception in Sec.  
411.357(p) for indirect compensation arrangements is better designed 
than the direct compensation arrangements exceptions to handle the 
types of complex contractual and business relationships between DHS 
entities and physician organizations. One commenter suggested that we 
clarify the basic analysis under the indirect compensation arrangements 
definition and exception without resorting to the physician ``stand in 
the shoes'' provisions. Another commenter suggested that a more focused 
and coherent approach could be achieved by proposing changes to the 
existing exception for indirect compensation arrangements.
    Response: We are not repealing the physician ``stand in the shoes'' 
provisions in Sec.  411.354(c). For the reasons discussed in Phase III, 
we continue to believe that these provisions are both appropriate and 
necessary to safeguard against program and patient abuse (72 FR 51027 
through 51029). We discussed above our determination not to revise, at 
this time, the definition of ``indirect compensation arrangement.''
    Comment: One commenter suggested that, given the serious 
consequences of failing to satisfy the ``set in advance'' requirement 
in many of the exceptions for direct compensation arrangements (which 
would apply if the compensation arrangement between a DHS entity and a 
physician organization is deemed to be a direct compensation 
arrangement between the DHS entity a physician in the physician 
organization), we allow parties subject to Sec.  411.354(c)(1)(ii) and 
(c)(2)(iv) a ``60-day grace period'' that would permit them to consider 
compensation to be ``set in advance,'' even if the written agreement 
embodying the compensation arrangement is not signed by the parties 
until 60 days after the commencement of the services agreement. The 
commenter asserted that, as long as the ``grace period'' is limited to 
no more than 60 days, the parties could not use it to recalibrate 
compensation in a way that reflects the volume or value of referrals or 
other business generated between the parties.
    Response: We are not revising the ``stand in the shoes'' provisions 
as requested by the commenter. We believe that new Sec.  411.353(g), 
discussed below in section VIII.D. of this preamble, which provides an 
alternative method for compliance when parties fail to satisfy a 
signature requirement, should address some of the commenter's concerns. 
We note that nothing in the rules regarding compensation that is ``set 
in advance'' in Sec.  411.354(d)(1) requires that signatures be 
present.
    Comment: One commenter contended that analyzing the remaining 
relationships after ``collapsing'' physicians into their physician 
organizations (or entities into organizations that they own) may not 
yield the correct result. According to the commenter, if the financial 
relationship

[[Page 48698]]

that disappears is the direct compensation arrangement closest to the 
referring physician (as a result of applying the physician ``stand in 
the shoes'' rules), the ``stand in the shoes'' rules may actually 
invite abuse.
    Response: As we read the commenter's analysis, it appears that the 
commenter is not considering the direct financial relationship between 
the physician and his or her physician organization which, wholly 
separate from the physician ``stand in the shoes'' provisions, must be 
analyzed for compliance with an applicable exception to the physician 
self-referral prohibition if the physician is to make referrals for DHS 
to the physician organization. It appears that the commenter 
misunderstood the application of the proposed conventions for our 
``stand in the shoes'' rules and assumed that relationships between 
``collapsed'' parties disappear and need not be analyzed for compliance 
with the physician self-referral law. The ``stand in the shoes'' 
provisions are applied for purposes of evaluating the relationship 
between a DHS entity and a referring physician when a physician 
organization is an intervening link in that chain of relationships and 
linked to the physician with no other intervening links between. 
Because we are not finalizing the DHS entity ``stand in the shoes'' 
provisions or the conventions for applying those provisions in concert 
with the physician ``stand in the shoes'' provisions, the commenter's 
concerns should be resolved.
    Comment: One commenter responded to the solicitation of comments 
regarding arrangements that would not fall within the ``stand in the 
shoes'' provisions but might fall outside of the scope of the 
definition of ``indirect compensation arrangement'' and, thus, outside 
the scope of the physician self-referral law. The commenter noted that 
such arrangements would be subject to the Federal anti-kickback 
statute. The commenter also asserted that the current rules regarding 
indirect compensation arrangements allow much-needed flexibility in 
establishing nonabusive financial relationships that foster the 
provision of necessary health care services. The commenter urged us to 
exercise caution in restricting the rules regarding indirect 
compensation arrangements. According to the commenter, further 
revisions to the definition of, and limitations of, the exception for 
indirect compensation arrangements would likely create unintended 
consequences that, in turn, would require additional exceptions--the 
very type of complexity, in the commenter's view, that makes compliance 
with the physician self-referral rules increasingly difficult.
    Response: As discussed above, we are not making changes to the 
definition of ``indirect compensation arrangement'' beyond what was 
proposed in the FY 2009 IPPS proposed rule with respect to the 
physician ``stand in the shoes'' provisions in Sec.  411.354(c), nor 
are we revising the exception in Sec.  411.357(p) to address the 
applicability of the physician self-referral law to compensation 
arrangements between DHS entities and referring physicians that involve 
intervening entities. However, as discussed below in sections VIII.E. 
and F. of this preamble, in this final rule, we are revising the 
exception in Sec.  411.357(p) to address our concerns regarding 
indirect compensation arrangements for the lease of office space or 
equipment.
    Comment: One commenter supported our proposal to clarify that the 
physician ``stand in the shoes'' provisions do not apply where all of 
the requirements of the exception in Sec.  411.355(e) for AMCs are 
satisfied. The commenter noted that, if the exception in Sec.  
411.355(e) is not considered sufficient protection against program and 
patient abuse so as to require the application of the physician ``stand 
in the shoes'' provisions, virtually all mission support payments would 
be in danger of violating the physician self-referral prohibition.
    Response: We are finalizing revisions to Sec.  
411.354(c)(3)(ii)(B), clarifying that the provisions of Sec.  
411.354(c)(1)(ii) and (c)(2)(iv)(A) do not apply when the requirements 
of Sec.  411.355(e) are satisfied.
    Comment: Three commenters supported our proposal to not apply the 
physician ``stand in the shoes'' provisions to a compensation 
arrangement between a physician organization and a component of an AMC 
for the provision to that AMC of only services required to satisfy the 
AMC's obligations under the Medicare GME rules in 42 CFR part 413, 
subpart F. Commenters stated that analysis under the rules regarding 
indirect compensation arrangements would be more appropriate for such 
arrangements, including arrangements under which a community physician 
organization services as a teaching site for the AMC's residents.
    Response: We are not finalizing our proposal. Upon further review, 
we believe that existing exceptions (including the exceptions for bona 
fide employment relationships, personal service arrangements, fair 
market value compensation arrangements, and indirect compensation 
arrangements) provide adequate protection for arrangements between 
physician organizations and AMCs for GME-related services, provided 
that the overall arrangement is fair market value (which could include 
the value to the physician organization of the placement of the medical 
resident at the training site or other valuable consideration from the 
AMC) for legitimate services that are actually performed, and provided 
that all other requirements of an exception are satisfied. Hospitals 
are also free to contract directly with individual physicians, rather 
than physician organizations, for the oversight and training required 
under the Medicare GME and IME rules in order to avoid perceived or 
actual obstacles caused by the physician ``stand in the shoes'' rules. 
We note also that the final physician ``stand in the shoes'' provisions 
in Sec.  411.354(c) require only physicians with an ownership or 
investment interest (other than titular owners) in a physician 
organization to stand in the shoes of that physician organization. As 
stated previously, we are permitting non-owners (and titular owners) to 
stand in the shoes of their physician organizations. To the extent that 
a compensation arrangement between a hospital and a physician 
organization to serve as a teaching site for the hospital's residents 
does not implicate the physician ``stand in the shoes rules'' (because 
the physician organization has no, or only titular, physician owners or 
investors), the rules regarding indirect compensation arrangements 
would apply.
    We recognize industry stakeholder concerns that compensation to a 
physician organization that is paid in accordance with Medicare rules 
that require a hospital to pay ``all or substantially all'' of the 
costs of training a resident and which may be determined following 
completion of a hospital's cost report (and, thus, may require a 
reconciliation payment between the parties) may not satisfy the ``set 
in advance'' requirement included in many of the exceptions to the 
physician self-referral prohibition. However, a properly structured 
formula for the compensation to the community physician organization 
could meet an applicable ``set in advance'' requirement if it is 
determined at the commencement of the compensation arrangement, does 
not take into account the volume or value of referrals or other 
business generated between the parties, and satisfies the other 
requirements in Sec.  411.354(d)(1).
    Comment: One commenter suggested that we also suspend the 
application of the physician ``stand in the shoes''

[[Page 48699]]

provisions to compensation arrangements for the provision of services 
required to satisfy an AMC's obligations under the Medicare rules 
regarding indirect medical education (IME) in 42 CFR 412.105. Other 
commenters suggested that we extend this protection to all hospitals 
and not limit it to compensation arrangements between community 
physician organizations and components of an AMC. The commenters noted 
that non-AMC hospitals provide training for medical residents and must 
comply with the Medicare GME (and IME) rules, and contended that it is 
unfair to treat similarly situated hospitals differently.
    Response: As discussed in response to the previous comment, we are 
not finalizing the proposal regarding the application of the physician 
``stand in the shoes'' provisions to compensation arrangements for the 
provision of services required to satisfy Medicare GME requirements; 
thus, we are not making the revision suggested by the commenters.
3. DHS Entity ``Stand in the Shoes'' Provisions
    Nearly all of the commenters who addressed the proposal to deem a 
DHS entity to stand in the shoes of an organization in which it has a 
100 percent ownership interest opposed the proposal. The few commenters 
who provided ``conditional'' comments (in the event that we finalize 
the proposal) urged us to confine the DHS entity ``stand in the shoes'' 
provisions to 100 percent ownership interests only. For the reasons 
described below in our responses to comments, we are not finalizing the 
DHS entity ``stand in the shoes'' proposal. One purpose for our 
proposal to require a DHS entity to stand in the shoes of an 
organization in which it has a 100 percent ownership interest was to 
safeguard further against abusive business structures that attempt to 
evade restrictions on payments for referrals by using shell 
organizations interposed between the DHS entity and referring 
physicians. We caution that such arrangements are highly suspect under 
the fraud and abuse laws and will be subject to close scrutiny. 
Depending on the circumstances, such arrangements could violate the 
physician self-referral law, constitute unlawful circumvention schemes, 
or violate the anti-kickback statute. Moreover, structuring an 
arrangement purposefully to evade restrictions on payments for 
referrals may be evidence of unlawful intent.
    Comment: Two commenters suggested that we not finalize the DHS 
entity ``stand in the shoes'' proposal until the implications of the 
final physician ``stand in the shoes'' rules are fully understood by 
the affected health care providers and by physicians. One commenter 
contended that, although the proposal is clearer than the one presented 
in the CY 2008 PFS proposal (72 FR 38184), it may add a new level of 
complexity to an already complex regulatory scheme.
    Response: We agree with the first set of commenters that a measured 
approach to the overall ``stand in the shoes'' regulatory scheme is 
warranted and appropriate. As suggested, we are not finalizing the 
entity ``stand in the shoes'' provisions. A key goal of our proposal in 
the FY 2009 IPPS proposed rule was to simplify the analysis of 
financial relationships between DHS entities and referring physicians. 
We believe that this final rule achieves that goal.
    Comment: One commenter asserted that the DHS entity ``stand in the 
shoes'' provisions do not offer any real protections to the Medicare 
program relating to the elimination of potentially abusive 
arrangements. This commenter further asserted that, to the extent that 
a DHS entity forms a 100 percent owned subsidiary with the intent to 
indirectly secure referrals that are otherwise prohibited under the 
self-referral law, the arrangement would constitute a circumvention 
scheme prohibited under the physician self-referral statute (section 
1877(g)(4) of the Act). According to the commenter, the arrangement 
could also be subject to prosecution under the Federal anti-kickback 
statute if the parties knowingly intended to induce referrals of 
services or the ordering of goods and services under Federal health 
programs. The commenter asserted that providers are well-aware of the 
legal risk these arrangements pose, and noted its belief that most 
arrangements involving DHS entities and subsidiaries are designed to 
treat the DHS entity and the subsidiary as the same and to satisfy an 
exception for direct compensation arrangements, where applicable, under 
the current physician self-referral rules. The commenter contended 
that, as a result, the DHS entity ``stand in the shoes'' rules would 
have little meaningful impact in limiting program abuse, while creating 
the need for complicated conventions for its application that could 
serve as a trap to even the most wary DHS entity attempting compliance 
with the physician self-referral law.
    Response: As discussed above, arrangements that attempt to evade 
restrictions on payments for referrals by using interposed 
organizations are highly suspect under the fraud and abuse laws and 
will be subject to close scrutiny. Depending on the circumstances, such 
arrangements could violate the physician self-referral law, constitute 
unlawful circumvention schemes, or violate the anti-kickback statute. 
Moreover, structuring an arrangement purposefully to evade restrictions 
on payments for referrals may be evidence of unlawful intent.
    Comment: One commenter contended that the proposal to deem a DHS 
entity to stand in the shoes of an organization in which it has a 100 
percent ownership interest is outside the scope of our authority under 
section 1877 of the Act because the purpose of the statute is to 
prevent self-referrals involving the provision of DHS. According to the 
commenter, the proposal purports to regulate relationships between 
organizations that are not DHS entities and physicians. Another 
commenter noted its strong opposition to any proposal that would permit 
us to regulate non-DHS entities through an extension of the physician 
self-referral law.
    Response: Our proposal, if finalized, would have governed the 
relationship between DHS entities and the physicians who refer to them, 
which is within the scope of our authority under section 1877 of the 
Act. The last commenters' concerns are moot, given that we are not 
finalizing the DHS entity ``stand in the shoes'' provisions proposed in 
the FY 2009 IPPS proposed rule.
    Comment: A few commenters urged us to not finalize any rule that 
requires a DHS entity to stand in the shoes of an organization that it 
owns or controls, regardless of the ownership percentage or level of 
control. These commenters asserted that the proposed provisions are 
complicated and would result in very complex conventions for applying 
the physician ``stand in the shoes'' rules and the DHS entity ``stand 
in the shoes'' rules to a chain of financial relationships where both 
sets of provisions are implicated.
    Response: We agree with the commenters that finalizing the DHS 
entity ``stand in the shoes'' provisions would require that we also 
issue formal rules regarding the application of the physician ``stand 
in the shoes'' provisions and the DHS entity ``stand in the shoes'' 
provisions in the event that both could apply to the same chain of 
financial relationships between a DHS entity and a referring physician. 
Given that we are not finalizing at this time the proposed DHS entity 
``stand in the shoes'' provisions, there is no need for such 
conventions in this final rule.

[[Page 48700]]

4. Application of the Physician ``Stand in the Shoes'' and the DHS 
Entity ``Stand in the Shoes'' Provisions (``Conventions'')
    As discussed above, we are not finalizing the DHS entity ``stand in 
the shoes'' provisions. Therefore, it is not necessary to finalize the 
proposed conventions for applying the physician ``stand in the shoes'' 
provisions and the DHS entity ``stand in the shoes'' provisions when 
both potentially would have applied. We received no comments regarding 
revisions to the conventions proposed in the FY 2009 IPPS proposed rule 
(73 FR 23689).
5. Definitions: ``Physician'' and ``Physician Organization''
    We are finalizing the revisions to the definitions of ``physician'' 
and ``physician organization'' as proposed in the FY 2009 IPPS proposed 
rule (73 FR 23690) in order to clarify that (1) a physician and the PC 
of which he or she is the sole owner are always treated the same for 
purposes of applying the physician ``stand in the shoes'' rules; and 
(2) a physician who stands in the shoes of his or her wholly-owned PC 
also stands in the shoes of his or her physician organization in 
accordance with revised Sec. Sec.  411.354(c)(1)(ii) and (c)(2)(iv). We 
received no comments regarding the proposed revisions to the 
definitions of ``physician'' and ``physician organization.''

C. Period of Disallowance

    In the CY 2008 PFS proposed rule (72 FR 38183), we noted that 
several commenters responding to the Phase II interim final rule with 
comment period (69 FR 16054) questioned the period of time for which a 
physician could not refer DHS to an entity and for which the entity 
could not bill Medicare because the financial relationship between the 
referring physician and the entity failed to satisfy all of the 
requirements of an exception to the general prohibition on physician 
self-referral. (We refer to this period of time as the ``period of 
disallowance.'') We solicited comments addressing how we might, to a 
practical extent, set forth the period of disallowance for financial 
relationships that implicate, but fail to satisfy the requirements of 
one or more of the various exceptions. We noted that our interpretation 
of the physician self-referral statute is that the period of 
disallowance begins on the date that a financial relationship fails to 
comply with the statute and regulations and ends on the date the 
relationship came into compliance or ended. We requested comments about 
whether we should allow the period of disallowance to terminate where 
the value or consideration has been returned (72 FR 38183).
    In the FY 2009 IPPS proposed rule (73 FR 23690, 23704) we discussed 
the comments that we received in response to the solicitation of 
comments in the CY 2008 PFS proposed rule, and we proposed to amend 
Sec.  411.353(c) to provide that the period of disallowance begins at 
the time the financial relationship fails to satisfy the requirements 
of an applicable exception and ends no later than:
    (1) Where the noncompliance is unrelated to compensation, the date 
that the financial relationship satisfies all of the requirements of an 
applicable exception;
    (2) Where the noncompliance is due to the payment of excess 
compensation, the date on which the excess compensation is returned to 
the party that paid it and the financial relationship satisfies all of 
the requirements of an applicable exception;
    (3) Where the noncompliance is due to the payment of compensation 
that is of an amount insufficient to satisfy the requirements of an 
applicable exception, the date on which the additional required 
compensation is paid to the party to which it is owed such that the 
financial relationship would satisfy all of the requirements of the 
exception as of its date of inception. We continue to believe that it 
is possible that a financial relationship may end prior to the 
arrangement being brought into compliance.
    Our proposals were intended to place an outside limit on the period 
of disallowance in certain circumstances. That is, where the reason(s) 
for noncompliance does not relate to compensation, the latest the 
period of disallowance would end would be the date the arrangement was 
brought into compliance. Where the reason for noncompliance is the fact 
that excess compensation was provided or too little compensation was 
paid, the latest the period of disallowance would end would be the date 
that the party receiving the excess compensation returned it to the 
party that provided it or the party owing the shortfall in compensation 
paid it to the party to which it was owed (assuming the arrangement 
otherwise satisfies the requirements of an applicable exception).
    After considering the public comments we received, we are 
finalizing the period of disallowance proposals, without modification 
in substance. We have revised the proposed regulatory text because we 
were concerned that the language ``the date on which the additional 
required compensation is paid to the party to which it is owed such 
that the financial relationship would satisfy all of the requirements 
of the exception as of its date of inception'' may not have been 
entirely clear. The purpose of the quoted language was to emphasize 
that where a party has underpaid compensation (such as where a party 
has paid rent in an amount below fair market value for each of the 
months 1-6 under a lease agreement), it is not sufficient for the 
parties to address the noncompliant compensation on a going forward 
basis (such as adjusting the compensation for month 7 of the rental 
agreement used in the example), or for some partial period (such as 
making up the shortfall for months 4-6 in the lease agreement), but 
rather all additional compensation must be paid (that is, in the 
example given, compensation required to bring the rental payments for 
months 1-6 up to fair market value must be paid). Similarly, under our 
proposal, and as finalized in this rule, it is not sufficient for the 
party receiving excess compensation under a financial relationship to 
repay some of the excess compensation, but rather the party receiving 
it must repay all of it to the party that paid it. Accordingly, we are 
revising the proposed text for language for Sec.  411.353(c) to provide 
that the period of disallowance ends no later than the date on which 
all excess compensation is returned to the party that paid it, or the 
date on which all additional required compensation is paid to the party 
to which it is owed. We emphasize that, consistent with our proposals, 
this final rule only prescribes the outside period of disallowance for 
certain situations, that is, a date by which parties can be assured 
that referrals for DHS are not prohibited (provided that compensation 
on a going-forward basis fully complies with an exception). Revised 
Sec.  411.353(c) does not prevent parties from arguing that the period 
of disallowance ended earlier than the prescribed outside period, on 
the theory that the financial relationship ended at an earlier time. 
This final rule does not purport to define when a financial 
relationship begins or ends. In every case, a financial relationship 
begins and ends according to the conduct of the parties and the 
specific facts of the case. We further emphasize that the beginning and 
end dates of a financial relationship do not necessarily coincide with 
the beginning and end dates of a written agreement.

[[Page 48701]]

    We address specifically the comments received in response to the FY 
2009 IPPS proposed rule below.
    Comment: Several groups commented that, although the proposals 
attempt to offer greater clarity regarding making referrals and billing 
the Medicare program in the case of noncompliant financial 
relationships, the proposals rely on a ``pay back'' concept or 
otherwise resort to a specific facts and circumstances test in 
determining the period of disallowance. The commenters stated that both 
approaches reach beyond the duration of the relationship and create 
consequences far into the future in complex ways. According to the 
commenters, the proposals would have the effect of inhibiting self-
reporting and self-correction of compliance violations rather than 
establishing the certainty to encourage them.
    Response: We disagree in all respects with the commenters' 
characterization of the effects of the proposals, which we are 
adopting. Prior to this final rule, there was no express statement in 
the statute, or in our regulations or other guidance as to when the 
period of disallowance ends for noncompliant relationships. This final 
rule provides assurance that the period of disallowance will end no 
later than: (1) Where the noncompliance is not related to the payment 
of compensation, the date that the financial relationship satisfies all 
of the requirements of an applicable exception; or (2) where the 
noncompliance is related to the payment of compensation, as applicable, 
the date on which all excess compensation is returned to the party that 
paid it, or the date on which all required compensation is paid to the 
party to which it is owed, and the financial relationship satisfies all 
of the requirements of an applicable exception. As we pointed out in 
the proposed rule (73 FR 23692), and as we reiterate here, the 
proposals were not intended to prevent parties from attempting to 
establish that the financial relationship, and thus the period of 
disallowance, ended at some earlier point. (We recognized in the 
proposed rule that all the terms of an exception may never be met, such 
as where an entity discovers that a physician has failed to sign an 
agreement and is never successful in obtaining the signature, or where 
excess compensation may never be repaid.) We are merely prescribing an 
outside limit on the period of disallowance, that is, a means by which 
parties are assured that referrals made after a certain date, and 
claims made pursuant to such referrals, will not run afoul of the 
prohibitions in the statute. Thus, the proposal, as adopted in this 
final rule, did not reach beyond the duration of the financial 
relationship. Similarly, our approach of using a case-by-case analysis 
for noncompliant arrangements that do not satisfy the conditions of 
Sec.  411.353(c)(1) or (c)(2), does not reach beyond the duration of 
the relationship. It has long been our policy that a financial 
relationship does not necessarily begin with, or end with, the opening 
or closing dates of a written agreement. As an example, where excess 
compensation is paid to a physician by an entity, the question is 
raised as to whether the excess was intended as a reward for referrals 
that took place prior to the beginning date of a written agreement and/
or was intended as an inducement for referrals subsequent to the ending 
date of a written agreement. It is not possible for us to specify, 
through rules of general applicability, the end date of the period of 
disallowance for this type of situation; rather, the same case-by-case 
analysis approach that was in effect prior to the proposed rule 
continues to be in effect.
    Finally, we do not agree that the proposals, as adopted, have the 
effect of inhibiting self-reporting and self-correction of compliance 
violations rather than establishing the certainty to encourage them. 
The proposals would not, and the final rule does not, require self-
reporting to take advantage of the certainty afforded by revised Sec.  
411.353(c). Moreover, as explained above, the proposals as adopted do 
establish a point at which the parties may be certain that the period 
of disallowance has ended. Where an entity discovers that it is missing 
a signature on an agreement, for example, or that too much or too 
little compensation has been paid, it should take steps to bring its 
relationship(s) into compliance. By doing so, the entity and the 
referring physician at issue will have the assurance that the period of 
disallowance ended no later than a certain date; again, revised Sec.  
411.353(c) sets only an outer limit on the period of disallowance and 
does not prevent parties from attempting to demonstrate that the period 
of disallowance ended on some earlier date.
    Comment: One commenter suggested that billing should be permitted 
to resume when the financial relationship between the physician and the 
DHS entity satisfies the requirements of an exception to the physician 
self-referral prohibition. This would not eliminate the violation for 
the time prior to the correction and other remedies would be applicable 
to that time period. Although the commenter acknowledged that the 
billing prohibition could last indefinitely or for some period after 
correction, it believes a better regulation to promote correction and 
compliance would be one that ends the billing prohibition upon 
correction of the noncompliance and establishment of a relationship 
within an exception.
    Response: We are unsure of the exact position of the commenter. We 
understand the commenter as suggesting that, in all cases, the 
prohibition on billing should end when the parties bring an arrangement 
into compliance with an exception, irrespective of whether the parties 
account for any problems with too much or too little compensation that 
may have taken place prior to the correction. If that is the 
commenter's position, we do not agree. An example concerning a contract 
between a physician and a hospital for personal services should serve 
to illustrate the essential difference between the position we are 
taking in this final rule and the position we believe the commenter may 
be advocating. Suppose a physician is paid excess compensation under a 
personal service agreement for months 1-6 and, near the end of month 6, 
the parties discover the error, with the result that, on July 1, the 
physician repays the excess compensation for months 1-6 and the 
arrangement otherwise complies with all of the requirements of an 
applicable exception. The final rule provides for an outside period of 
disallowance that will end no later than the date a party repays excess 
compensation provided that the financial relationship otherwise meets 
all of the requirements of an applicable exception. Thus, under the 
facts of this example, the final rule provides that the period of 
disallowance would end no later than July 1. The commenter appears to 
agree, that if the excess compensation is not repaid, referrals from 
the physician to the hospital for DHS during months 1-6 are tainted so 
that claims for such referrals may not be paid (and that other 
penalties may attach), but to the extent that the commenter is 
suggesting that the period of disallowance should end no later than 
July 1, even if the excess compensation is not repaid, simply because 
the parties have brought the arrangement into compliance with an 
exception going forward, we do not agree. As we stated in the response 
to the immediately preceding comment, the beginning and end dates of an 
agreement do not necessarily correspond with the beginning and end 
dates of a financial relationship. Thus, for example, compensation that 
does not meet the requirements of any exception

[[Page 48702]]

may establish a financial relationship that began prior to, or ended 
later than, the period specified in a written agreement between the 
parties, and the fact that a new agreement is entered into (or an 
existing agreement is modified) at some point does not, by itself, 
remove the tainted effects of the nonconforming compensation. Thus, 
under the facts of the example above, payment of excess compensation 
for months 1-6 may have been intended as a reward for referrals prior 
to, during, or after the period specified in the agreement, or as 
incentive for referrals past month 6.
    Comment: Commenters expressed concern regarding what they perceived 
as the ``seemingly piecemeal approach'' in addressing the issue of 
period of disallowance, raising doubts about the proposal's clarity and 
usefulness. To support this claim, the commenters cited the preamble 
discussion in the FY 2009 proposed rule that noted our consideration of 
a related proposed ``alternative method of compliance'' from the CY 
2008 PFS proposed rule that remained under consideration. Also, 
commenters noted that we suggested we ``may propose rulemaking on [a 
period of disqualification during which the parties to a noncompliant 
financial relationship would be prohibited from using a particular 
exception due to that relationship] in the future,'' although this was 
not included in the FY 2009 proposed rule. Additionally, these 
commenters noted that the proposal did not address whether the anti-
kickback statute is implicated and/or whether CMPs under the physician 
self-referral statute are potentially applicable due to the 
noncompliant financial relationship. The commenters urged us to 
consider developing and publishing a more comprehensive proposal that 
would allow organizations to consider the full impact of proposed 
changes. These commenters recommended that we work with OIG to 
coordinate efforts to address the full range of concerns raised 
regarding these arrangements.
    Response: We believe that revised Sec.  411.353(c), adopting the 
proposal, is clear, non-complex and useful to physicians and entities, 
as it sets forth bright line rules as to the outside limit of the 
period of disallowance for noncompliant financial relationships. Also 
appearing in this final rule is new Sec.  411.353(g), which contains a 
special rule for certain arrangements involving noncompliance with 
signature requirements (adopting the ``alternative method of 
compliance'' proposal referred to by the commenters). These two rules 
pertain to missing signatures (although the revisions to Sec.  
411.353(c) address other reasons for noncompliance), but they operate 
independently of each other. To illustrate, suppose a referring 
physician and a DHS entity enter into a financial relationship on 
January 1, 2009 for the lease of office space, and the physician 
initially failed to sign the lease agreement, but subsequently signed 
it. Depending on the facts and circumstances, new Sec.  411.353(g) may 
operate to keep the arrangement within the protection of the lease 
exception at Sec.  411.357(a). If, however, the requirements of new 
Sec.  411.353(g) are not met (because, for example, the agreement was 
signed more than 90 days after the financial relationship began), the 
arrangement would be noncompliant with the lease exception at Sec.  
411.357(a), and thus there would be a period of disallowance. Under 
revised Sec.  411.353(c), the period of disallowance would run from the 
beginning of the financial relationship until no later than the date 
the physician signed the lease agreement. (This example assumes that 
the physician subsequently signed the lease agreement and the financial 
arrangement continued past the date of signing. We recognize that, in 
some cases parties may never bring the arrangement back into 
compliance, such as failing to ever get a missing signature. That is 
why we proposed, and we adopt as final, a rule that specifies an 
outside date for the period of disallowance.) Note that taking action 
that fixes the outside date of the period of disallowance under revised 
Sec.  411.353(c) does not vitiate a DHS entity's overpayment for any 
claims submitted during the period of disallowance as a result of the 
prohibited referrals. Note also that the revisions to Sec.  411.353(c) 
do not affect the operation of the statutory provision for CMPs for 
knowing violations of the physician self-referral statute, the anti-
kickback statute, the False Claims Act, or any other applicable 
statute. That is, section 411.353(c) prescribes, for certain situations 
involving both knowing and inadvertent noncompliance, the outside 
period of disallowance. Section 411.353(c) does not purport to address 
the complete range of penalties or remedies that may be imposed for 
prohibited referrals for DHS during the period of disallowance and for 
the submission of claims to Medicare for such prohibited referrals. To 
illustrate, suppose an entity and a physician enter into a one-year 
personal service arrangement on January 1, and both parties are aware 
that the compensation called for under the contract is above fair 
market value and is therefore not compliant with any of our exceptions. 
On June 6, the physician repays the entity the excess compensation that 
he or she has received. Under revised Sec.  411.353(c), the period of 
disallowance would last from January 1 until June 6. Under section 
1877(g)(1) of the Act, claims submitted by the entity for referrals for 
DHS made during the period of disallowance are not payable. In 
addition, however, because the parties knowingly violated the 
provisions of the physician self-referral statute, CMPs, assessments 
and exclusions could be assessed under the authority of section 
1877(g)(3) of the Act (incorporating by reference section 1128A of the 
Act), and liability under the False Claims Act could be imposed. 
Further, depending on the facts, one or both parties could be guilty of 
violating the anti-kickback statute, or may have violated some other 
criminal or civil statute.
    Comment: A commenter recommended that we set a 90-day ``cure'' 
period for noncompliance not related to the compensation terms of an 
arrangement. If the noncompliance, such as a missing signature, is 
remedied within 90 days of when the services began, the commenter 
suggested a period of disallowance should not arise. The commenter 
believed that this ``cure'' period would encourage corrective action by 
hospitals in the case of an inadvertent technical noncompliance that is 
discovered and also would encourage diligent administrative monitoring 
to ensure that the required signatures are obtained in a timely 
fashion. The commenter expressed concern over the harsh effects of not 
obtaining a signature prior to the commencement of physician services 
under a valid medical services arrangement at fair market value. 
Ensuring that essential medical coverage is provided to the community, 
that is, emergency department, surgery, should be a higher priority to 
a hospital and us than is assurance that a compliant personal services 
contract is signed by the physician in advance of performing services. 
The proposal, if finalized, would require the hospital to refuse to 
provide services to Federal health program beneficiaries prior to 
bilateral execution of a valid contract. Hospitals may be forced to 
withhold services to avoid incurring fraud and abuse fines and/or CMPs 
for knowingly providing covered health services to federal health 
program beneficiaries for free which would violate OIG limits on 
allowable gratuities to beneficiaries. The commenter requested that we 
clarify that a ``valid written agreement'' is

[[Page 48703]]

defined by the requirements for an enforceable agreement under state 
law where the hospital is located. The commenter stated that, in many 
States, a legally enforceable agreement can exist even in the absence 
of every required signature.
    The commenter also suggested that, when a compensation-related 
violation is detected and the amount of the overpayment is de minimis 
and immaterial to the contract as a whole, we should exempt such 
violations from a period of disallowance. Materiality, in the view of 
this commenter, should be defined as any amount that exceeds 5 percent 
of the total payment expected or reasonably projected by the parties at 
the outset of the arrangement. This would allow for the correction of 
minor payment errors when promptly detected and repaid by the party who 
received the overpayment without imposing complete disallowance of 
hospital reimbursement for an erroneous payment of even $1 above stated 
limits or fair market value. The commenter suggested that if we go 
forward with imposing a period of disallowance for compensation-related 
violations that are de minimis, the disallowance be limited to the 
amount that matches the unearned benefit retained or received by the 
physician.
    Response: The commenter's suggestions are more closely related to 
our proposal in the CY 2008 PFS proposed rule for an alternative method 
of compliance than they are with respect to our proposal to specify the 
outside period of disallowance for certain situations. In this final 
rule, we are finalizing our proposal for an alternative method of 
compliance at new Sec.  411.353(g), entitled ``Special rule for certain 
arrangements involving noncompliance with signature requirements.'' It 
provides that a financial relationship that otherwise would be out of 
compliance with an exception that has a signature requirement will 
remain in compliance with that exception (assuming all other 
requirements are satisfied), provided that certain conditions are met. 
Specifically, in the case of non-inadvertent failures to obtain a 
necessary signature, the parties must obtain the missing signature 
within 30 days of the beginning of the financial relationship. In the 
case of inadvertent failures to obtain a necessary signature, the 
parties must obtain the necessary signature within 90 days of the 
beginning of the financial relationship. In either case, new Sec.  
411.353(g) may be used only once every 3 years with respect to the same 
referring physician. We are not extending the protection afforded by 
new Sec.  411.353(g) to failures to meet compensation requirements 
(such as the requirement that compensation be at fair market value or 
not take into account the volume or value of referrals), including 
failures that result in ``minor payment errors'' because we are not 
confident at this time that if we were to do so we would meet the 
requirement in section 1877(b)(4) of the Act that new exceptions, or 
modifications to existing exceptions, not create a risk of program or 
patient abuse. We also note a practical difficulty in defining what 
would constitute a ``minor'' payment error or a ``de minimis'' 
deviation from the compensation requirement. Finally, we note that the 
commenter may be referring to section 1128A(a)(5) of the Act, which 
provides for CMPs for certain prohibited inducements to beneficiaries; 
if so, it is not clear from the comment why the commenter believes that 
hospitals would be at risk for violating this section of the Act.
    Comment: One commenter urged us to reconsider our ``technical'' and 
``highly impractical'' interpretation of the physician self-referral 
prohibition as it relates to the period of disallowance proposal. The 
commenter addressed the examples we provided for application of the 
period of disallowance rules labeling them highly restrictive and 
unrealistic applications of the law. The commenter argued that a short 
delay in obtaining a signature should not trigger the physician self-
referral law, as the risk of abuse resulting from a delayed signature 
is so low as to be nonexistent. According to the commenter, there is 
nothing in the statute requiring us to adopt this interpretation, and 
doing so would only multiply the number of potential technical non-
abusive violations of the physician self-referral law. Another 
commenter requested that, in the event a potentially noncompliant 
arrangement is ``cured'' by repayment of money that was paid under an 
arrangement that did not comply with all elements of an exception, the 
``cure'' ``relate back'' to the start date of the arrangement. That is, 
no repayment to Medicare would be required and no other penalties or 
assessments under 42 CFR part 411 would occur.
    Response: Under the physician self-referral statute, a physician 
may not refer DHS to an entity, and the entity may not bill Medicare 
for such referred DHS, if the physician (or an immediate family member) 
has a financial relationship with the entity, unless an exception 
applies. For purposes of determining whether a referral for DHS (and 
the billing of such referred DHS) is protected by an exception, we 
believe that the most natural reading of the statute is that all of the 
requirements of the exception must be met at the time the referral is 
made. Further, we believe that the statute does not contemplate that 
parties have the right to back-date arrangements, return compensation, 
or otherwise attempt to turn back the clock so as to bring arrangements 
into compliance retroactively. Under section 1877(b)(4) of the Act, 
however, we have the authority to craft additional exceptions, or 
modify existing exceptions, if doing so would pose no risk of program 
or patient abuse. As noted above, in response to the immediately 
preceding comment, we have finalized our proposal for an alternative 
method of compliance, by providing, at new Sec.  411.353(g), that, an 
arrangement that is otherwise compliant with an exception but for the 
fact that a signature is missing, nevertheless will remain in 
compliance with the exception if certain conditions are met. We do not 
believe that allowing parties to ``cure'' retroactively a noncompliant 
relationship by having one party repay another party excess 
compensation would satisfy the requirement in section 1877(b)(4) that 
new or modified exceptions pose no risk of program abuse.
    Comment: A commenter offered support of our position that any 
period of disallowance begins when the violation of the physician self-
referral regulation occurs and ends when the violation is corrected. 
However, the commenter stated that the provider should have the burden 
of proof to establish that a violation was inadvertent and resulted in 
no financial harm to the Medicare program. For ``those violations,'' a 
financial penalty should apply rather than a period of disallowance.
    Response: We believe the proposal, which we are adopting without 
modification in this final rule, is fully consistent with the physician 
self-referral statute. We are unsure of the exact position taken by the 
commenter. First, to the extent that the commenter believes that it is 
necessary to require a provider or other DHS entity to establish that 
the violation was inadvertent in order to avail itself of the rules in 
Sec.  411.353(c) setting the outside period of disallowance, we 
disagree. We note that, under section 1877(g)(3) of the Act, knowing 
violations of the physician self-referral statute, irrespective of 
whether harm is caused to the program, are punishable by CMPs. 
Moreover, as discussed below, knowing violations of the physician self-
referral statute may also implicate the anti-kickback statute at 
section 1128B(b) of the Act, and/or

[[Page 48704]]

the False Claims Act, or other Federal statute.
    To the extent that the commenter is suggesting that if the parties 
to a noncompliant arrangement are able to demonstrate to us that the 
compliance was inadvertent and that there was ``no financial harm'' to 
the Medicare program, the parties should be subject to some financial 
penalty rather than a period of disallowance, we also disagree. The 
statute provides at section 1887(a) of the Act that, where a physician 
and an entity have a financial relationship that does not comply with 
the requirements of any exception, the physician may not refer DHS to 
the entity during the period of the noncompliant financial relationship 
and that the entity may not bill Medicare for DHS referred to it by the 
physician during that period. Section 1877(g)(1) of the Act provides 
that no claim made pursuant to a prohibited referral may be paid by 
Medicare. No finding of financial harm to the Medicare program is 
necessary, or even authorized, by the statute, in order to trigger the 
prohibition in section 1877(g)(1) of the Act on making payment. 
Moreover, the statute does not authorize us to impose financial 
penalties for inadvertent violations in lieu of (or in addition to) the 
prohibition on making payment in section 1877(g)(1) of the Act.
    Comment: Two commenters objected to the proposal on the basis that 
the physician may not have been aware that he or she was in violation 
of one or more physician self-referral prohibitions. For example, the 
physician may not have known that his or her compensation was greater 
than fair market value or exceeded limits for such services. The 
physician may have assumed that the entity that contracted with him or 
her had structured the relationship in accordance with appropriate 
restrictions and regulations. Additionally, according to the 
commenters, ``the typical physician'' would not know where to find the 
appropriate information that would clearly show the relevant values 
and/or limits. Similarly, the entity contracting with the physician may 
not have known the appropriate value or limits associated with the 
respective physician services. The entity may have difficulty 
determining whether or not the arrangement violated certain 
prohibitions, particularly if the entity is a small hospital without 
adequate resources or experience. Another commenter urged us to not 
impose defined periods of disallowance except for the most egregious 
violations, for which clear evidence of intent to defraud is found 
after examination of the individualized facts. The commenter also 
encouraged a stay of the period of disallowance if the arrangement's 
facts meet the temporary period of noncompliance exception authorized 
in Sec.  411.353(f). According to this commenter, the proposed rule 
imposes potential penalties that are far in excess of either the value 
of the loss, if any, to the public fisc or the wrongfulness of the 
violation and also presents concerns of unintended consequences such as 
jeopardizing essential patient care for federal health program 
beneficiaries.
    Response: The physician self-referral statute is a strict liability 
statute, meaning that a financial relationship that does not meet a 
relevant exception because the compensation was above or below fair 
market value (or because of any other reason) is noncompliant, 
regardless of whether one or both parties to the arrangement were 
unaware of the defect. (As noted above in response to another comment, 
however, certain penalties or remedies beyond claims denials are 
potentially applicable to knowing violations of the physician self-
referral statute.) New Sec.  411.353(g) allows parties to remain in 
compliance with an exception, under certain circumstances, despite a 
missing signature, if the parties later obtain the signature. Section 
411.353(g) does not provide protection for arrangements in which too 
little or too much compensation is paid because we are concerned that 
there would a risk of program or patient abuse if we were to provide 
such protection. Section 411.353(f) provides relief for temporary 
noncompliance in certain situations, but one condition that must be met 
is that the noncompliance must be for reasons beyond the control of the 
entity. We believe that the payment of compensation below, or above 
fair market value would rarely, if ever, be beyond the control of the 
entity.
    Comment: Two commenters objected that the period of disallowance as 
proposed could be extended unreasonably into the future, possibly 
beyond the relationship of the parties. The two commenters also 
objected that the same period of disallowance would apply to all 
compensation related violations regardless of the violation being the 
first such violation for the given entity or if it is an occurrence 
reflecting a pattern of violations for the entity. One of the 
commenters suggested that we apply a lighter period of disallowance to 
the first compensation-related violation than where the violation is 
not the first for either the physician or the entity.
    Response: We disagree that, under the proposal, the period of 
disallowance could be extended unreasonably into the future, possibly 
beyond the relationship. Revised Sec.  411.353(c), consistent with the 
statute (and with the proposal) does not attempt to set the period of 
disallowance beyond the end of the financial relationship. Rather, it 
provides clear guidance that, under certain circumstances, the period 
of disallowance ends no later than the date parties to a noncompliant 
financial relationship take certain, specified action.
    We fail to see why one rule should apply for a first violation and 
a different rule should apply for a repeat violation. Revised Sec.  
411.353 sets forth what we believe is the natural reading of the 
statute, that is, the period of disallowance begins when a financial 
relationship becomes noncompliant and ends when the noncompliance is 
rectified. Our rule provides that the period of disallowance ends no 
later than a certain time, in order to provide assurance to parties 
that referrals after that time and claims submitted pursuant to those 
referrals will not be tainted by the previous noncompliance. We 
reiterate that parties are free, in any given case, to assert that the 
financial relationship (and, hence, the period of disallowance) ended 
at a time prior to the correction of a noncompliant condition, and such 
assertions will be evaluated on a case-by-case basis. As noted above, 
certain penalties or remedies beyond claims denials are reserved only 
for knowing violations of the physician self-referral statute, and if 
the same parties repeat the same types of noncompliance it may raise 
questions as to whether the noncompliance was deliberate.
    Comment: A commenter expressed concern regarding whether the 
proposed period of disallowance was truly bilateral and applied to all 
parties in a multi-party agreement that is found to be in violation of 
the self-referral prohibition. The commenter requested that we state 
clearly in the final rule that any period of disallowance resulting 
from the final rule applies equally to all enrolled providers seeking 
federal health program reimbursement for DHS provided to Federal health 
program beneficiaries pursuant to an agreement found to be out of 
compliance with the physician self referral prohibition. The commenter 
stated that the physician involved in a noncompliant financial 
relationship should also be disallowed from billing federal health 
programs during the period of disallowance and should be required to 
refund any professional services reimbursement received from federal 
health programs during the same period that is

[[Page 48705]]

applicable to the improper agreement to which he or she is a party. To 
hold only the hospital liable during the period of disallowance would 
be arbitrary and capricious, whereas aligning compliance incentives for 
all parties to an agreement likely would be more effective than 
punishing the hospital only.
    Response: The physician self-referral statute, at section 1877(a) 
of the Act, provides for two types of prohibitions with respect to 
unexcepted financial relationships between a physician (or the 
physician's immediate family member) and an entity. First, the 
physician is prohibited from making referrals for DHS to the entity, 
and second, the entity is prohibited from billing Medicare for DHS 
referred by the physician. We believe the proposal was, and revised 
Sec.  411.353(c) is, clear that the period of disallowance refers to 
the period that the physician is prohibited from making referrals as 
well as the period the entity is prohibited from billing Medicare. We 
decline to adopt the commenter's suggestion that the physician party to 
a noncompliant financial relationship be disallowed from billing 
Federal health programs during the period of disallowance and to refund 
any professional services reimbursement received from federal health 
programs during that same period that is applicable to the improper 
agreement to which he or she is a party. We understand the commenter as 
alluding to the physician in the capacity of making prohibited 
referrals to a DHS entity such as a hospital and not in the capacity as 
a DHS entity (although sometimes physicians do act in the capacity of a 
DHS entity). Thus understood, we have no authority under the statute to 
impose such penalties as a matter of course on a physician who makes 
prohibited referrals. As noted above, where a physician or DHS entity 
knowingly violates the physician self-referral statute, under authority 
of section 1877(g)(3) of the Act, certain penalties and the remedy of 
exclusion may be imposed. If a physician is excluded, he or she is 
prohibited from participating in any Federal health care program. We 
refer readers to section 1128 of the Act.
    Comment: One commenter requested clarification, with respect to the 
situation in which a physician receives excess compensation from an 
entity, as to whether the physician may repay the excess compensation 
by negotiating a promissory note to the hospital, at commercially 
reasonable interest rates and is current on all loan payments under 
that note; and if so, whether one missed loan payment by the physician 
under the terms of the promissory note commences a period of 
disallowance that continues until all overdue payments, including any 
interest on the missed payment(s) per the terms of the note, are made 
current.
    Response: Revised Sec.  411.353(c) is applicable where the party 
that has received excess compensation has, in fact, repaid the excess 
compensation. Revised Sec.  411.353(c) places no restriction on the 
source of the funds that the physician uses to repay excess 
compensation (or to make up a shortfall in compensation), and thus, the 
physician may pay the funds out-of-pocket, or may obtain a loan from a 
commercial lender, private party or even from the entity itself, in 
order to repay the excess compensation (or make up the shortfall in 
compensation). However, where a physician receives excess compensation 
from an entity and then obtains a loan from the entity to repay the 
entity the excess compensation that he or she received, the question is 
raised whether the physician has in fact repaid the excess compensation 
through the use of a bona fide, commercially reasonable loan, or 
whether the loan transaction is a sham. We question the commercial 
reasonableness of any loan made to a referring physician by an entity 
to assist the physician in repaying funds owed to the entity, and we 
note that such a loan would be highly suspect under the anti-kickback 
statute. Entities, therefore, should be very cautious before offering 
to make such loans. Moreover, hospitals or other entities that do make 
loans to physicians (particularly for the purpose of allowing a 
physician to repay excess compensation or make up a shortfall in 
compensation following the discovery of a noncompliant financial 
relationship) would be well-advised to make reasonable efforts to 
enforce the terms of the loan agreement, lest the failure to do so 
raises questions as to whether the agreement was a sham arrangement. We 
also note that the granting of a loan by the entity to the physician 
would itself create a financial relationship, and thus the loan 
arrangement itself must meet an exception.

D. Alternative Method for Compliance With Signature Requirements in 
Certain Exceptions

    In the CY 2008 PFS proposed rule, we stated that, although we do 
not have discretion to waive violations of the physician self-referral 
statute, we were considering whether to amend some of the exceptions 
that appear in Sec. Sec.  411.355 through 411.357 to provide an 
alternate method for satisfying certain requirements of the exceptions 
(72 FR 38185). We cautioned that our proposal was intended to address 
only inadvertent violations in which a financial relationship fails to 
satisfy a procedural or ``form'' requirement of an exception in the 
statute or regulations. In addition, we stated that we did not intend 
to apply the alternative method for compliance to other requirements, 
such as compensation that must be fair market value, not related to the 
volume or value of referrals, or be set in advance. We cited the 
example of a situation in which parties are missing a signature but 
satisfy every other requirement of the exception for personal service 
arrangements in Sec.  411.357(d). Section 1877(b)(4) of the Act 
provides that the Secretary may promulgate additional exceptions 
regarding financial relationships that pose no risk of program or 
patient abuse. We proposed to rely on our authority under this 
provision of the Act to implement this policy. We proposed eight 
criteria that, if satisfied, would allow a financial relationship that 
did not satisfy all of the existing ``prescribed'' criteria of an 
exception nevertheless to meet the exception. They were: (1) The facts 
and circumstances of the financial relationship are self-disclosed by 
the parties to us; (2) we determine that the financial relationship 
satisfied all but the prescribed procedural or ``form'' requirements of 
the exception at the time of the referral for the DHS at issue and at 
the time of the claim(s) for such DHS; (3) the failure to meet all of 
the prescribed criteria of the exception was inadvertent; (4) the 
referral for the DHS and the claim(s) for the DHS were not made with 
knowledge that one or more of the prescribed criteria of the exception 
were not met (consistent with other exceptions, we would apply the same 
knowledge standard as that applicable under the False Claims Act); (5) 
the parties have brought (or will bring as soon as possible) the 
financial relationship into complete compliance with the prescribed 
criteria of the exception or have terminated (or will terminate as soon 
as possible) the financial relationship between or among them; (6) the 
financial relationship did not pose a risk of program or patient abuse; 
(7) no more than a set amount of time had passed since the time of the 
original noncompliance with the prescribed criteria; and (8) the 
financial relationship at issue is not the subject of an ongoing 
Federal investigation or other proceeding (including, but not limited 
to, an enforcement matter). We proposed no regulatory text.

[[Page 48706]]

    Commenters were generally supportive of the policies underlying the 
proposal, but most contended that the proposal was too restrictive. In 
particular, the commenters stated that we should not require parties to 
self-disclose that a procedural or ``form'' requirement was not met in 
order to be eligible for the alternative method for compliance.
    We are adopting the proposal, with modification. Specifically, we 
are not adopting most of the proposed eight criteria, including the 
requirements that parties self-disclose a noncompliant financial 
relationship and that we determine that the financial relationship 
satisfied all but the prescribed procedural or ``form'' requirements of 
an exception. Under new paragraph (g) of Sec.  411.353, payment may be 
made to an entity that submits a claim or bill for DHS if the financial 
relationship between the entity and the referring physician fully 
complied with an applicable exception under Sec.  411.357, except with 
respect to a signature requirement, and the following conditions are 
met: (1) If the failure to comply with the signature requirement was 
inadvertent, the entity rectifies the failure to comply with the 
signature requirement within 90 days after the commencement of the 
financial relationship (without regard to whether any referrals have 
occurred or compensation has been paid during such 90-day period); or 
(2) if the failure to comply with the signature requirement was not 
inadvertent, the entity rectifies the failure to comply with the 
signature requirement within 30 days after the commencement of the 
financial relationship (without regard to whether any referrals have 
occurred or compensation has been paid during such 30-day period). In 
order to take advantage of the alternative method for compliance in 
Sec.  411.353(g), the financial relationship at issue must, at the 
commencement of the financial relationship, satisfy all of the 
requirements (except the signature requirement) of an applicable 
exception. For example, if the applicable exception includes a 
requirement that the financial relationship not violate the Federal 
anti-kickback statute (section 1128B(b) of the Act), the alternative 
method for compliance with the exception would not be available to the 
parties unless this requirement was satisfied. New paragraph (g) of 
Sec.  411.353 may be used by an entity only once every 3 years with 
respect to the same referring physician.
    We decline, at this time, to extend the relief offered by the 
proposal to failures to meet other prescribed procedural or ``form'' 
criteria. Commenters have not identified other procedural or ``form'' 
criteria to which the final rule should apply. We are reluctant to 
expand the relief addressed in the proposed rule, particularly in light 
of the fact that we are not requiring entities to self-disclose the 
failure to meet the prescribed criteria, and are not requiring that we 
make a determination that alternative criteria are met.
    We address below the specific comments that we received in response 
to our proposal in the CY 2008 PFS proposed rule.
    Comment: One commenter stated that the proposed list of 
requirements that parties would need to satisfy in order to be eligible 
for the alternative method for compliance appeared reasonable and that 
we should not dilute the requirements if we finalize the proposal. 
Although the exception might have limited utility, it would provide 
flexibility when it is clear that the noncompliance with the 
substantive criteria was caused by an inadvertent error. One commenter 
stated that the proposal was cumbersome and ultimately would not 
benefit physicians because of the inordinate number of requirements 
that would have to be satisfied before an entity could take advantage 
of the alternative method for compliance. Another commenter expressed 
concern that the proposal was so burdened by cautions and reservations 
that it may be less viable than it otherwise could be. One commenter 
stated that requiring us to make individual determinations for each 
self-disclosure would provide an enormous administrative burden on both 
us and providers. The commenter suggested that, if providers meet the 
alternative criteria to comply with certain exceptions, they should be 
able to self-correct within 30 days of noncompliance and not be 
required to self-disclose. This structure, the commenter contended, 
would eliminate the administrative burden, yet provide ample 
protections against abuse, because the alternative criteria we set 
forth in the proposed rule are clear. Another commenter said that, in 
light of the potential tremendous penalties and the black-and-white 
nature of the prohibition, there should be a means specified in the 
regulations to rectify inadvertent violations internally, and for us or 
another agency to exercise discretion upon later review, without 
subjecting parties to the burden and expense of a self-disclosure. 
Another commenter stated that DHS entities would be unlikely to submit 
to (or be counseled to submit to) an ``uncertain'' process that exposes 
their mistakes. Two commenters complained that it was unfair to require 
a voluntary disclosure to use this method for compliance. Several 
commenters stated that the proposal for us to retain sole authority to 
determine whether a financial relationship failed to satisfy all of the 
prescribed procedural or ``form'' criteria of an exception would give 
the agency too much control. Several other commenters expressed 
dissatisfaction that the decision of whether the alternative criteria 
were met would not be subject to further administrative or judicial 
review. One of these commenters claimed that the proposed lack of 
administrative or judicial review, coupled with the proposed option of 
not making a decision, would be a perversion of due process.
    Response: We recognize that our proposal contained a significant 
number of requirements. In order not to discourage providers and 
suppliers from taking advantage of the opportunity to remain in 
compliance with an exception through an alternative method for 
compliance, we have decided to eliminate the requirement that we must 
make a determination that alternative criteria are met, as well as the 
requirement that DHS entities must self-disclose the failure to meet 
the prescribed criteria. We are modifying Sec.  411.353 to provide what 
is essentially an adjunct to the relief offered by the special rule in 
Sec.  411.353(f) for temporary noncompliance. New paragraph (g) of 
Sec.  411.353 provides that, notwithstanding that a financial 
relationship did not satisfy all of the requirements of an exception in 
Sec.  411.357 due to a missing signature on a written agreement, 
payment may be made to an entity that submits a claim or bill for a 
designated health service if the financial relationship between the 
entity and the referring physician fully complied with an applicable 
exception under Sec.  411.357, except with respect to the signature 
requirement (described below), and the following conditions are met: 
(1) The failure to comply with the signature requirement was 
inadvertent; and (2) the entity rectifies the noncompliance with the 
signature requirement within 90 days after the commencement of the 
financial relationship (without regard to whether any referrals have 
occurred or compensation has been paid during such 90-day period). (We 
describe in the next comment and response the provisions in this final 
rule for an alternative method for compliance where the failure to 
obtain a required signature was not inadvertent (that is, the failure 
was ``knowing'').) For

[[Page 48707]]

purposes of new paragraph (g) of Sec.  411.353, the relevant signature 
requirements are found in Sec.  411.357(a)(1), Sec.  411.357(b)(1), 
Sec.  411.357(d)(1)(i), Sec.  411.357(e)(1)(i), Sec.  411.357(e)(4)(i), 
Sec.  411.357(l)(1), Sec.  411.357(p)(2), Sec.  411.357(q) 
(incorporating the requirement contained in Sec.  1001.952(f)(4)), new 
Sec.  411.357(r) (2)(ii), Sec.  411.357(t)(1)(ii) and (t)(2)(iii) (both 
incorporating the requirement contained in Sec.  411.357(e)(1)(i)), 
Sec.  411.357(v)(7)(i), and Sec.  411.357(w)(7)(i). New Sec.  
411.353(g) may be used by an entity only once every 3 years with 
respect to the same referring physician.
    In this final rule, we have eliminated the proposed requirement of 
self-disclosure, as well as the proposed requirement that we make an 
advance determination that the alternative criteria were satisfied, but 
we emphasize that we have done so only for the purpose of encouraging 
entities to take advantage of the alternative method for compliance. 
Because the final rule is narrow in scope, applying to missing 
signatures only, we believe that we can eliminate these proposed 
requirements and still meet the statutory mandate under section 
1877(b)(4) of the Act that any additional exception that we create by 
regulation under that authority, or any revisions to existing 
regulations created under such authority not pose a risk of program or 
patient abuse.
    Comment: A few commenters suggested that a financial relationship 
should not be considered noncompliant for failure to get a signature on 
an agreement, even if the failure was not inadvertent. One commenter 
asserted that there is no risk of fraud or abuse with respect to a 
missing signature. Another commenter emphasized that it is difficult 
sometimes for parties to obtain all necessary signatures prior to the 
time that a physician must begin providing services to the hospital. A 
third commenter recommended a 60-day grace period for financial 
relationships that begin prior to the time that all necessary 
signatures are obtained. (These comments were submitted in response to 
our proposals on period of disallowance and the physician ``stand in 
the shoes'' provisions discussed in sections VIII.B and VIII.C of this 
preamble.)
    Response: We are distinguishing between inadvertent and knowing 
failures to comply with a signature requirement by allowing 90 days to 
obtain the missing signature for inadvertent noncompliance and 30 days 
for noncompliance that is not inadvertent (that is, noncompliance that 
is ``knowing''). We understand that parties may not obtain all 
signatures and that referrals may be made despite the missing 
signature(s). We also recognize that, on occasion, a hospital or other 
entity may need to retain a physician's services on very short notice 
(such as obtaining emergency on-call coverage from a physician who is 
substituting for another physician) and that the entity is faced with 
choosing to begin a financial relationship without the physician's 
signature on the agreement or to forego using the physician's services, 
thus possibly adversely affecting patient care. However, we want to 
incent parties to exercise diligence with our rules, and we believe 
that 90 days after the beginning of an otherwise fully compliant 
financial relationship is sufficient time for parties to exercise 
diligence and discover whether a signature is missing, and, where an 
entity has knowingly entered into an otherwise fully compliant 
financial relationship despite a missing signature, 30 days after the 
beginning of the financial relationship is sufficient time for such 
entity to procure the signature.
    Comment: One commenter asserted that our proposal was not an 
alternative method for compliance, but was instead a method for us or 
OIG to grant immunity in connection with a self-disclosure.
    Response: We disagree that the proposal was a method to grant 
immunity. As we explained in the proposed rule, we do not have the 
authority to waive or grant immunity for a violation of the physician 
self-referral law or regulations (72 FR 38185). Using our authority 
under section 1877(b)(4) of the Act, we proposed to amend our physician 
self-referral rules in order to keep within the exceptions certain 
financial relationships that, but for the proposed change, would be out 
of compliance with the rules.
    Comment: One commenter stated that the physician self-referral 
regulations are complex and that we should focus only on those parties 
that intentionally disregard the requirements, and not on those that 
missed a signature on a single document while attempting to comply with 
the rules. Another commenter stated that the proposal was a positive 
first step toward recognition that ``innocent and trivial'' violations 
of the statute should not be treated the same as those that involve 
intentional violations of the statute. The commenter believed, however, 
that the proposal was tailored far too narrowly and that it is unlikely 
that providers would submit, or be counseled to submit, to such an 
uncertain process that exposes them for ``innocent'' mistakes. The 
commenter urged us to focus only on those parties that intentionally 
disregard the physician self-referral law.
    Response: As we stated in the proposed rule, we do not have the 
authority to waive violations of the physician self-referral law, 
regardless of their nature. We have the authority under section 
1877(b)(4) of the Act to create (or modify) regulatory exceptions only 
to the extent that there is no risk of program or patient abuse. We do 
not believe that providing an alternative method for compliance that 
permits parties that inadvertently failed to obtain a required 
signature to correct this failure at any time during the term of the 
arrangement, as recommended by the commenter, would meet the ``no risk 
of program or patient abuse'' standard. Thus, we are proceeding in a 
cautious manner in order to guard against the possibility of abuse and, 
as discussed above, are permitting parties to use the alternative 
method for compliance for up to 90 days when the failure to obtain a 
required signature was inadvertent and up to 30 days when such failure 
was not inadvertent. We will evaluate our experience with new Sec.  
411.353(g) and may propose modifications, either less or more 
restrictive in nature, at a later date.
    Comment: One commenter suggested that an alternative to ``formal 
compliance'' should be permitted if: (1) The provider can identify 
contemporaneous written documentation that provides evidence that the 
key terms of the financial relationship complied with the substantive 
elements of the applicable exception; and (2) the provider brings the 
financial relationship into compliance with the procedural and 
substantive requirements of the exception. The commenter further stated 
that, if the provider is unable to identify contemporaneous written 
documentation, it should terminate the financial relationship and seek 
repayment of compensation from the physician of the amount that was 
paid to the physician in excess of that permitted or required under the 
physician self-referral law. If the physician will not repay the 
compensation, the commenter suggested that the provider should be 
required to submit an amount of money to us equal to the payment made 
in excess of the amount of money permitted or required by the physician 
self-referral law and regulations.
    Response: We decline to adopt the suggestions of the commenter. We 
do not believe that it is appropriate to protect the failure to comply 
with the substantive requirements of an

[[Page 48708]]

exception, as the commenter suggests. The commenter's suggestion that 
the entity be allowed to terminate a financial relationship and either 
collect from the physician the amount of excess compensation paid to 
the physician or pay such excess amount to the program does not address 
our concerns. Payment of excess compensation, even if ultimately repaid 
by the party that received it, could induce or reward referrals for at 
least the period of time before repayment is made. Without additional 
restrictions, the commenter's suggested approach is subject to abuse. 
The commenter's suggestion regarding repayment to the program by the 
provider that made the excess payment is not authorized by, or 
consistent with, the statute.
    Comment: One commenter stated that it was generally supportive of 
the proposal, but was concerned that hospitals will be hesitant to 
self-report violations unless we clarify certain issues. First, the 
commenter was concerned that, if a hospital were to have multiple 
``technical violations'' or have such violations over a sustained 
period of time, it could be subject to civil monetary penalties. 
Therefore, the commenter requested additional guidance regarding the 
specific circumstances in which the hospital could make an allowed 
correction. Second, the commenter requested guidance as to what 
hospitals would be permitted to do during three time intervals: (1) The 
time period between when the violation is discovered and when it is 
reported to us; (2) the time period between when the violation is 
reported to us and when we issue a determination; and (3) the time 
period between when the determination is issued and when the financial 
relationship is brought back into compliance. Without this guidance, 
the commenter contended, many hospitals will not self-report.
    Response: We believe that the commenter's concerns are addressed by 
the fact that the final rule does not require hospitals or other 
entities to self-report in order to take advantage of the relief 
offered under new Sec.  411.353(g). In order to encourage entities to 
monitor vigilantly their financial relationships with physicians, this 
final rule provides that entities must rectify inadvertent 
noncompliance with a signature requirement within 90 days after the 
commencement of the financial relationship (without regard to whether 
any referrals have occurred or compensation has been paid during such 
90-day period), and must rectify knowing noncompliance with a signature 
requirement within 30 days after the commencement of the financial 
relationship (without regard to whether any referrals have occurred or 
compensation has been paid during such 30-day period). New Sec.  
411.353(g) may be used by an entity only once every 3 years with 
respect to the same referring physician. A civil monetary penalty may 
be issued only for a knowing violation of the statute. By definition, 
an arrangement that complies fully with new Sec.  411.353(g) is not in 
violation of the statute.
    Comment: One commenter offered a number of criticisms and 
recommendations in response to the proposed alternative compliance 
criteria. First, requiring a provider to disclose to us the ``facts and 
circumstances'' of the inadvertent failure to satisfy procedural or 
``form'' requirements of an exception will require resources to be 
allocated to this process by both the providers and us. The commenter 
expressed concern that we would be flooded with disclosures of 
``technical'' violations, which may make us unable to respond in a 
timely fashion. The commenter suggested that we establish reasonable 
timeframes for our response so that providers are not awaiting a 
decision for a long period of time. Second, the commenter requested 
additional guidance regarding what constitutes an ``innocent or 
unintentional mistake,'' noting that this could be confusing for 
providers who seek to make a disclosure. Third, the commenter asserted 
that determining whether a provider complied with all requirements of 
an exception other than procedural or ``form'' requirements appears to 
be outside of the Department's normal course of business and would 
require significant resources and may require the use of outside 
experts. Fourth, the commenter claimed that it is not clear how we 
would evaluate whether the referral for DHS was made without knowledge 
that one or more of the exception's prescribed criteria were not met. 
The commenter contended that, if any knowledge requirement is used by 
us, it should be actual knowledge. Fifth, the commenter suggested that 
we remove the condition that no more than a set amount of time could 
pass following the time of the original noncompliance with the 
prescribed criteria, because this would exclude many financial 
relationships that otherwise would satisfy the alternative criteria (as 
many physician self-referral violations are unintentional and not 
discovered immediately).
    Response: We believe that the final rule, which does not contain 
most of the conditions specified in the proposed rule, will satisfy 
some, but not all, of the commenter's concerns. With respect to the 
commenter's first and second criticisms, the final rule does not 
require that the entity self-disclose the facts and circumstances of 
the financial relationship in order to use the alternative method for 
compliance. We note also that the final rule provides for protection 
both in the situation in which the failure to comply with the signature 
requirement is inadvertent (for which there is a 90-day period to 
rectify the noncompliance) as well as the situation in which the 
failure to comply with the signature requirement was not inadvertent or 
``knowing'' (for which there is a 30-day period to rectify the 
noncompliance). We do not believe that it is necessary to define 
``inadvertent;'' parties should attach the ordinary meaning to 
``inadvertent.'' We provide the following example of what we consider a 
knowing failure to comply with the signature requirement: A 
compensation arrangement under which a hospital contracts with a 
physician to provide medical directorship of a service at the hospital 
beginning January 1; the physician begins providing services on January 
1 and refers patients to the hospital for DHS; the physician does not 
sign the written agreement until January 15, when it is returned from 
the physician's attorney following legal review; and, at all times up 
to January 15, both the physician and the hospital are aware that the 
physician had not signed the agreement. In regard to the commenter's 
third and fourth criticisms, the final rule does not require an advance 
determination from us that the financial relationship satisfied all but 
the signature requirement of the exception at the time of the referral 
for the DHS at issue and at the time of the claim for such DHS. 
However, we note that a financial relationship that an entity believes 
complied with all criteria except the signature requirement, like all 
financial relationships that implicate the statute, is still subject to 
scrutiny; that is, nothing absolves the entity from otherwise having to 
satisfy the remaining requirements of the exception. As for the 
commenter's fifth criticism, the final rule requires that the entity 
rectify the noncompliance with the signature requirement within 90 days 
after the beginning of the financial relationship in the case of an 
inadvertent failure to comply with the signature requirement, or within 
30 days after the beginning of the financial relationship in the case 
of knowing failure to comply with the signature requirement (without 
regard to whether any referrals have occurred or

[[Page 48709]]

compensation has been paid during such 90-day or 30-day period). The 
condition that the entity promptly rectify the noncompliance is similar 
to that contained in existing Sec.  411.353(f)(2), as our approach in 
this final rule is to pattern the alternative method for compliance 
after the exception for certain arrangements involving temporary 
noncompliance in Sec.  411.353(f). We believe that it is appropriate to 
put a limit on the period during which parties may take advantage of 
the alternative method for compliance in order to encourage them to 
monitor diligently financial relationships for compliance with the 
prescribed criteria. The alternative method for compliance is designed 
to alleviate, under certain circumstances, the consequences that would 
otherwise result from the failure to obtain a signature as required by 
an exception; it is not intended to become the default means by which 
parties comply with the conditions of exceptions. For this reason, we 
have also placed a limit on the use of the alternative method for 
compliance. The final rule provides that new Sec.  411.353(g) may be 
used by an entity only once every 3 years with respect to the same 
referring physician, similar to the limit in existing Sec.  
411.353(f)(3).

E. Percentage-Based Compensation Formulae

    In the CY 2008 PFS proposed rule, we proposed clarifications to our 
regulations regarding compensation that is ``set in advance'' (72 FR 
38184). As discussed in the CY 2008 PFS proposed rule, our proposal 
would have affected numerous compensation arrangements, as the 
requirement that compensation be ``set in advance'' (or ``fixed in 
advance'') appears throughout our regulations--in both regulations 
implementing the statutory exceptions and in exceptions issued using 
our authority under section 1877(b)(4) of the Act. Specifically, we 
proposed to clarify that compensation determined using a percentage-
based formula: (1) May be used only for paying for personally performed 
physician services; and (2) must be based on the revenues directly 
resulting from the physician services rather than based on some other 
factor such as a percentage of the savings by a hospital department 
(which is not directly or indirectly related to the physician services 
provided).
    Under our regulations in Sec.  411.354(d), compensation is 
considered ``set in advance'' if the aggregate compensation, a time-
based or per-unit amount, or a specific formula for calculating the 
compensation, is set forth in an agreement between the parties before 
the furnishing of the items or services for which the compensation is 
to be paid. In Phase I, the regulation in Sec.  411.354(d)(1) read: 
``[p]ercentage compensation arrangements do not constitute compensation 
that is `set in advance' in which the percentage compensation is based 
on fluctuating or indeterminate measures or in which the arrangement 
results in the seller receiving different payment amounts for the same 
service from the same purchaser'' (66 FR 959). Following publication of 
Phase I, we received anecdotal accounts about contracts for physician 
services pursuant to which payment is calculated based on a percentage 
of the revenue billed or collected as a result of the physician's own 
professional services. We delayed the effective date of the final 
sentence of Sec.  411.354(d)(1) through five Federal Register notices 
to allow us to reconsider the provision (66 FR 60154; 67 FR 70322; 68 
FR 20347; 68 FR 74491; and 69 FR 35529). Ultimately, we did not 
finalize the last sentence of Sec.  411.354(d)(1), explaining in Phase 
II that we were persuaded that our original position was overly 
restrictive and that, as a result of us not finalizing this language, 
independent contractor physicians, like their group practice and 
employee counterparts, may receive certain limited forms of percentage 
compensation under section 1877 of the Act (69 FR 16068). We noted also 
that the same is true for academic physicians under the exception for 
academic medical centers, which also contains the ``set in advance'' 
requirement (69 FR 16068). In explaining our action, we stated that 
``[w]e considered maintaining the Phase I definition of `set in 
advance,' but realized that hospitals, academic medical centers, and 
other entities would have to renegotiate numerous legitimate contracts 
for physician services, potentially causing significant disruption 
within the health care industry without a corresponding program 
integrity benefit'' (69 FR 16124 through 16125, emphasis added). We 
also noted our concern that such disruption might unnecessarily 
inconvenience beneficiaries.
    In Phase II, we also addressed the concerns of commenters to Phase 
I that pointed out that, under section 1877 of the Act, group practices 
are not subject to the ``set in advance'' restriction when paying 
profit shares or productivity bonuses to group practice physicians, nor 
are employers so restricted in their payments to employed physicians 
under the exception for bona fide employment relationships. We 
discussed percentage-based compensation formulae in the context of 
contrasting the rules regarding compensation to physicians within a 
group practice (which evidence a statutory preference) and compensation 
outside of the group practice context, noting that we attempted to 
equalize the most important requirements in the other main physician 
compensation exceptions (that is, the exceptions for bona fide 
employment relationships, personal service arrangements, fair market 
value compensation arrangements, and academic medical centers) (69 FR 
16066). We stated that, under these exceptions, physicians can be paid 
a percentage of revenues or collections for personally performed 
services, receive a productivity bonus on any personally performed 
services, and participate in a physician incentive plan related to 
health plan enrollees (69 FR 16066, emphasis added).
    We noted in the CY 2008 PFS proposed rule that, despite our stated 
intent that percentage-based compensation formulae be used only for 
compensating physicians for the physician services they personally 
perform, it had come to our attention that arrangements involving 
percentage-based compensation formulae are being used for the rental of 
office space or for the provision of items and services, such as the 
rental of equipment (72 FR 38184). With respect to arrangements for the 
rental of office space or equipment, the rental charges for the office 
space or equipment are determined as a percentage of the revenues 
raised in the office space or by the equipment. With respect to billing 
agent or management agreements, the compensation is often set as a 
percentage of collections or revenues of the party for whom the 
services are provided.
    Although we proposed to revise Sec.  411.354(d) to specify that 
compensation determined using a percentage-based formula may be used 
for paying for personally performed physician services only, at this 
time, we are finalizing a targeted approach for addressing our primary 
concerns regarding percentage-based compensation formulae that are used 
to determine compensation outside the context of personally performed 
physician services. Specifically, relying on our authority in sections 
1877(e)(1)(A)(vi), 1877(e)(1)(B)(vi), and 1877(b)(4) of the Act, we are 
revising Sec.  411.357(a), Sec.  411.357(b), Sec.  411.357(l) and Sec.  
411.357(p) to prohibit the use of percentage-based compensation 
formulae in the determination of rental charges for the lease of office 
space or equipment. We continue to believe that

[[Page 48710]]

the use of percentage-based compensation formulae to determine rental 
charges for office space or equipment poses a heightened risk of 
program and patient abuse. For example, lease payments based on a 
percentage of revenues earned by the lessee provide incentive for the 
lessor to increase DHS referrals to the lessee so as to increase 
potentially the rental payment under the lease. In addition, 
fluctuating rental payments determined using a percentage-based formula 
may not result in fair market value payments (even if the formula 
itself is arguably reasonable), which also poses an increased risk of 
program or patient abuse. In Phase III, we discussed this concern in 
connection with compliance with the exception for indirect compensation 
arrangements in Sec.  411.357(p), which requires that compensation 
received by the referring physician (or immediate family member) is 
fair market value for the services and items provided. There, we noted 
that a compensation arrangement based on a percentage of collections 
may not, depending on how the actual collections progress, result in 
fair market value received by the referring physician (or immediate 
family member) (72 FR 51063). With respect to an indirect compensation 
arrangement involving, for example, the rental of equipment between a 
physician lessor and a DHS entity lessee, compensation based on a 
percentage of collections for the services performed on the equipment 
may not result in fair market value, depending on how the collections 
actually materialize.
    For a more detailed description of our concerns, we refer the 
reader to sections VIII.F and VIII.G of this preamble. We intend to 
continue to monitor compensation formulae in arrangements between DHS 
entities and referring physicians and, if appropriate, may further 
restrict percentage-based formulae in a future rulemaking. We refer the 
reader to section VIII.B of this preamble for a discussion of our 
interpretation of compensation that is ``set in advance'' as it applies 
to the modification of rental charges in office space or equipment 
leases. We address below the specific comments that we received in 
response to our proposal in the CY 2008 PFS proposed rule.
    Comment: One commenter expressed its support of the proposal to 
continue to allow percentage-based compensation for personally 
performed physician services. The commenter asserted that finalizing 
the proposal would curtail potentially abusive percentage compensation 
arrangements to physicians for non-professional services. Another 
commenter supported the elimination of percentage-based lease 
arrangements for office space and imaging equipment. The commenter 
asserted that such arrangements are prone to abuse and should be 
eliminated. The commenter further asserted that lease arrangements 
featuring flat-rate payments that are not tied to volume are less 
susceptible to abuse. Two other commenters suggested that, if our most 
significant concern is with the use of percentage-based compensation 
formulae for determining rental charges for office space and equipment 
rentals, a more effective solution would be to prohibit such formulae 
under the specific exceptions applicable to the rental of office space 
and equipment.
    Response: As discussed above, we are finalizing our proposal with 
the modifications suggested by the third and fourth commenters, which 
also reflect generally the second commenter's recommendation. 
Specifically, we are amending the exceptions for the rental of office 
space (Sec.  411.357(a)), the rental of equipment (Sec.  411.357(b)), 
fair market value compensation arrangements (Sec.  411.357(l)), and 
indirect compensation arrangements (Sec.  411.357(p)) to prohibit the 
use of compensation formulae based on a percentage of the revenue 
raised, earned, billed, collected, or otherwise attributable to the 
services performed or business generated in the leased office space or 
to the services performed on or business generated by the use of the 
leased equipment. We are finalizing a narrow, targeted approach to 
address our most significant concerns with percentage-based 
compensation formulae. We are revising Sec.  411.357(a), Sec.  
411.357(b), Sec.  411.357(l) and Sec.  411.357(p) to prohibit the use 
of percentage-based compensation formulae in the determination of 
rental charges for the lease of office space or equipment. Although we 
are not extending, at this time, the prohibition on the use of 
percentage-based compensation formulae to arrangements for any non-
professional service (such as management or billing services), we 
reiterate our intention to continue to monitor arrangements for non-
professional services that are based on a percentage of revenue raised, 
earned, billed, collected, or otherwise attributable to a physician's 
(or physician organization's) professional services.
    Comment: One commenter urged that we continue to permit percentage-
based fee arrangements for billing and collection services, even if 
this causes some variability in physician compensation. According to 
the commenter, percentage-based fee arrangements are the most common 
method of compensation for billing and collections services, and 
provide appropriate incentives for quality and accuracy. The commenter 
asserted that these fees should be set at fair market value. Two other 
commenters expressed similar concerns, arguing that practice management 
agreements (in which a manager provides administrative and other 
management services to physicians, typically in exchange for a 
percentage of the physician's revenues or collections, which could 
include ancillary revenue) and billing services agreements that are 
negotiated using percentage-based compensation formulae promote 
positive management or administrative practices without a risk of 
program or patient abuse. Another commenter asserted that the proposal 
would call into question a whole host of percentage-based compensation 
arrangements (for example, lease agreements, practice management 
agreements, and pay-for-performance incentives) that have little or no 
risk of abuse.
    Response: We disagree with the last commenter's assertion that all 
of the percentage-based compensation arrangements it cited pose little 
or no risk of program or patient abuse. As described above, due to our 
concerns regarding the use of percentage-based compensation formulae to 
determine rental charges for office space and equipment lease 
arrangements, the final rule prohibits such compensation formulae. We 
note that our determination to limit the prohibition to arrangements 
for the rental of office space and equipment only should not be 
construed as agreement with any of the commenters' other assertions, 
and we intend to continue to monitor compensation formulae in financial 
relationships between DHS entities and referring physicians. We may 
further restrict percentage-based formulae in a future rulemaking if 
appropriate to safeguard against program or patient abuse.
    Comment: Several commenters expressed concern that the proposal, if 
finalized, would prohibit a hospital (or other DHS entity) that leases 
office space in its medical office building from charging the physician 
tenants a pro rata share of real estate taxes and other costs 
associated with common areas of the property.
    Response: It appears that the commenters assume that charging a 
tenant a pro rata share of expenses related to the office space leased 
by a

[[Page 48711]]

tenant is equivalent to utilizing a percentage-based compensation 
formula for rental charges. We believe that there is a difference 
between determining rental charges using a percentage-based formula and 
assessing a tenant (lessee) for the expenses incurred that are related 
to the space leased by the tenant (lessee). The revised regulation text 
prohibits determining rental charges using a formula based on a 
percentage of the revenue raised, earned, billed, collected, or 
otherwise attributable to the services performed or business generated 
in the office space. We do not consider a percentage of expenses 
imposed or levied by a third party, such as property taxes or 
utilities, to be prohibited percentage compensation. Moreover, we do 
not interpret the revisions to Sec.  411.357(a) (or to Sec.  
411.357(b), Sec.  411.357(l) and Sec.  411.357(p)) as prohibiting a 
lessor from charging a lessee a pro rata share of expenses incurred 
that are attributable to that portion of the medical office building or 
other space (or the equipment) that is leased by the lessee.
    Comment: One commenter asserted that percentage compensation lease 
arrangements are used by parties to circumvent the physician self-
referral law. The commenter argued that our proposal does not go far 
enough to meet our objective because it permits percentage-based 
compensation lease arrangements through indirect compensation 
arrangements, the exception for which does not require that 
compensation be set in advance. According to the commenter, parties 
simply could structure an equipment lease as an indirect compensation 
arrangement that qualifies for the exception for indirect compensation 
arrangements. The commenter asserted that physicians often do not 
directly lease equipment; therefore, most equipment leasing 
arrangements are indirect compensation arrangements. The commenter 
recommended that we revise the exception for indirect compensation 
arrangements in Sec.  411.357(p) to require that compensation be set in 
advance.
    Response: As noted above, we proposed to prohibit the use of 
percentage-based compensation formulae for any arrangement other than 
an arrangement for personally performed physician services. However, in 
this final rule, we are prohibiting the use of such compensation 
formulae with respect to office space and equipment lease arrangements 
only. We agree with the commenter that our concerns regarding 
potentially abusive percentage-based compensation arrangements for 
office space or equipment are not fully addressed if parties could 
restructure an (office space or) equipment lease arrangement as an 
indirect compensation arrangement that would qualify for the exception 
in Sec.  411.357(p). Accordingly, we are making corresponding changes 
to the exception in Sec.  411.357(p) to prohibit the use of percentage-
based compensation formulae in the determination of rental charges for 
office space and equipment lease arrangements. We are also making 
corresponding changes to Sec.  411.357(l), the fair market value 
exception, to prohibit the use of percentage-based compensation 
formulae in the determination of rental charges for equipment lease 
arrangements (which is potentially applicable for equipment leases of 
less than a year.)
    We note also that our proposal in the CY 2008 PFS proposed rule and 
this commenter's letter pre-dated the publication of the Phase III 
``stand in the shoes'' provisions in Sec.  411.354(c) (72 FR 51012). To 
the extent that a physician organization, rather than an individual 
referring physician or joint venture, leases office space or equipment 
to or from a DHS entity, the physician may stand in the shoes of the 
physician organization, and the arrangement between the DHS entity and 
the referring physician is analyzed as if it were a lease arrangement 
between the DHS entity and the referring physician.
    Comment: A large number of commenters expressed concern that the 
proposal, if finalized, would have a chilling effect on, or prohibit 
outright, various gainsharing arrangements and other incentive payment 
(or pay-for-performance) programs. These commenters urged us not to 
finalize our proposal to clarify that compensation determined using a 
percentage-based formula must be based on the revenues directly 
resulting from physician services rather than based on some other 
factor such as a percentage of the savings by a hospital department.
    Several commenters, in similar or identical letters, stated that 
prohibiting percentage-based compensation (unless for personally 
performed physician services) fails to recognize the important role 
that financial incentives play in achieving the goals that the 
Institute of Medicine (IOM) has set for all of health care, including 
payments based on achieving quality measures, patient satisfaction, or 
efficiencies. Some of the commenters also asserted that the proposal, 
if finalized, would work against achieving clinical integration and 
coordination. According to several commenters, the proposed changes are 
out of sync with the relationships that are developing and need to 
evolve to meet the public policy goals for health care delivery. The 
commenters noted that, the financial model for integrated care 
delivery, through recognizing the challenges set by the IOM and 
responding to the use of financial incentives by the government and 
other payers, has come to rely on sharing revenue in appropriate ways 
as a mechanism to incent appropriate behavior. The commenters argued 
that these efforts will be frustrated if percentage-based compensation 
formulae can be used only for personally performed physician services. 
Many of these commenters recommended that we should permit certain 
types of percentage-based compensation arrangements such as: (1) 
Sharing of cost savings from efficiencies; (2) incentives to meet 
quality indicators, even when cost savings do not accrue to the 
hospital; (3) incentives to clinically integrate services and 
coordinate care across settings; (4) sharing of pay-for-performance 
bonuses from payers; (5) service contracts to build new service 
capacities; and (6) management contracts.
    Response: We have addressed the commenters' concerns by finalizing 
a narrow, targeted approach that does not require percentage-based 
formula used to determine physician compensation for personally 
performed services to be based on the revenues directly resulting from 
the physician's services rather than based on some other factor, such 
as a percentage of the savings by a hospital department. We share the 
commenters' interest in the permissibility of properly structured, 
nonabusive incentive payment and shared savings programs. We refer the 
reader to the CY 2009 PFS proposed rule (73 FR 38502) in which we 
proposed a new exception for certain incentive payment and shared 
savings programs (which may include gainsharing arrangements) (73 FR 
38548). We also note that, although we are not, at this time, 
prohibiting percentage-based compensation for personally performed 
physician services that is calculated based on a percentage of the 
savings of a hospital department, we refer the reader specifically to 
our discussion at 73 FR 38551 regarding whether such payments would 
meet necessarily the fair market value requirement present in the 
various exceptions that may be applicable to gainsharing and similar 
arrangements.
    Comment: A commenter representing academic medical centers (AMCs) 
and faculty practice plans (FPPs) expressed concern that the proposed 
changes, if finalized, would cause compensation

[[Page 48712]]

models within an AMC to fail to meet the requirements of the AMC 
exception. According to the commenter, some formulae compensate FPP 
physicians in a way in which some of the compensation is attributable 
to services performed by other physicians within the same FPP. The 
commenter asserted that stripping AMCs of the availability of such 
compensation formulae would have severe consequences with respect to an 
AMC's ability to achieve its teaching, research and community service 
mission.
    Response: The narrow, targeted approach we take in this final rule 
prohibits the use of percentage-based compensation formulae in the 
determination of rental charges for the lease of office space or 
equipment. The commenter discussed the compensation of FPP physicians 
in describing its concerns, but did not specify whether such 
compensation is related solely to physician services or includes other 
compensation to the FPP physicians, such as compensation for the rental 
of office space or equipment by the AMC (where the FPP physicians are 
or the FPP is the lessor). To the extent that the commenter's concerns 
relate to the use of percentage-based compensation formulae in the 
determination of compensation to physicians for physician services, 
rather than for the rental of office space or equipment, this 
commenter's concerns are moot. In this final rule, we are not 
finalizing any new prohibitions or limitations on the use of 
percentage-based compensation formulae to pay physicians for their 
physician services. If a compensation formula for physician 
compensation for items or services--other than the rental of office 
space or equipment--was permissible prior to October 1, 2009 (the 
effective date of the prohibition on the use of percentage-based 
compensation formulae for determining rental charges in arrangements 
for the lease of office space or equipment), that formula would not be 
made impermissible by this final rule.
    Comment: Several commenters asserted that percentage-based fee 
arrangements facilitate access to costly treatment modalities, often 
with predicted low volume, by allowing for the apportionment of risk of 
low or no volume for new or costly therapeutic modalities. According to 
two other commenters, prohibiting percentage-based compensation 
formulae would make new technology and equipment beyond the reach of 
all but the largest hospitals or government-sponsored hospitals. A 
number of commenters argued that beneficiary access will be impacted 
negatively if compensation arrangements cannot be structured with 
percentage-based compensation formulae. One commenter asserted that 
percentage fee arrangements are fair and the best option for vendors 
and for hospitals. Several other commenters agreed generally with this 
assertion, stating that percentage-based compensation formulae are used 
to spread risk, allowing hospitals and equipment vendors to share in 
market risks. Other commenters advocated that percentage-based 
compensation formulae can encourage the proper use of resources, 
sharing financial risk among the physicians in a group practice. 
According to some of these commenters, hospitals are able to avoid 
large financial risk by paying compensation as a percentage of 
reimbursement for a certain procedure. Several commenters argued that 
permitting percentage-based compensation formulae would ensure that a 
hospital never makes an equipment rental payment in an amount greater 
than what it collects for the services, from even the lowest paying 
insurer. One commenter questioned whether there are any distinct 
advantages inherent in flat-fee arrangements to reduce the potential 
for abuse that are not also apparent in other variable-fee 
arrangements.
    Response: Parties are free to structure arrangements using other 
permissible compensation methodologies, including flat-fee payments set 
at fair market value and, unless otherwise prohibited as described in 
section VIII.F. of this preamble, per-procedure compensation. We do not 
believe that prohibiting percentage-based compensation formulae for 
determining the rental charges for office space and equipment lease 
arrangements should limit beneficiary access to needed services because 
other compensation structures for office space and equipment leases 
remain available to contracting parties.
    Sharing of financial risk among parties does not eliminate 
necessarily the risk of program or patient abuse. As we described 
above, we believe that the use of percentage-based compensation 
formulae to determine rental charges for office space and equipment may 
provide significant incentive for parties to increase referrals in 
order to increase the rental payments that are based on revenues 
generated by those referrals. With respect to the comments regarding 
the ability of a hospital to ensure that it does not make a rental 
payment that is greater than the reimbursement it receives for the 
particular service for the particular patient, we note that rental 
charges must be set at fair market value. Reimbursement from an insurer 
does not correlate necessarily to fair market value, and rental charges 
based on a percentage of the amount reimbursed for a particular service 
may not result in fair market value rental charges for the equipment 
leased.
    As explained in section VIII.F. of this preamble, we are concerned 
that entities may enter into per-use equipment lease arrangements, even 
though they may have sufficient volume to justify purchasing the 
equipment, because they are afraid of losing the referral stream from 
the physician lessor. Similarly, we are concerned that entity lessees 
may enter into percentage-based office space or equipment leases 
instead of flat-rate compensation lease arrangements because they are 
afraid of losing the referral stream from the physician lessor. We note 
that, although these commenters (which are either physicians or 
representatives of physicians) emphasized the benefits of percentage-
based compensation arrangements for hospitals, no hospital or hospital 
association commented in support of this view.
    Comment: One commenter explained that requiring a flat-fee 
compensation methodology may result in a DHS entity paying more for 
services than such services are worth (that is, if the assumptions on 
which the fair market value assessment obtained at the commencement of 
the compensations arrangement was based do not bear out, the physicians 
may get paid more than their effort merits or more than the value of 
the service to the DHS entity). The commenter gave the example of a 
hospital that pays physicians to help develop a spine center and, 
despite their best efforts, the spine center is not utilized by 
patients.
    Response: This final rule does not prohibit the use of percentage-
based compensation formulae outside of the context of determining the 
rental charges for the lease of office space and equipment. The 
commenter appears to be concerned about the use of a percentage-based 
compensation formula for paying physicians for their personal services, 
which would not be prohibited under this final rule, provided that all 
of the requirements of an applicable exception to the physician self-
referral law are satisfied.
    Comment: According to one commenter, we would be adopting a 
superfluous provision if we limit the definition of ``set in advance'' 
to allow percentage compensation arrangements in connection with the 
services ``personally performed'' by the physician. The commenter 
asserted that it would never be necessary for a physician who receives 
compensation

[[Page 48713]]

related to services that he or she is personally performing even to 
need to take advantage of an exception that includes a ``set in 
advance'' requirement, as personally performed services are not 
referrals.
    Response: It is true that no exception is required for a financial 
relationship between a DHS entity and a physician if the physician is 
not making any ``referrals'' (as defined at Sec.  411.351) to the 
entity. However, if a physician who is compensated for his or her 
personally performed physician services on a percentage basis by a DHS 
entity makes DHS referrals to the entity, the financial relationship 
would need to satisfy an exception. Moreover, we note that the proposal 
would have restricted percentage-based compensation formulae to 
personally performed physician services. Physicians personally perform 
services other than physician services, such as medical directorship, 
management and other administrative services.
    Comment: One commenter asserted that continually changing the scope 
of permissible arrangements is very disruptive to established, long-
term arrangements.
    Response: In finalizing our proposal regarding percentage-based 
compensation formulae, as well as the other proposals finalized in this 
final rule, we have balanced the need for regulatory certainty to 
foster compliance against the risk of program and patient abuse from 
potential overutilization. The fact that a financial relationship is 
``established'' or long-term does not guarantee that it presents no 
risk of program or patient abuse. The restrictions on the use of 
percentage-based compensation formulae finalized here are necessary to 
address our concerns regarding the risks of overutilization and program 
or patient abuse when such formulae are used to determine rental 
charges for the lease of office space or equipment.
    Comment: One commenter suggested that we delay the effective date 
of the final rule. Another commenter asserted that the proposed change 
to the regulations would have complex and significant implications for 
sleep medicine as many specialists and hospitals have joint venture and 
lease management agreements that would require complete restructuring 
or possible termination.
    Response: For the reasons discussed above, the final restrictions 
regarding the use of percentage-based compensation formulae for 
determining rental charges for the lease of office space and equipment 
are effective October 1, 2009. We recognize that the revisions to Sec.  
411.357(a), Sec.  411.357(b), Sec.  411.357(l) and Sec.  411.357(p) in 
this final rule may require restructuring or termination of 
arrangements for the rental of office space and equipment. We expect 
that the delayed effective date of the revisions will provide parties 
with sufficient time to review existing arrangements and restructure 
them as necessary.

F. Unit of Service (Per Click) Payments in Lease Arrangements

    In the CY 2008 PFS proposed rule, we stated that arrangements 
involving a physician lessor to an entity lessee under which the 
physician lessor receives unit-of-service (also known as per-click or 
per-use) payments are inherently susceptible to abuse because the 
physician lessor has an incentive to profit from referring a higher 
volume of patients to the lessee. Therefore, we proposed that such 
arrangements would not qualify for the exceptions at Sec.  411.357(a) 
and (b) for space and equipment leases. We also solicited comments on 
the question of whether we should prevent per-click payments in 
situations in which the physician is the lessee and a DHS entity is the 
lessor. We received a few comments on the latter issue, all of which 
were in favor of answering the question in the affirmative.
    We received many comments in favor of the proposals that such per 
click arrangements do not qualify for the exceptions at Sec.  
411.357(a) and (b) for space and equipment leases. Some of these 
commenters asserted that per-click leases with physicians for 
lithotripters are abusive, and that hospitals are effectively coerced 
into leases with physicians for fear that if they contract with non-
physicians, their referral stream will dry up. We also received many 
comments opposed to our proposals, the great majority of which came 
from urologists, and from associations and law firms that represent 
urologists. Many of these commenters stated that lithotripsy is not a 
DHS, and that in any event there is no risk of overutilization because 
lithotripters and other equipment leased by urologists are for 
therapeutic, and not diagnostic, procedures. These commenters also 
emphasized that hospitals are either unwilling or unable to purchase 
lithotripters, lasers and other equipment, and that if it were not for 
physicians, including joint ventures among urology groups, patients 
would not have the benefit of advanced technology at all, or at best 
would have to travel longer distances to obtain it. These commenters 
also stated that instead of encouraging abuse, the per-click payment 
methodology was the fairest way to compensate the physician lessors. 
Many of these commenters also stated that the Congress intended that 
per-click leases be allowed.
    Many of the commenters in favor of, or in opposition to, the 
proposal also commented on the proposal to amend the definition of 
``entity'' at Sec.  411.351 to clarify that a person or entity is 
considered to be ``furnishing'' DHS if the person or entity is 
performing services that are billed as DHS, notwithstanding that 
another person or entity actually billed the services as DHS (see 
section VIII.G. of this final rule for a discussion of that proposal) 
and, in many cases, the comments made specifically with respect to one 
proposal were applicable to the other. In some cases, it was not clear 
on which proposal the commenters were commenting. Because we believe 
that the issues are intertwined, in finalizing the ``per-click'' 
proposal, we considered the comments to both the ``per-click'' and 
``under arrangements'' proposals, and considered also some of the 
comments submitted in response to the CY 2008 PFS proposed rule 
solicitation of comments on possible changes to the in-office ancillary 
services exception (72 FR 38181). We read carefully and considered each 
comment. Space limitations prevent us from summarizing each comment; 
however, we discuss below all of the significant points raised by 
commenters in favor of, or in opposition to, our proposal. A discussion 
of specific comments is presented below.
    At this time we are adopting our proposal to prohibit per-click 
payments to physician lessors for services rendered to patients who 
were referred by the physician lessor. We continue to have concerns 
that such arrangements are susceptible to abuse, and we also rely on 
our authority under sections 1877(e)(1)(A)(vi) and 1877(e)(l)(B)(vi) of 
the Act to disallow them. Because physicians themselves may bill for 
DHS, we have the same concerns with respect to per-click lease 
arrangements in which a DHS entity is the lessor and receives a per-
click payment from a physician lessee for space or equipment used by 
the physician in the provision of services to patients who were 
referred by the entity lessor to the physician lessee. The final rule 
revises the lease exceptions at Sec. Sec.  411.357(a)(5) and 
411.357(b)(4), as well as the fair market value exception at 
411.357(l), and the exception for indirect compensation arrangements at 
Sec.  411.357(p), and provides that per unit-of-service rental charges 
are not allowed to the extent that such charges reflect services

[[Page 48714]]

provided to patients referred by the lessor to the lessee. The 
prohibition on per-click payments for space or equipment used in the 
treatment of a patient referred to the lessee by a physician applies 
regardless of whether the physician himself or herself is the lessor or 
whether the lessor is an entity in which the referring physician has an 
ownership or investment interest. The prohibition also applies where 
the lessor is a DHS entity that refers patients to a physician lessee 
or a physician organization lessee.
    We are delaying the effective date of the amendments to Sec. Sec.  
411.357(a)(5) and 411.357(b)(4) until October 1, 2009, in order to 
afford parties adequate time to restructure arrangements.
    We are also taking this opportunity to remind parties to per-use 
leasing arrangements that the existing exceptions include the 
requirements that the leasing agreement be at fair market value (Sec.  
411.357(a)(4) and Sec.  411.357(b)(4)) and that it be commercially 
reasonable even if no referrals were made between the parties (Sec.  
411.357(a)(6) and Sec.  411.357(b)(5)). For example, we do not consider 
an agreement to be at fair market value if the lessee is paying a 
physician substantially more for a lithotripter or other equipment and 
a technologist than it would have to pay a non-physician-owned company 
for the same or similar equipment and service. As a further example, we 
would also have a serious question as to whether an agreement is 
commercially reasonable if the lessee is performing a sufficiently high 
volume of procedures, such that it would be economically feasible to 
purchase the equipment rather than continuing to lease it from a 
physician or physician entity that refers patients to the lessee for 
DHS. Such agreements raise the questions of whether the lessee is 
paying the lessor more than what it would have to pay another lessor, 
or is leasing equipment rather than purchasing it, because the lessee 
wishes to reward the lessor for referrals and/or because it is 
concerned that, absent such a leasing arrangement, referrals from the 
lessor would cease. In some cases, depending on the circumstances, such 
arrangements may also implicate the anti-kickback statute.
1. Support for Proposal
    Comment: Many commenters, including a national provider of 
diagnostic imaging services, an association of practitioners, an 
association of radiologists, an association of radiology group practice 
managers, a radiation oncologists and several radiology group 
practices, stated that they supported the proposal to revise the space 
and equipment rental exceptions to prohibit per-click payments in those 
situations in which a physician leases space to a DHS entity, such as a 
hospital or IDTF, and the DHS entity utilizes the leased space or 
equipment to furnish services to patients referred by the physician 
lessor. These commenters believed that our proposed revision is 
consistent with the goal of eliminating, or at least reducing, the 
ability of a referring physician to profit directly from his or her own 
referrals for DHS, thereby reducing the risk of overutilization and 
abuse. Another commenter, a provider of diagnostic imaging services, 
stated that we can prevent a significant area of abuse by restricting 
the availability of unit-of-service based payments to a physician 
lessor for services rendered by a lessee to patients referred by the 
lessor to the lessee. Another commenter, an association of 
radiologists, stated that it strongly supports banning unit-of-service 
based leases. The commenter maintains that such leases fuel an 
incentive to order unnecessary examinations and that this practice is 
as potent as if the ordering physician is a partner in a joint venture.
    One commenter, a radiation oncologist, said that some leasing 
arrangements are abusive and provide incentives to physicians to narrow 
their choice of treatment options to those for which they will realize 
a profit. Similar concerns were expressed by two companies that lease 
lasers, and individuals who apparently are employed by one of the 
companies. One of the commenters stated that: Financial motivation is 
driving treatment choices (that is, whereas options exist for the 
treatment of diseases, physician ownership of equipment plays a key 
role in influencing what the patient ultimately will be prescribed); 
physicians sometimes steer patients to facilities that are willing to 
lease equipment from the physicians; overutilization is created by 
practices that, due to physician ownership, use treatments that yield 
lower efficacy outcomes and causes the need for re-treatment; and, 
physicians pressure hospitals to use their leasing company despite not 
being the low cost provider. Another of the commenters also expressed 
concern that the utilization of antiquated or lesser technology in 
order to contain cost and keep profitability as high as possible, may 
result in the patient not receiving the best possible procedure, and 
leasing arrangements involving physician lessors may lead to increased 
insurance claims. An individual employed by one of the laser companies 
said that he has seen gross abuses of the current physician self-
referral law, following the proliferation of urologist-owned LLCs, 
which include investments in treatments beyond lithotripsy, such as 
laser treatments, brachytherapy, and cryotherapy. The abuses claimed by 
the commenter include: Physicians threatening hospitals into using the 
physician's company; hospitals violating contracts because they believe 
that the consequences of a broken contract will be less severe than not 
letting the physician have his or her way; and physicians steering 
patients to equipment they own, rather than use a third party for which 
the hospital has contracted, even if it means having the patient travel 
to a non-convenient hospital. The commenter alleges that hospital 
administrators are aware of steerage, but fear that reporting the 
physicians will result only in more lost business.
    A supplier of medical equipment said that it provides its equipment 
on a per-click basis, and also provides a clinical support technician 
to operate the equipment. It said that it has seen an increase in the 
number of equipment providers that are owned by physicians, and that 
physician-owned leasing groups are anti-competitive and undermine a 
hospital's independence. The commenter alleged that if a hospital 
demands that its business will be awarded to the lowest bidder of 
equivalent services, physician-owned leasing groups will threaten to 
move the cases that its physician owners control to another hospital. 
The commenter stated that in one instance a hospital that had been 
dealing with a physician-owned leasing company switched its business to 
the commenter with the result that many of the referrals went to other 
hospitals that dealt with the physician-owned company. The commenter 
also alleged that a physician group that has no equipment, but which 
controls the referral of cases, can say to a hospital's current 
equipment provider that it must be the physician group's subcontractor 
under a new contract between the physician group and the hospital. The 
commenter asserted that it had been approached by a physician that was 
assembling a group of urologists to join a physician-owned entity that 
would provide equipment and technicians for urological procedures. 
According to the commenter, its company would have acted as the 
subcontractor for the physician-owned entity; that is, it

[[Page 48715]]

would have been the actual supplier of the equipment.
    An individual who owns a business that leases lasers for urological 
procedures stated that his company has obtained new technology lasers 
that offer improved clinical results and other benefits to patients, 
but that his company sometimes has difficulties in persuading 
physicians to allow the newer technology lasers to be brought into a 
hospital because the physicians have no ownership in the equipment. A 
medical sales representative stated that he has witnessed unethical 
business conduct due to physician ownership in surgical laser devices. 
According to the commenter, surgical lasers make up a large portion of 
per-click leasing arrangements.
    An association that represents employers urged us to prohibit per-
click payments to physician lessors for services rendered to patients 
referred by the physician lessors. The commenter considered such 
payments to be based on the volume of referrals or other business 
generated by the parties, and said that such payments provide 
incentives to overutilize services, increase costs and reduce 
competition. A few commenters, including an organization that 
represents rehabilitation therapists, stated that clinical efficacy, 
not financial gain, should be the motivating factor in patient care, 
and that the proposed rule would reinstate balanced competition, 
promote competitive pricing, factoring in of quality of care, and would 
help to reduce healthcare costs.
    MedPAC stated that it believes that the financial incentives of 
leasing arrangements involving physician lessors could lead to 
overutilization of imaging services. MedPAC recommended that we 
prohibit these arrangements by expanding the definition of physician 
ownership to include interest in an entity that derives a substantial 
proportion of its revenue from DHS providers. (See page 167 of MedPAC's 
March 2005 Report to the Congress, available at http://www.medpac/publications/congressional_Reports/Mar05_TOC.pdf ).
    Response: We are finalizing our proposal due, in part, to many of 
the concerns expressed by commenters regarding lease arrangements that 
provide for per-click payments to a physician lessor for services 
provided to patients referred to the entity lessee by the physician 
lessor. We believe that such lease arrangements create the incentive 
for overutilization, because the more referrals the physician lessor 
makes, the more revenue he or she earns through the lease arrangement. 
We are also concerned that such agreements provide the incentive for 
the physician lessor to refer patients to the lessee of the physician's 
space or equipment, rather than to entities that may employ a 
different, and possibly more efficacious or appropriate, treatment 
modality (and in some cases, the appropriate course of action may be no 
treatment at all). We are also concerned that such lease agreements may 
foster anti-competitive behavior because entities may enter into such 
agreements due to fears of losing the physician lessor's referrals.
    We decline to adopt the approach recommended by MedPAC, by which we 
would expand the definition of physician ownership to include an 
interest in an entity that derives a substantial proportion of its 
revenue from DHS providers. We believe that attempting to define what 
would constitute a ``substantial'' proportion of an entity's revenue, 
for purposes of whether to consider it a DHS entity, may be difficult, 
both in terms of implementation and enforcement. Moreover, MedPAC's 
recommended approach may be both underinclusive and overinclusive in 
some instances. That is, under the MedPAC approach, a physician-owned 
entity would be considered to be a DHS entity only if a substantial 
proportion of its revenue is derived from DHS entities. Such an 
approach could be underinclusive in situations in which, as a minor 
part of its business, a physician-owned entity leases equipment to a 
hospital but also, as the much greater portion of its business, owns 
and manages real estate. Also, MedPAC's approach could, in effect, 
allow overutilization and restrictions on competition provided that 
such effects were but a relatively small part of an entity's 
enterprise. On the other hand, we believe MedPAC's approach would be 
overinclusive with respect to a physician-owned entity that only leases 
equipment to a DHS entity (thereby meeting the ``derives a substantial 
proportion of its revenue'' test) but which does not lease the 
equipment on a per-click basis. (Additional discussion of MedPAC's 
approach is contained below, in section VII.G. of this preamble.)
2. Authority for Proposal
    Comment: Several commenters said that Congress specifically 
intended to permit per-click leases and, therefore, we should not 
prohibit them. One commenter said that if Congress has spoken on an 
issue in legislative history, an agency's contrary interpretation must 
be set aside. One commenter said that it recognizes the potential for 
abuse but believes that per-click leases may be clearly permissible 
under the statute and current regulations. Another commenter said that 
although we possess authority under section 1877(e)(1) of the Act to 
impose requirements for space and equipment leases to protect against 
program or patient abuse, it is questionable whether that authority 
allows us to override a clear Congressional mandate. Some commenters 
noted that in the Phase I final rule with comment period (66 FR 876), 
we cited the Conference Report to the 1993 amendments to the physician 
self-referral law as support for the proposition that Congress intended 
that per-click payment was an accepted compensation method under the 
statutory space and equipment lease exceptions. A few commenters stated 
that we said in the CY 2008 PFS proposed rule that the statute does not 
expressly forbid per-click payments to a lessor for patients referred 
to the lessee. Another commenter said that it recognizes our concerns, 
but that per-click payments of the type addressed in the proposed rule 
may be clearly permissible under the statute, and, therefore, we should 
conduct further analysis prior to moving forward with any specific 
changes.
    Response: Although we agree that Congress specifically intended to 
permit certain per-click leases, we disagree that Congress intended an 
unqualified exception for per-click leases under the physician self-
referral statute. We recognize that in the Phase I final rule, we 
stated that the legislative history of the space and equipment lease 
exceptions led us to the conclusion that Congress clearly intended to 
permit leases that included per-click payments even for services 
provided to patients referred by the physician lessor. However, upon 
further analysis of the legislative history, we no longer believe that 
the interpretation we adopted in the Phase I final rule is the only 
reasonable interpretation of the statute and legislative history.
    In order for a space or equipment lease to satisfy the exceptions 
under Sec. Sec.  1877(e)(1)(A)(iv) or (e)(1)(B)(iv), the rental charges 
over the term of the lease must not be ``determined in a manner that 
takes into account the volume or value of any referrals or other 
business generated between the parties.'' The Conference Report to the 
1993 amendments to the physician self-referral statute explains the 
intent underlying these provisions as follows: ``[t]he conferees intend 
that charges for space and equipment leases may be based on daily, 
monthly, or other time-

[[Page 48716]]

based rates, or rates based on units-of-service furnished, so long as 
the amount of the time-based or units-of-service rates does not 
fluctuate during the contract period based on the volume or value of 
referrals between the parties to the lease or arrangement.'' H. Conf. 
Rep. No. 103-213 at 814 (1993). Where the total amount of rent (that 
is, the rental charges) over the term of the lease is directly affected 
by the number of patients referred by one party to the other, those 
rental charges can arguably be said to ``take into account'' or 
``fluctuate during the contract period based on'' the volume or value 
of referrals between the parties. Thus, both the statutory language and 
the Conference Report can reasonably be interpreted to exclude from the 
space and lease exceptions leases that include per-click payments for 
services provided to patients referred from one party to the other.
    We rely on our authority under Sec. Sec.  1877(e)(1)(A)(vi) and 
(e)(1)(B)(vi) to impose upon space and equipment leases additional 
requirements for per click leases needed to protect against program or 
patient abuse. In reaching our decision to prohibit certain per click 
payments for space and equipment leases under Sec. Sec.  
1877(e)(1)(A)(vi) and (e)(1)(B)(vi), we begin with the clear, 
overarching purpose of the statute. As we noted in the 1998 proposed 
rule (63 FR 1661), a number of studies prior to enactment of section 
1877 consistently found that physicians who had financial relationships 
with entities to which they referred ordered more services than 
physicians without such financial relationships. Congress recognized 
that a physician's financial incentive to refer can affect utilization, 
patient choice, and competition. 135 Cong. Rec. H240 (Feb. 9, 1989) 
(statement of Rep. Stark). Congress chose a preventive approach to the 
self-referral problem: it essentially prohibited many abusive financial 
relationships between physicians and DHS entities and imposed strict 
liability on the DHS entity for claims submitted in violation of the 
statute (knowing violations of the statute by DHS entities and 
referring physicians are subject to additional sanctions).
    The statute--with its significant financial sanctions--is far-
reaching in its effect on the health care industry, touching virtually 
all major industry sectors. As stated in the Phase I preamble (66 FR 
860), while the statute must be implemented to achieve its intent, we 
should be cautious in interpreting its reach so broadly as to prohibit 
potentially beneficial financial arrangements, and thus we would focus 
our regulations on financial relationships that may result in 
overutilization. We also indicated that we would ``continue to monitor 
financial arrangements in the health care industry and will revisit 
particular regulatory decisions if we determine that there is abuse or 
overutilization (66 FR 860).
    The statute responds to the context of the times in which it was 
enacted (by addressing known risks of overutilization and, in 
particular, by creating exceptions for common business arrangements), 
and also incorporates sufficient flexibility to adapt to changing 
circumstances and developments in the health care industry. For 
example, in section 1877(b)(4), Congress authorized the Secretary to 
protect additional beneficial arrangements by promulgating new 
regulatory exceptions. In addition, Congress included the means to 
address evolving fraud risks by inserting into many of the exceptions--
and notably, for our purposes, in the lease exceptions--specific 
authority for the Secretary to add conditions as needed to protect 
against abuse. See Sec. Sec.  1877(b)(2), (e)(1)(A)(vi), (e)(1)(B)(vi), 
(e)(2)(D), (e)(3)(A)(vii), (e)(5)(C), (e)(6)(B), and (e)(7)(A)(vii). 
This design reflects a recognition that a fraud and abuse law with 
sweeping coverage over most of the health care industry could not 
achieve its purpose over the long term if it were frozen in time. In 
short, the statute evidences Congress' foresight in anticipating that 
the nature of fraud and abuse--and of beneficial industry 
arrangements--might change over time.
    The evidence on the issue of overutilization and anti-competitive 
behavior persuades us that the lease exceptions need to be modified at 
this time to address a burgeoning risk of abuse and increased costs to 
the Medicare program. In our earlier rulemaking, we had been hopeful 
that risk of overutilization would be adequately controlled by the 
other conditions in the lease exceptions and by our interpretation 
permitting only those per-service (and similar) payments that are 
immutable and fair market value. With the passage of time, we are 
persuaded otherwise. Addressing this growing risk now is fully 
consistent with the statutory design and purpose.
3. Hospitals as Risk-Averse and Access to Care
    Comment: Commenters stated that physician joint ventures have 
brought new, innovative therapeutic technology to communities because 
physicians were willing to bear the risk of failure. According to the 
commenters, hospitals are risk-averse and per-click arrangements with 
physicians are necessary to alleviate hospitals' concerns over low 
volume. Some commenters explained that to accommodate hospitals' fear 
of failure, urology groups have created joint ventures to purchase 
state-of-the-art equipment and lease it on a per-click basis to 
hospitals. The commenters asserted that by doing so, the urology joint 
ventures take the entrepreneurial risks and the hospitals are able to 
avoid the risk that the volume will be lower than projected. One 
urologist gave the example of how his physician group practice raised 
its own capital to purchase a DaVinci robot and lithotripsy machine 
when hospitals refused to purchase them. Many other urologists 
contended that sometimes the patient will need a procedure that is less 
often performed and it is difficult to factor this into the 
compensation arrangement.
    One commenter said that per-click arrangements create efficiencies 
because they permit expensive equipment to be utilized by multiple 
parties. Without these types of arrangements, certain services may be 
unavailable to patients, particularly in rural areas where practices 
are too small to independently purchase such equipment. Another 
commenter said that he co-owns a lithotripter that travels around the 
state, including to rural hospitals where procedure volume may be too 
low to allow for a fixed monthly rental. Another commenter said that 
per-click fees work well with both low and high volume facilities and 
allow for smaller, rural hospitals to offer services locally to 
patients with little or no risk and with adequate compensation. The 
commenter contended that a weekly, monthly or yearly rental fee would 
not work given the great disparity of case loads and effectiveness of 
treatment.
    One commenter said that our proposal would force hospitals to bear 
the risk of leasing equipment, and would effectively eliminate the 
provision of certain part-time or mobile health care services, 
including mobile lithotripsy services, thereby eliminating access to 
health care in smaller communities where there is not sufficient volume 
to support the full-time provision of such modalities. One commenter 
stated that the proposal will have a negative impact on the healthcare 
system. The commenter's group practice asserted that it was able to 
purchase a lithotripter at a cost in excess of $400,000 and there is 
not enough need at the various hospitals for a full time machine. 
Further, per-click arrangements are vital to the provision of 
lithotripsy services

[[Page 48717]]

as they are infrequent and often require additional treatments.
    One commenter said that the prohibition on per-click payments would 
limit the efficacy of care. Another commenter said that because 
lithotripsy equipment is portable, it makes very little sense to have 
an expensive piece of equipment sitting in a hospital seven days a week 
when it is used only two or three days a week. Another commenter stated 
that although some per-click arrangements may be susceptible to abuse, 
many agreements provide enormous community benefit and have safeguards 
built in to prevent abuse.
    Another commenter stated that it expects that physician-owned 
ventures and lobbies will seek to delay the implementation of the 
proposal by claiming disruption to clinical services, but that, based 
on its experience, there are numerous independent businesses ready to 
service and purchase the equipment and take over contracts without 
creating an interruption of services. A radiation oncologist stated 
that the argument in support of joint ventures with regard to ancillary 
services such as diagnostic testing, radiation therapy and pathology 
services generally centers on improved access to care. However, the 
commenter contended, there are no access issues with respect to 
radiation therapy services, as very few patients are not within a 
reasonable distance of a radiation oncology center. The commenter 
further explained that the decision with regard to the most appropriate 
therapy for patients with localized prostate cancer must remain 
independent of financial incentives.
    Response: We are not convinced that per-click arrangements of the 
type that we are disallowing through this final rule are necessary to 
bring innovative technology to communities. We believe that, to the 
extent that hospitals or other DHS entities do not wish to purchase new 
technology, there will be a sufficient number of non-physician entities 
willing to lease the technology to them on a per-use or other basis. 
(Also, where it is not economically feasible for all hospitals in a 
given area to purchase the equipment, one hospital could purchase it 
and contract with the other hospitals to enable them to provide the 
service under arrangements.) Likewise, we believe that current leasing 
arrangements with physician lessors can be restructured on a block time 
or other basis. We further observe that the adoption of the proposal 
does not mean that physicians are prohibited from leasing to entities 
equipment or space on a per-use basis with respect to services rendered 
to patients that were referred by others; rather, consistent with the 
statutory directive that rental fees not take into account the volume 
or value of referrals or other business generated between the parties, 
a physician lessor may not receive per-use rental fees for services 
that were rendered to patients that he or she referred for DHS. Thus, 
if a physician wishes to lease equipment or space to an entity and 
refer patients for DHS to that entity, it may be possible for the 
parties to structure the arrangement so that the physician would 
receive per-use fees for services rendered to patients referred by 
others, but would receive compensation calculated on some other basis 
for services that were rendered to patients who were referred by the 
physician. We caution that leases that are structured to provide for a 
per-click payment methodology only with respect to those services that 
were furnished to patients who were not referred to the lessee by the 
lessor can implicate the anti-kickback statute. Regardless of the lease 
structure, in order to comply with the exception for space leases or 
the exception for equipment leases, payments under the agreement must 
be at fair market value (see Sec.  411.357(a)(4) and Sec.  
411.357(b)(4)) and the agreement must be commercially reasonable even 
if no referrals were made between the parties (see Sec.  411.357(a)(6) 
and Sec.  411.357(b)(5)).
    With respect to the commenters' assertion that physicians are 
willing to take risks in bringing new technology to communities and 
hospitals are risk-averse, to the extent that this is true, it begs the 
question of whether physicians are less concerned about risk because 
they can control the referral stream and whether hospitals are more 
concerned about risk because they fear that referrals will go to their 
competitors if they either purchase the equipment or refuse to enter 
into per-click leasing arrangements with physician lessors. We believe 
that the proposal as finalized will create a more level playing field 
between hospitals and physicians and also among hospital competitors. 
We note that although many of the physician commenters touted the 
benefits of per-click arrangements for hospitals, only one hospital 
commented and echoed this view. To the contrary, a large hospital 
association supported our proposal, as did two hospitals.
4. Evidence of Overutilization: Therapeutic Versus Diagnostic 
Procedures
    Comment: Several commenters, including a radiologist, an 
association representing cardiologists, a pulmonologist, and a law firm 
objected to our proposals. They stated that our concerns are 
theoretical and no data has been presented that per-click arrangements 
involving radiology have resulted in overutilization of services, 
abusive practices, or otherwise threaten program integrity. One 
commenter said that there is insufficient support for the contention 
that per-click payments in space and equipment leases result in abusive 
practices. The commenter believes that the current requirements in the 
regulations provide sufficient safeguards; that is, the lease payments 
must be at fair market value and the equipment or space being leased 
must be reasonable and necessary for the legitimate purposes of the 
lease.
    We also received many comments from urologists and others who 
stated that therapeutic procedures do not lend themselves to 
overutilization. Several of these commenters distinguished lithotripsy 
and other urological procedures from radiological procedures on the 
basis that the former are therapeutic procedures and thus do not pose 
the risk of overutilization that diagnostic radiological procedures do. 
For example, one commenter said that lithotripsy services present 
virtually no risk of overutilization. According to the commenter, this 
is so for two reasons. First, lithotripsy is a therapeutic, not a 
diagnostic, procedure. The commenter quoted us as having stated ``the 
procedure itself apparently documents the medical necessity to 
prescribe it. As we understand ESWL, the kidney stone is located, 
identified, and the progress of the therapy is recorded as part of the 
visualization process'' (63 FR 1682). Second, the commenter asserted 
that lithotripsy cannot be overutilized because of the strict standards 
of care for the use of a lithotripter. The commenter stated that, after 
a stone has been diagnosed, there are clearly defined guidelines for 
physicians to follow in the treatment of ureteral and kidney stones, 
based on the size and location of a stone and the clinical status of 
the patient. In addition, the commenter stated that there are formal 
protocols for the appropriate management of stone disease, all 
accredited lithotripsy facilities have thorough utilization review and 
quality assurance programs in place to ensure physician treatments are 
appropriate, and many facilities incorporate physician and staff review 
of each case prior to treatment to confirm its appropriateness and 
likely clinical efficacy. An association of urologists said that 
procedures such as green light laser procedures and cryotherapy also

[[Page 48718]]

would be affected by the proposed change to the space and lease 
equipment exception, and that, as with lithotripsy, these are 
therapeutic services, and there is little or no risk that these types 
of services will be overutilized. In contrast, one hospital stated that 
per-click arrangements for lithotripsy services are among the most 
abusive, and another hospital stated that per-click arrangements 
between hospitals and physicians are grounds for potential abuse.
    Response: As noted above, per-click leases create the incentive for 
overutilization because the more referrals the physician lessor makes, 
the more revenue he or she earns through the lease arrangement. Even in 
the case of leases for therapeutic, rather than diagnostic equipment, 
there remains the potential for a physician lessor, in order to protect 
his or her investment or gain additional profits, to refer to the 
lessee of that equipment instead of referring to another entity that 
utilizes the same or different (and perhaps more efficacious) 
technology to treat the patient's condition, or to refer to the lessee 
instead of making no referral where the best course of action is no 
treatment. In this regard we note that we received comments from a 
radiation oncologist who stated that one must assume that the recent 
interest in radiation oncology facility ownership by urologists is 
largely, if not solely, due to the potential financial benefit in 
referring patients for Intensity Modulated Radiation Therapy (IMRT) 
because of the favorable reimbursement IMRT receives as a new 
technology. Similarly, we have also received informal public comments 
from a professional advocacy organization concerned about the potential 
for overuse of IMRT that is provided in urology practices using the in-
office ancillary services exception. This commenter notes that the 
incentives may be greater for these physicians to prescribe IMRT to the 
vast majority, if not all, of their patients and that patients should 
not be steered to a specific treatment based on physicians' financial 
incentives. We are also concerned about the potential for anti-
competitive behavior that exists for entities to enter into leasing 
arrangements with physician-owned companies instead of entering into 
leasing arrangements with non-physician-owned companies, or instead of 
purchasing their own space or equipment, because of a real or perceived 
fear of losing referrals from the physician lessor.
    We also do not believe that it is necessary for us to have actual 
evidence of abuse involving lithotripsy or other therapeutic procedures 
in order to regulate per-click leasing arrangements; rather, we believe 
that the potential for abuse inherent in such arrangements, regardless 
of the nature of the service, allows us to issue a prophylactic rule. 
Several studies have established a link between physician self-referral 
and increased utilization. As an example of overutilized therapeutic 
treatments, we note that a large hospital system settled a case against 
several of their physicians who were accused of performing unnecessary 
cardiac surgeries. Federal officials alleged that the physicians 
entered a scheme to cause patients to undergo unneeded, invasive, 
cardiac procedures such as artery bypass and heart valve replacement 
surgeries. The hospital system agreed to pay $54 million to settle the 
Federal case.
5. Per-Click Payments as Best Measure of Fair Market Value
    Comment: One commenter claimed that, under per-click leasing 
arrangements, the amount of payment per service is the same 
irrespective of how many patients are referred and, in practice, 
compensation to the physician owner does not take into consideration 
the actual number of patients referred, but is based on a per capita 
distribution of RVUs performed by each physician. The commenter further 
stated that per-click leases are often the best measure of fair market 
value as they ensure that payment is made only for actual services 
provided, and also allow fixed costs to be appropriately spread out 
over all clicks, thus providing a more accurate reflection of fair 
market value. Furthermore, per-click arrangements are common in the 
industry, not only for physician-owned entities, but for non-physician-
owned entities as well. The commenter also asserted that per-click 
arrangements also may reduce overutilization, as a lessee who must pay 
a fixed amount lease may be more likely to use the equipment to ensure 
that the lease costs are covered. A second commenter stated that per-
click arrangements result in more accurate and fairer allocations of 
risk and compensation than flat rate lease arrangements. The commenter 
contended that referrals for therapeutic procedures ebb and flow by the 
week, by the month and by the year. In addition, the commenter stated, 
hospitals are unwilling to commit to an amount that may be too high for 
the services received and physician ventures are unwilling to commit to 
an amount that would be too low for the services rendered. Another 
commenter stated that the per-click methodology is the fairest manner 
for hospitals to contract for devices and services for which their 
capital budget prevents them from acquiring. The commenter believed 
that if a hospital were to contract for 200 procedures, it would be 
paying twice the fair market value if only 100 procedures were in fact 
performed. The commenter argued that in such a situation, the 
hospital's overpayment for the services could be considered an 
inducement for urologists to refer their patients to the hospital, and 
that per-click arrangements prevent this sort of abuse.
    Response: The points raised by the first commenter fail to address 
our concerns. Even though the amount of payment per service may not 
vary, the incentive for overutilization remains because the greater 
number of referrals, the greater amount of revenue realized by the 
lessor. Whether a physician receives a per-click payment directly or 
whether the entity in which the referring physician has an ownership or 
investment interest receives the payment, and revenues, profits and 
bonuses are then distributed to the various physician owners/investors, 
it remains true that the lessor has an incentive for overutilization. 
The potential for anti-competitive behavior is even more of a concern 
with respect to physician entity lessors, as such entities typically 
have more leverage over referral streams than do individual physicians. 
With respect to the statements that per-click leases are often the best 
measure of fair market value, we believe other types of arrangements 
can satisfy the fair market value requirement of the lease exceptions 
without presenting the same risk of overutilization or other abuse. 
(Again, we note that whereas the commenters emphasize the benefits of 
per-click leasing arrangements to hospitals, those entities and their 
associations generally have not echoed this view.) Moreover, in 
practice, per-click leases may be, in some cases, antithetical to fair 
market value compensation. That is because an entity leasing space or 
equipment on a per-use basis may pay willingly a significantly higher 
amount in per-click rental fees to a physician-owned entity, rather 
than leasing comparable space or equipment from a non-physician entity, 
because the lessee may still be realizing a profit, or breaking even, 
on services that are the subject of the lease and may not wish to risk 
losing referrals for those services and referrals for other services if 
it contracts with a non-physician lessor. Likewise, the physician 
entity lessor may be unwilling to enter into an arrangement under which 
the rental charges are reasonably based on the cost

[[Page 48719]]

of the equipment and its maintenance and its useful life, because it 
may earn much more through per-click fees where it has the ability to 
steer referrals to the hospital. The fact that per-click arrangements 
are common for physician-owned entities does not alleviate our concern 
of overutilization, but rather intensifies it. Nor does the fact that 
such agreements are commonly used mean that they are at fair market 
value. Finally, we are not persuaded by the statement that per-click 
arrangements may reduce overutilization, which is based on the theory 
that a lessee who must pay a fixed amount lease may be more likely to 
use the equipment to ensure that the lease costs are covered, because 
in many, if not most, cases the lessee is not in a position to refer 
patients for the service.
    We are similarly unpersuaded by the second commenter. We disagree 
with the contention that fair market value necessarily is best 
reflected in the number of procedures performed where a lessee has 
exclusive possession of equipment or space that may be used very 
sparingly, the per-click payments by the lessee may be less than fair 
market value taking into consideration the cost of the equipment or 
space involved and the amount of rent that would be charged under a 
block time or other arrangement. Conversely, where a lessee has 
exclusive use of equipment or space that is used very frequently, the 
per-click payments made by the lessee may be above fair market value, 
taking into consideration the cost of the equipment or space involved 
and the amount of rent that would be charged under a block time or 
other arrangement.
    We note that we are not prohibiting per-click arrangements 
involving non-physician-owned lessors to the extent that such lessors 
are not referring patients for DHS, nor are we prohibiting per-click 
payments to physician lessors for services rendered to patients who 
were not referred to the lessee by the physician lessors, because such 
arrangements do not carry with them risk under the physician self-
referral statute. Of course, such arrangements must still satisfy all 
the requirements of the lease exceptions, including the requirements 
that they be at fair market value and be commercially reasonable.
6. Lithotripsy as not DHS
    Comment: Some commenters wanted to know whether we consider 
lithotripsy to be a DHS, and cited the district court decision of Am. 
Lithotripsy Soc. v. Thompson, 215 F. Supp. 2d 23 (D.D.C. 2002), in 
which the court held that lithotripsy is not a DHS. A commenter noted 
that we did not address the above-referenced court decision in prior 
rulemakings. It stated that it assumes that the decision is binding 
only for lithotripsy services provided to Medicare beneficiaries in the 
District of Columbia, and that outside of that jurisdiction, 
lithotripsy services remain a DHS, because they are billed as inpatient 
or outpatient hospital services. Another commenter said that the rule 
should specify that lithotripsy is not a DHS. Other commenters wanted 
to know how the proposal would apply to per-use arrangements for 
lithotripsy services, given that lithotripsy services have been held 
not to be DHS. One commenter said that although we are concerned with 
per-click arrangements for DHS, the proposal would apply the ban more 
broadly to all physician-owned services. The commenter provided the 
example of a patient undergoing lithotripsy who may need a stent placed 
or removed or a ureteroscopy to push a stone into a more favorable 
position.
    Response: We presently do not consider lithotripsy to be a DHS. An 
arrangement under which a physician would refer patients to an entity 
for lithotripsy services (or other services not classified as DHS) and 
receive a per-use rental fee for such patients would not, by itself, 
constitute a violation of the physician self-referral law and 
regulations. However, a lessor/lessee relationship between a physician 
and an entity creates a compensation arrangement regardless of whether 
the lease involves the provision of DHS or other services (or no 
services at all). Therefore, a lease arrangement for the lease of a 
lithotripter in exchange for per-click fees that are prohibited by this 
final rule that is entered into on or after October 1, 2009, will 
constitute a non-excepted compensation arrangement, and, as a result, 
the physician would not be able to refer patients to the entity for DHS 
unless those referrals meet some other exception under the physician 
self-referral law or regulations.
7. Time-Based Rental Arrangements
    Comment: A hospital association stated that we should consider 
prohibiting time-based rental arrangements only when they permit 
payment for the use of leased space or equipment ``on demand.'' The 
commenter stated that if the aggregate amount of time for which space 
or equipment is available is not set in advance, but instead, the space 
or equipment is available on demand, the physician can pay to lease the 
space or equipment only when the physician needs it to provide specific 
patient care services. On the other hand, the commenter contended that, 
if the total amount of time leased by the physician is set in advance, 
the arrangement should be permitted because it would not fluctuate 
based on referrals and the physician would have financial 
responsibility for the rental payments without regard to the volume of 
services the physician provides using that space or equipment. An 
association of radiologists said that we should ban all time-based 
leasing arrangements. One commenter recommended that we not distinguish 
between per-click and time-based leasing arrangements. The commenter 
stated that although payments to a physician lessor would not increase 
directly through the referral of additional patients, as it would under 
a per-click agreement, the physician nevertheless has a financial 
incentive to refer patients to the provider in exchange for the fixed 
payment. Another commenter asked us to clarify that time-based rental 
payments, such as ``block time'' leases (for example, $1,000 per month) 
would be acceptable. Another commenter, which objected to our proposal, 
stated that if we were to require a ``flat fee'' lease, it would be 
almost impossible to comply with the requirement that the rental 
charges not take into account the volume or value of referrals.
    Response: We agree that ``on demand'' rental agreements are 
problematic. We believe that they are essentially a per-use or per-
click type of arrangement, and consider them to be covered by our 
revisions in this final rule. We decline to accept, at this time, the 
commenter's suggestion that we prohibit all time-based leasing 
arrangements. We also disagree with the comment that parties to a 
``flat fee'' leasing arrangement, which we interpret as an agreement in 
which the rental charges over a period of time are fixed and are thus 
unaffected by the usage of the equipment (or, in other words, a time-
based lease), will find it very difficult to avoid having the rental 
charges reflect the volume or value of any referrals or other business 
generated between the parties. We believe that time-based rental 
payments, such as block time leases, depending on how they are 
structured, may meet the requirements of the space and equipment lease 
exceptions, including the requirements that the agreement be at fair 
market value and be commercially reasonable, even if no referrals were 
made between the lessee and the lessor, and that they not take into 
account the volume or value of any referrals or other business 
generated

[[Page 48720]]

between the parties. We believe that the same concerns we identified 
above with respect to certain per-click lease arrangements can exist 
with certain time-based leasing arrangements, particularly those in 
which the lessee is leasing the space or equipment in small blocks of 
time (for example, once a week for 4 hours), or for a very extended 
time (which may indicate the lessee is leasing space or equipment that 
it does not need or cannot use in order to compensate the lessor for 
referrals). We will continue to study the ramifications of ``block 
time'' leasing arrangements and may propose rulemaking in the future. 
Parties entering into block leases should structure them carefully, 
taking into account the anti-kickback statute.
8. Physician Entities as Lessors
    Comment: One commenter stated that because leasing arrangements are 
usually between a DHS entity and a physician group practice or 
investment entity owned by a group of physicians rather than individual 
physicians, in order for the proposed revision to have any real effect 
on overutilization through physician self-referrals, we would need to 
eliminate or modify the indirect compensation exception or carry 
through on our proposal to develop some type of ``stand in the shoes'' 
provision for physician investors. Two commenters stated that, although 
they were in support of the proposal, we need to go further and 
prohibit unit-of-service based payments that reflect services furnished 
to patients referred to the lessee by a physician lessor or any 
physician owner or investor in the lessor. Another commenter suggested 
that we clarify that the proposed prohibition on physician lessors 
would apply to a referring physician and any entity with which the 
physician has a financial relationship.
    Response: We agree that the prohibition on per-click payments for 
space or equipment, to the extent that such payments reflect services 
provided to patients referred by the lessor to the lessee, should apply 
regardless of whether the physician himself or herself is the lessor or 
whether the lessor is an entity in which the referring physician has an 
ownership or investment interest. We agree with the commenter that our 
concerns with per-click payments for office space or equipment are not 
fully addressed if parties could structure an equipment or office space 
lease arrangement as an indirect compensation arrangement that would 
qualify for the exception in Sec.  411.357(p). Likewise, we do not 
believe that parties should be able to circumvent the prohibition by 
using the fair market value exception at Sec.  411.357(l) (which is 
applicable to equipment leases). Accordingly, we are making 
corresponding changes to the exception in Sec.  411.357(p) to prohibit 
the use of per-click payments in the determination of rental charges 
for office space and equipment arrangements, and to the exception in 
Sec.  411.357(l) to prohibit the use of per-click payments in the 
determination of rental charges for equipment. We decline, at this 
time, to adopt the commenter's suggestion that we clarify that the 
prohibition on per-click payments to physician lessors would apply to a 
referring physician and any entity with which the physician has a 
financial relationship. We understand the commenter's suggestion as 
encompassing the situation in which a physician, employed by Entity A, 
refers a patient to Hospital B for a procedure that uses equipment 
owned and leased by Entity A to Hospital B (with the physician having 
no ownership interest in Entity A). We understand that the potential 
for abuse exists in this situation for the physician's employer to 
direct or influence the physician to refer patients to a lessee that 
pays per-click rental charges to the employer, but are concerned that 
adopting the commenter's suggestion would not be a logical outgrowth of 
the proposed rule. Instead, we may propose rulemaking on this issue in 
the future, and we caution that if we make and finalize such a proposal 
we may not provide a lengthy delayed effective date.
9. Physicians and Physician Entities as Lessees
    Comment: A hospital association stated that per unit-of-service 
payments should be prohibited when the physician is the lessee and the 
DHS entity is the lessor. A large association of radiologists also 
supported prohibiting per-click payments made by physician lessees to 
entity lessors. It said that most leasing arrangements are economically 
driven, do not contribute to patient convenience or any other 
attributes that promote better patient care and generally drive up 
utilization. It was particularly concerned with the ``scheme'' by which 
a referring physician leases space on a unit-of-service or per diem 
basis from an MRI facility and then submits a claim to Medicare for the 
global fee. A radiology group practice said that we should prohibit a 
physician from leasing equipment from a hospital for use on a patient 
that the physician has referred, because one should anticipate that 
some physicians and attorneys might scheme with a hospital to set up 
``cross referral'' arrangements. The commenter stated that the only 
sure mechanism to prevent abuse is to prohibit entirely unit-of-service 
lease arrangements for physicians who are either lessors or lessees 
directly, or indirectly as owners of a lessee or lessor entity.
    One commenter, a radiology practice, said that, in its experience, 
the situation in which a DHS entity leases space and/or equipment to a 
referring physician to perform and bill for the technical component 
services the physician orders for his or her patients, is also 
prevalent and can lead to overutilization if the rental is based on a 
per-click payment to the DHS entity, because the physician pockets the 
difference between the lease fee and the reimbursement from Medicare. 
Therefore, the commenter urged us to prohibit per-click lease payments 
by physician lessees. A radiology benefits management company said we 
should develop a prohibition on per-click or time-based payments by 
physicians. An association that represents employers said unit-of-
service lease arrangements should be prohibited when the referring 
physician is either the lessor or the lessee.
    Response: In the proposed rule, we stressed the situation in which 
a physician is the lessor and the DHS entity is the lessee; however, we 
solicited comments on the issue of whether we should prohibit time-
based or unit-of-service based payments to an entity lessor by a 
physician lessee, to the extent that such payments reflect services 
rendered to patients sent to the physician lessee by the entity lessor 
(72 FR 38183). After considering the comments and after studying the 
matter further, we have decided to adopt a symmetrical approach. That 
is, because physicians themselves may submit claims for DHS, there is 
the potential for overutilization and for anti-competitive behavior 
where patients are referred to physician (or physician organization) 
lessees by an entity lessor that receives a per-click payment each time 
the physician uses space or equipment in treating the referred patient. 
We note that the language of the proposed rule (``Per unit-of-service 
rental charges are not allowed to the extent that such charges reflect 
services provided to patients referred by the lessor to the lessee'') 
was neutral insofar as it did not specify ``physician'' lessors, and, 
thus, we believe it is not necessary to substantively revise this 
language to accommodate the policy that the prohibition on certain per-
click payments applies to both physician lessors and other entity 
lessors. We are

[[Page 48721]]

not, at this time, extending the prohibition to time-based leasing 
arrangements (other than ``on-demand'' time-based arrangements, as 
discussed above in this section of the preamble).
10. Effective Date
    Comment: One commenter that supported the proposal stated that if 
we finalize the proposal, we should provide an appropriate grace period 
before the change would take effect, in order to allow parties time to 
restructure or unwind existing lease arrangements. The commenter was 
concerned that if an appropriate transition period is not provided, 
patient access to important services would be jeopardized and hospitals 
could be subjected unnecessarily to potential liability for services. A 
second commenter that supported the proposal said that there should be 
a one-year period in which parties can unwind current arrangements. A 
third commenter urged us not to adopt the proposal because frequent 
changes in regulatory standards are extremely disruptive to the 
continued provision of services. A fourth commenter stated that, in the 
event we impose a ``blanket prohibition'' on per-click payment 
agreements, existing arrangements should be grandfathered.
    Response: Our revisions to Sec.  411.357(a) and Sec.  411.357(b), 
concerning per-click fees, are effective for lease payments made on or 
after October 1, 2009. We believe this delayed effective date will 
provide parties sufficient time to restructure existing compensation 
arrangements or to unwind lease arrangements. We are not providing for 
grandfathering of existing per-click arrangements that are otherwise 
prohibited by this final rule given the concerns we have expressed 
above. We reiterate that the final rule does not impose a blanket 
prohibition on per-click payments, but rather prohibits per-click 
payments to the extent that such payments reflect services provided by 
the lessee to patients referred to the lessee by the lessor.

G. Services Provided ``Under Arrangements'' (Services Performed by an 
Entity Other Than the Entity That Submits the Claim)

    In the CY 2008 PFS proposed rule, we proposed to revise the 
definition of ``entity'' at Sec.  411.351 so that a person or entity is 
considered to be furnishing DHS if it is the person or entity that has 
performed the DHS or presented a claim or caused a claim to be 
presented for Medicare benefits for the DHS (72 FR 38186-38187). In 
this final rule, we are finalizing that proposal with modification. We 
also proposed in the CY 2008 PFS proposed rule that an ``entity'' would 
not include a physician organization that bills for the professional 
component (PC) of a diagnostic test where the anti-markup provisions of 
Sec.  414.50 are applicable to the PC and the physician organization 
bills in accordance with the anti-markup provisions. We finalized that 
proposal in the CY 2008 PFS final rule with comment period (72 FR 
66400).
    The physician self-referral rules prohibit a physician from making 
referrals for DHS to an entity with which the physician (or an 
immediate family member) has a financial relationship, and prohibits 
the entity from billing Medicare for the DHS, unless an exception 
applies. Under the Phase I revision to the definition of ``entity'' at 
Sec.  411.351, an ``entity'' includes only the person or entity that 
bills Medicare for the DHS, and not the person or entity that performs 
the DHS where the person or entity performing the DHS is not the person 
or entity billing for it.
    In the CY 2008 PFS proposed rule, we noted our continuing concern 
about the risk of overutilization with respect to services provided 
``under arrangements'' to hospitals and other providers because the 
risk of overutilization that we identified in the 1998 proposed rule 
has continued, particularly with respect to hospital outpatient 
services for which Medicare pays on a per-service basis (72 FR 38186). 
We proposed to revise our definition of entity at Sec.  411.351 to 
include both the person or entity that performs the DHS, as well as the 
person or entity that submits claims or causes claims to be submitted 
to Medicare for the DHS.
    We received many comments both in favor of, and in opposition to, 
the proposal. We read carefully and considered each comment. Space 
limitations prevent us from summarizing each comment; however we 
discuss below all of the significant points raised by commenters in 
favor of, or in opposition to, our proposal. Commenters in favor of the 
proposal stated that they believed that existing contractual 
arrangements between physician-owned service providers and hospitals 
are inconsistent with the purpose of the physician self-referral law 
and are susceptible to abuse. Notably, two large national hospital 
associations expressed support for the proposal, whereas only a few 
hospitals were opposed to it. Many of the commenters in support of the 
proposal pointed to the potential for overutilization and anti-
competitive behavior with respect to all types of procedures, including 
therapeutic services such as radiation oncology services used in the 
treatment of prostate cancer. The commenters opposed to the proposal 
largely were physician organizations and physicians, many of whom are 
urologists and cardiologists. These commenters argued that hospitals 
are unable or unwilling to invest in technology to provide services 
directly, and that their joint ventures provide care in an efficient 
manner, meet a community need, and offer good quality. They asserted 
that patient access would be negatively impacted if we adopted our 
proposal. Urologists engaged in joint ventures with hospitals for the 
treatment of prostate conditions, including prostate cancer, stressed 
their view that, unlike the case with imaging, there is no risk of 
overutilization with therapeutic services.
    Many of the commenters in favor of or in opposition to the proposal 
also commented on the proposal to disallow ``per-click'' lease payments 
in certain circumstances (see section VIII.F. of this final rule for a 
discussion of that proposal) and, in many cases, the comments made 
specifically with respect to one proposal were applicable to the other. 
In some cases, it was not clear on which proposal the commenters were 
commenting. Because we believe that the issues are intertwined, in 
finalizing the ``under arrangements'' proposal, we considered the 
comments to both the ``under arrangements'' and ``per-click'' 
proposals.
    In this final rule, we are adopting our proposal with modification 
and amending the definition of ``entity'' at Sec.  411.351 to clarify 
that a person or entity is considered to be ``furnishing'' DHS if it is 
the person or entity that has performed the DHS, (notwithstanding that 
another person or entity actually billed the services as DHS) or 
presented a claim for Medicare benefits for the DHS. Note that where 
one entity performs a service that is billed by another entity, both 
entities are DHS entities with respect to that service. We are delaying 
the effective date of the amendment to the definition of ``entity'' at 
Sec.  411.351 until October 1, 2009 in order to afford parties an 
adequate time to restructure arrangements. A discussion of specific 
comments is presented below.
1. Support for Proposal
    Comment: Many commenters supported the proposal. An association of 
radiologists stated that it shares our concerns that referring 
physicians have profited from joint venturing with

[[Page 48722]]

hospitals for imaging services provided ``under arrangements'' with 
hospitals. According to these commenters, these arrangements are 
essentially thinly-veiled substitutes for the imaging centers that were 
the original target of the physician self-referral law. Moreover, many 
of these arrangements do not appear to improve clinical quality or 
value, yet they may increase costs to the Medicare program and its 
beneficiaries. An organization that represents imaging providers and 
professionals and imaging equipment and supply vendors stated its 
belief that the proposed change to the definition of ``entity'' would 
preclude referrals that are based upon financial incentives and result 
in overutilization. An association that represents radiology practice 
managers and other radiology business professionals supported the 
proposal, asserting that the change is necessary because the existing 
definition of ``entity'' runs counter to the plain intent of the 
physician self-referral law. A radiology group practice contended that 
physician-hospital arrangements are an attempt to extort more money out 
of an already underfunded system. According to that commenter, it is 
particularly egregious where the hospital has the ability to provide 
the service. A different radiology group practice described its 
firsthand experience with what it believed to be the type of abusive 
arrangement described in the proposed rule. The commenter asserted that 
if a hospital or a freestanding imaging center has a solid business 
model and provides good services, only in rare circumstances would it 
need the capital of referring physicians to finance its operations. 
According to the commenter, we should consider such arrangements to be 
thinly-disguised forms of kickbacks and ban them entirely. One 
commenter asserted that the proposal, if finalized, will contribute 
importantly to closing the perceived ``under arrangements'' loophole 
that has been used inappropriately to circumvent the physician self-
referral prohibition.
    A nonprofit organization that represents large employers stated 
that it strongly supports the proposal, asserting that services 
performed in a non-hospital setting on registered hospital outpatients, 
under a contract between the hospital and the separate provider, 
present conflicts of interest and provide incentives for 
overutilization when the referring physicians have an ownership 
interest in the separate provider.
    One commenter, a urologist, stated that although some joint 
ventures certainly improve access to care and new technology, joint 
ventures have been abused and that intensity modulated radiation 
therapy (IMRT) for prostate cancer treatment is an example of how 
``under arrangements'' contracts are being abused. According to the 
commenter, because the profit margin is $15,000 per patient, numerous 
joint ventures have been established purely to capture this passive 
income. Another commenter, a radiation oncologist, wrote that he was 
compelled to comment on our proposal because of his recent experiences 
in dealing with referring physicians and because of the ``call for 
action'' that has been forwarded by a urological association to its 
members, urging them to comment on how proposed changes will impact 
negatively their practices. The commenter stated that the proposed 
changes will not have a negative or serious effect on the way urology 
is practiced. The commenter's view of the argument in support of joint 
ventures with regard to ancillary services such as diagnostic testing, 
radiation therapy and pathology services is that it generally centers 
on improved access to care. The commenter attempted to discredit this 
argument by asserting, with respect to radiation therapy services, 
there are no access issues, as very few patients are not within a 
reasonable distance of a radiation oncology center. The commenter noted 
further that urology practices' interest in external beam services is a 
relatively new phenomenon, although the use of external beam radiation 
therapy in the treatment of patients with prostate cancer is not. The 
commenter also stated that IMRT, a sophisticated form of external beam 
radiation, has become the new standard of care with respect to external 
beam therapy for patients with localized prostate cancer. According to 
the commenter, as a new technology, IMRT has a favorable reimbursement 
profile. In addition, the commenter stated that because the 
reimbursement is the only variable that has changed, the recent 
interest in radiation oncology facility ownership by urologists is 
largely, if not solely, due to the potential financial benefit in 
referring patients for IMRT at the urologist's own facility. The 
commenter emphasized that the decision regarding the most appropriate 
therapy for patients with localized prostate cancer must remain 
independent of financial incentives.
    One commenter, an association of radiation oncologists, endorsed 
the position of the Agency for Health Care Research and Quality (AHRQ), 
that no single therapy can be considered the preferred treatment for 
localized prostate cancer due to limitations in the evidence, as well 
as the likely tradeoffs an individual patient must make between 
estimated treatment effectiveness, necessity and adverse effects. The 
commenter asserted that prostatectomy, IMRT, and brachytherapy are 
equivalent treatments for local prostate cancer; that the right 
treatment for any particular prostate cancer patient depends on the 
patient's interests, age, concerns, disease status, and physiology; and 
that sometimes the best treatment might be no treatment at all. The 
commenter expressed its concern that, whereas some may argue that 
therapeutic services cannot be overused, because of inappropriate 
financial incentives, prostate cancer patient choice is being eroded 
and overutilization may be occurring. The commenter recounted reports 
from its members of instances where patients who might otherwise 
appropriately be monitored for disease progression (that is, watchful 
waiting) are being treated in urology practices with IMRT (which is 
permissible under the in-office ancillary services exception). Thus, 
the commenter believed, patients who might choose to monitor disease 
progression are undergoing significant procedures and treatment because 
the diagnosing physician is influenced by financial incentives.
    One commenter, a radiation oncologist, stated that since a large 
group practice in his county, consisting of about 38 urologists and 2 
radiation oncologists purchased a freestanding radiation oncology 
practice, with two linear accelerators, IMRT has been used in lieu of 
other types of treatment (or in lieu of no treatment, which is 
sometimes appropriate). In particular, the commenter contended that 
brachytherapy, an equally efficacious but significantly less expensive 
alternative to IMRT, is performed at a fraction of its past volume in 
his county. He also reported that community-based surgery is occurring 
significantly less than in the past. According to the commenter, 
because every cancer surgeon in his county and many in another county 
have been approached to join the group practice, hospitals have been 
forced to propose various ``under arrangements'' contracts or joint 
ventures to stem the tide of business lost to the group practice. The 
commenter concluded that, in his county, patients with prostate cancer 
who are treated by physicians in the group practice are being steered 
primarily in one direction to a single treatment, IMRT, at a single 
facility. In his opinion, the quality of prostate cancer treatment in 
his county

[[Page 48723]]

has been impacted negatively by inappropriate financial incentives.
    A commenter representing a medical equipment company asserted that 
hospitals use physician-owned vendors instead of other vendors simply 
because of the physicians' ownership even though other companies 
competing for the business had better service, equipment and pricing. 
The commenter contended that competition is stifled where a physician's 
investment is taken into account when deciding a service issue. The 
commenter also claimed knowledge of a situation in which patients are 
not able to get the best technology and service available because a 
physician will use only equipment from the company in which he or she 
is invested.
    One commenter offered its strong support for our proposal, as it 
would correct abuses that occur due to the increasingly prevalent use 
of providing services ``under arrangements.'' The commenter asserted 
that, historically, services were furnished ``under arrangements'' as a 
means to provide access to patients for necessary services without 
having multiple parties acquire and operate the same specialized 
services and technology. In addition, the commenter stated that the 
increasing frequency of ``under arrangements'' contracts, coupled with 
greater Medicare payment for hospital services (as opposed to payment 
for the same service under the Medicare physician fee schedule), 
provides what may be an irresistible financial incentive for physicians 
to refer patients to the entity contracted to provide the services 
``under arrangements'' to the hospital or other provider. The 
commenter, a large health benefits company, also stated that, because 
hospitals use the same billing system for both Medicare and private 
commercial payers, hospitals are frequently reimbursed where services 
were performed by entities under contract with the hospital to provide 
services, such as ASCs. Because the commenter's contractual 
reimbursement rate is higher for hospitals than for ASCs, in an ``under 
arrangements'' situation, the commenter sometimes inadvertently 
provides excessive reimbursement for the actual cost of care rendered, 
thereby inflating the cost of medical care.
    A commenter asserted that the number of physician-owned entities 
providing services ``under arrangements,'' including cardiac 
catheterization laboratories, have proliferated in recent years, 
presumably because of the physician self-referral rules. The commenter 
supported our proposal and opined that there appears to be no 
legitimate reason for these arranged services other than to allow 
referring physicians an opportunity to share revenue from referrals 
they make for separately payable services.
    One commenter, a national hospital association, offered support for 
our proposal, recognizing the legitimate concerns that may exist when a 
physician-owned joint venture provides the same services to a hospital 
``under arrangements'' that the hospital previously provided directly, 
without expanding the type of services provided, upgrading the facility 
or the equipment, or otherwise contributing to the improvement of 
healthcare quality or accessibility in the community. According to the 
commenter, the ``under arrangements'' concept, which originally was 
solely a payment concept, has been used in recent years as a way to 
work around the physician self-referral rules, as growing numbers of 
physicians and hospitals have exploited what amounts to a loophole in 
the regulations. The commenter asserted that we are ``clamping down'' 
appropriately on these abusive arrangements, which, when unraveled, are 
quite often merely a sophisticated way of circumventing the basic 
purpose of the physician self-referral law. Another national hospital 
association and two state hospital associations noted their support of 
our effort to ensure that services provided ``under arrangements'' meet 
a community need, that individual patients receive care in the setting 
most medically appropriate to their needs, and that only those 
arrangements that foster needed improvements in the delivery system, 
sustain community access to essential services, promote clinical 
integration or enhance efficiencies should be permitted. However, these 
commenters were concerned that our proposal unintentionally may 
eliminate hospital-physician joint ventures designed to achieve those 
goals.
    MedPAC commented on the CY 2008 PFS proposal, asserting that the 
``under arrangements'' model was used originally by hospitals to 
provide certain services to their patients that were not available at 
the hospital because they were required infrequently. It shared our 
concern regarding the growth of services provided ``under 
arrangements'' to hospitals by physician-owned entities, and stated 
that our proposal, if adopted, would be an effective way to address 
this issue.
    Response: We are adopting our proposal with modification. Our 
conclusion that the Congress intended an entity that performs services 
that are billed as DHS to be a DHS entity, notwithstanding that the 
entity contracts with another to bill Medicare, is supported by both 
the language of the physician self-referral statute and its underlying 
purpose. Section 1877(a) of the Act contains two basic prohibitions 
with respect to physician self-referral. First, under section 
1877(a)(1)(A) of the Act, if a physician (or an immediate family 
member) has a financial relationship with an ``entity,'' it may not 
make a referral to the entity for the ``furnishing'' of DHS, unless the 
financial relationship meets an exception. Second, under section 
1877(a)(1)(B) of the Act, an entity that receives a prohibited referral 
may not present or cause to be presented a claim to Medicare, and also 
may not bill any individual, third party payor, or other entity.
    Section 1877(a)(1)(A) of the Act does not define ``entity'' as any 
particular type of organization but rather defines it in a functional 
sense, that is, an organization that furnishes DHS. Our current 
definition of ``entity'' at Sec.  411.351 similarly provides that an 
``entity'' is any type of organization, regardless of form of ownership 
(for example, partnership, LLC or corporation) that ``furnishes'' DHS. 
We believe that furnishing DHS includes performing services that are 
billed as DHS to the Medicare program, irrespective of whether the 
entity performing the services submits the claim or whether some other 
entity (such as a hospital providing the services ``under 
arrangements'') submits the claim. In this regard, we note that section 
1877(a)(1)(B) of the Act provides that an entity that furnishes DHS may 
not present, or cause to be presented, a Medicare claim. This language 
demonstrates that the Congress intended that furnishing DHS encompasses 
not only the entity that bills for the DHS, but also the entity that 
performs it, if those are not the same entities; otherwise there would 
be no need to include the language ``cause to be presented.''
    Our conclusion is also consistent with the purpose of the statute. 
A basic premise of the physician self-referral statute is that, subject 
to some specific exceptions in section 1877(d) of the Act, a physician 
may not refer a patient to an entity in which he or she (or an 
immediate family member) has an ownership or investment interest. The 
general prohibition on self-referral to an entity in which the 
physician has an ownership or investment interest is not predicated 
upon a showing by us of actual or potential abuse; rather, the Congress 
has made a policy decision to

[[Page 48724]]

disallow self-referrals involving an ownership or investment interest, 
except in a few specified instances. We fail to see why the Congress 
would have intended to prohibit a physician from referring patients to 
a freestanding laboratory or imaging facility that he or she owns, but 
would have wanted to permit the physician to make such a referral 
simply because the laboratory or imaging service is sold to another 
entity that does the billing for it. (Likewise, we fail to see why the 
Congress would have intended that the general prohibition on physician 
referrals to entities in which they have an ownership or investment 
interest could be circumvented merely by arranging for the service 
provider to reassign to another, for a fee, the right to receive 
Medicare payment.)
    We also note that, in enacting the exception in section 1877(d)(3) 
of the Act for ownership or investment in a hospital, the Congress 
admonished that the exception is unavailable where the ownership or 
investment interest is in ``merely a subdivision of the hospital.'' If 
a physician may not purchase an interest in the radiology department of 
a hospital, refer patients to the hospital for radiology procedures, 
and claim the benefit of the hospital exception in section 1877(d)(3) 
of the Act, he or she should not be allowed to enter into a joint 
venture with the hospital through which the hospital effectively moves 
its radiology department (or part of its radiology department) outside 
of the hospital and into a facility in which the physician has an 
ownership interest and to which the physician refers patients for DHS 
that are billed ``under arrangements.'' Finally, we believe that the 
fact that Congress enacted an ownership exception for in-office 
ancillary services (which does not include inpatient or outpatient 
hospital services, and which has specific requirements as to where the 
services can be performed) is further indication that Congress did not 
intend to protect generally a physician's ownership in an entity that 
performs services that are then billed to Medicare as DHS by a hospital 
``under arrangements.'' See 66 FR at 894.
2. MedPAC Approach
    In the CY 2008 PFS proposed rule, we noted that MedPAC recommended 
in its March 2005 Report to Congress that a physician should be 
prohibited from referring patients for DHS to an entity if that entity 
derives a ``substantial portion'' of its revenue from a provider of DHS 
(hereinafter referred to as the ``MedPAC approach''). There, we stated 
that we believed that our proposed approach--that an entity is 
considered to be a DHS entity if it performs the DHS or bills for it--
was more straightforward than MedPAC's approach (which we believe is 
more difficult to apply and to enforce), but we solicited comment as to 
whether we should adopt MedPAC's approach, either in lieu of, or in 
addition to, our proposed approach (72 FR 38187).
    Comment: Two commenters believed that the MedPAC approach was 
preferable to our proposal. The first commenter asserted that the 
MedPAC approach would permit legitimate businesses to provide services 
to a referral source, and referrals would be prohibited only if that 
entity derives a substantial portion of its revenue from the DHS 
provider, whereas our proposal would prohibit any level of business 
activity with a DHS provider, without any investigation into the 
circumstances that cause some ``under arrangements'' joint ventures to 
be abusive. The second commenter argued that our proposal should be 
limited only to diagnostic services and should incorporate MedPAC's 
proposed approach.
    Most commenters disagreed with the MedPAC approach. For example, 
one commenter was concerned that the MedPAC approach virtually would 
eliminate ``under arrangements'' service contracts between hospitals 
and physicians or physician groups, potentially disrupting access and 
prompting duplication of investment in facilities and equipment. One 
commenter, although opposed to our proposal, contended that we would 
have difficulty defining ``substantial proportion of its revenue'' 
under the MedPAC approach. Another commenter that disagreed with our 
proposal said that MedPAC's ``substantial proportion of revenue'' test 
is overbroad and would have unintended and far-reaching consequences. 
According to the commenter, the MedPAC approach is not limited to 
entities performing, furnishing or billing for DHS, but instead 
effectively prohibits physician ownership of entities providing any 
service to a provider of DHS, if the service results in revenue 
significant enough to trigger the test's application.
    A commenter suggested that the most significant difference between 
our proposal and the MedPAC approach appears to be that our proposal 
would affect only companies that perform DHS in their own right, 
whereas the MedPAC approach would also affect companies that provide 
only ``inputs'' into the DHS, or indeed, services that have no 
relationship whatsoever to DHS. One commenter asserted that our 
proposal was ambiguous and could contribute to confusion in the 
industry and stated that the MedPAC approach was clear, but that its 
adoption would impact many other types of arrangements between 
physicians and hospitals, such as lease arrangements that comply with 
the physician self-referral rules and that do not present an incentive 
for overutilization. Finally, a commenter disagreed with both our 
proposal and the MedPAC approach, contending that the MedPAC approach 
is contrary to the basic tenets of a hospital's right to furnish 
services ``under arrangements.''
    Response: At this time, we decline to adopt the ``substantial 
proportion of revenue'' test suggested by MedPAC. In addition to our 
concerns that such a test would be difficult to administer and enforce, 
we are concerned that entities that do not directly perform a service 
or otherwise cause a claim to be presented, but rather have only 
tangential connection to the service by providing another entity with 
supplies or equipment could be included within the test. We question 
whether such a result is appropriate policy, as well as whether we 
would have the authority to adopt such a test. We note that in its 
comments on our proposal, MedPAC offered its support and merely noted 
that it had recommended that we expand the definition of ``physician 
ownership'' to include interests in an entity that derives a 
substantial proportion of its revenue from a provider of DHS.
3. Authority for Proposal
    Comment: A large association representing internists and medical 
students claimed that we lacked authority to expand the scope of the 
statute to apply to entities that do not bill the Medicare or Medicaid 
programs for DHS.
    Response: We disagree. For the reasons stated above, we believe our 
decision to clarify that an entity that performs services that are 
billed as DHS is a DHS entity, is consistent with both the language and 
the purpose of the physician self-referral statute. As stated above, 
section 1877(a)(1)(A) of the Act does not define ``entity'' as any 
particular type of organization; rather, the prohibition applies to any 
entity that ``furnishes'' DHS. Again, we note that section 
1877(a)(1)(B) of the Act provides that an entity that furnishes DHS may 
not present, or cause to be presented, a Medicare claim. Accordingly, 
an entity that ``furnishes'' DHS can include more than just the entity 
that bills for the DHS. We believe that ``furnishing'' DHS should 
include performing services that are billed as DHS to the Medicare 
program, irrespective of whether the entity performing the services 
submits

[[Page 48725]]

the claim or whether some other entity (such as a hospital providing 
the services ``under arrangements'') submits the claim.
    Comment: Several commenters alleged that the proposal was contrary 
to the Congress's decision, and/or our decision, to treat an ``under 
arrangements'' relationship as a compensation arrangement, rather than 
an ownership interest, between the parties. A few commenters believed 
that the statutory compensation exception for ``under arrangements'' 
services at section 1877(e)(7) of the Act indicated that we have 
questionable authority to promulgate regulations that would contradict 
this expression of Congressional intent. The commenters also believed 
that in enacting amendments to the physician self-referral law in 1993, 
the Congress determined that such service arrangements with group 
practices should be protected as compensation arrangements if certain 
standards are satisfied. According to one commenter, the Congress 
unequivocally decided that the physicians' ownership interest in the 
``under arrangements'' service provider is not an ownership interest in 
an entity furnishing DHS services, and that the only financial 
arrangement that triggers the physician self-referral law is the 
service agreement between the hospital and the under arrangements 
service provider. The commenter argued that this interpretation is 
supported by the exception's plain meaning and other sources. According 
to the commenter, if the Congress thought there was any ownership 
interest created under the physician self-referral law with these types 
of arrangements, it would have placed such an exception in section 
1877(b) of the statute, which contains all the exceptions that protect 
both ownership and compensation. Also, the commenter asserted that to 
meet the exception at section 1877(e)(7) of the Act, physicians 
participating in the arrangement must refer substantially all of their 
similar cases through the arrangement, and, therefore, our stated 
concern about the abusive incentives we see with arranged-for services 
cannot be reconciled with the Congress's comfort in requiring a high 
level of self-referral.
    Response: We disagree that, in enacting section 1877(e)(7) of the 
Act, the Congress determined that ownership in the entity performing 
DHS under arrangements is not ownership in a DHS entity. The commenters 
confuse which financial relationships our proposal addressed. Contrary 
to their arguments, there is no indication in either the text of the 
statute or its legislative history that the Congress intended to except 
ownership interests in the entity performing the service on behalf of 
the hospital. Instead the language of section 1877(e)(7) of the Act 
clearly says that a group practice will not have a prohibited 
compensation arrangement with a hospital, if certain conditions are 
met; it does not address whether a referring physician has a prohibited 
ownership interest in the entity performing the service. Moreover, the 
plain language of section 1877(e)(7) of the Act demonstrates that the 
Congress intended to protect compensation from a hospital to physicians 
performing services ``under arrangements'' only in very narrow 
circumstances. The exception at section 1877(e)(7) of the Act (and at 
Sec.  411.357(h) of our regulations) protects compensation from 
hospitals to group practices only (that is, not to individual 
physicians or to physician organizations not meeting the definition of 
a ``group practice'' as defined at section 1877(h)(4) of the Act and 
Sec.  411.352 of our regulations), and with respect to only inpatient 
services billed by the hospital (that is, not with respect to 
outpatient hospital services or other types of DHS). Also, in order to 
be protected, the arrangement with the hospital had to have begun prior 
to December 19, 1989 (the date of enactment of the Omnibus Budget 
Reconciliation Act of 1989, Pub. L. 101-239) and must have continued 
without interruption since that time. We also do not agree with the 
commenter that Congress was comfortable in requiring a high level of 
self-referral, because, according to the commenter, in order to meet 
the exception at section 1877(e)(7) of the Act, physicians 
participating in the arrangement must refer substantially all of their 
similar cases through the arrangement. The exception requires only that 
substantially all of the under arrangement services furnished to 
patients of the hospital must be furnished by the group under the 
arrangement; the exception does not require the group physicians to 
refer their patients to the hospital. In sum, we believe that, to the 
extent that section 1877(e)(7) of the Act evinces any intent of the 
Congress toward physician ownership in entities that provide services 
for a hospital to bill under arrangement, the fact that the Congress 
enacted such a narrow compensation exception would indicate that the 
Congress was not favorably disposed to protecting physician ownership 
in such entities.
    Comment: Two commenters asserted that, in the 2001 Phase I final 
rule with comment period, we stated that we would not consider an 
``under arrangement'' relationship to constitute an ownership interest 
for several reasons: (i) To do so would disrupt patient care; (ii) such 
relationships easily could be structured to comply with the personal 
services arrangements or fair market value exceptions; and (iii) there 
was precedent in the statute for treating such financial relationships 
as creating a compensation arrangement. The commenter stated that it 
was unaware of anything that had occurred over the years to mitigate 
the reasons stated in Phase I for treating ``under arrangements'' 
relationships as compensation arrangements, rather than ownership 
interests.
    Response: We do not believe that the proposal is inconsistent with 
the position we took in Phase I. The preamble discussion in the Phase I 
rule referred to by the commenters focused on the relationship between 
physicians and a hospital. There, we stated that we were concerned that 
the provision of services ``under arrangements'' could be used to 
circumvent the prohibition in section 1877(c)(3) of the Act of 
physician ownership of parts of hospitals. We said that we understood 
that some hospitals were leasing hospital space to physician groups, 
which the groups then used to provide services ``under arrangements'' 
that the hospital had previously provided directly, and that these 
arrangements raised significant issues under section 1877 of the Act, 
as well as the anti-kickback statute. We said that, although the 
physician self-referral statute could reasonably be interpreted to 
prohibit ``under arrangements'' relationships as constituting 
prohibited ownership interests in a part of a hospital, we declined to 
do so at that time. However, we cautioned that we would monitor ``under 
arrangements'' relationships and that we might reconsider our decision 
if it appears that the arrangements are abused (66 FR 942). In contrast 
to the preamble discussion in the Phase I rule, our proposal did not 
focus on the financial relationship between a physician and a hospital 
(or other entity) that bills Medicare for services furnished ``under 
arrangements''. Rather, it focused on the ownership interest that a 
physician has with an entity that performs DHS that are furnished 
``under arrangements'' with a hospital or other entity that bills 
Medicare for the DHS. We believe that where a physician has an 
ownership or investment in an entity that performs DHS, the application 
of the physician self-referral statute should not be avoided simply by 
having another entity bill Medicare for the DHS.

[[Page 48726]]

    We also believe that the preamble discussion in the 1995 final rule 
demonstrates that we recognized a distinction between the question of 
whether a physician or group practice has an ownership (as opposed to a 
compensation) relationship with a hospital and the question of whether 
a physician has an ownership interest in a service provider that 
contracts with a hospital for the billing of services ``under 
arrangements.'' There, we noted that a commenter believed that, if 
there is an under arrangement agreement between a hospital and a group 
practice for the group practice to provide laboratory services to 
hospital patients under section 1861(w)(1) of the Act, it is the 
hospital and not the group practice physicians that is making a 
referral for the purposes of the self-referral proscription found in 
section 1877 of the Act. We responded that we did not believe that the 
Congress intended to allow physicians to circumvent the referral 
prohibition by imputing their referrals to an operating entity such as 
a clinic, hospital, or other institution. We acknowledged that ``the 
exception in section 1877(e)(7) of the Act could apply to allow 
referrals based on part of this scenario'' but

    [t]here is, however, a complicating factor in the commenter's 
scenario. That is, the group practice physicians are referring to 
their own group practice laboratory. It is likely that these 
physicians are receiving compensation from the group practice that 
owns the laboratory or that they own some portion of the group 
practice and the laboratory. The compensation or ownership interests 
involved here would require a separate exception in order to allow 
the group practice physicians to refer. The services could, for 
example, be excepted under the in-office ancillary services 
exception in section 1877(b)(2) of the Act, which allows a group 
practice to refer to its own laboratory if certain criteria are met 
(66 FR 41941).
4. Suggested Changes and Clarifications to Definition of ``Performs the 
Service''
    Comment: One commenter, although supporting generally the proposal, 
was concerned that the proposal that an entity that ``performs'' the 
DHS is a DHS entity within the meaning of Sec.  411.351, may not have 
its desired effect because of the potential ambiguity of the meaning of 
``performs.'' The commenter suggested that the final rule give a 
specific definition of ``performs.'' One commenter stated that the 
proposed language in the definition ``has performed the DHS'' was 
ambiguous, and questioned whether it included individuals, management 
companies, lessors or vendors. Two commenters asked us to provide a 
clear definition of performing DHS. A commenter said that it is very 
common, with respect to a variety of healthcare participants, for 
equipment to be leased from one party, space to be leased from another, 
and personnel employed, leased or contracted from or by multiple 
organizations. Two commenters said that the meaning of the phrase 
``person or entity that has performed the DHS'' is unclear because the 
phrase could apply to the physician who performs the service, the 
location where the services are performed, the person or entity that 
owns the equipment with which a DHS is performed, or possibly some 
other person.
    Another commenter cautioned that further guidance may be necessary 
to better define who ``performs'' DHS in fact patterns in which billing 
entities acquire inputs from multiple sources to deliver DHS. A 
commenter that supported the proposal suggested that a better way to 
define ``entity'' would be to specify ``entity'' as any business 
arrangement, and provide one exception for physician investment in a 
large publicly traded corporation. Another commenter that supported the 
proposal said that the definition could be improved if, in addition to 
including the person or entity that furnished the service or billed for 
it, we also included ``the person or entity that owns or leases the 
space or equipment to either of the above.'' One commenter questioned 
whether the definition of entity would extend to entities that provide 
billing staff or equipment used in furnishing DHS, because neither of 
these activities constitutes providing DHS. A commenter stated that it 
is unclear whether an entity that performs a component of DHS 
``performs'' the DHS. The commenter stated it does not believe that an 
entity that provides management services performs DHS within the 
meaning of the proposed definition. Another commenter stated that 
although it believes that providing only some of the components of DHS 
should not be considered performing DHS or causing a claim to be 
submitted, the proposed rule created a level of uncertainty. The 
commenter stated that, taken to its extreme, the proposed definition of 
``entity'' could be viewed as making any equipment lessor or entity 
that performs services for a DHS entity, even a provider of linens or 
food services, into a DHS entity itself. The commenter further stated 
that the provision of equipment and customized devices for a medical 
procedure and/or the services of a technician to monitor the equipment 
should not be defined as ``performing the DHS.'' A large association 
representing group practices said that if we were to adopt the 
proposal, we should make clear that the new provision does not apply to 
companies that merely lease equipment.
    Response: We decline to provide a specific definition of 
``perform,'' but rather intend that it should have its common meaning. 
We note that the language ``performing'' a service, or ``perform'' a 
service, or ``performed'' a service, or ``services performed'' appears 
numerous times in title XVIII of the Act and in our regulations, 
without a definition of what ``perform'' or any of its derivations 
means. For example, section 1861(q) of the Act defines ``physicians' 
services'' as ``professional services performed by physicians'' without 
elaboration as to what ``performed'' means. Physicians and other 
suppliers and providers generally know when they have performed a 
service and when they are entitled to bill for it. By way of example 
only, we consider a service to have been ``performed'' by a physician 
or physician organization service if the physician or physician 
organization does the medical work for the service and could bill for 
the service, but the physician or physician organization has contracted 
with a hospital and the hospital bills for the service instead. We do 
not mean to imply that a physician service provider can escape the 
reach of the physician self-referral statute by doing substantially all 
of the necessary medical work for a service, and arranging for the 
billing entity or some other entity to complete the service. We do not 
consider an entity that leases or sells space or equipment used for the 
performance of the service, or furnishes supplies that are not 
separately billable but used in the performance of the medical service, 
or that provides management, billing services, or personnel to the 
entity performing the service, to perform DHS.
    Comment: Commenters addressed the issue of whether physician-owned 
implant or other medical device companies should or should not be 
considered to be an entity within the meaning of Sec.  411.351. One 
commenter noted that orthopedic surgeons may have an ownership interest 
in a manufacturer of spinal implants that sells its implants to the 
hospital where the surgeon performs his or her surgeries. The commenter 
also stated that, because the proposed definition of ``entity'' would 
extend to an entity that ``performs the DHS,'' arguably the 
manufacturer could be considered to be an ``entity'' under Sec.  
411.351. This commenter urged us to exclude such manufacturers from the 
definition of ``entity.'' It stated that the indirect types

[[Page 48727]]

of arrangements involving spinal implants would still trigger the self-
referral prohibition if they are not at fair market value. Comments 
submitted on behalf of a manufacturer of spinal implants asserted that, 
despite superficial similarities, joint ventures involving medical 
devices differ in many material ways from the types of arrangements 
over which we expressed concern. This commenter also said that the 
meaning of ``has performed the DHS'' is unclear and that we should 
clarify that the proposal applied only to ``true'' under arrangement 
relationships with hospitals, but that, in any event, implantable 
devices are not DHS. The commenter further stated that, even if 
implantable devices were deemed to be DHS, the rigorous physician self-
referral exceptions (for example, the indirect compensation exception) 
are still available to protect the arrangement, and that if we were to 
interpret the proposal as applying beyond formal ``under arrangement'' 
relationships, we would be sliding down an impermissibly slippery slope 
if we in fact intend our approach to be different than the one that was 
proposed by MedPAC.
    After the comment period closed for the CY 2008 PFS proposed rule, 
we received a comment from a large medical device manufacturer that 
requested that we examine the current prevalence of physician-owned 
implant companies and the impact that these ventures have on program or 
patient abuse, as well as what it considered to be the negative impact 
on competition among physician investor ventures and non-physician 
ventures. The commenter suggested that we deem physician-owned implant 
companies to be DHS entities under certain circumstances. The commenter 
also suggested that a physician-owned implant company should not be 
considered to have caused a claim to be presented where the referring 
physician is named as an inventor on an issued patent for the 
implantable item and the physician does not receive any remuneration 
from the company based on the value or volume of referrals, or where 
the physician's investment interest meets the requirements of Sec.  
411.356(a) for large, publicly traded entities.
    Response: In this final rule, we are not adopting the position that 
physician-owned implant or other medical device companies necessarily 
``perform the DHS'' and are therefore an ``entity'' on that basis. In 
the FY 2009 IPPS proposed rule, we solicited comments as to whether 
such companies should be considered to be an ``entity'' within the 
meaning of Sec.  411.351. We may decide to issue proposed rulemaking on 
this issue in the future.
5. Cause Claim To Be Submitted
    Comment: Some commenters were concerned with the aspect of the 
proposal that would include ``a person or entity that causes claims to 
be submitted'' within the definition of ``entity.'' Another commenter 
stated that the term ``causes a claim to be submitted'' is unclear and 
is susceptible to varying interpretations. One commenter asserted that 
our interpretation would make all vendors DHS entities. A commenter 
maintained that we did not indicate which entities would be subject to 
the physician self-referral prohibition as an individual or entity 
``that causes claims to be submitted.'' An association that represents 
oncologists was concerned that the proposed definition could be read to 
include management and billing companies. Because billing and 
management companies submit claims for DHS on behalf of their physician 
or provider clients, arguably they ``cause a claim to be presented'' 
for DHS. The commenter stated that it believed that we did not foresee 
or intend this result.
    Response: The proposed rule would have amended the definition of 
``entity'' in Sec.  411.351 to provide that ``[a] person or entity is 
considered to be furnishing DHS if it--(i) Is the person or entity that 
has performed the DHS, or (ii) Presented a claim or caused a claim to 
be presented for Medicare benefits for the DHS.'' We are not revising 
the definition of ``entity'' in Sec.  411.351 to include the ``or cause 
a claim to be presented'' language in proposed paragraph (ii). As noted 
above, section 1877(a)(1)(A) of the Act and our regulations define 
``entity'' as any organization that is ``furnishing'' DHS, and section 
1877(a)(1)(B) of the Act and Sec.  411.353(b) of our regulations 
prohibits an entity that receives a prohibited referral from presenting 
a claim to Medicare or causing such a claim to be presented. In this 
final rule we are revising the definition of ``entity'' to clarify that 
a person or entity that is performing DHS is furnishing DHS (as is a 
person or entity that presents a claim for Medicare benefits for DHS). 
We believe that an entity that performs services that are billed as DHS 
is furnishing DHS and, therefore, is a DHS entity. Under section 
1877(a)(1) of the Act, and in accordance with our current regulations 
at Sec.  411.353, once a person or entity has furnished DHS, and 
therefore is considered to be a DHS entity with respect to that 
service, the person or entity is prohibited from either presenting a 
claim or causing a claim to be submitted if the referral for the DHS 
was prohibited. We do not believe it is practical to attempt to define, 
through general rulemaking, what does or does not constitute causing a 
claim to be submitted. Rather, such a determination must be made, 
through adjudication, on a case-by-case basis.
6. Proposal Based on Anecdotal Evidence
    Comment: A large association representing internists and medical 
students stated that, whereas it fully understands and shares concerns 
about inappropriate utilization of certain services, completely 
restricting the ability of physicians to invest in their own industry 
is far from the answer. The commenter noted that throughout the 
proposal, we continued to cite anecdotal evidence of arrangements that 
are at risk for fraud and abuse, yet provided no actual evidence of 
program abuse. Other commenters stated that we have not substantiated 
our concerns with comprehensive analyses or objective data. One 
commenter, an association of cardiologists, stated that its members can 
demonstrate that collaborations between physicians and hospitals reduce 
duplication of services and competition for technical staff within 
local service areas, thus reducing practice expense and equipment costs 
for Medicare providers and the Medicare program.
    Response: We are finalizing the proposal because we believe that it 
would be inconsistent with Congress's intent to not consider an entity 
that performs DHS as a DHS entity. In addition, we have concerns that 
contractual arrangements between physician-owned service providers and 
hospitals may lead to overutilization and anti-competitive behavior. 
These concerns are based on studies that show an increase in 
utilization where physician ownership of services is involved, as well 
as anecdotal evidence.
7. Community Benefit and Access to Care
    Comment: One commenter stated that, in contrast to past policy 
statements, the proposed rule did not in any way recognize the positive 
role of arranged-for services in today's health care system, but 
instead seems to condemn them all with one-size-fits-all sweeping 
claims. According to the commenter, in the Phase I rule, we recognized 
that under arrangement relationships ``are pervasive in the hospital 
industry'' and that many help ``avoid unnecessary duplication of costs 
and underutilization of expensive equipment.'' (66 FR 942). One 
commenter stated that, although the

[[Page 48728]]

proposed rule discusses anecdotal reports related to ``under 
arrangements'' ventures that are presumably abusive, there is no 
suggestion that these concerns are equally applicable to all types of 
services, and yet, the proposed changes would eliminate completely this 
significant option utilized by hospitals, particularly those without 
significant financial resources, to bring certain services, such as new 
technology, to their community. The commenter believed that before we 
implement any changes to the physician self-referral regulations that 
will restrict or eliminate ``under arrangements'' ventures with 
entities that are owned in whole or in part by physician referral 
sources, it is imperative that we assess the potentially significant 
impact such a change will have on the quality and scope of care offered 
by many institutions.
    One commenter stated that many organized independent medical groups 
have fostered good working relationships with hospitals that benefit 
the community. A regional state-of-the-art cancer center that is a 
joint venture between physicians and a hospital allows Medicare 
beneficiaries to receive high quality, cost effective care in one 
setting. This type of arrangement is in contrast to one where each 
physician group in the community buys duplicative cancer technology, 
competes directly with the hospital, and little collaboration among 
providers exists.
    A health system stated that in circumstances where particular 
services are needed, but not frequently performed, having one provider 
develop consistent practices and expertise may afford a higher quality 
of care for patients seeking the service and ``under arrangements'' 
contracts prevent multiple health care providers from purchasing the 
same types of equipment in any given community, and as a result, the 
cost of care is actually reduced because of efficient resource 
management. One commenter stated that many of the ``under 
arrangements'' contracts result in significant community benefit and 
patient benefit, and avoid duplication of services, thus producing cost 
savings to the program. Another commenter, representing a public 
hospital district, stated that there are compelling and legitimate 
reasons for public hospitals and local physicians to create 
collaborative arrangements to deliver care in the community. It 
asserted that participation in collaborative ventures with local 
physicians reduces the operating burden on public hospitals.
    Another commenter said that hospitals that enter into ``under 
arrangements'' relationships are relieved of the burden of maintaining 
or expanding a particular service line, while still being able to 
provide much needed services to members of its community. This frees 
hospital capital to be spent on other needed services and space and 
other resources within the hospital to be used on other services. The 
commenter said that it has been its experience that hospitals have 
found themselves unable to keep up with the demand for outpatient 
surgery capacity and have found investing in ASCs to be a better use of 
their resources as compared to building and staffing larger outpatient 
surgery areas within the hospitals.
    Two commenters stated that we should encourage ``under 
arrangements'' contracts between physicians and hospitals. They stated 
that, in many instances, it can make financial and clinical sense to 
enter into a venture with a partner that can provide capital, shared 
risk, and operational expertise to a hospital striving to improve its 
specialty services and programs. The commenters further stated that the 
fact that physicians can sometimes bring these resources to a hospital 
should not exclude them automatically as participants in these efforts, 
and in many ways physicians are ideal hospital partners and offer 
benefits to hospitals beyond mere referral of patients, such as careful 
cost control and quality improvement expertise. Another commenter 
stated that it appeared incongruous that we appear to support 
gainsharing but also appear ready to prohibit economic models that 
seeks to align physician incentives with those of hospitals.
    Many commenters also expressed concern that if we finalize the 
proposal access to care will be disrupted, particularly in underserved 
or rural areas. A large association representing group practices 
commented that if we finalize our proposal, we should clarify that the 
``new restriction'' will not impact the exception available for rural 
markets. The commenter further asserted that it would be an ironic 
result and an unfortunate policy if a physician's referral to a rural 
hospital were prohibited because of an ``under arrangements'' contract 
between the hospital and an entity in which the physician had an 
interest, when the same physician's referral to the same entity would 
be clearly protected. A rural hospital commented that, in its market, 
provider-based entities protect against unnecessary duplication of 
services, equipment, staff and facilities and offer several other 
advantages. Some urologists complained that the proposal would prohibit 
providing lithotripsy and other services to rural patients. For 
example, one urologist said that adoption of the proposal would 
prohibit the provision of many services, including, but not limited to, 
laser services, cryotherapy services and IMRT, as well as the newer 
services transurethral microwave therapy (TUMT) and transurethral 
needle ablation of the prostate, which, more often than not, are 
performed in the office. Other physicians, primarily urologists, and an 
organization whose members form joint ventures with urologists, 
commented that physician joint ventures have provided Medicare 
beneficiaries with access to effective treatments that they otherwise 
would not have had and/or have saved Medicare millions of dollars.
    Comments submitted on behalf of a large multi-specialty physician 
group asserted that many ``under arrangements'' relationships have 
existed for many years and benefit both the hospital and the patient. 
The comments maintained that the hospital is able to secure services 
that it otherwise could not provide efficiently, through contracting 
with an outside supplier that often is an expert in these services. In 
addition, the comments stated that not all ``under arrangements'' 
relationships result in higher Medicare reimbursement levels, but where 
this is true, we should address any incentives due to differences in 
reimbursement between the PFS and OPPS by eliminating those differences 
in reimbursement rather than by revising the definition of entity. 
Finally, comments stated that independent physician groups cannot be 
further disadvantaged to the benefit of hospital system providers that 
enjoy special privileges of significantly higher reimbursement for 
similar services, wide latitude to create built-in referral 
relationships by employing physicians and, in many instances, the 
financial benefit of tax-exempt status.
    Response: We recognize that in some circumstances, providing 
services ``under arrangements'' may be beneficial to patients, 
providers and the program. We are not prohibiting services to be 
furnished ``under arrangements.''
    We are finalizing the proposal because we believe that it would be 
inconsistent with the Congress's intent to not consider an entity that 
performs DHS as a DHS entity. We note that in enacting ownership 
exceptions, the Congress did not provide for an exception based on lack 
of access per se, but rather enacted an exception only for

[[Page 48729]]

rural providers. With respect to service providers that furnish 
services to rural patients, our proposal as adopted in this final rule 
does not alter the availability of the exception for an ownership 
interest in a rural provider. However, as clarified in this final rule, 
as a DHS entity, a physician owner/investor in such a service provider 
would need an ownership exception (such as the rural provider 
exception) in order to protect his or her referrals to the service 
provider.
    With respect to ownership/investment interests that will not 
qualify for the rural provider exception because of the patient 
population they serve, we do not believe that patient access will be 
significantly disrupted, for several reasons. First, we are not 
prohibiting physician group practices or other physician organizations 
from contracting with hospitals for the provision of services ``under 
arrangements.'' Any physician that has a compensation arrangement with, 
but not an ownership/investment interest in, the physician group 
practice or other physician organization (such as an employee or 
contractor physician with the group practice or other physician 
organization) may refer patients for services that are provided by a 
hospital ``under arrangements'' provided that one of the compensation 
exceptions is met. Also, the definition of ``referral'' at Sec.  
411.351 excepts services that are personally performed by the referring 
physician. Thus, to the extent that an owner/investor in the physician 
service provider has referred the patient for a service but then 
personally performs the service, there is no ``referral'' within the 
meaning of Sec.  411.351 and the physician self-referral law is not 
implicated. (Note that if there is a technical component to a service 
or a facility fee, that is billed by a provider ``under arrangements,'' 
the fact that the referring physician performs the professional 
component, and thus there is no ``referral'' for the professional 
component, does not alter the fact that there is a ``referral'' for the 
TC or the facility fee. Note also that the definition of ``referral'' 
states that DHS is not personally performed or provided by the 
referring physician if it is performed or provided by any other person, 
including, but not limited to, the referring physician's employees, 
independent contractors, or group practice members. See, e.g., 66 FR 
941.) Also, we expect that hospitals that have not been furnishing 
services directly, but rather have been furnishing them ``under 
arrangements,'' will begin doing so. We believe that, in some 
instances, hospitals would prefer to furnish services directly but have 
been concerned about losing referral streams if they compete with 
physician service providers. (In this regard we note that we received 
very few comments from hospitals objecting to our proposal, and instead 
two major hospital associations were generally supportive of it.) We 
also believe that, conversely, in many cases physician groups could 
provide the services and bill for them directly, that is, without the 
need to contract with a hospital to provide them ``under 
arrangements'', and that, to the extent the services would be DHS when 
performed and billed by the physician group, referrals to the physician 
entity could be protected by the in-office ancillary services exception 
or another exception. We also note that to the extent that the 
physician service providers are furnishing lithotripsy (and based on 
the comments we received it appears that lithotripsy makes up a 
significant portion of the services furnished ``under arrangements''), 
we presently do not consider lithotripsy to be a DHS. Finally, the 
delayed effective date of the revision to Sec.  411.351, that is 
October 1, 2009, will provide sufficient time for arrangements to be 
restructured.
8. Hospitals as Risk-Averse
    Comment: Several urologists objected to what they perceive as our 
view that physicians who invest in joint ventures to provide services 
``under arrangements'' do so at the expense of good patient care. These 
commenters and others stated that hospitals balk at investing in new 
technology because of the risk of obsolescence (that is, what is new 
technology today may be soon outmoded) and because doing so will result 
in lesser use of other services that they currently provide. Also, a 
single hospital often does not have the volume to justify the expense 
of a large capital investment. Joint ventures involve physicians so 
that usage can be spread among several hospitals.
    One urologist stated that urologic joint ventures have been able to 
offer state-of-the-art services to the community while lowering costs 
and improving care. An association that represents urologists stated 
that state-of-the-art equipment made available by physician-owned 
companies fills the critical gap between what advances the latest 
technology can offer and what hospitals can afford.
    Response: With respect to the commenters' assertions that 
physicians are willing to take risks in bringing services to 
communities and that hospitals are risk averse, to the extent that this 
is true, it begs the question of whether physicians are less concerned 
about risk because they can control the referral stream and whether 
hospitals are more concerned about risk because they fear that 
referrals will go to their competitors if they do not enter into 
contractual arrangements with physician groups. We believe that the 
proposal as finalized will create a more level playing field between 
hospitals and physicians and also among hospital competitors. We note 
that, although many of the physician commenters emphasized the benefits 
to hospitals of contracting with physician groups to provide services 
``under arrangements,'' the hospital associations and hospitals that 
commented on the proposal generally did not support this view.
9. Cardiac Catheterization and Personally Performed Services
    Comment: Several commenters stressed the efficiency and quality of 
services offered by their joint ventures with hospitals for the 
provision of cardiac catheterization services. Some commenters stated 
that the vast bulk of the services provided to the hospital are based 
on flat fees for specific categories of services, which include the 
full costs for these services, and thus, the joint venture assumes the 
risk of all costs of providing the services. They further stated that 
the agreed-upon fees are reviewed periodically by a third-party 
valuation company to ensure that the fees are at fair market value. 
Other commenters stated that the physicians can provide the service at 
a lower cost than the hospital, that the physicians desire a greater 
level of clinical excellence by becoming more involved in the 
management of the service, and the service is not a priority for the 
hospital but is a priority for the physicians.
    Several commenters stated that the proposed rule made no attempt to 
distinguish under arrangement services involving personally performed 
services as opposed to other services. Another commenter stated that if 
services such as cardiac catheterizations or outpatient surgery were 
performed in an ASC or physician's practice, they would not qualify as 
DHS and therefore would not be subject to the physician self-referral 
law. Commenters recommended that we should clarify that these services 
constitute personally performed services excepted from the definition 
of ``referral'' or exclude these types of service providers from the 
definition of ``entity.''
    Response: This final rule does not prohibit physician group 
practices and other physician organizations from furnishing cardiac 
catheterization

[[Page 48730]]

services. Where a group practice or other physician organization 
provides the service and bills for it, the service is not DHS and the 
physician self-referral statute will not apply. Where a group practice 
or other physician organization provides the service and, pursuant to a 
contractual arrangement, a hospital bills for it as an outpatient or 
inpatient service, the service is DHS and therefore the group practice 
or other physician organization would be a DHS entity with respect to 
that service. If the referral to the group practice or other physician 
organization is made by a physician owner/investor, an ownership 
exception would be needed to protect the referral. If the referral is 
made by a non-owner/investor physician who has a compensation 
relationship with the group practice or other physician organization 
(that is a physician employee or contractor), a compensation exception 
would be needed to protect the referral. The definition of ``referral'' 
at Sec.  411.351 excepts services that are personally performed by the 
referring physician. Note that the definition of ``referral'' states 
that DHS is not personally performed or provided by the referring 
physician if it is performed or provided by any other person, 
including, but not limited to, the referring physician's employees, 
independent contractors, or group practice members. (Note also that if 
there is a technical component to a service or a facility fee, that is 
billed by a provider ``under arrangements,'' the fact that the 
referring physician performs the professional component, and thus there 
is no ``referral'' for the professional component, does not alter the 
fact that there is a ``referral'' for the TC or the facility fee.)
10. Lithotripsy and Therapeutic Versus Diagnostic Procedures
    Comment: Several commenters stated that, because we do not consider 
lithotripsy to be a DHS because of the district court decision of Am. 
Lithotripsy Soc. v. Thompson, 215 F. Supp. 2d 23 (D.D.C. 2002), they 
cannot be deemed to be performing DHS or causing a claim to be 
submitted when performing lithotripsy procedures. Some commenters 
stated that because the American Lithotripsy Society case held that 
lithotripsy is not DHS, common sense would dictate that other 
therapeutic procedures performed by urologists would also not be DHS. 
Other commenters requested that we clarify that lithotripsy would not 
be subject to the proposal. Another commenter stated that, generally, 
the physician who refers a patient for lithotripsy is the same 
physician who performs the service.
    Response: We presently do not consider lithotripsy to be a DHS, 
regardless of whether it is performed by a physician-owned service 
provider and billed by that provider, or whether it is sold by such a 
provider to a hospital that bills for it. Because the American 
Lithotripsy Society case was limited to lithotripsy, we see no reason 
to except other therapeutic services from being DHS if they are billed 
by a hospital as outpatient or inpatient hospital services. As noted in 
the response to the previous comment, the definition of ``referral'' 
excepts services that are personally performed by the referring 
physician.
    Comment: Many urologists asserted that, unlike diagnostic testing, 
lithotripsy and other urological procedures, such as BPH, do not 
present a risk of overutilization because they are therapeutic 
procedures. For example, the presence of kidney stones can be 
objectively determined, therefore lithotripsy is only used when needed 
by the patient. One commenter said that it is quite clear that if a 
patient does not have a stone, lithotripsy would not be appropriate. 
Another commenter said that urology joint ventures are not amenable to 
abuse unless fraud is being perpetrated. One commenter stated that, in 
1992, Florida studied therapeutic versus diagnostic services and 
concluded that there was no overutilization where physicians have 
ownership in and render therapeutic services. Other commenters said 
that there has been no objective proof of overutilization of 
lithotripsy and other therapeutic urologic procedures. One commenter 
stated that because the procedure is done in a hospital, there is 
additional scrutiny, including peer review, which guards against 
overutilization. An organization whose members form joint ventures with 
urologists stated that our perspective is overly cynical. This 
organization asserted that in the late 1990s many of the urologists who 
formed joint ventures to purchase first generation TUMT units came to 
realize that the older surgical approach for BPH was better for most of 
their patients and therefore did not use the TUMT partnership equipment 
despite their financial investment, and as a result, the joint ventures 
failed. The commenter also stated that, despite the fact that laser 
ventures are only minimally profitable, urologists are willing to 
invest in newer equipment to more effectively treat their patients. 
Finally, the commenter stated that, although a significant number of 
its members purchased one type of laser, they purchased newer and more 
expensive higher-powered lasers, despite having a significant 
investment in the older model, despite still owing money on loans for 
the older model, and despite being advised that there was no resale 
market for the older model.
    Response: As stated above, we believe that the Congress intended 
that an entity that performs services that are billed as DHS is a DHS 
entity, irrespective of whether it or some other entity does the 
billing for the services. The Congress did not provide for a general 
ownership exception for therapeutic procedures. Inpatient and 
outpatient hospital services are DHS, and thus subject to the general 
prohibition on ownership/investment interests in a DHS facility, 
regardless of whether the service is surgical or medical, or 
therapeutic or diagnostic. Although we do not doubt that the great 
majority of physicians are honest and honorable, the profit potential 
inherent in self-referral can corrupt medical decision-making both 
through deliberate and less-conscious behavior. In a self-disclosure 
case, a hospital agreed to pay $270,000 to maintain its existing 
compliance program and to undertake certain integrity obligations for a 
three-year period to resolve its liability under the CMP provisions 
applicable to kickbacks. The OIG alleged that the hospital entered into 
a series of contracts with an entity owned by urologists under which 
the hospital paid the entity in excess of fair market value for the 
lease of a lithotripter and contracted lithotripsy services. The OIG 
alleged that the hospital's payments were made to induce Federal 
healthcare program referrals from the urologists who owned the 
lithotripsy entity.
    In an example of overutilized therapeutic treatments, we note that 
a large hospital system settled a case against several of their 
physicians who were accused of performing unnecessary cardiac 
surgeries. Federal officials alleged that the physicians entered a 
scheme to cause patients to undergo unneeded, invasive, cardiac 
procedures such as artery bypass and heart valve replacement surgeries. 
The hospital system agreed to pay $54 million to settle the Federal 
case.
    We are also mindful of the comments we received on this proposal, 
our proposal on ``per-click'' lease payments, and our solicitation of 
comments on the in-office ancillary services exception, that self-
referral of therapeutic procedures is abusive at times, because 
patients are being steered to one type of procedure when another 
procedure may be more appropriate or less costly, and because in some 
cases it is appropriate that patients have no procedure at all.

[[Page 48731]]

    Comment: Several commenters stated that the proposal would ban 
legitimate physician joint ventures from contracting with hospitals to 
provide therapeutic services that are DHS only because they are 
performed in a hospital setting. According to the commenters, such 
therapeutic procedures include a variety of laser procedures for benign 
prostate disease and cryotherapy for cancer of the prostate. Some 
commenters asserted that we want to ban services furnished ``under 
arrangements'' because it has heard of questionable diagnostic imaging 
arrangements. Commenters further argued that the Congress made 
diagnostic imaging DHS regardless of the setting in which the imaging 
is performed, due to overutilization and improper referrals as 
identified in studies, and that we do not identify any overuse of, or 
improper referrals for, other services, such as laser services or other 
urological procedures. According to some commenters, simple fairness 
dictates that the proposal should not apply to services that are not 
DHS if they are not furnished in a hospital. Other commenters stated 
that it would be helpful if we excepted other procedures that are not 
DHS when not performed ``under arrangements'' from the proposed 
changes. One commenter stated that the applicable physician referral 
triggering the physician self-referral law is the referral for 
inpatient and outpatient hospital services. According to the commenter, 
inherent in this logic is that the hospital is the entity furnishing 
DHS, which contrasts with the proposed rule that attempts to invoke 
physician self-referral law jurisdiction on the ``under arrangements'' 
service provider by declaring it is an entity furnishing DHS.
    Response: As discussed above, we believe that a more reasonable, 
(and perhaps the better), reading of the statute is that an entity that 
performs DHS is a DHS entity, as is the entity that submits the claim 
for the DHS (which continues under our regulations to be treated as an 
entity that has furnished the DHS). Also as discussed above, we have 
program integrity concerns relating to services provided ``under 
arrangements'', and these concerns are not limited to diagnostic 
imaging. We disagree that it is unfair that an entity that performs 
services should be considered to have performed DHS if those services 
are billed as outpatient or inpatient hospital services. Where an 
entity performs services that are billed as DHS, we believe that it is 
appropriate and consistent with Congressional intent to consider the 
entity to have furnished DHS and to be a DHS entity with respect to 
such services.
11. Professional Fee Greater Than Incremental Return for Technical 
Component
    Comment: Several urologists and a law firm representing urologists 
stated that when urologists refer patients for therapeutic procedures 
that the urologists perform, the fee the urologist receives for 
performing the professional component of the procedure is greater than 
the incremental increase in the profit distribution to the urologist as 
a result of his or her participation in the joint venture. Therefore, 
the commenters maintained, the referring physician is not likely to be 
induced to refer based on the portion of the technical fee he or she 
will earn in distributions from the investment, and, accordingly, we 
should not prohibit services to be furnished ``under arrangements'' 
where the investor physician performs the professional portion of the 
procedure. An association whose members form joint ventures with 
urologists offered similar comments and stated further that underlying 
the proposal is our sense that surgeons in general, and urologists in 
particular, recommend a particular surgical procedure based on the 
professional fee they will receive rather than because the patient 
needs the procedure.
    Response: The arguments raised by the commenters would seem to be 
applicable to physician ownership in any DHS entity, including those 
that bill Medicare, yet Congress did not except professional fees for 
ownership/investment interests in DHS entities. In the Phase I rule, we 
stated that creating an exception for implants furnished in an ASC 
would not increase the risk of overutilization beyond what is already 
presented by the surgeon's professional fee and was consistent with 
Congress's decision not to include ASC services as a specific DHS. 
However, we noted there that in creating the exception we were 
motivated by our desire not to cause a site of service shift for 
implants to the more expensive setting of hospital outpatient services, 
and we specifically declined to allow the exception for implants in a 
setting other than an ASC (66 FR 934). In contrast, services provided 
``under arrangements'' by a hospital are, by definition, billed at the 
outpatient or inpatient rate.
12. Existing Exceptions Are Sufficient Protection
    Comment: Several commenters said that it is not necessary to adopt 
the proposal and revise the definition of ``entity'' because the 
existing protections in our physician self-referral rules and the anti-
kickback safe harbors are adequate. Some of these commenters pointed 
specifically to the indirect compensation exception at Sec.  
411.357(p). One commenter stated that the indirect compensation 
exception strikes an appropriate balance between permitting physician 
investment in entities that do business with hospitals and ensuring 
that physician-owned businesses are not overpaid by hospitals and other 
DHS entities to which they refer. Another commenter said that any 
profit a referring physician could make through his ownership of the 
entity that provides DHS to an entity that bills for the DHS would be 
limited to fair market value under the current physician self-referral 
exceptions, as well as under the anti-kickback statute.
    Response: For the reasons explained above, we believe that under 
the statute, an entity that performs a service and contracts with a 
hospital or other provider in order for the hospital or other provider 
to furnish the services as DHS ``under arrangements,'' is properly 
considered a DHS entity. The statute requires referrals from a 
physician who has (or whose immediate family member has) an ownership/
investment interest in a DHS entity to be protected by an ownership 
exception. In addition, we note that some of the protections contained 
in the compensation exceptions, such as the requirement that the 
compensation be at fair market value and not determined on the basis of 
the volume or value of referrals, would not provide protection against 
overutilization or anti-competitive behavior caused by inappropriate 
referrals from physician owners. The potential for overutilization or 
anti-competitive behavior that exists where a physician refers patients 
for DHS to an entity in which he or she has an ownership/investment 
interest and which perform DHS under contract for a hospital or other 
provider occurs because of the returns on investment such physician 
stands to earn, regardless of whether the physician also has a 
compensation arrangement with the hospital that is at fair market 
value.
    Commenter: A commenter agreed that the proposed rule identified a 
number of potentially abusive arrangements, but said such troubling 
arrangements clearly violate the existing physician self-referral 
rules, the anti-kickback statute or our ``under arrangement'' payment 
rules. The commenter further stated that, because the proposed rule 
fails to identify any loopholes that need to be closed, we should 
enforce the physician self-referral rules and not create more

[[Page 48732]]

regulations. With respect to the physician self-referral rules, the 
commenter stated that the most applicable exception is the fair market 
value exception. The commenter noted that, to be in compliance with 
that exception, the arrangement must, among other things, be 
commercially reasonable but for referrals, with the compensation 
consistent with fair market value, and the arrangements described in 
the proposed rule fail these tests. With respect to the anti-kickback 
statute, the commenter acknowledged that determining whether there is a 
violation of that statute is difficult and fact-intensive, but asserted 
that the arrangements described in the proposed rule would likely be 
investigated by the OIG and the Department of Justice as they appear to 
be driven by referrals without any bona fide clinical reasons.
    Response: With respect to the comment that the arrangements 
described in the proposed rule necessarily violate the existing 
physician self-referral rules, the anti-kickback statute or our ``under 
arrangement'' payment rules, we do not agree. We did not suggest in the 
proposed rule that the compensation relationship between physician-
owned service providers and hospitals are not at fair market value, or 
that they violate the anti-kickback statute. To the contrary, we assume 
that in the great majority of cases the compensation relationships 
between physicians and hospitals or other providers are at fair market 
value, and again, the fact that a compensation interest is at fair 
market value does not address the Congress's general prohibition on 
physician ownership in DHS entities and the potential for abuse that 
exists through the returns on equity. Likewise, we assume that the 
great majority of arrangements between physicians and hospitals or 
other providers do not involve illegal kickback schemes. Also, 
irrespective of whether the arrangements described in the proposed rule 
could violate the anti-kickback statute (and we express no opinion on 
the matter), we would be abrogating our statutory authority under the 
physician self-referral statute if we were to refrain from attempting 
to regulate what we see are potentially abusive arrangements simply 
because we might believe that the government might be able to prove 
that certain conduct violates the anti-kickback statute.
13. Differences in Payment For Services Rendered in Hospital Setting 
Versus Payment for Same Services in ASC Setting
    Comment: Two commenters stated that the proposal was inconsistent 
with the legislative intent to allow physicians to refer patients to 
ASCs in which they have ownership or investment interests, which is 
allowed based on the evidence that surgical cases are by nature not 
subject to unnecessary referrals. A third commenter said that several 
urologic procedures such as lithotripsy, green light photo vaporization 
of the prostate, and cryotherapeutic ablation of the prostate can be 
easily, safely and more cost effectively performed on an outpatient 
basis in an ASC, yet inequities in the present reimbursement rules make 
it cost prohibitive to perform these procedures in an ASC, and thus 
they must be performed in a hospital setting. In addition, the 
commenter stated, hospitals encourage a one-day stay for 
cryotherapeutic ablation of the prostate patients, because outpatient 
PPS reimbursement is not sufficient to cover the cost of the procedure. 
A fourth commenter, an association that represents urologists, stated 
that therapeutic services provided ``under arrangements'' can be 
provided only in the hospital or a provider-based department of a 
hospital, and therefore, our concern that patients are receiving 
services in a less medically-intensive setting than a hospital is 
misplaced with respect to therapeutic services.
    Response: In the Phase I rule we agreed that prosthetic devices 
implanted in a Medicare-certified ASC by the referring physician or a 
member of the referring physician's group practice should be protected. 
We stated that we were taking this position because implanted 
prosthetic devices, implanted prosthetics and implanted DME are not 
included in the bundled ASC payment rate (and thus would not fall under 
the exception to the definition of DHS for items paid under a composite 
rate such as the ASC payment rate), and that, as a practical matter, 
the absence of an exception for these items implanted in an ASC was 
likely to result in these procedures moving to more costly outpatient 
settings (66 FR 934). As we noted in the proposed rule, we are 
concerned that services that are relatively less resource intensive are 
being furnished ``under arrangements'' in order to secure higher 
reimbursement. The third commenter, although opposed to the proposal, 
reinforced this concern through its statements. We believe that the 
reimbursement under the ASC payment system is fair and adequate, and 
that it is inappropriate for us to provide an incentive to game the 
system by allowing self-referral for services furnished through an 
``under arrangements'' contract with a hospital that otherwise would be 
safely and effectively performed in an ASC or similar setting. 
Likewise, we do not believe it is appropriate for hospitals to admit a 
patient, in order to gain the higher inpatient reimbursement, for a 
procedure than can be safely and effectively performed on an outpatient 
basis. The fourth commenter is correct that, under Sec.  410.27 of our 
regulations, therapeutic procedures (urologic or otherwise) that are 
furnished ``under arrangements'' by a hospital must be performed in the 
hospital or in space that we designate as a department of a hospital.
14. Exceptions to Definition of DHS Entity
    Comment: Several commenters stated that if we were to adopt the 
proposal it should create one or more exceptions, so that not all 
physician-owned service entities are considered DHS entities. Two 
commenters stated that we should craft an exception for DHS that are 
furnished by a physician-owned entity, where the DHS involve a 
technology that requires a considerable capital investment and where 
the risk of overutilization is minimal because the number of patients 
to be treated with the technology is relatively small. One of these 
commenters stated that the exception could be narrowed further by 
requiring the technology or service to be used in the treatment of a 
serious or life-threatening illness or injury. Another commenter urged 
us to institute a degree of materiality into the existing ``under 
arrangements'' payment rules, rather than revise the definition of 
``entity.'' The commenter stated that, for example, we could require 
that if some material portion of the service (perhaps 50 percent) is 
outsourced to a provider in a less intensive setting, the hospital will 
be reimbursed at a reduced rate for the service rather than the higher 
provider-based rate. Another commenter suggested that if we adopt the 
proposal we should either prohibit physicians from owning or operating 
certain ancillary service providers, thereby ensuring sufficient demand 
for the hospital service, or devise an exception that will allow 
hospitals and physicians to provide services to their respective 
patients on a cost-sharing basis.
    Another commenter recommended an exception for high cost, low 
volume procedures such as lithotripsy, dialysis, radiation therapy, and 
cardiac

[[Page 48733]]

catheterization labs. This commenter pointed out that in 2001-2003, 
60.6 percent of stable angina patients who received cardiac 
catheterization immediately underwent a percutaneous coronary 
intervention. Another commenter stated that we should consider applying 
the proposal only to entities that provide services ``under 
arrangements'' for a fixed fee that does not vary based on the volume 
of services provided.
    One commenter stated that although it would be desirable to carve 
out an exception to the proposed definition in the case of arms-length 
transactions in areas that are underserved, in practice, if a physician 
owns any part of an entity (other than a publicly traded entity) that 
provides products or services to a facility, he or she will benefit 
from referrals.
    Response: As noted above, we are finalizing the proposal in part 
because we believe the better reading of the statute is that an entity 
that performs services that are billed as DHS is a DHS entity, as is 
the entity that submits the claim for the DHS (which continues under 
our regulations to be treated as an entity that has furnished the DHS. 
Also as noted above, we are delaying the date of applicability for 
revised Sec.  411.351 until October 1, 2009 because we wish to give 
parties time to restructure arrangements if necessary. We have 
authority under section 1877(b)(4) of the Act to create exceptions in 
addition to those specified in the statute only where we conclude there 
is no risk of program or patient abuse. We are not establishing an 
ownership exception for ownership/investment interests in one or more 
types of physician-owned service providers because we do not have 
sufficient information to persuade us that such an exception is 
necessary or to allow us to craft appropriate conditions for such an 
exception. In any event, if we were to create such an exception at this 
time we might be proceeding outside the scope of the proposed 
rulemaking. We welcome comments on whether we should create such an 
exception, and if so, what conditions for the exception should be 
included. We may issue a proposed rulemaking for such an exception in 
the future.
15. Outpatient Services Treated Differently Than Inpatient Services
    Comment: Commenters stated that, in several places, the proposal 
expressed a higher level of concern about the incentives inherent with 
arranged-for outpatient hospital services than with respect to 
inpatient hospital services. The commenters inferred that we might 
decide to regulate such outpatient hospital services differently from 
inpatient services, and that any differentiation would be misguided.
    Response: The final rule makes no distinction between outpatient 
and inpatient hospital services. If an entity performs services that, 
pursuant to a contractual arrangement with a hospital or other 
provider, are ultimately billed as DHS, the entity will be considered 
to have furnished DHS, regardless of whether the services are billed as 
outpatient hospital services, inpatient hospital services, or some 
other category of DHS.
16. Miscellaneous Services
    Comment: One commenter stated that the proposal would require a 
large number of sleep centers to restructure or unwind their ``under 
arrangements'' joint ventures, which would create a patient access 
problem.
    Response: Services performed at freestanding sleep centers 
generally are not DHS. Therefore, to the extent that sleep centers wish 
to perform sleep study services as well as bill for them, the physician 
self-referral statute will not be implicated. However, if the services 
are sold to a hospital for the hospital to bill for them as hospital 
services, the services will be DHS, because Congress included all 
inpatient and outpatient hospital services as DHS, and referrals from 
physician owners/investors in a sleep center will need to be protected 
by an ownership exception. As noted above, referrals from non-owner/
investor physicians to a physician-owned service provider should be 
able to fit within a compensation exception. Also as discussed above, 
we believe that most services currently performed by a physician-owned 
service provider but sold to a hospital could continue to be performed 
by the physician-owned service provider and billed by that provider. In 
this regard, we note that the commenter provided no explanation as to 
why it believes that the final rule will create an access problem for 
patients in need of sleep studies.
    Comment: One commenter stated that, in many rural areas, hospitals 
do not have either the technical or financial ability to provide 
dialysis services, especially if the need is only intermittent or 
involves a small number of patients, and that such hospitals need to be 
able to provide dialysis services to inpatients. The commenter further 
stated that because hospitals lose money on inpatient care furnished to 
ESRD patients, a hospital would not maintain a dialysis service simply 
to encourage admissions of ESRD patients, and that it is difficult to 
overutilize dialysis because the need for dialysis is very well 
defined.
    Response: The physician self-referral statute applies only to 
referrals for DHS. One category of DHS is inpatient hospital services. 
However, the definition of inpatient hospital services at Sec.  411.351 
excludes dialysis furnished by a hospital that is not certified to 
provide ESRD services under subpart U of 42 CFR part 405. We believe 
the exclusion addresses the commenter's concerns.
17. Effective Date
    Comment: One commenter stated that the proposal, if adopted, would 
result in a significant restructuring of a number of arrangements 
currently in effect and would have a significant impact on both DHS 
providers and physicians. Another commenter stated that it would be 
unfair for us to reverse our position after years of reliance on it by 
the industry and that it would require the unwinding and dissolution of 
numerous arrangements that have heretofore constituted lawful co-
ownership of non-DHS entities. A national hospital association, while 
supporting our proposal, urged us to consider a phase-in of any 
changes, which would permit the termination or restructuring of 
existing relationships and arrangements before absolute compliance is 
triggered. Three commenters asked that we grandfather all arrangements 
existing at the time the proposed rule was published, because it would 
be unfair to apply the changes ``retroactively.''
    Response: We are providing a delayed effective date until October 
1, 2009. We are interested in receiving comments on whether we should 
create any exception for physician ownership/investment interests in 
physician service providers, and if so, what conditions the exception 
should contain, for consideration in any future rulemaking. We are not 
grandfathering existing arrangements because we believe it is 
inconsistent with the statute to treat an entity that performs DHS as 
something other than a DHS entity.

H. Exceptions for Obstetrical Malpractice Insurance Subsidies

    In Phase II, we rejected the wholesale importation of the anti-
kickback statute safe harbors into the physician self-referral law 
exceptions, but, using our authority under section 1877(b)(4) of the 
Act, we determined that exceptions for referral services and 
obstetrical malpractice insurance subsidies could be established by 
incorporating the corresponding safe harbors in Sec.  1001.952(f) and 
(o), respectively (69

[[Page 48734]]

FR 16115, 16141). Accordingly, we created a new exception in Sec.  
411.357(r) for arrangements involving the provision of obstetrical 
malpractice insurance subsidies that complied with the anti-kickback 
statute safe harbor for such arrangements. In response to Phase II, we 
received a comment asserting that the exception in Sec.  411.357(r) is 
too narrow. The commenter noted that even an agreement that received a 
favorable advisory opinion from OIG, despite not fitting within the 
safe harbor, would fail to satisfy the requirements of Sec.  411.357(r) 
and, thus, would be prohibited under the physician self-referral law.
    Our conclusion in Phase II that the wholesale importation of safe 
harbors would be problematic was based, in part, on our recognition 
that the anti-kickback statute safe harbors and the physician self-
referral law exceptions appropriately diverge in some instances for 
reasons attributable to the difference in the scope of the statutes, 
core prohibited conduct, or liability standards (69 FR 16115). We 
continue to believe that differences in the anti-kickback and physician 
self-referral regulatory schemes are appropriate and sometimes 
necessary. We further believe that, upon revisiting the exception in 
Sec.  411.357(r) and reviewing the comments received in response to our 
proposal in the CY 2008 PFS proposed rule, the physician self-referral 
law exception need not incorporate by reference without modification 
the safe harbor in Sec.  1001.952(o) in order to provide adequate 
protection against program and patient abuse.
    In the CY 2008 PFS proposed rule, we expressed concern that the 
current exception for obstetrical malpractice insurance subsidies may 
be too narrow, and proposed revising the exception in Sec.  411.357(r) 
to list specifically the conditions that we believe are appropriate to 
safeguard against program or patient abuse when remuneration is 
provided by a hospital to a physician in the form of an obstetrical 
malpractice insurance subsidy (72 FR 38182). As with the Phase III 
revisions to the exceptions for retention payments and physician 
recruitment noted above, concern regarding beneficiary access to 
services was a significant basis for our proposal. We requested 
comments regarding barriers to patient access to obstetrical care in 
communities in which obstetrical malpractice insurance premiums are 
relatively high. We also requested recommendations for revising the 
exception without creating a risk of program or patient abuse.
    We received 14 comment letters in response to our proposal to 
revise the exception in Sec.  411.357(r) for obstetrical malpractice 
insurance subsidies. All commenters agreed with the concerns that we 
expressed in the CY 2008 PFS proposed rule that the current exception 
for obstetrical malpractice insurance subsidies is unnecessarily 
restrictive. Many commenters stated that the existing exception is 
unlikely to have the effect of increasing access to obstetrical care. 
Commenters generally supported revisions to the exception, and offered 
various suggestions for requirements we might include in a revised 
exception.
    After consideration of the public comments received, in this final 
rule we are revising Sec.  411.357(r) to (1) retain the provisions of 
the current exception (renumbered as Sec.  411.357(r)(1)); and (2) 
provide an alternative set of requirements under which hospitals, 
federally qualified health centers, and rural health clinics (but not 
other entities) may provide obstetrical malpractice insurance subsidies 
(new Sec.  411.357(r)(2)). We believe that the provisions in new Sec.  
411.357(r)(2) will reduce perceived obstacles to maintaining or 
improving patient access to needed obstetrical services by providing 
flexibility for the provision to qualifying physicians of obstetrical 
malpractice insurance subsidies. New Sec.  411.357(r)(2) allows 
hospitals, federally qualified health centers, and rural health clinics 
to provide an obstetrical malpractice insurance subsidy to a physician 
who regularly engages in obstetrical practice as a routine part of a 
medical practice that is: (1) Located in a primary care HPSA, rural 
area, or area with a demonstrated need, as determined by the Secretary 
in an advisory opinion; or (2) is comprised of patients at least 75 
percent of whom reside in a medically underserved area (MUA) or are 
part of a medically underserved population (MUP). The expansion to 
additional practice locations and patient populations is found also in 
the requirements regarding the composition of the patient population 
treated by the physician under the coverage of the malpractice 
insurance and the determination of ``costs of malpractice insurance 
premiums.'' Where possible, we maintain parallel structure and 
conditions in the exceptions to the physician self-referral law. In 
Phase III, we similarly revised the exception for retention payments in 
underserved areas in Sec.  411.357(t) to incorporate criteria that are 
based on the patient population served by the physician receiving the 
retention payment, rather than focusing the requirements of the 
exception solely on the location of the hospital making the retention 
payment (72 FR 51065 through 51068). Our concerns regarding beneficiary 
access to services was a significant basis for this revision, as well 
as for the revisions to the exception for physician recruitment in 
Sec.  411.357(e) with respect to the allocation of certain costs where 
a physician is recruited into a practice in a rural area or HPSA to 
replace a retired, relocated, or deceased physician (72 FR 51047 
through 51054).
    We are not revising the exception to adopt only the provisions in 
new Sec.  411.357(r)(2) and to discard the provisions of the current 
exception, because the current exception, through its incorporation of 
Sec.  1001.952(o), applies to subsidies provided by a ``hospital or 
other entity,'' and we did not propose in the CY 2008 PFS proposed rule 
to limit the types of entities that may provide subsidies under the 
exception. On the other hand, we are unwilling to extend the provisions 
in new Sec.  411.357(r)(2) to entities beyond hospitals, federally 
qualified health centers, and rural health clinics, because we are not 
persuaded that, if we did so, there would be no risk of program or 
patient abuse (as required under section 1877(b)(4) of the Act for new 
exceptions or modifications to existing exceptions). (We note that, 
although the provisions of new Sec.  411.357(r)(2) apply to hospitals, 
federally qualified health centers, and rural health clinics, for ease 
of reference and readability, we refer throughout the discussion below 
to all three types of entities as ``hospitals.'')
    Finally, our revisions to the exception in Sec.  411.357(r) for 
obstetrical malpractice insurance subsidies should not be construed as 
having any effect on the safe harbor under the anti-kickback statute 
for obstetrical malpractice insurance subsidies in Sec.  1001.952(o), 
nor as a commentary on what we believe is or is not permitted under the 
anti-kickback statute. We discuss below the specific comments that we 
received in response to our proposal in the CY 2008 PFS proposed rule.
    Comment: Several commenters asserted that conditioning the 
availability of an obstetrical malpractice insurance subsidy on the 
location of the physician's medical practice in a primary care HPSA 
disadvantages patients. Numerous commenters questioned the link between 
a hospital's ability to provide an obstetrical malpractice insurance 
subsidy and the lack of primary care physicians in a particular area. 
(The exception in

[[Page 48735]]

Sec.  411.357(r), by incorporating Sec.  1001.952(o), requires that the 
physician's medical practice be located in a primary care HPSA.) These 
commenters noted that a community may be underserved with respect to 
obstetrical services, even if it is not underserved with respect to 
primary care services; in fact, an increase in primary care physicians 
in an area could cause the area to lose its HPSA designation, despite 
no corresponding increase in obstetrical services. Many of the 
commenters suggested that the exception should condition a hospital's 
ability to provide an obstetrical malpractice insurance subsidy on the 
location of the physician's practice in an area that has a shortage of 
obstetrical services. One commenter provided possible criteria for 
determining whether an area is an ``obstetrician shortage area.''
    Response: We agree generally with the commenters that asserted 
that, rather than be restricted to providing obstetrical malpractice 
insurance subsidies only in situations where the physician's practice 
is located in a primary care HPSA, a hospital should be able to provide 
a subsidy to physicians who serve underserved areas or patient 
populations. We share the commenters' concern that an increase in 
primary care physicians in an area could cause the area to lose its 
HPSA designation, thus making all physicians in the area ineligible to 
receive a needed obstetrical malpractice insurance subsidy. However, we 
continue to believe that designation as a primary care HPSA is one 
appropriate way to establish need for additional obstetrical patient 
care services, because obstetrics is one of the specialties included by 
HRSA in its determination regarding whether an area should be 
designated as a primary care HPSA (together with general family 
practice, general internal medicine, pediatrics, and gynecology).
    In this final rule, we provide greater flexibility for hospitals 
(and federally qualified health centers and rural health clinics, as 
discussed above) to facilitate continued patient access to obstetrical 
patient care services through the provision of needed obstetrical 
malpractice insurance subsidies. Under new Sec.  411.357(r)(2), a 
physician who engages in obstetrical practice as a routine part of his 
or her medical practice will be eligible for receipt of an obstetrical 
malpractice insurance subsidy if his or her medical practice is: (1) 
Located in a primary care HPSA, a rural area, or an area with 
demonstrated need for the physician's obstetrical services, as 
determined by the Secretary in an advisory opinion; or (2) is comprised 
of patients, at least 75 percent of whom reside in a MUA or are members 
of a MUP. We are not adopting the commenter's suggestion that we adopt 
a definition for ``obstetrician shortage area'' and permit the 
provision of obstetrical malpractice insurance subsidies in such an 
area. We believe that it would be difficult to define ``obstetrician 
shortage area'' (and maintain updates to the definition), and that our 
policy as finalized here affords sufficient flexibility for physicians 
and for hospitals, federally qualified health centers, and rural health 
clinics.
    Comment: Two commenters suggested that we remove all requirements 
in the exception relating to the location of the physician practice 
receiving the subsidy. Three commenters suggested that we impose no 
limitations at all on the location of the hospital providing the 
obstetrical malpractice insurance subsidy. Another commenter suggested 
that the exception permit obstetrical malpractice insurance subsidies 
where there is no other facility to which the physician receiving the 
subsidy could refer his or her obstetrical patients.
    Response: We agree with the commenters with respect to not 
including requirements for the location of the hospital making the 
obstetrical malpractice insurance subsidy payment, but disagree with 
the commenters that a practice location restriction on the eligibility 
for receipt of an obstetrical malpractice insurance subsidy is 
unnecessary or inappropriate. The provision of obstetrical malpractice 
insurance (or a contribution towards its cost) is a valuable benefit to 
a physician, and we believe that the requirement that the physician 
provide obstetrical services in an underserved area (that is, a primary 
care HPSA, rural area, or area of designated need) or to an underserved 
population is necessary to help ensure that this valuable benefit is 
provided only to maintain or improve patient access to needed 
obstetrical services, rather than as an inducement for referrals to the 
hospital providing the subsidy. This requirement, in combination with 
the other requirements in new Sec.  411.357(r)(2), is necessary to 
satisfy the mandate of section 1877(b)(4) of the Act that any exception 
issued using such authority pose no risk of program or patient abuse. 
As we described in the previous response, although we continue to 
include requirements with respect to the location of a physician's 
medical practice as a determining factor for eligibility for receipt of 
an obstetrical malpractice insurance subsidy, we are permitting 
subsidies to physicians who provide obstetrical services in medical 
practices located in areas other than a primary care HPSA and to 
patient populations that reside in areas other than a primary care 
HPSA.
    We disagree with the commenter that advocated permitting 
obstetrical malpractice insurance subsidies to physicians where there 
is no other facility to which the physician could refer his or her 
obstetrical patients. We believe that the commenter is arguing that 
there is no risk of program or patient abuse if a hospital provides an 
obstetrical malpractice insurance subsidy payment to a physician who 
would have referred all of his or her obstetrical patients to the 
hospital regardless of the existence of the subsidy. We do not believe 
that the risk of program or patient abuse is reduced merely because the 
physician would have referred his or her obstetrical patients to the 
hospital regardless of the subsidy. The subsidy could serve as an 
inducement for referrals to the hospital of other DHS.
    Comment: One commenter urged that the exception in Sec.  411.357(r) 
be revised to permit a hospital located in a rural area to provide an 
obstetrical malpractice insurance subsidy, regardless of the location 
of the physician's medical practice. The commenter argued that there 
would be no risk of program or patient abuse if we adopt this 
suggestion given the nature of obstetrical services; that is, according 
to the commenter, obstetricians have no ability to increase the number 
of deliveries that they perform because the volume of deliveries is 
determined by the number of pregnancies in the area, and not based on 
the therapy choice of a physician. The commenter contrasted this with 
the risk of program and patient abuse in other specialties where a 
physician who wishes to increase his or her revenue could do so by 
increasing the number of procedures that he or she performs.
    Response: We do not agree necessarily with the commenter's 
assertion regarding the relative risk of program or patient abuse 
between obstetrical services and other medical specialties, and we 
decline to adopt the commenter's suggestion. We believe that a 
restriction on the location of the hospital providing the obstetrical 
malpractice insurance subsidy, by itself, does not guarantee an 
improvement to or the maintenance of access to obstetrical services to 
patients most in need of the services. Rather, we believe that the 
location or composition of the physician's medical practice is a better 
indicator of which physicians are providing obstetrical services to the 
patient populations we believe would

[[Page 48736]]

be harmed if the physician discontinued his or her obstetrical medical 
practice. We continue to require that the location or composition of 
the physician's obstetrical medical practice determine the availability 
of the exception in Sec.  411.357(r), although we have expanded the 
exception to cover obstetrical medical practices located in rural 
areas. With respect to the commenter's point that obstetricians have no 
ability to increase the number of deliveries that they perform because 
the volume of deliveries is determined by the number of pregnancies in 
the area, we reiterate that obstetrical malpractice insurance subsidies 
can serve as an inducement for referrals of other DHS.
    Comment: Some commenters suggested that we revise or eliminate the 
requirement that 75 percent of the patients treated under the subsidy 
reside in a HPSA or MUA, or be part of a MUP. Two commenters asserted 
that this requirement imposes a substantial administrative burden on 
physicians, as the determination of whether a patient resides in a HPSA 
or MUA must be completed manually; that is, there is no automated, 
simple way to determine the information needed to make the 
certification required in Sec.  1001.952(o)(2), as incorporated by 
reference in Sec.  411.357(r). Moreover, according to one of the 
commenters, determining the exact location or boundaries of a HPSA is 
difficult because HPSAs are registered by census tract with boundaries 
that are not easily defined. According to the other commenter, 
physician practice management systems are not configured so that the 
physician can abstract HPSA or MUA status from patient records. Rather, 
systems are equipped to capture zip code information, not the census 
data that delineate HPSAs and MUAs. One commenter suggested that the 
exception require only that a physician who receives an obstetrical 
malpractice insurance subsidy from a hospital certify initially that 
his or her medical practice is in or near a HPSA, and that more than 
one half of his or her patients are expected to reside in a MUA or be 
part of a MUP. This commenter and another suggested that certification 
be required less frequently than annually.
    Response: We continue to believe that this requirement is necessary 
to ensure that arrangements that satisfy the requirements of the 
exception in Sec.  411.357(r) (whether under renumbered Sec.  
411.357(r)(1) or new Sec.  411.357(r)(2)) pose no risk of program or 
patient abuse. We understand the commenters' assertions regarding 
administrative burden. However, particularly in light of the expansion 
of the exception to permit the inclusion of patients who live in rural 
areas in the calculation of patients treated under the subsidized 
malpractice insurance coverage, we do not believe that this requirement 
is an undue burden for a physician where the physician is receiving a 
valuable benefit in the form of an obstetrical malpractice insurance 
subsidy. For purposes of satisfying the exception under the new 
alternative requirements in Sec.  411.357(r)(2), we are permitting the 
inclusion of patients who reside in a rural area when calculating 
whether at least 75 percent of the patients treated under the coverage 
of the subsidized malpractice insurance reside in an underserved area 
(that is, a HPSA or MUA) or are part of a MUP. We believe that doing so 
adds needed flexibility without posing a risk of program or patient 
abuse. We have made no other changes to this requirement, however. (We 
note that ``rural area'' is defined at Sec.  411.351 as an area that is 
not an urban area. ``Urban area'' is defined at Sec.  412.62(f)(1)(ii) 
as a Metropolitan Statistical Area (MSA) or New England County 
Metropolitan Area (NECMA), as defined by the Executive Office of 
Management and Budget (or certain New England counties specified in the 
regulation.) Determining whether a patient lives in a rural area should 
be simple and not pose an undue administrative burden.) Given our 
concerns regarding the maintenance or improvement of patient access to 
needed obstetrical services described above, we believe that it is 
important to require the continued provision of services to the 
neediest patients in exchange for a physician's receipt of an 
obstetrical malpractice insurance subsidy.
    Comment: Several commenters argued that the requirement that 75 
percent of the physician's obstetrical patients be treated under the 
coverage of the malpractice insurance for which the subsidy is provided 
may be too high, given the low reimbursement rates for obstetrical 
services and the high cost of malpractice insurance. One commenter 
suggested that the obstetrical patient treatment requirement be lowered 
to 25 percent of the physician's obstetrical patients treated under the 
coverage of the malpractice insurance.
    Response: We disagree with the commenters. We believe that 
requiring less than 75 percent of the physician's obstetrical patients 
to be treated under the coverage of the malpractice insurance for which 
the subsidy is provided may be insufficient to ensure continued access 
to obstetrical services for the neediest patients. We also believe that 
the 75 percent threshold, in combination with the other requirements of 
the exception, ensures that arrangements protected by the exception 
pose no risk of program or patient abuse.
    Comment: Numerous commenters urged us to expand the scope of the 
exception in Sec.  411.357(r) to permit malpractice insurance subsidies 
to specialties other than obstetrics. The commenters' arguments in 
support of such an expansion include the increase in malpractice 
insurance premiums generally; an expansion would be in keeping with 
guidance provided by OIG regarding malpractice insurance assistance 
(specifically, OIG's Letter on Hospital Corporation's Malpractice 
Insurance Assistance Program, its Compliance Guidance for Hospitals, 
and OIG Advisory Opinion 04-19); and the lack of statutory authority to 
limit any exception to certain medical specialties, rural areas, or 
HPSAs.
    One commenter asserted that, because malpractice insurance is 
unaffordable in some geographic locations, some physicians practice 
medicine without any professional malpractice insurance coverage. 
According to the commenter, this disadvantages patients and other 
providers, because insurers' costs in defending malpractice claims 
against physicians with no insurance coverage are passed on 
disproportionately to hospitals (because hospitals are named as co-
defendants). The commenter suggested that we expand the exception to 
include other physician specialties, and recommended that the subsidy 
be available only to a physician practicing in a particular specialty 
that is identified by an independent third party as having a 
demonstrated shortage of physicians practicing in that particular 
specialty in the geographic area served by the hospital providing the 
malpractice insurance subsidy. In addition, according to the commenter, 
the amount of the subsidy could be capped at the amount that the 
average premium for that specialty in the hospital's community exceeds 
the national average for that specialty. The commenter suggested 
further protection against program and patient abuse, for example, a 
requirement that hospitals not provide malpractice insurance subsidies 
in a targeted, preferential or discriminating manner, or in a manner 
that takes into account the volume or value of referrals or other 
business generated by the referring physician.
    One commenter suggested that we permit a hospital to provide a 
malpractice insurance subsidy to any member of the hospital's medical 
staff, regardless of the physician's specialty.

[[Page 48737]]

Another commenter suggested that we permit hospitals to provide 
malpractice insurance subsidies to physicians who practice in any 
specialty in a State in which malpractice premiums are ``relatively 
high,'' and suggested that we could compare the percentage increase of 
malpractice insurance premiums to the salary of the average physician 
in that specialty to determine this relativity. A different commenter 
suggested that, if we expand the exception to cover all medical 
specialties, we could impose a cost sharing requirement similar to that 
included in our exception for the donation of electronic health records 
items and services in Sec.  411.357(w).
    Response: In Phase III, we addressed the issue of our statutory 
authority to limit the exception in Sec.  411.357(r) to physician 
practices in HPSAs (72 FR 51064). There, we stated:

    Section 1877(b)(4) of the Act allows us to create additional 
exceptions to the general prohibition on physician self-referral 
where doing so would not result in a risk of program or patient 
abuse. It does not require us, where we exercise such authority, to 
make the additional exceptions available to all types of entities 
and physicians, or make them applicable in all areas. The Congress 
and CMS have long recognized the special needs and character of 
rural, urban, and underserved areas. Malpractice insurance 
availability in HPSAs poses specific concerns not present in other 
areas and supports a targeted exception.

    Our position with respect to limiting the exception to physician 
practices in certain identified locations has not changed, nor are we 
persuaded by the commenters' similar argument regarding our statutory 
authority to limit the applicability of the exception to obstetrical 
malpractice insurance only (rather than to permit subsidies of 
malpractice insurance for all specialties or for certain specified 
medical specialties).
    We decline to expand the exception to cover the provision of 
malpractice insurance subsidies to physicians practicing in other 
medical specialties, as suggested by many of the commenters. The 
commenters did not provide us with information indicating that, without 
an expansion of the exception, beneficiary access to necessary medical 
services is hindered, nor are we independently aware of such data. Such 
information would be helpful to ensuring that an expansion of the 
exception to other (or all) medical specialties would not pose a risk 
of program or patient abuse. We note also that we addressed this issue 
in Phase III in response to a comment urging us to expand the exception 
to all specialties and hospitals (72 FR 51063). There, we stated:
    The exception in Sec.  411.357(r) is one of several exceptions 
that allow DHS entities to provide assistance with malpractice 
insurance. Other exceptions that permit DHS entities to provide such 
assistance are the fair market value compensation exception (as 
discussed above in response to the previous comment) in Sec.  
411.357(l), the exception for bona fide employment relationships in 
Sec.  411.357(c), and the exception for personal service 
arrangements in Sec.  411.357(d) (provided that the value of the 
assistance is commensurate with the value of actual services 
furnished to the hospital by the physician). These exceptions allow 
any DHS entity to provide assistance with malpractice insurance, 
without regard to the specialty of the physician or the area in 
which the physician practices.

    We believe that the exceptions to the physician self-referral 
prohibition discussed in our Phase III response provide sufficient 
flexibility for hospitals that desire to provide assistance with the 
costs of malpractice insurance coverage.
    Comment: According to one commenter, it would be more cost-
effective for hospitals to subsidize malpractice premiums to retain 
physicians than to lose those physicians and have to pay expensive 
recruitment packages to recruit new physicians to the area.
    Response: We assume that the commenter is arguing that the 
exception should be expanded in light of the commenter's assertion 
regarding the cost-effectiveness of providing malpractice insurance 
subsidies versus recruitment packages to replace physicians who leave 
the geographic area due to high malpractice insurance costs. Regardless 
of whether the commenter's assertion regarding cost-effectiveness is 
accurate, cost effectiveness is not an indicator that an arrangement is 
without risk of program or patient abuse, and we are obliged to follow 
the mandate in section 1877(b)(4) of the Act that new exceptions that 
we create under that authority, or modifications of existing exceptions 
created under that authority, must not pose a risk of program or 
patient abuse. We believe that the provisions of new Sec.  
411.357(r)(2) will enable hospitals to subsidize obstetrical 
malpractice premiums for some physicians who would not have qualified 
for them under our previous rules.

I. Ownership or Investment Interest in Retirement Plans

    In the CY 2008 proposed rule we proposed to revise Sec.  
411.354(b)(3)(i) to clarify that the exclusion from the definition of 
``ownership or investment interest'' of an interest in a retirement 
plan pertains only to an interest in an entity arising from a 
retirement plan offered by that entity to the physician (or the 
physician's immediate family member) through the physician's (or 
immediate family member's) employment with that entity (72 FR 38224). 
That is, where a physician has an interest in a retirement plan offered 
by Entity A, through the physician's (or immediate family member's) 
employment with Entity A, we intended to except from the definition of 
``ownership or investment interest'' any interest the physician would 
have in Entity A by virtue of his or her interest in the retirement 
plan; we did not intend to exclude from the definition of ``ownership 
or investment interest'' any interest the physician may have in Entity 
B through the retirement plan's purchase of an interest in Entity B.
    As we explained in the CY 2008 PFS proposed rule, we made our 
proposal because we were concerned that some physicians may be using 
retirement plans to purchase or invest in other entities (that is, 
entities other than the one that is sponsoring the retirement plan) to 
which they refer patients for DHS (72 FR 38183). After consideration of 
the public comments, we are adopting our proposal. We address below the 
specific comments we received in response to out proposal in the CY 
2008 PFS proposed rule.
    Comment: Three commenters agreed with the proposed revision. 
Another commenter stated that the proposal ``represented another 
example of our broad-brush approach to physician practices by punishing 
and restricting all physicians based on negligible and likely 
unsubstantiated, anecdotal evidence of questionable physician 
investment.''
    Response: The commenter that did not agree with our proposal 
offered no reason why the exclusion from the definition of ``ownership 
and investment interest'' in Sec.  411.354(b)(3)(i) should pertain to a 
physician's (or immediate family member's) interest in an entity that 
is purchased by the retirement plan in which the physician (or 
immediate family member) has an interest by virtue of the physician's 
(or immediate family member's) employment, regardless of how frequent 
or infrequent such purchases by retirement plans take place. The 
purpose of the original exclusion in Sec.  411.354(b)(3)(i), and as 
clarified in this final rule, is to exclude automatically a physician's 
(or immediate family member's) interest in a retirement plan offered by 
an entity as a result of the physician's (or immediate family

[[Page 48738]]

member's) employment from being considered an ``ownership or investment 
interest'' in that entity. Without such a per se exclusion, a 
physician's ability to refer patients for DHS to an entity that extends 
a retirement plan to the physician (or his or her immediate family 
member) as a result of the physician's (or immediate family member's) 
employment without running afoul of the physician self-referral rules 
would be in doubt in some cases, because what would otherwise be a 
compensation arrangement (based on the physician's or immediate family 
member's employment) could be considered to be an ownership or 
investment interest. Where a retirement plan offered by the entity that 
employs the physician (or his or her immediate family member) purchases 
or invests in another DHS entity, however, we see no need to exclude 
per se the physician's (or immediate family member's) interest in the 
retirement plan from being considered an ownership or investment 
interest in the other entity. To do otherwise would create the 
potential for abuse. For example, assume that a group practice offers a 
retirement plan to its members and, through the assets of the 
retirement plan, purchases or invests in an imaging facility to which 
the members of the group practice refer patients for DHS. Had the 
members of the group practice purchased or invested directly in the 
imaging facility, the requirements of an exception (such as the rural 
provider exception) would need to be satisfied in order for the 
physicians to refer patients to the imaging facility for DHS. If, 
however, the members of the group practice used the assets of the 
retirement plan to purchase the imaging facility, in the absence of the 
regulatory provision finalized here, the members of the group practice 
would have effectively skirted the general prohibition on ownership in 
entities to which they refer patients for DHS.

J. Burden of Proof

    In the CY 2008 PFS proposed rule, we proposed to add a new 
regulatory provision to clarify that, consistent with our existing 
procedures with respect to claims denials, in any appeal of a denial of 
payment for a designated health service that was made on the basis that 
the service was furnished pursuant to a prohibited referral, the burden 
is on the entity submitting the claim for payment to establish that the 
service was not furnished pursuant to a prohibited referral (72 FR 
38224). That is, the burden of proof is not on us or our contractors to 
establish that the service was furnished pursuant to a prohibited 
referral.
    We received several public comments objecting to our proposal as 
unfair or inconsistent with the current rules. After consideration of 
the public comments, we are adopting our proposal as final and 
clarifying that the burden of proof (otherwise known as the burden of 
persuasion) is on the claimant throughout the course of the appellate 
proceeding (and at each level of appeal), whereas the burden of 
production initially is on the claimant but may shift to us or our 
contractor during the course of the proceeding. The new provision is 
codified in revised Sec.  411.353(c)(2) in this final rule. We address 
below the specific comments that we received in response to our 
proposals in the CY 2008 PFS proposed rule.
    Comment: Many commenters expressed concern regarding the statement 
in the CY 2008 PFS proposed rule that, in an appeal brought by a 
provider, the burden of proof is on the entity submitting the claim for 
payment to establish that a service was not furnished pursuant to a 
prohibited referral. Some commenters asserted that the burden of proof 
should be on us because, according to these commenters, the law 
historically places the burden on the party that makes the rules. The 
commenters concluded that we are in a better position to determine 
whether actions were illegal, as we draft the regulations that provide 
interpretations of whether these actions are legal. Other commenters 
asserted that placing the burden on providers makes us ``the judge and 
jury,'' fails to adhere to the fundamental principle that people are 
``innocent until proven guilty,'' or amounts to us taking an 
unconstitutional action. Some commenters concluded that the proposed 
language amounts to a ``hidden tax'' requiring physicians to prove that 
they conducted their actions legally. One commenter expressed concern 
that providers already render healthcare services for the prices we 
set, and placing the burden of proof on providers is an additional onus 
that impacts them unfairly.
    Response: Our proposal was intended only to clarify existing 
procedures with respect to the Medicare claims appeals process (which 
is the administrative remedy for providers and suppliers, regardless of 
whether the denial is for physician self-referral reasons, lack of 
medical necessity grounds, or some other reason). The claimant 
traditionally has borne the ultimate burden of proof in the Medicare 
claims appeals process, which is set forth in 42 CFR Part 405, Subpart 
I of our regulations (and which formerly appeared in 42 CFR Part 405, 
Subparts G and H), as well as in the Social Security beneficiary claims 
appeals process, which is set forth in 20 CFR Part 404, Subpart J (and 
which is the model upon which the Medicare claims appeals process is 
based). Because government funds are at issue, it is appropriate to 
place the burden on providers and suppliers to show that they are 
entitled to payments from the public fisc, and not on the government to 
show that the provider or supplier is not entitled to such payments. 
Our regulations expressly state that the provider, supplier or 
beneficiary must furnish sufficient information for our contractors to 
determine whether payment is due and the amount of such payment. (See 
42 CFR 424.5(a)(6); see also section 1833(e) of the Act.) We note also 
that section 205(a) of the Act, as incorporated into title XVIII by 
section 1872 of the Act, gives the Secretary broad authority to 
allocate the burden of proof. The Supreme Court has noted that the 
general rule is that the burden of proof lies with the party seeking 
relief, and that the Congress expressed its approval of the general 
rule when it chose to apply it to administrative proceedings under the 
Administrative Procedure Act (5 U.S.C. 556(d)). (See Shaffer v. West, 
546 U.S. 49, 57-58 (2005).) We do not agree that, because we draft the 
physician self-referral regulations, the burden of proof should be on 
us and the Medicare program.
    Comment: One commenter stated that, because many exceptions to the 
physician self-referral prohibition require compliance with the anti-
kickback statute, the proposal would require a provider to satisfy the 
burden of proving that it: (1) Meets an anti-kickback statute safe 
harbor; (2) has received a favorable advisory opinion from OIG; or (3) 
otherwise does not violate the anti-kickback statute. The commenter 
concluded that providers will have the unreasonable burden of having to 
``prove a negative,'' even though the government has the burden to 
prove intent under the anti-kickback statute. Two other commenters 
expressed similar concerns, and stated that the language in the 
proposed regulation would shift the burden from the government to the 
provider with respect to the anti-kickback statute. Other commenters 
expressed concerns about having to ``prove a negative'' with respect to 
other requirements of exceptions for certain compensation arrangements, 
such as the requirements that: (1) Compensation does not take into 
account the volume or value of referrals or other business between the

[[Page 48739]]

parties; (2) equipment or space is not shared by others; (3) an 
arrangement would be commercially reasonable even in the absence of 
referrals; and (4) no payment is made directly or indirectly as an 
inducement to reduce or limit medically necessary services.
    Response: Section 1877(b)(4) of the Act authorizes us to create 
additional exceptions to the physician self-referral statute, provided 
that such exceptions do not pose a risk of program or patient abuse. 
All of the exceptions for financial relationships promulgated using our 
authority in section 1877(b)(4) of the Act include the requirement that 
the financial relationship covered by the exception not violate the 
anti-kickback statute, which is an intent-based criminal statute, or 
any Federal or State law or regulation governing billing or claims 
submission. Similarly, most of the exceptions applicable to 
compensation arrangements, including those prescribed by statute and 
those created using our authority in section 1877(b)(4) of the Act, 
contain a requirement that the compensation not take into account the 
volume or value of referrals or other business generated between the 
parties. We recognize that requiring claimants to prove that they did 
not violate the anti-kickback statute may, in some cases, be difficult. 
However, our proposal and this final rule pertain to the ultimate 
burden of proof (or burden of persuasion) and not to the burden of 
production (or burden of going forward with evidence).
    As explained by courts and legal commentators, the burden of proof 
remains on the same party throughout the appellate proceeding, whereas 
the burden of production on a particular issue or element may shift 
from one party to another (and even back to the first party) as 
evidence is put forth. We believe it is appropriate that the burden of 
production be on the claimant initially with respect to all 
requirements in our physician self-referral regulations. The claimant 
may produce evidence in such quantity or quality so as to shift the 
burden of production to the Medicare program requiring us to show that 
the requirement was not met. Thus, although a claimant would have the 
initial burden to show that it did not violate the anti-kickback 
statute, the claimant may produce evidence that is conclusive on the 
issue (such as showing that the arrangement satisfied a safe harbor to 
the anti-kickback statute) or is sufficient to shift the burden of 
production to the government to show that the financial relationship at 
issue did violate the anti-kickback statute. We decline to attempt to 
prescribe by regulation what type or quantity of evidence is sufficient 
to shift the burden of production to us on any given requirement of our 
physician self-referral regulations, as this would be impractical, if 
not impossible, to do given the infinite factual variations that may be 
present. We instead leave to the adjudicators that hear the appeals the 
question of whether the burden of production has shifted.
    Comment: Several commenters asserted that it will be difficult for 
providers to prove that compensation arrangements were made at fair 
market value because valuation experts may disagree about what 
constitutes fair market value. A few commenters stated that hospitals 
may contract with physicians at a rate that was low in an effort not to 
have the arrangement questioned, and complained that requiring a 
hospital to prove fair market value will further disadvantage parties 
negotiating rates under hospital-physician contractual arrangements.
    Response: In Phase III, we addressed requests for us to comment on 
fair market valuation methodologies. There, we stated ``[n]othing 
precludes parties from calculating fair market value using any 
commercially reasonable methodology that is appropriate under the 
circumstances and otherwise fits the definition at section 1877(h) of 
the Act and Sec.  411.351. Ultimately, fair market value is determined 
based on facts and circumstances. The appropriate method will depend on 
the nature of the transaction, its location, and other factors'' (72 FR 
51015 through 51016).
    We believe that, in most instances, what constitutes fair market 
value for an item or service will be expressed as a range and, 
accordingly, claimants should not face significant difficulty in 
establishing fair market value, provided that they use a methodology 
that is reasonable under the facts and circumstances, determine a 
payment amount that is within the range that the methodology yields, 
and maintain documentation regarding the determination of fair market 
value that was created at the time of the financial relationship. We 
disagree that codifying burden of proof obligations should have the 
negative impact on business arrangements claimed by the commenters, 
these are the procedures that claimants must currently follow.
    Comment: One commenter expressed concern that large fines may be 
imposed upon any party whom we believe violates the physician self-
referral law. Another commenter asserted that the proposed provision 
should not affect the burden of proof that is applicable to other 
governmental sanction and enforcement provisions (including civil 
monetary penalties and exclusions).
    Response: Our proposal (now finalized in Sec.  411.353(c)(2) in 
this final rule) related only to administrative appeals of claims 
denials under the appeals process in 42 CFR Part 405, Subpart I of our 
regulations. Appeals of civil monetary penalties, exclusions or other 
remedies imposed because of a determination that a DHS entity or a 
physician knowingly violated the self-referral statute or regulations 
involve other appeals processes.
    Comment: One commenter asked if the proposed regulation would trump 
evidentiary rules that may exist elsewhere, including under the False 
Claims Act.
    Response: No, it would not. Our proposal was not intended to have 
any impact on the evidentiary rules in False Claims Act cases or in 
other types of cases, but instead was intended only to clarify existing 
procedures with respect to the Medicare claims appeals process. New 
Sec.  411.353(c)(2) does not establish any standards of knowledge or 
other evidentiary rules, but merely clarifies that, in any case in 
which a claim is denied for failure to comply with the physician self-
referral rules, the ultimate burden of proof (that is, the burden of 
persuasion) is on the claimant to demonstrate compliance and not on the 
Medicare program to demonstrate noncompliance. Thus, for example, if a 
claim is denied and a DHS entity appeals on the basis that it did not 
know the identity of the referring physician, the current standard of 
knowledge in Sec.  411.353(e) (that is, the entity did not have actual 
knowledge of, and did not act in reckless disregard or deliberate 
ignorance of, the identity of the referring physician) continues to be 
applicable. The claimant would have the burden of persuasion that it 
did not know the identity of the referring physician, using the 
standard contained in Sec.  411.353(e).
    Comment: One commenter asked if the burden of proof remains on the 
provider at every level of appeal.
    Response: At every level of appeal, the burden of proof (that is, 
the burden of persuasion) remains on the entity that submitted the 
claim.
    Comment: One commenter suggested that, although providers have the 
burden to prove that services they provided are covered by Medicare, 
the same standard should not apply to compliance with the physician 
self-referral law and regulations. The commenter argued that an appeal 
of a claim that was denied due to lack of medical necessity differs 
from an appeal of a claim denied due to noncompliance with the 
physician self-referral law,

[[Page 48740]]

because the congressional intent underlying the two types of appeals is 
different and the potential consequences of failure to comply with the 
physician self-referral statute are significant.
    Response: We do not agree that the allocation of the burden of 
proof should vary depending on the underlying reason for the claim 
denial. We note that the Congress has not indicated any intent to make 
such a differentiation. With respect to the commenter's statement that 
the potential consequences of failure to comply with the physician 
self-referral statute are significant, the same can be said for medical 
necessity denials and other types of coverage denials. Where a 
financial relationship between an entity and one or more referring 
physicians is found to fail to meet an exception, a few or many claims 
may be at issue, depending on the circumstances. Likewise, a 
contractor's denial, on medical necessity or other grounds, may affect 
a few claims of a supplier or provider or may affect an entire class of 
claims.
    Comment: Several commenters reasoned that, because the physician 
self-referral law is a strict liability statute, it is even more 
important for the burden of proof to be on the government. One of these 
commenters asserted that we have the ``weight of the Federal 
bureaucracy behind [us]'' and that we should prove our case if a 
benefit is denied.
    Response: We reiterate that the language finalized in Sec.  
411.353(c)(2) of this final rule is entirely consistent with the 
allocation of the burden of proof in appeals of Medicare claims denied 
for reasons other than due to a prohibited referral. Virtually all 
coverage rules carry with them ``strict liability,'' and, where a claim 
is denied, the burden of proof is on the claimant to establish coverage 
and not on the government to prove noncoverage. (We note an exception 
to the strict liability rule in section 1879 of the Act, under which 
Medicare may pay the provider or supplier if the provider or supplier 
can establish that neither it nor the beneficiary knew or reasonably 
should have known that the item or service was not covered. The 
Congress has not authorized such limitation of liability protection for 
physician self-referral denials.)
    Comment: Two commenters disagreed that the proposal is consistent 
with our general policy and procedures regarding the appeals of claims 
denials. The commenters asserted that, when a claim is denied (in 
circumstances other than when a prohibited referral occurred), all that 
the provider must do to receive payment is produce a medical record 
that indicates that the service was provided and, in combination with 
accepted standards of care, was reasonable and necessary. In these 
circumstances, according to the commenters, each appeal is for only a 
single claim. The commenters contended that, when we do not pay a claim 
due to a violation of the physician self-referral law, thousands of 
claims are at stake, a huge fine is possible, and exclusion from 
Federal health care programs may occur.
    Response: The Congress has enacted a general prohibition against 
physician self-referral that is subject to certain exceptions (most 
created under our regulatory authority in section 1877(b)(4) of the 
Act). We believe that it is appropriate to require a provider or 
supplier to be prepared to demonstrate that its financial relationship 
with a referring physician does, in fact, satisfy an exception and that 
the claims at issue should be paid. Also, in most instances, the 
question of whether a provider or supplier meets an exception will be a 
factual one. The documentation containing the particulars of the 
financial relationship at issue will be in the possession of the 
provider or supplier (and most often will not be in the possession of 
us or our contractors).
    Although the commenters claim that appeals of claims denied for 
reasons other than alleged violations of the physician self-referral 
rules involve a single claim each and that the claimants need only 
produce the medical record to demonstrate medical necessity, many such 
appeals involve large numbers of aggregated claims and complex coverage 
issues. In addition, it is not true necessarily that any claims denial 
based on an alleged violation of the physician self-referral rules will 
involve thousands of claims or complex issues. In any event, it is not 
apparent to us why the number of claims, the amount of money involved, 
or the complexity of the issues should cut in favor of the government 
having the burden of proof, rather than the claimant. Finally, with 
respect to the commenters' point that the burden of proof should be on 
the government because an alleged violation of the physician self-
referral rules may lead to a large fine and exclusion from Federal 
health care programs, the proposal, which is finalized in Sec.  
411.353(c)(2) in this final rule, relates only to appeals of claims 
denials, not to appeals of the imposition of civil monetary penalties, 
exclusion or other remedies.
    Comment: Two commenters stated that the proposed rule will provide 
greater incentive for Medicare contractors to deny claims based on 
alleged violations of the physician self-referral law.
    Response: We disagree with the commenters' assertion that the 
proposal, which is finalized in Sec.  411.353(c)(2) in this final rule, 
will induce our contractors to deny claims based on physician self-
referral violations. The burden has always been on the party seeking 
Medicare payment to prove entitlement to payment if the claim is 
denied, and we assume that our contractors have been aware of this 
longstanding policy. Contractors should make determinations to deny 
claims based on the merits of the case and not based on concerns as to 
who bears the burden of proof. However, to the extent that any 
contractor, prior to this final rule, may have been less inclined to 
deny a claim due to its mistaken belief that it would bear the burden 
of proof, it is appropriate that it be apprised of the proper 
allocation of the burden of proof.

IX. Financial Relationships Between Hospitals and Physicians

    Most, if not all, hospitals have financial relationships with 
referring physicians. These financial relationships may involve 
ownership or investment interests, compensation arrangements, or both. 
The financial relationships may be direct or they may be indirect (such 
as through a physician group practice or limited liability company). 
The physician self-referral statute was first enacted in 1989, and the 
reporting requirements in the regulations in Sec.  411.361 were first 
implemented in our December 3, 1991 interim final rule with comment 
period, published in the Federal Register at 56 FR 61374. Since that 
time, we have not engaged in a comprehensive reporting initiative to 
examine financial relationships between hospitals and physicians. 
Consistent with Congressional intent in enacting the physician self-
referral statute, we believe it is important to query hospitals 
concerning their financial relationships with physicians.
    To assist in enforcement of the physician self-referral statute and 
implementing regulations, we created an information collection 
instrument, referred to as the Disclosure of Financial Relationships 
Report (``DFRR''). The DFRR is designed to collect information 
concerning the ownership and investment interests and compensation 
arrangements between hospitals and physicians. In the FY 2009 IPPS 
proposed rule, using our authority under section 1877(f) of the Act and 
Sec.  411.361, we proposed to send the DFRR to 500 hospitals, (both 
general

[[Page 48741]]

acute care hospitals and specialty hospitals), a number that we believe 
is necessary to provide us with sufficient information: (1) To identify 
arrangements that potentially may not be in compliance with the 
physician self-referral statute and implementing regulations; and (2) 
to identify practices that may assist us in any future rulemaking 
concerning the reporting requirements and other physician self-referral 
provisions (73 FR 23697). We note that to the extent we do not find a 
physician self-referral violation based on the results of the DFRR, 
this should not be taken as an affirmative statement that the financial 
relationships are in compliance, and the government will not be 
estopped from determining that there is a violation based on further 
review of information collected as part of the DFRR or additional 
different information. At this time we are proceeding with our proposal 
to send the DFRR to 500 hospitals (both general acute care hospitals 
and specialty hospitals). However, based on further review and comments 
we may receive in response to the revised Paperwork Reduction Act (PRA) 
package that will be published separately in the Federal Register, we 
may decide to decrease (but not increase) the number of hospitals to 
which we would send the DFRR.
    In the FY 2009 IPPS proposed rule, we provided a discussion of the 
potential burden associated with completing the DFRR, including an 
analysis that provided estimates of the burden for small, medium, and 
large hospitals. In the proposed rule, based on a review of the DFRR by 
33 hospitals, we estimated that the average number of hours to complete 
the DFRR was 31 hours. In addition, we sought comment on the accuracy 
of the time and burden estimates associated with this information 
collection instrument. Because the DFRR requires information that 
hospitals already should be keeping in the normal course of their 
business activities (even apart from the need to document compliance 
with the physician self-referral law), we anticipated that the majority 
of the time spent completing the DFRR would be spent by administrative 
staff. We believed that the tasks involved would include retrieving the 
information and printing it from electronic files or copying it from 
hard files, which largely should involve administrative personnel. In 
addition, the review and organization of the materials would also 
impose burden on the respondent. Nevertheless, in order to err on the 
side of more potential burden rather than less, we calculated costs 
using an hourly rate for accountants (73 FR 23697).
    As discussed more thoroughly below, we have revised our estimate of 
the time it will take each hospital to complete the DFRR from 31 hours 
to 100 hours and concluded that many hospitals may choose to involve 
accounting staff and attorneys for legal review. Therefore, the costs 
per hospital, associated with completing the DFFR has increased from 
$1,550 to $4,080. We have calculated a revised total burden for 500 
hospitals to be $2,040,000. A more detailed discussion of the aggregate 
burden may be found in the PRA section, section XI., of the preamble of 
this final rule. A revised PRA notice will be published separately in 
the Federal Register. The revised PRA notice will set forth a public 
comment period of 30 days from the date of display.
    In the FY 2009 IPPS proposed rule, we proposed that the DFRR be 
completed, certified by the appropriate officer of the hospital, and 
received by us within 60 days of the date that appears on the cover 
letter or e-mail transmission of the DFRR. We solicited comments on the 
proposed 60-day timeframe for completing the DFRR (73 FR 23697). 
Although we received a few comments objecting to the proposed 60-day 
timeframe, we are adopting the proposed 60-day limit for completing the 
DFRR. In the FY 2009 IPPS proposed rule, we noted that Sec.  411.361(f) 
provides that failure to submit timely the requested information 
concerning an entity's ownership, investment, and compensation 
arrangements may result in civil monetary penalties of up to $10,000 
for each day beyond the deadline established for disclosure. Although 
we have the authority to impose civil monetary penalties, we indicated 
in the proposed rule that we seek not to invoke this authority and will 
work with entities to comply with the reporting requirements. Prior to 
imposing a civil monetary penalty in any amount, we would issue a 
letter to any hospital that does not return the completed DFRR, 
inquiring as to why the hospital did not return timely the completed 
DFRR. In addition, a hospital may, upon a demonstration of good cause, 
receive an extension of time to submit the requested information (73 FR 
23697). Although we did not make a specific proposal concerning the 
imposition of civil money penalties, we are informing the public in 
this final rule that, before imposing any civil money penalties, we 
will follow the procedures described above.
    In the FY 2009 IPPS proposed rule, we solicited comments on the 
DFRR information collection instrument as follows:
     Whether the DFRR should be recurring, and, if so, whether 
it should be implemented on an annual or some other periodic basis;
     Whether the DFRR collects too much or not enough 
information, and whether it collects the correct (or incorrect) type of 
information;
     The amount of time it will take hospitals to complete the 
DFRR, the costs associated with completing the DFRR, and the amount of 
time we should give hospitals to complete and return their responses to 
us;
     Whether we should direct the collection instrument to all 
hospitals, and, if so, whether we should stagger the collection so that 
only a certain number of hospitals are subject to it in any given year;
     Whether hospitals, once having completed the DFRR, should 
have to send us yearly updates and report only changed information.
    After consideration of the public comments we received, we are not 
adopting a regular reporting or disclosure process at this time, and 
thus, the DFRR will be used, at this time, as a one-time collection 
effort. (Depending on the information we receive on the DFRR and other 
factors, we may propose future rulemaking to use the DFRR or some other 
instrument as a periodic or regular collection instrument.) We have 
concluded that we are collecting the correct type and appropriate 
amount of information, and thus, we are finalizing the DFRR, as 
proposed, with minor modifications. (We refer readers to the revised 
PRA notice that will be published separately in the Federal Register 
which will offer the public the opportunity to comment on the proposed 
collection of information.) As discussed more thoroughly below and in 
section XI. of the preamble of this final rule, we are increasing the 
amount of time it will take hospitals to complete the DFRR from 31 
hours to 100 hours, and the costs associated with completing the DFRR 
are being increased from $1,550 to $4,080 per hospital. We are 
finalizing our timeframe of 60 days to complete, certify, and return 
the DFRR to us.
    We respond to specific comments below.
    Comment: Several commenters asserted that neither the Deficit 
Reduction Act (DRA) of 2005, nor section 1877(f) of the Act, nor Sec.  
411.361 grants us the authority to impose ``such a far-reaching 
request,'' especially without the articulation of a specific

[[Page 48742]]

compliance problem to be addressed related to community hospitals. The 
commenters encouraged us to limit the scope of the DFRR to physician-
owned specialty hospitals, as directed by the DRA. The commenters 
stated that, alternatively, and at the very least, the burden of the 
demand should be significantly reduced and the request be narrowly 
tailored to result in information aimed at addressing a clearly defined 
compliance problem.
    Response: Our authority for the DFRR is not based on the DRA. We 
believe section 1877(f) of the Act and Sec.  411.361 of our regulations 
give us authority to collect this information. These provisions provide 
that entities must submit to us information concerning their financial 
relationships with referring physicians in the form, manner and at the 
times we specify. Nor do we agree that the DRA directed us to confine 
the scope of the DFRR (which did not exist at the time of the DRA), or 
any other collection instrument, to physician-owned specialty 
hospitals. As stated above, since the enactment of the physician self-
referral statute, we have not engaged in a comprehensive reporting 
initiative to examine financial relationships between hospitals and 
physicians, and consistent with section 1877(f) of the Act, we believe 
it is important to query hospitals concerning their financial 
relationships with physicians. Section 5006 of the Deficit Reduction 
Act of 2005 required the Secretary to develop a strategic and 
implementing plan to address certain issues relating to physician-owned 
specialty hospitals. The strategic and implementing plan that was 
included in our ``Final Report to the Congress and Strategic and 
Implementing Plan Required under Section 5006 of the Deficit Reduction 
Act of 2005'' issued on August 8, 2006, is available on our Web site at 
http://www.cms.hhs.gov/PhysicianSelfReferral/06a_DRA_Reports.asp 
(hereinafter referred to as the ``DRA Report to Congresss.''. We also 
refer to the DRA Report to Congress, at page 69, wherein we stated that 
we would require hospitals to provide us information on a periodic 
basis concerning their investment and compensation relationships with 
physicians.
    Comment: One commenter stated that we incorrectly asserted that 
section 1877(f) of the Act gives us the authority to obtain information 
about compensation arrangements that comply with an exception. The 
commenter stated that instead, section 1877(f) of the Act allows us to 
seek information only about compensation arrangements that do not meet 
an exception in section 1877(e) of the Act. The commenter further 
stated that section 1877(f) of the Act states that we may require 
information concerning compensation arrangements that are ``described 
in subsection (a)(2)(B) of [section 1877 of the Act].'' The commenter 
contended that section 1877(a)(2)(B) of the Act describes compensation 
arrangements that do not meet any of the exceptions contained in 
section 1877(e) of the Act. The commenter concluded that by including 
certain information that entities must report, Congress effectively 
excluded other information from our authority.
    Response: We believe that Congress did not intend to limit our 
ability to capture information about compensation arrangements that 
meet an exception. Section 1877(f) of the Act states that ``each entity 
* * * shall provide the Secretary with the information concerning 
entity's * * * compensation arrangements * * * including the names and 
[UPINs] of all physicians with a compensation arrangement (as described 
in subsection (a)(2)(B)) * * *'' (emphasis added). We believe Congress' 
use of the word ``including'' meant that it was providing only examples 
of the type of information that we may require. To read the statute 
otherwise would effectively negate our ability to make fully informed 
decisions about the extent to which entities are complying with the 
physician self-referral law and instead, allow entities to report 
information only about those compensation relationships that they self-
determine are out of compliance.
    Comment: Most commenters stated that our estimated burden of 31 
hours still fell short of what will be required within a facility to 
complete the DFRR. They indicated that steps a hospital will likely 
engage in are: (1) Identification of the relevant contracts; (2) 
retrieval of the contracts; (3) review and analysis of the contracts to 
determine the appropriate response to the DFRR; (4) review by an 
attorney for accuracy; (5) copying for submission; and (6) CEO 
certification. The commenters noted, anecdotally, the burden estimates 
for hospitals include at least 200 hours just to identify and assemble 
all the relevant contracts, 4 weeks to fully prepare responses, 3 
months to respond with 1 FTE's time. Another commenter, a 232 bed 
hospital, identified similar steps (including the creation of an ad hoc 
committee), and provided a total estimate of 120 hours. Another 
commenter suggested that the burden hours were underestimated and that 
we should either abandon the DFRR or redesign the tool to reduce the 
scope of the information requested.
    Response: Some of the commenters have identified an additional, 
self-imposed step in the process that, if taken into account, would 
increase the time and burden estimate, namely, legal review of all 
supporting documentation (including contracts). The DFRR requires 
hospitals to supply certain information and documentation concerning 
existing ownership/investment and compensation relationships with 
physicians, which relationships, presumably, underwent legal review 
prior to their inception. The information and documentation required by 
the DFRR is that which hospitals should already be keeping in the 
normal course of their business activities (even apart from the need to 
document compliance with the physician self-referral law), and 
therefore, the only burden imposed by the DFRR is the time needed to 
locate and compile the information and documentation. Notwithstanding 
our view that the true burden of responding to the DFRR does not 
properly include time for legal or other professional review, we have 
increased our time and burden estimates from 31 to 100 hours to 
complete and submit the DFRR. With respect to the suggestion that we 
either abandon the DFRR or reduce the scope of the information 
requested, we are adopting the DFRR as final, with some modification. 
(We refer readers to the revised PRA notice that will be published 
separately in the Federal Register.) We believe that each piece of 
information requested in the various worksheets of the DFRR is 
necessary to assist us in identifying arrangements between hospitals 
and physicians that may not be compliant with the physician self-
referral prohibition regulations, and to identify examples and areas of 
noncompliance that may assist us in future rulemaking concerning our 
existing, and potentially new, exceptions. We remind the reader that to 
the extent we do not find a physician self-referral violation based on 
results of the DFRR, this should not to be taken as an affirmative 
statement that the financial relationships are in compliance, and the 
government will not be estopped from determining that there is a 
violation based on further review of information collected as part of 
the DFRR, or additional, different information.
    Comment: One commenter believed that we continue to underestimate 
the burdensomeness and costs associated with completing the DFRR. For 
example, the commenter believes that the estimated hours to respond 
will range between 50 hours for a smaller

[[Page 48743]]

facility to over 200 hours for a larger facility. Cost estimates for 
personnel needed to complete the work, which would include clerical, 
administrative, accounting and legal support, would range from $5,000 
to $15,000. The estimate of $50 an hour, based on accounting personnel, 
underestimates the manpower costs of fully and accurately completing 
the survey document and that accountants and legal counsel will review 
all documentation related to the DFRR so their involvement should be 
considered when calculating the burden. Several commenters asserted 
that some questions require information on arrangements of which a 
simple review of the agreement will not be sufficient. Another 
commenter expressed a similar objection stating that administrative 
staff would not be able to complete Worksheet 7 with the instruction 
that reads `` For those compensation arrangements listed in Columns A 
through D, include not only those that you believe fit within an 
exception in 42 CFR 411.357, but those that are implicated by the 
referenced exception.'' Several comments argued that knowing which 
specific exception an arrangement relied on, when more than one may be 
applicable, will not necessarily be noted in the contract. The 
commenters further stated that only an attorney's review will allow a 
hospital to determine that information
    Response: As noted above, we have taken into account the time and 
costs involved for hospitals to involve attorneys in the process of 
completing and submitting the DFRR to ensure that all supporting 
documentation satisfies the specific exception(s) upon which the 
arrangement relied on when the agreement was executed. Therefore, we 
have revised the costs associated with completing the DFRR. As 
discussed more thoroughly in section XI. of the preamble of this final 
rule, we have increased the time and burden estimate (per hospital) 
from 31 to 100 hours. In addition, we have calculated costs using an 
hourly rate for accountants and attorneys. Specifically, we are 
attributing 60 hours to administrative and accounting staff that will 
assemble relevant documentation, and we are allotting an additional 40 
hours to account for the burden associated with hospitals that 
voluntarily seek input from legal counsel. We are revising our average 
cost per hospital to $4,080. A more detailed analysis of the total time 
and burden estimate associated with the DFRR may be found in section 
XI. of the preamble of this final rule and in the revised PRA notice 
that will be published separately in the Federal Register.
    Comment: A commenter recommended that if the DFRR is implemented, 
it be initially tested as a targeted pilot program. The commenter 
stated that the pilot should be limited to a minimum number of 
hospitals needed to test the accuracy of the survey instrument and its 
effectiveness in securing the information sought.
    Response: We do not believe that testing the DFRR with a pilot 
group of hospitals is necessary. As we stated in the FY 2009 IPPS 
proposed rule, we proposed to send the DFRR to 500 hospitals, a number 
that we believe is necessary to provide us with sufficient information: 
(1) To identify arrangements that potentially may not be in compliance 
with the physician self-referral statute and implementing regulations; 
and (2) to identify practices that may assist us in future rulemaking. 
As stated earlier, we note to the extent we do not find a physician 
self-referral violation based on the results of the DFRR, this should 
not be taken as an affirmative statement that the financial 
relationships are in compliance, and the government will not be 
estopped from determining that there is a violation based on further 
review of information collected as part of the DFRR or additional, 
different information. At this time, we are proceeding with our 
proposal to send the DFRR to 500 hospitals. However, based on further 
review and comments we may receive in response to the revised PRA 
package that will be published separately in the Federal Register, we 
may decide to decrease (but not increase) the number of hospitals that 
we would send the DFRR. With respect to the commenter's concern about 
the accuracy of the instrument, the DFRR builds upon information that 
was previously requested in the voluntary DRA survey, and thus, should 
help increase the accuracy of the instrument. In addition, as a result 
of public comments received in response to our PRA packages published 
in the Federal Register on May 18, 2007 (72 FR 28056), and September 
14, 2007 (72 FR 52568), respectively, we have revised the DFRR 
instructions and worksheets to address ambiguities.
    Comment: Many commenters noted that the DFRR requires information 
on nine different categories of compensation arrangements. These 
commenters stated that, depending on the size of the hospital, 
documents will be required for hundreds or thousands of contracts. 
Another commenter, a 300 bed hospital, estimated that it would spend 
approximately 80 hours to gather data from 224 agreements with 
physicians to complete Worksheets 7 and 8. The commenter stated that 
the hours would be much less if the proposed DFRR were to address only 
compensation arrangements that involve a physician owner.
    Response: We acknowledge that the DFRR would take less time to 
complete if we required hospitals to report only compensation 
arrangements involving a physician owner. However, confining the DFRR 
to such relationships would significantly reduce the scope of the 
collection instrument and, therefore, potentially fail to capture much 
needed information. Moreover, so restricting the DFRR would be 
inconsistent with the commitment we made at page 69 of the DRA Report 
to Congress to require hospitals to provide us information on a 
periodic basis concerning their investment and compensation 
relationships with physicians. As stated above, the DFRR is designed to 
identify arrangements between hospital and physicians that may not be 
in compliance with the physician self-referral statute and regulations 
and to assist with our statutory obligation to ensure that no payment 
is made for a prohibited referral. In addition, in the DRA Report to 
Congress at page 69, we noted that a physician may be just as likely to 
refer patients to a hospital with which he or she has a compensation 
relationship, given that the physician may see a direct and immediate 
financial benefit from the compensation arrangement. To adopt the 
commenter's suggestion would have the effect of disproportionately 
impacting physician-owned hospitals.
    Comment: Several commenters argued that under the current rule at 
Sec.  411.361, routine mandatory reporting is not required. They stated 
that it was included in the 1998 proposed rule on reporting, and after 
receiving comments that routine mandatory reporting would be unduly 
burdensome, we decided not to use that approach. They further stated 
that the proposed rule on reporting also made clear that we were not 
developing any forms or recordkeeping requirements specific to 
reporting. They concluded that the DFRR, therefore, would circumvent 
our own rulemaking decision. Another commenter urged us to return to 
the position taken in the Phase II regulations in 2004 and not require 
each and every provider to supply the information required by the DFRR 
but merely to request information on a case-by-case basis.
    Response: In the correction notice of the interim final rule with 
comment period entitled, Physicians' Referrals to Health Care Entities 
With Which They

[[Page 48744]]

Have Financial Relationships (Phase II); published in the Federal 
Register on April 6, 2004 (72 FR 17934), we stated that we did not 
intend at that time to develop any forms for the submission of 
information. The language referenced by the commenter referred to the 
creation of forms for a regular reporting process. At this time, we are 
not creating forms for a regular reporting process. Rather, we are 
pursuing a one-time collection effort which involves the use of the 
DFRR. Thus, we believe it would be best to proceed with sending the 
DFRR to the hospitals, and upon completion of the reviews, decide 
whether to issue a notice of proposed rulemaking concerning both the 
frequency of a reporting or disclosure process and any revisions to the 
DFRR to focus upon certain types of financial relationships or certain 
hospitals. We believe the use of a uniform information collection 
instrument is more efficient than a case-by-case approach because we 
are capturing the same type of information and analyzing it in the same 
manner. We disagree that proceeding with the DFRR is, in any way, 
inconsistent with, or circumvents, a prior ``rulemaking decision.''
    Comment: One commenter recommended that the DFRR should not require 
paper submission of any kind, but rather all data should be scanned and 
submitted electronically to save hospitals significant unfunded 
administrative burden, as well as to spare us the storage capacity 
required for millions of paper pages. However, most commenters stated 
that recordkeeping is predominantly manual, not electronic, documents 
are decentralized, not centralized; there is no ``self-referral law'' 
filing system required, and of course the number of physicians on staff 
will affect the number of potential contracts. Thus, the commenters 
asserted that the burden estimate and our description of what a 
response will require are at odds with current recordkeeping processes 
in hospitals.
    Response: We considered requiring hospitals to scan documents and 
submit them electronically, but we concluded that there was great 
variation in the recordkeeping systems of most hospitals. Therefore, we 
chose to encourage, but not require, that an electronic copy of the 
DFRR worksheets be submitted. We recognize that many hospitals will 
submit paper copies of all supporting documentation, and we have made 
arrangements for storage of the information collected. In response to 
an earlier comment, we have increased the time and burden estimate, 
which should assist in affording hospitals time in which to locate all 
required documentation.
    Comment: Several commenters stated that under any new reporting 
initiative there will be a necessary ``learning curve'' for hospitals 
to determine the type of data necessary to accurately complete the 
report. The commenters asserted that this is especially true for the 
DFRR, as it will only be sent to a small subset of hospitals, and the 
hospitals will not know it is coming until it arrives. The commenters 
requested that we adopt a 5-month due date for the report, consistent 
with the time frame for completion of the Medicare cost report.
    Response: We are not adopting the commenter's suggestions. The DFRR 
is not as complex as the Medicare cost report; and we believe that the 
60-day timeframe specified in the proposed rule provides hospitals with 
sufficient time to complete and submit the DFRR to us. In addition, we 
will grant extensions of time beyond the 60 days to complete the DFRR 
in appropriate cases.
    Comment: Many commenters also recommended that the DFRR be a one-
time data collection effort, until we have fully evaluated responses 
from the initial reports filed. One of the commenters opposed an annual 
DFRR filing requirement, and supported a periodic or staggered filing 
requirement. The commenter also stated that where a pattern or history 
of problems was known to exist, more frequent reporting might be 
warranted.
    Response: At this time we believe it is best to proceed with 
sending the DFRR to the hospitals, and upon completion of the reviews, 
decide whether to issue a notice of proposed rulemaking concerning both 
the frequency of a reporting or disclosure process and any revisions to 
the DFRR to focus upon certain types of financial relationships or 
certain hospitals.
    Comment: One commenter recommended that hospitals should not have 
to submit a signed copy of each agreement related to Worksheet 7, 
unless we deem it necessary. If copies of agreement must be submitted, 
the commenter suggested that we permit hospitals to submit copies of 
uniform rental or recruitment agreements in those instances where a 
uniform rental or recruitment agreement has been prepared by the 
hospital and all of the elements present are materially the same.
    Response: We are revising Worksheet 7 of the DFRR and the 
corresponding instructions to permit hospitals to submit one copy of a 
uniform rental or recruitment agreement. (Worksheet 7 also allows 
parties to submit one copy of a uniform personal services agreement.) 
We caution, however, that we consider an agreement to be ``uniform'' 
only if all material terms are the same. The following examples may 
prove helpful.
    Example 1: Hospital has entered into lease agreements with 
different physicians or physician practices for space in the same 
medical office building (MOB A), and the value of the space is not 
materially different from one office to the next, the price per square 
foot charged to the physician or physician practice by the hospital is 
the same in all agreements (notwithstanding that amount of square 
footage, and thus, the monthly rental charges, may differ from office 
to office), and the rights and obligations are the same under each 
lease agreement. Under these facts, we would consider the agreements to 
be uniform for purposes of the DFRR and the hospital would need to 
transmit only one copy of the agreement (although it would be required 
to identify the other physicians who have entered into the similar 
agreements).
    Example 2: Same facts as Example 1, with the additional facts that 
Hospital also owns medical office buildings B, C, and D (MOBs B, C, and 
D), which it also leases to physicians or physician practices. Within 
each building, the lease terms are materially the same, as described in 
Example 1, from office tenant to office tenant, although the lease 
terms vary significantly from MOB to MOB (for example, the price per 
square foot is much less for MOB C than it is for MOB D). Under these 
facts, we would consider the lease agreements to be uniform with 
respect to each MOB, but not uniform across all MOBs. Therefore, in 
responding to the DFRR, the hospital would need to send one copy of the 
lease agreement for MOB A, one copy of the lease agreement for MOB B, 
one copy of the lease agreement for MOB C, and one copy of the lease 
agreement for MOB D.
    Example 3: Same facts as Example 1, except that the price per 
square foot varies slightly from office to office, with no two offices 
having the same price per square foot. In this case, we do not consider 
there to be a uniform agreement; therefore, in responding to the DFRR, 
the hospital would need to send a copy of the lease agreement for each 
physician or physician practice.
    Comment: One commenter stated that the data requested would contain 
confidential information, and despite the reference to the Federal 
Trade Secrets Act (18 U.S.C. 1905) and the Freedom of Information Act 
(5 U.S.C. 552(b)(6)), which prevent information

[[Page 48745]]

provided to us from being released, expressed concern as to the 
specific safeguards in place to prevent such a release from occurring.
    Response: We have established numerous safeguards to physically 
house the data provided to us. In addition, we will release such 
information, where appropriate, to federal law enforcement agencies 
such as the HHS's Office of Inspector General (OIG) and the Department 
of Justice (DOJ). We will not release information contained in the DFRR 
as matter of course to law enforcement agencies, but rather will do so 
only where we believe a specific referral to the OIG, DOJ, or other 
agency is warranted. Our policy is not to release any confidential 
business information or FOIA-protected personally identifiable 
information to the public. More detailed information concerning our 
disclosure policy is set forth in the general instructions accompanying 
the DFRR. We note that whereas the Trade Secrets Act prohibits federal 
agencies from releasing certain information under certain 
circumstances, the FOIA does not prohibit federal agencies from 
releasing information--rather, the FOIA allows us to withhold certain 
information under certain circumstances.
    Comment: One commenter questioned the placement of the DFRR within 
the FY 2009 IPPS proposed rule and stated that the DFRR should be 
evaluated and approved by OMB and be consistent with the PRA. In 
addition, the commenter stated that we should contact physicians 
directly, rather than requesting that hospitals gather this information 
from each of their physicians.
    Response: Our aim in including the DFRR in the FY 2009 IPPS 
proposed rule was to increase the likelihood that the general public 
would be aware of our proposed information collection request and 
submit comments concerning it. Therefore, we outlined the proposed 
requirements of the DFRR in the preamble, included a discussion of the 
costs associated with the DFRR in the Collection of Information section 
(section XI.B.) of the preamble of the proposed rule, and sent forth to 
OMB a PRA package concerning the DFRR. Pursuant to procedures required 
by the PRA, a revised PRA package, reflecting the changes to the DFRR 
that we have made based on comments received thus far, has been sent to 
OMB for its review and approval. The revised PRA notice will be 
published separately in the Federal Register. The revised PRA notice 
will set forth a public comment period of 30 days from the date of 
display.

X. MedPAC Recommendations

    We are required by section 1886(e)(4)(B) of the Act to respond to 
MedPAC's recommendations regarding hospital inpatient payments in our 
annual proposed and final IPPS rules. Having reviewed both MedPAC's 
March 2008 ``Report to the Congress: Medicare Payment Policy'' and its 
June 2007 ``Report to Congress: Promoting Greater Efficiency in 
Medicare,'' we have given those reports careful consideration in 
conjunction with the policies set forth in this document.
    Recommendation 2A-1: MedPAC's March 2008 Report to Congress states 
that ``The Congress should increase payment rates for the acute 
inpatient and outpatient prospective payment systems in 2009 by the 
projected rate of increase in the hospital market basket index, 
concurrent with implementation of a quality incentive payment 
program.'' This recommendation is discussed in Appendix B to this final 
rule.
    Recommendation 2A-2: MedPAC also recommended that ``The Congress 
should reduce the indirect medical education adjustment in 2009 by 1 
percentage point to 4.5 percent per 10 percent increment in the 
resident-to-bed ratio. The funds obtained by reducing the indirect 
medical education adjustment should be used to fund a quality incentive 
payment program.''
    Response to Recommendation 2A-2: Redirecting funds obtained by 
reducing the IME adjustment to fund a quality incentive payment program 
is consistent with the VBP initiatives to improve the quality of care 
and, therefore, merits consideration. However, section 502(a) of Public 
Law 108-173 modified the formula multiplier (c) to be used in the 
calculation of the IME adjustment beginning midway through FY 2004 and 
provided for a new schedule of formula multipliers for FYs 2005 and 
thereafter. Consequently, CMS does not have the authority to implement 
MedPAC's recommendation to reduce the IME adjustment in 2009. We note 
that included in the President's FY 2009 budget proposal was a proposal 
to reduce the IME adjustment from 5.5 percent to 2.2 percent over 3 
years, starting in FY 2009, in order to better align IME payments with 
the estimated costs per case that teaching hospitals may face.
    In its June 2007 Report to Congress, MedPAC made recommendations 
concerning the Medicare hospital wage index. Section 106(b)(1) of the 
MIEA-TRHCA (Pub. L. 109-432) required MedPAC to submit to Congress, not 
later than June 30, 2007, a report on the Medicare hospital wage index 
classification system applied under the Medicare IPPS, including any 
alternatives that MedPAC recommended to the method to compute the wage 
index under section 1886(d)(3)(E) of the Act. In addition, section 
106(b)(2) of the MIEA-TRHCA required the Secretary taking into account 
MedPAC's recommendations on the Medicare hospital wage index 
classification system, to include in this FY 2009 IPPS proposed rule 
one or more policies to revise the wage index adjustment applied under 
section 1886(d)(3)(E) of the Act for purposes of the IPPS. The MedPAC 
recommendations and our policies concerning the Medicare hospital wage 
index are discussed in section III.B. of the preamble of the FY 2009 
IPPS proposed rule and this final rule.
    For further information relating specifically to the MedPAC reports 
or to obtain a copy of the reports, visit MedPAC's Web site at: http://www.medpac.gov.

XI. Other Required Information

A. Requests for Data From the Public

    In order to respond promptly to public requests for data related to 
the prospective payment system, we have established a process under 
which commenters can gain access to raw data on an expedited basis. 
Generally, the data are available in computer tape or cartridge format. 
However, some files are available on diskette as well as on the 
Internet at: http://www.cms.hhs.gov/providers/hipps. We listed the data 
files and the cost for each file, if applicable, in the FY 2009 IPS 
proposed rule (73 FR 23698 through 23700).
    Commenters interested in discussing any data used in constructing 
the proposed rule or this final rule should contact Nisha Bhat at (410) 
786-5320.

B. Collection of Information Requirements

1. Legislative Requirement for Solicitation of Comments
    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:

[[Page 48746]]

     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
2. Requirements in Regulatory Text
    In the FY 2009 IPPS proposed rule (73 FR 23700 through 23702), we 
solicited public comment on each of the issues listed under section 
XI.B.1. of this preamble for the following sections of this document 
that contain information collection requirements (ICRs). We discuss and 
respond to any public comments we received in each individual sections.
a. ICRs Regarding Reporting Requirements (Sec.  411.361)
    Section 411.361(a) of the regulations states that, except for 
entities that furnish 20 or fewer Part A and Part B services during a 
calendar year, or for Medicare covered services furnished outside the 
United States, all entities furnishing services for which payment may 
be made under Medicare must submit information to CMS or to the Office 
of the Inspector General (OIG) concerning their reportable financial 
relationships (any ownership or investment interest, or compensation 
arrangement) in the form, manner, and within the timeframe that CMS or 
OIG specifies. As described in section IX.C. of the preamble of this 
final rule and in accordance with its authority under Sec.  411.361(e), 
we are requiring that hospitals provide information concerning their 
ownership, investment, and compensation arrangements with physicians by 
completing the DFRR instrument.
    An information collection request concerning the DFRR was 
previously submitted to OMB for approval. We announced and sought 
public comment on the information collection request in both 60-day and 
30-day Federal Register notices that were published on May 18, 2007 (72 
FR 28056), and September 14, 2007 (72 FR 52568), respectively. In the 
FY 2009 IPPS proposed rule (73 FR 23695 and 23700), we discussed the 
requirement for submission of information using the DFRR instrument and 
the time and cost burden associated with completing and submitting the 
instrument.
    As further discussed in section IX.C. of the preamble of this final 
rule, we have decided to obtain additional input from the public 
concerning the time and cost burden associated with completing and 
submitting the DFRR instrument. In addition to the discussion of the 
revised burden estimates for the DFRR information collection request 
included in the preamble of this final rule and below in this 
collection of information section, we will publish, under a separate 
notice and comment period, a 30-day Federal Register notice for the 
associated information collection request prior to submitting the 
information collection request to OMB for review and approval.
    We believe that hospital accounting personnel will be responsible 
for: (1) Ensuring that the appropriate data or supporting documentation 
is retrieved; (2) completing the DFRR instrument; and (3) submitting 
the DFRR to the Chief Executive Officer, Chief Financial Officer, or 
comparable officer of the hospital for his or her signature on the 
certification statement.
    Initially, CMS would require (no greater than) 500 hospitals to 
complete and submit the DFRR instrument. Based on public comments we 
received, we have revised our estimated completion time for the DFRR 
that we presented in the proposed rule. The estimated amount of time 
needed to comply with this information collection request is 100 hours 
for each of the hospitals. Thus, the total number of burden hours 
required for 500 hospitals to complete the DFRR instrument is 50,000 
hours.
b. ICRs Regarding Risk Adjustment Data (Sec.  422.310)
    As discussed in section IV.H. of the preamble of the proposed rule 
and this final rule, Sec.  422.310(b) states that each MA organization 
must submit to CMS (in accordance with CMS instructions) the data 
necessary to characterize the context and purposes of each item and 
service provided to a Medicare enrollee by a provider, supplier, 
physician, or other practitioner. In addition, Sec.  422.310(b) states 
that CMS may collect data necessary to characterize the functional 
limitations of enrollees of each MA organization. Section 422.310(c) 
lists the nature of the data elements to be submitted to CMS.
    For the proposed rule, we estimated the burden associated with 
these requirements to be the time and effort necessary for the MA 
organization to submit the necessary data to CMS. These requirements 
are subject to the PRA and the associated burden is currently approved 
under OMB control number 0938-0878. However, we noted that under notice 
and comment periods separate from the proposed rule, we intended to 
revise the currently approved information collection request to include 
burden estimates as they pertain to Sec.  422.310. The preliminary 
burden estimate for the proposed rule was as follows: Currently, there 
are 676 MA organizations. Assuming that 99 percent of encounter data 
claims are submitted electronically and 1 percent are submitted 
manually, we estimated that it would take 1,089 hours annually for 
submission of electronic claims and 73,335 hours annually for 
submission of manual claims. The estimated annual burden associated 
with these requirements was an annual average of 110 hours per MA 
organization.
    Comment: A few commenters stated that the burden estimates in the 
proposed rule were inadequate to capture the time associated with 
collecting and submitting risk adjustment data. Another commenter 
stated that CMS' estimate did not account for the impact on a plan's 
already-existing verification processes and procedures, including 
internal audit processes, which are undertaken to ensure the 
``completeness, truthfulness and accuracy'' of the data. One commenter 
requested that CMS discuss in more detail the current impact analysis 
before finalizing the rule. One commenter noted that, while the 
estimates in the proposed rule gauged that an MA plan would spend less 
than 110 hours annually to comply with this request, its plan's RAPS 
transmission takes about 2 hours each month to run. Another commenter 
stated that CMS' preliminary estimate that 99 percent of claims are 
assumed to be electronic is inaccurate for the majority of PACE 
organizations. One commenter estimated that the cost of submitting 
encounter data would be no less than 2,000 hours a year in addition to 
having to retool internal systems as well as change or amend provider 
contracts.
    Response: We appreciate the input of the commenters on their plans 
regarding the time and effort involved in their data collection 
efforts. While we will take these commenters' concerns into account, we 
also plan to obtain feedback from a wide variety of MA organizations 
regarding the work that would be involved in implementing and reporting 
encounter data. Because we want to wait until we have designed our 
reporting process and have obtained specific information about what 
work will be needed on the part of MA organizations to report such 
data, in this final rule, we are not changing our preliminary burden 
estimates presented in the FY 2009 IPPS proposed rule. Instead, we will 
address the issue in the PRA information collection request that will 
be released for public comment

[[Page 48747]]

prior to the implementation of encounter data collection.
c. ICRs Regarding Basic Commitments of Providers (Sec.  489.20)
    As discussed in section IV.I. of the preamble of this final rule, 
Sec.  489.20(r)(2) states that a hospital, as defined in Sec.  
489.24(b), must maintain an on-call list of physicians on its medical 
staff who are available to provide treatment necessary to stabilize 
patients who are receiving services required under Sec.  489.24 in 
accordance with the resources available to the hospital. The burden 
associated with this requirement is the time and effort necessary to 
draft, maintain, and periodically update the list of on-call 
physicians. We estimate that it will take 3 hours for each Medicare-
participating hospitals (including CAHs) to comply with this 
recordkeeping requirement. The estimated annual burden associated with 
this requirement is 300 hours.
    However, after further review, we have determined that maintenance 
of a list of on-call physicians is a usual and customary business 
practice as hospitals routinely maintain the required information. 
Hospitals are required to maintain an on-call list of physicians to 
comply with the section 1866(a)(1)(I)(iii) of the Act. In accordance 
with 5 CFR 1320.3(b)(2), we are removing the aforementioned 300-hour 
annual burden associated with this requirement. As stated in 5 CFR 
1320.3(b)(2), the burden associated with the time, effort, and 
financial resources necessary to comply with an ICR that would be 
incurred by persons in the normal course of their activities (that is, 
in compiling and maintaining business records) is exempt from the PRA.
    As discussed in section VII. of the preamble of this final rule, 
Sec.  489.20(u)(1) states that, in the case of a physician-owned 
hospital as defined in Sec.  489.3, the hospital must furnish written 
notice to all patients at the beginning of their hospital stay or 
outpatient visit that the hospital is a physician-owned facility. In 
addition, patients must be advised that a list of the hospital's owners 
or investors who are physicians (or immediate family members of 
physicians) is available upon request. Upon receiving the request of 
the patient or an individual on behalf of the patient, a hospital must 
immediately disseminate the list to the requesting patient.
    The burden associated with the requirements in this section is the 
time and effort necessary for a hospital to furnish written notice to 
all patients that the hospital is a physician-owned hospital. Because 
this requirement is subject to the PRA, the associated burden is 
currently approved under OMB control number 0938-1034, with an 
expiration date of February 28, 2011.
    In addition, there is burden associated with furnishing a patient 
with the list of the hospital's owners or investors who are physicians 
(or immediate family members of physicians) at the time of the 
patient's request. However, CMS has no way to accurately quantify the 
burden because we cannot estimate the number of this type of requests 
that a hospital may receive. We solicited public comments on the annual 
number of requests a hospital may receive for lists of physician owners 
and investors in the FY 2009 IPPS proposed rule (73 FR 23528). However, 
we did not receive any public comments to assist us in our burden 
analysis. While we acknowledge that there is a burden associated with 
this ICR, we also acknowledge that we have no way to quantify this 
requirement's burden. For that reason, we are assigning 1 token burden 
hour to this requirement until such a time that we can conduct an 
accurate burden analysis for this information collection requirement.
    Section 489.20(u)(2) requires disclosure of physician ownership as 
a condition of continued medical staff membership or admitting 
privileges. The burden associated with this requirement is the time and 
effort required for a hospital to develop, draft, and implement changes 
to its medical staff bylaws and other policies governing admitting 
privileges. Approximately 175 physician-owned hospitals will be 
required to comply with this requirement. We estimate that it will 
require a hospital's general counsel 4 hours to revise a hospital's 
medical staff bylaws and policies governing admitting privileges. 
Therefore, the total annual hospital burden is 700 hours.
    In addition, Sec.  489.20(u)(2) imposes a burden on physicians. As 
stated earlier, all physicians who are also members of the hospital's 
medical staff must agree, as a condition of continued medical staff 
membership or admitting privileges, to disclose, in writing, to all 
patients they refer to the hospital any ownership or investment 
interest in the hospital held by themselves or by an immediate family 
member. The disclosure must be made at the time the referral is made. 
The burden associated with this requirement is the time and effort 
necessary for a physician to draft a disclosure notice and to provide 
it to the patient at the time the referral is made to the physician-
owned hospital. We estimate that it will take each physician, or 
designated office staff member, 1 hour to develop a disclosure notice 
and make copies that will be distributed to patients. In addition, we 
estimate that it will take 30 seconds to provide the disclosure notice 
to each patient and an additional 30 seconds to record proof of 
disclosure in each patient's medical record.
    Although we can estimate the number of physician-owned hospitals, 
we are unable to quantify the numbers of physicians (or their immediate 
family members) that possess an ownership or investment interest in 
hospitals. There is limited data available concerning physician 
ownership in hospitals. The studies to date, including those by CMS and 
the GAO, pertain to physician ownership in specialty hospitals 
(cardiac, orthopedic, and surgical hospitals). These specialty hospital 
studies published data concerning the average percentage of shares of 
direct ownership by physicians (less than 2 percent), indirect 
ownership through group practices, and the aggregate percentage of 
physician ownership, but did not publish the number of physician owners 
in these types of hospitals. More importantly, Sec.  489.20(u)(2) 
applies to physician ownership in any type of hospital. Our other 
research involved a review of enrollment data. However, the CMS 
Medicare enrollment application (CMS 855) requires that physicians 
report ownership interests that exceed 5 percent or greater, and, thus, 
most physician ownership is not captured. While we acknowledge there is 
a burden associated with this ICR, we also acknowledge that we have no 
way to quantify this requirement's burden. For that reason, we are 
assigning 1 token burden hour to this requirement until such a time 
that we can conduct an accurate burden analysis for this information 
collection requirement.
    Section 489.20(v) states that the aforementioned requirements in 
Sec.  489.20(u)(1) and (u)(2) do not apply to a physician-owned 
hospital that does not have at least one referring physician who has an 
ownership or investment interest in the hospital, or who has an 
immediate family member who has an ownership or investment interest in 
the hospital. To comply with this exception, an eligible hospital must 
sign an attestation to that effect and maintain the document in its 
records. Therefore, the number of hospitals that are subject to the 
disclosure requirement would be slightly reduced. However, there may be 
a minimal burden attributable to the requirement that the hospital 
maintain an attestation statement in its records.
    The burden associated with this requirement is limited to those 
physician-owned hospitals that do not

[[Page 48748]]

have at least one referring physician who has an ownership or 
investment interest in the hospital, or who has an immediate family 
member who has an ownership or investment interest in the hospital. The 
burden includes the time and effort for these hospitals to develop, 
sign, and maintain the attestations in their records. We estimate that 
10 percent, or approximately 18, of the estimated 175 physician-owned 
hospitals will be subject to this requirement. We estimate that it will 
take each of these physician-owned hospitals an average of 1 hour to 
develop, sign, and maintain the attestation in its records. The 
estimated annual burden associated with this requirement is 18 hours. 
However, we have no way of knowing for certain the number of physician-
owned hospitals that do not have at least one referring physician who 
has an ownership or investment interest in the hospital, or who has an 
immediate family member who has an ownership or investment interest in 
the hospital.
    In the FY 2009 IPPS proposed rule (73 FR 23528), we solicited 
public comments on the number of physician-owned hospitals that do not 
have at least one referring physician who has an ownership or 
investment interest in the hospital, or who has an immediate family 
member who has an ownership or investment interest in the hospital. 
However, we did not receive any public comments to assist us in our 
burden analysis. Therefore, we are submitting the burden estimate for 
this requirement as it appeared in the proposed rule.
    Section 489.20(w) requires all hospitals, as defined in Sec.  
489.24(b), to furnish all patients notice, in accordance with Sec.  
482.13(b)(2), at the beginning of their hospital stay or outpatient 
visit if a doctor of medicine, or a doctor of osteopathy, is not 
present in the hospital 24 hours per day, 7 days per week. The notice 
must indicate how the hospital will meet the medical needs of any 
inpatient who develops an emergency medical condition, as defined in 
Sec.  489.24(b), at a time when there are no physicians present in the 
hospital. The burden associated with this requirement is the time and 
effort necessary for each hospital to develop a standard notice to 
furnish to its patients. Because this requirement is subject to the 
PRA, the associated burden is approved under OMB control number 0938-
1034, with a current expiration date of February 28, 2011.

                               Estimated Annual Reporting and Recordkeeping Burden
----------------------------------------------------------------------------------------------------------------
                                                                                    Burden per
     Regulation section(s)       OMB control No.    Respondents      Responses       response      Total annual
                                                                                      (hours)     burden (hours)
----------------------------------------------------------------------------------------------------------------
Sec.   411.361................  0938-New........             500             500             100         *50,000
Sec.   422.310(b).............  0938-0878.......             676             676             110        **74,424
Sec.   489.20(u)(1) and (w)...  0938-1034.......           2,679      49,735,635             ***         839,599
Sec.   489.20(u)(2)...........  0938-New........             175             175               4             700
Sec.   489.20(v)..............  0938-New........              18              18               1              18
                               ---------------------------------------------------------------------------------
    Total.....................  ................  ..............  ..............  ..............         964,741
----------------------------------------------------------------------------------------------------------------
*For a comprehensive summary of our rationale for modifying these burden estimates, we refer readers to section
  IX.C. of the preamble of this final rule.
**Burden estimate is based on revisions to the currently approved OMB control number.
*** There are multiple requirements associated with the regulation section approved under this OMB control
  number. There is no uniform estimate of the burden per response.

3. Associated Information Collections Not Specified in Regulatory Text
    As we indicated in the FY 2009 IPPS proposed rule, this final rule 
imposes ICRs as outlined in the regulation text and specified above. 
However, this rule also makes reference to several associated 
information collections that are not discussed in the regulation text. 
The following is a discussion of these collections, which have received 
OMB approval.
a. Present on Admission (POA) Indicator Reporting
    Section II.F.8 of the preamble of this final rule discusses the POA 
indicator reporting requirements. As stated earlier, POA indicator 
information is necessary to identify which conditions are acquired 
during hospitalization for the hospital-acquired condition (HAC) 
payment provision, and for broader public health uses of Medicare data. 
Through Change Request No. 5499 (released May 11, 2007), CMS issued 
instructions that require IPPS hospitals to submit POA indicator data 
for all diagnosis codes on Medicare claims.
    The burden associated with this requirement is the time and effort 
necessary to place the appropriate POA indicator codes on Medicare 
claims. Because the requirement is subject to the PRA; the associated 
burden is approved under OMB control number 0938-0997, with an 
expiration date of August 31, 2009.
b. Add-On Payments for New Services and Technologies
    Section II.J. of the preamble of the FY 2009 IPPS proposed rule and 
this final rule discusses add-on payments for new services and 
technologies. Specifically, this section states that applicants for 
add-on payments for new medical services or technologies for FY 2010 
must submit a formal request. A formal request includes a full 
description of the clinical applications of the medical service or 
technology and the results of any clinical evaluations demonstrating 
that the new medical service or technology represents a substantial 
clinical improvement. In addition, the request must contain a 
significant sample of the data to demonstrate that the medical service 
or technology meets the high-cost threshold.
    We detailed the burden associated with this requirement in the 
September 7, 2001 IPPS final rule (66 FR 46902). As stated in that 
final rule, we believe the associated burden is exempt from the PRA as 
stipulated under 5 CFR 1320.3(h)(6). Collection of the information for 
this requirement is conducted on individual case-by-case basis.
c. Reporting of Hospital Quality Data for Annual Hospital Payment 
Update
    As noted in section IV.B. of the preamble of the proposed rule and 
this final rule, the RHQDAPU program was originally established to 
implement section 501(b) of Public Law 108-173, thereby expanding our 
voluntary HQI. The RHQDAPU program originally consisted of a ``starter 
set'' of 10 quality measures. OMB approved the collection of data 
associated with the original

[[Page 48749]]

starter set of quality measures under OMB control number 0938-0918, 
with a current expiration date of January 31, 2010.
    We added additional quality measures to the RHQDAPU program and 
submitted the information collection request to OMB for approval. This 
expansion of the RHQDAPU measures was part of our implementation of 
section 5001(a) of the DRA. Section 1886(b)(3)(B)(viii)(III) of the 
Act, added by section 5001(a) of the DRA, requires that the Secretary 
expand the ``starter set'' of 10 quality measures that were established 
by the Secretary as of November 1, 2003, to include measures ``that the 
Secretary determines to be appropriate for the measurement of the 
quality of care furnished by hospitals in inpatient settings.'' The 
burden associated with these reporting requirements is currently 
approved under OMB control number 0938-1022 with a current expiration 
date of June 30, 2011.
    However, for FY 2009, we submitted to OMB for approval a revised 
information collection request using the same OMB control number (0938-
1022). In the revised request, we added three new RHQDAPU quality 
measures that we adopted for the FY 2009 RHQDAPU program to the PRA 
process. These three measures are as follows:
     Pneumonia 30-day Mortality (Medicare patients);
     SCIP Infection 4: Cardiac Surgery Patients with Controlled 
6AM Postoperative Serum Glucose; and
     SCIP Infection 6: Surgery Patients with Appropriate Hair 
Removal
    The revised information collection request was announced in the 
Federal Register via an emergency notice on January 28, 2008 (73 FR 
4868). The burden associated with these reporting requirements has been 
approved under OMB control number 0938-1022, with a current expiration 
date of June 30, 2011. However, as stated in section IV.V.2. of this 
final rule, we are submitting another revised information collection 
request to obtain approval for the 13 new RHQDAPU program measures 
listed below;
     SCIP Cardiovascular 2: Surgery Patients on a Beta Blocker 
Prior to Arrival Who Received a Beta Blocker During the Perioperative 
Period
     Heart Failure (HF) 30-Day Risk Standardized Readmission 
Measure
     Death among surgical patients with treatable serious 
complications (Medicare patients)
     Iatrogenic pneumothorax, adult (Medicare patients)
     Postoperative wound dehiscence (Medicare patients)
     Accidental puncture or laceration (Medicare patients)
     Abdominal aortic aneurysm (AAA) mortality rate (with or 
without volume) (Medicare patients)
     Hip fracture mortality rate (Medicare patients)
     Mortality for selected surgical procedures (composite) 
(Medicare patients)
     Complication/patient safety for selected indicators 
(composite) (Medicare patients)
     Mortality for selected medical conditions (composite) 
(Medicare patients)
     Failure to Rescue (Medicare claims only)
     Participation in a Systematic Database for Cardiac Surgery
    Section IV.B.5. of the preamble of the proposed rule and this final 
rule also discusses the requirements for the continuous collection of 
HCAHPS quality data. The HCAHPS survey is designed to produce 
comparable data regarding the patient's perspective on care that allows 
objective and meaningful comparisons between hospitals on domains that 
are important to consumers. We also added the HCAHPS survey to the PRA 
process in the information collection request currently approved under 
OMB control number 0938-1022, with a current expiration date of June 
30, 2011.
    Section IV.B.9. of the preamble of the FY 2009 IPPS proposed rule 
and this final rule addresses the reconsideration and appeal procedures 
for a hospital that we believe did not meet the RHQDAPU program 
requirements. If a hospital disagrees with our determination, it may 
submit a written request to CMS requesting that we reconsider our 
decision. The hospital's letter must explain the reasons why it 
believes it did meet the RHQDAPU program requirements. While this is a 
reporting requirement, the burden associated with it is not subject to 
the PRA under 5 CFR 1320.4(a)(2). The burden associated with 
information collection requirements imposed subsequent to an 
administrative action is not subject to the PRA.
d. Occupational Mix Adjustment to the FY 2009 Index (Hospital Wage 
Index Occupational Mix Survey)
    Section III. of the preamble of this final rule details the changes 
to the hospital wage index. Specifically, section III.D. addresses the 
occupational mix adjustment to the FY 2009 wage index. While the 
preamble does not contain any new ICRs, it is important to note that 
there is an OMB approved information collection request associated with 
the hospital wage index.
    Section 304(c) of Public Law 106-554 amended section 1886(d)(3)(E) 
of the Act to require CMS to collect data at least once every 3 years 
on the occupational mix of employees for each short-term, acute care 
hospital participating in the Medicare program in order to construct an 
occupational mix adjustment to the wage index. We collect the data via 
the occupational mix survey.
    The burden associated with this information collection requirement 
is the time and effort required to collect and submit the data in the 
Hospital Wage Index Occupational Mix Survey to CMS. Because this burden 
is subject to the PRA, it is approved under OMB control number 0938-
0907, with an expiration date of February 28, 2011.

C. Waiver of Proposed Rulemaking, Waiver of Delay in Effective Date, 
and Retroactive Effective Date

1. Requirements for Waivers and Retroactive Rulemaking
    We ordinarily publish a notice of proposed rulemaking in the 
Federal Register to provide for public comment before the provisions of 
a rule take effect in accordance with section 553(b) of the 
Administrative Procedure Act (APA). However, we can waive notice and 
comment procedures if the Secretary finds, for good cause, that the 
notice and comment process is impracticable, unnecessary, or contrary 
to the public interest, and incorporates a statement of the finding and 
the reasons therefore in the rule. Section 553(d) of the APA also 
ordinarily requires a 30-day delay in effective date of final rules 
after the date of their publication. However, this 30-day delay in 
effective date can be waived if an agency finds for good cause that the 
delay is impracticable, unnecessary, or contrary to the public 
interest, and the agency incorporates a statement of the findings and 
its reasons in the rule issued. Moreover, section 1871(e)(1)(A) of the 
Act generally prohibits the Secretary from making retroactive 
substantive changes in policy unless retroactive application of the 
change is necessary to comply with statutory requirements or failure to 
apply the change retroactively would be contrary to the public 
interest.
2. FY 2008 Puerto Rico-Specific Rates
    We are waiving notice-and-comment procedures and the 30-day delay 
in effective date with respect to the application of the documentation 
and coding adjustment to the Puerto Rico-specific operating 
standardized amounts

[[Page 48750]]

and the Puerto Rico specific capital payment rate for FY 2008. As 
discussed in section II.D.3. of this final rule, the documentation and 
coding adjustment established in the FY 2008 final rule with comment 
period relied upon our authority under section 1886(d)(3)(A)(vi) of the 
Act, which provides the authority to adjust ``the standardized amounts 
computed under this paragraph'' to eliminate the effect of changes in 
coding or classification that do not reflect real change in case-mix. 
We believe that the application of the documentation and coding 
adjustment to the Puerto-Rico specific rates in the FY 2008 IPPS final 
rule was not consistent with the plain meaning of section 
1886(d)(3)(A)(vi) of the Act. Therefore, we are revising the Puerto-
Rico specific rates for FY 2008 to remove the application of the 
documentation and coding adjustment. We are waiving notice and comment 
procedures with respect to this policy change because we believe it 
would be unnecessary and contrary to the public interest to undertake 
notice-and-comment procedures prior to changing our policy to make the 
policy consistent with the plain meaning of the section of the statute 
upon which the policy was based. For the same reasons, we are waiving 
the 30-day delay in effective date because we believe it would be 
unnecessary and contrary to the public interest to delay the policy 
change beyond the October 1, 2007 effective date of the FY 2008 IPPS 
final rule. We are also applying this policy change retroactive to 
October 1, 2007, under section 1871(e)(1)(A)(i) of the Act because it 
would be contrary to the public interest for our policy not to be 
consistent with the plain meaning of the section of the statute upon 
which the policy was based.
3. Rebasing of Payments to SCHs
    We are waiving notice-and-comment procedures with respect to the 
provisions relating to the rebasing of payments to SCHs discussed in 
section IV.D.2. of the preamble of this final rule. As discussed in 
that section, section 122 of the Medicare Improvements for Patients and 
Providers Act of 2008 (Pub. L. 110-275) provides that, for cost 
reporting periods beginning on or after January 1, 2009, SCHs will be 
paid based on an FY 2006 hospital-specific rate (that is, based on 
their updated costs per discharge based on their 12-month cost 
reporting period beginning during Federal fiscal year 2006), if this 
results in the greatest payment to the SCH. Therefore, effective with 
cost reporting periods beginning on or after January 1, 2009, SCHs will 
be paid based on the rate that results in the greatest aggregate 
payment using either the Federal rate or their hospital-specific rate 
based on their 1982, 1987, 1996, or 2006 costs per discharge. This 
statutory provision is self-implementing. Therefore, we are waiving 
notice-and-comment procedures with respect to incorporating this change 
in our regulations. We believe it is unnecessary and contrary to the 
public interest to undertake notice-and-comment procedures prior to 
incorporating the policy in the regulations, consistent with the 
provisions of the statute.
4. Technical Change to Regulations Governing Payments to Hospitals With 
High Percentage of ESRD Discharges
    As discussed in section II.G.12.g. of the preamble of this final 
rule, the existing regulation at Sec.  412.104 specifies the rules for 
an additional payment to hospitals where 10 percent or more of their 
patients who are discharged receive dialysis treatment during an 
inpatient stay. However, there are specific DRGs cited in the 
regulation that are excluded from this additional payment. Because, 
beginning in FY 2008, we adopted MS-DRGs to replace the DRGs cited in 
the regulation, we are making a technical change to cite the 
appropriate replacement MS-DRGs. We believe that it is unnecessary and 
contrary to the public interest to undertake notice and comment 
procedures for this technical conforming change.
5. Changes to Regulations at 42 CFR 412.230, 412.232, and 412.234 
Relating to Procedures for Terminating and Withdrawing Certain 
Reclassifications
    Our changes to 42 CFR 412.230, 412.232, and 412.234 will be 
effective on September 2, 2008, the deadline for hospitals to submit 
applications for reclassifications for the FY 2010 wage index. In 
addition, the procedures we have described in section III.I.7. of the 
preamble of this final rule will be effective upon publication. It is 
in the public interest of hospitals for the changes to the 
reclassification thresholds to be in place at the time their 
applications are due to the MGCRB for FY 2010. This provides confidence 
to hospitals that the applications they are filing are using correct 
thresholds. It also is unnecessary for the changes to Sec. Sec.  
412.230, 412.232, and 412.234 to have a delayed effective date, as the 
changes to these regulatory provisions will have no effect on FY 2009 
reclassifications but rather will affect only FY 2010 
reclassifications. Thus, in the most practical sense, hospitals have 
more than a year's worth of notice regarding the standards that will be 
applied for FY 2010. Finally, even if the thresholds were effective at 
a later date, the MGCRB would use the thresholds that are in effect at 
the time it makes its reclassification decisions.
    The rules discussed in section III.I.7. of the preamble of this 
final rule are simply procedural and thus are not subject to any delay 
in effective date. Even if they were, however, it is in the public 
interest to make them effective upon publication, as they provide a 
necessary and expeditious timetable for both CMS and hospitals to 
respond to intervening MIPPA legislation. In addition, we view these 
rules as ``relieving a restriction'' under 5 U.S.C. 553(d)(1), as they 
allow affected hospitals another opportunity to withdraw or terminate 
reclassifications in response to the intervening MIPPA legislation. 
Finally, we note that section 1871(b)(2)(B) of the Act allows for 
waiver of notice and comment rulemaking when a statute creates a 
deadline for implementation that is less than 150 days after the date 
of enactment of the statute. The time between MIPPA enactment (July 15, 
2008) and the date by which the extended reclassifications and special 
exceptions must take effect (October 1, 2008) is less than 150 days.

List of Subjects

42 CFR Part 411

    Kidney diseases, Medicare, Physician referral, Reporting and 
recordkeeping requirements.

42 CFR Part 412

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

42 CFR Part 413

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

42 CFR Part 422

    Administrative practice and procedure, Grant programs--health, 
Health care, Health insurance, Health maintenance organizations (HMO), 
Loan programs--health, Medicare, Reporting and recordkeeping 
requirements.

42 CFR Part 489

    Health facilities, Medicare, Reporting and recordkeeping 
requirements.

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

[[Page 48751]]

PART 411--EXCLUSIONS FROM MEDICARE AND LIMITATIONS ON MEDICARE 
PAYMENT

0
1. The authority citation for part 411 continues to read as follows:

    Authority: Secs. 1102, 1860D-1 through 1860D-42, 1871, and 1877 
of the Social Security Act (42 U.S.C. 1302, 1395w-101 through 1395w-
152, 1395hh, and 1395nn).

0
2. Section 411.351 is amended by--
0
a. Revising paragraph (1) of the definition of ``entity''.
0
b. Revising the definition of ``physician''.
0
c. Revising the definition of ``physician organization''.
    The revisions read as follows:


Sec.  411.351   Definitions.

* * * * *
    Entity means--
    (1) A physician's sole practice or a practice of multiple 
physicians or any other person, sole proprietorship, public or private 
agency or trust, corporation, partnership, limited liability company, 
foundation, nonprofit corporation, or unincorporated association that 
furnishes DHS. An entity does not include the referring physician 
himself or herself, but does include his or her medical practice. A 
person or entity is considered to be furnishing DHS if it--
    (i) Is the person or entity that has performed services that are 
billed as DHS; or
    (ii) Is the person or entity that has presented a claim to Medicare 
for the DHS, including the person or entity to which the right to 
payment for the DHS has been reassigned in accordance with Sec.  
424.80(b)(1) (employer) or (b)(2) (payment under a contractual 
arrangement) of this chapter (other than a health care delivery system 
that is a health plan (as defined at Sec.  1001.952(l) of this title), 
and other than any managed care organization (MCO), provider-sponsored 
organization (PSO), or independent practice association (IPA) with 
which a health plan contracts for services provided to plan enrollees).
* * * * *
    Physician means a doctor of medicine or osteopathy, a doctor of 
dental surgery or dental medicine, a doctor of podiatric medicine, a 
doctor of optometry, or a chiropractor, as defined in section 1861(r) 
of the Act. A physician and the professional corporation of which he or 
she is a sole owner are the same for purposes of this subpart.
* * * * *
    Physician organization means a physician, a physician practice, or 
a group practice that complies with the requirements of Sec.  411.352.
* * * * *

0
3. Section 411.353 is amended by--
0
a. Revising paragraph (c).
0
b. Adding a new paragraph (g).
    The revision and addition read as follows:


Sec.  411.353   Prohibition on certain referrals by physicians and 
limitations on billing.

* * * * *
    (c) Denial of payment for services furnished under a prohibited 
referral.
    (1) Except as provided in paragraph (e) of this section, no 
Medicare payment may be made for a designated health service that is 
furnished pursuant to a prohibited referral. The period during which 
referrals are prohibited is the period of disallowance. For purposes of 
this section, with respect to the following types of noncompliance, the 
period of disallowance begins at the time the financial relationship 
fails to satisfy the requirements of an applicable exception and ends 
no later than--
    (i) Where the noncompliance is unrelated to compensation, the date 
that the financial relationship satisfies all of the requirements of an 
applicable exception;
    (ii) Where the noncompliance is due to the payment of excess 
compensation, the date on which all excess compensation is returned, by 
the party that received it, to the party that paid it and the financial 
relationship satisfies all of the requirements of an applicable 
exception; or
    (iii) Where the noncompliance is due to the payment of compensation 
that is of an amount insufficient to satisfy the requirements of an 
applicable exception, the date on which all additional required 
compensation is paid, by the party that owes it, to the party to which 
it is owed and the financial relationship satisfies all of the 
requirements of an applicable exception.
    (2) When payment for a designated health service is denied on the 
basis that the service was furnished pursuant to a prohibited referral, 
and such payment denial is appealed--
    (i) The ultimate burden of proof (burden of persuasion) at each 
level of appeal is on the entity submitting the claim for payment to 
establish that the service was not furnished pursuant to a prohibited 
referral (and not on CMS or its contractors to establish that the 
service was furnished pursuant to a prohibited referral); and
    (ii) The burden of production on each issue at each level of appeal 
is initially on the claimant, but may shift to CMS or its contractors 
during the course of the appellate proceeding, depending on the 
evidence presented by the claimant.
* * * * *
    (g) Special rule for certain arrangements involving temporary 
noncompliance with signature requirements. (1) An entity may submit a 
claim or bill and payment may be made to an entity that submits a claim 
or bill for a designated health service if--
    (i) The compensation arrangement between the entity and the 
referring physician fully complied with an applicable exception in 
Sec.  411.355, Sec.  411.356 or Sec.  411.357, except with respect to 
the signature requirement in Sec.  411.357(a)(1), Sec.  411.357(b)(1), 
Sec.  411.357(d)(1)(i), Sec.  411.357(e)(1)(i), Sec.  411.357(e)(4)(i), 
Sec.  411.357(l)(1), Sec.  411.357(p)(2), Sec.  411.357(q) 
(incorporating the requirement contained in Sec.  1001.952(f)(4)), 
Sec.  411.357(r)(2)(ii), Sec.  411.357(t)(1)(ii) or (t)(2)(iii) (both 
incorporating the requirement contained in Sec.  411.357(e)(1)(i)), 
Sec.  411.357(v)(7)(i), or Sec.  411.357(w)(7)(i); and
    (ii) The failure to comply with the signature requirement was--
    (A) Inadvertent, and the parties obtain the required signature(s) 
within 90 consecutive calendar days immediately following the date on 
which the compensation arrangement becomes noncompliant (without regard 
to whether any referrals occur or compensation is paid during such 90-
day period) and the compensation arrangement otherwise complies with 
all criteria of the applicable exception; or
    (B) Not inadvertent, and the parties obtain the required 
signature(s) within 30 consecutive calendar days immediately following 
the date on which the compensation arrangement becomes noncompliant 
(without regard to whether any referrals occur or compensation is paid 
during such 30-day period) and the compensation arrangement otherwise 
complies with all criteria of the applicable exception.
    (2) Paragraph (g)(1) of this section may be used by an entity only 
once every 3 years with respect to the same referring physician.
* * * * *

0
4. Section 411.354 is amended by--
0
a. Revising paragraph (b)(3)(i).
0
b. Revising paragraph (c)(1)(ii).
0
c. Revising paragraph (c)(2)(iv).
0
d. Revising paragraph (c)(3)(ii).
0
e. Adding paragraphs (c)(3)(iii).
    The revisions and additions read as follows:


Sec.  411.354   Financial relationship, compensation, and ownership or 
investment interest.

    (b) * * *
    (3) * * *

[[Page 48752]]

    (i) An interest in an entity that arises from a retirement plan 
offered by that entity to the physician (or a member of his or her 
immediate family) through the physician's (or immediate family 
member's) employment with that entity;
* * * * *
    (c) * * *
    (1) * * *
    (ii) Except as provided in paragraph (c)(3)(ii)(C) of this section, 
a physician is deemed to stand in the shoes of his or her physician 
organization and have a direct compensation arrangement with an entity 
furnishing DHS if--
    (A) The only intervening entity between the physician and the 
entity furnishing DHS is his or her physician organization; and
    (B) The physician has an ownership or investment interest in the 
physician organization.
    (iii) A physician (other than a physician described in paragraph 
(c)(1)(ii)(B) of this section) is permitted to ``stand in the shoes'' 
of his or her physician organization and have a direct compensation 
arrangement with an entity furnishing DHS if the only intervening 
entity between the physician and the entity furnishing DHS is his or 
her physician organization.
    (2) * * *
    (iv)(A) For purposes of paragraph (c)(2)(i) of this section, except 
as provided in paragraph (c)(3)(ii)(C) of this section, a physician is 
deemed to ``stand in the shoes'' of his or her physician organization 
if the physician has an ownership or investment interest in the 
physician organization.
    (B) For purposes of paragraph (c)(2)(i) of this section, a 
physician (other than a physician described in paragraph (c)(2)(iv)(A) 
of this section) is permitted to ``stand in the shoes'' of his or her 
physician organization.
    (3) * * *
    (ii) The provisions of paragraphs (c)(1)(ii) and (c)(2)(iv)(A) of 
this section--
    (A) Need not apply during the original term or current renewal term 
of an arrangement that satisfied the requirements of Sec.  411.357(p) 
as of September 5, 2007 (see 42 CFR Parts 400-413, revised as of 
October 1, 2007);
    (B) Do not apply to an arrangement that satisfies the requirements 
of Sec.  411.355(e); and
    (C) Do not apply to a physician whose ownership or investment 
interest is titular only. A titular ownership or investment interest is 
an ownership or investment interest that excludes the ability or right 
to receive the financial benefits of ownership or investment, 
including, but not limited to, the distribution of profits, dividends, 
proceeds of sale, or similar returns on investment.
    (iii) An arrangement structured to comply with an exception in 
Sec.  411.357 (other than Sec.  411.357(p)), but which would otherwise 
qualify as an indirect compensation arrangement under this paragraph as 
of August 19, 2008, need not be restructured to satisfy the 
requirements of Sec.  411.357(p) until the expiration of the original 
term or current renewal term of the arrangement.
* * * * *

0
5. Section 411.357 is amended by--
0
a. Republishing the introductory text of the section.
0
b. Revising paragraph (a).
0
c. Revising paragraph (b).
0
d. Revising paragraph (l).
0
e. Revising paragraph (p)(1).
0
f. Revising paragraph (r).
    The revisions read as follows:


Sec.  411.357   Exceptions to the referral prohibition related to 
compensation arrangements.

    For purposes of Sec.  411.353, the following compensation 
arrangements do not constitute a financial relationship:
    (a) Rental of office space. Payments for the use of office space 
made by a lessee to a lessor if there is a rental or lease agreement 
that meets the following requirements:
    (1) The agreement is set out in writing, is signed by the parties, 
and specifies the premises it covers.
    (2) The term of the agreement is at least 1 year. To meet this 
requirement, if the agreement is terminated during the term with or 
without cause, the parties may not enter into a new agreement during 
the first year of the original term of the agreement.
    (3) The space rented or leased does not exceed that which is 
reasonable and necessary for the legitimate business purposes of the 
lease or rental and is used exclusively by the lessee when being used 
by the lessee (and is not shared with or used by the lessor or any 
person or entity related to the lessor), except that the lessee may 
make payments for the use of space consisting of common areas if the 
payments do not exceed the lessee's pro rata share of expenses for the 
space based upon the ratio of the space used exclusively by the lessee 
to the total amount of space (other than common areas) occupied by all 
persons using the common areas.
    (4) The rental charges over the term of the agreement are set in 
advance and are consistent with fair market value.
    (5) The rental charges over the term of the agreement are not 
determined--
    (i) In a manner that takes into account the volume or value of any 
referrals or other business generated between the parties; or
    (ii) Using a formula based on--
    (A) A percentage of the revenue raised, earned, billed, collected, 
or otherwise attributable to the services performed or business 
generated in the office space; or
    (B) Per-unit of service rental charges, to the extent that such 
charges reflect services provided to patients referred between the 
parties.
    (6) The agreement would be commercially reasonable even if no 
referrals were made between the lessee and the lessor.
    (7) A holdover month-to-month rental for up to 6 months immediately 
following the expiration of an agreement of at least 1 year that met 
the conditions of paragraphs (a)(1) through (a)(6) of this section 
satisfies the requirements of paragraph (a) of this section, provided 
that the holdover rental is on the same terms and conditions as the 
immediately preceding agreement.
    (b) Rental of equipment. Payments made by a lessee to a lessor for 
the use of equipment under the following conditions:
    (1) A rental or lease agreement is set out in writing, is signed by 
the parties, and specifies the equipment it covers.
    (2) The equipment rented or leased does not exceed that which is 
reasonable and necessary for the legitimate business purposes of the 
lease or rental and is used exclusively by the lessee when being used 
by the lessee and is not shared with or used by the lessor or any 
person or entity related to the lessor.
    (3) The agreement provides for a term of rental or lease of at 
least 1 year. To meet this requirement, if the agreement is terminated 
during the term with or without cause, the parties may not enter into a 
new agreement during the first year of the original term of the 
agreement.
    (4) The rental charges over the term of the agreement are set in 
advance, are consistent with fair market value, and are not 
determined--
    (i) In a manner that takes into account the volume or value of any 
referrals or other business generated between the parties; or
    (ii) Using a formula based on--
    (A) A percentage of the revenue raised, earned, billed, collected, 
or otherwise attributable to the services performed on or business 
generated by the use of the equipment; or
    (B) Per-unit of service rental charges, to the extent that such 
charges reflect services provided to patients referred between the 
parties.

[[Page 48753]]

    (5) The agreement would be commercially reasonable even if no 
referrals were made between the parties.
    (6) A holdover month-to-month rental for up to 6 months immediately 
following the expiration of an agreement of at least 1 year that met 
the conditions of paragraphs (b)(1) through (b)(5) of this section 
satisfies the requirements of paragraph (b) of this section, provided 
that the holdover rental is on the same terms and conditions as the 
immediately preceding agreement.
* * * * *
    (l) Fair market value compensation. Compensation resulting from an 
arrangement between an entity and a physician (or an immediate family 
member) or any group of physicians (regardless of whether the group 
meets the definition of a group practice set forth in Sec.  411.352) 
for the provision of items or services (other than the rental of office 
space) by the physician (or an immediate family member) or group of 
physicians to the entity, or by the entity to the physician (or an 
immediate family member) or a group of physicians, if the arrangement 
is set forth in an agreement that meets the following conditions:
    (1) The arrangement is in writing, signed by the parties, and 
covers only identifiable items or services, all of which are specified 
in the agreement.
    (2) The writing specifies the timeframe for the arrangement, which 
can be for any period of time and contain a termination clause, 
provided that the parties enter into only one arrangement for the same 
items or services during the course of a year. An arrangement made for 
less than 1 year may be renewed any number of times if the terms of the 
arrangement and the compensation for the same items or services do not 
change.
    (3) The writing specifies the compensation that will be provided 
under the arrangement. The compensation must be set in advance, 
consistent with fair market value, and not determined in a manner that 
takes into account the volume or value of referrals or other business 
generated by the referring physician. Compensation for the rental of 
equipment may not be determined using a formula based on--
    (i) A percentage of the revenue raised, earned, billed, collected, 
or otherwise attributable to the services performed or business 
generated through the use of the equipment; or
    (ii) Per-unit of service rental charges, to the extent that such 
charges reflect services provided to patients referred between the 
parties.
    (4) The arrangement is commercially reasonable (taking into account 
the nature and scope of the transaction) and furthers the legitimate 
business purposes of the parties.
    (5) The arrangement does not violate the anti-kickback statute 
(section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission.
    (6) The services to be performed under the arrangement do not 
involve the counseling or promotion of a business arrangement or other 
activity that violates a Federal or State law.
* * * * *
    (p) Indirect compensation arrangements. Indirect compensation 
arrangements, as defined at Sec.  411.354(c)(2), if all of the 
following conditions are satisfied:
    (1)(i) The compensation received by the referring physician (or 
immediate family member) described in Sec.  411.354(c)(2)(ii) is fair 
market value for services and items actually provided and not 
determined in any manner that takes into account the volume or value of 
referrals or other business generated by the referring physician for 
the entity furnishing DHS. Compensation for the rental of office space 
or equipment may not be determined using a formula based on--
    (A) A percentage of the revenue raised, earned, billed, collected, 
or otherwise attributable to the services performed or business 
generated in the office space or to the services performed or business 
generated through the use of the equipment; or
    (B) Per-unit of service rental charges, to the extent that such 
charges reflect services provided to patients referred between the 
parties.
    (ii) The compensation arrangement described in Sec.  
411.354(c)(2)(ii) is set out in writing, signed by the parties, and 
specifies the services covered by the arrangement, except in the case 
of a bona fide employment relationship between an employer and an 
employee, in which case the arrangement need not be set out in a 
written contract, but must be for identifiable services and be 
commercially reasonable even if no referrals are made to the employee; 
and
    (iii) The compensation arrangement does not violate the anti-
kickback statute (section 1128B(b) of the Act), or any Federal or State 
law or regulation governing billing or claims submission.
* * * * *
    (r) Obstetrical malpractice insurance subsidies. Remuneration that 
meets all of the conditions of paragraph (r)(1) or (2) of this section.
    (1) Remuneration that meets all of the conditions set forth in 
Sec.  1001.952(o) of this title.
    (2) A payment from a hospital, federally qualified health center, 
or rural health clinic that is used to pay for some or all of the costs 
of malpractice insurance premiums for a physician who engages in 
obstetrical practice as a routine part of his or her medical practice, 
if all of the following conditions are met:
    (i)(A) The physician's medical practice is located in a rural area, 
a primary care HPSA, or an area with demonstrated need for the 
physician's obstetrical services as determined by the Secretary in an 
advisory opinion issued in accordance with section 1877(g)(6) of the 
Act; or
    (B) At least 75 percent of the physician's obstetrical patients 
reside in a medically underserved area or are members of a medically 
underserved population.
    (ii) The arrangement is set out in writing, is signed by the 
physician and the hospital, federally qualified health center, or rural 
health clinic providing the payment, and specifies the payments to be 
made by the hospital, federally qualified health center, or rural 
health clinic and the terms under which the payments are to be 
provided.
    (iii) The arrangement is not conditioned on the physician's 
referral of patients to the hospital, federally qualified health 
center, or rural health clinic providing the payment.
    (iv) The hospital, federally qualified health center, or rural 
health clinic does not determine (directly or indirectly) the amount of 
the payment based on the volume or value of any actual or anticipated 
referrals by the physician or any other business generated between the 
parties.
    (v) The physician is allowed to establish staff privileges at any 
hospital(s), federally qualified health center(s), or rural health 
clinic(s) and to refer business to any other entities (except as 
referrals may be restricted under an employment arrangement or services 
contract that complies with Sec.  411.354(d)(4)).
    (vi) The payment is made to a person or organization (other than 
the physician) that is providing malpractice insurance (including a 
self-funded organization).
    (vii) The physician treats obstetrical patients who receive medical 
benefits or assistance under any Federal health care program in a 
nondiscriminatory manner.
    (viii) The insurance is a bona fide malpractice insurance policy or 
program, and the premium, if any, is calculated based on a bona fide 
assessment of the liability risk covered under the insurance.

[[Page 48754]]

    (ix)(A) For each coverage period (not to exceed 1 year), at least 
75 percent of the physician's obstetrical patients treated under the 
coverage of the obstetrical malpractice insurance during the prior 
period (not to exceed 1 year)--
    (1) Resided in a rural area, HPSA, medically underserved area, or 
an area with a demonstrated need for the physician's obstetrical 
services as determined by the Secretary in an advisory opinion issued 
in accordance with section 1877(g)(6) of the Act; or
    (2) Were part of a medically underserved population.
    (B) For the initial coverage period (not to exceed 1 year), the 
requirements of paragraph (r)(2)(ix)(A) of this section will be 
satisfied if the physician certifies that he or she has a reasonable 
expectation that at least 75 percent of the physician's obstetrical 
patients treated under the coverage of the malpractice insurance will--
    (1) Reside in a rural area, HPSA, medically underserved area, or an 
area with a demonstrated need for the physician's obstetrical services 
as determined by the Secretary in an advisory opinion issued in 
accordance with section 1877(g)(6) of the Act; or
    (2) Be part of a medically underserved population.
    (x) The arrangement does not violate the anti-kickback statute 
(section 1128B(b) of the Act), or any Federal or State law or 
regulation governing billing or claims submission.
    (3) For purposes of paragraph (r)(2) of this section, costs of 
malpractice insurance premiums means:
    (i) For physicians who engage in obstetrical practice on a full-
time basis, any costs attributable to malpractice insurance; or
    (ii) For physicians who engage in obstetrical practice on a part-
time or sporadic basis, the costs attributable exclusively to the 
obstetrical portion of the physician's malpractice insurance, and 
related exclusively to obstetrical services provided--
    (A) In a rural area, primary care HPSA, or an area with 
demonstrated need for the physician's obstetrical services, as 
determined by the Secretary in an advisory opinion issued in accordance 
with section 1877(g)(6) of the Act; or
    (B) In any area, provided that at least 75 percent of the 
physician's obstetrical patients treated in the coverage period (not to 
exceed 1 year) resided in a rural area or medically underserved area or 
were part of a medically underserved population.
* * * * *

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

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

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

0
7. Section 412.22 is amended by--
0
a. In the introductory text of paragraph (e), removing the phrase 
``paragraph (f) of this section'' and adding in its place ``paragraphs 
(e)(1) (vi) and (f) of this section''.
0
b. Adding a new paragraph (e)(1)(vi).
    The addition reads as follows:


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

* * * * *
    (e) * * *
    (1) * * *
    (vi) Effective October 1, 2008, if a State hospital that is 
occupying space in the same building or on the same campus as another 
State hospital cannot meet the criterion under paragraph (e)(1)(i) of 
this section solely because its governing body is under the control of 
the State hospital with which it shares a building or a campus, or is 
under the control of a third entity that also controls the State 
hospital with which it shares a building or a campus, the State 
hospital can nevertheless qualify for an exclusion if it meets the 
other applicable criteria in this section and--
    (A) Both State hospitals occupy space in the same building or on 
the same campus and have been continuously owned and operated by the 
State since October 1, 1995;
    (B) Is required by State law to be subject to the governing 
authority of the State hospital with which it shares space or the 
governing authority of a third entity that controls both hospitals; and
    (C) Was excluded from the inpatient prospective payment system 
before October 1, 1995, and continues to be excluded from the inpatient 
prospective payment system through September 30, 2008.
* * * * *

0
8. Section 412.64 is amended by--
0
a. Republishing the introductory text of paragraph (b)(1)(ii) and 
revising paragraph (b)(1)(ii)(A).
0
b. Revising paragraph (e)(1)(ii).
0
c. Adding a new paragraph (e)(4).
0
d. In the introductory text of paragraph (h)(4), removing the date 
``September 30, 2008'' and adding in its place ``September 30, 2011''.
    The revisions and additions read as follows:


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

* * * * *
    (b) * * *
    (1) * * *
    (ii) The term urban area means--
    (A) A Metropolitan Statistical Area or a Metropolitan division (in 
the case where a Metropolitan Statistical Area is divided into 
Metropolitan Divisions), as defined by the Executive Office of 
Management and Budget; or
* * * * *
    (e) * * *
    (1) * * *
    (ii) Except as provided in paragraph (e)(4) of this section, the 
annual updates and adjustments to the wage index under paragraph (h) of 
this section are made in a manner that ensures that aggregate payments 
are not affected; and
* * * * *
    (4) CMS makes an adjustment to the wage index to ensure that 
aggregate payments after implementation of the rural floor under 
section 4410 of the Balanced Budget Act of 1997 (Pub. L. 105-33) and 
the imputed floor under paragraph (h)(4) of this section are equal to 
the aggregate prospective payments that would have been made in the 
absence of such provisions. Beginning October 1, 2008, such adjustment 
will transition from a nationwide to a statewide adjustment, with a 
statewide adjustment fully in place by October 1, 2010.
* * * * *


Sec.  412.78   [Redesignated]

0
9. Section 412.78 is redesignated as Sec.  412.76.

0
10. A new Sec.  412.78 is added to read as follows:


Sec.  412.78   Determination of the hospital-specific rate for 
inpatient operating costs for sole community hospitals based on a 
Federal fiscal year 2006 base period.

    (a) Applicability. (1) This section applies to a hospital that has 
been designated as a sole community hospital, as described in Sec.  
412.92. If the 2006 hospital-specific rate exceeds the rate that would 
otherwise apply, that is, either the Federal rate under Sec.  412.64 or 
the hospital-specific rates for either FY 1982 under Sec.  412.73, FY 
1987 under Sec.  412.75 or FY 1996 under Sec.  412.77, this 2006 rate 
will be used in the payment formula set forth in Sec.  412.92(d)(1).
    (2) This section applies only to cost reporting periods beginning 
on or after January 1, 2009.
    (3) The formula for determining the hospital-specific costs for 
hospitals described under paragraph (a)(1) of this

[[Page 48755]]

section is set forth in paragraph (f) of this section.
    (b) Based costs for hospitals subject to fiscal year 2006 
rebasing--(1) General rule. Except as provided in paragraph (b)(2) of 
this section, for each hospital eligible under paragraph (a) of this 
section, the intermediary determines the hospital's Medicare Part A 
allowable inpatient operating costs, as described in Sec.  412.2(c), 
for the 12-month or longer cost reporting period ending on or after 
September 30, 2006, and before September 30, 2007, and computes the 
hospital-specific rate for purposes of determining prospective payment 
rates for inpatient operating costs as determined under Sec.  
412.92(d).
    (2) Exceptions. (i) If the hospital's last cost reporting period 
ending before September 30, 2007 is for less than 12 months, the base 
period is the hospital's most recent 12-month or longer cost reporting 
period ending before the short period report.
    (ii) If the hospital does not have a cost reporting period ending 
on or after September 30, 2006 and before September 30, 2007, and does 
have a cost reporting period beginning on or after October 1, 2005 and 
before October 1, 2006, that cost reporting period is the base period 
unless the cost reporting period is for less than 12 months. If that 
cost reporting period is for less than 12 months, the base period is 
the hospital's most recent 12-month or longer cost reporting period 
ending before the short cost reporting period. If a hospital has no 
cost reporting period beginning in fiscal year 2006, the hospital will 
not have a hospital-specific rate based on fiscal year 2006.
    (c) Costs on a per discharge basis. The intermediary determines the 
hospital's average base-period operating cost per discharge by dividing 
the total operating costs by the number of discharges in the base 
period. For purposes of this section, a transfer as defined in Sec.  
412.4(b) is considered to be a discharge.
    (d) Case-mix adjustment. The intermediary divides the average base-
period cost per discharge by the hospital's case-mix index for the base 
period.
    (e) Updating base-period costs. For purposes of determining the 
updated base-period costs for cost reporting periods beginning in 
Federal fiscal year 2006, the update factor is determined using the 
methodology set forth in Sec.  412.73(c)(15).
    (f) DRG adjustment. The applicable hospital-specific cost per 
discharge is multiplied by the appropriate DRG weighting factor to 
determine the hospital-specific base payment amount (target amount) for 
a particular covered discharge.
    (g) Notice of hospital-specific rates. The intermediary furnishes a 
hospital eligible for rebasing a notice of the hospital-specific rate 
as computed in accordance with this section. The notice will contain a 
statement of the hospital's Medicare Part A allowable inpatient 
operating costs, the number of Medicare discharges, and the case-mix 
index adjustment factor used to determine the hospital's cost per 
discharge for the Federal fiscal year 2006 base period.
    (h) Right to administrative and judicial review. An intermediary's 
determination under this section of the hospital-specific rate for a 
hospital is subject to administrative and judicial review in accordance 
with Sec.  412.77(h).
    (i) Modification of hospital-specific rate. The intermediary 
recalculates the hospital-specific rate determined under this section 
in the manner set forth in Sec.  412.77(i).
    (j) Maintaining budget neutrality. CMS makes an adjustment to the 
hospital-specific rate determined under this section in the manner set 
forth in Sec.  412.77(j).
0
11. Section 412.87 is amended by--
0
a. Revising paragraph (b)(1).
0
b. Adding a new paragraph (c).
    The revision and addition read as follows:


Sec.  412.87  Additional payment for new medical services and 
technologies: General provisions.

* * * * *
    (b) * * *
    (1) A new medical service or technology represents an advance that 
substantially improves, relating to technologies previously available, 
the diagnosis or treatment of Medicare beneficiaries.
* * * * *
    (c) Announcement of determinations and deadline for consideration 
of new medical service or technology applications. CMS will consider 
whether a new medical service or technology meets the eligibility 
criteria specified in paragraph (b) of this section and announce the 
results in the Federal Register as part of its annual updates and 
changes to the IPPS. CMS will only consider, for add-on payments for a 
particular fiscal year, an application for which the new medical 
service or technology has received FDA approval or clearance by July 1 
prior to the particular fiscal year.

0
12. Section 412.92 is amended--
0
a. Republishing the introductory text of paragraph (d)(1).
0
b. Adding a new paragraph (d)(1)(v).
    The addition reads as follows:


Sec.  412.92   Special treatment: Sole community hospitals.

* * * * *
    (d) Determining prospective payment rates for inpatient operating 
costs for sole community hospitals--(1) General rule. For cost 
reporting periods beginning on or after April 1, 1990, a sole community 
hospital is paid based on whichever of the following amounts yields the 
greatest aggregate payment for the cost reporting period.
* * * * *
    (v) For cost reporting periods beginning on or after January 1, 
2009, the hospital-specific rate as determined under Sec.  412.78.
* * * * *

0
13. Section 412.104 is amended by revising paragraph (a) to read as 
follows:


Sec.  412.104  Special treatment: Hospitals with high percentages of 
ESRD discharges.

    (a) Criteria for classification. CMS provides an additional payment 
to a hospital for inpatient services provided to ESRD beneficiaries who 
receive a dialysis treatment during a hospital stay, if the hospital 
has established that ESRD beneficiary discharges, excluding discharges 
classified into MS-DRG 652 (Renal Failure), MS-DRG 682 (Renal Failure 
with MCC), MS-DRG 683 (Renal Failure with CC), MS-DRG 684 (Renal 
Failure without CC/MCC) and MS-DRG 685 (Admit for Renal Dialysis), 
where the beneficiary received dialysis services during the inpatient 
stay, constitute 10 percent or more of its total Medicare discharges.
* * * * *

0
14. Section 412.105 is amended by revising paragraph (f)(1)(vi) to read 
as follows:


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

* * * * *
    (f) * * *
    (1) * * *
    (vi) Hospitals that are part of the same Medicare GME affiliated 
group or emergency Medicare GME affiliated group (as defined in Sec.  
413.75(b) of this subchapter) may elect to apply the limit specified in 
paragraph (f)(1)(iv) of this section on an aggregate basis, as 
specified in Sec.  413.79(f) of this subchapter. Effective beginning on 
or after October 1, 2008, home and host hospitals with valid emergency 
Medicare GME affiliation agreements are exempt from the application of 
the ratio cap specified in paragraph (a)(1)(i) of this section.
* * * * *

0
15. Section 412.230 is amended by--

[[Page 48756]]

0
a. Revising paragraph (d)(1)(iv)(C).
0
b. Adding new paragraphs (d)(1)(iv)(D) and (d)(1)(iv)(E).
    The additions and revision read as follows:


Sec.  412.230  Criteria for an individual hospital seeking 
redesignation to another rural area or an urban area.

* * * * *
    (d) * * *
    (1) * * *
    (iv) * * *
    (C) With respect to redesignations for fiscal years 2002 through 
2009, the hospital's average hourly wage is equal to, in the case of a 
hospital located in a rural area, at least 82 percent, and in the case 
of a hospital located in an urban area, at least 84 percent of the 
average hourly wage of hospitals in the area to which it seeks 
redesignation.
    (D) With respect to redesignations for fiscal year 2010, the 
hospital's average hourly wage is equal to, in the case of a hospital 
located in a rural area, at least 84 percent, and in the case of a 
hospital located in an urban area, at least 86 percent of the average 
hourly wage of hospitals in the area to which it seeks redesignation.
    (E) With respect to redesignations for fiscal year 2011 and later 
fiscal years, the hospital's average hourly wage is equal to, in the 
case of a hospital located in a rural area, at least 86 percent, and in 
the case of a hospital located in an urban area, at least 88 percent of 
the average hourly wage of hospitals in the area to which it seeks 
redesignation.
* * * * *

0
16. Section 412.232 is amended by--
0
a. Revising paragraph (c)(1).
0
b. Revising paragraph (c)(2).
0
c. Adding a new paragraph (c)(3).
    The revisions and addition read as follows:


Sec.  412.232   Criteria for all hospitals in a rural county seeking 
urban redesignation.

* * * * *
    (c) * * *
    (1) Aggregate hourly wage for fiscal years before fiscal year 2010.
    (i) Aggregate hourly wage. With respect to redesignations effective 
beginning fiscal year 1999 and before fiscal year 2010, the aggregate 
average hourly wage for all hospitals in the rural county must be equal 
to at least 85 percent of the average hourly wage in the adjacent urban 
area.
    (ii) Aggregate hourly wage weighted for occupational mix. For 
redesignations effective before fiscal year 1999, the aggregate hourly 
wage for all hospitals in the rural county, weighed for occupational 
categories, is at least 90 percent of the average hourly wage in the 
adjacent urban area.
    (2) Aggregate hourly wage for fiscal year 2010. With respect to 
redesignations effective for fiscal year 2010, the aggregate average 
hourly wage for all hospitals in the rural county must be equal to at 
least 86 percent of the average hourly wage in the adjacent urban area.
    (3) Aggregate hourly wage for fiscal year 2011 and later fiscal 
years. With respect to redesignations effective for fiscal year 2011 
and later fiscal years, the aggregate average hourly wage for all 
hospitals in the rural county must be equal to at least 88 percent of 
the average hourly wage in the adjacent urban area.
* * * * *

0
17. Section 412.234 is amended by--
0
a. Revising paragraph (b)(1).
0
b. Revising paragraph (b)(2).
0
c. Adding a new paragraph (b)(3).
    The revisions and addition read as follows:


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

* * * * *
    (b) * * *
    (1) Aggregate hourly wage for fiscal years before fiscal year 2010.
    (i) Aggregate hourly wage. With respect to redesignations effective 
beginning fiscal year 1999 and before fiscal year 2010, the aggregate 
average hourly wage for all hospitals in the urban county must be at 
least 85 percent of the average hourly wage in the urban area to which 
the hospitals in the county seek reclassification.
    (ii) Aggregate hourly wage weighted for occupational mix. For 
redesignations effective before fiscal year 1999, the aggregate hourly 
wage for all hospitals in the county, weighed for occupational 
categories, is at least 90 percent of the average hourly wage in the 
adjacent urban area.
    (2) Aggregate hourly wage for fiscal year 2010. With respect to 
redesignations effective for fiscal year 2010, the aggregate average 
hourly wage for all hospitals in the urban county must be at least 86 
percent of the average hourly wage in the urban area to which the 
hospitals in the county seek reclassification.
    (3) Aggregate hourly wage for fiscal year 2011 and later fiscal 
years. With respect to redesignations effective for fiscal year 2011 
and later fiscal years, the aggregate average hourly wage for all 
hospitals in the urban county must be at least 88 percent of the 
average hourly wage in the urban area to which the hospitals in the 
county seek reclassification.
* * * * *

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

0
18. The authority citation for part 413 continues to read as follows:

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

0
19. Section 413.79 is amended by--
0
a. Adding a heading to paragraph (f)(6)(i).
0
b. Revising paragraph (f)(6)(ii).
0
c. In paragraph (f)(6)(iv), removing the cross-reference ``Sec.  
413.75(d)'' and adding the cross-reference ``paragraph (d) of this 
section'' in its place.
    The revisions read as follows:


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

* * * * *
    (f) * * *
    (6) * * *
    (i) Requirements for submission of emergency Medicare GME 
affiliation agreements. * * *
    (ii) Deadline for submission of the emergency Medicare GME 
affiliation agreement. Each participating home and host hospital must 
submit an emergency Medicare GME affiliation agreement to CMS and 
submit a copy to the CMS fiscal intermediary/MAC by the applicable due 
date.
    (A) For emergency Medicare GME affiliation agreements that would 
otherwise be required to be submitted by June 30, 2006, or July 1, 
2006, each participating host and home hospital must submit an 
emergency Medicare GME affiliation agreement to CMS and submit a copy 
to its CMS intermediary/MAC on or before October 9, 2006.
    (B) Except for emergency Medicare GME affiliation agreements 
specified in paragraph (f)(6)(ii)(A) of this section, for emergency 
Medicare GME affiliation agreements that would otherwise be required to 
be submitted prior to October 1, 2008, the following due dates are 
applicable:
    (1) First year. The later of 180 days after the section 1135 
emergency period begins or by June 30 of the academic year in which the 
section 1135 emergency was declared; or
    (2) Subsequent academic years. The later of 180 days after the 
section 1135

[[Page 48757]]

emergency period begins, or by July 1 of each academic year.
    (C) For emergency Medicare GME affiliation agreements that would 
otherwise be required to be submitted after October 1, 2008, the 
following due dates are applicable:
    (1) First year. By 180 days after the end of the academic year in 
which the section 1135 emergency was declared;
    (2) Second academic year. By 180 days after the end of the next 
academic year following the academic year in which the section 1135 
emergency was declared; or
    (3) Subsequent academic years. By July 1 of each academic year.
* * * * *

PART 422--MEDICARE ADVANTAGE PROGRAM

0
20. The authority citation for part 422 continues to read as follows:

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

0
21. Section 422.310 is revised to read as follows:


Sec.  422.310   Risk adjustment data.

    (a) Definition of risk adjustment data. Risk adjustment data are 
all data that are used in the development and application of a risk 
adjustment payment model.
    (b) Data collection: Basic rule. Each MA organization must submit 
to CMS (in accordance with CMS instructions) the data necessary to 
characterize the context and purposes of each item and service provided 
to a Medicare enrollee by a provider, supplier, physician, or other 
practitioner. CMS may also collect data necessary to characterize the 
functional limitations of enrollees of each MA organization.
    (c) Sources and extent of data.
    (1) To the extent required by CMS, risk adjustment data must 
account for the following:
    (i) Items and services covered under the original Medicare program.
    (ii) Medicare covered items and services for which Medicare is not 
the primary payer.
    (iii) Other additional or supplemental benefits that the MA 
organization may provide.
    (2) The data must account separately for each provider, supplier, 
physician, or other practitioner that would be permitted to bill 
separately under the original Medicare program, even if they 
participate jointly in the same service.
    (d) Other data requirements.
    (1) MA organizations must submit data that conform to CMS' 
requirements for data equivalent to Medicare fee-for-service data, when 
appropriate, and to all relevant national standards. CMS may specify 
abbreviated formats for data submission required of MA organizations.
    (2) The data must be submitted electronically to the appropriate 
CMS contractor.
    (3) MA organizations must obtain the risk adjustment data required 
by CMS from the provider, supplier, physician, or other practitioner 
that furnished the item or service.
    (4) MA organizations may include in their contracts with providers, 
suppliers, physicians, and other practitioners, provisions that require 
submission of complete and accurate risk adjustment data as required by 
CMS. These provisions may include financial penalties for failure to 
submit complete data.
    (e) Validation of risk adjustment data. MA organizations and their 
providers and practitioners will be required to submit a sample of 
medical records for the validation of risk adjustment data, as required 
by CMS. There may be penalties for submission of false data.
    (f) Use of data. CMS uses the data obtained under this section to 
determine the risk adjustment factors used to adjust payments, as 
required under Sec. Sec.  422.304(a) and (c). CMS also may use the data 
for updating risk adjustment models, calculating Medicare DSH 
percentages, conducting quality review and improvement activities, and 
for Medicare coverage purposes.
    (g) Deadlines for submission of risk adjustment data. Risk 
adjustment factors for each payment year are based on risk adjustment 
data submitted for items and services furnished during the 12-month 
period before the payment year that is specified by CMS. As determined 
by CMS, this 12-month period may include a 6-month data lag that may be 
changed or eliminated as appropriate. CMS may adjust these deadlines, 
as appropriate.
    (1) The annual deadline for risk adjustment data submission is the 
first Friday in September for risk adjustment data reflecting items and 
services furnished during the 12-month period ending the prior June 30, 
and the first Friday in March for data reflecting services furnished 
during the 12-month period ending the prior December 31.
    (2) CMS allows a reconciliation process to account for late data 
submissions. CMS continues to accept risk adjustment data submitted 
after the March deadline until January 31 of the year following the 
payment year. After the payment year is completed, CMS recalculates the 
risk factors for affected individuals to determine if adjustments to 
payments are necessary. Risk adjustment data that are received after 
the annual January 31 late data submission deadline will not be 
accepted for the purposes of reconciliation.

PART 489--PROVIDER AGREEMENTS AND SUPPLIER APPROVAL

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

    Authority: Secs. 1102, 1819, 1820(e), 1861, 1864(m), 1866, 1869, 
and 1871 of the Social Security Act (42 U.S.C. 1302, 1395i-3, 1395x, 
1395aa(m), 1395cc, 1395ff, and 1395hh).

0
23. Section 489.3 is amended by revising the definition of ``physician-
owned hospital'' to read as follows:


Sec.  489.3   Definitions.

* * * * *
    Physician-owned hospital means any participating hospital (as 
defined in Sec.  489.24) in which a physician, or an immediate family 
member of a physician (as defined in Sec.  411.351 of this chapter), 
has an ownership or investment interest in the hospital. The ownership 
or investment interest may be through equity, debt, or other means, and 
includes an interest in an entity that holds an ownership or investment 
interest in the hospital. This definition does not include a hospital 
with physician ownership or investment interests that satisfy the 
requirements at Sec.  411.356(a) or (b) of this chapter.
* * * * *

0
24. Section 489.20 is amended by--
0
a. Revising paragraph (r)(2).
0
b. Revising paragraph (u).
0
c. Redesignating paragraphs (v) and (w) as paragraphs (w) and (x), 
respectively.
0
d. Adding a new paragraph (v).
    The revisions and addition read as follows:


Sec.  489.20  Basic commitments.

* * * * *
    (r) * * *
    (2) An on-call list of physicians who are on the hospital's medical 
staff or who have privileges at the hospital, or who are on the staff 
or have privileges at another hospital participating in a formal 
community call plan, in accordance with Sec.  489.24(j)(2)(iii), 
available to provide treatment necessary after the initial examination 
to stabilize individuals with emergency medical conditions who are 
receiving services required under Sec.  489.24 in accordance with the 
resources available to the hospital; and
* * * * *
    (u) Except as provided in paragraph (v) of this section, in the 
case of a

[[Page 48758]]

physician-owned hospital as defined at Sec.  489.3--
    (1) To furnish written notice to each patient at the beginning of 
the patient's hospital stay or outpatient visit that the hospital is a 
physician-owned hospital, in order to assist the patient in making an 
informed decision regarding his or her care, in accordance with Sec.  
482.13(b)(2) of this subchapter. The notice should disclose, in a 
manner reasonably designed to be understood by all patients, the fact 
that the hospital meets the Federal definition of a physician-owned 
hospital specified in Sec.  489.3 and that the list of the hospital's 
owners or investors who are physicians or immediate family members (as 
defined at Sec.  411.351 of this chapter) of physicians is available 
upon request and must be provided to the patient at the time the 
request for the list is made by or on behalf of the patient. For 
purposes of this paragraph (u)(1), the hospital stay or outpatient 
visit begins with the provision of a package of information regarding 
scheduled preadmission testing and registration for a planned hospital 
admission for inpatient care or an outpatient service.
    (2) To require each physician who is a member of the hospital's 
medical staff to agree, as a condition of continued medical staff 
membership or admitting privileges, to disclose, in writing, to all 
patients the physician refers to the hospital any ownership or 
investment interest in the hospital that is held by the physician or by 
an immediate family member (as defined at Sec.  411.351 of this 
chapter) of the physician. Disclosure must be required at the time the 
referral is made.
    (v) The requirements of paragraph (u) of this section do not apply 
to any physician-owned hospital that does not have at least one 
referring physician (as defined at Sec.  411.351 of this chapter) who 
has an ownership or investment interest in the hospital or who has an 
immediate family member who has an ownership or investment interest in 
the hospital, provided that such hospital signs an attestation 
statement to that effect and maintains such attestation in its records.
* * * * *

0
25. Section 489.24 is amended by--
0
a. Revising paragraph (a)(2).
0
b. Revising paragraph (f).
0
c. Revising paragraph (j).
    The revisions read as follows:


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

    (a) * * *
    (2) Nonapplicability of provisions of this section. Sanctions under 
this section for an inappropriate transfer during a national emergency 
or for the direction or relocation of an individual to receive medical 
screening at an alternate location pursuant to an appropriate State 
emergency preparedness plan or, in the case of a public health 
emergency that involves a pandemic infectious disease, pursuant to a 
State pandemic preparedness plan do not apply to a hospital with a 
dedicated emergency department located in an emergency area during an 
emergency period, as specified in section 1135(g)(1) of the Act. A 
waiver of these sanctions is limited to a 72-hour period beginning upon 
the implementation of a hospital disaster protocol, except that, if a 
public health emergency involves a pandemic infectious disease (such as 
pandemic influenza), the waiver will continue in effect until the 
termination of the applicable declaration of a pubic health emergency, 
as provided for by section 1135(e)(1)(B) of the Act.
* * * * *
    (f) Recipient hospital responsibilities. A participating hospital 
that has specialized capabilities or facilities (including, but not 
limited to, facilities such as burn units, shock-trauma units, neonatal 
intensive case units, or, with respect to rural areas, regional 
referral centers (which, for purposes of this subpart, mean hospitals 
meeting the requirements of referral centers found at Sec.  412.96 of 
this chapter)) may not refuse to accept from a referring hospital 
within the boundaries of the United States an appropriate transfer of 
an individual who requires such specialized capabilities or facilities 
if the receiving hospital has the capacity to treat the individual.
    (1) The provisions of this paragraph (f) apply to any participating 
hospital with specialized capabilities, regardless of whether the 
hospital has a dedicated emergency department.
    (2) The provisions of this paragraph (f) do not apply to an 
individual who has been admitted to a referring hospital under the 
provisions of paragraph (d)(2)(i) of this section.
* * * * *
    (j) Availability of on-call physicians. In accordance with the on-
call list requirements specified in Sec.  489.20(r)(2), a hospital must 
have written policies and procedures in place--
    (1) To respond to situations in which a particular specialty is not 
available or the on-call physician cannot respond because of 
circumstances beyond the physician's control; and
    (2) To provide that emergency services are available to meet the 
needs of individuals with emergency medical conditions if a hospital 
elects to--
    (i) Permit on-call physicians to schedule elective surgery during 
the time that they are on call;
    (ii) Permit on-call physicians to have simultaneous on-call duties; 
and
    (iii) Participate in a formal community call plan. Notwithstanding 
participation in a community call plan, hospitals are still required to 
perform medical screening examinations on individuals who present 
seeking treatment and to conduct appropriate transfers. The formal 
community plan must include the following elements:
    (A) A clear delineation of on-call coverage responsibilities; that 
is, when each hospital participating in the plan is responsible for on-
call coverage.
    (B) A description of the specific geographic area to which the plan 
applies.
    (C) A signature by an appropriate representative of each hospital 
participating in the plan.
    (D) Assurances that any local and regional EMS system protocol 
formally includes information on community on-call arrangements.
    (E) A statement specifying that even if an individual arrives at a 
hospital that is not designated as the on-call hospital, that hospital 
still has an obligation under Sec.  489.24 to provide a medical 
screening examination and stabilizing treatment within its capability, 
and that hospitals participating in the community call plan must abide 
by the regulations under Sec.  489.24 governing appropriate transfers.
    (F) An annual assessment of the community call plan by the 
participating hospitals.

0
26. Section 489.53 is amended by revising paragraph (c) to read as 
follows:


Sec.  489.53   Termination by CMS.

* * * * *
    (c) Termination of agreements with hospitals that fail to make 
required disclosures. In the case of a physician-owned hospital, as 
defined at Sec.  489.3, CMS may terminate the provider agreement if the 
hospital failed to comply with the requirements of Sec.  489.20(u) or 
(w). In the case of other participating hospitals, as defined at Sec.  
489.24, CMS may terminate the provider agreement if the participating 
hospital failed to comply with the requirements of Sec.  489.20(w).
* * * * *
(Catalog of Federal Domestic Assistance Program No. 93.773, 
Medicare--Hospital Insurance; and Program No. 93.774, Medicare--
Supplementary Medical Insurance Program)


[[Page 48759]]


    Dated: July 24, 2008.
Kerry Weems,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Dated: July 31, 2008.
Michael O. Leavitt,
Secretary.

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

Addendum--Schedule of Standardized Amounts, Update Factors, and Rate-
of-Increase Percentages Effective With Cost Reporting Periods Beginning 
On or After October 1, 2008

I. Summary and Background

    In 2007, Congress passed the MMSEA, Public Law 108-173, and 
section 117 of that Act extended section 508 wage index 
reclassifications and certain special exceptions through FY 2008, 
with the special reclassifications and exceptions scheduled to 
expire September 30, 2008. However, before these reclassifications 
and exceptions could expire, on July 15, 2008, Congress enacted 
Public Law 110-275 (MIPPA). Section 124 of that Act further extended 
the 508 reclassifications and special exceptions through the end of 
FY 2009--or September 30, 2009. As a result of this intervening 
legislation, section 508 or special exception hospitals that would 
have otherwise been reclassified under section 1886 of the Act will 
no longer be considered as such, thus affecting the wage index 
calculations. We did not have sufficient time between the passage of 
the legislation and the deadline for publication of this final rule 
to recalculate wage indices based on the new reclassification data. 
Therefore, we are not able to provide all of the final FY 2009 wage 
index tables, payment rates, or impacts in this final rule. Because 
the wage data affect the calculation of the outlier threshold as 
well as the outlier offset and budget neutrality factors that are 
applied to the standardized amounts, we are only able to provide 
tentative figures at this time. These tentative amounts will be 
revised once section 124 of Public Law 110-275 is implemented and as 
a result the wage index will be finalized. Subsequent to this final 
rule, we will publish a Federal Register document listing the final 
standardized amounts, outlier offsets, and budget neutrality factors 
that are effective October 1, 2008, for FY 2009. The final data also 
will be published on the CMS Web site.
    In this Addendum, we are setting forth a final description of 
the methods and data we used to determine the prospective payment 
rates for Medicare hospital inpatient operating costs and Medicare 
hospital inpatient capital-related costs. We are also setting forth 
the rate-of-increase percentages for updating the target amounts for 
certain hospitals and hospital units excluded from the IPPS. We note 
that, because certain hospitals excluded from the IPPS are paid on a 
reasonable cost basis subject to a rate-of-increase ceiling (and not 
by the IPPS), these hospitals are not affected by the tentative 
figures for standardized amounts, offsets, and budget neutrality 
factors. Therefore, in this final rule, we are finalizing the rate-
of-increase percentages for updating the target amounts for certain 
hospitals and hospital units excluded from the IPPS that are 
effective for cost reporting periods beginning on or after October 
1, 2008.
    In general, except for SCHs, MDHs, and hospitals located in 
Puerto Rico, each hospital's payment per discharge under the IPPS is 
based on 100 percent of the Federal national rate, also known as the 
national adjusted standardized amount. This amount reflects the 
national average hospital cost per case from a base year, updated 
for inflation.
    Currently, SCHs are paid based on whichever of the following 
rates yields the greatest aggregate payment: the Federal national 
rate; the updated hospital-specific rate based on FY 1982 costs per 
discharge; the updated hospital-specific rate based on FY 1987 costs 
per discharge; or the updated hospital-specific rate based on FY 
1996 costs per discharge. For cost reporting periods beginning on or 
after January 1, 2009, section 122 of Public Law 110-275 amended 
section 1886(b)(3) of the Act and added the updated hospital-
specific rate based on the FY 2006 costs per discharge to determine 
the rate that yields the greatest aggregate payment. We refer 
readers to section IV.D.2. of this final rule for a discussion of 
this provision.
    Under section 1886(d)(5)(G) of the Act, MDHs historically have 
been paid based on the Federal national rate or, if higher, the 
Federal national rate plus 50 percent of the difference between the 
Federal national rate and the updated hospital-specific rate based 
on FY 1982 or FY 1987 costs per discharge, whichever was higher. 
(MDHs did not have the option to use their FY 1996 hospital-specific 
rate.) However, section 5003(a)(1) of Public Law 109-171 extended 
and modified the MDH special payment provision that was previously 
set to expire on October 1, 2006, to include discharges occurring on 
or after October 1, 2006, but before October 1, 2011. Under section 
5003(b) of Public Law 109-171, if the change results in an increase 
to an MDH's target amount, we must rebase an MDH's hospital-specific 
rates based on its FY 2002 cost report. Section 5003(c) of Public 
Law 109-171 further required that MDHs be paid based on the Federal 
national rate or, if higher, the Federal national rate plus 75 
percent of the difference between the Federal national rate and the 
updated hospital-specific rate. Further, based on the provisions of 
section 5003(d) of Public Law 109-171, MDHs are no longer subject to 
the 12-percent cap on their DSH payment adjustment factor.
    For hospitals located in Puerto Rico, the payment per discharge 
is based on the sum of 25 percent of an updated Puerto Rico-specific 
rate based on average costs per case of Puerto Rico hospitals for 
the base year and 75 percent of the Federal national rate. (We refer 
readers to section II.D.3. of this Addendum for a complete 
description.)
    As discussed below in section II. of this Addendum, we are 
making changes in the determination of the prospective payment rates 
for Medicare inpatient operating costs for FY 2009. In section III. 
of this Addendum, we discuss our policy changes for determining the 
prospective payment rates for Medicare inpatient capital-related 
costs for FY 2009. Section IV. of this Addendum sets forth our 
changes for determining the rate-of-increase limits for certain 
hospitals excluded from the IPPS for FY 2009. The tables to which we 
refer in the preamble of this final rule are presented in section V. 
of this Addendum of this final rule. Some of these tables are based 
upon tentative data, and the final tables will be presented in a 
separate document that will be published on the CMS Web site, as 
well as in the Federal Register after publication of this final rule 
but prior to October 1, 2008.

II. Changes to Prospective Payment Rates for Hospital Inpatient 
Operating Costs for FY 2009

    The basic methodology for determining prospective payment rates 
for hospital inpatient operating costs for FY 2005 and subsequent 
fiscal years is set forth at Sec.  412.64. The basic methodology for 
determining the prospective payment rates for hospital inpatient 
operating costs for hospitals located in Puerto Rico for FY 2005 and 
subsequent fiscal years is set forth at Sec. Sec.  412.211 and 
412.212. Below we discuss the factors used for determining the 
prospective payment rates.
    In summary, the tentative standardized amounts set forth in 
Tables 1A, 1B, and 1C, of section VI. of this Addendum reflect--
     Equalization of the standardized amounts for urban and 
other areas at the level computed for large urban hospitals during 
FY 2004 and onward, as provided for under section 1886(d)(3)(A)(iv) 
of the Act, updated by the applicable percentage increase required 
under sections 1886(b)(3)(B)(i)(XX) and 1886(b)(3)(B)(viii) of the 
Act.
     The labor-related share that is applied to the 
tentative standardized amounts and tentative Puerto Rico-specific 
standardized amounts to give the hospital the highest payment, as 
provided for under sections 1886(d)(3)(E), and 1886(d)(9)(C)(iv) of 
the Act.
     Final updates of 3.6 percent for all areas (that is, 
the estimated full market basket percentage increase of 3.6 
percent), as required by section 1886(b)(3)(B)(i)(XX) of the Act, as 
amended by section 5001(a)(1) of Public Law 109-171, and reflecting 
the requirements of section 1886(b)(3)(B)(viii) of the Act, as added 
by section 5001(a)(3) of Public Law 109-171, to reduce the 
applicable percentage increase by 2.0 percentage points for a 
hospital that fails to submit data, in a form and manner specified 
by the Secretary, relating to the quality of inpatient care 
furnished by the hospital.
     A final update of 3.6 percent to the tentative Puerto 
Rico-specific standardized amount (that is, the full estimated rate-
of-increase in the hospital market basket for IPPS hospitals), as 
provided for under Sec.  412.211(c), which states that we update the 
Puerto Rico-specific standardized amount using the percentage 
increase specified in Sec.  412.64(d)(1), or the percentage increase 
in the market basket index for prospective payment hospitals for all 
areas.
     An adjustment to the standardized amount to ensure 
budget neutrality for DRG

[[Page 48760]]

recalibration and reclassification, as provided for under section 
1886(d)(4)(C)(iii) of the Act.
     An adjustment to ensure the wage index update and 
changes are budget neutral, as provided for under section 
1886(d)(3)(E) of the Act.
     An adjustment to ensure the effects of geographic 
reclassification are budget neutral, as provided for in section 
1886(d)(8)(D) of the Act, by removing the FY 2008 budget neutrality 
factor and applying a revised factor.
     An adjustment to remove the FY 2008 outlier offset and 
apply an offset for FY 2009 as provided for in section 1886(d)(3)(B) 
of the Act.
     An adjustment to ensure the effects of the rural 
community hospital demonstration required under section 410A of 
Public Law 108-173 are budget neutral, as required under section 
410A(c)(2) of Public Law 108-173.
     An adjustment to eliminate the effect of coding or 
classification changes that do not reflect real changes in case-mix, 
as provided for in section 1886(d)(3)(A)(vi) of the Act and as 
discussed below and in section II.D. of the preamble to this final 
rule.
    We note that, beginning in FY 2008, we applied the budget 
neutrality adjustment for the rural floor to the hospital wage 
indices rather than the standardized amount. For FY 2009, we are 
continuing to apply the rural floor budget neutrality adjustment to 
hospital wage indices rather than the standardized amount. In 
addition, instead of applying the budget neutrality adjustment for 
the imputed floor adopted under section 1886(d)(3)(E) of the Act to 
the standardized amounts, beginning with FY 2009, we are applying 
the imputed floor budget neutrality adjustment to the wage indices. 
Beginning in FY 2009, we are also applying the budget neutrality 
adjustments for the rural floor and imputed rural floor at the State 
level rather than the national level. For a complete discussion of 
the budget neutrality changes concerning the rural floor and the 
imputed floor, including the within-State budget neutrality 
adjustment, we refer readers to section III.B.2.b. of the preamble 
to this final rule.

A. Calculation of the Tentative Adjusted Standardized Amount

1. Standardization of Base-Year Costs or Target Amounts

    In general, the national standardized amount is based on per 
discharge averages of adjusted hospital costs from a base period 
(section 1886(d)(2)(A) of the Act), updated and otherwise adjusted 
in accordance with the provisions of section 1886(d) of the Act. For 
Puerto Rico hospitals, the Puerto Rico-specific standardized amount 
is based on per discharge averages of adjusted target amounts from a 
base period (section 1886(d)(9)(B)(i) of the Act), updated and 
otherwise adjusted in accordance with the provisions of section 
1886(d)(9) of the Act. The September 1, 1983 interim final rule (48 
FR 39763) contained a detailed explanation of how base-year cost 
data (from cost reporting periods ending during FY 1981) were 
established for urban and rural hospitals in the initial development 
of standardized amounts for the IPPS. The September 1, 1987 final 
rule (52 FR 33043 and 33066) contains a detailed explanation of how 
the target amounts were determined and how they are used in 
computing the Puerto Rico rates.
    Sections 1886(d)(2)(B) and (d)(2)(C) of the Act require us to 
update base-year per discharge costs for FY 1984 and then 
standardize the cost data in order to remove the effects of certain 
sources of cost variations among hospitals. These effects include 
case-mix, differences in area wage levels, cost-of-living 
adjustments for Alaska and Hawaii, indirect medical education costs, 
and costs to hospitals serving a disproportionate share of low-
income patients.
    In accordance with section 1886(d)(3)(E) of the Act, the 
Secretary estimates, from time-to-time, the proportion of hospitals' 
costs that are attributable to wages and wage-related costs. In 
general, the standardized amount is divided into labor-related and 
nonlabor-related amounts; only the proportion considered to be the 
labor-related amount is adjusted by the wage index. Section 
1886(d)(3)(E) of the Act requires that 62 percent of the 
standardized amount be adjusted by the wage index, unless doing so 
would result in lower payments to a hospital than would otherwise be 
made. (Section 1886(d)(9)(C)(iv)(II) of the Act extends this 
provision to the labor-related share for hospitals located in Puerto 
Rico.)
    For FY 2009, we are not changing the national and Puerto Rico-
specific labor-related and nonlabor-related shares from the 
percentages established for FY 2008. Therefore, the labor-related 
share continues to be 69.7 percent for the national standardized 
amounts and 58.7 percent for the Puerto Rico-specific standardized 
amount. Consistent with section 1886(d)(3)(E) of the Act, we are 
applying the wage index to a labor-related share of 62 percent for 
all non-Puerto Rico hospitals whose wage indexes are less than or 
equal to 1.0000. For all non-Puerto Rico hospitals whose wage 
indices are greater than 1.0000, we are applying the wage index to a 
labor-related share of 69.7 percent of the national standardized 
amount. For hospitals located in Puerto Rico, we are applying a 
labor-related share of 58.7 percent if its Puerto Rico-specific wage 
index is less than or equal to 1.0000. For hospitals located in 
Puerto Rico whose Puerto Rico-specific wage index values are greater 
than 1.0000, we are applying a labor share of 62 percent.
    The tentative standardized amounts for operating costs appear in 
Table 1A, 1B, and 1C of the Addendum to this final rule.

2. Computing the Tentative Average Standardized Amount

    Section 1886(d)(3)(A)(iv)(II) of the Act requires that, 
beginning with FY 2004 and thereafter, an equal standardized amount 
be computed for all hospitals at the level computed for large urban 
hospitals during FY 2003, updated by the applicable percentage 
update. Section 1886(d)(9)(A)(ii)(II) of the Act equalizes the 
Puerto Rico-specific urban and rural area rates. Accordingly, we are 
calculating FY 2009 national and Puerto Rico standardized amounts 
irrespective of whether a hospital is located in an urban or rural 
location.

3. Updating the Tentative Average Standardized Amount

    In accordance with section 1886(d)(3)(A)(iv)(II) of the Act, we 
are updating the equalized standardized amount for FY 2008 by the 
full estimated market basket percentage increase for hospitals in 
all areas, as specified in section 1886(b)(3)(B)(i)(XX) of the Act, 
as amended by section 5001(a)(1) of Public Law 109-171. The 
percentage change in the market basket reflects the average change 
in the price of goods and services comprising routine, ancillary, 
and special care unit inpatient hospital services. The most recent 
forecast of the hospital market basket increase for FY 2009 is 3.6 
percent. Thus, for FY 2009, the update to the average standardized 
amount is 3.6 percent for hospitals in all areas. The market basket 
increase of 3.6 percent is based on the 2008 second quarter forecast 
of the hospital market basket increase (as discussed in Appendix B 
of this final rule).
    Section 1886(b)(3)(B) of the Act specifies the mechanism to be 
used to update the standardized amount for payment for inpatient 
hospital operating costs. Section 1886(b)(3)(B)(viii) of the Act, as 
added by section 5001(a)(3) of Public Law 109-171, provides for a 
reduction of 2.0 percentage points from the update percentage 
increase (also known as the market basket update) for FY 2007 and 
each subsequent fiscal year for any ``subsection (d) hospital'' that 
does not submit quality data, as discussed in section IV.A. of the 
preamble of this final rule. The tentative standardized amounts in 
Tables 1A through 1C of section V. of the Addendum to this final 
rule reflect these differential amounts.
    Section 412.211(c) states that we update the Puerto Rico-
specific standardized amount using the percentage increase specified 
in Sec.  412.64(d)(1) or the percentage increase in the market 
basket index for prospective payment hospitals for all areas. We are 
applying the full rate-of-increase in the hospital market basket for 
IPPS hospitals to the Puerto Rico-specific standardized amount. 
Therefore, the update to the Puerto Rico-specific standardized 
amount is 3.6 percent.
    Although the update factors for FY 2009 are set by law, we are 
required by section 1886(e)(4) of the Act to recommend, taking into 
account MedPAC's recommendations, appropriate update factors for FY 
2009 for both IPPS hospitals and hospitals and hospital units 
excluded from the IPPS. Our recommendation on the update factors 
(which is required by sections 1886(e)(4)(A) and (e)(5)(A) of the 
Act) is set forth in Appendix B of this final rule.
    We note that the implementation of section 124 of Public Law 
110-275 will have no affect on the market basket increase factor of 
3.6 percent. Therefore, the update factors of 3.6 and 1.6 percent 
are final and not tentative. These update factors (3.6 and 1.6 
percent) are one element that will be used to determine the FY 2009 
standardized amounts. Other factors, such as the outlier offset and 
the rural floor budget neutrality factors, are yet to be determined 
pending the implementation of section 124 of Public Law 110-275. (We 
note that the rural floor budget

[[Page 48761]]

neutrality adjustment is applied to the wage index and not the 
standardized amount as explained below). The market basket increase 
of 3.6 percent is based on the second quarter forecast of the 
hospital market basket increase by Global Insight, Inc. (as 
discussed in Appendix B of this final rule).

4. Other Adjustments to the Average Standardized Amount

    As in the past, we are adjusting the FY 2009 standardized amount 
to remove the effects of the FY 2008 geographic reclassifications 
and outlier payments before applying the FY 2009 updates. We then 
applied budget neutrality offsets for outliers and geographic 
reclassifications to the standardized amount based on FY 2009 
payment policies.
    We do not remove the prior year's budget neutrality adjustments 
for reclassification and recalibration of the DRG weights and for 
updated wage data because, in accordance with sections 
1886(d)(4)(C)(iii) and 1886(d)(3)(E) of the Act, estimated aggregate 
payments after updates in the DRG relative weights and wage index 
should equal estimated aggregate payments prior to the changes. If 
we removed the prior year's adjustment, we would not have satisfied 
these conditions.
    Budget neutrality is determined by comparing aggregate IPPS 
payments before and after making changes that are required to be 
budget neutral (for example, changes to DRG classifications, 
recalibration of the DRG relative weights, updates to the wage 
index, and different geographic reclassifications). We included 
outlier payments in the simulations because they may be affected by 
changes in these parameters.
    We are also adjusting the standardized amount this year by an 
estimated amount to ensure that aggregate IPPS payments do not 
exceed the amount of payments that would have been made in the 
absence of the rural community hospital demonstration program, as 
required under section 410A of Public Law 108-173. This 
demonstration is required to be budget neutral under section 
410A(c)(2) of Public Law 108-173. For FY 2009, we are no longer 
applying budget neutrality for the imputed floor to the standardized 
amount, and to apply it instead to the wage index, as discussed in 
section of II.B.2. of the preamble to this final rule. For FY 2009, 
we are also applying an adjustment to eliminate the effect of coding 
or classification changes that do not reflect real changes in case-
mix using the Secretary's authority under section 1886(d)(3)(A)(vi) 
of the Act, by the percentage specified in section 7 of Public Law 
110-90.

a. Recalibration of DRG Weights and Updated Wage Index--Budget 
Neutrality Adjustment

    Section 1886(d)(4)(C)(iii) of the Act specifies that, beginning 
in FY 1991, the annual DRG reclassification and recalibration of the 
relative weights must be made in a manner that ensures that 
aggregate payments to hospitals are not affected. As discussed in 
section II. of the preamble of this final rule, we normalized the 
recalibrated DRG weights by an adjustment factor so that the average 
case weight after recalibration is equal to the average case weight 
prior to recalibration. However, equating the average case weight 
after recalibration to the average case weight before recalibration 
does not necessarily achieve budget neutrality with respect to 
aggregate payments to hospitals because payments to hospitals are 
affected by factors other than average case weight. Therefore, as we 
have done in past years, we made a budget neutrality adjustment to 
ensure that the requirement of section 1886(d)(4)(C)(iii) of the Act 
is met.
    Section 1886(d)(3)(E) of the Act requires us to update the 
hospital wage index on an annual basis beginning October 1, 1993. 
This provision also requires us to make any updates or adjustments 
to the wage index in a manner that ensures that aggregate payments 
to hospitals are not affected by the change in the wage index. 
Consistent with current policy, for FY 2009, we are adjusting 100 
percent of the wage index factor for occupational mix. We describe 
the occupational mix adjustment in section III.D. of the preamble to 
this final rule.
    To comply with the requirement that DRG reclassification and 
recalibration of the relative weights and the updated wage index be 
budget neutral, we used FY 2007 discharge data to simulate payments 
and compared aggregate payments using the FY 2008 relative weights 
and wage indices to aggregate payments using the proposed FY 2009 
relative weights and wage indices. The same methodology was used for 
the FY 2008 budget neutrality adjustment. Based on this comparison, 
we computed a budget neutrality adjustment factor equal to 0.999580 
to be applied to the national standardized amount. As we have done 
in the past, we also adjusted the Puerto Rico-specific standardized 
amount for the effect of DRG reclassification and recalibration. We 
computed a budget neutrality adjustment factor of 0.998795 to be 
applied to the Puerto Rico-specific standardized amount. These 
budget neutrality adjustment factors are applied to the standardized 
amounts for FY 2008 without removing the prior year's budget 
neutrality adjustments. In addition, as discussed in section IV. of 
this Addendum, we applied the same DRG reclassification and 
recalibration budget neutrality factor of 0.998795 to the hospital-
specific rates that will be effective for cost reporting periods 
beginning on or after October 1, 2008. We note that the preceding 
budget neutrality adjustment factors use pre-reclassified wage 
indices and are not affected by the implementation of section 124 of 
Public Law 110-275, therefore, these budget neutrality factors are 
final and not tentative.

b. Reclassified Hospitals--Tentative Budget Neutrality Adjustment

    Section 1886(d)(8)(B) of the Act provides that, effective with 
discharges occurring on or after October 1, 1988, certain rural 
hospitals are deemed urban. In addition, section 1886(d)(10) of the 
Act provides for the reclassification of hospitals based on 
determinations by the MGCRB. Under section 1886(d)(10) of the Act, a 
hospital may be reclassified for purposes of the wage index.
    Under section 1886(d)(8)(D) of the Act, the Secretary is 
required to adjust the standardized amount to ensure that aggregate 
payments under the IPPS after implementation of the provisions of 
sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal 
to the aggregate prospective payments that would have been made 
absent these provisions. We note that the wage index adjustments 
provided under section 1886(d)(13) of the Act are not budget 
neutral. Section 1886(d)(13)(H) of the Act provides that any 
increase in a wage index under section 1886(d)(13) shall not be 
taken into account ``in applying any budget neutrality adjustment 
with respect to such index'' under section 1886(d)(8)(D) of the Act. 
To calculate the tentative budget neutrality factor for FY 2009, we 
used FY 2007 discharge data to simulate payments, and compared total 
IPPS payments prior to any reclassifications under sections 
1886(d)(8)(B) and (C) and 1886(d)(10) of the Act to total IPPS 
payments after such reclassifications. Based on these simulations, 
we calculated a tentative adjustment factor of 0.991339 to ensure 
that the effects of these provisions are budget neutral, consistent 
with the statute.
    The tentative adjustment factor is applied to the standardized 
amount after removing the effects of the FY 2008 budget neutrality 
adjustment factor. We note that the FY 2009 tentative adjustment 
reflects FY 2009 wage index reclassifications approved by the MGCRB 
or the Administrator. (Section 1886(d)(10)(D)(v) of the Act makes 
wage index reclassifications effective for 3 years. As we note 
earlier in this final rule, we have yet to implement section 124 of 
Public Law 110-275. Therefore, we will calculate the final budget 
neutrality adjustments for geographic reclassification subsequent to 
this final rule, but prior to October 1, 2008, and will make this 
information available with the wage indices and final IPPS rates.

c. Rural and Imputed Floor Budget Neutrality

    As discussed in the preamble in section III.B.2.b. of the 
preamble of this final rule, we are adopting as final our proposal 
for State level budget neutrality for the rural and imputed floors 
in this rule, to be effective beginning with the FY 2009 wage index. 
However, in response to the public's concerns and taking into 
account the potentially significant payment cuts that could occur to 
hospitals in some States if we implement this change with no 
transition, we have decided to phase in, over a 3-year period, the 
transition from the national rural floor budget neutrality 
adjustment on the wage index to the State level rural floor budget 
neutrality adjustment on the wage index. In FY 2009, hospitals will 
receive a blended wage index that is comprised of 20 percent of the 
wage index adjusted by applying the State level rural and imputed 
floor budget neutrality adjustment and 80 percent of the wage index 
adjusted by applying the national budget neutrality adjustment. In 
FY 2010, the blended wage index will be determined by adding 50 
percent of the wage index adjusted by applying the State level 
budget neutrality adjustment and 50 percent of the wage index 
adjusted by applying the national budget neutrality adjustment. In 
FY 2011, the adjustment will be completely transitioned to the State 
level methodology, such that the wage index will be determined by 
applying 100 percent of the State level budget

[[Page 48762]]

neutrality adjustment. We note that the rural floor budget 
neutrality adjustment is applied to the wage index and not the 
standardized amount. However, because these blended wage indices 
reflecting the 20 percent State rural and imputed floor budget 
neutrality adjustment and the 80 percent national rural and imputed 
floor budget neutrality adjustment are used in calculating the FY 
2009 outlier threshold (as discussed below), we are explaining our 
calculation of the rural floor budget neutrality adjustments (in 
this section) below.
    In order to compute a budget neutral wage index that is a blend 
of 20 percent of the wage index adjusted by the State level rural 
and imputed floor budget neutrality adjustment and 80 percent of the 
index adjusted by the national rural and imputed floor budget 
neutrality adjustment, similar to our calculation of the FY 2008 
wage index (72 FR 47329), we used FY 2007 discharge data and FY 2009 
wage indices to simulate IPPS payments. First, we compared the 
national simulated payments without the rural and imputed floors 
applied to national simulated payments with the rural and imputed 
floors applied to determine the national rural and imputed floor 
budget neutrality adjustment factor of 0.996355. This national 
adjustment was then applied to the wage indices to produce a 
national rural and imputed floor budget neutral wage index, which 
was used in determining the FY 2009 blended wage indices for the 
first year of the transition (as described below). We then used the 
same methodology to determine each State's rural or imputed floor 
budget neutrality adjustment by comparing each State's total 
simulated payments with and without the rural or imputed floor 
applied. These State level rural and imputed floor budget neutrality 
factors were then applied to the wage indices to produce a State 
level rural and imputed floor budget neutral wage index, which was 
used in determining the FY 2009 blended wage indices for the first 
year of the transition (as described below). (As noted above, the 
final adjustment factors used for each state will be published in a 
forthcoming notice in the Federal Register implementing section 124 
of Pub. L. 110-275).
    To determine the FY 2009 wage indices for the first year of the 
transition, we then blended the national and State level wage index 
values (computed above) by taking 80 percent of the national rural 
and imputed floor budget neutral wage index and 20 percent of the 
State level rural and imputed floor budget neutral wage index. 
Because of interactive effects between the payment factors applied 
under the IPPS and/or rounding issues, the blended wage index 
calculated above does not necessarily result in overall budget 
neutrality. That is, aggregate IPPS payments simulated using the 
blended budget neutral wage index may not be equal to aggregate IPPS 
payments simulated using the wage index prior to the application of 
the rural and imputed floors. Therefore, in order to ensure that 
national payments overall remain budget neutral after application of 
the rural and imputed floor, an additional adjustment factor of 
0.999923 must be applied to the blended wage indexes calculated as 
described above. We note that, because we have yet to determine the 
final geographic wage index reclassifications as a result of Public 
Law 110-275, we will publish the final rural floor budget neutrality 
adjustment factors in a subsequent notice in the Federal Register.

d. Case-Mix Budget Neutrality Adjustment

    As stated earlier, beginning in FY 2008, we adopted the new MS-
DRG patient classification system for the IPPS to better recognize 
severity of illness in Medicare payment rates. In the FY 2008 IPPS 
final rule with comment period, we indicated that we believe the 
adoption of the MS-DRGs had the potential to lead to increases in 
aggregate payments without a corresponding increase in actual 
patient severity of illness due to the incentives for improved 
documentation and coding. In that final rule, using the Secretary's 
authority under section 1886(d)(3)(A)(vi) of the Act to maintain 
budget neutrality by adjusting the national standardized amounts to 
eliminate the effect of changes in coding or classification that do 
not reflect real change in case-mix, we established prospective 
documentation and coding adjustments of -1.2 percent for FY 2008, -
1.8 percent for FY 2009, and -1.8 percent for FY 2010. On September 
29, 2007, Public Law 110-90 was enacted. Section 7 of Public Law 
110-90 included a provision that reduces the documentation and 
coding adjustment for the MS-DRG system that we adopted in the FY 
2008 IPPS final rule with comment period to -0.6 percent for FY 2008 
and -0.9 percent for FY 2009. To comply with the provision of 
section 7 of Public Law 110-90, in a final rule that appeared in the 
Federal Register on November 27, 2007 (72 FR 66886), we changed the 
IPPS documentation and coding adjustment for FY 2008 to -0.6 
percent, and revised the FY 2008 national standardized amounts (as 
well as other payment factors and thresholds) accordingly, with 
these revisions effective October 1, 2007. For FY 2009, section 7 of 
Public Law 110-90 requires a documentation and coding adjustment of 
-0.9 percent instead of the -1.8 percent adjustment specified in the 
FY 2008 IPPS final rule with comment period. As required by statute, 
we are applying a documentation and coding adjustment of -0.9 
percent to the FY 2009 IPPS national standardized amounts. The 
documentation and coding adjustments established in the FY 2008 IPPS 
final rule with comment period are cumulative. As a result, the -0.9 
percent documentation and coding adjustment in FY 2009 is in 
addition to the -0.6 percent adjustment in FY 2008, yielding a 
combined effect of -1.5 percent.
    As discussed in more detail in section II.D. of the preamble of 
this final rule, in calculating the FY 2008 Puerto Rico standardized 
amount, we made an inadvertent error and applied the documentation 
and coding adjustment established using our authority in section 
1886(d)(3)(A)(vi) of the Act (which only applies to the national 
standardized amounts) to the Puerto Rico-specific standardized 
amount. Therefore, we are correcting this inadvertent error by 
removing the -0.6 percent documentation and coding adjustment from 
the FY 2008 Puerto Rico-specific rates. The revised FY 2008 Puerto 
Rico-specific operating standardized amounts are: $1,471.10 labor 
share and $901.64 nonlabor share for a hospital with a wage index 
greater than 1; and $1,392.80 labor share and $979.94 nonlabor share 
for a hospital with a wage index less than or equal to 1. The 
revised FY 2008 Puerto Rico capital payment rate is $202.89. These 
revised rates are effective October 1, 2007, for FY 2008. As 
discussed in section II.D. of the preamble of this final rule, we 
are not applying the documentation and coding adjustment to the 
Puerto Rico-specific standardized amount for FY 2009, but we may 
consider doing so for the FY 2010 Puerto Rico-specific standardized 
amount in the FY 2010 rulemaking. In calculating the FY 2009 Puerto 
Rico-specific standardized amount for this final rule, we have 
removed the -0.6 percent documentation and coding adjustment that 
was inadvertently applied to the FY 2008 Puerto Rico-specific 
standardized amount.
    We note that the implementation of Section 124 of Public Law 
110-275 will have no affect on the document and coding adjustment 
factor. Therefore, the document and coding adjustment factor is 
final and not tentative.

e. Outliers

    Section 1886(d)(5)(A) of the Act provides for payments in 
addition to the basic prospective payments for ``outlier'' cases 
involving extraordinarily high costs. To qualify for outlier 
payments, a case must have costs greater than the sum of the 
prospective payment rate for the DRG, any IME and DSH payments, any 
new technology add-on payments, and the ``outlier threshold'' or 
``fixed loss'' amount (a dollar amount by which the costs of a case 
must exceed payments in order to qualify for an outlier payment). We 
refer to the sum of the prospective payment rate for the DRG, any 
IME and DSH payments, any new technology add-on payments, and the 
outlier threshold as the outlier ``fixed-loss cost threshold.'' To 
determine whether the costs of a case exceed the fixed-loss cost 
threshold, a hospital's CCR is applied to the total covered charges 
for the case to convert the charges to estimated costs. Payments for 
eligible cases are then made based on a marginal cost factor, which 
is a percentage of the estimated costs above the fixed-loss cost 
threshold. The marginal cost factor for FY 2009 is 80 percent, the 
same marginal cost factor we have used since FY 1995 (59 FR 45367).
    In accordance with section 1886(d)(5)(A)(iv) of the Act, outlier 
payments for any year are projected to be not less than 5 percent 
nor more than 6 percent of total operating DRG payments plus outlier 
payments. Section 1886(d)(3)(B) of the Act requires the Secretary to 
reduce the average standardized amount by a factor to account for 
the estimated proportion of total DRG payments made to outlier 
cases. Similarly, section 1886(d)(9)(B)(iv) of the Act requires the 
Secretary to reduce the average standardized amount applicable to 
hospitals located in Puerto Rico to account for the estimated 
proportion of total DRG payments made to outlier cases. More 
information on outlier payments may be found on the CMS

[[Page 48763]]

Web site at http://www.cms.hhs.gov/AcuteInpatientPPS/04_outlier.asp#TopOfPage.

(1) FY 2009 Tentative Outlier Fixed-Loss Cost Threshold

    As stated above, some of the wage index tables, rates, and 
impacts will not be final in this final rule because we have not 
implemented section 124 of Public Law 110-275. Therefore, we are 
only able to provide tentative standardized amounts, relative 
weights, offsets, and budget neutrality factors in this final rule. 
The same circumstances apply to the outlier threshold. Without final 
wage index data, final standardized amounts, final offsets and final 
budget neutrality factors, we are only able to provide a tentative 
fixed loss outlier threshold in this final rule. Subsequent to this 
final rule, we will publish a final fixed-loss outlier threshold 
that will be effective for discharges on and after October 1, 2008, 
for FY 2009. However, in this final rule, we are adopting as final 
the methodology we will use to calculate the final outlier fixed-
loss cost threshold.
    For FY 2009, we proposed to continue to use the same methodology 
used for FY 2008 (72 FR 47417) to calculate the outlier threshold. 
Similar to the methodology used in the FY 2008 final rule with 
comment period, for FY 2009, we proposed to apply an adjustment 
factor to the CCRs to account for cost and charge inflation (as 
explained below). As we have done in the past, to calculate the 
proposed FY 2009 outlier threshold, we simulated payments by 
applying FY 2009 rates and policies using cases from the FY 2007 
MedPAR files. Therefore, in order to determine the proposed FY 2009 
outlier threshold, we inflate the charges on the MedPAR claims by 2 
years, from FY 2007 to FY 2009.
    We proposed to continue to use a refined methodology that takes 
into account the lower inflation in hospital charges that are 
occurring as a result of the outlier final rule (68 FR 34494), which 
changed our methodology for determining outlier payments by 
implementing the use of more current CCRs. Our refined methodology 
uses more recent data that reflect the rate-of-change in hospital 
charges under the new outlier policy.
    Using the most recent data available, we calculated the 1-year 
average annualized rate-of-change in charges-per-case from the last 
quarter of FY 2006 in combination with the first quarter of FY 2007 
(July 1, 2006 through December 31, 2006) to the last quarter of FY 
2007 in combination with the first quarter of FY 2008 (July 1, 2007 
through December 31, 2007). This rate of change was 5.84 percent 
(1.0585) or 12.03 percent (1.1204) over 2 years.
    As we have done in the past, we established the proposed FY 2009 
outlier threshold using hospital CCRs from the December 2007 update 
to the Provider-Specific File (PSF)--the most recent available data 
at the time of the proposed rule. This file includes CCRs that 
reflected implementation of the changes to the policy for 
determining the applicable CCRs that became effective August 8, 2003 
(68 FR 34494).
    As discussed in the FY 2007 final rule (71 FR 48150), we worked 
with the Office of Actuary to derive the methodology described below 
to develop the CCR adjustment factor. For FY 2009, we proposed to 
continue to use the same methodology to calculate the CCR adjustment 
by using the FY 2007 operating cost per discharge increase in 
combination with the actual FY 2007 operating market basket increase 
determined by Global Insight, Inc., as well as the charge inflation 
factor described above to estimate the adjustment to the CCRs. (We 
note that the FY 2007 actual (otherwise referred to as ``final'') 
operating market basket increase reflects historical data whereas 
the published FY 2007 operating market basket update factor was 
based on Global Insight, Inc.'s 2006 second quarter forecast with 
historical data through the first quarter of 2007.) By using the 
operating market basket rate-of-increase and the increase in the 
average cost per discharge from hospital cost reports, we are using 
two different measures of cost inflation. For FY 2009, we determined 
the adjustment by taking the percentage increase in the operating 
costs per discharge from FY 2005 to FY 2006 (1.0538) from the cost 
report and dividing it by the final operating market basket increase 
from FY 2006 (1.0420). This operation removes the measure of pure 
price increase (the market basket) from the percentage increase in 
operating cost per discharge, leaving the nonprice factors in the 
cost increase (for example, quantity and changes in the mix of goods 
and services). We repeated this calculation for 2 prior years to 
determine the 3-year average of the rate of adjusted change in costs 
between the operating market basket rate-of-increase and the 
increase in cost per case from the cost report (FY 2003 to FY 2004 
percentage increase of operating costs per discharge of 1.0629 
divided by FY 2004 final operating market basket increase of 1.0400, 
FY 2004 to FY 2005 percentage increase of operating costs per 
discharge of 1.0565 divided by FY 2005 final operating market basket 
increase of 1.0430). For FY 2009, we averaged the differentials 
calculated for FY 2004, FY 2005, and FY 2006, which resulted in a 
mean ratio of 1.0154. We multiplied the 3-year average of 1.0154 by 
the FY 2007 final operating market basket percentage increase of 
1.0340, which resulted in an operating cost inflation factor of 5.0 
percent or 1.05. We then divided the operating cost inflation factor 
by the 1-year average change in charges (1.058474) and applied an 
adjustment factor of 0.9920 to the operating CCRs from the PSF.
    As stated in the FY 2008 final rule with comment period, we 
continue to believe it is appropriate to apply only a 1-year 
adjustment factor to the CCRs. On average, it takes approximately 9 
months for fiscal intermediaries (or, if applicable, the MAC) to 
tentatively settle a cost report from the fiscal year end of a 
hospital's cost reporting period. The average ``age'' of hospitals' 
CCRs from the time the fiscal intermediary or the MAC inserts the 
CCR in the PSF until the beginning of FY 2008 is approximately 1 
year. Therefore, as stated above, we believe a 1-year adjustment 
factor to the CCRs is appropriate.
    We used the same methodology for the capital CCRs and determined 
the adjustment by taking the percentage increase in the capital 
costs per discharge from FY 2005 to FY 2006 (1.0462) from the cost 
report and dividing it by the final capital market basket increase 
from FY 2006 (1.0090). We repeated this calculation for 2 prior 
years to determine the 3-year average of the rate of adjusted change 
in costs between the capital market basket rate-of-increase and the 
increase in cost per case from the cost report (FY 2003 to FY 2004 
percentage increase of capital costs per discharge of 1.0315 divided 
by FY 2004 final capital market basket increase of 1.0050, FY 2004 
to FY 2005 percentage increase of capital costs per discharge of 
1.0311 divided by FY 2005 final capital market basket increase of 
1.0060). For FY 2009, we averaged the differentials calculated for 
FY 2004, FY 2005, and FY 2006, which resulted in a mean ratio of 
1.0294. We multiplied the 3-year average of 1.0294 by the FY 2007 
final capital market basket percentage increase of 1.0120, which 
resulted in a capital cost inflation factor of 4.17 percent or 
1.0417. We then divided the capital cost inflation factor by the 1-
year average change in charges (1.058474) and applied an adjustment 
factor of 0.9842 to the capital CCRs from the PSF. We are using the 
same charge inflation factor for the capital CCRs that was used for 
the operating CCRs. The charge inflation factor is based on the 
overall billed charges. Therefore, we believe it is appropriate to 
apply the charge factor to both the operating and capital CCRs.
    For purposes of estimating the proposed outlier threshold for FY 
2009, we assume 3.0 percent case-mix growth in FY 2009 compared with 
our FY 2007 claims data (that is, a 1.2 percent increase in FY 2008 
and an additional 1.8 percent increase in FY 2009). The 3 percent 
case-mix growth was projected by the Office of the Actuary as the 
amount case-mix is expected to increase in response to adoption of 
the MS-DRGs as a result of improvements in documentation and coding 
that do not reflect real changes in patient severity of illness. It 
is necessary to take the 3 percent expected case-mix growth into 
account when calculating the outlier threshold that results in 
outlier payments being 5.1 percent of total payments for FY 2009. If 
we did not take this 3 percent projected case-mix growth into 
account, our estimate of total payments would be too low, and as a 
result, our estimate of the outlier threshold would be too high. 
While we assume 3 percent case-mix growth for all hospitals in our 
outlier threshold calculations, the FY 2009 national standardized 
amounts used to calculate the outlier threshold reflect the 
statutorily mandated documentation and coding adjustment of -0.9 
percent for FY 2009, on top of the -0.6 percent adjustment for FY 
2008.
    Using this methodology, we calculated a proposed outlier fixed-
loss cost threshold for FY 2009 equal to the prospective payment 
rate for the DRG, plus any IME and DSH payments, and any add-on 
payments for new technology, plus $21,025.
    Comment: Many commenters, including major hospital associations, 
commented that CMS currently projects that outlier payments in FY 
2008 are estimated at 4.8 percent of

[[Page 48764]]

total payments. The commenters commended CMS for making refinements 
such as applying an adjustment factor to CCRs when computing the 
outlier threshold but noted that, because CMS is still not reaching 
the 5.1 percent target, there is still room for improvement. 
Specifically, the commenters suggested that the methodology to 
develop the adjustment factor to the CCRs is unnecessarily 
complicated and does not lead to a more accurate result. The 
commenters urged CMS to adopt a methodology that uses recent 
historical industry wide average rate of change, similar to the 
methodology used to develop the charge inflation factor. Further, in 
addition to applying an adjustment to the CCRs based on historical 
data, the commenters suggested that the CCRs should be projected 
over different periods of time, some less or more than one year, 
based on variations in hospital fiscal year ends. The commenters 
believed this methodology would more accurately project the decline 
in CCRs. In addition, the commenters noted that CMS used the 
December 2007 CCR update for the proposed rule and has historically 
used the March update for the final rule. The commenters urged CMS 
to use the June 2008 update instead of the March 2008 update for the 
final rule.
    Response: Similar to our response in the FY 2008 final rule (72 
FR 47418), in response to the comment that CCRs should be projected 
over different periods of time, as we have mentioned in the past, it 
is possible that some of the CCRs in the March PSF will be used in 
FY 2009 for actual outlier payments, while other CCRs may be one 
year old. Therefore, we apply a 1-year adjustment to the CCRs. 
However, once we have a complete FY 2008 MedPAR claims database to 
determine the actual FY 2008 outlier percentage (as opposed to the 
current estimate of the FY 2008 outlier percentage in this final 
rule which is based on FY 2007 MedPAR claims), we will closely study 
and consider the commenters' proposal for the future.
    With respect to the comment on our methodology used to adjust 
the CCRs, as we stated in the FY 2008 IPPS final rule with comment 
period (72 FR 47418), we continue to believe this calculation of an 
adjustment to the CCRs is more accurate and stable than the 
commenter's methodology because it takes into account the costs per 
discharge and the market basket percentage increase when determining 
a cost adjustment factor. There are times where the market basket 
and the cost per discharge will be constant, while other times these 
values will differ from each other, depending on the fiscal year. 
Therefore, as mentioned above, using the market basket in 
conjunction with the cost per discharge takes into account two 
sources that measure potential cost inflation and ensures a more 
accurate and stable cost adjustment factor. Additionally, we are 
continuing to use the March update of the PSF for the final rule 
because the June PSF update will not be ready for use until the end 
of July, which is beyond the timetable necessary for us to compute 
the outlier threshold and publish this final rule with comment 
period by August 1.
    Because we are not making any changes to our methodology for 
this final rule, for FY 2009, we are using the same methodology we 
proposed to calculate the outlier threshold. We used the blended 
wage indices (as discussed above) when we simulated payments in our 
outlier modeling to determine the tentative outlier threshold for FY 
2009. Using the most recent data available, we calculated the 1-year 
average annualized rate-of-change in charges per case from the first 
quarter of FY 2007 in combination with the second quarter of FY 2007 
(October 1, 2006 through March 31, 2007) to the first quarter of FY 
2008 in combination with the second quarter of FY 2008 (October 1, 
2007 through March 31, 2008). This rate of change was 5.7549 percent 
(1.057549) or 11.841 percent (1.11841) over 2 years.
    As we have done in the past, we established the tentative FY 
2009 outlier threshold using hospital CCRs from the March 2008 
update to the PSF--the most recent available data at the time of 
this final rule with comment period. This file includes CCRs that 
reflected implementation of the changes to the policy for 
determining the applicable CCRs that became effective August 8, 2003 
(68 FR 34494).
    For FY 2009, we calculated the CCR adjustment by using the 
operating cost per discharge increase in combination with the market 
basket increase determined by Global Insight, Inc., as well as the 
charge inflation factor described above to estimate the adjustment 
to the CCRs. We determined the operating CCR adjustment by taking 
the percentage increase in the operating costs per discharge from FY 
2005 to FY 2006 (1.0550) from the cost report and dividing it by the 
final market basket increase from FY 2006 (1.042). This operation 
removes the measure of pure price increase (the market basket) from 
the percentage increase in operating cost per discharge, leaving the 
non-price factors in the cost increase (that is, quantity and 
changes in the mix of goods and services) to increase the projected 
market basket for estimating the future cost increase. We repeated 
this calculation for 2 prior years to determine the 3-year average 
of the rate of adjusted change in costs between the market basket 
rate-of-increase and the increase in cost per case from the cost 
report (FY 2003 to FY 2004 percentage increase of operating costs 
per discharge of 1.0622 divided by FY 2004 final market basket 
increase of 1.040, FY 2004 to FY 2005 percentage increase of 
operating costs per discharge of 1.0571 divided by FY 2005 final 
market basket increase of 1.043). For FY 2009, we averaged the 
differentials calculated for FY 2004, FY 2005, and FY 2006 which 
resulted in a mean ratio of 1.0158. We multiplied the 3-year average 
of 1.0158 by the FY 2007 final market basket percentage increase of 
1.034, which resulted in an operating cost inflation factor of 5.03 
percent or 1.0503. We then divided the operating cost inflation 
factor by the 1-year average change in charges (1.057549) and 
applied an adjustment factor of 0.9932 to the operating CCRs from 
the PSF.
    We used the same methodology for the capital CCRs and determined 
the adjustment by taking the percentage increase in the capital 
costs per discharge from FY 2005 to FY 2006 (1.0446) from the cost 
report and dividing it by the final capital market basket increase 
from FY 2006 (1.0090). We repeated this calculation for 2 prior 
years to determine the 3-year average of the rate of adjusted change 
in costs between the capital market basket rate-of-increase and the 
increase in cost per case from the cost report (FY 2003 to FY 2004 
percentage increase of capital costs per discharge of 1.0307 divided 
by FY 2004 final capital market basket increase of 1.0050, FY 2004 
to FY 2005 percentage increase of capital costs per discharge of 
1.0324 divided by FY 2005 final capital market basket increase of 
1.0060). For FY 2009, we averaged the differentials calculated for 
FY 2004, FY 2005, and FY 2006, which resulted in a mean ratio of 
1.0290. We multiplied the 3-year average of 1.0290 by the FY 2007 
final capital market basket percentage increase of 1.0120, which 
resulted in a capital cost inflation factor of 4.14 percent or 
1.0414. We then divided the capital cost inflation factor by the 1-
year average change in charges (1.057549) and applied an adjustment 
factor of 0.9847 to the capital CCRs from the PSF. We are using the 
same charge inflation factor for the capital CCRs that was used for 
the operating CCRs. The charge inflation factor is based on the 
overall billed charges. Therefore, we believe it is appropriate to 
apply the charge factor to both the operating and capital CCRs.
    Similar to the proposed rule, for purposes of estimating the 
tentative outlier threshold for FY 2009, we assume 3.0 percent case-
mix growth in FY 2009 compared with our FY 2007 claims data (that 
is, a 1.2 percent increase in FY 2008 and an additional 1.8 percent 
increase in FY 2009). The 3 percent case-mix growth was projected by 
the Office of the Actuary as the amount case-mix is expected to 
increase in response to adoption of the MS-DRGs as a result of 
improvements in documentation and coding that do not reflect real 
changes in patient severity of illness. It is necessary to take the 
3 percent expected case-mix growth into account when calculating the 
outlier threshold that results in outlier payments being 5.1 percent 
of total payments for FY 2009. If we did not take this 3 percent 
projected case-mix growth into account, our estimate of total 
payments would be too low, and as a result, our estimate of the 
outlier threshold would be too high. While we assume 3 percent case-
mix growth for all hospitals in our tentative outlier threshold 
calculations, the FY 2009 national standardized amounts used to 
calculate the outlier threshold reflect the statutorily mandated 
documentation and coding adjustment of -0.9 percent for FY 2009, on 
top of the -0.6 percent adjustment for FY 2008.
    Using this methodology, we calculated a tentative outlier fixed-
loss cost threshold for FY 2009 equal to the prospective payment 
rate for the DRG, plus any IME and DSH payments, and any add-on 
payments for new technology, plus $20,185. With this threshold, we 
project that outlier payments will equal 5.1 percent of total IPPS 
payments. We note that, in this final rule, we are adopting this 
methodology to compute the final outlier fixed-loss cost threshold 
for FY

[[Page 48765]]

2009, although the final dollar amount of the outlier threshold will 
be published in a subsequent Federal Register document.
    As we did in establishing the FY 2008 outlier threshold (72 FR 
47419), in our projection of FY 2009 outlier payments, we are not 
making any adjustments for the possibility that hospitals' CCRs and 
outlier payments may be reconciled upon cost report settlement. We 
continue to believe that, due to the policy implemented in the 
outlier final rule (68 FR 34494, June 9, 2003), CCRs will no longer 
fluctuate significantly and, therefore, few hospitals will actually 
have these ratios reconciled upon cost report settlement. In 
addition, it is difficult to predict the specific hospitals that 
will have CCRs and outlier payments reconciled in any given year. We 
also noted that reconciliation occurs because hospitals' actual CCRs 
for the cost reporting period are different than the interim CCRs 
used to calculate outlier payments when a bill is processed. Our 
simulations assume that CCRs accurately measure hospital costs based 
on information available to us at the time we set the outlier 
threshold. For these reasons, we are not making any assumptions 
about the effects of reconciliation on the outlier threshold 
calculation.
    We also note that there are some factors that contributed to a 
lower tentative fixed loss outlier threshold for FY 2009 compared to 
FY 2008. First, the case-weighted national average operating CCR 
declined by approximately an additional 1.3 percentage points from 
the March 2007 update (used to calculate the FY 2008 outlier 
threshold) to the March 2008 update of the PSF (used to calculate 
the FY 2009 outlier threshold). In addition, as discussed in 
sections II.C. and II.H. of the preamble of this final rule, we 
began a 2-year phase-in of the MS-DRGs in FY 2008, with the DRG 
relative weights based on a 50 percent blend of the CMS DRGs and MS-
DRGs in FY 2008 and based on 100 percent of the MS-DRGs beginning in 
FY 2009. Better recognition of severity of illnesses with the MS-
DRGs means that regular operating IPPS payments will compensate 
hospitals for the higher costs of some cases that previously 
received outlier payments. As cases are paid more accurately, in 
order to meet the 5.1 percent target, we need to decrease the fixed-
loss outlier threshold so that more cases qualify for outlier 
payments. In addition, as noted previously, in our modeling of the 
tentative outlier threshold, we included a 3-percent adjustment for 
expected case-mix growth between FY 2007 and FY 2009. Finally, the 
market basket estimate increased from 3.0 percent in the proposed 
rule to 3.6 percent for this final rule. Adding an extra 0.6 percent 
to the standardized amount increases funds to typical cases and 
requires that we lower the outlier threshold to increase the amount 
of atypical cases in order to reach the 5.1 percent target. 
Together, we believe that the above factors cumulatively contributed 
to a lower tentative fixed-loss outlier threshold in FY 2009 
compared to FY 2008.
    Comment: One commenter recommended that CMS make a midyear 
change to the outlier threshold if it appears that the 5.1 percent 
target will not be met. The commenter suggested that CMS use more 
recent CCR data for a midyear correction to the outlier threshold 
and use thresholds such as if outlier payments less than 95 percent 
or greater than 105 percent of the 5.1 percent target to trigger a 
midyear adjustment. Other commenters recommended that CMS further 
lower the threshold because CMS did not spend the total allocated 
pool of cost outlier funds allocated for outlier payments in FYs 
2005, 2006, and 2007.
    Response: With respect to these comments, we have responded to 
similar comments in the FY 2006 IPPS final rule (70 FR 47495). We 
refer readers to that final rule.
    Comment: One commenter stated that it may be time for CMS to 
reconsider the appropriateness of continuing with a yearly target of 
5.1 percent outlier payments. The commenter explained that the 
introduction of MS-DRGs has increased the accuracy of DRG payments 
representing fair estimates of the costs of treating particular 
diagnosis and has resulted in the significant decline in the outlier 
threshold since implementation of the MS-DRGs. The commenter noted 
that CMS is bound by language in the Act that requires payments be 
between 5 and 6 percent of total DRG payments. As a result, the 
commenter urged CMS to consider this issue and seek from Congress a 
change in the statutory requirement that would allow for a lower 
outlier target percentage.
    Response: We thank the commenter for the comment. However, as 
noted above and by the commenter, section 1886(d)(5)(A)(iv) of the 
Act requires outlier payments to be not less than 5 percent nor more 
than 6 percent of total estimated or projected payments.

(2) Other Changes Concerning Outliers

    As stated in the FY 1994 IPPS final rule (58 FR 46348), we 
establish an outlier threshold that is applicable to both hospital 
inpatient operating costs and hospital inpatient capital-related 
costs. When we modeled the combined operating and capital outlier 
payments, we found that using a common threshold resulted in a lower 
percentage of outlier payments for capital-related costs than for 
operating costs. We project that the thresholds for FY 2009 will 
result in outlier payments that will equal 5.1 percent of operating 
DRG payments and 5.35 percent of capital payments based on the 
Federal rate.
    In accordance with section 1886(d)(3)(B) of the Act, we are 
reducing the FY 2009 standardized amount by the same percentage to 
account for the projected proportion of payments paid as outliers.
    The tentative outlier adjustment factors that are applied to the 
standardized amount for the FY 2009 outlier threshold are as 
follows:

------------------------------------------------------------------------
                                             Operating
                                           standardized       Capital
                                              amounts      federal rate
------------------------------------------------------------------------
National................................        0.948975        0.946457
Puerto Rico.............................        0.954561         0.93139
------------------------------------------------------------------------

    We are applying the tentative outlier adjustment factors to the 
tentative FY 2009 rates after removing the effects of the FY 2008 
outlier adjustment factors on the standardized amount.
    To determine whether a case qualifies for outlier payments, we 
apply hospital-specific CCRs to the total covered charges for the 
case. Estimated operating and capital costs for the case are 
calculated separately by applying separate operating and capital 
CCRs. These costs are then combined and compared with the outlier 
fixed-loss cost threshold.
    The outlier final rule (68 FR 34494) eliminated the application 
of the statewide average CCRs for hospitals with CCRs that fell 
below 3 standard deviations from the national mean CCR. However, for 
those hospitals for which the fiscal intermediary or MAC computes 
operating CCRs greater than 1.196 or capital CCRs greater than 
0.145, or hospitals for whom the fiscal intermediary or MAC is 
unable to calculate a CCR (as described at (412.84(i)(3) of our 
regulations), we still use statewide average CCRs to determine 
whether a hospital qualifies for outlier payments.\25\ Table 8A in 
this Addendum contains the statewide average operating CCRs for 
urban hospitals and for rural hospitals for which the fiscal 
intermediary or MAC is unable to compute a hospital-specific CCR 
within the above range. Effective for discharges occurring on or 
after October 1, 2008, these statewide average ratios will replace 
the ratios published in the IPPS final rule for FY 2008 (72 FR 
48126-48127). Table 8B in this Addendum contains the comparable 
statewide average capital CCRs. Again, the CCRs in Tables 8A and 8B 
will be used during FY 2009 when hospital-specific CCRs based on the 
latest settled cost report are either not available or are outside 
the range noted above. For an explanation of Table 8C, we refer 
readers to section V. of this Addendum.
---------------------------------------------------------------------------

    \25\ These figures represent 3.0 standard deviations from the 
mean of the log distribution of CCRs for all hospitals.
---------------------------------------------------------------------------

    We finally note that we published a manual update (Change 
Request 3966) to our outlier policy on October 12, 2005, which 
updated Chapter 3, Section 20.1.2 of the Medicare Claims Processing 
Manual. The manual update covered an array of topics, including 
CCRs, reconciliation, and the time value of money. We encourage 
hospitals that are assigned the statewide average operating

[[Page 48766]]

and/or capital CCRs to work with their fiscal intermediaries (or 
MAC, if applicable) on a possible alternative operating and/or 
capital CCR as explained in Change Request 3966. Use of an 
alternative CCR developed by the hospital in conjunction with the 
fiscal intermediary or MAC can avoid possible overpayments or 
underpayments at cost report settlement, thus ensuring better 
accuracy when making outlier payments and negating the need for 
outlier reconciliation. We also note that a hospital may request an 
alternative operating or capital CCR ratio at any time as long as 
the guidelines of Change Request 3966 are followed. To download and 
view the manual instructions on outlier and cost-to-charge ratios, 
visit the Web site: http://www.cms.hhs.gov/manuals/downloads/clm104c03.pdf.
    Comment: One commenter stated that it was unable to replicate 
the estimated FY 2009 capital outlier percentage of 5.73 percent 
cited in the proposed rule (73 FR 23711 and 23718). Instead, its 
analysis resulted in a somewhat lower capital outlier percentage. 
Consequently, the commenter recommended that CMS reevaluate its 
calculations to ensure that the estimated capital outlier percentage 
for FY 2009 is correct.
    Response: Section 412.312(c) of our regulations establishes a 
unified outlier payment methodology for inpatient operating and 
inpatient capital-related costs. A single set of thresholds is used 
to identify outlier cases for both operating IPPS and capital IPPS 
payments. The outlier threshold is set so that operating IPPS 
outlier payments are projected to be 5.1 percent of total operating 
IPPS payments.
    In the proposed rule (73 FR 23711), we discussed that for 
purposes of estimating the proposed outlier threshold for FY 2009, 
we assumed 3.0 percent case-mix growth in FY 2009 compared with our 
FY 2007 claims data (that is, a 1.2 percent increase in FY 2008 and 
an additional 1.8 percent increase in FY 2009), based on the Office 
of the Actuary's estimate of the amount that hospitals' case-mix is 
expected to increase in response to the adoption of the MS-DRGs due 
to improvements in documentation and coding that do not reflect real 
changes in patient severity of illness. As discussed above, it is 
necessary to take the 3 percent expected case-mix growth into 
account when establishing an outlier threshold for FY 2009 that 
would result in operating IPPS outlier payments being between 5 and 
6 percent of total operating IPPS payments in accordance with 
section 1886(d)(5)(A)(iv) of the Act. If we did not take this 3 
percent projected case-mix growth into account, our estimate of 
total operating IPPS payments would be too low, and, as a result, 
our estimate of the outlier threshold for FY 2009 would be too high.
    Upon review of our calculations of the proposed FY 2009 outlier 
fixed-loss amount, we realized that, while we had discussed applying 
the 3.0 percent expected case-mix increase adjustment, in actuality, 
we unintentionally neglected to apply the assumed 3.0 percent case-
mix growth for FY 2009. We appreciate the commenter bringing this 
inadvertent error in our outlier calculations to our attention, and 
we have revised our outlier calculations for this final rule 
accordingly. As discussed above, in this final rule, based on more 
recent data and the rates and policies finalized in this final rule, 
we are establishing a tentative fixed-loss amount for FY 2009 of 
$20,185. We are projecting that this outlier threshold for FY 2009 
will result in outlier payments that will equal 5.1 percent of 
operating IPPS DRG payments and 5.35 percent of capital IPPS 
payments based on the Federal rate.

(3) FY 2007 and FY 2008 Outlier Payments

    In the FY 2008 IPPS final rule (72 FR 47420), we stated that, 
based on available data, we estimated that actual FY 2007 outlier 
payments would be approximately 4.6 percent of actual total DRG 
payments. This estimate was computed based on simulations using the 
FY 2006 MedPAR file (discharge data for FY 2006 bills). That is, the 
estimate of actual outlier payments did not reflect actual FY 2007 
bills, but instead reflected the application of FY 2007 rates and 
policies to available FY 2006 bills.
    Our current estimate, using available FY 2007 bills, is that 
actual outlier payments for FY 2007 were approximately 4.64 percent 
of actual total DRG payments. Thus, the data indicate that, for FY 
2007, the percentage of actual outlier payments relative to actual 
total payments is lower than we projected before FY 2007. Consistent 
with the policy and statutory interpretation we have maintained 
since the inception of the IPPS, we do not plan to make retroactive 
adjustments to outlier payments to ensure that total outlier 
payments for FY 2007 are equal to 5.1 percent of total DRG payments.
    We currently estimate that actual outlier payments for FY 2008 
will be approximately 4.7 percent of actual total DRG payments, 0.4 
percentage points lower than the 5.1 percent we projected in setting 
the outlier policies for FY 2008. This estimate is based on 
simulations using the FY 2007 MedPAR file (discharge data for FY 
2007 bills). We used these data to calculate an estimate of the 
actual outlier percentage for FY 2008 by applying FY 2008 rates and 
policies, including an outlier threshold of $22,185 to available FY 
2007 bills. We note that the FY 2007 MedPAR file does not contain 
claims that account for upcoding. As a result, in our simulation of 
the estimate of the FY 2008 outlier percentage, it was necessary to 
increase the charges on the claims by 1.2 percent to account for one 
year of upcoding.
    Comment: Some commenters simulated the FY 2008 estimate and 
calculated an estimate of 4.3 percent of outlier payments for that 
year. The commenters noted this percentage was very different from 
the 4.8 percent estimate CMS calculated in the proposed rule. The 
commenters requested that CMS revisit its calculation and publish an 
explanation of its estimate.
    Response: We verified our calculation of the FY 2008 estimate 
and did not find any discrepancies that would result in an estimate 
similar to the commenters. We believe we have explained our process 
above with one minor adjustment from the proposed rule. The 
difference from the proposed rule to this final rule is that we 
inflated the claims by 1.2 percent to account for upcoding which 
slightly changed our FY 2008 estimate from 4.8 percent in the 
proposed rule to 4.7 percent in this final rule. As stated above, we 
will monitor the FY 2008 outlier payout once the FY 2008 MedPAR 
claims database is available and will then consider and evaluate the 
commenters comments on modifiying the outlier threshold methodology.

e. Tentative Rural Community Hospital Demonstration Program Adjustment 
(Section 410A of Pub. L. 108-173)

    Section 410A of Public Law 108-173 requires the Secretary to 
establish a demonstration that will modify reimbursement for 
inpatient services for up to 15 small rural hospitals. Section 
410A(c)(2) of Public Law 108-173 requires that ``in conducting the 
demonstration program under this section, the Secretary shall ensure 
that the aggregate payments made by the Secretary do not exceed the 
amount which the Secretary would have paid if the demonstration 
program under this section was not implemented.'' As discussed in 
section IV.H. of the preamble to this final rule with comment 
period, we have satisfied this requirement by adjusting national 
IPPS rates by a factor that is sufficient to account for the added 
costs of this demonstration. We estimate that the average additional 
annual payment that will be made to each participating hospital 
under the demonstration will be approximately $1,753,106. We based 
this estimate on the recent historical experience of the difference 
between inpatient cost and payment for hospitals that are 
participating in the demonstration program. For 13 participating 
hospitals, the total annual impact of the demonstration program for 
FY 2009 is $22,790,388. The required tentative adjustment to the 
Federal rate used in calculating Medicare inpatient prospective 
payments as a result of the demonstration is 0.999764.
    In order to achieve budget neutrality, we adjust the tentative 
national IPPS rates by a tentative amount sufficient to account for 
the added costs of this demonstration. In other words, we apply 
budget neutrality across the payment system as a whole rather than 
merely across the participants of this demonstration, consistent 
with past practice. We believe that the language of the statutory 
budget neutrality requirement permits the agency to implement the 
budget neutrality provision in this manner. The statutory language 
requires that ``aggregate payments made by the Secretary do not 
exceed the amount which the Secretary would have paid if the 
demonstration * * * was not implemented,'' but does not identify the 
range across which aggregate payments must be held equal.

5. Tentative FY 2009 Standardized Amount

    The tentative adjusted standardized amount is divided into 
labor-related and nonlabor-related portions. Tables 1A and 1B of 
this Addendum contain the tentative national standardized amounts 
that we are applying to all hospitals, except hospitals located in 
Puerto Rico, for FY 2009. The tentative Puerto Rico-specific amounts 
are shown in Table 1C of this Addendum. The tentative amounts shown 
in Tables 1A and

[[Page 48767]]

1B differ only in that the labor-related share applied to the 
tentative standardized amounts in Table 1A is 69.7 percent, and 
Table 1B is 62 percent. In accordance with sections 1886(d)(3)(E) 
and 1886(d)(9)(C)(iv) of the Act, we apply a labor-related share of 
62 percent, unless application of that percentage would result in 
lower payments to a hospital than would otherwise be made. In 
effect, the statutory provision means that we apply a labor-related 
share of 62 percent for all hospitals (other than those in Puerto 
Rico) whose wage indexes are less than or equal to 1.0000.
    In addition, Tables 1A and 1B include tentative standardized 
amounts reflecting the full 3.6 percent update for FY 2009, and 
tentative standardized amounts reflecting the 2.0 percentage point 
reduction to the update (a 1.6 percent update) applicable for 
hospitals that fail to submit quality data consistent with section 
1886(b)(3)(B)(viii) of the Act.
    Under section 1886(d)(9)(A)(ii) of the Act, the Federal portion 
of the Puerto Rico payment rate is based on the discharge-weighted 
average of the national large urban standardized amount (this amount 
is set forth in Table 1A). The tentative labor-related and nonlabor-
related portions of the national average standardized amounts for 
Puerto Rico hospitals for FY 2009 are set forth in Table 1C of this 
Addendum. This table also includes the tentative Puerto Rico 
standardized amounts. The labor-related share applied to the 
tentative Puerto Rico specific standardized amount is 58.7 percent, 
or 62 percent, depending on which provides higher payments to the 
hospital. (Section 1886(d)(9)(C)(iv) of the Act, as amended by 
section 403(b) of Public Law 108-173, provides that the labor-
related share for hospitals located in Puerto Rico be 62 percent, 
unless the application of that percentage would result in lower 
payments to the hospital.)
    We note that, in this final rule, we are not supplying a table 
that illustrates the changes from the FY 2008 national average 
standardized amount. Because we are only setting the standardized 
amounts tentatively, we do not believe it is appropriate to include 
this table in this final rule. However, we will publish a table in 
the subsequent notice to this final rule that details the 
calculation of the final standardized amounts.

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

    Tables 1A through 1C, as set forth in this Addendum, contain the 
tentative labor-related and nonlabor-related shares that we used to 
calculate the prospective payment rates for hospitals located in the 
50 States, the District of Columbia, and Puerto Rico for FY 2009. 
This section addresses two types of adjustments to the tentative 
standardized amounts that were made in determining the prospective 
payment rates as described in this Addendum.

1. Tentative Adjustment for Area Wage Levels

    Sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act require 
that we make an adjustment to the labor-related portion of the 
national and Puerto Rico prospective payment rates, respectively, to 
account for area differences in hospital wage levels. This 
adjustment is made by multiplying the labor-related portion of the 
adjusted standardized amounts by the appropriate wage index for the 
area in which the hospital is located. In section III. of the 
preamble to this final rule, we discuss the data and methodology for 
the FY 2009 wage index. We note that because we have not implemented 
section 124 of Public Law 110-275, we will not be publishing Tables 
4A, 4B, 4C, 4D-1, 4D-2, 4E, and 4F in this final rule. However, we 
will publish these tables in a subsequent Federal Register notice 
and post them on the CMS Web site once all the data are finalized 
and prior to October 1, 2008.

2. Final Adjustment for Cost-of-Living in Alaska and Hawaii

    Section 1886(d)(5)(H) of the Act authorizes the Secretary to 
make an adjustment to take into account the unique circumstances of 
hospitals in Alaska and Hawaii. Higher labor-related costs for these 
two States are taken into account in the adjustment for area wages 
described above. For FY 2009, we adjusted the payments for hospitals 
in Alaska and Hawaii by multiplying the nonlabor-related portion of 
the standardized amount by the applicable adjustment factor 
contained in the table below.

 Table of Cost-of-Living Adjustment Factors: Alaska and Hawaii Hospitals
------------------------------------------------------------------------
                                                          Cost of living
                          Area                              adjustment
                                                              factor
------------------------------------------------------------------------
Alaska:
  City of Anchorage and 80-kilometer (50-mile) radius by            1.24
   road.................................................
  City of Fairbanks and 80-kilometer (50-mile) radius by            1.24
   road.................................................
  City of Juneau and 80-kilometer (50-mile) radius by               1.24
   road.................................................
    Rest of Alaska......................................            1.25
Hawaii:
  City and County of Honolulu...........................            1.25
  County of Hawaii......................................            1.18
  County of Kauai.......................................            1.25
  County of Maui and County of Kalawao..................           1.25
------------------------------------------------------------------------
(The above factors are based on data obtained from the U.S. Office of
  Personnel Management.)

C. MS-DRG Relative Weights

    As discussed in section II.H. of the preamble of this final 
rule, we have developed relative weights for each MS-DRG that 
reflect the resource utilization of cases in each MS-DRG relative to 
Medicare cases in other MS-DRGs. Table 5 of this Addendum contains 
the relative weights that we will apply to discharges occurring in 
FY 2009. These factors have been recalibrated as explained in 
section II. of the preamble of this final rule.

D. Calculation of the Prospective Payment Rates

    General Formula for Calculation of the Prospective Payment Rates 
for FY 2009.
    In general, the operating prospective payment rate for all 
hospitals paid under the IPPS located outside of Puerto Rico, except 
SCHs and MDHs, for FY 2009 equals the Federal rate.
    Currently, SCHs are paid based on whichever of the following 
rates yields the greatest aggregate payment: The Federal national 
rate; the updated hospital-specific rate based on FY 1982 costs per 
discharge; the updated hospital-specific rate based on FY 1987 costs 
per discharge; or the updated hospital-specific rate based on FY 
1996 costs per discharge. For cost reporting periods beginning on or 
after January 1, 2009, section 124 of Public Law 110-275 amended 
section 1886(b)(3) of the Act and added the updated hospital-
specific rate based on the FY 2006 costs per discharge to determine 
the rate that yields the greatest aggregate payment. This provision 
is discussed in detail in section IV.D.2. of the preamble of this 
final rule.
    The prospective payment rate for SCHs for FY 2009 equals the 
higher of the applicable Federal rate, or the hospital-specific rate 
as described below. The prospective payment rate for MDHs for FY 
2009 equals the higher of the Federal rate, or the Federal rate plus 
75 percent of the difference between the Federal rate and the 
hospital-specific rate as described below. The prospective payment 
rate for hospitals located in Puerto Rico for FY 2009 equals 25 
percent of the Puerto Rico rate plus 75 percent of the applicable 
national rate.

1. Federal Rate

    The Federal rate is determined as follows:
    Step 1--Select the applicable average standardized amount 
depending on whether the hospital submitted qualifying quality data 
(full update for qualifying hospitals, update minus 2.0 percentage 
points for nonqualifying hospitals).
    Step 2--Multiply the labor-related portion of the standardized 
amount by the applicable wage index for the geographic area in which 
the hospital is located or the area to which the hospital is 
reclassified.
    Step 3--For hospitals in Alaska and Hawaii, multiply the 
nonlabor-related portion of the standardized amount by the 
applicable cost-of-living adjustment factor.
    Step 4--Add the amount from Step 2 and the nonlabor-related 
portion of the standardized amount (adjusted, if applicable, under 
Step 3).
    Step 5--Multiply the final amount from Step 4 by the relative 
weight corresponding to the applicable MS-DRG (see Table 5 of this 
Addendum).
    The Federal rate as determined in Step 5 is then further 
adjusted if the hospital qualifies for either the IME or DSH 
adjustment. In addition, for hospitals that qualify for a low-volume 
payment adjustment under section 1886(d)(12) of the Act and 42 CFR 
412.101(b), the payment in Step 5 is increased by 25 percent.

[[Page 48768]]

2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs)

a. Calculation of Hospital-Specific Rate

    Section 1886(b)(3)(C) of the Act provides that for cost 
reporting periods beginning prior to January 1, 2009, SCHs are paid 
based on whichever of the following rates yields the greatest 
aggregate payment: The Federal rate; the updated hospital-specific 
rate based on FY 1982 costs per discharge; the updated hospital-
specific rate based on FY 1987 costs per discharge; or the updated 
hospital-specific rate based on FY 1996 costs per discharge. As 
discussed above, for cost reporting periods beginning on or after 
January 1, 2009, section 124 of Public Law 110-275 amended section 
1886(b)(3) of the Act and added the updated hospital-specific rate 
based on the FY 2006 costs per discharge to determine the rate that 
yields the greatest aggregate payment. We refer readers to section 
IV.D.2. of the preamble of this final rule for further discussion of 
this provision.
    As discussed previously, we are required to rebase MDHs 
hospital-specific rates to their FY 2002 cost reports if doing so 
results in higher payments. In addition, effective for discharges 
occurring on or after October 1, 2006, MDHs are to be paid based on 
the Federal national rate or, if higher, the Federal national rate 
plus 75 percent (changed from 50 percent) of the difference between 
the Federal national rate and the greater of the updated hospital-
specific rates based on either FY 1982, FY 1987 or FY 2002 costs per 
discharge. Further, MDHs are no longer subject to the 12-percent cap 
on their DSH payment adjustment factor.
    Hospital-specific rates have been determined for each of these 
hospitals based on the FY 1982 costs per discharge, the FY 1987 
costs per discharge, or, for SCHs, the FY 1996 costs per discharge 
and for MDHs, the FY 2002 cost per discharge. For a more detailed 
discussion of the calculation of the hospital-specific rates, we 
refer the reader to the FY 1984 IPPS interim final rule (48 FR 
39772); the April 20, 1990, final rule with comment (55 FR 15150); 
the FY 1991 IPPS final rule (55 FR 35994); and the FY 2001 IPPS 
final rule (65 FR 47082). In addition, for both SCHs and MDHs, the 
hospital-specific rate is adjusted by the budget neutrality 
adjustment factor as discussed in section III. of this Addendum. The 
resulting rate is used in determining the payment rate an SCH or MDH 
will receive for its discharges beginning on or after October 1, 
2008.

b. Updating the FY 1982, FY 1987, FY 1996, and FY 2002 Hospital-
Specific Rates for FY 2009

    We are increasing the hospital-specific rates by 3.6 percent 
(the hospital market basket percentage increase) for FY 2009 for 
those SCHs and MDHs that submit qualifying quality data and by 1.6 
percent for SCHs and MDHs that fail to submit qualifying quality 
data. Section 1886(b)(3)(C)(iv) of the Act provides that the update 
factor applicable to the hospital-specific rates for SCHs is equal 
to the update factor provided under section 1886(b)(3)(B)(iv) of the 
Act, which, for SCHs in FY 2008, is the market basket rate-of-
increase for hospitals that submit qualifying quality data and the 
market basket rate-of-increase minus 2 percent for hospitals that 
fail to submit qualifying quality data. Section 1886(b)(3)(D) of the 
Act provides that the update factor applicable to the hospital-
specific rates for MDHs also equals the update factor provided for 
under section 1886(b)(3)(B)(iv) of the Act, which, for FY 2009, is 
the market basket rate-of-increase for hospitals that submit 
qualifying quality data and the market basket rate-of-increase minus 
2 percent for hospitals that fail to submit qualifying quality data.

3. General Formula for Calculation of Prospective Payment Rates for 
Hospitals Located in Puerto Rico Beginning On or After October 1, 2008, 
and Before October 1, 2009

    Section 1886(d)(9)(E)(iv) of the Act provides that, effective 
for discharges occurring on or after October 1, 2004, hospitals 
located in Puerto Rico are paid based on a blend of 75 percent of 
the national prospective payment rate and 25 percent of the Puerto 
Rico-specific rate.

a. Puerto Rico Rate

    The Puerto Rico prospective payment rate is determined as 
follows:
    Step 1--Select the applicable average standardized amount 
considering the applicable wage index (Table 1C of this Addendum).
    Step 2--Multiply the labor-related portion of the standardized 
amount by the applicable Puerto Rico-specific wage index.
    Step 3--Add the amount from Step 2 and the nonlabor-related 
portion of the standardized amount.
    Step 4--Multiply the amount from Step 3 by the applicable MS-DRG 
relative weight (Table 5 of this Addendum).
    Step 5--Multiply the result in Step 4 by 25 percent.

b. National Rate

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

III. Changes to Payment Rates for Acute Care Hospital Inpatient 
Capital-Related Costs for FY 2009

    The PPS for acute care hospital inpatient capital-related costs 
was implemented for cost reporting periods beginning on or after 
October 1, 1991. Effective with that cost reporting period, 
hospitals were paid during a 10-year transition period (which 
extended through FY 2001) to change the payment methodology for 
Medicare acute care hospital inpatient capital-related costs from a 
reasonable cost-based methodology to a prospective methodology 
(based fully on the Federal rate).
    The basic methodology for determining Federal capital 
prospective rates is set forth in the regulations at 42 CFR 412.308 
through 412.352. Below we discuss the factors that we used to 
determine the capital Federal rate for FY 2009, which will be 
effective for discharges occurring on or after October 1, 2008. We 
note that, as discussed in detail in section III.I. of the preamble 
of this final rule, section 124 of newly enacted Public Law 110-275 
extends, through FY 2009, wage index reclassifications under section 
508 of Public Law 108-173 (the MMA) and the special exceptions 
contained in the final rule published in the Federal Register on 
August 11, 2004 (69 FR 49105, 49107) and extended under section 117 
of the MMSEA of 2007 (Pub. L. 110-173). As a result, we cannot 
finalize the FY 2009 capital rates, including the GAF/DRG adjustment 
factor, the outlier payment adjustment factor, and the outlier 
threshold, until we recompute the wage indices for FY 2009 as a 
result of these extensions. Therefore, the capital Federal rate, the 
GAF/DRG adjustment factor, and the outlier payment adjustment factor 
for FY 2009 discussed below are tentative. The final capital rates 
and factors for FY 2009, reflecting the extension of the 
reclassification provisions noted above, will be published in a 
forthcoming notice in the Federal Register.
    The 10-year transition period ended with hospital cost reporting 
periods beginning on or after October 1, 2001 (FY 2002). Therefore, 
for cost reporting periods beginning in FY 2002, all hospitals 
(except ``new'' hospitals under Sec.  412.304(c)(2)) are paid based 
on the capital Federal rate. For FY 1992, we computed the standard 
Federal payment rate for capital-related costs under the IPPS by 
updating the FY 1989 Medicare inpatient capital cost per case by an 
actuarial estimate of the increase in Medicare inpatient capital 
costs per case. Each year after FY 1992, we update the capital 
standard Federal rate, as provided at Sec.  412.308(c)(1), to 
account for capital input price increases and other factors. The 
regulations at Sec.  412.308(c)(2) provide that the capital Federal 
rate be adjusted annually by a factor equal to the estimated 
proportion of outlier payments under the capital Federal rate to 
total capital payments under the capital Federal rate. In addition, 
Sec.  412.308(c)(3) requires that the capital Federal rate be 
reduced by an adjustment factor equal to the estimated proportion of 
payments for (regular and special) exceptions under Sec.  412.348. 
Section 412.308(c)(4)(ii) requires that the capital standard Federal 
rate be adjusted so that the effects of the annual DRG 
reclassification and the recalibration of DRG weights and changes in 
the geographic adjustment factor (GAF) are budget neutral.
    For FYs 1992 through 1995, Sec.  412.352 required that the 
capital Federal rate also be adjusted by a budget neutrality factor 
so that aggregate payments for inpatient hospital

[[Page 48769]]

capital costs were projected to equal 90 percent of the payments 
that would have been made for capital-related costs on a reasonable 
cost basis during the respective fiscal year. That provision expired 
in FY 1996. Section 412.308(b)(2) describes the 7.4 percent 
reduction to the capital Federal rate that was made in FY 1994, and 
Sec.  412.308(b)(3) describes the 0.28 percent reduction to the 
capital Federal rate made in FY 1996 as a result of the revised 
policy for paying for transfers. In FY 1998, we implemented section 
4402 of Public Law 105-33, which required that, for discharges 
occurring on or after October 1, 1997, the budget neutrality 
adjustment factor in effect as of September 30, 1995, be applied to 
the unadjusted capital standard Federal rate and the unadjusted 
hospital-specific rate. That factor was 0.8432, which was equivalent 
to a 15.68 percent reduction to the unadjusted capital payment 
rates. An additional 2.1 percent reduction to the rates was 
effective from October 1, 1997 through September 30, 2002, making 
the total reduction 17.78 percent. As we discussed in the FY 2003 
IPPS final rule (67 FR 50102) and implemented in Sec.  
412.308(b)(6), the 2.1 percent reduction was restored to the 
unadjusted capital payment rates effective October 1, 2002.
    To determine the appropriate budget neutrality adjustment factor 
and the regular exceptions payment adjustment during the 10-year 
transition period, we developed a dynamic model of Medicare 
inpatient capital-related costs; that is, a model that projected 
changes in Medicare inpatient capital-related costs over time. With 
the expiration of the budget neutrality provision, the capital cost 
model was only used to estimate the regular exceptions payment 
adjustment and other factors during the transition period. As we 
explained in the FY 2002 IPPS final rule (66 FR 39911), beginning in 
FY 2002, an adjustment for regular exception payments is no longer 
necessary because regular exception payments were only made for cost 
reporting periods beginning on or after October 1, 1991, and before 
October 1, 2001 (see Sec.  412.348(b)). Because payments are no 
longer made under the regular exception policy effective with cost 
reporting periods beginning in FY 2002, we discontinued use of the 
capital cost model. The capital cost model and its application 
during the transition period are described in Appendix B of the FY 
2002 IPPS final rule (66 FR 40099).
    Section 412.374 provides for blended payments to hospitals 
located in Puerto Rico under the IPPS for acute care hospital 
inpatient capital-related costs. Accordingly, under the capital PPS, 
we compute a separate payment rate specific to hospitals located in 
Puerto Rico using the same methodology used to compute the national 
Federal rate for capital-related costs. In accordance with section 
1886(d)(9)(A) of the Act, under the IPPS for acute care hospital 
operating costs, hospitals located in Puerto Rico are paid for 
operating costs under a special payment formula. Prior to FY 1998, 
hospitals located in Puerto Rico were paid a blended operating rate 
that consisted of 75 percent of the applicable standardized amount 
specific to Puerto Rico hospitals and 25 percent of the applicable 
national average standardized amount. Similarly, prior to FY 1998, 
hospitals located in Puerto Rico were paid a blended capital rate 
that consisted of 75 percent of the applicable capital Puerto Rico-
specific rate and 25 percent of the applicable capital Federal rate. 
However, effective October 1, 1997, in accordance with section 4406 
of Public Law 105-33, the methodology for operating payments made to 
hospitals located in Puerto Rico under the IPPS was revised to make 
payments based on a blend of 50 percent of the applicable 
standardized amount specific to Puerto Rico hospitals and 50 percent 
of the applicable national average standardized amount. In 
conjunction with this change to the operating blend percentage, 
effective with discharges occurring on or after October 1, 1997, we 
also revised the methodology for computing capital payments to 
hospitals located in Puerto Rico to be based on a blend of 50 
percent of the Puerto Rico capital rate and 50 percent of the 
national capital Federal rate.
    As we discussed in the FY 2005 IPPS final rule (69 FR 49185), 
section 504 of Public Law 108-173 increased the national portion of 
the operating IPPS payments for hospitals located in Puerto Rico 
from 50 percent to 62.5 percent and decreased the Puerto Rico 
portion of the operating IPPS payments from 50 percent to 37.5 
percent for discharges occurring on or after April 1, 2004 through 
September 30, 2004 (see the March 26, 2004 One-Time Notification 
(Change Request 3158)). In addition, section 504 of Public Law 108-
173 provided that the national portion of operating IPPS payments 
for hospitals located in Puerto Rico is equal to 75 percent and the 
Puerto Rico-specific portion of operating IPPS payments is equal to 
25 percent for discharges occurring on or after October 1, 2004. 
Consistent with that change in operating IPPS payments to hospitals 
located in Puerto Rico, for FY 2005 (as we discussed in the FY 2005 
IPPS final rule), we revised the methodology for computing capital 
payments to hospitals located in Puerto Rico to be based on a blend 
of 25 percent of the Puerto Rico-specific capital rate and 75 
percent of the national capital Federal rate for discharges 
occurring on or after October 1, 2004.

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

    In the FY 2008 IPPS final rule with comment period (72 FR 66886 
through 66888), we established a capital Federal rate of $426.14 for 
FY 2008. In the FY 2009 IPPS proposed rule (73 FR 23720), we 
proposed to establish a capital Federal rate of $421.29 for FY 2009. 
In the discussion that follows, we explain the factors that we used 
to determine the FY 2009 capital Federal rate in this final rule. In 
particular, we explain why the FY 2009 capital Federal rate will 
decrease approximately 0.51 percent, compared to the FY 2008 capital 
Federal rate. However, taking into account an estimated increase in 
Medicare fee-for-service discharges in FY 2009 as compared to FY 
2008, as well as the estimated increase in payments due to 
documentation and coding (discussed in section VIII. of Appendix A 
to this final rule), we estimate that aggregate capital payments 
will increase during this same period (approximately $40 million). 
Total payments to hospitals under the IPPS are relatively unaffected 
by changes in the capital prospective payments. Because capital 
payments constitute about 10 percent of hospital payments, a 1-
percent change in the capital Federal rate yields only about a 0.1 
percent change in actual payments to hospitals. As noted above, 
aggregate payments under the capital IPPS are projected to increase 
in FY 2009 compared to FY 2008.

1. Projected Capital Standard Federal Rate Update

a. Description of the Update Framework

    Under Sec.  412.308(c)(1), the capital standard Federal rate is 
updated on the basis of an analytical framework that takes into 
account changes in a capital input price index (CIPI) and several 
other policy adjustment factors. Specifically, we have adjusted the 
projected CIPI rate-of-increase as appropriate each year for case-
mix index-related changes, for intensity, and for errors in previous 
CIPI forecasts. The update factor for FY 2009 under that framework 
is 0.9 percent based on the best data available at this time. The 
update factor under that framework is based on a projected 1.4 
percent increase in the CIPI, a 0.0 percent adjustment for 
intensity, a 0.0 percent adjustment for case-mix, a -0.5 percent 
adjustment for the FY 2007 DRG reclassification and recalibration, 
and a forecast error correction of 0.0 percent. As discussed below 
in section III.C. of the Addendum to this final rule, we continue to 
believe that the CIPI is the most appropriate input price index for 
capital costs to measure capital price changes in a given year. We 
also explain the basis for the FY 2009 CIPI projection in that same 
section of this Addendum. In addition, as also noted below, the 
capital rates will be further adjusted to account for documentation 
and coding improvements under the MS-DRGs discussed in section II.D. 
of the preamble of this final rule. Below we describe the policy 
adjustments that we are applying in the update framework for FY 2009 
presented in this final rule.
    The case-mix index is the measure of the average DRG weight for 
cases paid under the IPPS. Because the DRG weight determines the 
prospective payment for each case, any percentage increase in the 
case-mix index corresponds to an equal percentage increase in 
hospital payments.
    The case-mix index can change for any of several reasons:
     The average resource use of Medicare patients changes 
(``real'' case-mix change);
     Changes in hospital coding of patient records result in 
higher weight DRG assignments (``coding effects''); and
     The annual DRG reclassification and recalibration 
changes may not be budget neutral (``reclassification effect'').
    We define real case-mix change as actual changes in the mix (and 
resource requirements) of Medicare patients as opposed to changes in 
coding behavior that result in assignment of cases to higher

[[Page 48770]]

weighted DRGs but do not reflect higher resource requirements. The 
capital update framework includes the same case-mix index adjustment 
used in the former operating IPPS update framework (as discussed in 
the May 18, 2004 IPPS proposed rule for FY 2005 (69 FR 28816)). (We 
no longer use an update framework to make a recommendation for 
updating the operating IPPS standardized amounts as discussed in 
section II. of Appendix B in the FY 2006 IPPS final rule (70 FR 
47707).)
    Absent the projected increase in case-mix resulting from 
documentation and coding improvements under the adoption of the MS-
DRGs, as we presented in the proposed rule, for FY 2009, we are 
projecting a 1.0 percent total increase in the case-mix index. We 
estimate that the real case-mix increase will also equal 1.0 percent 
for FY 2009. The net adjustment for change in case-mix is the 
difference between the projected real increase in case-mix and the 
projected total increase in case-mix. Therefore, as we proposed, the 
net adjustment for case-mix change in FY 2009 is 0.0 percentage 
points.
    The capital update framework also contains an adjustment for the 
effects of DRG reclassification and recalibration. This adjustment 
is intended to remove the effect on total payments of prior year's 
changes to the DRG classifications and relative weights, in order to 
retain budget neutrality for all case-mix index-related changes 
other than those due to patient severity. Due to the lag time in the 
availability of data, there is a 2-year lag in data used to 
determine the adjustment for the effects of DRG reclassification and 
recalibration. For example, we are adjusting for the effects of the 
FY 2007 DRG reclassification and recalibration as part of our update 
for FY 2009. As we presented in the proposed rule, we estimate that 
FY 2007 DRG reclassification and recalibration resulted in a 0.5 
percent change in the case-mix when compared with the case-mix index 
that would have resulted if we had not made the reclassification and 
recalibration changes to the DRGs. Therefore, as we proposed, we are 
making a -0.5 percent adjustment for DRG reclassification in the 
update for FY 2009 to maintain budget neutrality.
    The capital update framework also contains an adjustment for 
forecast error. The input price index forecast is based on 
historical trends and relationships ascertainable at the time the 
update factor is established for the upcoming year. In any given 
year, there may be unanticipated price fluctuations that may result 
in differences between the actual increase in prices and the 
forecast used in calculating the update factors. In setting a 
prospective payment rate under the framework, we make an adjustment 
for forecast error only if our estimate of the change in the capital 
input price index for any year is off by 0.25 percentage points or 
more. There is a 2-year lag between the forecast and the 
availability of data to develop a measurement of the forecast error. 
A forecast error of 0.10 percentage point was calculated for the FY 
2007 update. That is, current historical data indicate that the 
forecasted FY 2007 CIPI (1.1 percent) used in calculating the FY 
2007 update factor slightly understated the actual realized price 
increases (1.2 percent) by 0.1 percentage point. This slight 
underprediction was mostly due to the incorporation of newly 
available source data for fixed asset prices and moveable asset 
prices into the market basket. However, because this estimation of 
the change in the CIPI is less than 0.25 percentage points, it is 
not reflected in the update recommended under this framework. 
Therefore, as we proposed, we are making a 0.0 percent adjustment 
for forecast error in the update for FY 2009.
    Under the capital IPPS update framework, we also make an 
adjustment for changes in intensity. We calculate this adjustment 
using the same methodology and data that were used in the past under 
the framework for operating IPPS. The intensity factor for the 
operating update framework reflects how hospital services are 
utilized to produce the final product, that is, the discharge. This 
component accounts for changes in the use of quality-enhancing 
services, for changes within DRG severity, and for expected 
modification of practice patterns to remove noncost-effective 
services.
    We calculate case-mix constant intensity as the change in total 
charges per admission, adjusted for price level changes (the CPI for 
hospital and related services) and changes in real case-mix. The use 
of total charges in the calculation of the intensity factor makes it 
a total intensity factor; that is, charges for capital services are 
already built into the calculation of the factor. Therefore, we have 
incorporated the intensity adjustment from the operating update 
framework into the capital update framework. Without reliable 
estimates of the proportions of the overall annual intensity 
increases that are due, respectively, to ineffective practice 
patterns and the combination of quality-enhancing new technologies 
and complexity within the DRG system, we assume that one-half of the 
annual increase is due to each of these factors. The capital update 
framework thus provides an add-on to the input price index rate of 
increase of one-half of the estimated annual increase in intensity, 
to allow for increases within DRG severity and the adoption of 
quality-enhancing technology.
    We have developed a Medicare-specific intensity measure based on 
a 5-year average. Past studies of case-mix change by the RAND 
Corporation (Has DRG Creep Crept Up? Decomposing the Case Mix Index 
Change Between 1987 and 1988 by G. M. Carter, J. P. Newhouse, and D. 
A. Relles, R-4098-HCFA/ProPAC (1991)) suggest that real case-mix 
change was not dependent on total change, but was usually a fairly 
steady increase of 1.0 to 1.5 percent per year. However, we used 1.4 
percent as the upper bound because the RAND study did not take into 
account that hospitals may have induced doctors to document medical 
records more completely in order to improve payment.
    We calculate case-mix constant intensity as the change in total 
charges per admission, adjusted for price level changes (the CPI for 
hospital and related services), and changes in real case-mix. As we 
noted above, in accordance with Sec.  412.308(c)(1)(ii), we began 
updating the capital standard Federal rate in FY 1996 using an 
update framework that takes into account, among other things, 
allowable changes in the intensity of hospital services. For FYs 
1996 through 2001, we found that case-mix constant intensity was 
declining, and we established a 0.0 percent adjustment for intensity 
in each of those years. For FYs 2002 and 2003, we found that case-
mix constant intensity was increasing, and we established a 0.3 
percent adjustment and 1.0 percent adjustment for intensity, 
respectively. For FYs 2004 and 2005, we found that the charge data 
appeared to be skewed (as discussed in greater detail below), and we 
established a 0.0 percent adjustment in each of those years. 
Furthermore, we stated that we would continue to apply a 0.0 percent 
adjustment for intensity until any increase in charges can be tied 
to intensity rather than attempts to maximize outlier payments.
    As noted above, our intensity measure is based on a 5-year 
average, and therefore, as we explained in the proposed rule, the 
intensity adjustment for FY 2009 is based on data from the 5-year 
period beginning with FY 2003 and extending through FY 2007. There 
continues to be a substantial increase in hospital charges for 3 of 
those 5 years without a corresponding increase in the hospital case-
mix index. Most dramatically, for FY 2003, the change in hospitals' 
charges is over 16 percent, which is reflective of the large 
increases in charges that we found in the 4 years prior to FY 2003 
and before our revisions to the outlier policy in 2003 (discussed 
below). For FY 2004 and FY 2005, the change in hospitals' charges is 
somewhat lower in comparison to FY 2003, but is still significantly 
large. For FY 2006 and FY 2007, the change in hospitals' charges 
appears to be slightly moderating. However, the change in hospitals' 
charges for FYs 2003 and 2004 and to a somewhat lesser extent FY 
2005 remains similar to the considerable increase in hospitals' 
charges that we found when examining hospitals' charge data in 
determining the intensity factor in the update recommendations for 
the past few years, as discussed in the FY 2004 IPPS final rule (68 
FR 45482), the FY 2005 IPPS final rule (69 FR 49285), the FY 2006 
IPPS final rule (70 FR 47500), the FY 2007 IPPS final rule (72 FR 
47500), and the FY 2008 IPPS final rule with comment period (72 FR 
47426). If hospitals were treating new or different types of cases, 
which would result in an appropriate increase in charges per 
discharge, then we would expect hospitals' case-mix to increase 
proportionally. As we discussed most recently in the FY 2008 IPPS 
final rule with comment period (72 FR 47426), because our intensity 
calculation relies heavily upon charge data and we believe that 
these charge data may be inappropriately skewed, we established a 
0.0 percent adjustment for intensity for FY 2008 just as we did for 
FYs 2004 through 2007.
    On June 9, 2003, we published in the Federal Register revisions 
to our outlier policy for determining the additional payment for 
extraordinarily high-cost cases (68 FR 34494 through 34515). These 
revised policies were effective on August 8, 2003, and October 1, 
2003. While it does appear that a response to these policy changes 
is

[[Page 48771]]

beginning to occur, that is, the increase in charges for FYs 2004 
and 2005 are somewhat less than the previous 4 years, they still 
show a significant annual increase in charges without a 
corresponding increase in hospital case-mix. Specifically, the 
increases in charges in FY 2004 and FY 2005 (approximately 12 
percent and 8 percent, respectively), for example, which, while less 
than the increase in the previous 3 years, are still much higher 
than increases in years prior to FY 2001. In addition, these 
increases in charges for FYs 2003, FY 2004, and FY 2005 
significantly exceed the respective case-mix increases for the same 
period. Based on the significant increases in charges for FYs 2003 
through 2005 that remain in the 5-year average used for the 
intensity adjustment, as we discussed in the proposed rule, we 
believe residual effects of hospitals' charge practices prior to the 
implementation of the outlier policy revisions established in the 
June 9, 2003 final rule continue to appear in the data, because it 
may have taken hospitals some time to adopt changes in their 
behavior in response to the new outlier policy. Thus, we believe 
that the FY 2003, FY 2004, FY 2005 charge data may still be skewed. 
Although it appears that the change in hospitals' charges is more 
reasonable because the intensity adjustment is based on a 5-year 
average, and although the new outlier policy was generally effective 
in FY 2004, we believe the effects of hospitals attempting to 
maximize outlier payments, while lessening costs, continue to skew 
the charge data.
    Therefore, as we proposed, we are making a 0.0 percent 
adjustment for intensity for FY 2009. In the past (FYs 1996 through 
2001) when we found intensity to be declining, we believed a zero 
(rather than negative) intensity adjustment was appropriate. 
Similarly, we believe that it is appropriate to apply a zero 
intensity adjustment for FY 2009 until any increase in charges 
during the 5-year period upon which the intensity adjustment is 
based can be tied to intensity rather than to attempts to maximize 
outlier payments.
    Above, we described the basis of the components used to develop 
the 0.9 percent capital update factor under the capital update 
framework for FY 2009 as shown in the table below.

          CMS FY 2009 Update Factor to the Capital Federal Rate
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Capital Input Price Index.......................................     1.4
Intensity:......................................................     0.0
Case-Mix Adjustment Factors:
  Real Across DRG Change........................................    -1.0
  Projected Case-Mix Change.....................................     1.0
                                                                 -------
    Subtotal....................................................     1.4
Effect of FY 2007 Reclassification and Recalibration............    -0.5
Forecast Error Correction.......................................     0.0
                                                                 -------
    Total Update................................................     0.9
------------------------------------------------------------------------

b. Comparison of CMS and MedPAC Update Recommendation

    In its March 2008 Report to Congress, MedPAC did not make a 
specific update recommendation for capital IPPS payments for FY 
2009. However, in that same report, in assessing the adequacy of 
current payments and costs, MedPAC recommended an update to the 
hospital inpatient and outpatient PPS rates equal to the increase in 
the hospital market basket in FY 2009, concurrent with a quality 
incentive program. (MedPAC's Report to the Congress: Medicare 
Payment Policy, March 2008, Section 2A).

2. Outlier Payment Adjustment Factor

    Section 412.312(c) establishes a unified outlier payment 
methodology for inpatient operating and inpatient capital-related 
costs. A single set of thresholds is used to identify outlier cases 
for both inpatient operating and inpatient capital-related payments. 
Section 412.308(c)(2) provides that the standard Federal rate for 
inpatient capital-related costs be reduced by an adjustment factor 
equal to the estimated proportion of capital-related outlier 
payments to total inpatient capital-related PPS payments. The 
outlier thresholds are set so that operating outlier payments are 
projected to be 5.1 percent of total operating IPPS DRG payments.
    In the FY 2008 IPPS final rule with comment (72 FR 66887), we 
estimated that outlier payments for capital will equal 4.77 percent 
of inpatient capital-related payments based on the capital Federal 
rate in FY 2008. Based on the thresholds as set forth in section 
II.A. of this Addendum, we estimate that outlier payments for 
capital-related costs will equal 5.35 percent for inpatient capital-
related payments based on the capital Federal rate in FY 2009. 
Therefore, we are applying an outlier adjustment factor of 0.9465 to 
the capital Federal rate. Thus, we estimate that the percentage of 
capital outlier payments to total capital standard payments for FY 
2009 will be higher than the percentages for FY 2008. This increase 
is primarily due to the decrease to the fixed-loss amount, which is 
discussed in section II.A. of this Addendum.
    The outlier reduction factors are not built permanently into the 
capital rates; that is, they are not applied cumulatively in 
determining the capital Federal rate. The FY 2009 outlier adjustment 
of 0.9465 is a -0.61 percent change from the FY 2008 outlier 
adjustment of 0.9523. Therefore, the net change in the outlier 
adjustment to the capital Federal rate for FY 2009 is 0.9939 
(0.9465/0.9523). Thus, the outlier adjustment decreases the FY 2009 
capital Federal rate by 0.61 percent compared with the FY 2008 
outlier adjustment.

3. Budget Neutrality Adjustment Factor for Changes in DRG 
Classifications and Weights and the GAF

    Section 412.308(c)(4)(ii) requires that the capital Federal rate 
be adjusted so that aggregate payments for the fiscal year based on 
the capital Federal rate after any changes resulting from the annual 
DRG reclassification and recalibration and changes in the GAF are 
projected to equal aggregate payments that would have been made on 
the basis of the capital Federal rate without such changes. Because 
we implemented a separate GAF for Puerto Rico, we apply separate 
budget neutrality adjustments for the national GAF and the Puerto 
Rico GAF. We apply the same budget neutrality factor for DRG 
reclassifications and recalibration nationally and for Puerto Rico. 
Separate adjustments were unnecessary for FY 1998 and earlier 
because the GAF for Puerto Rico was implemented in FY 1998.
    In the past, we used the actuarial capital cost model (described 
in Appendix B of the FY 2002 IPPS final rule (66 FR 40099)) to 
estimate the aggregate payments that would have been made on the 
basis of the capital Federal rate with and without changes in the 
DRG classifications and weights and in the GAF to compute the 
adjustment required to maintain budget neutrality for changes in DRG 
weights and in the GAF. During the transition period, the capital 
cost model was also used to estimate the regular exception payment 
adjustment factor. As we explain in section III.A. of this Addendum, 
beginning in FY 2002, an adjustment for regular exception payments 
is no longer necessary. Therefore, we will no longer use the capital 
cost model. Instead, we are using historical data based on 
hospitals' actual cost experiences to determine the exceptions 
payment adjustment factor for special exceptions payments.
    To determine the factors for FY 2009, we compared (separately 
for the national capital rate and the Puerto Rico capital rate) 
estimated aggregate capital Federal rate payments based on the FY 
2008 DRG relative weights and the FY 2008 GAF to estimated aggregate 
capital Federal rate payments based on the FY 2009 relative weights 
and the FY 2009 GAFs. We established the final FY 2008 budget 
neutrality factors of 0.9902 for the national capital rate and 
0.9955 for the Puerto Rico capital rate. In making the comparison, 
we set the exceptions reduction factor to 1.00. To achieve budget 
neutrality for the changes in the national GAFs, based on 
calculations using updated data, we are applying an incremental 
budget neutrality adjustment of 1.0016 for FY 2009 to the previous 
cumulative FY 2008 adjustments of 0.9902, yielding an adjustment of 
0.9918, through FY 2009. For the Puerto Rico GAFs, we are applying 
an incremental budget neutrality adjustment of 1.0010 for FY 2009 to 
the previous cumulative FY 2008 adjustment of 0.9955, yielding a 
cumulative adjustment of 0.9965 through FY 2009.
    We then compared estimated aggregate capital Federal rate 
payments based on the FY 2008 DRG relative weights and the FY 2009 
GAFs to estimated aggregate capital Federal rate payments based on 
the cumulative effects of the FY 2009 DRG relative weights and the 
FY 2009 GAFs. The incremental adjustment for DRG classifications and 
changes in relative weights is 0.9995 both nationally and for Puerto 
Rico. The cumulative adjustments for DRG classifications and changes 
in relative weights and for changes in the GAFs through FY 2009 are 
0.9995 both nationally and for Puerto Rico. The cumulative 
adjustments for DRG classifications and changes in relative weights 
and for changes in the GAFs through FY 2009 are 0.9912 (calculated 
with unrounded numbers) nationally and 0.9960 for Puerto Rico. The 
following table summarizes the adjustment factors for each fiscal 
year:
BILLING CODE 4120-01-P

[[Page 48772]]

[GRAPHIC] [TIFF OMITTED] TR19AU08.014

BILLING CODE 4120-01-C
    The methodology used to determine the recalibration and 
geographic adjustment factor (DRG/GAF) budget neutrality adjustment 
is similar to the methodology used in establishing budget neutrality 
adjustments under the IPPS for operating costs. One difference is 
that, under the operating IPPS, the budget neutrality adjustments 
for the effect of geographic reclassifications are determined 
separately from the effects of other changes in the hospital wage 
index and the DRG relative weights. Under the capital IPPS, there is 
a single DRG/GAF budget neutrality adjustment factor (the national 
capital rate and the Puerto Rico capital rate are determined 
separately) for changes in the GAF (including geographic 
reclassification) and the DRG relative weights. In addition, there 
is no adjustment for the effects that geographic reclassification 
has on the other payment parameters, such as the payments for DSH or 
IME.
    In the FY 2008 IPPS correction notice (72 FR 57636), we 
calculated a GAF/DRG budget neutrality factor of 0.9996 for FY

[[Page 48773]]

2008. For FY 2009, we are establishing a GAF/DRG budget neutrality 
factor of 1.0010. The GAF/DRG budget neutrality factors are built 
permanently into the capital rates; that is, they are applied 
cumulatively in determining the capital Federal rate. This follows 
the requirement that estimated aggregate payments each year be no 
more or less than they would have been in the absence of the annual 
DRG reclassification and recalibration and changes in the GAFs. The 
incremental change in the adjustment from FY 2008 to FY 2009 is 
1.0010. The cumulative change in the capital Federal rate due to 
this adjustment is 0.9912 (the product of the incremental factors 
for FYs 1994 though 2008 and the incremental factor of 1.0010 for FY 
2009). (We note that averages of the incremental factors that were 
in effect during FYs 2004 and 2005, respectively, were used in the 
calculation of the cumulative adjustment of 0.9912 for FY 2009.)
    The factor accounts for DRG reclassifications and recalibration 
and for changes in the GAFs. It also incorporates the effects on the 
GAFs of FY 2009 geographic reclassification decisions made by the 
MGCRB compared to FY 2008 decisions. However, it does not account 
for changes in payments due to changes in the DSH and IME adjustment 
factors.

4. Exceptions Payment Adjustment Factor

    Section 412.308(c)(3) of our regulations requires that the 
capital standard Federal rate be reduced by an adjustment factor 
equal to the estimated proportion of additional payments for both 
regular exceptions and special exceptions under Sec.  412.348 
relative to total capital PPS payments. In estimating the proportion 
of regular exception payments to total capital PPS payments during 
the transition period, we used the actuarial capital cost model 
originally developed for determining budget neutrality (described in 
Appendix B of the FY 2002 IPPS final rule (66 FR 40099)) to 
determine the exceptions payment adjustment factor, which was 
applied to both the Federal and hospital-specific capital rates.
    An adjustment for regular exception payments is no longer 
necessary in determining the FY 2009 capital Federal rate because, 
in accordance with Sec.  412.348(b), regular exception payments were 
only made for cost reporting periods beginning on or after October 
1, 1991 and before October 1, 2001. Accordingly, as we explained in 
the FY 2002 IPPS final rule (66 FR 39949), in FY 2002 and subsequent 
fiscal years, no payments are made under the regular exceptions 
provision. However, in accordance with Sec.  412.308(c), we still 
need to compute a budget neutrality adjustment for special exception 
payments under Sec.  412.348(g). We describe our methodology for 
determining the exceptions adjustment used in calculating the FY 
2008 capital Federal rate below.
    Under the special exceptions provision specified at Sec.  
412.348(g)(1), eligible hospitals include SCHs, urban hospitals with 
at least 100 beds that have a disproportionate share percentage of 
at least 20.2 percent or qualify for DSH payments under Sec.  
412.106(c)(2), and hospitals with a combined Medicare and Medicaid 
inpatient utilization of at least 70 percent. An eligible hospital 
may receive special exceptions payments if it meets the following 
criteria: (1) A project need requirement as described at Sec.  
412.348(g)(2), which, in the case of certain urban hospitals, 
includes an excess capacity test as described at Sec.  
412.348(g)(4); (2) an age of assets test as described at Sec.  
412.348(g)(3); and (3) a project size requirement as described at 
Sec.  412.348(g)(5).
    Based on information compiled from our fiscal intermediaries, 
six hospitals have qualified for special exceptions payments under 
Sec.  412.348(g). One of these hospitals closed in May 2005. Because 
we have cost reports ending in FY 2006 for all five of these 
hospitals, we calculated the adjustment based on actual cost 
experience. Using data from cost reports ending in FY 2006 from the 
March 2008 update of the HCRIS data, we divided the capital special 
exceptions payment amounts for the five hospitals that qualified for 
special exceptions by the total capital PPS payment amounts 
(including special exception payments) for all hospitals. Based on 
the data from cost reports ending in FY 2006, this ratio is rounded 
to 0.0001. We also computed the ratio for FY 2005, which rounds to 
0.0002, and the ratio for FY 2004, which rounds to 0.0003. Because 
the ratios are trending downward, we are making an adjustment of 
0.0001. Because special exceptions are budget neutral, we are 
offsetting the capital Federal rate by 0.01 percent for special 
exceptions payments for FY 2009. Therefore, the exceptions 
adjustment factor is equal to 0.9999 (1-0.0001) to account for 
special exceptions payments in FY 2009.
    In the FY 2008 IPPS final rule with comment period (72 FR 
47430), we estimated that total (special) exceptions payments for FY 
2008 would equal 0.03 percent of aggregate payments based on the 
capital Federal rate. Therefore, we applied an exceptions adjustment 
factor of 0.9997 (1-0.0003) to determine the FY 2008 capital Federal 
rate. As we stated above, we estimate that exceptions payments in FY 
2009 will equal 0.01 percent of aggregate payments based on the FY 
2009 capital Federal rate. Therefore, we are applying an exceptions 
payment adjustment factor of 0.9999 to the capital Federal rate for 
FY 2009. The exceptions adjustment factor for FY 2009 is somewhat 
lower than the factor used in determining the FY 2008 capital 
Federal rate in the FY 2008 IPPS final rule. The exceptions 
reduction factors are not built permanently into the capital rates; 
that is, the factors are not applied cumulatively in determining the 
capital Federal rate. Therefore, the net change in the exceptions 
adjustment factor used in determining the FY 2009 capital Federal 
rate is 1.0002 (0.9999/0.9997).

5. Capital Standard Federal Rate for FY 2009

    In the FY 2008 IPPS final rule with comment period (72 FR 
66888), we established a capital Federal rate of $426.14 for all 
hospitals for FY 2008. In the FY 2009 IPPS proposed rule, we 
proposed an update of 0.7 percent in determining the proposed FY 
2009 capital Federal rate. In this final rule, we are establishing 
an update of 0.09 percent in determining the FY 2009 capital Federal 
rate. In the proposed rule, under the statutory authority at section 
1886(d)(3)(A)(vi) of the Act, and as specified in section 7 of 
Public Law 110-90, we proposed to make an additional 0.9 percent 
reduction to the standardized amounts for both capital and operating 
Federal payment rates in FY 2009.
    Comment: A few commenters expressed opposition to the proposal 
to apply the 0.9 percent adjustment for FY 2009 for improvements in 
documentation and coding that do not reflect real changes in patient 
severity of illness in response to the adoption of the MS-DRGs. 
These commenters argued that they have already committed funds 
toward various capital projects with the expectation that Medicare 
funding would be available to reimburse a portion of the cost of 
those expenses, and that a reduction in this funding would impede 
their ability to maintain their facilities while providing necessary 
technological upgrades. Therefore, the commenters recommended that 
CMS do not apply the 0.9 percent adjustment and provide the full 
update in determining the capital Federal rate for FY 2009.
    Response: In the FY 2008 IPPS final rule with comment period (72 
FR 47186), we established a documentation and coding adjustment for 
FY 2008, FY 2009, and FY 2010. The establishment of these 
documentation and coding adjustments was subject to notice and 
comment rulemaking, and when we established these adjustments, we 
carefully considered the concerns expressed by commenters on the 
proposal presented in the FY 2008 IPPS proposed rule and provided 
detailed responses to those comments in the FY 2008 IPPS final rule 
with comment period (72 FR 47175 through 47186). Subsequently, 
Congress enacted Public Law 110-90, which mandated that the 
documentation and coding adjustments established in the FY 2008 IPPS 
final rule with comment period be changed to -0.6 percent for FY 
2008 and -0.9 percent for FY 2009 (72 FR 66886 through 66887). As we 
discussed in the FY 2009 IPPS proposed rule (73 FR 23720), 
consistent with section 7 of Public Law 110-90, we proposed the 
additional 0.9 percent reduction to the proposed standardized 
amounts for both capital and operating Federal payment rates in FY 
2009.
    As we discussed in greater detail in the FY 2008 IPPS final rule 
with comment period (72 FR 23710), beginning in FY 2008, we adopted 
the new MS-DRG patient classification system for the IPPS to better 
recognize severity of illness in Medicare payment rates. In that 
same final rule, we indicated that we believe the adoption of the 
MS-DRGs had the potential to lead to increases in aggregate payments 
without a corresponding increase in actual patient severity of 
illness due to the incentives for improved documentation and coding. 
Without a documentation and coding adjustment, the changes to MS-
DRGs would not be budget neutral. As explained in the same final 
rule (72 FR 47179), substantial evidence supports our conclusion 
that the case-mix will increase as a result of adoption of MS-DRGs 
without corresponding growth in patient severity. We provided 
evidence

[[Page 48774]]

from studies going back over 20 years that show that hospitals 
respond to incentives when payment classifications are changed to 
improve documentation and coding to receive higher payments. In 
addition, in its public comments on the FY 2008 IPPS proposed rule, 
MedPAC indicated that the increases in payments that result from 
improvements in documentation and coding are not warranted because 
the increase in measured case-mix does not reflect any real change 
in illness severity or the cost of care for the patients being 
treated. (72 FR 47181) Therefore, offsetting adjustments to the IPPS 
payment rates are needed to maintain budget neutrality and if the 
assumed increase in hospitals' case-mix is realized, even with the 
0.9 percent offset to the capital Federal rate, aggregate capital 
IPPS payments would remain at the same level they would have been 
had the MS-DRGs not been adopted.
    Consequently, we continue to believe it is necessary and 
appropriate to apply an adjustment to the national capital Federal 
payment rate for FY 2009 to account for changes in documentation and 
coding due to the adoption of the MS-DRGs. Therefore, in this final 
rule, as proposed, the national capital Federal payment rate was 
determined by applying the 0.9 percent reduction for FY 2009. As 
discussed in greater detail above in section III.A.1.a. of Addendum 
to this final rule, in accordance with the analytical framework set 
forth at Sec.  412.308(c)(1), the update to the capital Federal rate 
for FY 2009 is 0.9 percent. This analytical update framework takes 
into account changes in the CIPI and several other policy adjustment 
factors; however, it does not include the adjustment to account for 
changes in documentation and coding, which is applied separately in 
the determination of the FY 2009 capital Federal rate. As discussed 
in the proposed rule (73 FR 23720 through 23721), although the 0.9 
percent reduction is outside the established process for developing 
the capital Federal payment rate, it nevertheless is a factor in the 
final prospective payment rate to hospitals for capital-related 
costs. For that reason, the national capital Federal payment rate in 
this final rule was determined by applying the 0.9 percent 
reduction. (As discussed below in section II.A.6.of this Addendum, 
we are not applying the 0.9 percent reduction in developing the FY 
2009 Puerto Rico-specific capital rate.) As a result of the 0.90 
percent update and other budget neutrality factors discussed above, 
we are establishing a capital Federal rate of $423.96 for FY 2009. 
The capital Federal rate for FY 2009 was calculated as follows:
     The FY 2009 update factor is 1.0090, that is, the 
update is 0.90 percent.
     The FY 2009 budget neutrality adjustment factor that is 
applied to the capital standard Federal payment rate for changes in 
the DRG relative weights and in the GAFs is 1.0010.
     The FY 2009 outlier adjustment factor is 0.9465.
     The FY 2009 (special) exceptions payment adjustment 
factor is 0.9999.
     The FY 2009 reduction for improvements in documentation 
and coding under the MS-DRGs is 0.9 percent.
    Because the capital Federal rate has already been adjusted for 
differences in case-mix, wages, cost-of-living, indirect medical 
education costs, and payments to hospitals serving a 
disproportionate share of low-income patients, we are not making 
additional adjustments in the capital standard Federal rate for 
these factors, other than the budget neutrality factor for changes 
in the DRG relative weights and the GAFs. As noted above, section 
124 of Public Law 110-275 extends, through FY 2009, wage index 
reclassifications under section 508 of Public Law 108-173 (the MMA) 
and special exceptions contained in the final rule published in the 
Federal Register on August 11, 2004 (69 FR 49105, 49107) and 
extended under section 117 of the MMSEA of 2007 (Pub. L. 110-173). 
As a result, we cannot finalize the FY 2009 capital rates, including 
the GAF/DRG adjustment factor, the outlier payment adjustment 
factor, and the outlier threshold, until we recompute the wage 
indices for FY 2009 as a result of these extensions. (A complete 
discussion on the extension of these provisions can be found in 
section III.I. of the preamble to this final rule). Therefore, the 
capital Federal rate, GAF/DRG adjustment factor and the outlier 
payment adjustment factor for FY 2009 discussed in this section are 
tentative. The final capital rates and factors for FY 2009, 
reflecting the extension of the reclassification provisions noted 
above, will be published in a forthcoming notice in the Federal 
Register.
    We are providing the following chart that shows how each of the 
factors and adjustments for FY 2009 affected the computation of the 
tentative FY 2009 capital Federal rate in comparison to the FY 2008 
capital Federal rate. The FY 2009 update factor has the effect of 
increasing the capital Federal rate by 0.90 percent compared to the 
FY 2008 capital Federal rate. The GAF/DRG budget neutrality factor 
has the effect of increasing the capital Federal rate by 0.09 
percent. The FY 2009 outlier adjustment factor has the effect of 
decreasing the capital Federal rate by 0.61 percent compared to the 
FY 2008 capital Federal rate. The FY 2009 exceptions payment 
adjustment factor has the effect of increasing the capital Federal 
rate by 0.02 percent. The adjustment for improvements in 
documentation and coding under the MS-DRGs has the effect of 
decreasing the FY 2009 capital Federal rate by 0.9 percent as 
compared to the FY 2008 capital Federal rate. The combined effect of 
all the changes decreases the capital Federal rate by 0.51 percent 
compared to the FY 2008 capital Federal rate.

 Comparison of Factors and Adjustments: FY 2008 Capital Federal Rate and Tentative FY 2009 Capital Federal Rate
----------------------------------------------------------------------------------------------------------------
                                                                                                       Percent
                                                                FY 2008    FY 2009 \4\     Change     change \5\
----------------------------------------------------------------------------------------------------------------
Update Factor \1\...........................................       1.0090       1.0090       1.0090         0.90
GAF/DRG Adjustment Factor \1\...............................       0.9996       1.0010       1.0010         0.10
Outlier Adjustment Factor \2\...............................       0.9523       0.9465       0.9939        -0.61
Exceptions Adjustment Factor \2\............................       0.9997       0.9999       1.0002         0.02
MS-DRG Coding and Documentation Improvements Adjustment            0.9940       0.9910       0.9910        -0.90
 Factor \3\.................................................
Capital Federal Rate........................................      $426.14      $423.96       0.9949       -0.51
----------------------------------------------------------------------------------------------------------------
\1\ The update factor and the GAF/DRG budget neutrality factors are built permanently into the capital rates.
  Thus, for example, the incremental change from FY 2008 to FY 2009 resulting from the application of the 1.0010
  GAF/DRG budget neutrality factor for FY 2009 is 1.0010.
\2\ The outlier reduction factor and the exceptions adjustment factor are not built permanently into the capital
  rates; that is, these factors are not applied cumulatively in determining the capital rates. Thus, for
  example, the net change resulting from the application of the FY 2009 outlier adjustment factor is 0.9465/
  0.9523, or 0.9939.
\3\ Adjustment to FY 2009 IPPS rates to account for documentation and coding improvements expected to result
  from the adoption of the MS-DRGs, as discussed above in section III.D. of the Addendum to this final rule.
\4\ Factors for FY 2009, as discussed above in section III. of this Addendum. The GAF/DRG adjustment factor,
  outlier adjustment factor and capital Federal rate for FY 2009 are tentative pending the implementation of
  section 124 of Public Law 110-275, as discussed above.
\5\ Percent change of individual factors may not sum due to rounding.

    We are also providing the following chart that shows how the 
tentative final FY 2009 capital Federal rate differs from the 
proposed FY 2009 capital Federal rates s as presented in the FY 2009 
IPPS proposed rule (72 FR 23721).

[[Page 48775]]



Comparison of Factors and Adjustments: Proposed FY 2009 Capital Federal Rate and Tentative Final FY 2009 Capital
                                                  Federal Rate
----------------------------------------------------------------------------------------------------------------
                                                              Proposed FY    Final FY                  Percent
                                                                  2009        2009*       Change**     change**
----------------------------------------------------------------------------------------------------------------
Update Factor...............................................       1.0070       1.0090         0.02         0.20
GAF/DRG Adjustment Factor...................................       1.0007       1.0010       1.0003         0.03
Outlier Adjustment Factor...................................       0.9427       0.9465       1.0040         0.40
Exceptions Adjustment Factor................................       0.9998       0.9999       1.0001         0.01
MS-DRG Upcoding Adjustment Factor...........................       0.9910       0.9910       1.0000         0.00
Capital Federal Rate........................................      $421.29      $423.96       1.0063        0.63
----------------------------------------------------------------------------------------------------------------
* The GAF/DRG adjustment factor, outlier adjustment factor and capital Federal rate for FY 2009 are tentative
  pending the implementation of section 124 of Public Law 110-275, as discussed above.
** Percent change of individual factors may not sum due to rounding.

6. Special Capital Rate for Puerto Rico Hospitals

a. General

    Section 412.374 provides for the use of a blended payment system 
for payments to hospitals located in Puerto Rico under the PPS for 
acute care hospital inpatient capital-related costs. Accordingly, 
under the capital PPS, we compute a separate payment rate specific 
to hospitals located in Puerto Rico using the same methodology used 
to compute the national Federal rate for capital-related costs. 
Under the broad authority of section 1886(g) of the Act, as 
discussed in section V. of the preamble of this final rule, 
beginning with discharges occurring on or after October 1, 2004, 
capital payments to hospitals located in Puerto Rico are based on a 
blend of 25 percent of the Puerto Rico capital rate and 75 percent 
of the capital Federal rate. The Puerto Rico capital rate is derived 
from the costs of Puerto Rico hospitals only, while the capital 
Federal rate is derived from the costs of all acute care hospitals 
participating in the IPPS (including Puerto Rico).
    To adjust hospitals' capital payments for geographic variations 
in capital costs, we apply a GAF to both portions of the blended 
capital rate. The GAF is calculated using the operating IPPS wage 
index, and varies depending on the labor market area or rural area 
in which the hospital is located. We use the Puerto Rico wage index 
to determine the GAF for the Puerto Rico part of the capital-blended 
rate and the national wage index to determine the GAF for the 
national part of the blended capital rate. Because we implemented a 
separate GAF for Puerto Rico in FY 1998, we also apply separate 
budget neutrality adjustments for the national GAF and for the 
Puerto Rico GAF. However, we apply the same budget neutrality factor 
for DRG reclassifications and recalibration nationally and for 
Puerto Rico.
    In computing the payment for a particular Puerto Rico hospital, 
the Puerto Rico portion of the capital rate (25 percent) is 
multiplied by the Puerto Rico-specific GAF for the labor market area 
in which the hospital is located, and the national portion of the 
capital rate (75 percent) is multiplied by the national GAF for the 
labor market area in which the hospital is located (which is 
computed from national data for all hospitals in the United States 
and Puerto Rico). In FY 1998, we implemented a 17.78 percent 
reduction to the Puerto Rico capital rate as a result of Public Law 
105-33. In FY 2003, a small part of that reduction was restored.

b. Revised Puerto Rico-Specific Rate for FY 2008

    As noted above, Puerto Rico hospitals are paid based on 75 
percent of the national capital Federal rate and 25 percent of the 
Puerto Rico-specific capital rate. As discussed in section II.D.3. 
of the preamble of this final rule, the documentation and coding 
adjustment we adopted in the FY 2008 IPPS final rule with comment 
period relied upon our authority under section 1886(d)(3)(A)(vi) of 
the Act, which provides the authority to adjust ``the standardized 
amounts computed under this paragraph'' to eliminate the effect of 
changes in coding or classification that do not reflect real changes 
in case-mix. Section 1886(d)(3)(A)(vi) of the Act applies to the 
national operating standardized amounts computed under section 
1886(d)(3) of the Act, but does not apply to the Puerto Rico-
specific standardized amount computed under section 1886(d)(9)(C) of 
the Act. In calculating the FY 2008 payment rates, we made an 
inadvertent error and applied the FY 2008 -0.6 percent documentation 
and coding adjustment to the Puerto Rico-specific operating 
standardized amount, relying on our authority under section 
1886(d)(3)(A)(vi) of the Act which does not apply to the Puerto-
Rico-specific standardized amount. In this final rule, consistent 
with the correction to the Puerto Rico-specific operating 
standardized amount for FY 2008 presented in section II.D.3. of the 
preamble of this final rule, we are correcting this inadvertent 
error by removing the -0.6 percent documentation and coding 
adjustment from the FY 2008 Puerto Rico-specific rates. The revised 
FY 2008 Puerto Rico capital rate, effective October 1, 2007, is 
$202.89. The statute gives broad authority to the Secretary under 
section 1886(g) of the Act, with respect to the development of and 
adjustments to a capital PPS. As we discussed in the proposed rule 
(73 FR 23721), although we would not be outside the authority of 
section 1886(g) of the Act in applying the documentation and coding 
adjustment to the Puerto Rico-specific portion of the capital 
payment rate, we have historically made changes to the capital PPS 
consistent with those changes made to the IPPS. Thus, we are 
removing the documentation and coding adjustment from the FY 2008 
Puerto Rico-specific capital rate, consistent with its removal from 
the Puerto Rico-specific operating standardized amount.

c. Puerto Rico-Specific Rate for FY 2009

    As noted above, capital payments to hospitals located in Puerto 
Rico are based on a blend of 25 percent of the Puerto Rico capital 
rate and 75 percent of the capital Federal rate. As also noted 
previously, because we implemented a separate GAF for Puerto Rico in 
FY 1998, we also apply separate budget neutrality adjustments for 
the national GAF and for the Puerto Rico GAF. However, we apply the 
same budget neutrality factor for DRG reclassifications and 
recalibration nationally and for Puerto Rico. As we stated above in 
section III.A.4. of this Addendum, for Puerto Rico, for FY 2009, the 
GAF budget neutrality factor is 1.0010, while the DRG adjustment is 
0.9995, for a combined cumulative adjustment of 1.0004.
    For FY 2008, before application of the GAF, the special capital 
rate for hospitals located in Puerto Rico was $201.67 for discharges 
occurring on or after October 1, 2007, through September 30, 2008 
(72 FR 66888). However, as discussed above, in this final rule, we 
are revising this rate retroactive to October 1, 2007, to remove the 
application of the 0.6 percent documentation and coding adjustment 
for FY 2008, consistent with the correction to the Puerto Rico 
specific standardized amount for FY 2008. The revised FY 2008 Puerto 
Rico capital rate, effective October 1, 2007, is $202.89. Consistent 
with our development of the Puerto Rico-specific operating 
standardized amount, we are not applying the 0.9 percent 
documentation and coding adjustment to the FY 2009 Puerto Rico-
specific capital rate. However, as also discussed in section II.D.3. 
of the preamble of this final rule, we may propose to apply such an 
adjustment to the Puerto Rico operating and capital rates in the 
future. With the changes we are making to the other factors used to 
determine the capital rate, the FY 2009 special capital rate for 
hospitals in Puerto Rico is $198.84.

B. Calculation of the Inpatient Capital-Related Prospective 
Payments for FY 2009

    Because the 10-year capital PPS transition period ended in FY 
2001, all hospitals (except ``new'' hospitals under Sec.  412.324(b) 
and under Sec.  412.304(c)(2)) are paid based on 100 percent of the 
capital Federal rate in FY 2007. The applicable capital Federal rate 
was determined by making the following adjustments:

[[Page 48776]]

     For outliers, by dividing the capital standard Federal 
rate by the outlier reduction factor for that fiscal year; and
     For the payment adjustments applicable to the hospital, 
by multiplying the hospital's GAF, DSH adjustment factor, and IME 
adjustment factor, when appropriate.
    For purposes of calculating payments for each discharge during 
FY 2009, the capital standard Federal rate is adjusted as follows: 
(Standard Federal Rate) x (DRG weight) x (GAF) x (COLA for hospitals 
located in Alaska and Hawaii) x (1 + DSH Adjustment Factor + IME 
Adjustment Factor, if applicable). The result is the adjusted 
capital Federal rate.
    Hospitals also may receive outlier payments for those cases that 
qualify under the thresholds established for each fiscal year. 
Section 412.312(c) provides for a single set of thresholds to 
identify outlier cases for both inpatient operating and inpatient 
capital-related payments. The outlier thresholds for FY 2009 are in 
section II.A. of this Addendum. For FY 2009, a case qualifies as a 
cost outlier if the cost for the case plus the IME and DSH payments 
is greater than the prospective payment rate for the MS-DRG plus the 
fixed-loss amount of $20,185.
    An eligible hospital may also qualify for a special exceptions 
payment under Sec.  412.348(g) up through the 10th year beyond the 
end of the capital transition period if it meets the following 
criteria: (1) A project need requirement described at Sec.  
412.348(g)(2), which in the case of certain urban hospitals includes 
an excess capacity test as described at Sec.  412.348(g)(4); and (2) 
a project size requirement as described at Sec.  412.348(g)(5). 
Eligible hospitals include SCHs, urban hospitals with at least 100 
beds that have a DSH patient percentage of at least 20.2 percent or 
qualify for DSH payments under Sec.  412.106(c)(2), and hospitals 
that have a combined Medicare and Medicaid inpatient utilization of 
at least 70 percent. Under Sec.  412.348(g)(8), the amount of a 
special exceptions payment is determined by comparing the cumulative 
payments made to the hospital under the capital PPS to the 
cumulative minimum payment level. This amount is offset by: (1) Any 
amount by which a hospital's cumulative capital payments exceed its 
cumulative minimum payment levels applicable under the regular 
exceptions process for cost reporting periods beginning during which 
the hospital has been subject to the capital PPS; and (2) any amount 
by which a hospital's current year operating and capital payments 
(excluding 75 percent of operating DSH payments) exceed its 
operating and capital costs. Under Sec.  412.348(g)(6), the minimum 
payment level is 70 percent for all eligible hospitals.
    During the transition period, new hospitals (as defined under 
Sec.  412.300) were exempt from the capital IPPS for their first 2 
years of operation and were paid 85 percent of their reasonable 
costs during that period. Effective with the third year of operation 
through the remainder of the transition period, under Sec.  
412.324(b), we paid the hospitals under the appropriate transition 
methodology (if the hold-harmless methodology were applicable, the 
hold-harmless payment for assets in use during the base period would 
extend for 8 years, even if the hold-harmless payments extend beyond 
the normal transition period).
    Under Sec.  412.304(c)(2), for cost reporting periods beginning 
on or after October 1, 2002, we pay a new hospital 85 percent of its 
reasonable costs during the first 2 years of operation unless it 
elects to receive payment based on 100 percent of the capital 
Federal rate. Effective with the third year of operation, we pay the 
hospital based on 100 percent of the capital Federal rate (that is, 
the same methodology used to pay all other hospitals subject to the 
capital PPS).

C. Capital Input Price Index

1. Background

    Like the operating input price index, the capital input price 
index (CIPI) is a fixed-weight price index that measures the price 
changes associated with capital costs during a given year. The CIPI 
differs from the operating input price index in one important 
aspect--the CIPI reflects the vintage nature of capital, which is 
the acquisition and use of capital over time. Capital expenses in 
any given year are determined by the stock of capital in that year 
(that is, capital that remains on hand from all current and prior 
capital acquisitions). An index measuring capital price changes 
needs to reflect this vintage nature of capital. Therefore, the CIPI 
was developed to capture the vintage nature of capital by using a 
weighted-average of past capital purchase prices up to and including 
the current year.
    We periodically update the base year for the operating and 
capital input price indexes to reflect the changing composition of 
inputs for operating and capital expenses. The CIPI was last rebased 
to FY 2002 in the FY 2006 IPPS final rule (70 FR 47387).

2. Forecast of the CIPI for FY 2009

    Based on the latest forecast by Global Insight, Inc. (second 
quarter of 2008), we are forecasting the CIPI to increase 1.4 
percent in FY 2009. This reflects a projected 2.1 percent increase 
in vintage-weighted depreciation prices (building and fixed 
equipment, and movable equipment), and a 2.9 percent increase in 
other capital expense prices in FY 2009, partially offset by 2.6 
percent decline in vintage-weighted interest expenses in FY 2009. 
The weighted average of these three factors produces the 1.4 percent 
increase for the CIPI as a whole in FY 2009.

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

    Historically, hospitals and hospital units excluded from the 
prospective payment system received payment for inpatient hospital 
services they furnished on the basis of reasonable costs, subject to 
a rate-of-increase ceiling. An annual per discharge limit (the 
target amount as defined in Sec.  413.40(a)) was set for each 
hospital or hospital unit based on the hospital's own cost 
experience in its base year. The target amount was multiplied by the 
Medicare discharges and applied as an aggregate upper limit (the 
ceiling as defined in Sec.  413.40(a)) on total inpatient operating 
costs for a hospital's cost reporting period. Prior to October 1, 
1997, these payment provisions applied consistently to all 
categories of excluded providers (rehabilitation hospitals and units 
(now referred to as IRFs), psychiatric hospitals and units (now 
referred to as IPFs), LTCHs, children's hospitals, and cancer 
hospitals).
    Payment for services furnished in children's hospitals and 
cancer hospitals that are excluded from the IPPS continues to be 
subject to the rate-of-increase ceiling based on the hospital's own 
historical cost experience. (We note that, in accordance with Sec.  
403.752(a), RNHCIs are also subject to the rate-of-increase limits 
established under Sec.  413.40 of the regulations.)
    In the FY 2009 IPPS proposed rule, we proposed that the FY 2009 
rate-of-increase percentage for cancer and children's hospitals and 
RNHCIs was the percentage increase in the FY 2009 IPPS operating 
market basket, estimated to be 3.0 percent. For this final rule, we 
are using the most recent data available for the IPPS hospital 
market basket. For cancer and children's hospitals and RNHCIs, the 
FY 2009 rate-of-increase percentage that is applied to FY 2008 
target amounts in order to calculate the FY 2009 target amounts is 
based on Global Insight, Inc.'s second quarter 2008 forecast of the 
IPPS operating market basket increase, which is estimated to be 3.6 
percent, in accordance with the applicable regulations at 42 CFR 
413.40.
    IRFs, IPFs, and LTCHs were previously paid under the reasonable 
cost methodology. However, the statute was amended to provide for 
the implementation of prospective payment systems for IRFs, IPFs, 
and LTCHs. In general, the prospective payment systems for IRFs, 
IPFs, and LTCHs provide transitioning periods of varying lengths of 
time during which a portion of the prospective payment is based on 
cost-based reimbursement rules under 42 CFR Part 413 (certain 
providers do not receive a transitioning period or may elect to 
bypass the transition as applicable under 42 CFR Part 412, Subparts 
N, O, and P.) We note that the various transitioning periods 
provided for under the IRF PPS, the IPF PPS, and the LTCH PPS have 
ended. For cost reporting periods beginning on or after October 1, 
2002, all IRFs are paid 100 percent of the adjusted Federal rate 
under the IRF PPS. Therefore, for cost reporting periods beginning 
on or after October 1, 2002, no portion of an IRF PPS payment is 
subject to 42 CFR Part 413. Similarly, for cost reporting periods 
beginning on or after October 1, 2006, all LTCHs are paid 100 
percent of the adjusted Federal prospective payment rate under the 
LTCH PPS. Therefore, for cost reporting periods beginning on or 
after October 1, 2006, no portion of the LTCH PPS payment is subject 
to 42 CFR Part 413. Likewise, for cost reporting periods beginning 
on or after January 1, 2008, all IPFs are paid 100 percent of the 
Federal per diem amount under the IPF PPS. Therefore, for cost 
reporting periods beginning on or after January 1, 2008, no portion 
of an IPF PPS payment is subject to 42 CFR Part 413.

[[Page 48777]]

V. Tables

    This section contains a majority of the tables referred to 
throughout the preamble to this final rule and in this Addendum.
    The following tables, which contain data relating to the FY 2009 
wage indices and the hospital reclassifications and payment amounts 
for operating and capital-related costs that are affected by Public 
Law 110-275, which extends through September 30, 2009 (FY 2009) 
section 508 wage index reclassifications as discussed in section 
III.I.7. of this final rule, will be posted on the CMS Web site and 
published in a subsequent Federal Register notice prior to October 
1, 2008:
    Table 2.--Hospital Case-Mix Indexes for Discharges Occurring in 
Federal Fiscal Year 2007; Hospital Wage Indexes for Federal Fiscal 
Year 2009; Hospital Average Hourly Wages for Federal Fiscal Years 
2007 (2003 Wage Data), 2008 (2004 Wage Data), and 2009 (2005 Wage 
Data); and 3-Year Average of Hospital Average Hourly Wages.
    Table 4A.--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Urban Areas by CBSA and by State--FY 2009.
    Table 4B.--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Rural Areas by CBSA and by State--FY 2009.
    Table 4C.--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Hospitals That Are Reclassified by CBSA and by State--FY 
2009.
    Table 4D-1.--Rural Floor Budget Neutrality Factors--FY 2009.
    Table 4D-2.--Urban Areas with Hospitals Receiving the Statewide 
Rural Floor or Imputed Floor Wage Index--FY 2009.
    Table 4E.--Urban CBSAs and Constituent Counties--FY 2009.
    Table 4F.--Puerto Rico Wage Index and Capital Geographic 
Adjustment Factor (GAF) by CBSA--FY 2009.
    The following tables are included in this final rule as 
tentative tables and do not reflect the final calculation of the 
wage indices based on the extension of section 508 wage index 
reclassifications through FY 2009. Additional information appears 
with each table. Revised tables reflecting the final calculation of 
the FY 2009 wage indices will be posted on the CMS Web site and 
published in a subsequent Federal Register notice prior to October 
1, 2008:
    Table 1A.--National Adjusted Operating Standardized Amounts, 
Labor/Nonlabor (69.7 Percent Labor Share/30.3 Percent Nonlabor Share 
If Wage Index Is Greater Than 1).
    Table 1B.--National Adjusted Operating Standardized Amounts, 
Labor/Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If 
Wage Index Is Less Than or Equal To 1).
    Table 1C.--Adjusted Operating Standardized Amounts for Puerto 
Rico, Labor/Nonlabor.
    Table 1D.--Capital Standard Federal Payment Rate.
    Table 2.--Hospital Case-Mix Indexes for Discharges Occurring in 
Federal Fiscal Year 2007; Hospital Average Hourly Wages for Federal 
Fiscal Years 2007 (2003 Wage Data), 2008 (2004 Wage Data), and 2009 
(2005 Wage Data); and 3-Year Average of Hospital Average Hourly 
Wages.
    Table 4J.--Out-Migration Adjustment--FY 2009.
    Table 9A.--Hospital Reclassifications and Redesignations--FY 
2009.
    Table 9C.--Hospitals Redesignated as Rural under Section 
1886(d)(8)(E) of the Act--FY 2009.
    Table 10.--Tentative Geometric Mean Plus the Lesser of .75 of 
the National Adjusted Operating Standardized Payment Amount 
(Increased to Reflect the Difference Between Costs and Charges) or 
.75 of One Standard Deviation of Mean Charges by Medicare Severity 
Diagnosis-Related Group (MS-DRG)--July 2008.
    The following tables are final and not subject to revision based 
on the final calculation of the FY 2009 wage index because of the 
extension of section 508 wage index reclassifications through FY 
2009:
    Table 3A.--FY 2009 and 3-Year Average Hourly Wage for Urban 
Areas by CBSA.
    Table 3B.--FY 2009 and 3-Year Average Hourly Wage for Rural 
Areas by CBSA.
    Table 5.--List of Medicare Severity Diagnosis-Related Groups 
(MS-DRGs), Relative Weighting Factors, and Geometric and Arithmetic 
Mean Length of Stay.
    Table 6A.--New Diagnosis Codes.
    Table 6B.--New Procedure Codes.
    Table 6C.--Invalid Diagnosis Codes.
    Table 6D.--Invalid Procedure Codes.
    Table 6E.--Revised Diagnosis Code Titles.
    Table 6F.--Revised Procedure Code Titles.
    Table 7A.--Medicare Prospective Payment System Selected 
Percentile Lengths of Stay: FY 2007 MedPAR Update--March 2008 
GROUPER V25.0 MS-DRGs.
    Table 7B.--Medicare Prospective Payment System Selected 
Percentile Lengths of Stay: FY 2007 MedPAR Update--March 2008 
GROUPER V26.0 MS-DRGs.
    Table 8A.--Statewide Average Operating Cost-to-Charge Ratios--
July 2008.
    Table 8B.--Statewide Average Capital Cost-to-Charge Ratios--July 
2008.
    Table 8C.--Statewide Average Total Cost-to-Charge Ratios for 
LTCHs--July 2008.
    Table 11.--FY 2009 MS-LTC-DRGs, Relative Weights, Geometric 
Average Length of Stay, and Short-Stay Outlier (SSO) Threshold.
    The following tables discussed in section II. of the preamble of 
this final rule are available only through the Internet on the CMS 
Web site at: http://www.cms.hhs.gov/AcuteInpatientPPS/:
    Table 6G.--Additions to the CC Exclusions List.
    Table 6H.--Deletions from the CC Exclusions List.
    Table 6I.--Complete List of Complication and Comorbidity (CC) 
Exclusions Table 6J.--Major Complication and Comorbidity (MCC) List.
    Table 6K.--Complication and Comorbidity (CC).
BILLING CODE 4120-01-P

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BILLING CODE 4120-01-C

Appendix A: Regulatory Impact Analysis

I. Overall Impact

    We have examined the impacts of this final rule as required by 
Executive Order 12866 (September 1993, Regulatory Planning and 
Review) and the Regulatory Flexibility Act (RFA) (September 19, 
1980, Pub. L. 96-354), section 1102(b) of the Social Security Act, 
the Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4), 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) 
directs agencies to assess all costs and benefits of available 
regulatory alternatives and, if regulation is necessary, to select 
regulatory approaches that maximize net benefits (including 
potential economic, environmental, public health and safety effects, 
distributive impacts, and equity). A regulatory impact analysis 
(RIA) must be prepared for major rules with economically significant 
effects ($100 million or more in any 1 year).
    We have determined that this final rule is a major rule as 
defined in 5 U.S.C. 804(2). We estimate that the changes for FY 2009 
operating and capital payments will redistribute in excess of $100 
million among different types of inpatient cases. The market basket 
update to the IPPS rates required by the statute, in conjunction 
with other payment changes in this final rule, will result in an 
approximate $4.7 billion increase in FY 2009 operating and capital 
payments. Our impact estimate includes the -0.9 percent adjustment 
for documentation and coding changes to the IPPS standardized 
amounts and capital Federal rates for FY 2009 in accordance with 
section 7 of Public Law 110-90. For purposes of the impact analysis, 
we also assume an additional 1.8 percent increase in case-mix 
between FY 2008 and FY 2009 because we believe the adoption of the 
MS-DRGs will result in case-mix growth due to documentation and 
coding changes that do not reflect real changes in patient severity 
of illness. The estimates of IPPS operating payments do not reflect 
any changes in hospital admissions or real case-mix intensity, which 
would also affect overall payment changes.
    The RFA requires agencies to analyze options for regulatory 
relief of small businesses. For purposes of the RFA, small entities 
include small businesses, nonprofit organizations, and small 
government jurisdictions. Most hospitals and most other providers 
and suppliers are considered to be small entities, either by being 
nonprofit organizations or by meeting the Small Business 
Administration definition of a small business (having revenues of 
$31.5 million or less in any 1 year). (For details on the latest 
standards for heath care providers, we refer readers to page 33 of 
the Table of Small Business Size Standards at the Small Business 
Administration Web site at: http://www.sba.gov/services/

[[Page 49063]]

contractingopportunities/sizestandardstopics/tableofsize/
index.html.) For purposes of the RFA, all hospitals and other 
providers and suppliers are considered to be small entities. 
Individuals and States are not included in the definition of a small 
entity. We believe that this final rule will have a significant 
impact on small entities as explained in this Appendix. Because we 
acknowledge that many of the affected entities are small entities, 
the analysis discussed throughout the preamble of this final rule 
constitutes our final regulatory flexibility analysis. In the FY 
2009 IPPS proposed rule, we solicited comments on our estimates and 
analysis of the impact of the proposed rule on those small entities. 
We address any public comments that we received on the impact of 
these changes we are finalizing in the applicable sections of this 
Appendix.
    The Small Business Regulatory Enforcement Fairness Act of 1996 
(SBREFA), Public Law 104-121, as amended by section 8302 of Public 
Law 110-28 (enacted May 25, 2007), requires an agency to provide 
compliance guides for each rule or group of related rules for which 
an agency is required to prepare a final regulatory flexibility 
analysis. The compliance guides associated with this final rule are 
available on the inpatient prospective payment system web page at 
http://www.cms.hhs.gov/AcuteInpatientPPS/01_overview.asp. We also 
note that the Hospital Center Web page http://www.cms.hhs.gov/center/hospital.asp was developed to assist hospitals in 
understanding and adapting to changes in Medicare regulations and in 
billing and payment procedures. This Web page provides hospitals 
with substantial downloadable explanatory materials.
    In addition, section 1102(b) of the Act requires us to prepare a 
regulatory impact analysis for any proposed or final rule that may 
have a significant impact on the operations of a substantial number 
of small rural hospitals. This analysis must conform to the 
provisions of section 604 of the RFA. With the exception of 
hospitals located in certain New England counties, for purposes of 
section 1102(b) of the Act, we now define a small rural hospital as 
a hospital that is located outside of an urban area and has fewer 
than 100 beds. Section 601(g) of the Social Security Amendments of 
1983 (Pub. L. 98-21) designated hospitals in certain New England 
counties as belonging to the adjacent urban area. Thus, for purposes 
of the IPPS, we continue to classify these hospitals as urban 
hospitals.
    Section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4) also requires that agencies assess anticipated costs and 
benefits before issuing any rule whose mandates require spending in 
any 1 year of $100 million in 1995 dollars, updated annually for 
inflation. That threshold level is currently approximately $130 
million. This final rule will not mandate any requirements for 
State, local, or tribal governments, nor will it affect private 
sector costs.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on 
State and local governments, preempts State law, or otherwise has 
Federalism implications. As stated above, this final rule will not 
have a substantial effect on State and local governments.
    The following analysis, in conjunction with the remainder of 
this document, demonstrates that this final rule is consistent with 
the regulatory philosophy and principles identified in Executive 
Order 12866, the RFA, and section 1102(b) of the Act. The final rule 
will affect payments to a substantial number of small rural 
hospitals, as well as other classes of hospitals, and the effects on 
some hospitals may be significant.

II. Objectives

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

III. Limitations of Our Analysis

    The following quantitative analysis presents the projected 
effects of our policy changes, as well as statutory changes 
effective for FY 2009, on various hospital groups. We estimate the 
effects of individual policy changes by estimating payments per case 
while holding all other payment policies constant. We use the best 
data available, but, generally, we do not attempt to make 
adjustments for future changes in such variables as admissions, 
lengths of stay, or case-mix. However, in the FY 2008 IPPS final 
rule with comment period, we indicated that we believe that 
implementation of the MS-DRGs would lead to increases in case-mix 
that do not reflect actual increases in patients' severity of 
illness as a result of more comprehensive documentation and coding. 
As explained in section II.D. of the preamble of this final rule, 
the FY 2008 IPPS final rule with comment period established a 
documentation and coding adjustment of -1.2 percent for FY 2008, -
1.8 percent for FY 2009, and -1.8 percent for FY 2010 to maintain 
budget neutrality for the transition to the MS-DRGs. Subsequently, 
Congress enacted Public Law 110-90. Section 7 of Public Law 110-90 
reduced the IPPS documentation and coding adjustment from -1.2 
percent to -0.6 percent for FY 2008 and from -1.8 percent to -0.9 
percent for FY 2009. Following the enactment of Public Law 110-90, 
we revised the FY 2008 standardized amounts (as well as other 
affected payment factors and thresholds) to reflect the -0.6 percent 
FY 2008 documentation and coding adjustment. The tentative FY 2009 
IPPS national standardized amount included in this final rule 
reflects the documentation and coding adjustment of -0.9 percent for 
FY 2009. While we have adopted the statutorily mandated 
documentation and coding adjustments for payment purposes, we 
continue to believe that an increase in case-mix of 1.8 percent 
between FY 2008 and FY 2009 is likely as a result of the adoption of 
the MS-DRGs. The impacts shown below illustrate the impact of the FY 
2009 IPPS changes on hospital operating payments, including the -0.9 
percent FY 2009 documentation and coding adjustment to the IPPS 
national standardized amounts, both prior to and following the 
expected 1.8 percent growth in case-mix between FY 2008 and FY 2009. 
As we have done in the previous rules, we solicited comments and 
information about the anticipated effects of the proposed changes on 
hospitals and our methodology for estimating them. We did not 
receive any public comments on the methodology for estimating the 
impacts.

IV. Hospitals Included in and Excluded From the IPPS

    The prospective payment systems for hospital inpatient operating 
and capital-related costs encompass most general short-term, acute 
care hospitals that participate in the Medicare program. There were 
35 Indian Health Service hospitals in our database, which we 
excluded from the analysis due to the special characteristics of the 
prospective payment methodology for these hospitals. Among other 
short-term, acute care hospitals, only the 46 such hospitals in 
Maryland remain excluded from the IPPS under the waiver at section 
1814(b)(3) of the Act.
    As of July 2008, there are 3,538 IPPS hospitals to be included 
in our analysis. This represents about 58 percent of all Medicare-
participating hospitals. The majority of this impact analysis 
focuses on this set of hospitals. There are also approximately 1,313 
CAHs. These small, limited service hospitals are paid on the basis 
of reasonable costs rather than under the IPPS. There are also 1,226 
specialty hospitals and 2,226 specialty units that are excluded from 
the IPPS. These specialty hospitals include IPFs, IRFs, LTCHs, 
RNHCIs, children's hospitals, and cancer hospitals, which are paid 
under separate payment systems. Changes in the prospective payment 
systems for IPFs and IRFs are made through separate rulemaking. 
Payment impacts for these specialty hospitals and units are not 
included in this final rule. There is also a separate rule to update 
and make changes to the LTCH PPS for its rate year (RY). However, we 
have traditionally used the IPPS rule to update the LTCH patient 
classifications and relative weights because the LTCH PPS uses the 
same DRGs as the IPPS, resulting in the LTCH relative weights being 
reclassified and recalibrated according to the same schedule as the 
IPPS (that is, for each Federal fiscal year). The impacts of our 
policy changes on LTCHs, where applicable, are discussed below. (We 
note that, as discussed in section II.I. of the preamble of this 
final rule, in the RY 2009 LTCH PPS final rule 73 FR 26797 through 
26798), we moved the annual LTCH PPS RY

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update (currently effective July 1) to be effective October 1 
through September 30 (the Federal fiscal year) each year beginning 
October 1, 2009. Under this change, RY 2009 is extended 3 months, 
such that RY 2009 will be the 15-month period of July 1, 2008 
through September 30, 2009.)

V. Effects on Excluded Hospitals and Hospital Units

    As of July 2008, there were 1,226 hospitals excluded from the 
IPPS. Of these 1,226 hospitals, 56 IPFs, 78 children's hospitals, 11 
cancer hospitals, and 19 RNHCIs are either being paid on a 
reasonable cost basis or have a portion of the PPS payment based on 
reasonable cost principles subject to the rate-of-increase ceiling 
under Sec.  413.40. The remaining providers, 226 IRFs, 396 LTCHs, 
and 440 IPFs, are paid 100 percent of the Federal prospective rate 
under the IRF PPS and the LTCH PPS, respectively, or 100 percent of 
the Federal per diem amount under the IPF PPS. As stated above, IRFs 
and IPFs are not affected by this final rule. The impacts of the 
changes to LTCHs are discussed separately below. In addition, there 
are 1,320 IPFs co-located in hospitals otherwise subject to the 
IPPS, 312 of which are paid on a blend of the IPF PPS per diem 
payment and the reasonable cost-based payment. The remaining 1,008 
IPF units are paid 100 percent of the Federal amount under the IPF 
PPS. There are 970 IRFs (paid under the IRF PPS) co-located in 
hospitals otherwise subject to the IPPS.
    In the past, certain hospitals and units excluded from the IPPS 
have been paid based on their reasonable costs subject to limits as 
established by the Tax Equity and Fiscal Responsibility Act of 1982 
(TEFRA). Hospitals that continue to be paid fully on a reasonable 
cost basis are subject to TEFRA limits for FY 2009. For these 
hospitals (cancer and children's hospitals), consistent with section 
1886(b)(3)(B)(ii) of the Act, the update is the percentage increase 
in the FY 2009 IPPS operating market basket, which is estimated to 
be 3.6 percent, based on Global Insight, Inc.'s 2008 second quarter 
forecast of the IPPS operating market basket increase. In addition, 
in accordance with Sec.  403.752(a) of the regulations, RNHCIs are 
paid under Sec.  413.40, which also uses section 1886(b)(3)(B)(ii) 
of the Act to update target amounts by the rate-of-increase 
percentage. For RNHCIs, the update is the percentage increase in the 
FY 2009 IPPS operating market basket increase, which is estimated to 
be 3.6 percent, based on Global Insight, Inc.'s 2008 second quarter 
forecast of the IPPS operating market basket increase.
    The final rule implementing the IPF PPS (69 FR 66922) 
established a 3-year transition to the IPF PPS during which some 
providers received a blend of the IPF PPS per diem payment and the 
TEFRA reasonable cost-based payment. This transitional period for a 
blended payment amount for IPFs ended for cost reporting periods 
that began on or after January 1, 2008. Because the reasonable cost-
based amount is zero percent for cost reporting periods beginning 
during CY 2008, no IPF will have a portion of its PPS payment that 
is based in part on reasonable cost subject to the rate-of-increase 
ceiling during FY 2009. Thus, there is no longer a need for an 
update factor for IPFs' TEFRA target amount for FY 2009 and 
thereafter.
    The impact on those excluded hospitals and hospital units of the 
update in the rate-of-increase limit depends on the cumulative cost 
increases experienced by each excluded hospital or unit since its 
applicable base period. For excluded hospitals and units that have 
maintained their cost increases at a level below the rate-of-
increase limits since their base period, the major effect is on the 
level of incentive payments these hospitals and hospital units 
receive. Conversely, for excluded hospitals and hospital units with 
per-case cost increases above the cumulative update in their rate-
of-increase limits, the major effect is the amount of excess costs 
that will not be reimbursed.
    We note that, under Sec.  413.40(d)(3), an excluded hospital or 
unit, that continue to be paid under the TEFRA system, whose costs 
exceed 110 percent of its rate-of-increase limit receives its rate-
of-increase limit plus 50 percent of the difference between its 
reasonable costs and 110 percent of the limit, not to exceed 110 
percent of its limit. In addition, under the various provisions set 
forth in Sec.  413.40, certain excluded hospitals and hospital units 
can obtain payment adjustments for justifiable increases in 
operating costs that exceed the limit.

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

A. Basis and Methodology of Estimates

    In this final rule, we are announcing policy changes and payment 
rate updates for the IPPS for operating costs. Changes to the 
capital payments are discussed in section VIII. of this Appendix. We 
note that, due to recently passed legislation (section 124 of Pub. 
L. 110-275) that extended certain special exceptions and reinstated 
the provisions of section 508 of Public Law 108-173 relating to the 
wage index reclassifications of hospitals for an additional year, 
through FY 2009, as discussed in section III.I. of the preamble of 
this final rule, we are unable to finalize the FY 2009 wage index at 
this time. Therefore, we are also unable to finalize budget 
neutrality calculations, the outlier threshold, the outlier offsets, 
and the standardized payment amounts. We have calculated tentative 
amounts for all of these factors and have based the impacts shown in 
the following pages on these tentative amounts. When we revise the 
wage index to account for the recently enacted legislation that 
extends certain exceptions as well as the section 508 
reclassifications for an additional year through FY 2009, we will 
recalculate impacts and publish them in a separate Federal Register 
notice prior to October 1, 2008.
    Based on the overall percentage change in payments per case 
estimated using our payment simulation model, we estimate that total 
FY 2009 operating payments will increase 4.7 percent compared to FY 
2008, largely due to the statutorily mandated update to the IPPS 
rates. This amount also reflects the -0.9 percent FY 2009 
documentation and coding adjustment to the IPPS national 
standardized amounts and our assumption of an additional 1.8 percent 
increase in case-mix between FY 2008 and FY 2009 as a result of 
improvements in documentation and coding that do not represent real 
increases in underlying resource demands and patient acuity due to 
the adoption of the MS-DRGs. The impacts do not illustrate changes 
in hospital admissions or real case-mix intensity, which will also 
affect overall payment changes.
    We have prepared separate impact analyses of the changes to each 
system. This section deals with changes to the operating prospective 
payment system. Our payment simulation model relies on the most 
recent available data to enable us to estimate the impacts on 
payments per case of certain changes in this final rule. However, 
there are other changes for which we do not have data available that 
would allow us to estimate the payment impacts using this model. For 
those changes, we have attempted to predict the payment impacts 
based upon our experience and other more limited data.
    The data used in developing the quantitative analyses of changes 
in payments per case presented below are taken from the FY 2007 
MedPAR file and the most current Provider-Specific File that is used 
for payment purposes. Although the analyses of the changes to the 
operating PPS do not incorporate cost data, data from the most 
recently available hospital cost report were used to categorize 
hospitals. Our analysis has several qualifications. First, in this 
analysis, we do not make adjustments for future changes in such 
variables as admissions, lengths of stay, or underlying growth in 
real case-mix. Second, due to the interdependent nature of the IPPS 
payment components, it is very difficult to precisely quantify the 
impact associated with each change. Third, we use various sources 
for the data used to categorize hospitals in the tables. In some 
cases, particularly the number of beds, there is a fair degree of 
variation in the data from different sources. We have attempted to 
construct these variables with the best available source overall. 
However, for individual hospitals, some miscategorizations are 
possible.
    Using cases from the FY 2007 MedPAR file, we simulated payments 
under the operating IPPS given various combinations of payment 
parameters. Any short-term, acute care hospitals not paid under the 
IPPS (Indian Health Service hospitals and hospitals in Maryland) 
were excluded from the simulations. The impact of payments under the 
capital IPPS, or the impact of payments for costs other than 
inpatient operating costs, are not analyzed in this section. 
Estimated payment impacts of FY 2009 changes to the capital IPPS are 
discussed in section VIII. of this Appendix.
    The changes discussed separately below are the following:
     The effects of the annual reclassification of diagnoses 
and procedures, full implementation of the MS-DRG system and 100 
percent cost-based DRG relative weights,
     The effects of the changes in hospitals' wage index 
values reflecting wage data from hospitals' cost reporting periods 
beginning during FY 2005, compared to the FY 2004 wage data.
     The effects of the recalibration of the DRG relative 
weights as required by section

[[Page 49065]]

1886(d)(4)(C) of the Act, including the wage and recalibration 
budget neutrality factors.
     The effects of geographic reclassifications by the 
MGCRB that will be effective in FY 2009.
     The effects of the first year of the 3-year transition 
to apply rural floor budget neutrality adjustment at the State 
level. In FY 2009, hospitals will receive a blended wage index that 
is 20 percent of a wage index with the State level rural and imputed 
floor budget neutrality adjustment and 80 percent of a wage index 
with the national budget neutrality adjustment.
     The effects of section 505 of Public Law 108-173, which 
provides for an increase in a hospital's wage index if the hospital 
qualifies by meeting a threshold percentage of residents of the 
county where the hospital is located who commute to work at 
hospitals in counties with higher wage indexes.
     The effect of the budget neutrality adjustment being 
made for the adoption of the MS-DRGs under section 1886(d)(3)(A)(iv) 
of the Act for the change in aggregate payments that is a result of 
changes in the coding or classification of discharges that do not 
reflect real changes in case-mix.
     The total estimated change in payments based on the FY 
2009 policies relative to payments based on FY 2008 policies.
    To illustrate the impacts of the FY 2009 changes, our analysis 
begins with an FY 2008 baseline simulation model using: The FY 2009 
update of 3.6 percent; the FY 2008 DRG GROUPER (Version 25.0); the 
most current CBSA designations for hospitals based on OMB's MSA 
definitions; the FY 2008 wage index; and no MGCRB reclassifications. 
Outlier payments are set at 5.1 percent of total operating DRG and 
outlier payments.
    Section 1886(b)(3)(B)(viii) of the Act, as added by section 
5001(a) of Public Law 109-171, provides that for FY 2007 and 
subsequent years, the update factor will be reduced by 2.0 
percentage points for any hospital that does not submit quality data 
in a form and manner and at a time specified by the Secretary. At 
the time this impact was prepared, 186 hospitals did not receive the 
full market basket rate-of-increase for FY 2008 because they failed 
the quality data submission process. For purposes of the simulations 
shown below, we modeled the payment changes for FY 2009 using a 
reduced update for these 186 hospitals. However, we do not have 
enough information at this time to determine which hospitals will 
not receive the full market basket rate-of-increase for FY 2009.
    Each policy change, statutorily or otherwise, is then added 
incrementally to this baseline, finally arriving at an FY 2009 model 
incorporating all of the changes. This simulation allows us to 
isolate the effects of each change.
    Our final comparison illustrates the percent change in payments 
per case from FY 2008 to FY 2009. Three factors not discussed 
separately have significant impacts here. The first is the update to 
the standardized amount. In accordance with section 1886(b)(3)(B)(i) 
of the Act, we are updating the standardized amounts for FY 2009 
using the most recently forecasted hospital market basket increase 
for FY 2009 of 3.6 percent. (Hospitals that fail to comply with the 
quality data submission requirements to receive the full update will 
receive an update reduced by 2.0 percentage points to 1.6 percent.) 
Under section 1886(b)(3)(B)(iv) of the Act, the updates to the 
hospital-specific amounts for SCHs and for MDHs are also equal to 
the market basket increase, or 3.6 percent.
    A second significant factor that affects the changes in 
hospitals' payments per case from FY 2008 to FY 2009 is the change 
in a hospital's geographic reclassification status from one year to 
the next. That is, payments may be reduced for hospitals 
reclassified in FY 2008 that are no longer reclassified in FY 2009. 
Conversely, payments may increase for hospitals not reclassified in 
FY 2008 that are reclassified in FY 2009. This impact analysis was 
prepared under the assumption that certain special exceptions, as 
well as section 508 of Public Law 108-173, the reclassification 
provision, were to expire in FY 2009. However, legislation (section 
124 of Pub. L. 110-275) enacted after preparation of this impact 
analysis has extended the certain special exceptions, as well as the 
section 508 reclassification provision for an additional year 
through FY 2009, and the impact of the provision will be addressed 
in a separate Federal Register notice to be published subsequent to 
this final rule. In the impact analysis for this final rule, the 
expiration of certain special exceptions as well as section 508 of 
Public Law 108-173 resulted in substantial impacts for a relatively 
small number of hospitals in a particular category because those 
providers would have lost their reclassification status resulting in 
a percentage change in payments for the category to be below the 
national mean.
    A third significant factor is that we currently estimate that 
actual outlier payments during FY 2008 will be 4.7 percent of total 
DRG payments. When the FY 2008 final rule with comment period was 
published, we projected FY 2008 outlier payments would be 5.1 
percent of total DRG plus outlier payments; the average standardized 
amounts were offset correspondingly. The effects of the lower than 
expected outlier payments during FY 2009 (as discussed in the 
Addendum to this final rule) are reflected in the analyses below 
comparing our current estimates of FY 2008 payments per case to 
estimated FY 2009 payments per case (with outlier payments projected 
to equal 5.1 percent of total DRG payments).

B. Analysis of Table I

    Table I displays the results of our analysis of the changes for 
FY 2009. The table categorizes hospitals by various geographic and 
special payment consideration groups to illustrate the varying 
impacts on different types of hospitals. The top row of the table 
shows the overall impact on the 3,538 hospitals included in the 
analysis.
    The next four rows of Table I contain hospitals categorized 
according to their geographic location: All urban, which is further 
divided into large urban and other urban; and rural. There are 2,553 
hospitals located in urban areas included in our analysis. Among 
these, there are 1,408 hospitals located in large urban areas 
(populations over 1 million), and 1,145 hospitals in other urban 
areas (populations of 1 million or fewer). In addition, there are 
985 hospitals in rural areas. The next two groupings are by bed-size 
categories, shown separately for urban and rural hospitals. The 
final groupings by geographic location are by census divisions, also 
shown separately for urban and rural hospitals.
    The second part of Table I shows hospital groups based on 
hospitals' FY 2009 payment classifications, including any 
reclassifications under section 1886(d)(10) of the Act. For example, 
the rows labeled urban, large urban, other urban, and rural show 
that the numbers of hospitals paid based on these categorizations 
after consideration of geographic reclassifications (including 
reclassifications under section 1886(d)(8)(B) and section 
1886(d)(8)(E) of the Act that have implications for capital 
payments) are 2,594, 1,430, 1,164 and 944, respectively.
    The next three groupings examine the impacts of the changes on 
hospitals grouped by whether or not they have GME residency programs 
(teaching hospitals that receive an IME adjustment) or receive DSH 
payments, or some combination of these two adjustments. There are 
2,495 nonteaching hospitals in our analysis, 808 teaching hospitals 
with fewer than 100 residents, and 235 teaching hospitals with 100 
or more residents.
    In the DSH categories, hospitals are grouped according to their 
DSH payment status, and whether they are considered urban or rural 
for DSH purposes. The next category groups together hospitals 
considered urban after geographic reclassification, in terms of 
whether they receive the IME adjustment, the DSH adjustment, both, 
or neither.
    The next five rows examine the impacts of the changes on rural 
hospitals by special payment groups (SCHs, RRCs, and MDHs). There 
were 196 RRCs, 356 SCHs, 157 MDHs, 104 hospitals that are both SCHs 
and RRCs, and 12 hospitals that are both an MDH and an RRC.
    The next series of groupings are based on the type of ownership 
and the hospital's Medicare utilization expressed as a percent of 
total patient days. These data were taken from the FY 2005 Medicare 
cost reports.
    The next two groupings concern the geographic reclassification 
status of hospitals. The first grouping displays all urban hospitals 
that were reclassified by the MGCRB for FY 2009. The second grouping 
shows the MGCRB rural reclassifications. The final category shows 
the impact of the policy changes on the 20 cardiac specialty 
hospitals in our analysis.
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C. Effects of the Changes to the MS-DRG Reclassifications and Relative 
Cost-Based Weights (Column 2)

    In Column 2 of Table I, we present the effects of the DRG 
reclassifications, as discussed in section II. of the preamble to 
this final rule. Section 1886(d)(4)(C)(i) of the Act requires us 
annually to make appropriate classification changes in order to 
reflect changes in treatment patterns, technology, and any other 
factors that may change the relative use of hospital resources.
    As discussed in the preamble of this final rule, the FY 2009 DRG 
relative weights will be 100 percent cost-based and 100 percent MS-
DRGs, thus completing our 3-year transition to cost-based relative 
weights and our 2-year transition to MS-DRGs. For FY 2009, the MS-
DRGs are calculated using the FY 2007 MedPAR data grouped to the 
Version 26.0 (FY 2009) DRGs. The methods of calculating the relative 
weights and the reclassification changes to the GROUPER are 
described in more detail in section II.H. of the preamble to this 
final rule. In previous years, this column also reflected the 
effects of the recalibration budget neutrality factor that is 
applied to the hospital-specific rates and the Puerto Rico-specific 
standardized amount. However, for this final rule, we show the 
effects of the recalibration budget neutrality factor of 0.998795 in 
column 4. We note that, consistent with section 1886(d)(4)(C)(iii) 
of the Act, we are applying a budget neutrality factor to the 
national standardized amounts to ensure that the overall payment 
impact of the DRG changes (combined with the wage index changes) is 
budget neutral. This wage and recalibration budget neutrality factor 
of 0.999580 is applied to payments in Column 4 and not Column 2.
    The changes to the relative weights and DRGs shown in column 2 
are prior to any offset for budget neutrality. The ``All Hospitals'' 
line indicates that changes in this column will increase payments by 
0.1 percent. However, as stated earlier, the changes shown in this 
column are combined with revisions to the wage index, and the budget 
neutrality adjustments made for these changes are shown in column 4. 
Thus, the impact after accounting only for budget neutrality for 
changes to the DRG relative weights and classification is somewhat 
lower than the figures shown in this column (approximately 0.1 
percent).

D. Effects of Wage Index Changes (Column 3)

    Section 1886(d)(3)(E) of the Act requires that, beginning 
October 1, 1993, we annually update the wage data used to calculate 
the wage index. In accordance with this requirement, the wage index 
for FY 2009 is based on data submitted for hospital cost reporting 
periods beginning on or after October 1, 2004 and before October 1, 
2005. The estimated impact of the wage data on hospital payments is 
isolated in Column 3 by holding the other payment parameters 
constant in this simulation. That is, Column 3 shows the percentage 
changes in payments when going from a model using the FY 2008 wage 
index, based on FY 2004 wage data and having a 100-percent 
occupational mix adjustment applied, to a model using the FY 2009 
pre-reclassification wage index, also having a 100-percent 
occupational mix adjustment applied, based on FY 2005 wage data 
(while holding other payment parameters such as use of the Version 
26.0 DRG GROUPER constant). The wage data collected on the FY 2005 
cost report include overhead costs for contract labor that were not 
collected on FY 2004 and earlier cost reports. The impacts below 
incorporate the effects of the FY 2005 wage data collected on 
hospital cost reports, including additional overhead costs for 
contract labor compared to the wage data from FY 2004 cost reports 
that were used to calculate the FY 2008 wage index.
    Column 3 shows the impacts of updating the wage data using FY 
2004 cost reports. Overall, the new wage data will lead to a 0.0 
percent change for all hospitals before application of the wage and 
DRG recalibration budget neutrality adjustment shown in column 4. 
Thus, the figures in this column are estimated to be the same as 
what they otherwise would be if they also illustrated a budget 
neutrality adjustment solely for changes to the wage index. Among 
the regions, the largest increase is in the urban Pacific region, 
which experiences a 1.1 percent increase before applying an 
adjustment for budget neutrality. The largest decline from updating 
the wage data is seen in Puerto Rico (0.7 percent decrease).
    In looking at the wage data itself, the national average hourly 
wage increased 4.3 percent compared to FY 2008. Therefore, the only 
manner in which to maintain or exceed the previous year's wage index 
was to match or exceed the national 4.3 percent increase in average 
hourly wage. Of the 3,458 hospitals with wage data for both FYs 2008 
and 2009, 1,703, or 49.2 percent, experienced an average hourly wage 
increase of 4.3 percent or more.
    The following chart compares the shifts in wage index values for 
hospitals for FY 2009 relative to FY 2008. Among urban hospitals, 32 
will experience an increase of more than 5 percent and less than 10 
percent and 3 will experience an increase of more than 10 percent. 
Among rural hospitals, none will experience an increase of more than 
5 percent and less than 10 percent, and none will experience an 
increase of more than 10 percent. However, 970 rural hospitals will 
experience increases or decreases of less than 5 percent, while 
2,426 urban hospitals will experience increases or decreases of less 
than 5 percent. Seventeen urban hospitals will experience decreases 
in their wage index values of more than 5 percent and less than 10 
percent. Ten urban hospitals will experience decreases in their wage 
index values of greater than 10 percent. No rural hospitals will 
experience decreases of more than 5 percent. These figures reflect 
changes in the wage index which is an adjustment to either 69.7 
percent or 62 percent of a hospital's standardized amount, depending 
upon whether its wage index is greater than 1.0 or less than or 
equal to 1.0. Therefore, these figures are illustrating a somewhat 
larger change in the wage index than would occur to the hospital's 
total payment.
    The following chart shows the projected impact for urban and 
rural hospitals.

[[Page 49070]]



------------------------------------------------------------------------
                                                            Number of
                                                            hospitals
      Percentage change in area wage index values      -----------------
                                                         Urban    Rural
------------------------------------------------------------------------
Increase more than 10 percent.........................        3        0
Increase more than 5 percent and less than 10 percent.       32        0
Increase or decrease less than 5 percent..............    2,426      970
Decrease more than 5 percent and less than 10 percent.       17        0
Decrease more than 10 percent.........................       10        0
------------------------------------------------------------------------

E. Combined Effects of MS-DRG and Wage Index Changes (Column 4)

    Section 1886(d)(4)(C)(iii) of the Act requires that changes to 
MS-DRG reclassifications and the relative weights cannot increase or 
decrease aggregate payments. In addition, section 1886(d)(3)(E) of 
the Act specifies that any updates or adjustments to the wage index 
are to be budget neutral. As noted in the Addendum to this final 
rule, in determining the budget neutrality factor, we equated 
simulated aggregate payments for FY 2008 and FY 2009 using the FY 
2007 Medicare utilization data after applying the changes to the DRG 
relative weights and the wage index.
    We computed a wage and MS-DRG recalibration budget neutrality 
factor of 0.999580 (which is applied to the national standardized 
amounts) and a recalibration budget neutrality factor 0.998795 
(which is applied to the hospital-specific rates and the Puerto 
Rico-specific standardized amount). The 0.0 percent impact for all 
hospitals demonstrates that the MS-DRG and wage changes, in 
combination with the budget neutrality factor, are budget neutral. 
In Table I, the combined overall impacts of the effects of both the 
MS-DRG reclassifications and the updated wage index are shown in 
Column 4. The estimated changes shown in this column reflect the 
combined effects of the changes in Columns 2 and 3 and the budget 
neutrality factors discussed previously.
    We estimate that the combined impact of the changes to the 
relative weights and DRGs and the updated wage data with budget 
neutrality applied will increase payments to hospitals located in 
large urban areas (populations over 1 million) by approximately 0.3 
percent. These changes will generally increase payments to hospitals 
in all urban areas (0.1 percent) and teaching hospitals (0.1 
percent). Rural hospitals will generally experience a decrease in 
payments (-1.0 percent). Among the rural hospital categories, rural 
hospitals with less than 50 beds will experience the greatest 
decline in payment (-2.3 percent) primarily due to the changes to 
MS-DRGs and the relative cost weights.

F. Effects of MGCRB Reclassifications (Column 5)

    Our impact analysis to this point has assumed hospitals are paid 
on the basis of their actual geographic location (with the exception 
of ongoing policies that provide that certain hospitals receive 
payments on other bases than where they are geographically located). 
The changes in Column 5 reflect the per case payment impact of 
moving from this baseline to a simulation incorporating the MGCRB 
decisions for FY 2009 which affect hospitals' wage index area 
assignments.
    By Spring of each year, the MGCRB makes reclassification 
determinations that will be effective for the next fiscal year, 
which begins on October 1. The MGCRB may approve a hospital's 
reclassification request for the purpose of using another area's 
wage index value. Hospitals may appeal denials of MGCRB decisions to 
the CMS Administrator. Further, hospitals have 45 days from 
publication of the IPPS rule in the Federal Register to decide 
whether to withdraw or terminate an approved geographic 
reclassification for the following year. This column reflects all 
MGCRB decisions, Administrator appeals and decisions of hospitals 
for FY 2009 geographic reclassifications.
    The overall effect of geographic reclassification is required by 
section 1886(d)(8)(D) of the Act to be budget neutral. Therefore, 
for the purposes of this impact analysis, we are applying an 
adjustment of 0.991339 to ensure that the effects of the section 
1886(d)(10) reclassifications are budget neutral. (See section II.A. 
of the Addendum to this final rule.) Geographic reclassification 
generally benefits hospitals in rural areas. We estimate that 
geographic reclassification will increase payments to rural 
hospitals by an average of 2.1 percent.
    However, we note that this budget neutrality factor and this 
impact are both calculated using wage adjustments applied prior to 
legislation that extends certain special exceptions and section 508 
reclassifications for an additional year through FY 2009. As noted 
earlier in section III.I.7. of the preamble of this final rule, for 
affected areas, CMS will use best efforts to apply a 
reclassification decision for FY 2009 on behalf of hospitals to give 
them the highest wage index. Hospitals will have 15 days from the 
date of publication to revise the decision that CMS made on their 
behalf. We are unable to state with certainty that all of the 
reclassified providers shown in tentative Table 9A of the Addendum 
to this final rule will retain their approved reclassifications for 
FY 2009 once the wage indices that account for the new legislation 
are known. We will include the FY 2009 wage related impacts and our 
reclassification decisions made on behalf of hospitals in a separate 
Federal Register notice document to be published prior to October 1, 
2008.

G. Effects of the Rural Floor and Imputed Floor, Including the 
Transition to Apply Budget Neutrality at the State Level (Column 6)

    As discussed in section III.B. of the preamble of this FY 2009 
final rule, section 4410 of Public Law 105-33 established the rural 
floor by requiring that the wage index for a hospital in any urban 
area cannot be less than the wage index received by rural hospitals 
in the same State. In FY 2008, we changed how we applied budget 
neutrality to the rural floor. Rather than applying a budget 
neutrality adjustment to the standardized amount, a uniform budget 
neutrality adjustment is applied to the wage index. In the FY 2009 
proposed rule, we had proposed to apply the rural floor budget 
neutrality adjustment at the State level, which will redistribute 
payments within the State rather than across all other providers 
within the Nation. In this final rule, we are finalizing the policy 
to apply the rural floor budget neutrality at the State level with a 
3-year transition. In FY 2009, hospitals will receive a blended wage 
index that is 20 percent of a wage index with the State level rural 
and imputed floor budget neutrality adjustment and 80 percent of a 
wage index with the national budget neutrality adjustment. The 
national rural floor budget neutrality applied to the wage index is 
0.996355. The within-State rural floor budget neutrality factors 
applied to the wage index will be available in Table 4D that will be 
published in a separate Federal Register notice before October 1, 
2008. After the wage index is blended, an additional adjustment of 
0.999923 is applied to the wage index to ensure that payments before 
the application of the rural floor are equivalent to the payments 
under the blended budget neutral rural floor wage index.
    Furthermore, the FY 2005 IPPS final rule (69 FR 49109) 
established a temporary imputed floor for all urban States from FY 
2005 to FY 2007. The rural floor requires that an urban wage index 
cannot be lower than the wage index for any rural hospital in that 
State. Therefore, an imputed floor was established for States that 
do not have rural areas or rural IPPS hospitals. In the FY 2008 IPPS 
final rule with comment period (72 FR 47321), we finalized our rule 
to extend the imputed floor for 1 additional year. In this final 
rule, we are extending the imputed floor for an additional 3 years 
through FY 2011. Furthermore, in the proposed rule, we wanted the 
application of the imputed floor budget neutrality to be consistent 
with our application of the rural floor budget neutrality adjustment 
at the State level, so we proposed to apply the imputed floor budget 
neutrality adjustment to the wage index at the State level. In this 
final rule, we will have a 3-year transition to the rural floor 
budget neutrality adjustment at the State level. Therefore, we will 
also apply the imputed floor budget neutrality adjustment at the 
State level through a 3-year transition, so that wage indices 
adjusted for the imputed floor will be blended where 80 percent of 
the wage index will have the national rural and imputed floor budget 
neutrality factor applied and 20 percent of the wage index will have 
the within-State rural and imputed budget neutrality factor applied. 
The national rural floor budget neutrality factor listed also 
incorporates the imputed floor in its adjustment to the wage index. 
Column 6 shows the projected impact of the rural floor and the 
imputed floor, including the application of the transition to 
within-State rural and imputed floor budget neutrality. The column 
compares the post-reclassification FY 2009 wage index of providers 
before the rural floor adjustment and the post-reclassification FY 
2009 wage index of providers with the rural floor and

[[Page 49071]]

imputed floor adjustment. Only urban hospitals can benefit from the 
rural floor provision. Because the provision is budget neutral, in 
prior years, all other hospitals (that is, all rural hospitals and 
those urban hospitals to which the adjustment is not made) had 
experienced a decrease in payments due to the budget neutrality 
adjustment applied nationally. However, under this final rule, 
because the rural floor adjusted wage index is based on a blend 
where 20 percent of the wage index has a within state budget 
neutrality factor applied and 80 percent of the wage index has a 
national rural floor budget neutrality factor applied, rural 
hospitals and urban hospitals that do not benefit from the rural 
floor will continue to see decreases in payments, to a lesser 
extent. Conversely, all hospitals in States with hospitals receiving 
a rural floor will have their wage indices only partly downwardly 
adjusted to achieve budget neutrality within the State.
    We project that, in aggregate, rural hospitals will experience a 
0.1 percent decrease in payments as a result of the transition to 
within-State rural floor budget neutrality. We project hospitals 
located in other urban areas (populations of 1 million or fewer) 
will experience a 0.1 percent increase in payments because those 
providers benefit from the rural floor. Rural New England hospitals 
can expect the greatest decrease in payment, 0.3 percent, because 
under the blended rural floor budget neutrality adjustment, 
hospitals in Vermont will receive a rural floor budget neutrality 
adjustment of 0.97721 or a reduction of approximately 2 percent, and 
hospitals in Connecticut will receive a rural floor budget 
neutrality adjustment of 0.98968 or a reduction of approximately 1 
percent. New Jersey, which is the only State that benefits from the 
imputed floor, is expected to receive a rural floor budget 
neutrality adjustment of 0.99441, or a reduction of less than 1 
percent.
    We note that these wage indices and rural floor budget 
neutrality factors are subject to change when we revise these 
factors to account for the recent enacted legislation that extended 
certain special exceptions and section 508 reclassifications through 
FY 2009. In the notice that we will publish in the Federal Register 
prior to October 1, 2008, we will present the revised wage indices 
and rural floor budget neutrality factors and the impacts.
    The table that appears in section III B.2.b. of the preamble of 
this final rule compares payments under our former policy of 
applying rural floor budget neutrality at the national level to 
payments under our new policy to undergo a 3-year transition to 
apply the rural floor budget neutrality within the State so that, 
for FY 2009, hospitals receive a blended wage index where 20 percent 
of their wage index has the within-State rural floor budget 
neutrality applied and 80 percent of their wage index has the 
national rural floor budget neutrality applied. The last column of 
the table shows the net effect on State payments resulting from this 
policy change. The table shows that, under our former policy of 
applying budget neutrality at the national level, States that do not 
have any hospitals receiving the rural floor wage index will expect 
a decrease in payments because, in order to maintain budget 
neutrality nationally, these hospitals have to pay for the hospitals 
in other States that do receive a rural floor. For example, States 
such as Arizona, New York, and Rhode Island, which do not have 
hospitals receiving a rural floor, will expect to lose 0.2 percent 
in payments under a national rural floor budget neutrality 
adjustment. However, under our new policy to transition to within-
State rural floor budget neutrality and to have a blended budget 
neutral wage index for FY 2009, States with providers that receive 
the rural floor will expect minor decreases in their payments under 
blended budget neutral wage indices relative to a wage index with 
national rural floor budget neutrality applied. Therefore, States 
such as California and Connecticut, which have several hospitals 
that benefit from the rural floor, can expect decreases in payments 
by 0.2 and 0.4, respectively. States that do not have hospitals 
receiving a floor will see a negligible change in payments (compared 
with our previous policy of applying budget neutrality at the 
national level) because a majority of their wage index (80 percent) 
has a national rural floor budget neutrality applied, resulting in a 
zero percent change in payments relative to national rural floor 
budget neutrality. For States that do not have hospitals receiving a 
floor, their wage indices is a blend of a wage index with within-
State budget neutrality applied (which is 1.0 because they do not 
have a rural floor) and a wage index with a national rural floor 
budget neutrality applied (which is 0.996355), so the blended wage 
index would be reduced by 0.19 percent.

H. Effects of the Wage Index Adjustment for Out-Migration (Column 7)

    Section 1886(d)(13) of the Act, as added by section 505 of 
Public Law 108-173, provides for an increase in the wage index for 
hospitals located in certain counties that have a relatively high 
percentage of hospital employees who reside in the county, but work 
in a different area with a higher wage index. Hospitals located in 
counties that qualify for the payment adjustment are to receive an 
increase in the wage index that is equal to a weighted average of 
the difference between the wage index of the resident county, post-
reclassification and the higher wage index work area(s), weighted by 
the overall percentage of workers who are employed in an area with a 
higher wage index. With the out-migration adjustment, rural 
providers will experience a 0.1 percent increase in payments in FY 
2009 relative to no adjustment at all. We included these additional 
payments to providers in the impact table shown above, and we 
estimate the impact of these providers receiving the out-migration 
increase to be approximately $34 million.
    As section 505 reclassification adjustments must be calculated 
using wage data after accounting for the extension of certain 
special exceptions and section 508 reclassifications through FY 
2009, we are unable to assess whether any new counties would qualify 
for section 505 reclassification adjustments for FY 2009. In the 
notice that we will publish in the Federal Register prior to October 
1, 2008, we will show any new counties that qualify for the section 
505 reclassification adjustment for FY 2009 and any related impacts 
that result from application of the out-migration adjustment to the 
revised adjusted wage indices.

I. Effects of All Changes With CMI Adjustment Prior to Estimated Growth 
(Column 8)

    Column 8 compares our estimate of payments per case between FY 
2008 and FY 2009 with all changes reflected in this final rule for 
FY 2009, including a -0.9 percent documentation and coding 
adjustment to the FY 2009 national standardized amounts to account 
for anticipated improvements in documentation and coding that are 
expected to increase case-mix. We generally apply an adjustment to 
the DRGs to ensure budget neutrality assuming constant utilization. 
However, in the FY 2008 IPPS final rule with comment period, we 
indicated that we believe that the adoption of MS-DRGs would lead to 
increases in case-mix as a result of improved documentation and 
coding. In the FY 2008 IPPS final rule with comment period, we had 
finalized a policy to apply a documentation and coding adjustment to 
the standardized amount of -1.2 percent for FY 2008, -1.8 percent 
for FY 2009, and -1.8 percent for FY 2010 to offset the expected 
increase in case-mix and achieve budget neutrality. However, in 
compliance with section 7 of Public Law 110-90, we reduced the 
documentation and coding adjustment to -0.6 percent for FY 2008. In 
accordance with section 7 of Public Law 110-90, for FY 2009, we are 
applying a documentation and coding adjustment of -0.9 percent to 
the FY 2009 national standardized amounts (in addition to the -0.6 
percent adjustment made for FY 2008). We are not applying the 
documentation and coding adjustment to the FY 2009 hospital-specific 
rates and the FY 2009 Puerto Rico-specific standardized amount. 
However, we continue to believe that case-mix growth of an 
additional 1.8 percent compared to FY 2008 is likely to occur across 
all hospitals as a result of improvements in documentation and 
coding.
    Column 8 illustrates the total payment change for FY 2009 
compared to FY 2008, taking into account the -0.9 percent FY 2009 
documentation and coding adjustment but not the projected 1.8 
percent case-mix increase itself. Therefore, this column illustrates 
a total payment change that is less than what is anticipated to 
occur.

J. Effects of All Changes With CMI Adjustment and Estimated Growth 
(Column 9)

    Column 9 compares our estimate of payments per case between FY 
2008 and FY 2009, incorporating all changes reflected in this final 
rule for FY 2009 (including statutory changes). This column includes 
the FY 2009 documentation and coding adjustment of -0.9 percent and 
the projected 1.8 percent increase in case-mix from improved 
documentation and coding (with the 1.8 percent case-mix increase 
assumed to occur equally across all hospitals). We note that this 
impact is calculated using standardized amounts, outlier estimates, 
and budget neutrality factors that do not account for wage index 
changes due to the recently

[[Page 49072]]

enacted legislation that extends certain special exceptions and 
section 508 reclassifications for FY 2009.
    Column 9 reflects the impact of all FY 2009 changes relative to 
FY 2008, including those shown in Columns 2 through 7. The average 
increase for all hospitals is approximately 4.7 percent. This 
increase includes the effects of the 3.6 percent market basket 
update. It also reflects the 0.4 percentage point difference between 
the projected outlier payments in FY 2008 (5.1 percent of total DRG 
payments) and the current estimate of the percentage of actual 
outlier payments in FY 2008 (4.7 percent), as described in the 
introduction to this Appendix and the Addendum to this final rule. 
As a result, payments are projected to be 0.4 percentage points 
lower in FY 2008 than originally estimated, resulting in a 0.4 
percentage point greater increase for FY 2009 than would otherwise 
occur. This analysis accounts for the impact of expiration of 
certain special exceptions and section 508 reclassification, a 
nonbudget neutral provision, which results in a decrease in 
estimated payments by 0.1 percent. However, recently enacted 
legislation has extended certain special exceptions and section 508 
reclassifications for FY 2009, and a revised impacts analysis to 
account for this change will be published in a Federal Register 
notice prior to October 1, 2008. There might also be interactive 
effects among the various factors comprising the payment system that 
we are not able to isolate. For these reasons, the values in Column 
9 may not equal the product of the percentage changes described 
above.
    The overall change in payments per case for hospitals in FY 2009 
is estimated to increase by 4.7 percent. Hospitals in urban areas 
will experience an estimated 4.8 percent increase in payments per 
case compared to FY 2008. Hospitals in large urban areas will 
experience an estimated 5.0 percent increase and hospitals in other 
urban areas will experience an estimated 4.5 percent increase in 
payments per case in FY 2008. Hospital payments per case in rural 
areas are estimated to increase 3.9 percent. The increases that are 
larger than the national average for larger urban areas and smaller 
than the national average for other urban and rural areas are 
largely attributed to the differential impact of adopting MS-DRGs.
    Among urban census divisions, the largest estimated payment 
increases will be 6.4 percent in the Pacific region (generally 
attributed to MS-DRGs and wage data) and 5.4 percent in the Mountain 
region (mostly due to MS-DRGs). The smallest urban increase is 
estimated at 3.6 percent in the Middle Atlantic region.
    Among the rural regions in Column 9, the providers in the New 
England region experience the smallest increase in payments (3.3 
percent) primarily due to the transition to the within-State rural 
floor budget neutrality adjustment. The Pacific and South Atlantic 
regions will have the highest increases among rural regions, with 
4.6 percent and 4.3 percent estimated increases, respectively. 
Again, increases in rural areas are generally less than the national 
average due to the adoption of MS-DRGs.
    Among special categories of rural hospitals in Column 9, the MDH 
and the RRC providers will receive an estimated increase in payments 
of 4.7 percent, and the MDHs and RRCs will experience an estimated 
increase in payments by 3.6 percent.
    Urban hospitals reclassified for FY 2009 are anticipated to 
receive an increase of 4.9 percent, while urban hospitals that are 
not reclassified for FY 2009 are expected to receive an increase of 
4.8 percent. Rural hospitals reclassifying for FY 2009 are 
anticipated to receive a 4.2 percent payment increase and rural 
hospitals that are not reclassifying are estimated to receive a 
payment increase of 3.4 percent.

K. Effects of Policy on Payment Adjustments for Low-Volume Hospitals

    For FY 2009, we are continuing to apply the volume adjustment 
criteria we specified in the FY 2005 IPPS final rule (69 FR 49099). 
We expect that three providers will receive the low-volume 
adjustment for FY 2009. We estimate the impact of these providers 
receiving the additional 25-percent payment increase to be 
approximately $22,000.

L. Impact Analysis of Table II

    Table II presents the projected impact of the changes for FY 
2009 for urban and rural hospitals and for the different categories 
of hospitals shown in Table I. It compares the estimated payments 
per case for FY 2008 with the average estimated payments per case 
for FY 2009, as calculated under our models. Thus, this table 
presents, in terms of the average dollar amounts paid per discharge, 
the combined effects of the changes presented in Table I. The 
percentage changes shown in the last column of Table II equal the 
percentage changes in average payments from Column 9 of Table I.
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VII. Effects of Other Policy Changes

    In addition to those policy changes discussed above that we are 
able to model using our IPPS payment simulation model, we are making 
various other changes in this final rule. Generally, we have limited 
or no specific data available with which to estimate the impacts of 
these changes. Our estimates of the likely impacts associated with 
these other changes are discussed below.

A. Effects of Policy on HACs, Including Infections

    In section II.F. of the preamble of this final rule, we discuss 
our implementation of section 1886(d)(4)(D) of the Act, which 
requires the Secretary to identify conditions that are: (1) High 
cost, high volume, or both; (2) result in the assignment of a case 
to an MS-DRG that has a higher payment when present as a secondary 
diagnosis; and (3) could reasonably have been prevented through 
application of evidence-based guidelines. For discharges occurring 
on or after October 1, 2008, hospitals will not receive additional 
payment for cases in which one of the selected conditions was not 
present on admission, unless based on data and clinical judgment, it 
cannot be determined at the time of admission whether a condition is 
present. That is, the case will be paid as though the secondary 
diagnosis were not present. However, the statute also requires the 
Secretary to continue counting the condition as a secondary 
diagnosis that results in a higher IPPS payment when doing the 
budget neutrality calculations for MS-DRG reclassifications and 
recalibration. Therefore, we will perform our budget neutrality 
calculations as though the payment provision did not apply, but 
Medicare will make a lower payment to the hospital for the specific 
case that includes the secondary diagnosis. Thus, the provision will 
result in cost savings to the Medicare program.
    We note that the provision will only apply when one or more of 
the selected conditions are the only secondary diagnosis or 
diagnoses present on the claim that will lead to higher payment. 
Medicare beneficiaries will generally have multiple secondary 
diagnoses during a hospital stay, such that beneficiaries having one 
MCC or CC will frequently have additional conditions that also will 
generate higher payment. Only a small percentage of the cases will 
have only one secondary diagnosis that would lead to a higher 
payment. Therefore, if at least one nonselected secondary diagnosis 
that leads to higher payment is on the claim, the case will continue 
to be assigned to the higher paying MS-DRG and there will be no 
Medicare savings from that case.
    The HAC payment provision will go into effect on October 1, 
2008. Our savings estimates for the next 5 fiscal years are shown 
below:

------------------------------------------------------------------------
                                                             Savings (in
                            Year                              millions)
------------------------------------------------------------------------
FY 2009....................................................          $21
FY 2010....................................................           21
FY 2011....................................................           21
FY 2012....................................................           22
FY 2013....................................................           22
------------------------------------------------------------------------

B. Effects of MS-LTC-DRG Reclassifications and Relative Weights for 
LTCHs

    In section II.I. of the preamble to this final rule, we discuss 
the MS-LTC-DRGs (Version 26.0 of the GROUPER) and development of the 
relative weights for use under the LTCH PPS for FY 2009. We also 
discuss that when we adopted the new severity adjusted MS-LTC-DRG 
patient classification system under the LTCH PPS in the FY 2008 IPPS 
final rule with comment, we implemented a 2-year transition, in 
which the MS-LTC-DRG relative weights for FY 2009 will be based 
completely on the MS-LTC-DRG patient classification system (and no 
longer based in part on the former LTC-DRG patient classification 
system). Consistent with the requirement at Sec.  412.517 
established in the RY 2008 LTCH PPS final rule (72 FR 26880 through 
26884), the annual update to the classification and relative weights 
under the LTCH PPS for RY 2009 was done in a budget neutral manner, 
such that estimated aggregate LTCH PPS payments would be unaffected; 
that is, they would be neither greater than nor less than the 
estimated aggregate LTCH PPS payments that would have been made 
without the MS-LTC-DRG classification and relative weight changes. 
To achieve budget neutrality under Sec.  412.517, in determining the 
FY 2009 MS-LTC-DRG relative weights, we applied a factor of 1.03887 
in the first step of the budget neutrality process (normalization), 
and we applied a budget neutrality factor of 1.04186 after 
normalization (see section II.I.4. (step 7) of the preamble of this 
final rule). These factors that were applied to maintain budget 
neutrality were based on the most recent available LTCH claims data 
(FY 2007 MedPAR files) for the 388 LTCHs in our database. Consistent 
with the budget neutrality requirement under Sec.  412.517, we 
estimate that with the changes to the MS-LTC-DRG classifications and 
relative weights for FY 2009, there will be no change in aggregate 
LTCH PPS payments. In applying the budget neutrality adjustment 
described above, we assumed constant utilization.

C. Effects of Policy Change Relating to New Medical Service and 
Technology Add-On Payments

    In section II.J. of the preamble to this final rule, we discuss 
add-on payments for new medical services and technologies. As 
explained in that section, add-on payments for new technology under 
section 1886(d)(5)(K) of the Act are not required to be budget 
neutral. As discussed in section II.J.4. of this final rule, one 
applicant, the CardioWest(tm) temporary Total Artificial Heart 
system (TAH-t) met the criteria for new technology add-on payments 
for FY 2009. There were no technologies receiving new technology 
add-on payment in FY 2008. In the proposed rule, we estimated that 
Medicare's new technology add-on payments would remain unchanged in 
FY 2009 compared to FY 2008 because we believed it was premature to 
predict which, if any, new technology add-on payment applications 
would be approved in the FY 2009 final rule. In the proposed rule, 
we stated that if any of the four applicants were found to be 
eligible for new technology add-on payments for FY 2009, in the 
final rule, we would discuss the estimated payment impact for FY 
2009 in that final rule. As stated above, the TAH-t was approved for 
FY 2009 new technology add-on payments. The maximum add-on payment 
for the TAH-t is $53,000 per case and the applicant estimates that 
there will be approximately 180 cases in FY 2009. Therefore, we 
estimate that total new technology add-on payments will be $9.54 
million in FY 2009.

D. Effects of Requirements for Hospital Reporting of Quality Data for 
Annual Hospital Payment Update

    In section IV.B. of the preamble of this final rule, we discuss 
the requirements for hospitals to report quality data in order for 
hospitals to receive the full annual hospital payment update for FY 
2009 and FY 2010. We also note that, for the FY 2009 payment update, 
hospitals must pass our validation requirement of a minimum of 80 
percent reliability, based upon our chart-audit validation process, 
for the fourth quarter of data from CY 2006 and first three quarters 
of data from CY 2007. These data were due to the QIO Clinical 
Warehouse by May 15, 2007 (fourth quarter CY 2006 discharges), 
August 15, 2007 (first quarter CY 2007 discharges), November 15, 
2007 (second quarter CY 2007 discharges), and February 15, 2008 
(third quarter CY 2006 discharges). We have continued our efforts to 
ensure that QIOs provide assistance to all hospitals that wish to 
submit data. In the preamble of this final rule, we are providing 
additional validation criteria to ensure that the quality data being 
sent to CMS are accurate. The requirement of 5 charts per hospital 
will result in approximately 21,500 charts per quarter total 
submitted to the agency. We reimburse hospitals for the cost of 
sending charts to the Clinical Data Abstraction Center (CDAC) at the 
rate of 12 cents per page for copying and approximately $4.00 per 
chart for postage. Our experience shows that the average chart 
received at the CDAC is approximately 150 pages. Thus, the agency 
will have expenditures of approximately $597,600 per quarter to 
collect the charts. Given that we reimburse for the data collection 
effort, we believe that a requirement for five charts per hospital 
per quarter represents a minimal burden to the participating 
hospital.

E. Effects of Policy Change to Methodology for Computing Core Staffing 
Factors for Volume Decrease Adjustment for SCHs and MDHs

    In section IV.D. of the preamble of this final rule, we discuss 
a change to the methodology we will use to compute the average 
nursing staff factors (nursing hours per patient days) for the 
volume decrease adjustment for SCHs and MDHs. If certain 
requirements are met, this adjustment may be made if the hospital's 
total discharges decrease by more than 5 percent from one cost 
reporting period to the next. We do not believe this change will 
have any significant

[[Page 49076]]

impact on Medicare payments to these hospitals.

F. Impact of the Policy Revisions Related to Payment to Hospitals for 
Direct Graduate Medical Education (GME)

    As we discussed in detail in section IV.G. of the preamble of 
this final rule, we are finalizing the current GME regulations that 
were included in interim final rules with comment periods issued on 
April 12, 2006 (71 FR 18654) and November 27, 2007 (72 FR 66580), as 
they apply to emergency Medicare GME affiliated groups, with two 
modifications. They provide for greater flexibility in training 
residents in approved residency programs during times of disaster. 
Specifically, this final rule modifies the provision for ``emergency 
Medicare GME affiliated groups'' to extend the submission deadline 
for emergency Medicare GME affiliation agreements and also provides 
for home and host hospitals with valid emergency Medicare GME 
affiliation agreements an exemption to the application of the IRB 
ratio cap. That is, IME payments for home and host hospitals with 
valid emergency Medicare GME affiliation agreements are calculated 
based on the 3-year rolling average FTE resident count, subject to 
the hospital's FTE resident cap for IME; and the calculation is not 
subject to the IRB ratio cap.
    We believe that there is limited, if any, impact associated with 
modifying the existing emergency Medicare GME affiliation 
regulations to extend the deadline for hospitals to submit emergency 
Medicare GME affiliation agreements. In estimating the impact 
resulting from the exemption from application of the IRB ratio cap 
for home and host hospitals with valid emergency Medicare GME 
affiliation agreements, CMS' Office of the Actuary notes that it is 
nearly impossible to predict the occurrence of future emergencies, 
the magnitude of those emergencies, or how they would affect 
graduate medical education programs at teaching hospitals in a 
declared emergency area under section 1135 of the Act. However, for 
purposes of estimating the impact of the change to hospitals 
affected by Hurricanes Katrina and Rita, the Office of the Actuary 
estimates that the IRB ratio cap exemption for home and host 
hospitals will result in an additional cost of no more than $1 
million per year for the remaining 2 years for which emergency 
Medicare GME affiliation agreements due to Hurricanes Katrina and 
Rita are permitted.

G. Effects of Clarification of Policy for Collection of Risk Adjustment 
Data From MA Organizations

    In section IV.H. of the preamble of this final rule, we discuss 
our revision of our regulations to clarify that CMS has the 
authority to require MA organizations to submit encounter data for 
each item and service provided to an MA plan enrollee. The revision 
also clarifies that CMS will determine the formats for submitting 
encounter data, which may be more abbreviated than those used for 
the Medicare fee-for-service claims data submission process. At this 
time, we have not yet determined an approach for submission of the 
encounter data. Therefore, we are not in a position to determine the 
extent to which the cost impact of submitting encounter data would 
differ from the current costs to MA organizations of submitting risk 
adjustment data.

H. Effects of Policy Changes Relating to Hospital Emergency Services 
Under EMTALA

    In section IV.I. of the preamble of this final rule, we are 
clarifying our policy regarding the applicability of EMTALA to 
hospital inpatients. We are stating that when an individual covered 
by EMTALA is admitted as an inpatient and remains unstabilized with 
an emergency medical condition, a receiving hospital with 
specialized capabilities does not have an EMTALA obligation to 
accept that individual. In addition, we are making two changes 
related to the requirements for on-call physicians in hospital 
emergency departments. We are deleting the provision related to 
maintaining a list of on-call physicians from the EMTALA regulations 
at Sec.  489.24(j)(1) and merging it with Sec.  489.20(r)(2) because 
the requirement to maintain an on-call list is not found in the 
EMTALA statutory provision at section 1867 of the Act, but rather in 
section 1866 of the Act which outlines the requirements for provider 
agreements. We are incorporating the language of Sec.  489.24(j)(1) 
as replacement language for the existing Sec.  489.20(r)(2) and 
amending the regulatory language to make it more consistent with the 
statutory language found at section 1866(a)(1)(I)(iii) of the Act, 
which refers to provider agreements and the requirement to maintain 
an on-call list. These changes will make the regulations consistent 
with the statutory basis for maintaining an on-call list. In 
addition, we are amending our regulations to provide that hospitals 
may comply with the on-call list requirement by participating in a 
formal community call plan so long as the plan includes a number of 
elements that are specified in the final rule. Lastly, we are making 
a technical change to the regulations to conform them to the 
statutory language found in the Pandemic and All-Hazards 
Preparedness Act. These changes do not include any substantive new 
requirements. Although hospitals choosing to participate in a 
community call arrangement will be required to devise a formal 
community call plan, such a plan will increase a hospital's 
flexibility in meeting its on-call requirements. We are estimating 
no impact on Medicare expenditures and no significant impact on 
hospitals with emergency departments.

I. Effects of Implementation of Rural Community Hospital Demonstration 
Program

    In section IV.K. of the preamble to this final rule, we discuss 
our implementation of section 410A of Public Law 108-173 that 
required the Secretary to establish a demonstration that will modify 
reimbursement for inpatient services for up to 15 small rural 
hospitals. Section 410A(c)(2) requires that ``in conducting the 
demonstration program under this section, the Secretary shall ensure 
that the aggregate payments made by the Secretary do not exceed the 
amount which the Secretary would have paid if the demonstration 
program under this section was not implemented.'' There are 
currently 13 hospitals participating in the demonstration; 4 of 
these hospitals were selected to participate in the demonstration as 
of July 1, 2008, as a result of our February 6, 2008 solicitation 
(73 FR 6971).
    As discussed in section IV.K. of the preamble to this final 
rule, we are satisfying this requirement by adjusting national IPPS 
rates by a factor that is sufficient to account for the added costs 
of this demonstration. We estimate that the average additional 
annual payment for FY 2009 that will be made to each participating 
hospital under the demonstration will be approximately $1,753,106. 
We based this estimate on the recent historical experience of the 
difference between inpatient cost and payment for hospitals that are 
participating in the demonstration. We estimate that the total 
annual impact of the demonstration program for FY 2009 for the 13 
participating hospitals will be $22,790,388. The adjustment factor 
to the Federal rate used in calculating Medicare inpatient 
prospective payments as a result of the demonstration is 0.999764.

J. Effects of Policy Changes Relating to Payments to Hospitals-Within-
Hospitals

    In section VI.F. of the preamble of this final rule, we discuss 
our policy change to allow a HwH that, because of state law, cannot 
meet the criteria in regulations for a separate governing body 
solely because it is a State hospital occupying space with another 
State hospital or located on the same campus as another State 
hospital and both hospitals are under the same governing authority, 
or the governing authority of a third entity that controls both 
State hospitals, to nevertheless qualify for an exclusion from the 
IPPS if the hospital meets other applicable criteria for HwHs in the 
regulations and the specified criteria in this final rule. We are 
only aware of one hospital that would qualify for exclusion from the 
IPPS under the criteria and to expand its bed size under the 
provisions. Because any expansion would occur at some point in the 
future, we are unable to quantify the impact of this change.

K. Effects of Policy Changes Relating to Requirements for Disclosure of 
Physician Ownership in Hospitals

    In section VII. of the preamble of this final rule, we discuss 
revisions to the definition of a physician-owned hospital at Sec.  
489.3 to include hospitals that have ownership or investment 
interests by a physician and/or by an immediate family member of a 
physician. We are excepting from the definition of physician-owned 
hospital those hospitals that do not have at least one owner/
investor who is either a physician who refers patients to the 
hospital or an immediate family member of a referring physician. We 
believe that the changes to the definition of physician-owned 
hospital will result in no more than a de minimis increase in the 
number of hospitals that are subject to the disclosure requirements 
applicable to physician-owned hospitals. We believe that there will 
be very few hospitals that will meet the revised definition of 
physician-owned hospital that did not already meet the definition as 
set forth in the existing

[[Page 49077]]

regulations. That is, we believe there are very few hospitals that 
have no referring physician owners/investors but which have one or 
more owners/investors who are immediate family members of a 
referring physician. We note that such hospitals that have no 
physician owners/investors (and, thus, that are not subject to the 
former disclosure requirement) but do have at least one owner/
investor that is the immediate family member of a referring 
physician will be subject to the revised disclosure requirement.
    We expect that under the final policy for an exception to the 
definition of physician-owned hospital, the number of hospitals that 
now are subject to the disclosure requirement may be reduced 
slightly as we understand that there are some hospitals that have no 
referring physician owner/investors but rather have physician owner/
investors who have retired from the practice of medicine. Thus, for 
both of our final changes to the definition of physician-owned 
hospital, the net result may be no change, or a minimal increase or 
decrease in the number of hospitals that are subject to the 
disclosure requirement. Finally, by changing the definition of 
physician-owned hospital to encompass immediate family members, we 
believe that some hospitals that already meet the definition based 
on the investment of referring physicians may have to amend their 
list of physician owner/investors to add immediate family members, 
which we believe will be a minimal burden.
    As specified in section VII. of the preamble of this final rule, 
and in new Sec.  489.20(u)(1), the list of the hospital's owners or 
investors who are physicians or immediate family members of 
physicians must be provided to the patient at the time the request 
for the list is made by or on behalf of the patient. We note that 
hospitals are already currently required to furnish the list of 
physician owners or investors and, thus, we believe that the impact 
of stipulating a timeframe for furnishing the list is negligible. 
Also specified in section VII. of this final rule, in new 
489.20(u)(2), all hospitals must require that all physician owners 
who also are members of the hospital's medical staff to agree, as a 
condition of continued medical staff membership or admitting 
privileges, to disclose, in writing, to all patients they refer to 
the hospital any ownership or investment interest that is held by 
themselves or by an immediate family member (as defined in Sec.  
411.351). Disclosure will be required at the time the referral is 
made. Both hospitals and physicians will participate in the 
disclosure process. We believe this requirement will have a minimal 
financial impact on physician-owned hospitals to the extent that it 
may require them to change their by-laws or make similar changes. We 
are collectively referring to the requirements of Sec. Sec.  
489.20(u)(1) and (u)(2) as ``physician ownership disclosure 
requirements.''
    We do not anticipate that these policy changes discussed in 
section VII. of the preamble of this final rule will have a 
significant economic impact on a substantial number of physicians, 
other health care providers and suppliers, or the Medicare or 
Medicaid programs and their beneficiaries. Specifically, we believe 
that this final rule will affect mostly hospitals, physicians, and 
beneficiaries. The changes concerning both the definition of a 
physician-owned hospital and the disclosure of physician ownership 
in hospitals are consistent with the physician self-referral statute 
and regulations as well as the current practices of most hospitals. 
Thus, our requirement that the list of physician owners be provided 
to the patient at the time the request for the list is made by or on 
behalf of the patient will present a negligible economic impact on 
the hospital. Similarly, the cost borne by individual physicians to 
implement these provisions will be limited to a one-time cost 
associated with developing a disclosure notice that will be shared 
with patients at the time the referral is made in addition to the 
negligible time associated with providing the list to the patient 
and maintaining a copy of the notice in the patient's medical 
record.
    Also specified in section VII. of the preamble of this final 
rule, new Sec.  489.20(w) requires that hospitals and CAHs furnish 
written notice to all patients at the beginning of their hospital or 
outpatient visit if a physician is not available 24 hours per day, 7 
days per week and describe how the hospital will meet the medical 
needs of any patient who develops an emergency medical condition at 
a time when there is no physician present in the hospital. We 
referred to this requirement in section VII. of the preamble of this 
final rule as the ``physician availability disclosure requirement.'' 
This requirement was finalized in the FY 2008 IPPS final rule and 
previously located at Sec.  489.20(v). Thus, there is no impact 
associated with this requirement.
    In section VII. of the preamble of this final rule, we discuss 
revisions to Sec.  489.53(c) to establish additional bases for 
terminating the Medicare provider agreement. In the case of a 
physician-owned hospital, as defined at Sec.  489.3, CMS may 
terminate the provider agreement if the hospital failed to comply 
with the requirements of Sec.  489.20(u) or (w). In the case of a 
participating hospital, as defined at Sec.  489.24, CMS may 
terminate the provider agreement if the participating hospital 
failed to comply with the requirements of Sec.  489.20(w). We 
believe that the cost borne by hospitals to implement these 
requirements will be limited to a one-time cost associated with 
completing minor revisions to the hospital's policies and procedures 
to comply with the requirements of its Medicare provider agreement. 
Most hospitals have standard procedures to satisfy CMS by correcting 
deficiencies (such as the failure to furnish notice of physician 
ownership in the hospital to patients) before action is taken by CMS 
to terminate the Medicare provider agreement.
    Overall, we believe that beneficiaries will be positively 
impacted by these provisions. Specifically, disclosure of physician 
ownership or investment interests equips patients to make informed 
decisions about where they elect to receive care. These policies 
make no significant changes that have the potential to impede 
patient access to health care facilities and services. In fact, we 
believe that our policies will help minimize anti-competitive 
behavior that can affect the decision as to where a beneficiary 
receives health care services and possibly the quality of the 
services furnished.

L. Effects of Policy Changes Relating to Physician Self-Referral 
Provisions

    In section VIII. of the preamble of this final rule, we discuss 
changes in our policies pertaining to physician self-referral 
provisions, including: ``Stand in the shoes,'' period of 
disallowance, alternative method of compliance with certain 
exceptions, percentage-based compensation, unit of service (``per-
click'') payments in lease arrangements, services provided ``under 
arrangements,'' exception for obstetrical malpractice insurance 
subsidies, ownership or investment interest in retirement plans, and 
burden of proof. We do not anticipate that these final policies will 
have a significant impact on physicians, other health care providers 
and suppliers, or the Medicare or Medicaid programs and their 
beneficiaries.
    With respect to the policies pertaining to the physician ``stand 
in the shoes'' provisions, we do not anticipate that entities that 
have financial relationships with one or more physician 
organizations will find it necessary to restructure those 
relationships. We believe that compliance with the ``stand in the 
shoes'' provisions will be made easier by simplifying the required 
analysis of arrangements in which a physician organization is 
interposed between the referring physician and the entity furnishing 
DHS. We are not finalizing our proposal to make an entity ``stand in 
the shoes,'' whereby an entity that furnishes DHS would have been 
deemed to stand in the shoes of an organization in which it has a 
100-percent ownership interest and would have been deemed to have 
the same compensation arrangements with the same parties and on the 
same terms as does the organization that it owns. In not finalizing 
this proposal, we anticipate no additional impact on the industry.
    Our policy pertaining to the period of disallowance is a 
codification of what we believe is existing law and reflects what we 
believe most entities furnishing DHS are already following. 
Therefore, we do not anticipate a significant economic impact on the 
industry.
    The following policies set forth in section VIII. of the 
preamble of this final rule pertain to the expansion of physician 
self-referral exceptions; exception for obstetrical malpractice 
insurance subsidies, ownership or investment interest in retirement 
plans, and alternative method of compliance with certain exceptions. 
To the extent that expanded exceptions permit additional legitimate 
arrangements to comply with the law, this rule will reduce the 
potential costs of restructuring such arrangements, and the 
consequences of noncompliance may be avoided entirely.
    We anticipate that our remaining physician self-referral 
policies set forth in section VIII. of the preamble of this final 
rule will result in savings to the program by reducing 
overutilization and anti-competitive business arrangements. We 
cannot gauge with any

[[Page 49078]]

certainty the extent of these savings to the Medicare program.

M. Effects of Changes Relating to Reporting of Financial Relationships 
Between Hospitals and Physicians

    As discussed in section IX. of the preamble to this final rule, 
500 hospitals will be required to furnish information concerning 
their financial relationships with their physicians. The financial 
relationships include ownership and investment interests and 
compensation arrangements. This information will be submitted in a 
collection of information instrument that CMS has developed--the 
``DFRR.'' We are unable to quantify the number of physicians who 
have ownership and investment interests and compensation 
arrangements with hospitals. Even if we assume that the 500 or less 
hospitals have a substantial number of financial relationships with 
physicians, we believe that, in general, the economic impact on 
these hospitals would not be substantial. Because the physician 
information requested in the DFRR will be on file at the hospital, 
we believe there should be negligible, if any, impact upon 
physicians or other health care providers or suppliers. 
Specifically, we believe that the cost to complete the DFRR for each 
hospital would be approximately $4,080, and the total cost burden 
for the industry would be approximately $2,040,000.
    We expect that this final rule may result in savings to the 
Medicare program by minimizing anti-competitive business 
arrangements as well as financial incentives that encourage 
overutilization. In addition, to the extent that we determine that 
any arrangements are noncompliant with the physician self-referral 
statute and regulations, there may be monies returned to the 
Medicare Trust Fund. We cannot gauge with any certainty the extent 
of these savings to the Medicare program at this time. Finally, we 
do not anticipate any financial burden on beneficiaries or impact on 
beneficiary access to medically necessary services because the 
completion of the DFRR would be conducted by hospitals.

N. Effects of Policy Change Relating to Payments to SCHs

    Currently, an SCH is paid under the IPPS based on whichever of 
the following rates yields the greatest aggregate payment for the 
cost reporting period: The Federal payment rate applicable to IPPS 
hospitals or the hospital-specific rate based on FY 1982, FY 1987, 
or FY 1996 updated costs per discharge. As discussed in section 
IV.D.2. of the preamble of this final rule, section 122 of Public 
Law 110-275, effective for cost reporting periods beginning on or 
after January 1, 2009, an SCH's hospital-specific rate will be based 
on its costs per discharge in FY 2006 if greater than the hospital-
specific rates based on its costs in FY 1982, FY 1987, or FY 1986, 
or the IPPS rate based on the standardized amount.
    In this final rule, we are incorporating this self-implementing 
provision of section 122 of Public Law 110-275 in our regulations.
    At this time, many FY 2006 cost reports have not as yet been 
settled by the Medicare fiscal intermediary/MAC. Therefore, we are 
unable to determine with any degree of accuracy a hospital's FY 2006 
costs per discharge. Because we cannot determine whether the use of 
the SCH's hospital-specific rate based on its FY 2006 cost report 
would yield the greatest aggregate payment for the cost reporting 
period, we are unable to determine which SCHs would benefit from 
this provision. However, we note that, in scoring the provision of 
section 112 of Public Law 110-275, the CMS Office of the Actuary 
estimated the cost of this provision to be $140 million for 2009 
from its effective date in January 2009 through the end of FY 2009 
(September 30, 2009) and the 5-year impact for FYs 2009 through 2013 
to be $2.74 billion (per FY in millions: $140 in 2009, $550 in 2010, 
$640 in 2011, $680 in 2012, and $730 in 2013).

VIII. Effects of Changes in the Capital IPPS

A. General Considerations

    Fiscal year (FY) 2001 was the last year of the 10-year 
transition period established to phase in the PPS for hospital 
capital-related costs. During the transition period, hospitals were 
paid under one of two payment methodologies: fully prospective or 
hold harmless. Under the fully prospective methodology, hospitals 
were paid a blend of the capital Federal rate and their hospital-
specific rate (see Sec.  412.340). Under the hold-harmless 
methodology, unless a hospital elected payment based on 100 percent 
of the capital Federal rate, hospitals were paid 85 percent of 
reasonable costs for old capital costs (100 percent for SCHs) plus 
an amount for new capital costs based on a proportion of the capital 
Federal rate (see Sec.  412.344). As we state in section V. of the 
preamble of this final rule, with the 10-year transition period 
ending with hospital cost reporting periods beginning on or after 
October 1, 2001 (FY 2002), beginning in FY 2002 capital prospective 
payment system payments for most hospitals are based solely on the 
capital Federal rate. Therefore, we no longer include information on 
obligated capital costs or projections of old capital costs and new 
capital costs, which were factors needed to calculate payments 
during the transition period, for our impact analysis.
    The basic methodology for determining a capital IPPS payment is 
set forth at Sec.  412.312. The basic methodology for calculating 
capital IPPS payments in FY 2009 is as follows: (Standard Federal 
Rate) x (DRG weight) x (GAF) x (COLA for hospitals located in Alaska 
and Hawaii) x (1 + DSH Adjustment Factor + IME Adjustment Factor, if 
applicable).
    We note that, in accordance with Sec.  412.322(c), the IME 
adjustment factor for FY 2009 is equal to half of the current 
adjustment, as discussed in section V.B.2. of the preamble of this 
final rule. In addition, hospitals may also receive outlier payments 
for those cases that qualify under the threshold established for 
each fiscal year.
    The data used in developing the impact analysis presented below 
are taken from the March 2008 update of the FY 2007 MedPAR file and 
the March 2008 update of the Provider-Specific File that is used for 
payment purposes. Although the analyses of the changes to the 
capital prospective payment system do not incorporate cost data, we 
used the March 2008 update of the most recently available hospital 
cost report data (FYs 2005 and 2006) to categorize hospitals. Our 
analysis has several qualifications. We use the best data available 
and make assumptions about case-mix and beneficiary enrollment as 
described below. In addition, as discussed in section III. of the 
Addendum to this final rule, as we established for FY 2008, we are 
adjusting the national capital rate to account for improvements in 
documentation and coding under the MS-DRGs in FY 2009. (As discussed 
in section III.A.6. of the Addendum to this final rule, we are not 
adjusting the Puerto Rico specific capital rate to account for 
improvements in documentation and coding under the MS-DRGs in FY 
2009.) Furthermore, due to the interdependent nature of the IPPS, it 
is very difficult to precisely quantify the impact associated with 
each change. In addition, we draw upon various sources for the data 
used to categorize hospitals in the tables. In some cases (for 
instance, the number of beds), there is a fair degree of variation 
in the data from different sources. We have attempted to construct 
these variables with the best available sources overall. However, 
for individual hospitals, some miscategorizations are possible.
    Using cases from the March 2008 update of the FY 2007 MedPAR 
file, we simulated payments under the capital PPS for FY 2008 and FY 
2009 for a comparison of total payments per case. Any short-term, 
acute care hospitals not paid under the general IPPS (Indian Health 
Service hospitals and hospitals in Maryland) are excluded from the 
simulations. As discussed in section III.A. of the Addendum to this 
final rule, section 124 of Public Law 110-275 extends, through FY 
2009, wage index reclassifications under section 508 of Public Law 
108-173 and special exceptions contained in the final rule published 
in the Federal Register on August 11, 2004 (69 FR 49105 and 49107) 
and extended under section 117 of the MMSEA of 2007 (Pub. L. 110-
173). As a result, we cannot finalize the FY 2009 capital rates, 
including the GAF/DRG adjustment factor, the outlier payment 
adjustment factor, and the outlier threshold, until we recompute the 
wage indices for FY 2009 as a result of these extensions. (A 
complete discussion on the extension of these provisions can be 
found in section III.I. of the preamble to this final rule.) 
Therefore, the impact analysis presented below is based on the 
tentative capital rates and factors discussed in section III.A. of 
the Addendum to this final rule. (The final capital rates and 
factors for FY 2009 will be published in a forthcoming notice in the 
Federal Register.)
    As we explain in section III.A. of the Addendum to this final 
rule, payments are no longer made under the regular exceptions 
provision under Sec. Sec.  412.348(b) through (e). Therefore, we no 
longer use the actuarial capital cost model (described in Appendix B 
of the August 1, 2001 proposed rule (66 FR 40099)). We modeled 
payments for each hospital by multiplying the capital Federal rate 
by the GAF and the hospital's case-mix. We then added estimated 
payments for indirect medical education (which are reduced by 50 
percent in FY 2009 in

[[Page 49079]]

accordance with Sec.  412.322(c), as discussed in section V.B.2. of 
the preamble of this final rule), disproportionate share, and 
outliers, if applicable. For purposes of this impact analysis, the 
model includes the following assumptions:
     We estimate that the Medicare case-mix index will 
increase by 1.0 percent in both FYs 2008 and 2009. (We note that 
this does not reflect the expected growth in case-mix due to 
improvement in documentation and coding under the MS-DRGs, as 
discussed below.)
     We estimate that the Medicare discharges will be 
approximately 13 million in both FY 2008 and FY 2009.
     The capital Federal rate was updated beginning in FY 
1996 by an analytical framework that considers changes in the prices 
associated with capital-related costs and adjustments to account for 
forecast error, changes in the case-mix index, allowable changes in 
intensity, and other factors. As discussed in section III.A.2.1. of 
the Addendum to this final rule, the FY 2009 update is 0.9 percent.
     In addition to the FY 2009 update factor, the FY 2009 
capital Federal rate was calculated based on a GAF/DRG budget 
neutrality factor of 1.0010, an outlier adjustment factor of 0.9465, 
and an exceptions adjustment factor of 0.9999.
     For FY 2009, as discussed in section III.A. of the 
Addendum to this final rule, the FY 2009 national capital rate was 
further adjusted by a factor to account for anticipated improvements 
in documentation and coding that are expected to increase case-mix 
under the MS-DRGs. In the FY 2008 IPPS final rule with comment 
period (72 FR 47186), we established adjustments to the IPPS rates 
based on the Office of the Actuary projected case-mix growth 
resulting from improved documentation and coding of 1.2 percent for 
FY 2008, 1.8 percent for FY 2009, and 1.8 percent for FY 2010. 
However, we reduced the documentation and coding adjustment to -0.6 
percent for FY 2008, and for FY 2009, we are applying an adjustment 
of 0.9 percent, consistent with section 7 of Public Law 110-90. As 
noted above and as discussed in section III.A.6. of the Addendum to 
this final rule, we are not adjusting the Puerto Rico-specific 
capital rate to account for improvements in documentation and coding 
under the MS-DRGs in FY 2009.

B. Results

    We used the actuarial model described above to estimate the 
potential impact of our changes for FY 2009 on total capital 
payments per case, using a universe of 3,538 hospitals. As described 
above, the individual hospital payment parameters are taken from the 
best available data, including the March 2008 update of the FY 2007 
MedPAR file, the March 2008 update to the PSF, and the most recent 
cost report data from the March 2008 update of HCRIS. In Table III, 
we present a comparison of estimated total payments per case for FY 
2008 compared to FY 2009 based on the FY 2009 payment policies. 
Column 2 shows estimates of payments per case under our model for FY 
2008. Column 3 shows estimates of payments per case under our model 
for FY 2009. Column 4 shows the total percentage change in payments 
from FY 2008 to FY 2009. The change represented in Column 4 includes 
the 0.9 percent update to the capital Federal rate, other changes in 
the adjustments to the capital Federal rate (for example, the 50 
percent reduction to the teaching adjustment for FY 2009), and the 
additional 0.9 percent reduction to the national capital rate to 
account for improvements in documentation and coding (or other 
changes in coding that do not reflect real changes in case-mix) for 
implementation of the MS-DRGs). Consistent with the impact analysis 
for the policy changes under the IPPS for operating costs in section 
VI. of this Appendix, for purposes of this impact analysis, we also 
assume a 1.8 percent increase in case-mix growth for FY 2009, as 
determined by the Office of the Actuary, because we believe the 
adoption of the MS-DRGs will result in case-mix growth due to 
documentation and coding changes that do not reflect real changes in 
patient severity of illness. The comparisons are provided by: (1) 
Geographic location; (2) region; and (3) payment classification.
    The simulation results show that, on average, capital payments 
per case in FY 2009 are expected to increase as compared to capital 
payments per case in FY 2008. The capital rate for FY 2009 will 
decrease 0.51 percent as compared to the FY 2008 capital rate, and 
the changes to the GAFs are expected to result in a slight decrease 
(0.3 percent) in capital payments. In addition, the 50 percent 
reduction to the teaching adjustment in FY 2009 will also result in 
a decrease in capital payments from FY 2008 as compared to FY 2009. 
Countering these factors is the projected case-mix growth as a 
result of improved documentation and coding (discussed above) as 
well as an estimated increase in outlier payments in FY 2008 as 
compared to FY 2009. The net result of these changes is an estimated 
0.4 percent change in capital payments per discharge from FY 2008 to 
FY 2009 for all hospitals (as shown below in Table III).
    The results of our comparisons by geographic location and by 
region are consistent with the results we expected with the decrease 
to the teaching adjustment in FY 2009 (Sec.  412.522(c)). The 
geographic comparison shows that, on average, all urban hospitals 
are expected to experience a 0.4 percent increase in capital IPPS 
payments per case in FY 2009 as compared to FY 2008, while hospitals 
in large urban areas are expected to experience a 0.1 percent 
increase in capital IPPS payments per case in FY 2009 as compared to 
FY 2008. Capital IPPS payments per case for rural hospitals are 
expected to increase 1.0 percent. These differences in payments per 
case by geographic location are mostly due to the decrease in the 
teaching adjustment. Because teaching hospitals generally tend to be 
located in urban or large urban areas, we expect that the 50 percent 
decrease in the teaching adjustment for FY 2009 will have a more 
significant impact on hospitals in those areas than those hospitals 
located in rural areas.
    Most regions are estimated to experience an increase in total 
capital payments per case from FY 2008 to FY 2009. These increases 
vary by region and range from a 2.8 percent increase in the Pacific 
urban region to a 0.4 percent increase in the West North Central 
urban region. Two urban regions are projected to experience a 
relatively larger decrease in capital payments, with the difference 
mostly due to changes in the GAFs and the 50 percent reduction in 
the teaching adjustment for FY 2009: -2.3 percent in the Middle 
Atlantic urban region and -2.6 percent in the New England urban 
region. The East North Central urban region is also expected to 
experience a decrease of 0.6 percent in capital payments in FY 2009 
as compared to FY 2008, mostly due to changes in the GAFs. There are 
two rural regions that are also expected to experience a decrease in 
total capital payments per case: a -3.2 percent decrease in the New 
England rural region and a -0.6 percent decrease in the Middle 
Atlantic rural region. Again, for these two rural regions, the 
projected decrease in capital payments is mostly due to changes in 
the GAF, as well as a smaller than average expected increase in 
payments due to the adoption of the MS-DRGs.
    By type of ownership, voluntary and proprietary hospitals are 
estimated to experience an increase of 0.2 percent and 2.0 percent, 
respectively. The projected increase in capital payments per case 
for proprietary hospitals is mostly because these hospitals are 
expected to experience a smaller than average decrease in their 
payments due to the 50 percent teaching adjustment reduction for FY 
2009. Government hospitals are estimated to experience a decrease in 
capital payments per case of -0.3 percent. This estimated decrease 
in capital payments is mostly due to a larger than average decrease 
in payments resulting from the 50 percent teaching adjustment 
reduction for FY 2009.
    Section 1886(d)(10) of the Act established the MGCRB. Before FY 
2005, hospitals could apply to the MGCRB for reclassification for 
purposes of the standardized amount, wage index, or both. Section 
401(c) of Public Law 108-173 equalized the standardized amounts 
under the operating IPPS. Therefore, beginning in FY 2005, there is 
no longer reclassification for the purposes of the standardized 
amounts; however, hospitals still may apply for reclassification for 
purposes of the wage index for FY 2009. Reclassification for wage 
index purposes also affects the GAFs because that factor is 
constructed from the hospital wage index.
    To present the effects of the hospitals being reclassified for 
FY 2009, we show the average capital payments per case for 
reclassified hospitals for FY 2008. All classifications of 
reclassified hospitals are expected to experience an increase in 
payments in FY 2009 as compared to FY 2008. Rural nonreclassified 
hospitals are expected to have the smallest increase in capital 
payments of 0.3 percent, while rural reclassified hospitals are 
expected to have the largest increase in capital payments of 1.4 
percent. Other reclassified hospitals (that is, hospitals 
reclassified under section 1886(d)(8)(B) of the Act) are expected to 
experience a 1.3 percent increase in capital payment from FY 2008 to 
FY 2009. The large than average increase in projected changes in 
capital payments for rural reclassified and other reclassified 
hospitals is mainly due to

[[Page 49080]]

a smaller than average change in payments from FY 2009 as compared 
to FY 2008 resulting from the 50 percent reduction in the teaching 
adjustment in FY 2009.
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[[Page 49081]]


[GRAPHIC] [TIFF OMITTED] TR19AU08.310

BILLING CODE 4120-01-C

IX. Alternatives Considered

    This final rule contains a range of policies. The preamble of 
this final rule provides descriptions of the statutory provisions 
that are addressed, identifies those policies when discretion has 
been exercised, and presents rationale for our decisions and, where 
relevant, alternatives that were considered.

X. Overall Conclusion

    The changes we are making in this final rule will affect all 
classes of hospitals. Some hospitals are expected to experience 
significant gains and others less significant gains, but overall 
hospitals are projected to experience positive updates in IPPS 
payments in FY 2009. Table I of section VI. of this Appendix 
demonstrates the estimated distributional impact of the IPPS budget 
neutrality requirements for MS-DRG and wage index changes, and for 
the wage index reclassifications under the MGCRB. Table I also shows 
an overall increase of 4.7 percent in operating payments. We 
estimate operating payments to increase by $4.709 billion. This 
accounts for the projected savings associated with the HACs policy, 
which have an estimated savings of $21 million. In addition, this 
estimate includes the hospital reporting of quality data program 
costs for $2.39 million, the estimated new technology payments of 
$9.54 million, and all operating payment policies as described in 
section VII. of this Appendix. Capital payments are estimated to 
increase by 0.4 percent per case, as shown in Table III of section 
VIII. of this Appendix. Therefore, we project that the increase in 
capital payments in FY 2009 compared to FY 2008 will be 
approximately $40 million. The cumulative operating and capital 
payments should result in a net increase of $4.749 billion to IPPS 
providers. The discussions presented in the previous pages, in 
combination with the rest of this final rule, constitute a 
regulatory impact analysis.

XI. Accounting Statement

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

Table IV--Accounting Statement: Classification of Estimated Expenditures
                         From FY 2008 to FY 2009
------------------------------------------------------------------------
                 Category                             Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers............  $4.749 Billion.
From Whom to Whom.........................  Federal Government to IPPS
                                             Medicare Providers.
                                           -----------------------------
Total.....................................  $4.749 Billion.
------------------------------------------------------------------------

XII. Executive Order 12866

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

Appendix B: Recommendation of Update Factors for Operating Cost Rates 
of Payment for Inpatient Hospital Services

I. Background

    Section 1886(e)(4)(A) of the Act requires that the Secretary, 
taking into consideration the recommendations of the MedPAC, 
recommend update factors for inpatient hospital services for each 
fiscal year that take into account the amounts necessary for the 
efficient and effective delivery of medically appropriate and 
necessary high quality care. Under section 1886(e)(5)(B) of the Act, 
we are required to publish update factors recommended by the 
Secretary in the proposed and final IPPS rules, respectively. 
Accordingly, this Appendix provides the final recommendations for 
the update factors for the IPPS national standardized amount, the 
Puerto Rico-specific standardized amount, the hospital-specific 
rates for SCHs and MDHs, and the rate-of-increase limits for 
hospitals and hospital units excluded from the IPPS, as well as 
LTCHS, IPFs, and IRFs. We also discuss our response to MedPAC's 
recommended update factors for inpatient hospital services.

II. Inpatient Hospital Update for FY 2009

    Section 1886(b)(3)(B)(i)(XX) of the Act, as amended by section 
5001(a) of Public Law 109-171, sets the FY 2009 percentage increase 
in the operating cost standardized amount equal to the rate-of-
increase in the hospital market basket for IPPS hospitals in all 
areas, subject to the hospital submitting quality information under 
rules established by the Secretary in accordance with 
1886(b)(3)(B)(viii) of the Act. For hospitals that do not provide 
these data, the update is equal to the market basket percentage

[[Page 49082]]

increase less 2.0 percentage points. Consistent with current law, 
based on Global Insight, Inc.'s first quarter 2008 forecast of the 
FY 2009 market basket increase, we stated in the proposed rule that 
we are estimating that the FY 2009 update to the standardized amount 
will be 3.0 percent (that is, the then current estimate of the 
market basket rate-of-increase) for hospitals in all areas, provided 
the hospital submits quality data in accordance with our rules. For 
hospitals that do not submit quality data, we stated in the proposed 
rule that we are estimating that the update to the standardized 
amount will be 1.0 percent (that is, the then current estimate of 
the market basket rate-of-increase minus 2.0 percentage 
points).Therefore, we are adopting in this final rule, based on 
Global Insight, Inc.'s second quarter 2008 forecast of the FY 2009 
market basket increase, a FY 2009 update to the standardized amount 
of 3.6 percent (that is, the current estimate of the market basket 
rate-of-increase) for hospitals in all areas, provided the hospital 
submits quality data in accordance with our rules. For hospitals 
that do not submit quality data, the update to the standardized 
amount will be 1.6 percent (that is, the current estimate of the 
market basket rate-of-increase minus 2.0 percentage points).
    This revision to the FY 2009 market basket increase is primarily 
due to the increase in prices associated with energy components, 
both primary and secondary. The price pressures with these secondary 
energy components (chemicals, rubber and plastics, accounting for 
4.1 percent of the hospital market basket) are responsible for 
approximately 50 percent of the revision. Most of the increased 
price pressure in energy components is a result of changing 
fundamentals; that is, supply and demand. There is an increase in 
global demand for the commodity from emerging market countries, and 
there is an inability or lack of desire for oil-producing countries 
to increase supply. A secondary effect is an overall increase in 
many goods and commodity prices due to the weakness of the U.S. 
dollar, coupled with increased global demand.
    Also contributing to the revision in the FY 2009 forecast of the 
IPPS market basket is the short-term price increase in the wages for 
hospital workers as a result of continued tightness in the market 
and pressure for providers to increase wages to keep pace with 
inflation. The health service sector has continued to show growth, 
unlike other service sectors that have seen a slackening in wage 
growth due to weakness in their labor markets.
    Section 1886(d)(9)(C)(1) of the Act is the basis for determining 
the percentage increase to the Puerto Rico-specific standardized 
amount. In the proposed rule, we proposed to apply the full rate-of-
increase in the hospital market basket for IPPS hospitals to the 
Puerto Rico-specific standardized amount. Because we did not receive 
any public comments on this proposal, for FY 2009, we are applying 
the full rate-of-increase in the hospital market basket for IPPS 
hospitals to the Puerto Rico-specific standardized amount. 
Therefore, the update to the Puerto Rico-specific standardized 
amount is 3.6 percent.
    Section 1886(b)(3)(B)(iv) of the Act sets the FY 2009 percentage 
increase in the hospital-specific rates applicable to SCHs and MDHs 
equal to the rate set forth in section 1886(b)(3)(B)(i) of the Act 
(that is, the same update factor as for all other hospitals subject 
to the IPPS, or the rate-of-increase in the market basket). 
Therefore, the update to the hospital-specific rates applicable to 
SCHs and MDHs is 3.6, or 1.6 percent, depending upon whether the 
hospital submits quality data.
    Section 1886(b)(3)(B)(ii) of the Act is used for purposes of 
determining the percentage increase in the rate-of-increase limits 
for children's and cancer hospitals. Section 1886(b)(3)(B)(ii) of 
the Act sets the percentage increase in the rate-of-increase limits 
equal to the market basket percentage increase. In accordance with 
Sec.  403.752(a) of the regulations, RNHCIs are paid under Sec.  
413.40, which also uses section 1886(b)(3)(B)(ii) of the Act to 
update the percentage increase in the rate-of-increase limits. 
Section 1886(j)(3)(C) of the Act addresses the increase factor for 
the Federal prospective payment rate of IRFs. Section 123 of Public 
Law 106-113, as amended by section 307(b) of Public Law 106-554, 
provides the statutory authority for updating payment rates under 
the LTCH PPS. As discussed below, for cost reporting periods 
beginning on or after October 1, 2006, LTCHs that are not defined as 
new under Sec.  412.23(e)(4), and that had not elected to be paid 
under 100 percent of the Federal rate are paid 100 percent of the 
adjusted Federal PPS rate. Therefore, because no portion of LTCHs' 
prospective payments will be based on reasonable cost concepts for 
cost reporting periods beginning on or after October 1, 2006, we are 
not establishing a rate-of-increase percentage to the reasonable 
cost portion for FY 2009 for LTCHs to be used under Sec.  413.40. In 
addition, section 124 of Public Law 106-113 provides the statutory 
authority for updating all aspects of the payment rates for IPFs. 
Under this broad authority, IPFs that are not defined as new under 
Sec.  412.426(c) are paid under a blended methodology for cost 
reporting periods beginning on or after January 1, 2005, and before 
January 1, 2008. For cost reporting periods beginning on or after 
January 1, 2008, existing IPFs are paid based on 100 percent of the 
Federal per diem rate. Therefore, because no portion of the existing 
IPFs prospective payments will be based on reasonable cost concepts 
for cost reporting periods beginning on or after January 1, 2008, we 
are not establishing a rate-of-increase percentage to the reasonable 
cost portion for FY 2009 for IPFs to be used under Sec.  412.428(b). 
New IPFs are paid based on 100 percent of the Federal per diem 
payment amount.
    Currently, children's hospitals, cancer hospitals, and RNHCIs 
are the remaining three types of hospitals still reimbursed under 
the reasonable cost methodology. We are providing our current 
estimate of the FY 2009 IPPS operating market basket percentage 
increase (3.6 percent) to update the target limits for children's 
hospitals, cancer hospitals, and RNHCIs.
    Effective for cost reporting periods beginning on or after 
October 1, 2002, LTCHs have been paid under the LTCH PPS. 
Additionally, for cost reporting periods beginning on or after 
October 1, 2006, no portion of a LTCH's PPS payments can be based on 
reasonable cost concepts. Consequently, there is no need to update 
the target limit under Sec.  413.40 effective October 1, 2008, for 
LTCHs.
    In the RY 2009 LTCH PPS final rule (73 FR 26812), we established 
an update of 2.7 percent to the LTCH PPS Federal rate for RY 2009, 
which is based on a market basket increase of 3.6 percent and an 
adjustment of 0.9 percent to account for the increase in case-mix in 
a prior year that resulted from changes in coding practices rather 
than an increase in patient severity. The market basket of 3.6 
percent used in determining this update factor is based on our final 
policy in the RY 2009 LTCH final rule to extend the LTCH RY 2009 by 
3 months (a total of 15 months instead of 12 months) through 
September 30, 2009. (A full discussion of the reasons for this 
extension of RY 2009 can be found in the RY 2009 LTCH PPS final rule 
(73 FR 26797 through 26798).)
    Effective for cost reporting periods beginning on or after 
January 1, 2005, IPFs are paid under the IPF PPS. IPF PPS payments 
are based on a Federal per diem rate that is derived from the sum of 
the average routine operating, ancillary, and capital costs for each 
patient day of psychiatric care in an IPF, adjusted for budget 
neutrality. For cost reporting periods beginning on or after January 
1, 2005, and before January 1, 2008, existing IPFs (those not 
defined as ``new'' under Sec.  412.426(c)) are paid based on a blend 
of the reasonable cost-based PPS payments and the Federal per diem 
base rate. For cost reporting periods beginning on or after January 
1, 2008, existing IPFs are paid based on 100 percent of the Federal 
per diem rate. Consequently, there is no need to update the target 
limit under Sec.  413.40 effective October 1, 2008, for IPFs.
    IRFs are paid under the IRF PPS for cost reporting periods 
beginning on or after January 1, 2002. For cost reporting periods 
beginning on or after October 1, 2002 (FY 2003), and thereafter, the 
Federal prospective payments to IRFs are based on 100 percent of the 
adjusted Federal IRF prospective payment amount, updated annually 
(69 FR 45721). Section 1886(j)(3)(C) of the Act, as amended by 
section 115 of Public Law 110-173, sets the FY 2009 IRF PPS update 
factor equal to 0 percent. Thus, we are not applying an update 
(market basket) to the IRF PPS rates for FY 2009.
    We did not receive any public comments on the market basket 
updates and, therefore, are finalizing the market basket updates for 
FY 2009.

III. Secretary's Final Recommendation

    MedPAC is recommending an inpatient hospital update equal to the 
market basket rate of increase for FY 2009. MedPAC's rationale for 
this update recommendation is described in more detail below. Based 
on the FY 2009 President's Budget, we are recommending an inpatient 
hospital update to the standardized amount of zero percent. We are 
recommending that this same update factor also apply to SCHs and 
MDHs.

[[Page 49083]]

    Section 1886(d)(9)(C)(1) of the Act is the basis for determining 
the percentage increase to the Puerto Rico-specific standardized 
amount. As noted above, for FY 2009, we are applying the full rate-
of-increase in the hospital market basket for IPPS hospitals to the 
Puerto Rico-specific standardized amount. Therefore, the update to 
the Puerto Rico-specific standardized amount is 3.6 percent.
    In addition to making a recommendation for IPPS hospitals, in 
accordance with section 1886(e)(4)(A) of the Act, we are also 
recommending update factors for all other types of hospitals. 
Consistent with the President's Budget, we are recommending an 
update similar to the IPPS update of zero percent for children's 
hospitals, cancer hospitals, and RNHCIs. As mentioned above, for 
cost reporting periods beginning on or after January 1, 2008, 
existing IPFs are paid based on 100 percent of the Federal per diem 
rate (and are no longer paid a blend of the reasonable cost-based 
PPS payments and the Federal per diem base rate). Consequently, we 
are no longer recommending an update factor for the portion of the 
payment that is based on reasonable costs. Consistent with the 
President's Budget, as we implemented in a Federal Register notice 
(73 FR 25709) for the RY 2009 IPF PPS, we finalized an update to the 
IPF PPS Federal rate for RY 2009 of 3.2 percent (which is based on 
Global Insight, Inc.'s first quarter 2008 forecast of the RPL market 
basket increase) for the Federal per diem payment amount.
    In the RY 2009 LTCH PPS final rule (73 FR 26812), we established 
an update of 2.7 percent to the LTCH PPS Federal rate for RY 2009, 
which is based on a market basket increase of 3.6 percent and an 
adjustment of 0.9 percent to account for the increase in case-mix in 
a prior year that resulted from changes in coding practices rather 
than an increase in patient severity. The market basket of 3.6 
percent used in determining this final update factor is based on our 
final policy in the LTCH final rule to extend the LTCH RY 2009 by 3 
months (a total of 15 months instead of 12 months) through September 
30, 2009. (A full discussion on the reasons for this extension of RY 
2009 can be found in the RY 2009 LTCH PPS final rule (73 FR 26797 
through 26798).) Finally, consistent with the President's FY 2009 
Budget, we are recommending a zero percent update to the IRF PPS 
Federal rate for FY 2009.

IV. MedPAC Recommendation for Assessing Payment Adequacy and 
Updating Payments in Traditional Medicare

    In its March 2008 Report to Congress, MedPAC assessed the 
adequacy of current payments and costs, and the relationship between 
payments and an appropriate cost base, utilizing an established 
methodology used by MedPAC in the past several years.
    MedPAC recommended an update to the hospital inpatient rates 
equal to the increase in the hospital market basket in FY 2009, 
concurrent with implementation of a quality incentive program. 
Similar to last year, MedPAC also recommended that CMS put pressure 
on hospitals to control their costs rather than accommodate the 
current rate of cost growth, which is, in part, caused by a lack of 
pressure from private payers.
    MedPAC noted that indicators of payment adequacy are almost 
uniformly positive. MedPAC expects Medicare margins to remain low in 
2008. At the same time though, MedPAC's analysis finds that 
hospitals with low non-Medicare profit margins have below average 
standardized costs and most of these facilities have positive 
overall Medicare margins.
    Response: Similar to our response last year, we agree with 
MedPAC that hospitals should control costs rather than accommodate 
the current rate of growth. An update equal to less than the market 
basket will motivate hospitals to control their costs, consistent 
with MedPAC's recommendation. As MedPAC noted, the lack of financial 
pressure at certain hospitals can lead to higher costs and in turn 
bring down the overall Medicare margin for the industry.
    As discussed in section II. of the preamble of this final rule, 
CMS implemented the MS-DRGs in FY 2008 to better account for 
severity of illness under the IPPS and is basing the DRG weights on 
costs rather than charges. We continue to believe that these 
refinements will better match Medicare payment of the cost of care 
and provide incentives for hospitals to be more efficient in 
controlling costs.
    We note that, because the operating and capital prospective 
payment systems remain separate, we are continuing to use separate 
updates for operating and capital payments. The final update to the 
capital rate is discussed in section III. of the Addendum to this 
final rule.
[FR Doc. E8-17914 Filed 7-31-08; 4:30 pm]
BILLING CODE 4120-01-P