[Federal Register Volume 74, Number 98 (Friday, May 22, 2009)]
[Proposed Rules]
[Pages 24080-24686]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-10458]



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Part II

Book 2 of 2 Books

Pages 24079-24694





Department of Health and Human Services





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Centers for Medicare & Medicaid Services



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42 CFR Parts 412, 413, 415 et al.



Medicare Program; Proposed Changes to the Hospital Inpatient 
Prospective Payment Systems for Acute Care Hospitals and Fiscal Year 
2010 Rates and to the Long-Term Care Hospital Prospective Payment 
System and Rate Year 2010 Rates; Proposed Rule

  Federal Register / Vol. 74 , No. 98 / Friday, May 22, 2009 / Proposed 
Rules  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Parts 412, 413, 415, and 489

[CMS-1406-P]
RIN 0938-AP39


Medicare Program; Proposed Changes to the Hospital Inpatient 
Prospective Payment Systems for Acute Care Hospitals and Fiscal Year 
2010 Rates and to the Long-Term Care Hospital Prospective Payment 
System and Rate Year 2010 Rates

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

ACTION: Proposed rule.

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SUMMARY: We are proposing to revise the Medicare hospital inpatient 
prospective payment systems (IPPS) for operating and capital-related 
costs of acute care hospitals to implement changes arising from our 
continuing experience with these systems, and to implement certain 
provisions made by the Medicare Improvements for Patients and Providers 
Act of 2008 (MIPPA, Pub. L. 110-275) and the American Recovery and 
Reinvestment Act of 2009 (ARRA, Pub. L. 111-5). In addition, in the 
Addendum to this proposed rule, we describe the proposed changes to the 
amounts and factors used to determine the rates for Medicare acute care 
hospital inpatient services for operating costs and capital-related 
costs. These proposed changes would be applicable to discharges 
occurring on or after October 1, 2009. We also are setting forth the 
proposed update to the rate-of-increase limits for certain hospitals 
excluded from the IPPS that are paid on a reasonable cost basis subject 
to these limits. The proposed updated rate-of-increase limits would be 
effective for cost reporting periods beginning on or after October 1, 
2009.
    In addition, we are proposing to update the annual payment rates 
for the Medicare prospective payment system (PPS) for inpatient 
hospital services provided by long-term care hospitals (LTCHs). In the 
Addendum to this proposed rule, we also set forth the proposed changes 
to the payment rates, factors, and other payment rate policies under 
the LTCH PPS for rate year 2010. These proposed changes would be 
applicable to discharges occurring on or after October 1, 2009. In this 
proposed rule, we also note those provisions of the ARRA that amended 
provisions of the Medicare, Medicaid, and SCHIP Extension Act of 2007 
(MMSEA, Pub. L. 110-173) relating to payments to LTCHs and new LTCHs 
and LTCH satellite facilities, and increases in beds in existing LTCHs 
and LTCH satellite facilities under the LTCH PPS that will be 
implemented in the final rule issued for this proposed rule.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. E.S.T. on June 30, 
2009.

ADDRESSES: When commenting on issues presented in this proposed rule, 
please refer to file code CMS-1406-P. Because of staff and resource 
limitations, we cannot accept comments by facsimile (FAX) transmission.
    You may submit comments in one of four ways (please choose only one 
of the ways listed):
    1. Electronically. You may submit electronic comments on this 
regulation at http://www.regulations.gov. Follow the instructions for 
``Comment or Submission'' and enter the file code CMS-1406-P to submit 
comments on this proposed rule.
    2. By regular mail. You may mail written comments (one original and 
two copies) to the following address only: Centers for Medicare & 
Medicaid Services, Department of Health and Human Services, Attention: 
CMS-1406-P, P.O. Box 8011, Baltimore, MD 21244-1850.
    Please allow sufficient time for mailed comments to be received 
before the close of the comment period.
    3. By express or overnight mail. You may send written comments (one 
original and two copies) to the following address only: Centers for 
Medicare & Medicaid Services, Department of Health and Human Services, 
Attention: CMS-1406-P, Mail Stop C4-26-05, 7500 Security Boulevard, 
Baltimore, MD 21244-1850.
    4. By hand or courier. If you prefer, you may deliver (by hand or 
courier) your written comments (one original and two copies) before the 
close of the comment period to either of the following addresses:
    a. Room 445-G, Hubert H. Humphrey Building, 200 Independence 
Avenue, SW., Washington, DC 20201
    (Because access to the interior of the HHH Building is not readily 
available to persons without Federal Government identification, 
commenters are encouraged to leave their comments in the CMS drop slots 
located in the main lobby of the building. A stamp-in clock is 
available for persons wishing to retain a proof of filing by stamping 
in and retaining an extra copy of the comments being filed.)
    b. 7500 Security Boulevard, Baltimore, MD 21244-1850.
    If you intend to deliver your comments to the Baltimore address, 
please call telephone number (410) 786-7195 in advance to schedule your 
arrival with one of our staff members.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by following the 
instructions at the end of the ``Collection of Information 
Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION, CONTACT: Tzvi Hefter, (410) 786-4487, 
Operating Prospective Payment, MS-DRGs, Wage Index, New Medical Service 
and Technology Add-On Payments, Hospital Geographic Reclassifications, 
Capital Prospective Payment, Excluded Hospitals, Direct and Indirect 
Graduate Medical Education Payments, EMTALA, Hospital Emergency 
Services, and Hospital-Within-Hospital Issues.
    Michele Hudson, (410) 786-4487, Long-Term Care Hospital Prospective 
Payment System and MS-LTC-DRGs 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-Acquired Conditions.

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

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Friday of each week from 8:30 a.m. to 4 p.m. To schedule an appointment 
to view public comments, phone 1-800-743-3951.

Electronic Access

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

Acronyms

3M 3M Health Information System
AAHKS American Association of Hip and Knee Surgeons
AAMC Association of American Medical Colleges
ACGME Accreditation Council for Graduate Medical Education
AHA American Hospital Association
AHIC American Health Information Community
AHIMA American Health Information Management Association
AHRQ Agency for Healthcare Research and Quality
ALOS Average length of stay
ALTHA Acute Long Term Hospital Association
AMA American Medical Association
AMGA American Medical Group Association
AOA American Osteopathic Association
APR DRG All Patient Refined Diagnosis Related Group System
ARRA American Recovery and Reinvestment Act of 2009, Public Law 111-
5
ASC Ambulatory surgical center
ASCA Administrative Simplification Compliance Act of 2002, Public 
Law 107-105
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
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
COLA Cost-of-living adjustment
CoP [Hospital] condition of participation
CPI Consumer price index
CY Calendar year
DPP Disproportionate patient percentage
DRA Deficit Reduction Act of 2005, Public Law 109-171
DRG Diagnosis-related group
DSH Disproportionate share hospital
ECI Employment cost index
EMR Electronic medical record
EMTALA Emergency Medical Treatment and Labor Act of 1986, Public Law 
99-272
FAH Federation of Hospitals
FDA Food and Drug Administration
FFY Federal fiscal year
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
HCO High-cost outlier
HCRIS Hospital Cost Report Information System
HHA Home health agency
HHS Department of Health and Human Services
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
ICR Information collection requirement
IHS Indian Health Service
IME Indirect medical education
I-O Input-Output
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
LOS Length of stay
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
NALTH National Association of Long Term Hospitals
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
OACT [CMS'] Office of the Actuary
OBRA 86 Omnibus Budget Reconciliation Act of 1996, Public Law 99-509
OES Occupational employment statistics
OIG Office of the Inspector General
OMB Executive Office of Management and Budget
OPM U.S. Office of Personnel Management

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O.R. Operating room
OSCAR Online Survey Certification and Reporting [System]
PIP Periodic interim payment
PLI Professional liability insurance
PMSAs 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
RCE Reasonable compensation equivalent
RHC Rural health clinic
RHQDAPU Reporting hospital quality data for annual payment update
RNHCI Religious nonmedical health care institution
RPL Rehabilitation psychiatric long-term care (hospital)
RRC Rural referral center
RTI Research Triangle Institute, International
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
SSO Short-stay outlier
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Public Law 
97-248
TEP Technical expert panel
TMA TMA [Transitional Medical Assistance], Abstinence Education, and 
QI [Qualifying Individuals] Programs Extension Act of 2007, Public 
Law 110-90
TJA Total joint arthroplasty
UHDDS Uniform hospital discharge data set
VAP Ventilator-associated pneumonia

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
    3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)
    4. Critical Access Hospitals (CAHs)
    5. Payments for Graduate Medical Education (GME)
    B. Provisions of the Medicare Improvements for Patients and 
Providers Act of 2008 (MIPPA)
    C. Provisions of the American Recovery and Reinvestment Act of 
2009 (ARRA)
    D. Major Contents of This Proposed Rule
    1. Proposed Changes to MS-DRG Classifications and Recalibrations 
of Relative Weights
    2. Proposed Changes to the Hospital Wage Index for Acute Care 
Hospitals
    3. Proposed Rebasing and Revision of the Hospital Market Basket 
for Acute Care Hospitals
    4. Other Decisions and Proposed Changes to the IPPS for 
Operating Costs and GME Costs
    5. FY 2010 Policy Governing the IPPS for Capital-Related Costs
    6. Proposed Changes to the Payment Rates for Certain Excluded 
Hospitals: Rate-of-Increase Percentages
    7. Proposed Changes to the LTCH PPS
    8. Determining Proposed Prospective Payment Operating and 
Capital Rates and Rate-of-Increase Limits for Acute Care Hospitals
    9. Determining Proposed Prospective Payments Rates for LTCHs
    10. Impact Analysis
    11. Recommendation of Update Factors for Operating Cost Rates of 
Payment for Hospital Inpatient Services
    12. Discussion of Medicare Payment Advisory Commission 
Recommendations
    E. Public Comments Received on Two LTCH PPS Interim Final Rules 
with Comment Period Issued in 2008
II. Proposed Changes to Medicare Severity Diagnosis-Related Group 
(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. Proposed FY 2010 MS-DRG Documentation and Coding Adjustment, 
Including the Applicability to the Hospital-Specific Rates and the 
Puerto Rico-Specific Standardized Amount
    1. Background on the Prospective MS-DRG Documentation and Coding 
Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90
    2. Prospective Adjustment to the Average Standardized Amounts 
Required by Section 7(b)(1)(A) of Public Law 110-90
    3. Recoupment or Repayment Adjustments in FYs 2010 through 2012 
Required by Public Law 110-90
    4. Retrospective Evaluation of FY 2008 Claims Data
    5. Proposed Adjustments for FY 2010 and Subsequent Years 
Authorized by Section 7(b)(1)(A) of Public Law 110-90 and Section 
1886(d)(3)(vi) of the Act
    6. Additional Adjustment for FY 2010 Authorized by Section 
7(b)(1)(B) of Public Law 110-90
    7. Background on the Application of the Documentation and Coding 
Adjustment to the Hospital-Specific Rates
    8. Proposed Documentation and Coding Adjustment to the Hospital-
Specific Rates for FY 2010 and Subsequent Years
    9. Background on the Application of the Documentation and Coding 
Adjustment to the Puerto Rico-Specific Standardized Amount
    10. Proposed Documentation and Coding Adjustment to the Puerto 
Rico-Specific Standardized Amount
    E. Refinement of the MS-DRG Relative Weight Calculation
    1. Background
    a. Summary of the RTI Study of Charge Compression and CCR 
Refinement
    b. Summary of the Rand Corporation Study of Alternative Relative 
Weight Methodologies
    2. Summary of FY 2009 Changes and Discussion for FY 2010
    3. Timeline for Revising the Medicare Cost Report
    F. Preventable Hospital-Acquired Conditions (HACs), Including 
Infections
    1. Statutory Authority
    2. HAC Selection Process
    3. Collaborative Process
    4. Selected HAC Categories
    5. Public Input Regarding Selected and Potential Candidate HACs
    6. POA Indicator Reporting
    G. Proposed Changes to Specific MS-DRG Classifications
    1. MDC 5 (Diseases and Disorders of the Circulatory System): 
Intraoperative Fluorescence Vascular Angiography (IFVA)
    2. MDC 8 (Diseases and Disorders of the Musculoskeletal System 
and Connective Tissue): Infected Hip and Knee Replacements
    3. Proposed Medicare Code Editor (MCE) Changes
    a. Diagnoses Allowed for Males Only Edit
    b. Manifestation Codes as Principal Diagnosis Edit
    c. Invalid Diagnosis or Procedure Code
    d. Unacceptable Principal Diagnosis
    e. Proposed Creation of New Edit Titled ``Wrong Surgeries''
    f. Procedures Allowed for Females Only Edit
    4. Surgical Hierarchies
    5. Complication or Comorbidity (CC) Exclusions List
    a. Background
    b. CC Exclusions List for FY 2010
    6. Review of Procedure Codes in MS-DRGs 981 through 983, 984 
through 986, and 987 through 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
    7. Changes to the ICD-9-CM Coding System
    H. Recalibration of MS-DRG Weights
    I. Proposed Add-On Payments for New Services and Technologies
    1. Background
    2. Public Input Before Publication of a Notice of Proposed 
Rulemaking on Add-On Payments
    3. FY 2010 Status of Technologies Approved for FY 2009 Add-On 
Payments
    4. FY 2010 Applications for New Technology Add-On Payments
    a. The AutoLITTTM System
    b. CLOLAR[supreg] (clofarabine) Injection
    c. LipiScanTM Coronary Imaging System
    d. Spiration[supreg] IBV[supreg] Valve System
    e. TherOx Downstream[supreg] System
    5. Technical Correction
III. Proposed Changes to the Hospital Wage Index for Acute Care 
Hospitals

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    A. Background
    B. Requirements of Section 106 of the MIEA-TRHCA
    1. Wage Index Study Required Under the MIEA-TRHCA
    a. Legislative Requirement
    b. Interim and Final Reports on Results of Acumen's Study
    2. FY 2009 Policy Changes in Response to Requirements Under 
Section 106(b) of the MIEA-TRHCA
    a. Reclassification Average Hourly Wage Comparison Criteria
    b. Within-State Budget Neutrality Adjustment for the Rural and 
Imputed Floors
    C. Core-Based Statistical Areas for the Hospital Wage Index
    D. Proposed Occupational Mix Adjustment to the Proposed FY 2010 
Wage Index
    1. Development of Data for the Proposed FY 2010 Occupational Mix 
Adjustment Based on the 2007-2008 Occupational Mix Survey
    2. Calculation of the Proposed Occupational Mix Adjustment for 
FY 2010
    E. Worksheet S-3 Wage Data for the Proposed FY 2010 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
    G. Method for Computing the Proposed FY 2010 Unadjusted Wage 
Index
    H. Analysis and Implementation of the Proposed Occupational Mix 
Adjustment and the Proposed FY 2010 Occupational Mix Adjusted Wage 
Index
    I. Revisions to the Wage Index Based on Hospital Redesignations
    1. General
    2. Effects of Reclassification/Redesignation
    3. FY 2010 MGCRB Reclassifications
    4. Redesignations of Hospitals Under Section 1886(d)(8)(B) of 
the Act
    5. Reclassifications Under Section 1886(d)(8)(B) of the Act
    6. Reclassifications Under Section 508 of Public Law 108-173
    J. Proposed FY 2010 Wage Index Adjustment Based on Commuting 
Patterns of Hospital Employees
    K. Process for Requests for Wage Index Data Corrections
IV. Proposed Rebasing and Revision of the Hospital Market Baskets 
for Acute Care Hospitals
    A. Background
    B. Rebasing and Revising the IPPS Market Basket
    1. Development of Cost Categories and Weights
    a. Medicare Cost Reports
    b. Other Data Sources
    2. Final Cost Category Computation
    3. Selection of Price Proxies
    a. Wages and Salaries
    b. Employment Benefits
    c. Fuel, Oil, and Gasoline
    d. Electricity
    e. Water and Sewage
    f. Professional Liability Insurance
    g. Pharmaceuticals
    h. Food: Direct Purchase
    i. Food: Contract Services
    j. Chemicals
    k. Blood and Blood Products
    l. Medical Instruments
    m. Photographic Supplies
    n. Rubber and Plastics
    o. Paper and Printing Products
    p. Apparel
    q. Machinery and Equipment
    r. Miscellaneous Products
    s. Professional Fees: Labor-Related
    t. Administrative and Business Support Services
    u. All Other: Labor-Related Services
    v. Professional Fees: Nonlabor-Related
    w. Financial Services
    x. Telephone Services
    y. Postage
    z. All Other: Nonlabor-Related Services
    4. Labor-Related Share
    C. Separate Market Basket for Certain Hospitals Presently 
Excluded From the IPPS
    D. Rebasing and Revising the Capital Input Price Index (CIPI)
V. Other Decisions and Proposed Changes to the IPPS for Operating 
Costs and GME Costs
    A. Reporting of Hospital Quality Data for Annual Hospital 
Payment Update
    1. Background
    a. Overview
    b. Hospital Quality Data Reporting Under Section 501(b) of 
Public Law 108-173
    c. Hospital Quality Data Reporting Under Section 5001(a) of 
Public Law 109-171
    2. Retirement of RHQDAPU Program Measures
    3. Quality Measures for the FY 2011 Payment Determination and 
Subsequent Years
    a. Considerations in Expanding and Updating Quality Measures 
Under the RHQDAPU Program
    b. Proposed RHQDAPU Program Quality Measures for the FY 2011 
Payment Determination
    3. Possible New Quality Measures for the FY 2012 Payment 
Determination and Subsequent Years
    4. Possible New Quality Measures for the FY 2012 Payment 
Determination and Subsequent Years
    5. Form, Manner, and Timing of Quality Data Submission
    a. Proposed RHQDAPU Program Procedures for the FY 2011 Payment 
Determination
    b. RHQDAPU Program Disaster Extensions and Waivers
    c. HACHPS Requirements for the FY 2011 Payment Determination
    6. Proposed Chart Validation Requirements
    a. Proposed Chart Validation Requirements and Methods for the FY 
2011 Payment Determination
    b. Proposed Chart Validation Requirements and Methods for the FY 
2012 Payment Determination and Subsequent Years
    c. Possible Supplements to the Chart Validation Process for the 
FY 2013 Payment Determination and Subsequent Years
    7. Data Accuracy and Completeness Acknowledgement Requirements 
for the FY 2011 Payment Determination and Subsequent Years
    8. Public Display Requirements for the FY 2011 Payment 
Determination and Subsequent Years
    9. Proposed Reconsideration and Appeal Procedures for the FY 
2010 Payment Determination
    10. RHQDAPU Program Withdrawal Deadlines
    11. Electronic Health Records
    a. Background
    b. EHR Testing of Quality Measures Submission
    c. HITECH Act EHR Provisions
    B. Sole Community Hospitals (SCHs) and Medicare-Dependent, Small 
Rural Hospitals (MDHs): Budget Neutrality Adjustment Factors for FY 
2002-Based Hospital-Specific Rate for MDHs
    1. Background
    2. FY 2002-Based Hospital-Specific Rate
    C. Rural Referral Centers (RRCs)
    1. Case-Mix Index
    2. Discharges
    D. Indirect Medical Education (IME) Adjustment
    1. Background
    2. IME Adjustment Factor for FY 2010
    3. IME-Related Proposed Changes in Other Sections of this 
Proposed Rule
    E. Payment Adjustment for Medicare Disproportionate Share 
Hospitals (DSHs)
    1. Background
    2. Proposed Policy Change Relating to the Inclusion of Labor and 
Delivery Patient Days in the Medicare DSH Calculation
    a. Background
    b. Proposed Policy Change
    3. Proposed Policy Change Relating to Calculation of Inpatient 
Days in the Medicaid Fraction in the Medicare DSH Calculation
    a. Background
     b. Proposed Policy Change
    4. Proposed Policy Change Relating to the Exclusion of 
Observation Beds and Patient Days From the Medicare DSH Calculation
    a. Background
    b. Proposed Policy Change
    F. Technical Correction to Regulations on Payments for 
Anesthesia Services Furnished by Hospital or CAH Employed 
Nonphysician Anesthetists or Obtained Under Arrangements
    G. Payments for Direct Graduate Medical Education (GME) Costs
    1. Background
    2. Clarification of Definition of New Medical Residency Training 
Program
    3. Participation of New Teaching Hospitals in Medicare GME 
Affiliated Groups
    4. Technical Corrections to Regulations
    H. Hospital Emergency Services Under EMTALA
    1. Background
    2. Proposed Changes Relating to Applicability of Sanctions Under 
EMTALA
    I. Rural Community Hospital Demonstration Program
    J. Technical Correction to Regulations Relating to Calculation 
of the Federal Rate Under the IPPS
VI. Proposed Changes to the IPPS for Capital-Related Costs

[[Page 24084]]

    A. Overview
    B. Exception Payments
    C. New Hospitals
    D. Hospitals Located in Puerto Rico
    E. Proposed Changes
    1. Proposed FY 2010 MS-DRG Documentation and Coding Adjustment
    a. Background on the Prospective MS-DRG Documentation and Coding 
Adjustments for FY 2008 and FY 2009
    b. Proposed Prospective MS-DRG Documentation and Coding 
Adjustment to the National Capital Federal Rate for FY 2010 and 
Subsequent Years
    c. Proposed Documentation and Coding Adjustment to the Puerto 
Rico-Specific Capital Rate
    2. Revision to the FY 2009 IME Adjustment Factor
    3. Other Proposed Changes for FY 2010
VII. Proposed Changes for Hospitals Excluded From the IPPS
    A. Excluded Hospitals
    B. Criteria for Satellite Facilities of Hospitals
    C. Critical Access Hospitals (CAHs)
    1. Background
    2. Payment for Clinical Diagnostic Laboratory Tests Furnished by 
CAHs
    3. CAH Optional Method of Payment for Outpatient Services
    D. Provider-Based Status of Facilities and Organizations: 
Proposed Policy Changes
    1. Background
    2. Proposed Changes to the Scope of the Provider-Based Status 
Regulations for CAHs
    a. CAH-Based Clinical Diagnostic Laboratory Facilities
    b. CAH-Based Ambulance Services
    3. Technical Correction to Regulations
VIII. Proposed Changes to the Long-Term Care Hospital Prospective 
Payment System (LTCH PPS) for RY 2010
    A. Background of the LTCH PPS
    1. Legislative and Regulatory Authority
    2. Criteria for Classification as a LTCH
    a. Classification as a LTCH
    b. Hospitals Excluded from the LTCH PPS
    3. Limitation on Charges to Beneficiaries
    4. Administrative Simplification Compliance Act (ASCA) and 
Health Insurance Portability and Accountability Act (HIPAA) 
Compliance
    B. Proposed Medicare Severity Long-Term Care Diagnosis-Related 
Group (MS-LTC-DRG) Classifications and Relative Weights
    1. Background
    2. Patient Classifications Into MS-LTC-DRGs
    a. Background
    b. Proposed Changes to the MS-LTC-DRGs for RY 2010
    3. Development of the Proposed RY 2010 MS-LTC-DRG Relative 
Weights
    a. General Overview of the Development of the MS-LTC-DRG 
Relative Weights
    b. Data
    c. Hospital-Specific Relative Value (HSRV) Methodology
    d. Treatment of Severity Levels in Developing the Proposed MS-
LTC-DRG Relative Weights
    e. Low-Volume MS-LTC-DRGs
    f. Steps for Determining the Proposed RY 2010 MS-LTC-DRG 
Relative Weights
    C. Proposed Changes to the LTCH Payment Rates and Other Changes 
to the RY 2010 LTCH PPS
    1. Overview of Development of the LTCH Payment Rates
    2. Market Basket for LTCHs Reimbursed under the LTCH PPS
    a. Overview
    b. Proposed Market Basket under the LTCH PPS for RY 2010
    c. Proposed Market Basket Update for LTCHs for RY 2010
    d. Proposed Labor-Related Share under the LTCH PPS for RY 2010
    3. Proposed Adjustment for Changes in LTCHs' Case-Mix Due to 
Changes in Documentation and Coding Practices That Occurred in a 
Prior Period
    a. Background
    b. Evaluation of FY 2007 Claims Data
    c. Evaluation of FY 2008 Claims Data
    d. Proposed RY 2010 Documentation and Coding Adjustment
    D. Monitoring
    E. Research Conducted by the Research Triangle Institute, 
International (RTI)
    F. Proposed Technical Corrections of LTCH PPS Regulations
IX. MedPAC Recommendations
X. Other Required Information
    A. Requests for Data from the Public
    B. Collection of Information Requirements
    C. Additional Information Collection Requirements
    1. Present on Admission (POA) Indicator Reporting
    2. Proposed Add-On Payments for New Services and Technologies
    3. Reporting of Hospital Quality Data for Annual Hospital 
Payment Update
    4. Occupational Mix Adjustment to the FY 2010 Index (Hospital 
Wage Index Occupational Mix Survey)
    5. Hospital Applications for Geographic Reclassifications by the 
MGCRB
    C. Response to Public Comments

Regulation Text

    Addendum--Proposed Schedule of Standardized Amounts, Update 
Factors, and Rate-of-Increase Percentages Effective With Cost 
Reporting Periods Beginning on or after October 1, 2009
I. Summary and Background
II. Proposed Changes to the Prospective Payment Rates for Hospital 
Inpatient Operating Costs for Acute Care Hospitals for FY 2010
    A. Calculation of the Adjusted Standardized Amount
    B. Proposed Adjustments for Area Wage Levels and Cost-of-Living
    C. Proposed MS-DRG Relative Weights
    D. Calculation of the Proposed Prospective Payment Rates
III. Proposed Changes to Payment Rates for Acute Care Hospital 
Inpatient Capital-Related Costs for FY 2010
    A. Determination of Proposed Federal Hospital Inpatient Capital-
Related Prospective Payment Rate Update
    B. Calculation of the Proposed Inpatient Capital-Related 
Prospective Payments for FY 2010
    C. Capital Input Price Index
IV. Proposed Changes to Payment Rates for Certain Excluded 
Hospitals: Rate-of-Increase Percentages
V. Proposed Changes to the Payment Rates for the LTCH PPS for RY 
2010
    A. Proposed LTCH PPS Standard Federal Rate for RY 2010
    B. Proposed Adjustment for Area Wage Levels under the LTCH PPS 
for RY 2010
    C. Proposed Adjustment for LTCH PPS High-Cost Outlier (HCO) 
Cases
    D. Computing the Proposed Adjusted LTCH PPS Federal Prospective 
Payments for RY 2010
VI. Tables
    Table 1A.--National Adjusted Operating Standardized Amounts, 
Labor/Nonlabor (67.1 Percent Labor Share/32.9 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 1E.--LTCH Standard Federal Prospective Payment Rate
    Table 2.--Acute Care Hospitals Case-Mix Indexes for Discharges 
Occurring in Federal Fiscal Year 2008; Hospital Wage Indexes for 
Federal Fiscal Year 2010; Hospital Average Hourly Wages for Federal 
Fiscal Years 2008 (2004 Wage Data), 2009 (2005 Wage Data), and 2010 
(2006 Wage Data); and 3-Year Average of Hospital Average Hourly 
Wages
    Table 3A.--FY 2010 and 3-Year Average Hourly Wage for Acute Care 
Hospitals in Urban Areas by CBSA
    Table 3B.--FY 2010 and 3-Year Average Hourly Wage for Acute Care 
Hospitals in Rural Areas by CBSA
    Table 4A.--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Acute Care Hospitals in Urban Areas by CBSA and by State--
FY 2010
    Table 4B.--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Acute Care Hospitals in Rural Areas by CBSA and by State--
FY 2010
    Table 4C.--Wage Index and Capital Geographic Adjustment Factor 
(GAF) for Acute Care Hospitals That Are Reclassified by CBSA and by 
State--FY 2010
    Table 4D-1.--Rural Floor Budget Neutrality Factors for Acute 
Care Hospitals--FY 2010
    Table 4D-2.--Urban Areas with Acute Care Hospitals Receiving the 
Statewide Rural Floor or Imputed Floor Wage Index--FY 2010
    Table 4E.--Urban CBSAs and Constituent Counties for Acute Care 
Hospitals--FY 2010
    Table 4F.--Puerto Rico Wage Index and Capital Geographic 
Adjustment Factor (GAF) for Acute Care Hospitals by CBSA--FY 2010
    Table 4J.--Out-Migration Adjustment for Acute Care Hospitals--FY 
2010

[[Page 24085]]

    Table 5.--List of Medicare Severity Diagnosis-Related Groups 
(MS-DRGs), Relative Weighting Factors, and Geometric and Arithmetic 
Mean Length of Stay--FY 2010
    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/)
    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 2008 MedPAR Update--December 2008 
GROUPER V26.0 MS-DRGs
    Table 7B.--Medicare Prospective Payment System Selected 
Percentile Lengths of Stay: FY 2008 MedPAR Update--December 2008 
GROUPER V27.0 MS-DRGs
    Table 8A.--Proposed Statewide Average Operating Cost-to-Charge 
Ratios (CCRs) for Acute Care Hospitals--March 2009
    Table 8B.--Proposed Statewide Average Capital Cost-to-Charge 
Ratios (CCRs) for Acute Care Hospitals--March 2009
    Table 8C.--Proposed Statewide Average Total Cost-to-Charge 
Ratios (CCRs) for LTCHs--March 2009
    Table 9A.--Hospital Reclassifications and Redesignations--FY 
2010
    Table 9C.--Hospitals Redesignated as Rural under Section 
1886(d)(8)(E) of the Act--FY 2010
    Table 10.--Geometric Mean Plus the Lesser of .75 of the National 
Adjusted Operating Standardized Payment Amount (Increased to Reflect 
the Difference Between Costs and Charges) or .75 of One Standard 
Deviation of Mean Charges by Medicare Severity Diagnosis-Related 
Groups (MS-DRGs)--March 2009
    Table 11.--Proposed MS-LTC-DRGs, Relative Weights, Geometric 
Average Length of Stay, and Short-Stay Outlier Threshold for 
Discharges Occurring from October 1, 2009 through September 30, 2010 
under the LTCH PPS
    Table 12A.--LTCH PPS Wage Index for Urban Areas for Discharges 
Occurring from October 1, 2009 through September 30, 2010
    Table 12B.--LTCH PPS Wage Index for Rural Ares for Discharges 
Occurring from October 1, 2009 through September 30, 2010

Appendix A--Regulatory Impact Analysis

I. Overall Impact
II. Objectives of the IPPS
III. Limitations of Our Analysis
IV. Hospitals Included in and Excluded From the IPPS
V. Effects on Hospitals Excluded from the IPPS
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 Proposed Changes to the MS-DRG 
Reclassifications and Relative Cost-Based Weights (Column 1)
    D. Effects of the Application of Recalibration Budget Neutrality 
(Column 2)
    E. Effects of Proposed Wage Index Changes (Column 3)
    F. Application of the Wage Budget Neutrality Factor (Column 4)
    G. Combined Effects of Proposed MS-DRG and Wage Index Changes 
(Column 5)
    H. Effects of MGCRB Reclassifications (Column 6)
    I. Effects of the Proposed Rural Floor and Imputed Floor, 
Including the Transition To Apply Budget Neutrality at the State 
Level (Column 7)
    J. Effects of the Proposed Wage Index Adjustment for Out-
Migration (Column 8)
    K. Effects of All Proposed Changes Prior to Documentation and 
Coding (or CMI) Adjustment (Column 9)
    L. Effects of All Proposed Changes With Documentation and Coding 
(or CMI) Adjustment (Column 10)
    M. Effects of Policy on Payment Adjustments for Low-Volume 
Hospitals
    N. Impact Analysis of Table II
VII. Effects of Other Proposed Policy Changes
    A. Effects of Proposed Policy on HACs, Including Infections
    B. Effects of Proposed Policy Change Relating to New Medical 
Service and Technology Add-On Payments
    C. Effects of Proposed Requirements for Hospital Reporting of 
Quality Data for Annual Hospital Payment Update
    D. Effects of Correcting the FY 2002-Based Hospital-Specific 
Rates for MDHs
    E. Effects of Proposed Policy Changes Relating to DSH Payment 
Adjustment
    F. Effects of Proposed Policy Changes Related to Direct GME
    G. Effects of Proposed Policy Changes Relating to Hospital 
Emergency Services under EMTALA
    H. Effects of Proposed Policy Changes Relating to Payments to 
CAHs
    I. Effects of Proposed Policy Changes Relating to Provider-Based 
Status of Facilities and Organizations
    J. Effects of Proposed Policy Changes Relating to Criteria for 
Satellite Facilities of Hospitals
    K. Effects of Implementation of Rural Community Hospital 
Demonstration Program
VIII. Effects of Proposed Changes in the Capital IPPS
    A. General Considerations
    B. Results
IX. Effects of Proposed Payment Rate Changes and Policy Changes 
Under the LTCH PPS
    A. Introduction and General Considerations
    B. Impact on Rural Hospitals
    C. Anticipated Effects of Proposed LTCH PPS Payment Rate Change 
and Policy Changes
    D. Effect on the Medicare Program
    E. Effect on Medicare Beneficiaries
X. Alternatives Considered
XI. Overall Conclusion
    A. Acute Care Hospitals
    B. LTCHs
XII. Accounting Statements
    A. Acute Care Hospitals
    B. LTCHs
XIII. 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 2010
III. Secretary's 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.

[[Page 24086]]

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 eligible outlier payment is added to the DRG-adjusted base payment 
rate, plus any DSH, IME, and new technology or medical service add-on 
adjustments.
    Although payments to most hospitals under the IPPS are made on the 
basis of the standardized amounts, some categories of hospitals are 
paid 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 highest of FY 1982, FY 1987, FY 1996, or FY 
2006) or the IPPS Federal rate based on the standardized amount. 
Through and including FY 2006, a Medicare-dependent, small rural 
hospital (MDH) received the higher of the Federal rate or the Federal 
rate plus 50 percent of the amount by which the Federal rate is 
exceeded by the higher of its FY 1982 or FY 1987 hospital-specific 
rate. As discussed below, for discharges occurring on or after October 
1, 2007, but before October 1, 2011, an MDH will receive the higher of 
the Federal rate or the Federal rate plus 75 percent of the amount by 
which the Federal rate is exceeded by the highest of its FY 1982, FY 
1987, or FY 2002 hospital-specific 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. Specifically, section 1886(d)(5)(D)(iii) 
of the Act defines an SCH as a hospital that is located more than 35 
road miles from another hospital or 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 hospital inpatient services reasonably available to Medicare 
beneficiaries. In addition, certain rural hospitals previously 
designated by the Secretary as essential access community hospitals are 
considered SCHs. Section 1886(d)(5)(G)(iv) of the Act defines an MDH as 
a hospital that is located in a rural area, has no more than 100 beds, 
is not an SCH, and has a high percentage of Medicare discharges (not 
less than 60 percent of its inpatient days or discharges in its cost 
reporting year beginning in FY 1987 or in two of its three most 
recently settled Medicare cost reporting years). 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. We began phasing out the capital IPPS IME adjustment in 
FY 2008, as discussed in section VI.B.2. of this preamble. However, 
section 4301(b)(1) of the American Recovery and Reinvestment Act of 
2009 (Pub. L. 111-5), enacted on February 17, 2009, requires that the 
50-percent reduction in the capital IPPS teaching adjustment for FY 
2009 specified in the regulations at Sec.  412.322(c) shall not be 
applied. Section 4301(b)(2) of Public Law 111-5 specifies that, for 
subsequent years, the change made by section 4301(b)(1) has no effect 
on the capital teaching adjustment. Therefore, beginning in FY 2010, 
there will no longer be a capital teaching adjustment under the capital 
IPPS. The provisions of section 4301(b) of Public Law 111-5 are 
discussed in sections VI.A. and E. of this preamble. 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 
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 (BBA, Pub. L. 105-33), the Medicare, 
Medicaid and SCHIP [State Children's Health Insurance Program] Balanced 
Budget Refinement Act of 1999 (BBRA, Pub. L. 106-113), and the 
Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act 
of 2000 (BIPA, 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)). (We 
note that the proposed annual updates to the LTCH PPS are now included 
as part of the IPPS annual update document (for RY 2010, in this 
proposed rule). Updates to the IRF PPS and IPF PPS are issued as 
separate documents.) Children's hospitals, cancer hospitals, and RNHCIs 
continue to be paid solely under a reasonable cost-based system subject 
to a rate-of-increase ceiling on inpatient operating costs per 
discharge.
    The existing regulations governing payments to excluded hospitals 
and hospital units are located in 42 CFR Parts 412 and 413.
3. Long-Term Care Hospital Prospective Payment System (LTCH PPS)
    The Medicare prospective payment system (PPS) for LTCHs applies to 
hospitals described in section 1886(d)(1)(B)(iv) effective for cost 
reporting periods beginning on or after October 1, 2002. The LTCH PPS 
was established under the authority of sections 123(a) and (c) of 
Public Law 106-113 and section 307(b)(1) of Public Law 106-554. During 
the 5-year (optional) transition period, a LTCH's payment under the PPS 
was based on an increasing proportion of the LTCH Federal rate with a 
corresponding decreasing proportion based on reasonable cost 
principles. Effective for

[[Page 24087]]

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. Beginning with RY 2010, we are issuing the annual updates to 
the LTCH PPS in the same documents that update the IPPS (73 FR 26797 
through 26798).
4. Critical Access Hospitals (CAHs)
    Under sections 1814(l), 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 generally 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.
5. Payments for Graduate Medical Education (GME)
    Under section 1886(a)(4) of the Act, costs of approved educational 
activities are excluded from the operating costs of inpatient hospital 
services. Hospitals with approved graduate medical education (GME) 
programs are paid for the direct costs of GME in accordance with 
section 1886(h) of the Act. The amount of payment for direct GME costs 
for a cost reporting period is based on the hospital's number of 
residents in that period and the hospital's costs per resident in a 
base year. The existing regulations governing payments to the various 
types of hospitals are located in 42 CFR Part 413.

B. Provisions of the Medicare Improvements for Patients and Providers 
Act of 2008 (MIPPA)

    Section 148 of the MIPPA (Pub. L. 110-275) changes the payment 
rules regarding outpatient clinical diagnostic laboratory tests 
furnished by a CAH. The statutory change applies to services furnished 
on or after July 1, 2009. In section VI.C.2. of the preamble of this 
proposed rule, we discuss our proposal to codify policies in the 
Medicare regulations to implement this provision.

C. Provisions of the American Recovery and Reinvestment Act of 2009 
(ARRA)

    Section 4301(b) of the American Recovery and Reinvestment Act of 
2009 (AARA), Public Law 111-5, enacted on February 17, 2009, requires 
that the phase-out of the capital IPPS teaching adjustment at Sec.  
412.322(c) (that is, the 50-percent reduction for FY 2009) shall be 
applied, as if such paragraph had not been in effect. Section 4301(b) 
of Public Law 111-5 also specifies that there will be no effect on the 
phase-out of the capital teaching adjustment for subsequent years, such 
that, for discharges occurring during FY 2010 and thereafter, there 
will no longer be a teaching adjustment under the capital IPPS as is 
currently specified at Sec.  412.322(d). We discuss the proposed 
implementation of these provisions in section VI.A. and E. of the 
preamble of this proposed rule.
    Section 4302 of Public Law 111-5 included several amendments to 
provisions of section 114 of the MMSEA relating to (1) the 3-year delay 
in the application of certain provisions of the payment adjustments for 
short-stay outliers and revision to the RY 2008 standard Federal rate 
for LTCHs; and (2) the 3-year moratorium on the establishment of new 
LTCHs and LTCH satellite facilities and on increases in beds in 
existing LTCHs and LTCH satellite facilities. We discuss the proposed 
implementation of these provisions in sections I.E. and VIII. of the 
preamble of this proposed rule.

D. Major Contents of this Proposed Rule

    In this proposed rule, we are setting forth proposed changes to the 
Medicare IPPS for operating costs and for capital-related costs of 
acute care hospitals in FY 2010. We also are setting forth proposed 
changes relating to payments for IME costs and payments to certain 
hospitals and units that continue to be excluded from the IPPS and paid 
on a reasonable cost basis. In addition, we are setting forth proposed 
changes to the payment rates, factors, and other payment rate policies 
under the LTCH PPS for RY 2010.
    The following is a summary of the major changes that we are 
proposing to make:
1. Proposed Changes to MS-DRG Classifications and Recalibrations of 
Relative Weights
    In section II. of the preamble of this proposed rule, we are 
including--
     Proposed changes to MS-DRG classifications based on our 
yearly review.
     Proposed application of the documentation and coding 
adjustment to hospital-specific rates for FY 2010 resulting from 
implementation of the MS-DRG system.
     A discussion of the Research Triangle International, Inc. 
(RTI) and RAND Corporation reports and recommendations relating to 
charge compression, including a solicitation of public comments on the 
``over'' standardization of hospital charges.
     Proposed recalibrations of the MS-DRG relative weights.
    We are also presenting a listing and discussion of hospital-
acquired conditions (HACs), including infections, that are subject to 
the statutorily required quality adjustment in MS-DRG payments for FY 
2010.
    We are presenting our evaluation and analysis of the FY 2010 
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).
2. Proposed Changes to the Hospital Wage Index for Acute Care Hospitals
    In section III. of the preamble to this proposed rule, we are 
proposing revisions to the wage index for acute care hospitals and the 
annual update of the wage data. Specific issues addressed include the 
following:
     Second year of the 3-year transition from national to 
within-State budget neutrality for the rural floor and imputed floor.
     Final year of the 2-year transition for changes in the 
average hourly wage criterion for geographic reclassifications.
     Changes to the CBSA designations.
     The proposed FY 2010 wage index update using wage data 
from cost reporting periods that began during FY 2007.
     Analysis and implementation of the proposed FY 2010 
occupational mix adjustment to the wage index for acute care hospitals, 
including the use of data from the 2007-2008 occupational mix survey.
     Proposed revisions to the wage index for acute care 
hospitals based on hospital redesignations and reclassifications.
     The proposed adjustment to the wage index for acute care 
hospitals for FY 2010 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 2010 wage index for acute care 
hospitals.
3. Proposed Rebasing and Revision of the Hospital Market Basket for 
Acute Care Hospitals
    In section IV. of the preamble of this proposed rule, we are 
proposing to rebase and revise the acute care hospital operating and 
capital market baskets to be used in developing the FY 2010 update 
factor for the operating and capital prospective payment rates and the 
FY 2010 update factor for the

[[Page 24088]]

excluded hospital rate-of-increase limits. We also are setting forth 
the data sources used to determine the proposed revised market basket 
relative weights.
4. Other Decisions and Proposed Changes to the IPPS for Operating Costs 
and GME Costs
    In section V. of the preamble of this proposed rule, we discuss a 
number of the provisions of the regulations in 42 CFR Parts 412, 413, 
and 489, including the following:
     The reporting of hospital quality data as a condition for 
receiving the full annual payment update increase.
     Discussion of applying the correct budget neutrality 
adjustment for the FY 2002-based hospital-specific rates for 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 
2010.
     Proposed changes to the policies governing payments to 
Medicare disproportionate share hospitals, including proposed policies 
relating to the inclusion of labor and delivery patient days in the 
calculation of the DSH payment adjustment, calculation of inpatient 
days in the Medicaid fraction for the Medicare DSH calculation, and 
exclusion of observation beds and patient days from the Medicare DSH 
calculation and from the bed count for the IME adjustment.
     Proposed changes to the policies governing payment for 
direct GME.
     Proposed changes to policies on hospital emergency 
services under EMTALA relating to the applicability of sanctions under 
EMTALA.
     Discussion of the implementation of the Rural Community 
Hospital Demonstration Program in FY 2010.
     Proposed technical correction to the regulations governing 
the calculation of the Federal rate under the IPPS.
5. FY 2010 Policy Governing the IPPS for Capital-Related Costs
    In section VI. of the preamble to this proposed rule, we discuss 
the payment policy requirements for capital-related costs and capital 
payments to hospitals for FY 2010. We also are proposing to remove a 
section of the regulations relating to the phase-out of the capital IME 
adjustment for FY 2009 to implement the provisions of section 4301(b) 
of the American Recovery and Reinvestment Act of 2009 (Pub. L. 111-5).
6. Proposed Changes to the Payment Rates for Certain Excluded 
Hospitals: Rate-of-Increase Percentages
    In section VII. of the preamble of this proposed rule, we discuss--
     Proposed changes to payments to excluded hospitals.
     Proposed changes to the regulations governing satellite 
facilities of hospitals.
     Proposed changes relating to payments to CAHs, including 
payment for clinical laboratory tests furnished by CAHs and payment for 
outpatient facility services when a CAH elects the optional payment 
method.
     Proposed changes to the rules governing provider-based 
status of facilities and a proposed technical correction to the 
regulations governing provider-based entities.
7. Proposed Changes to the LTCH PPS
    In section VIII.A. through C. and F. of the preamble of this 
proposed rule, we set forth proposed changes to the payment rates, 
factors, and other payment rate policies under the LTCH PPS for RY 
2010, including the annual update of the MS-LTC-DRG classifications and 
relative weights for use under the LTCH PPS for RY 2010, the proposed 
use of the FY 2002-based RPL market basket for LTCHs, and proposed 
technical corrections to the LTCH PPS regulations.
    In section VIII.D. of the preamble of this proposed rule, we 
discuss our ongoing monitoring protocols under the LTCH PPS. In section 
VIII.E., we discuss the Research Triangle Institute, International 
(RTI) Phase III Report on its evaluation of the feasibility of 
establishing facility and patient criteria for LTCHs, as recommended by 
MedPAC in its June 2004 Report to Congress.
8. Determining Proposed Prospective Payment Operating and Capital Rates 
and Rate-of-Increase Limits for Acute Care Hospitals
    In the Addendum to this proposed rule, we set forth proposed 
changes to the amounts and factors for determining the proposed FY 2010 
prospective payment rates for operating costs and capital-related costs 
for acute care hospitals. We also establish the proposed threshold 
amounts for outlier cases. In addition, we address the proposed update 
factors for determining the rate-of-increase limits for cost reporting 
periods beginning in FY 2010 for hospitals excluded from the IPPS.
9. Determining Proposed Prospective Payment Rates for LTCHs
    In the Addendum to this proposed rule, we set forth proposed 
changes to the amounts and factors for determining the proposed RY 2010 
prospective standard Federal rate. We also establish the proposed 
adjustments for wage levels, the labor-related share, the cost-of-
living adjustment, and high-cost outliers, including the fixed-loss 
amount, and the LTCH cost-to-charge ratios (CCRs) under the LTCH PPS.
10. Impact Analysis
    In Appendix A of this proposed rule, we set forth an analysis of 
the impact that the proposed changes would have on affected acute care 
hospitals and LTCHs.
11. Recommendation of Update Factors for Operating Cost Rates of 
Payment for Hospital Inpatient Services
    In Appendix B of this proposed rule, as required by sections 
1886(e)(4) and (e)(5) of the Act, we provide our recommendations of the 
appropriate percentage changes for FY 2010 for the following:
     A single average standardized amount for all areas for 
hospital inpatient services paid under the IPPS for operating costs of 
acute care hospitals (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 certain hospitals 
excluded from the IPPS.
     The standard Federal rate for hospital inpatient services 
furnished by LTCHs.
12. 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 hospital inpatient 
operating costs and capital-related costs under the IPPS, for hospitals 
and distinct part hospital units excluded from the IPPS, and for LTCHs. 
We address these recommendations in Appendix B of this proposed rule. 
For further information relating specifically to the MedPAC March 2008 
report or to obtain a copy of the report, contact MedPAC at (202) 220-
3700 or visit MedPAC's Web site at: http://www.medpac.gov.

[[Page 24089]]

E. Public Comments Received on Two LTCH PPS Interim Final Rules With 
Comment Period Issued in 2008

    On May 6, 2008 and May 22, 2008, we issued in the Federal Register 
two interim final rules with comment periods relating to the LTCH PPS 
(73 FR 24871 and 73 FR 29699, respectively), which implement section 
114 of Public Law 110-173 (MMSEA). The May 6, 2008 interim final rule 
with comment period implemented provisions of section 114 of Public Law 
110-173 relating to a 3-year delay in the application of certain 
provisions of the payment adjustment for short-stay outliers and 
revisions to the RY 2008 standard Federal rate for LTCHs. The May 22, 
2008 interim final rule with comment period implemented certain 
provisions of section 114 of Public Law 110-173 relating to a 3-year 
moratorium on the establishment of new LTCHs and LTCH satellite 
facilities and on increases in beds in existing LTCHs and LTCH 
satellite facilities. The May 22, 2008 interim final rule with comment 
period also implemented a 3-year delay in the application of certain 
payment policies that apply to payment adjustments for discharges from 
LTCHs and LTCH satellite facilities that were admitted from certain 
referring hospitals in excess of various percentage thresholds.
    Section 4302 of the American Recovery and Reinvestment Act of 2009 
(ARRA, Pub. L. 111-5) included several amendments to section 114 of 
Public Law 110-173. We have issued instructions to the fiscal 
intermediaries and Medicare administrative contractors (MACs) to 
interpret these amendments (Change Request 6444). We intend to 
implement the provisions of section 4302 of Public Law 111-5 by issuing 
an interim final rule with comment period along with the FY 2010 IPPS 
and RY 2010 LTCH PPS final rule that is scheduled for publication in 
August 2009. In the FY 2010 IPPS and RY 2010 LTCH PPS final rule, we 
also intend to respond to the public comments that we received on the 
two interim final rules with comment period noted above and finalize 
those provisions, as appropriate.

II. Proposed 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 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).
    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 2009, cases are assigned to one of 746 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.

[[Page 24090]]

 
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 
13 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 13 current pre-MDCs.

               Pre-Major Diagnostic Categories (Pre-MDCs)
------------------------------------------------------------------------
 
------------------------------------------------------------------------
MS-DRG 001........................  Heart Transplant or Implant of Heart
                                     Assist System with MCC.
MS-DRG 002........................  Heart Transplant or Implant of Heart
                                     Assist System without MCC.
MS-DRG 003........................  ECMO or Tracheostomy with Mechanical
                                     Ventilation 96+ Hours or Principal
                                     Diagnosis Except for Face, Mouth,
                                     and Neck Diagnosis with Major O.R.
MS-DRG 004........................  Tracheostomy with Mechanical
                                     Ventilation 96+ Hours or Principal
                                     Diagnosis Except for Face, Mouth,
                                     and Neck Diagnosis with Major O.R.
MS-DRG 005........................  Liver Transplant with MCC or
                                     Intestinal Transplant.
MS-DRG 006........................  Liver Transplant without MCC.
MS-DRG 007........................  Lung Transplant.
MS-DRG 008........................  Simultaneous Pancreas/Kidney
                                     Transplant.
MS-DRG 009........................  Bone Marrow Transplant.
MS-DRG 010........................  Pancreas Transplant.
MS-DRG 011........................  Tracheostomy for Face, Mouth, and
                                     Neck Diagnoses with MCC.
MS-DRG 012........................  Tracheostomy for Face, Mouth, and
                                     Neck Diagnoses with CC.
MS-DRG 013........................  Tracheostomy for Face, Mouth, and
                                     Neck Diagnoses without CC/MCC.
------------------------------------------------------------------------

    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 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

[[Page 24091]]

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 
improvements 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. Our MS-DRG analysis for the FY 2009 final 
rule was based on data from the March 2008 update of the FY 2007 MedPAR 
file, which contained hospital bills received through March 31, 2008, 
for discharges occurring through September 30, 2007. For this proposed 
rule, for FY 2010, our MS-DRG analysis is based on data from the 
September 2008 update of the FY 2008 MedPAR file, which contains 
hospital bills received through September 30, 2008, for discharges 
occurring through September 30, 2008.
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 comments no later than early December 
of each year 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). Based on public comments received on the FY 2007 
IPPS proposed rule, we decided not to adopt the CS DRGs. In the FY 2007 
IPPS final rule (71 FR 47906 through 47912), we discussed several 
concerns raised by commenters regarding the proposal to adopt CS DRGs. 
We acknowledged the many comments suggesting the logic of Medicare's 
DRG system should continue to remain in the public domain as it has 
since the inception of the PPS. We also acknowledged concerns about the 
impact on hospitals and software vendors of moving to a proprietary 
system. Several commenters suggested that CMS refine the existing DRG 
classification system to preserve the many policy decisions that were 
made over the last 20 years and were already incorporated into the DRG 
system, such as complexity of services and new device technologies. 
Consistent with the concerns expressed in the public comments, this 
option had the advantage of using the existing DRGs as a starting point 
(which was already familiar to the public) and retained the benefit of 
many DRG decisions that were made in recent years. We stated our belief 
that the suggested approach of incorporating severity measures into the 
existing DRG system was a viable option that would be evaluated.
    Therefore, 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-1990's in connection with adopting severity DRGs. We 
describe below the progress we have made on these two initiatives, our 
actions for FY 2008 and FY 2009, and our proposals for FY 2010 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

[[Page 24092]]

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 2010 in other sections of this 
preamble and in the Addendum to this proposed rule.
    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 were 
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 proposed rule for discussion of the issue of 
charge compression and the HSRV cost-weighting methodology for FY 2010.
    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 proposing to make in this proposed rule for FY 2010 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. Proposed FY 2010 MS-DRG Documentation and Coding Adjustment, 
Including the Applicability to the Hospital-Specific Rates and the 
Puerto Rico-Specific Standardized Amount

1. Background on the Prospective MS-DRG Documentation and Coding 
Adjustments for FY 2008 and FY 2009 Authorized by Public Law 110-90
    As we discussed earlier in this preamble, we adopted the MS-DRG 
patient classification system for the IPPS, effective October 1, 2007, 
to better recognize severity of illness in Medicare payment rates for 
acute care hospitals. The adoption of the MS-DRG system resulted in the 
expansion of the number of DRGs from 538 in FY 2007 to 745 in FY 2008 
(currently, 746 DRGs, which include 1 additional MS-DRG created in FY 
2009). By increasing the number of DRGs and more fully taking into 
account patients' severity of illness in Medicare payment rates for 
acute care hospitals, the use of MS-DRGs encourages 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), 
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 additional documentation and coding. In that final rule 
with comment period, we exercised our authority under section 
1886(d)(3)(A)(vi) of the Act, which authorizes us to maintain budget 
neutrality by adjusting the national standardized amount to eliminate 
the estimated effect of changes in coding or classification that do not 
reflect real changes in case-mix. Our actuaries estimated that 
maintaining budget neutrality required an adjustment of -4.8 percent to 
the national standardized amount. We phased in this -4.8 percent 
adjustment over 3 years. Specifically, 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, Congress enacted the TMA [Transitional 
Medical Assistance], Abstinence Education, and QI [Qualifying 
Individuals] Programs Extension Act of 2007, Public Law 110-90. Section 
7(a) of Public Law 110-90 reduced the documentation and coding 
adjustment made as a result of 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. Section 7(a) of Public Law 110-90 did not 
adjust the FY 2010 -1.8 percent documentation and coding adjustment 
promulgated in the FY 2008 IPPS final rule with comment period. To 
comply with section 7(a) of Public Law 110-90, we promulgated a final 
rule on November 27, 2007 (72 FR 66886) that modified the IPPS 
documentation and coding adjustment for FY 2008 to -0.6 percent, and 
revised the FY 2008 payment rates, factors, and thresholds accordingly. 
These revisions were effective on October 1, 2007.
    For FY 2009, section 7(a) of Public Law 110-90 required 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 discussed in the FY 2009 IPPS final rule (73 FR 
48447) and required by statute, we applied 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

[[Page 24093]]

adjustment for FY 2009 was in addition to the -0.6 percent adjustment 
for FY 2008, yielding a combined effect of -1.5 percent.
2. Prospective Adjustment to the Average Standardized Amounts Required 
by Section 7(b)(1)(A) of Public Law 110-90
    Section 7(b)(1)(A) of Public Law 110-90 requires that if the 
Secretary determines that implementation of the MS-DRG system resulted 
in changes in documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FY 2008 or FY 2009 
that are different than the prospective documentation and coding 
adjustments applied under section 7(a) of Public Law 110-90, the 
Secretary shall make an appropriate adjustment under section 
1886(d)(3)(A)(vi) of the Act. Section 1886(d)(3)(A)(vi) of the Act 
authorizes adjustments to the average standardized amounts for 
subsequent fiscal years in order to eliminate the effect of such coding 
or classification changes. These adjustments are intended to ensure 
that future annual aggregate IPPS payments are the same as the payments 
that otherwise would have been made had the prospective adjustments for 
documentation and coding applied in FY 2008 and FY 2009 reflected the 
change that occurred in those years.
3. Recoupment or Repayment Adjustments in FYs 2010 through 2012 
Required by Public Law 110-90
    If, based on a retroactive evaluation of claims data, the Secretary 
determines that implementation of the MS-DRG system resulted in changes 
in documentation and coding that did not reflect real changes in case-
mix for discharges occurring during FY 2008 or FY 2009 that are 
different from the prospective documentation and coding adjustments 
applied under section 7(a) of Public Law 110-90, section 7(b)(1)(B) of 
Public Law 110-90 requires the Secretary to make an additional 
adjustment to the standardized amounts under section 1886(d) of the 
Act. This adjustment must offset the estimated increase or decrease in 
aggregate payments for FYs 2008 and 2009 (including interest) resulting 
from the difference between the estimated actual documentation and 
coding effect and the documentation and coding adjustment applied under 
section 7(a) of Public Law 110-90. This adjustment is in addition to 
making an appropriate adjustment to the standardized amounts under 
section 1886(d)(3)(A)(vi) of the Act as required by section 7(b)(1)(A) 
of Public Law 110-90. That is, these adjustments are intended to recoup 
(or repay) spending in excess of (or less than) spending that would 
have occurred had the prospective adjustments for changes in 
documentation and coding applied in FY 2008 and FY 2009 precisely 
matched the changes that occurred in those years. Public Law 110-90 
requires that the Secretary make these recoupment or repayment 
adjustments for discharges occurring during FYs 2010, 2011, and 2012.
4. Retrospective Evaluation of FY 2008 Claims Data
    In order to implement the requirements of section 7 of Public Law 
110-90, we indicated in the FY 2009 IPPS final rule (73 FR 48450) that 
we planned a thorough retrospective evaluation of our claims data. We 
stated that the results of this evaluation would be used by our 
actuaries to determine any necessary payment adjustments to the 
standardized amounts under section 1886(d) of the Act beginning in FY 
2010 to ensure the budget neutrality of the MS-DRGs implementation for 
FY 2008 and FY 2009, as required by law. In the FY 2009 IPPS proposed 
rule (73 FR 23541 through 23542), we described our preliminary plan for 
a retrospective analysis of inpatient hospital claims data and invited 
public input on our proposed methodology.
    In that proposed rule, we indicated that we intended to measure and 
corroborate the extent of the overall national average changes in case-
mix for FY 2008 and FY 2009. We expected that the two largest parts of 
this overall national average change would be attributable to 
underlying changes in actual patient severity and to documentation and 
coding improvements under the MS-DRG system. In order to separate the 
two effects, we planned 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 MS-DRGs divide the base DRGs into three severity levels (with 
MCC, with CC and without CC); the previously used CMS DRGs had only two 
severity levels (with CC and without CC). Under the CMS DRG system, the 
majority of hospital discharges had a secondary diagnosis which was on 
the CC list, which led to the higher severity level. The MS-DRGs 
significantly changed the code lists of what was classified as an MCC 
or a CC. Many codes that were previously classified as a CC are no 
longer included on the MS-DRG CC list because the data and clinical 
review showed these conditions did not lead to a significant increase 
in resource use. The addition of a new level of high severity 
conditions, the MCC list, also provided a new incentive to code more 
precisely in order to increase the severity level. We anticipated that 
hospitals would examine the MS-DRG MCC and CC code lists and then work 
with physicians and coders on documentation and coding practices so 
that coders could appropriately assign codes from the highest possible 
severity level. We note that there have been numerous seminars and 
training sessions on this particular coding issue. The topic of 
improving documentation practices in order to code conditions on the 
MCC list was also discussed extensively by participants at the March 
11-12, 2009 ICD-9-CM Coordination and Maintenance Committee meeting. 
Participants discussed their hospitals' efforts to encourage physicians 
to provide more precise documentation so that coders could 
appropriately assign codes that would lead to a higher severity level. 
Because we expected most of the documentation and coding changes under 
the MS-DRG system would occur in the secondary diagnoses, we believed 
that the shifts among base DRGs were less likely to be the result of 
the MS-DRG system and the shifts within base DRGs were more likely to 
be the result of the MS-DRG system. We also anticipated evaluating data 
to identify the specific MS-DRGs and diagnoses that contributed 
significantly to the documentation and coding payment effect and to 
quantify their impact. This step entailed analysis of the secondary 
diagnoses driving the shifts in severity within specific base DRGs.
    In that same 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 changes, we might 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).
    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 performing 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.
    A few commenters, including MedPAC, expressed support for the

[[Page 24094]]

analytic approach described in the FY 2009 IPPS 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 
the payment adjustments beginning in FY 2010.
    We took these comments into consideration as we developed our 
proposed analysis plan (described in greater detail below) and in this 
proposed rule are seeking comment on our methodology. We performed a 
retrospective evaluation of the FY 2008 data for claims paid through 
December 2008. Based on this evaluation, our actuaries have determined 
that implementation of the MS-DRG system resulted in a 2.5 percent 
change due to documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FY 2008.
    In performing this analysis, we first divided the case-mix index 
(CMI) obtained by grouping the FY 2008 claims data through the FY 2008 
GROUPER (Version 25.0) by the CMI obtained by grouping these same FY 
2008 claims through the FY 2007 GROUPER (Version 24.0). This resulted 
in a value of 1.028. Because these cases are the same FY 2008 cases 
grouped using the Versions 24.0 and 25.0 of the GROUPER, we attribute 
this increase primarily to two factors: (1) The effect of changes in 
documentation and coding under the MS-DRG system; and (2) the 
measurement effect from the calibration of the GROUPER. We estimated 
the measurement effect from the calibration of the GROUPER by dividing 
the CMI obtained by grouping cases in the FY 2007 claims data through 
the FY 2008 GROUPER by the CMI obtained by grouping cases in these same 
claims through the FY 2007 GROUPER. This resulted in a value of 1.003. 
In order to isolate the documentation and coding effect, we then 
divided the combined effect of the changes in documentation and coding 
and measurement (1.028) by the measurement effect (1.003) to yield 
1.025. Therefore, our estimate of the documentation and coding increase 
is 2.5 percent.
    We then sought to corroborate this 2.5 percent estimate by 
examining the increases in the within-base DRGs as compared to the 
increases in the across base DRGs as described earlier in our analysis 
plan. In other words, we looked for improvements in code selection that 
would lead to a secondary diagnosis increasing the severity level to 
either a CC or an MCC level.
    We found that the within-base DRG increases were almost entirely 
responsible for the case-mix change, supporting our conclusion that the 
2.5 percent estimate was an accurate reflection of the FY 2008 effect 
of changes in documentation and coding under the MS-DRG system. In 
fact, almost every base DRG that was split into different severity 
levels under the MS-DRG system experienced increases in the within-base 
DRGs. In Figure 1 below, we show that, between FY 2007 and FY 2008, 
there was a 5 percentage point increase in the discharges with an MCC 
from 21 percent to 26 percent and a corresponding decrease of 5 
percentage points from 56 percent to 51 percent in discharges without a 
CC or an MCC.
[GRAPHIC] [TIFF OMITTED] TP22MY09.000

    We then further analyzed the changes in the within-base DRGs to 
determine which MS-DRGs had the highest contributions to this increase. 
Consistent with the expectations of our medical coding experts 
concerning areas with potential for documentation and coding 
improvements, the top contributors were heart failure, chronic 
obstructive pulmonary disease, and simple pneumonia and pleurisy. In 
fact, the coding of heart failure was discussed extensively at the 
March 11-12, 2009 ICD-9-CM Coordination and Maintenance Committee 
meeting. Heart failure is a very common secondary diagnosis among 
Medicare hospital admissions. The heart failure codes are assigned to 
all three severity levels. Some are classified as non-CCs, while others 
are on the CC and MCC lists. By changing physician documentation to 
more precisely identify the type of heart failure, coders are able to 
appropriately change the severity level of cases from the lowest level 
(non-CC) to a higher severity level (CC or MCC). This point was 
stressed repeatedly at the March 11-12, 2009 ICD-9-CM Coordination and 
Maintenance Committee meeting as coders discussed their work with 
physicians on this coding issue. Many of the participants indicated 
that

[[Page 24095]]

additional work was still needed with their physicians in order to 
document conditions in the medical record more precisely.
    The results of this analysis provides additional support for our 
conclusion that the 2.5 percent estimate accurately reflects the FY 
2008 increases in documentation and coding under the MS-DRG system.
    While we attempted to use the CDAC data to distinguish real 
increase in case-mix growth from documentation and coding in the 
overall case-mix number, we found aberrant data and significant 
variation across the FY 1999-FY 2007 analysis period. It was not 
possible to distinguish changes in documentation and coding from 
changes in real case-mix in the CDAC data. Therefore, we concluded that 
the CDAC data would not support analysis of real case-mix growth that 
could be used in our retrospective evaluation of the FY 2008 claims 
data.
    Although we could not use the CDAC data, we did examine the overall 
growth in case-mix using the FY 2007 claims data in which we grouped 
cases using the FY 2007 GROUPER and the FY 2008 data in which we 
grouped cases using the FY 2008 GROUPER. We found the overall growth in 
case-mix was 1.9 percent. The implication of overall FY 2008 case-mix 
growth of 1.9 percent relative to our estimate of the FY 2008 
documentation and coding effect and the GROUPER measurement effect is 
that real case-mix declined between FY 2007 and FY 2008. After 
additional data analysis, our actuaries determined that the 1.9 percent 
growth in overall case-mix was consistent with our 2.5 percent estimate 
of the FY 2008 documentation and coding effect for reasons that 
included: (1) Our mathematical model for determining the 2.5 percent 
documentation and coding effect was corroborated by the amount of case-
mix growth attributed to within-DRG improvements in secondary coding of 
MCCs and CCs; (2) our data analysis confirmed the substitution of 
specified diagnosis for unspecified diagnoses for such common 
conditions as heart failure and chronic obstructive pulmonary disease; 
and (3) there was a relative decline in above average cost short-stay 
surgical cases that can be performed on an outpatient basis, such as 
certain high volume pacemaker procedures.
    We also examined the differences in case-mix between the FY 2008 
claims data in which cases were grouped through the FY 2008 GROUPER 
(Version 25.0) and the FY 2009 GROUPER (Version 26.0). This was to help 
inform analysis of the potential for increase in the documentation and 
coding effect in FY 2009. In FY 2008, we were transitioning to the 
fully implemented MS-DRG relative weights and the fully implemented 
cost-based weights. We found that the use of the transition weights 
mitigated the FY 2008 documentation and coding effect on expenditures. 
Using the FY 2009 relative weights, the documentation and coding effect 
would have been an estimated 3.2 percent in FY 2008 instead of our 
estimated 2.5 percent. Even assuming no continued improvement in 
documentation and coding in FY 2009, we estimate that the use of the FY 
2009 relative weights will result in an additional 0.7 percent 
documentation and coding effect in FY 2009. After taking into account 
the results of our FY 2008 analysis and the expertise of our coding 
staff, our actuaries continue to estimate that the cumulative overall 
effect of documentation and coding improvements under the MS-DRG system 
will be 4.8 percent. However, our actuaries estimate that these 
improvements will be substantially complete by the end of FY 2009. 
Therefore, our current estimate of the FY 2009 MS-DRG documentation and 
coding effect is 2.3 percent.
    As in prior years, the FY 2008 MedPAR files are available to the 
public to allow independent analysis of the FY 2008 documentation and 
coding effect. Interested individuals may order these files by going to 
the Web site at http://www.cms.hhs.gov/LimitedDataSets/ and clicking on 
MedPAR Limited Data Set (LDS)-Hospital (National). This Web page will 
describe the file and provide directions and further detailed 
instructions for how to order.
    Persons placing an order must send the following: a Letter of 
Request, the LDS Data Use Agreement and Research Protocol (refer to the 
Web site for further instructions), the LDS Form, and a check for 
$3,655 to: Mailing address if using the U.S. Postal Service: Centers 
for Medicare & Medicaid Services, RDDC Account, Accounting Division, 
P.O. Box 7520, Baltimore, MD 21207-0520. Mailing address if using 
express mail: Centers for Medicare & Medicaid Services, OFM/Division of 
Accounting--RDDC, 7500 Security Boulevard, C3-07-11, Baltimore, MD 
21244-1850.
    We are seeking public comment on our methodology and analysis. We 
intend to update our analysis with FY 2008 data on claims paid through 
March 2008 in the FY 2010 IPPS final rule.
5. Proposed Adjustments for FY 2010 and Subsequent Years Authorized by 
Section 7(b)(1)(A) of Public Law 110-90 and Section 1886(d)(3)(vi) of 
the Act
    The estimated 2.5 percent change in FY 2008 case-mix due to changes 
in documentation and coding that did not reflect real changes in case-
mix for discharges occurring during FY 2008 exceeded the -0.6 percent 
prospective documentation and coding adjustment applied under section 
7(a) of Public Law 110-90 by 1.9 percentage points. Under section 
7(B)(1)(a) of Public Law 119-90, the Secretary is required to make an 
appropriate adjustment under section 1886(d)(3)(A)(vi) of the Act to 
the average standardized amounts for subsequent fiscal years in order 
to eliminate the full effect of the documentation and coding changes. 
In addition, we note that the Secretary has the authority to make this 
prospective adjustment in FY 2010 under section 1886(d)(3)(A)(vi) of 
the Act. As we have consistently stated since the initial 
implementation of the MS-DRG system, we do not believe it is 
appropriate for expenditures to increase due to MS-DRG-related changes 
in documentation and coding that do not reflect real changes in case-
mix.
    Therefore, we are proposing to change the average standardized 
amounts under section 1886(d) of the Act in FY 2010 by -1.9 percent, 
the difference between the changes in documentation and coding that do 
not reflect real changes in case-mix for discharges occurring during FY 
2008 and the prospective adjustment applied under section 7 of Public 
Law 110-90. We are proposing to leave this adjustment in place for 
subsequent fiscal years in order to ensure that changes in 
documentation and coding resulting from the adoption of the MS-DRGs do 
not lead to an increase in aggregate payments not reflective of an 
increase in real case-mix.
    We also estimate that the change in case-mix due to changes in 
documentation and coding that do not reflect real changes in case-mix 
for discharges occurring during FY 2009 will be 2.3 percent, which 
would exceed by 1.4 percentage points the -0.9 percent prospective 
documentation and coding adjustment for FY 2009 applied under section 
7(a) of Public Law 100-90. We have the statutory authority to adjust 
the FY 2010 rates for this estimated 1.4 percentage point increase. 
However, given that Public Law 100-90 requires a retrospective claims 
evaluation for the additional adjustments described in section II.D.6. 
of this preamble, we believe our

[[Page 24096]]

evaluation of the extent of the overall national average changes in 
case-mix for FY 2009 should also be based on a retrospective evaluation 
of all FY 2009 claims data. Because we will not receive all FY 2009 
claims data prior to publication of the final rule, we will address any 
difference between the increase in FY 2009 case-mix due to changes in 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FY 2009 and the -0.9 percent 
prospective documentation and coding adjustment applied under section 
7(a) of Public Law 110-90 in the FY 2011 rulemaking cycle.
    We are seeking public comment on the proposed -1.9 percent 
prospective adjustment to the standardized amounts under section 
1886(d) of the Act to address the effects of documentation and coding 
changes unrelated to changes in real case-mix in FY 2008. In addition, 
we are seeking public comments on addressing in the FY 2011 rulemaking 
cycle any differences between the increase in FY 2009 case-mix due to 
changes in documentation and coding changes that do not reflect real 
changes in case-mix for discharges occurring during FY 2009 and the -
0.9 percent prospective documentation and coding adjustment applied 
under section 7(a) of Public Law 110-90.
6. Additional Adjustment for FY 2010 Authorized by Section 7(b)(1)(B) 
of Public Law 110-90
    As indicated above, the 2.5 percent change due to documentation and 
coding that did not reflect real changes in case-mix for discharges 
occurring during FY 2008 exceeded the -0.6 percent prospective 
documentation and coding adjustment applied under section 7(a) of 
Public Law 110-90 by 1.9 percentage points. Our actuaries currently 
estimate that this 1.9 percentage point increase resulted in an 
increase in aggregate payments of approximately $2.2 billion. As 
described earlier, section 7(b)(1)(B) of Public Law 110-90 requires an 
additional adjustment for discharges occurring in FYs 2010, 2011, and/
or 2012 to offset the estimated amount of this increase in aggregate 
payments (including interest).
    Although section 7(b)(1)(B) of Public Law 110-90 requires us to 
make this adjustment in FYs 2010, 2011, and/or 2012, we have discretion 
as to when during this 3 year period we will apply the adjustment. For 
example, we could make adjustments to the standardized amounts under 
section 1886(d) of the Act in FY 2010, 2011, and 2012. Alternatively, 
we could delay offsetting the increase in FY 2008 aggregate payments by 
applying the adjustment required under section 7(b)(1)(B) of Public Law 
110-90 only to FYs 2011 and 2012.
    We are not proposing to make an adjustment to FY 2010 to offset, in 
whole or in part, the estimated increase in aggregate payments for 
discharges occurring in FY 2008, but intend to address this issue in 
future rulemaking for FYs 2011 and 2012. That is, we will address 
recouping the additional expenditures that occurred in FY 2008 as a 
result of the 1.9 percentage point difference between the actual 
changes in documentation and coding that do not reflect real changes in 
case-mix, or 2.5 percent, and the -0.6 percent adjustment applied under 
Public Law 110-90 in FY 2011 and/or FY 2012, as required by law. While 
we have the statutory authority to make this -1.9 percent recoupment 
adjustment entirely in FY 2010, we are proposing to delay the 
adjustment until FY 2011 and FY 2012 because we do not have any data 
yet on the magnitude of the documentation and coding effect in FY 2009. 
If the documentation and coding effect were less in FY 2009 than our 
current estimates, it could lessen the anticipated recoupment 
adjustment that we currently estimate we would have to make for FY 2008 
and FY 2009 combined. As we have the authority to recoup the aggregate 
effect of this 1.9 percentage point difference in FY 2008 IPPS payments 
in FY 2011 or FY 2012 (with interest), delaying this adjustment would 
have no effect on Federal budget outlays. For this reason, we are 
proposing to wait until we have a complete year of data on the FY 2009 
documentation and coding effect before applying a recoupment adjustment 
for IPPS spending that occurred in FY 2008 or we estimate will occur in 
FY 2009.
    As discussed above, section 7(b)(1)(B) of Public Law 110-90 
requires the Secretary to make an additional adjustment to the 
standardized amounts under section 1886(d) of the Act to offset the 
estimated increase or decrease in aggregate payments for FY 2009 
(including interest) resulting from the difference between the 
estimated actual documentation and coding effect and the documentation 
and coding adjustments applied under section 7(a) of Public Law 110-90. 
This determination must be based on a retrospective evaluation of 
claims data. Because we will not receive all FY 2009 claims data prior 
to publication of the final rule, we intend to address any increase or 
decrease in FY 2009 payments in future rulemaking for FY 2011 and 2012 
after we perform a retrospective evaluation of the FY 2009 claims data. 
Our actuaries currently estimate that this adjustment will be 
approximately -3.3 percent. This reflects the difference between the 
estimated 4.8 percent cumulative actual documentation and coding 
changes for FY 2009 (2.5 percent for FY 2008 and an additional 2.3 
percent for FY 2009) and the cumulative -1.5 percent documentation and 
coding adjustments applied under section 7(a) of Public Law 110-90 (-
0.6 percent in FY 2008 and -0.9 percent in FY 2009). We note that the 
actual adjustments are multiplicative and not additive. This estimated 
4.8 percent cumulative actual documentation and coding changes for FY 
2009 includes the impact of the changes in documentation and coping 
first occurring in FY 2008 because we believe hospitals will continue 
these changes in documentation and coding in subsequent fiscal years. 
Consequently, these documentation and coding changes will continue to 
impact payments under the IPPS absent a prospective adjustment to 
account for the effect of these changes.
    We note that unlike the proposed -1.9 adjustment to the 
standardized amounts under section 7(b)(1)(A) of Public Law 110-90 
described earlier, any adjustment to the standardized amounts under 
section 7(b)(1)(B) of Public Law 110-90 would not be cumulative, but 
would be removed for subsequent fiscal years once we have offset the 
increase in aggregate payments for discharges occurring in FY 2008 
expenditures and FY 2009 expenditures, if any.
    We are seeking public comment on our proposal not to offset the 1.9 
percent increase in aggregate payments (including interest) for 
discharges occurring in FY 2008 resulting from the adoption of the MS-
DRGs, but to instead address this issue in future rulemaking for FYs 
2011 and 2012.
    To assist the public in commenting on this issue, the following 
table shows our estimate of the adjustments required under section 
7(b)(1) of Public Law 110-90. Column (A) and Column (C) show the 
prospective adjustments discussed above in section II.D.5. of this 
preamble. Column (B) and Column (D) show the retrospective adjustments 
discussed above in section II.D.6. of this preamble. Column (E) shows 
the -1.9 percent adjustment from Column (A) that we are proposing for 
FY 2010. The estimated -6.6 percent adjustment in Column (F) reflects 
the cumulative effect of the remaining -1.9 adjustment from Column (B), 
the remaining -1.4 percent adjustment from Column (C), and the 
remaining -3.3 adjustment from

[[Page 24097]]

Column (D) that are required by statute, but that we are not proposing 
for FY 2010. Column (G) shows the combined effect of the -1.9 percent 
adjustment in Column (E) that we are proposing for FY 2010 and the -6.6 
percent adjustment in Column (F) that we currently estimate we will 
need to propose in future years. As noted above, we are unable to 
provide our final estimate of the documentation and coding changes in 
FY 2009 that do not reflect real changes in case-mix, as we do not have 
all FY 2009 claims data. The table instead reflects our current 
estimate of the difference between changes in documentation and coding 
in FY 2009 that do not reflect real changes in case-mix and the 
prospective adjustment applied in FY 2009 under section 7(a) of Public 
Law 110-90. If documentation and coding increases were to exceed 
current projections for FY 2009, future adjustments would be greater 
than those shown here. If documentation and coding adjustments were to 
be less than current projections for FY 2009, future adjustments would 
be less than those shown here.

                                                FY 2010 MS-DRG Documentation and Coding Adjustment Range
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                 Estimated      Total
                                      Prospective          Recoupment          Prospective         Recoupment       Adjustment   remaining    adjustment
                                   adjustment for FY    adjustment for FY   adjustment for FY   adjustment for FY    proposed    adjustment  FY 2010- FY
                                          2008                2008               2009 *              2009 *        for FY 2010       *          2012 *
                                  (A)................  (B)...............  (C)...............  (D)...............          (E)          (F)          (G)
--------------------------------------------------------------------------------------------------------------------------------------------------------
FY 2010 Proposal................  Proposed for FY      Not Proposed for    Not Proposed for    Not Proposed for
                                   2010.                FY 2010.            FY 2010.            FY 2010.
Amount of Adjustment............  -1.9...............  -1.9..............  -1.4..............  -3.3..............         -1.9         -6.6        -8.5
--------------------------------------------------------------------------------------------------------------------------------------------------------
* Estimated. The actual percentage adjustment to the national standardized amounts for the purpose of offsetting the estimated $2.2 billion in increased
  payments under IPPS in FY 2008 will depend on when we apply the adjustment. However, we believe this adjustment will be approximately -1.9 percent, or
  the difference between the actual changes in documentation and coding that do not reflect real changes in case-mix in FY 2008 and the documentation
  and coding adjustment applied under section 7(a) of Public Law 110-90. Similarly, we based our estimate of the percentage adjustment to the national
  standardized amounts for the purpose of offsetting the expected increase in payments in FY 2009 on the estimated difference between the cumulative
  actual changes in documentation and coding that do not reflect real changes in case-mix in FY 2009 and the documentation and coding adjustments
  applied under section 7(a) of Public Law 110-90, or 3.3 percent. As discussed earlier, we are not permitted to apply a retroactive FY 2009 adjustment
  until we have performed an analysis of the FY 2009 data.

7. Background on the 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 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; the updated hospital-specific rate based on 
FY 1996 costs per discharge; or the updated hospital-specific rate 
based on FY 2006 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 greatest of the FY 1982, FY 1987, or FY 2002 costs 
per discharge. In the FY 2008 IPPS final rule with comment period (72 
FR 47152 through 47188), we established a policy of applying the 
documentation and coding adjustment to the hospital-specific rates. In 
that final rule with comment period, 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, we relied on section 1886(d)(3)(A)(vi) of the 
Act, which provides us with 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 the 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 the 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'' 
under section 1886(d) of the Act and does not mention adjusting the 
hospital-specific rates.
    In the FY 2009 IPPS proposed rule (73 FR 23540), we indicated that 
we continued 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 documentation and coding changes that do not reflect real 
increases in patients' severity of illness. In section 
1886(d)(3)(A)(vi) of the Act, 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 rates should not have the potential 
to realize increased payments due to documentation and coding changes 
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 provision authorizes us 
to provide ``for such other exceptions and adjustments to [IPPS] 
payment amounts * * * as the Secretary deems appropriate.'' In the FY 
2009 IPPS final rule (73 FR 48448 through 48449), we indicated that, 
for the FY 2010 rulemaking, we planned to examine our FY 2008 claims 
data for hospitals paid based on the hospital-specific rate. We further 
indicated that if we found evidence of significant increases in case-
mix for patients treated in these hospitals that do not reflect real 
changes in case-mix, we would consider

[[Page 24098]]

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.
    In response to public comments received on the FY 2009 IPPS 
proposed rule, we stated in the FY 2009 IPPS final rule that we would 
consider whether such a proposal is warranted for FY 2010. To gather 
information to evaluate these considerations, we indicated that we 
planned 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 found that application of 
the documentation and coding adjustment to the hospital-specific rates 
for FY 2010 is warranted, we indicated that we would include a proposal 
to do so in the FY 2010 IPPS proposed rule.
8. Proposed Documentation and Coding Adjustment to the Hospital-
Specific Rates for FY 2010 and Subsequent Fiscal Years
    We performed a retrospective evaluation of the FY 2008 claims data 
for SCHs and MDHs using the same methodology described earlier for 
other IPPS hospitals. We found that, independently for both SCHs and 
MDHs, the change due to documentation and coding that did not reflect 
real changes in case-mix for discharges occurring during FY 2008 
slightly exceeded the 2.5 percent result discussed earlier, but did not 
significantly differ from that result.
    Again, we found that the within-base DRG increases were almost 
entirely responsible for the case-mix change. In Figure 2 below, we 
show that, for SCHs, there was a 5 percentage point increase in the 
discharges with an MCC from 17 percent to 22 percent and a 
corresponding decrease of 5 percentage points from 59 percent to 54 
percent in discharges without a CC or an MCC. In Figure 3 below, we 
show that, for MDHs, there was a 5 percentage point increase in the 
discharges with an MCC from 15 percent to 20 percent and a decrease of 
6 percentage points from 60 percent to 54 percent in discharges without 
a CC or an MCC.
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    The largest within-base DRG contributors for both types of 
hospitals are heart failure and shock, chronic obstructive pulmonary 
disease, and simple pneumonia and pleurisy. For each of these 
conditions, a significant decrease in the percentage of discharges 
without a CC or an MCC was observed.
    Therefore, consistent with our statements in prior IPPS rules, we 
are proposing to use our authority under section 1886(d)(5)(I)(i) of 
the Act to prospectively adjust the hospital-specific rates by -2.5 
percent in FY 2010 to account for our estimated documentation and 
coding effect in FY 2008 that does not reflect real changes in case-
mix. We are proposing to leave this adjustment in place for subsequent 
fiscal years in order to ensure that changes in documentation and 
coding resulting from the adoption of the MS-DRGs do not lead to an 
increase in aggregate payments for SCHs and MDHs not reflective of an 
increase in real case-mix. This proposed -2.5 percent adjustment to the 
hospital-specific rates exceeds the proposed -1.9 percent adjustment to 
the national standardized amount under section 7(b)(1)(A) of Public Law 
110-90 because, unlike the national standardized rates, the FY 2008 
hospital-specific rates were not previously reduced in order to account 
for anticipated changes in documentation and coding that do not reflect 
real changes in case-mix resulting from the adoption of the MS-DRGs.
    Consistent with our proposed approach for IPPS hospitals discussed 
earlier, we will address in the FY 2011 rulemaking cycle any changes in 
documentation and coding that do not reflect real changes in case-mix 
for discharges occurring during FY 2009. We note that, unlike the 
national standardized rates, the FY 2009 hospital-specific rates were 
not previously reduced in order to account for anticipated changes in 
documentation and coding that do not reflect real changes in case-mix 
resulting from the adoption of the MS-DRGs.
    We are seeking public comment on the proposed -2.5 percent 
prospective adjustment to the hospital-specific rates under section 
1886(d)(5)(I)(i) of the Act and addressing in the FY 2011 rulemaking 
cycle any changes in FY 2009 case-mix due to changes in documentation 
and coding that do not reflect real changes in case-mix for discharges 
occurring during FY 2009. We intend to update our analysis with FY 2008 
data on claims paid through March 2008 for the FY 2010 IPPS final rule.
9. Background on the 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 Secretary 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 the FY 2009 
IPPS final rule (73 FR 48449), we corrected this inadvertent error by 
removing the -0.6 percent documentation and coding adjustment from the 
FY 2008 Puerto Rico-specific rates.
    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, 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 changes 
that do not reflect real increases in patients' severity of illness. 
Consistent with the approach described for SCHs and MDHs, in the FY 
2009 IPPS final rule (73 FR 48449), we indicated that we planned to 
examine our FY 2008 claims data for hospitals in Puerto Rico. We 
indicated in the FY 2009 IPPS proposed rule (73 FR 23541), that if we 
found 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.
10. Proposed Documentation and Coding Adjustment to the Puerto Rico-
Specific Standardized Amount
    We performed a retrospective evaluation of the FY 2008 claims data 
for Puerto Rico hospitals using the same methodology described earlier 
for IPPS hospitals paid under the national standardized amounts under 
section 1886(d) of the Act. We found that, for Puerto Rico hospitals, 
the increase in payments for discharges occurring during FY 2008 due to 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FY 2008 was approximately 1.1 percent. 
When we calculate the within-base DRG changes and the across-base DRG 
changes for Puerto Rico hospitals, we find that responsibility for the 
case-mix change between FY 2007 and FY 2008 is much more evenly shared. 
Across-base DRG shifts account for 44 percent of the changes, and 
within-base DRG shifts account for 56 percent. Thus, the change in the 
percentage of discharges with an MCC is not as large as that for other 
IPPS hospitals. In Figure 4 below, we show that, for Puerto Rico 
hospitals, there was a 3 percentage point increase in the discharges 
with an MCC from 22 percent to 25 percent and a corresponding decrease 
of 3 percentage points from 58 percent to 55 percent in discharges 
without a CC or an MCC.

[[Page 24101]]

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    The top contributing base DRGs to the case-mix change due to the 
within-base DRG changes differ partially from those of other hospitals. 
The top three are acute myocardial infarction, major small and large 
bowel procedures, and chronic obstructive pulmonary disease.
    Given these documentation and coding increases, consistent with our 
statements in prior IPPS rules, we are proposing to use our authority 
under section 1886(d)(5)(I)(i) of the Act to adjust the Puerto Rico-
specific standardized amount by -1.1 percent in FY 2010 to account for 
the FY 2008 documentation and coding increase not due to changes in 
real case-mix and to leave that adjustment in place for subsequent 
fiscal years. The proposed -1.1 percent adjustment will be applied to 
the Puerto Rico-specific rate that accounts for 25 percent of payments 
to Puerto Rico hospitals, with the remaining 75 percent based on the 
national standardized amount, which we are proposing to adjust as 
described above. Consequently, the overall reduction to the payment 
rates for Puerto Rico hospitals to account for documentation and coding 
changes will be slightly less than the reduction for IPPS hospitals 
paid based on 100 percent of the national standardized amount. We note 
that, as with the hospital-specific rates, the Puerto Rico-specific 
standardized amount had not previously been reduced based on estimated 
changes in documentation and coding associated with the adoption of the 
MS-DRGs.
    Consistent with our proposed approach for IPPS hospitals discussed 
above, we will address in the FY 2011 rulemaking cycle any change in FY 
2009 case-mix due to documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FY 2009. We note 
that, unlike the national standardized rates, the FY 2009 hospital-
specific rates were not previously reduced in order to account for 
anticipated changes in documentation and coding that do not reflect 
real changes in case-mix resulting from the adoption of the MS-DRGs.
    We are seeking public comment on the proposed -1.1 percent 
prospective adjustment to the hospital-specific rates under section 
1886(d)(5)(I)(i) of the Act and addressing in the FY 2011 rulemaking 
cycle any changes in FY 2009 case-mix due to changes in documentation 
and coding that did not reflect real changes in case-mix for discharges 
occurring during FY 2009. We intend to update our analysis with FY 2008 
data on claims paid through March 2008 for the FY 2010 IPPS final rule.

E. Refinement of the MS-DRG Relative Weight Calculation

1. Background
    In the FY 2009 IPPS final rule (73 FR 48450), we continued to 
implement significant revisions to Medicare's inpatient hospital rates 
by completing 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 expressed in the public comments we received on the proposal, 
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. (We refer readers to 
the FY 2007 IPPS final rule for details on the HSRVcc methodology and 
the 3-year transition blend from charge-based relative weights to cost-
based relative weights (71 FR 47882 through 47898).)
    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.
    In FY 2009, the third and final year of the transition from charge-
based weights to cost-based weights, we calculated the MS-DRG relative 
weights based on 100 percent of hospital costs. We refer readers to the 
FY 2007 IPPS final rule (71 FR 47882) for a more

[[Page 24102]]

detailed discussion of 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.
a. Summary of the RTI Study of Charge Compression and CCR Refinement
    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 January 2007 with its 
findings on charge compression (which was posted on the CMS Web site 
at: http://www.cms.hhs.gov/reports/downloads/Dalton.pdf). In that 
report, RTI found that a number of factors contribute to charge 
compression and affect the accuracy of the relative weights. RTI's 
findings demonstrated that charge compression exists in several CCRs, 
most notably in the Medical Supplies and Equipment CCR.
    In its interim draft report, RTI offered a number of 
recommendations to mitigate the effects of charge compression, 
including estimating regression-based CCRs to disaggregate the Medical 
Supplies Charged to Patients, Drugs Charged to Patients, and Radiology 
cost centers, and 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''. (For more details on 
RTI's findings and recommendations, we refer readers to the FY 2009 
IPPS final rule (73 FR 48452).) 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 recommendation to 
create 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 the OPPS rely on cost-based weights, we preferred to introduce any 
methodological adjustments to both payment systems at the same time. 
RTI's analysis of charge compression has since been expanded to 
incorporate outpatient services. RTI evaluated the cost estimation 
process for the OPPS cost-based relative weights, including a 
reassessment of the regression-based CCR models using both outpatient 
and inpatient charge data. This interim report was made available in 
April 2008 during the public comment period on the FY 2009 IPPS 
proposed rule and 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, were included in the July 3, 2008 RTI final 
report entitled, ``Refining Cost-to-Charge Ratios for Calculating APC 
[Ambulatory Payment Classification] and DRG Relative Payment Weights,'' 
that became available at the time of the development of the FY 2009 
IPPS 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. 
Importantly, RTI found that, under the IPPS and the OPPS, accounting 
improvements to the cost reporting data reduce 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 sufficiently refined to support more accurate 
CCR estimates under both the IPPS and the OPPS.
    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 the other rate adjustments 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. For a 
more detailed summary of RTI's findings, recommendations, and public 
comments we received on the report, we refer readers to the FY 2009 
IPPS final rule (73 FR 48452 through 48453).
b. Summary of the RAND Corporation Study of Alternative Relative Weight 
Methodologies
    One of the reasons 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 the RAND Corporation as 
the contractor to evaluate the HSRV methodology in conjunction with 
regression-based CCRs, and that we would consider its analysis as we 
prepared for the FY 2009 IPPS rulemaking process. In the FY 2009 IPPS 
final rule (73 FR 48453 through 48457), we provided a summary of the 
RAND report and the public comments we received in response to the FY 
2009 IPPS proposed rule. The report may be found on RAND's Web site at: 
http://www.rand.org/pubs/working_papers/WR560/.
    RAND evaluated six different methods that could be used to 
establish relative weights, CMS' current relative weight methodology of 
15 national CCRs and 5 alternatives, including a method in which the 15 
national CCRs are disaggregated using the regression-based methodology, 
and a method using hospital-specific CCRs for the 15 cost center 
groupings. In addition, RAND analyzed our standardization methodologies 
that account for systematic cost differences across hospitals. The 
purpose of standardization is to eliminate

[[Page 24103]]

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, under which a 
hospital's wage index factor, and IME and/or DSH factor, are divided 
out of its estimated DRG cost; the HSRV methodology, which 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.
    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 (that is, understated). 
However, RAND also found that the hospital payment factors are 
overstated and increase more rapidly than cost. Therefore, while the 
relative weights are compressed, these payment factors offset the 
compression such that total payments to hospitals increase more rapidly 
than hospitals' costs.
    RAND found that relative weights using the 19 national 
disaggregated regression-based CCRs result in significant 
redistributions in payments among hospital groupings. However, RAND did 
not believe the regression-based charge compression adjustments 
significantly improve payment accuracy. 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. RAND concluded that 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.
2. Summary of FY 2009 Changes and Discussion for FY 2010
    In the FY 2009 IPPS final rule (73 FR 48458 through 48467), in 
response to the RTI's recommendations concerning cost report 
refinements, and because of RAND's finding that regression-based 
adjustments to the CCRs do not significantly improve payment accuracy, 
we discussed our decision to pursue changes to the cost report to split 
the 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.'' We acknowledged, as RTI 
had found, that charge compression occurs in several cost centers that 
exist on the Medicare cost report. However, as we stated in the final 
rule, we focused 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. In 
determining what should be reported in these respective cost centers, 
we adopted the commenters' recommendation that hospitals should use 
revenue codes established by AHA's National Uniform Billing Committee 
to determine what should be reported in the ``Medical Supplies Charged 
to Patients'' and the ``Implantable Devices Charged to Patients'' cost 
centers.
    When we developed the FY 2009 IPPS final rule, we considered all of 
the public comments we received both for and against adopting 
regression-based CCRs. Also noteworthy is RAND's belief that 
regression-based CCRs may not significantly 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 continue to 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 proposing to adopt regression-based 
CCRs for the calculation of the FY 2010 IPPS relative weights.
    However, we are concerned about RAND's finding that there are 
significant limitations of CMS' current hospital payment factor 
standardization method. As summarized above, RAND found that the 
current standardization 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, use them to standardize cost, and revise the 
analysis of payment accuracy to reflect only the cost-related 
component. However, RAND cautions that ``re-estimating'' these payment 
factors ``raises important policy issues that warrant additional 
analyses'' (page 49 of RAND's report, which is available on the Web 
site at: http://www.rand.org/pubs/working_papers/WR560/), particularly 
to ``determine the analytically justified-levels using the MS-DRGs'' 
(page 86 of the RAND report). 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 of RTI's final report, which is available at 
the Web site at: http://www.rti.org/reports/cms/HHSM-500-2005-0029I/PDF/Refining_Cost_to_Charge_Ratios_200807_Final.pdf). While it 
may be more accurate to standardize using the empirically justified 
levels of the IME and DSH adjustments, consideration needs to be given 
to the extent to which these payment factors offset the compression of 
the relative weights.
    We understand that MedPAC has performed an analysis to identify 
empirically justifiable formulas for determining appropriate IME and 
DSH adjustments. For example, in its March 2007 report (and reiterated 
in its March 2009 report), MedPAC asserts that the current level of the 
IME adjustment factor, 5.5 percent for every 10 percent increase in 
resident-to-bed ratio, overstates IME payments by more than

[[Page 24104]]

twice the empirically justified level, resulting in approximately $3 
billion in overpayments. The empirical level of the IME adjustment is 
estimated to be 2.2 percent for every 10 percent increase in the 
resident-to-bed ratio. We cannot propose to change the IME and DSH 
factors used for actual payment under the IPPS because these factors 
are mandated by law. However, under section 1886(d)(4) of the Act, we 
have the authority to determine the appropriate weighting factor for 
each MS-DRG (including which factors or method we will employ in making 
annual adjustments to the MS-DRGs so as to reflect changes in the 
relative use of hospital resources). In addition, section 1886(d)(7)(B) 
of the Act precludes judicial review of our methodology for determining 
the appropriate weighting factors. Therefore, we do have some 
flexibility in what factors may be used for standardization purposes. 
For purposes of standardization only, one option may be for CMS to use 
the empirically justified IME adjustment of 2.2 percent, such that only 
the cost-related component of teaching hospitals is removed from the 
claim charges prior to calculating the relative weights. Similarly, for 
the DSH adjustment, in its March 2007 report, MedPAC found that costs 
per case increase about 0.4 percent for each 10 percent increase in the 
low income patient percentage. This is significantly less than the 
percentage increase expressed by the current factors used in the DSH 
payment formulas. (According to MedPAC, in FY 2004, about $5.5 billion 
in DSH payments were made above the empirically justified level.) In 
looking only at urban hospitals with greater than 100 beds, which 
manifest the strongest positive correlation between cost and low income 
patient share, MedPAC found that costs increase about 1.4 percent for 
every 10 percent increment of the low-income patient percentage. MedPAC 
did not find a positive cost relationship between low-income patient 
percentage and costs per case for urban hospitals with less than 100 
beds and/or for rural hospitals. Therefore, for purposes of 
standardizing for the DSH adjustment, an option we may consider is to 
incorporate an adjustment factor of 1.4 percent for urban hospitals 
with greater than 100 beds, and to remove the DSH payment adjustment 
altogether for other hospitals that otherwise currently qualify for DSH 
payment. While we cannot predict the effect of using the empirical 
factors for IME and DSH in the standardized methodology on the relative 
weights without further analysis, dividing out (that is, excluding) 
reduced IME and DSH payment factors from a hospital's total payment 
would result in a greater share of teaching and DSH hospitals' costs 
used in calculating the relative weights. With respect to the wage 
index, because there are multiple wage index factors, one for each 
geographic area, determining the true cost associated with geographic 
location and standardizing for those costs is much more challenging. 
While we are not proposing changes for FY 2010, in light of the 
previous discussion of the current IME and DSH adjustments in the 
standardization process, we are interested in receiving public comments 
as to how the standardization process can be improved to more precisely 
remove cost differences across hospitals, thereby improving the 
accuracy of the relative weights in subsequent fiscal years.
3. Timeline for Revising the Medicare Cost Report
    As mentioned in the FY 2009 IPPS final rule (73 FR 48467), we are 
currently in the process of comprehensively reviewing the Medicare 
hospital cost report, and the finalized policy from the FY 2009 IPPS 
final rule 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 report. Under an effort initiated by CMS to update the Medicare 
hospital cost report to eliminate outdated requirements in conjunction 
with provisions of the Paperwork Reduction Act (PRA), we have been 
planning to propose the actual changes to the cost reporting form, the 
attending cost reporting software, and the cost reporting instructions 
in Chapter 40 of the Medicare Provider Reimbursement Manual (PRM), Part 
II. Under the effort to update the cost report and eliminate outdated 
requirements in conjunction with the provisions of the PRA, changes to 
the cost reporting form and cost reporting instructions would be made 
available to the public for comment. Thus, the public would have an 
opportunity to suggest comprehensive reforms (which they had advocated 
in the FY 2009 IPPS final rule in response to our proposals), 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.
    In the FY 2009 IPPS final rule (73 FR 48468), we stated that we 
expect the revised cost reporting forms that reflect one cost center 
for ``Medical Supplies Charged to Patients'' and one cost center for 
``Implantable Devices Charged to Patients'' would not be available 
until cost reporting periods beginning after the Spring of 2009. At 
this time, we anticipate that the transmittal to create this new cost 
center will be issued in June 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 or calendar year, we may be 
able to derive two distinct CCRs, one for medical supplies and one for 
devices, for use in calculating the FY 2013 IPPS relative weights and 
the CY 2013 OPPS relative weights. Until the revised cost reporting 
forms are published, hospitals must include costs and charges of 
separately chargeable medical supplies and implantable medical devices 
in the cost center for ``Medical Supplies Charged to Patients'' 
(section 2202.8 of the PRM-I), and effective for cost reporting periods 
specified in the revised cost reporting forms, hospitals must include 
costs and charges of separately chargeable medical supplies in the cost 
center for ``Medical Supplies Charged to Patients'' and of separately 
chargeable implantable medical devices in the new ``Implantable Devices 
Charged to Patients'' cost center.

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

1. Statutory Authority
    Section 1886(d)(4)(D) of the Act addresses certain hospital-
acquired conditions (HACs), including infections. By October 1, 2007, 
the Secretary was required to select, in consultation with CDC, at 
least two conditions that: (a) Are high cost, high volume, or both; (b) 
are assigned to a higher paying MS-DRG when present as a secondary 
diagnosis (that is, conditions under the MS-DRG system that are CCs or 
MCCs); and (c) could reasonably have been prevented through the 
application of evidence-based guidelines. The list of conditions can be 
revised from time to time, again in consultation with CDC, as long as 
the list contains at least two conditions.
    Medicare continues to assign a discharge to a higher paying MS-DRG 
if a selected condition is present on admission (POA). However, since 
October 1, 2008, Medicare no longer assigns an inpatient hospital 
discharge to a higher paying MS-DRG if a selected

[[Page 24105]]

condition is not POA. That is, if there is a HAC, the case is paid as 
though the secondary diagnosis was not present. 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.
    Since October 1, 2007, hospitals have been required to submit 
information on Medicare claims specifying whether diagnoses were POA. 
The POA indicator reporting requirement and the HAC payment provision 
apply to IPPS hospitals only. Non-IPPS hospitals, including CAHs, 
LTCHs, IRFs, IPFs, cancer hospitals, children's hospitals, hospitals in 
Maryland operating under waivers, rural health clinics, federally 
qualified health centers, RNHCIs, and Department of Veterans Affairs/
Department of Defense hospitals, are exempt from POA reporting and the 
HAC payment provision. Throughout this section, the term ``hospital'' 
refers to IPPS hospitals.
2. HAC Selection Process
    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 through 24726), we 
sought 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 selected 8 categories to which the HAC payment provisions 
would apply.
    In the FY 2009 IPPS proposed rule (73 FR 23547), we proposed 
several additional candidate HACs and proposed refinements to the 
previously selected HACs. In the FY 2009 IPPS final rule (73 FR 48471), 
we expanded and refined several of the previously-selected HACs and we 
selected 2 additional categories of HACs. A complete list of the 10 
current categories of HACs is included in section II.F.4. of this 
preamble.
3. Collaborative Process
    CMS experts have 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 
have 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. On December 18, 2008, CMS and CDC again 
hosted a jointly sponsored HAC and POA Listening Session to receive 
input from interested organizations and individuals. Experts from AHRQ 
also participated in the event. The agenda, presentations, audio file, 
and written transcript of the December 18, 2008, Listening Session are 
available on the CMS Web site at: http://www.cms.hhs.gov/HospitalAcqCond/07_EducationalResources.asp#TopOfPage.
4. Selected HAC Categories
    The following table lists the current HACs.

------------------------------------------------------------------------
                  HAC                         CC/MCC (ICD-9-CM code)
------------------------------------------------------------------------
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
 --Fracture                               the CC/MCC list: 800-829, 830-
 --Dislocation                            839, 850-854, 925-929, 940-
 --Intracranial Injury                    949, 991-994.
 --Crushing Injury
 --Burn
 --Electric Shock
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 Infections:
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), 998.59 (CC).
 Certain Orthopedic Procedures.
                                         And one of the following
                                          procedure codes: 81.01-81.08,
                                          81.23-81.24, 81.31-81.38,
                                          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), 415.19 (MCC),
 Embolism Following Certain Orthopedic    453.40-453.42 (MCC).
 Procedures.                             And one of the following
                                          procedure codes: 00.85-00.87,
                                          81.51-81.52, or 81.54.
------------------------------------------------------------------------

    We refer readers to section II.F.6. of the FY 2008 IPPS final rule 
with comment period (72 FR 47202 through 47218) and to section II.F.7. 
of the FY 2009 IPPS final rule with comment period (73 FR 48474 through 
48486) for detailed analyses supporting the selection of each of these 
HACs.
    The list of selected HAC categories is dependent upon CMS' list of 
diagnoses designated as CC/MCCs. As changes and/or new diagnosis codes 
are proposed and finalized to the list of CC/MCCs, these changes need 
to be reflected in the list of selected HAC

[[Page 24106]]

categories. We refer readers to Table 6A in the Addendum to this 
proposed rule for proposed changes. In Table 6A, we are proposing the 
following changes that reflect the new diagnosis codes that are within 
the fracture code range for the falls/trauma HAC category:

------------------------------------------------------------------------
                                                           Proposed CC/
       ICD-9-CM code               Code descriptor              MCC
                                                           designations
------------------------------------------------------------------------
813.46....................  Torus fracture of ulna......              CC
813.47....................  Torus fracture of radius and              CC
                             ulna.
------------------------------------------------------------------------

    If these proposed CC designations for ICD-9-CM codes 813.46 and 
813.47 are finalized, these codes will be adopted within the fracture 
code range for the falls/trauma HAC category.
5. Public Input Regarding Selected and Potential Candidate HACs
    We are not proposing to add or remove categories of HACs at this 
time. However, we continue to encourage public dialogue about 
refinements to the HAC list. During and after the December 18, 2008 
Listening Session, we received many oral and written stakeholder 
comments about both previously selected and potential candidate HACs.
    Some stakeholders commented on previously selected HACs. For 
example, one commenter requested a coding change to the Stages III and 
IV Pressure Ulcer HAC. The commenter recommended that CMS include the 
following ICD-9-CM codes to further define pressure ulcers as a HAC: 
(1) 707.20 (Pressure ulcer, unspecified stage); and (2) 707.25 
(Pressure ulcer, unstageable). However, these codes are not classified 
as CCs or MCCs and, therefore, do not meet the statutory requirement of 
causing a higher paying MS-DRG.
    Commenters strongly supported using information gathered from early 
experience with the HAC payment provision to inform maintenance of the 
HAC list and consideration of future potential candidate HACs. Now that 
we have early program data, we are focused on evaluating the impact of 
the HAC payment provision through a joint program evaluation with CDC 
and AHRQ. That evaluation process will provide valuable information for 
future policymaking aimed at preventing HACs. Commenters emphasized 
during the IPPS FY 2009 rulemaking and during and after the December 
18, 2008 Listening Session the need for a robust program evaluation 
prior to changing the HAC list.
    As an early aspect of the program evaluation, we plan to analyze 
the available POA data. This early analysis may be useful for future 
HAC policymaking and for other purposes like identifying priorities for 
the development of HAC prevention guidelines.
6. POA Indicator Reporting
    Collection of POA indicator data is necessary to identify which 
conditions were acquired during hospitalization for the HAC payment 
provision as well as for broader public health uses of Medicare data. 
Through Change Request No. 5679 (released on June 20, 2007), CMS issued 
instructions requiring IPPS hospitals to submit POA indicator data for 
all diagnosis codes on Medicare claims. CMS also issued Change Request 
No. 6086 (released on June 13, 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 on the CDC 
Web site at: http://www.cdc.gov/nchs/datawh/ftpserv/ftpicd9/icdguide07.pdf (the POA reporting guidelines begin on page 92). 
Additional information regarding POA indicator reporting and 
application of the POA reporting options is available on the CMS Web 
site at: http://www.cms.hhs.gov/HospitalAcqCond. CMS has historically 
not provided coding advice. Rather, CMS collaborates 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 Guidelines for Coding and Reporting:

------------------------------------------------------------------------
             Indicator                           Descriptor
------------------------------------------------------------------------
Y.................................  Indicates that the condition was
                                     present on admission.
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 Guidelines for Coding and
                                     Reporting.
------------------------------------------------------------------------

    In the FY 2009 IPPS final rule (73 FR 48487), we adopted our 
proposal to: (1) Pay the CC/MCC MS-DRGs for those HACs coded with ``Y'' 
and ``W'' indicators; and (2) not pay the CC/MCC MS-DRGs for those HACs 
coded with ``N'' and ``U'' indicators. We are not proposing changes to 
the payment implications of the POA indicator reporting options at this 
time.
    As we have noted in previous IPPS rulemaking documents, most 
recently in the FY 2009 IPPS final rule (73 FR 48487), 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. Further, Medicare program 
integrity initiatives closely monitor for inaccurate coding and coding 
inconsistent with medical record documentation.

G. Proposed Changes to Specific MS-DRG Classifications

1. MDC 5 (Diseases and Disorders of the Circulatory System): 
Intraoperative Fluorescence Vascular Angiography (IFVA)
    We received a request to reassign cases reporting the use of 
intraoperative fluorescence vascular angiography (IFVA) with coronary 
artery bypass graft (CABG) procedures from MS-DRGs 235 and 236 
(Coronary Bypass without Cardiac Catheterization with and without MCC, 
respectively) into MS-DRG 233 (Coronary Bypass with Cardiac 
Catheterization with MCC) and MS-DRG 234 (Coronary Bypass with Cardiac 
Catheterization without MCC). Effective October 1, 2007, procedure code 
88.59 (Intraoperative fluorescence vascular angiography (IFVA)) 
describes this technology.
    IFVA technology consists of a mobile device imaging system with 
software. The technology is used to test cardiac graft patency and 
technical adequacy at the time of coronary artery bypass grafting 
(CABG). While this system does not involve fluoroscopy or cardiac 
catheterization, it has been suggested by the manufacturer and clinical 
studies that it yields results that are similar to those achieved with 
selective coronary

[[Page 24107]]

arteriography and cardiac catheterization. Intraoperative coronary 
angiography provides information about the quality of the anastomosis, 
blood flow through the graft, distal perfusion and durability. For 
additional detailed information regarding IFVA technology, we refer 
readers to the September 28-29, 2006 ICD-9-CM Coordination and 
Maintenance Committee meeting handout at the following Web site: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/03_meetings.asp#TopOfPage.
    We examined data on cases identified by procedure code 88.59 in MS-
DRGs 233, 234, 235, and 236 in the FY 2008 MedPAR file. As shown in the 
table below, for both MS-DRGs 235 and 236, the cases utilizing IFVA 
technology identified by procedure code 88.59 have a shorter length of 
stay and lower average costs compared to all cases in MS-DRGs 235 and 
236. There were a total of 10,312 cases in MS-DRG 235 with an average 
length of stay of 11.12 days with average costs of $33,846. There were 
88 cases in MS-DRG 235 identified by procedure code 88.59 with an 
average length of stay of 9.82 days with average costs of $29,258. In 
MS-DRG 236, there were a total of 24,799 cases with an average length 
of stay of 6.52 days and average costs of $22,329. There were 159 cases 
in MS-DRG 236 identified by procedure code 88.59 with an average length 
of stay of 6.30 days and average costs of $20,404. The data clearly 
demonstrate that the IFVA cases identified by procedure code 88.59 are 
assigned appropriately to MS-DRGs 235 and 236. We also examined data on 
cases identified by procedure code 88.59 in MS-DRGs 233 and 234. 
Similarly, in MS-DRGs 233 and 234, cases identified by procedure code 
88.59 reflect shorter lengths of stay and lower average costs compared 
to all of the other cases in those MS-DRGs. There were a total of 
17,453 cases in MS-DRG 233 with an average length of stay of 13.65 days 
with average costs of $41,199. There were 60 cases in MS-DRG 233 
identified by procedure code 88.59 with an average length of stay of 
12.82 days and average costs of $38,842. In MS-DRG 234, there were a 
total of 27,003 cases with an average length of stay of 8.70 days and 
average costs of $28,327. There were 69 cases in MS-DRG 234 identified 
by procedure code 88.59 with an average length of stay of 8.75 days and 
average costs of $25,308. As a result of our analysis, the data 
demonstrate that the IFVA cases identified by procedure code 88.59 are 
appropriately assigned to MS-DRGs 233 and 234.

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        cost*
------------------------------------------------------------------------
235--All cases...................       10,312        11.12      $33,846
235--Cases with code 88.59.......           88         9.82       29,258
235--Cases without code 88.59....       10,224        11.14       33,886
236--All cases...................       24,799         6.52       22,329
236--Cases with code 88.59.......          159         6.30       20,404
236--Cases without code 88.59....       24,640         6.52       22,341
------------------------------------------------------------------------


 
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        cost*
------------------------------------------------------------------------
233--All cases...................       17,453        13.65      $41,199
233--Cases with code 88.59.......           60        12.82       38,842
233--Cases without code 88.59....       17,393        13.65       41,207
234--All cases...................       27,003         8.70       28,327
234--Cases with code 88.59.......           69         8.75       25,308
234--Cases without code 88.59....       26,934         8.70      28,334
------------------------------------------------------------------------
* In the FY 2007 IPPS final rule (71 FR 47882), we adopted a cost-based
  weighting methodology. The cost-based weights were adopted over a 3-
  year transition period in 1/3 increments between FY 2007 and FY 2009.
  The average cost represents the average standardized charges on the
  claims reduced to cost using the cost center-specific CCRs for a
  specific DRG. The standardization process includes adjustments for
  IME, DSH, and wage index as applied to individual hospitals. This
  estimation of cost is the same method used in the computation of the
  relative weights. We are using cost-based data instead of our
  historical charge-based data to evaluate proposed MS-DRG
  classification changes.

    We believe that if the cases identified by procedure code 88.59 
were proposed to be reassigned from MS-DRGs 235 and 236 to MS-DRGs 233 
and 234, they would be significantly overpaid. In addition, because the 
cases in MS-DRGs 235 and 236 did not actually have a cardiac 
catheterization performed, a proposal to reassign cases identified by 
procedure code 88.59 would result in lowering the relative weights of 
MS-DRGs 233 and 234 where a cardiac catheterization is truly performed.
    In summary, the data do not support moving IFVA cases identified by 
procedure code 88.59 from MS-DRGs 235 and 236 into MS-DRGs 233 and 234. 
We invite the public to submit comments on our proposal not to make any 
MS-DRG modifications for cases reporting procedure code 88.59 for FY 
2010.
2. MDC 8 (Diseases and Disorders of the Musculoskeletal System and 
Connective Tissue): Infected Hip and Knee Replacements
    We received a request that we examine the issue of patients who 
have undergone hip or knee replacement procedures that have 
subsequently become infected and who are then admitted for inpatient 
services for removal of the prosthesis. The requestor stated that these 
patients are presented with devastating complications and require 
extensive resources to treat. The infection often results in the need 
for multiple re-operations, prolonged use of intravenous and oral 
antibiotics, extended rehabilitation, and frequent followups. 
Furthermore, the requestor stated that, even with extensive treatment, 
the outcomes can still be poor for some of these patients. The 
requestor stated that patients who are admitted for inpatient services 
with an infected hip or knee prosthesis must first undergo a procedure 
to remove the prosthesis and to insert an antibiotic spacer to treat 
the infection and maintain a space for the new prosthesis. The new 
prosthesis cannot be inserted until after the infection has been 
treated. Patients who are admitted for inpatient services with a hip or 
knee infection and then undergo a removal of the prosthesis are 
captured by the following procedure codes:

[[Page 24108]]

     80.05 (Arthrotomy for removal of prosthesis, hip)
     80.06 (Arthrotomy for removal of prosthesis, knee)
    In addition, code 84.56 (Insertion or replacement of (cement) 
spacer) would be used for any insertion of a spacer that would be 
reported if an antibiotic spacer were inserted.
    The issue of hip and knee infections and revisions was discussed in 
the FY 2009 IPPS final rule (73 FR 48498 through 48507) in response to 
a more complicated request that we received involving the creation and 
modification of several joint DRGs. Because data did not support the 
requestor's suggested changes, we did not make any modifications to the 
joint DRGs at that time.
    The current requestor asked that we move cases involving the 
removal of hip and knee prostheses (procedure codes 80.05 and 80.06) 
from their current assignment in MS-DRGs 480, 481, and 482 (Hip and 
Femur Procedures Except Major Joint with MCC, with CC, without CC/MCC, 
respectively) and in MS-DRGs 495, 496, and 497 (Local Excision of 
Internal Fixation Device Except Hip and Femur with MCC, with CC, and 
with CC/MCC, respectively) and assign them to MS-DRGs 463, 464, and 465 
(Wound Debridement and Skin Graft Except Hand, for Musculo-Connective 
Tissue Disease with MCC, with CC, without CC/MCC, respectively). MS-
DRGs 463, 464, and 465 include cases that are treated with a 
debridement for infection. The requestor stated that these cases are 
clinically similar to those captured by procedure codes 80.05 and 80.06 
where the prosthesis is removed and a new prosthesis is not inserted 
because of an infection.
    The requestor specifically asked that we remove the hip arthrotomy 
code 80.05 from MS-DRGs 480, 481, and 482, and assign it to MS-DRGs 
463, 464, and 465. The requestor also recommended that we remove the 
knee arthrotomy code 80.06 from MS-DRGs 495, 496, and 497 and assign it 
to MS-DRGs 463, 464, and 465.
    If we were to accept the requestor's suggestion, joint replacement 
cases in which the patients were admitted for inpatient services to 
remove the prosthesis because of an infection would be assigned to the 
higher paying debridement MS-DRGs (MS-DRGs 463, 464, and 465). As 
mentioned earlier, these MS-DRGs contain other cases involving 
treatment for infections.
    We examined hip replacement cases identified by procedure code 
80.05 in MS-DRGs 480, 481, and 482, and knee replacement cases 
identified by procedure code 80.06 in MS-DRGs 495, 496, and 497 using 
the FY 2008 MedPAR file. Our data support the requestor's suggestion 
that these cases have similar costs to those in MS-DRGs 463, 464, and 
465, and that they are significantly more expensive to treat than those 
in their current MS-DRG assignments. The following table summarizes 
those findings:

------------------------------------------------------------------------
                                                  Average
              MS-DRG                Number of    length of     Average
                                      cases         stay        cost*
------------------------------------------------------------------------
463--All Cases...................        4,834        16.59      $26,696
464--All Cases...................        4,934         9.52       15,065
465--All Cases...................        1,696         5.45        9,041
480--All Cases...................       31,181         8.89       17,168
480--Cases with code 80.05.......          643        13.35       26,053
480--Cases without code 80.05....       30,538         8.80       16,981
481--All Cases...................       72,406         5.68       11,259
481--Cases with code 80.05.......          871         8.34       17,202
481--Cases without code 80.05....       71,535         5.65       11,187
482--All Cases...................       37,443         4.65        9,320
482--Cases with code 80.05.......          282         6.82       13,718
482--Cases without code 80.05....       37,161         4.63        9,287
495--All Cases...................        2,140        10.40       18,729
495--Cases with code 80.06.......          513        11.53       23,508
495--Cases without code 80.06....        1,627        10.04       17,432
496--All Cases...................        5,518         5.73       10,827
496--Cases with code 80.06.......        1,346         6.67       14,454
496--Cases without code 80.06....        4,172         5.42        9,657
497--All Cases...................        5,856         2.84        7,148
497--Cases with code 80.06.......          688         5.08       12,234
497--Cases without code 80.06....        5,168         2.54       6,470
------------------------------------------------------------------------
* In the FY 2007 IPPS final rule (71 FR 47882), we adopted a cost-based
  weighting methodology. The cost-based weights were adopted over a 3-
  year transition period in 1/3 increments between FY 2007 and FY 2009.
  The average cost represents the average standardized charges on the
  claims reduced to cost using the cost center-specific CCRs for a
  specific DRG. The standardization process includes adjustments for
  IME, DSH, and wage index as applied to individual hospitals. This
  estimation of cost is the same method used in the computation of the
  relative weights. We are using cost-based data instead of our
  historical charge-based data to evaluate proposed MS-DRG
  classification changes.

    The data show that hip replacement cases with procedure code 80.05 
in MS-DRGs 480, 481, and 482 have average costs of $26,053, $17,202, 
and $13,718, respectively, compared to overall average costs of $17,168 
in MS-DRG 480; $11,259 in MS-DRG 481; and $9,320 in MS-DRG 482. The 
data also show that knee replacement cases with procedure code 80.06 in 
MS-DRGs 495, 496, and 497 have average costs of $23,508, $14,454, and 
$12,234, respectively, compared to average costs of all cases of 
$18,729 in MS-DRG 495, $10,827 in MS-DRG 496, and $7,148 in MS-DRG 497. 
All cases in MS-DRGs 463, 464, and 465 had average costs of $26,696, 
$15,065, and $9,041, respectively.
    The results of this analysis of data support the reassignment of 
procedure codes 80.05 and 80.06 to MS-DRGs 463, 464, and 465. 
Therefore, we are proposing to move procedure codes 80.05 and 80.06 
from their current assignments in MS-DRGs 480, 481, and 482 and 495, 
496, and 497 and assign them to MS-DRGs 463, 464, and 465. We also are 
proposing to revise the code title of procedure code 80.05 to read 
``Arthrotomy for removal of prosthesis without replacement, hip'' and 
the title of procedure code 80.06 to read ``Arthrotomy for removal of 
prosthesis without replacement, knee'', effective October 1, 2009, as 
is shown in Table

[[Page 24109]]

6F of the Addendum to this proposed rule.
3. Proposed 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. For FY 2010, 
we are proposing to make the following changes to the MCE edits:
a. 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.'' In the FY 2009 IPPS final rule, we 
indicated that we were adding the following four codes to this MCE 
edit:
     603.0 (Encysted hydrocele)
     603.1 (Infected hydrocele)
     603.8 (Other specified types of hydrocele)
     603.9 (Hydrocele, unspecified).
    We 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 indicated that we were adding these codes for FY 2009. 
However, through an oversight, we failed to implement the indicated FY 
2009 changes to the MCE by adding codes 603.0, 603.1, 603.8, and 603.9 
to the MCE edit of diagnosis allowed for males only. In this FY 2010 
IPPS proposed rule, we are acknowledging this omission and are again 
proposing to make the changes.
b. Manifestation Codes as Principal Diagnosis Edit
    Manifestation codes describe the manifestation of an underlying 
disease, not the disease itself. Therefore, manifestation codes should 
not be used as a principal diagnosis. The National Center for Health 
Statistics (NCHS) has removed the advice ``code first associated 
disorder'' from three codes, thereby making them acceptable principal 
diagnosis codes. These codes are:
     365.41 (Glaucoma associated with chamber angle anomalies)
     365.42 (Glaucoma associated with anomalies of iris)
     365.43 (Glaucoma associated with other anterior segment 
anomalies)
    In order to make conforming changes to the MCE, we are proposing to 
remove codes 365.41, 365.42, and 365.43 from the Manifestation Code as 
Principal Diagnosis Edit.
c. Invalid Diagnosis or Procedure Code
    The MCE checks each diagnosis, including the admitting diagnosis, 
and each procedure against a table of valid ICD-9-CM codes. If an 
entered code does not agree with any code on the list, it is assumed to 
be invalid or that the 4th or 5th digit of the code is invalid or 
missing.
    An error was discovered in this edit. ICD-9-CM code 00.01 
(Therapeutic ultrasound of vessels of head and neck) was inadvertently 
left out of the MCE tables. The inclusion of this code in the MCE 
tables would have generated an error message at the Medicare contractor 
level, but we had instructed the Medicare contractors to override this 
edit for discharges on or after October 1, 2008. To make a conforming 
change to the MCE, we are proposing to add code 00.01 to the table of 
valid codes.
d. Unacceptable Principal Diagnosis
    There are selected codes that describe a circumstance that 
influences an individual's health status but not a current illness or 
injury and codes that are not specific manifestations but may describe 
illnesses due to an underlying cause. These codes are considered 
unacceptable as a principal diagnosis.
    For FY 2008, a series of diagnostic codes were created at 
subcategory 209, Neuroendocrine Tumors. An instructional note under 
this subcategory stated that coders were to ``Code first any associated 
multiple endocrine neoplasia syndrome (258.01-258.03)''. Medicare 
contractors had interpreted this note to mean that none of the codes in 
subcategory 209 were acceptable principal diagnoses and had entered 
these codes on the MCE edit for unacceptable principal diagnoses. We 
later deemed this interpretation to be incorrect. We had not intended 
that the series of codes at subcategory 209 were only acceptable as 
secondary diagnoses.
    To avoid future misinterpretation, in this proposed rule, we are 
proposing to remove the following codes from the MCE edit for 
unacceptable principal diagnoses.
     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)
     209.40 (Benign carcinoid tumor of the small intestine, 
unspecified portion)
     209.41 (Benign carcinoid tumor of the duodenum)
     209.42 (Benign carcinoid tumor of the jejunum)
     209.43 (Benign carcinoid tumor of the ileum)
     209.50 (Benign carcinoid tumor of the large intestine, 
unspecified portion)
     209.51 (Benign carcinoid tumor of the appendix)
     209.52 (Benign carcinoid tumor of the cecum)
     209.53 (Benign carcinoid tumor of the ascending colon)
     209.54 (Benign carcinoid tumor of the transverse colon)
     209.55 (Benign carcinoid tumor of the descending colon)
     209.56 (Benign carcinoid tumor of the sigmoid colon)
     209.57 (Benign carcinoid tumor of the rectum)
     209.60 (Benign carcinoid tumor of unknown primary site)
     209.61 (Benign carcinoid tumor of the bronchus and lung)
     209.62 (Benign carcinoid tumor of the thymus)

[[Page 24110]]

     209.63 (Benign carcinoid tumor of the stomach)
     209.64 (Benign carcinoid tumor of the kidney)
     209.65 (Benign carcinoid tumor of foregut, not otherwise 
specified)
     209.66 (Benign carcinoid tumor of midgut, not otherwise 
specified)
     209.67 (Benign carcinoid tumor of hindgut, not otherwise 
specified)
     209.69 (Benign carcinoid tumor of other sites)
    In the meantime, CMS has issued instructions in the form of an 
interim working document called a joint signature memorandum to the 
Medicare contractors to override this edit and process claims 
containing codes from the subcategory 209 series as acceptable 
principal diagnoses.
e. Proposed Creation of New Edit Titled ``Wrong Surgeries''
    On January 15, 2009, CMS issued three National Coverage Decision 
memoranda on the coverage of erroneous surgeries on Medicare patients: 
Wrong Surgical or Other Invasive Procedure Performed on a Patient (CAG-
00401N); Surgical or Other Invasive Procedure Performed on the Wrong 
Body Part (CAG-00402N); and Surgical or Other Invasive Procedure 
Performed on the Wrong Patient (CAG-00403N). We refer readers to the 
following CMS Web sites to view the memoranda in their entirety: For 
the decision memorandum on surgery on the wrong body part: https://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=222. For the decision 
memorandum on surgery on the wrong patient: https://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=221. For the decision memorandum on the 
wrong surgery performed on a patient: https://www.cms.hhs.gov/mcd/viewdecisionmemo.asp?id=223.
    To conform to these new coverage decisions, in this proposed rule, 
we are proposing to create a new edit to identify cases in which wrong 
surgeries occurred. The NCHS has revised the title of one E-code and 
created two new E-codes to identify cases in which incorrect surgeries 
have occurred. The revised E-code title is:
     E876.5 (Performance of wrong operation (procedure) on 
correct patient).
    The two new E-codes are as follows:
     E876.6 (Performance of operation (procedure) on patient 
not scheduled for surgery)
     E876.7 (Performance of correct operation (procedure) on 
wrong side/body part)
    A complete list of all of the E-codes that will be implemented on 
October 1, 2009, can be found on the CMS Web site home page at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/07_summarytables.asp#TopOfPage in the download titled ``New, Deleted, and 
Invalid Diagnosis and Procedure Codes.''
    Currently, an E-code used as a principal diagnosis will receive the 
MCE Edit ``E-code as principal diagnosis''. This edit will remain in 
effect. However, we are proposing a change to the MCE so that E-codes 
E876.5 through E876.7, whether they are in the principal or secondary 
diagnosis position, will trigger the ``Wrong Surgery'' edit. Any claim 
with this edit will be denied and returned to the provider.
f. Procedures Allowed for Females Only Edit
    It has come to our attention that code 75.37 (Amnioinfusion) and 
code 75.38 (Fetal pulse oximetry) were inadvertently omitted from the 
MCE edit ``Procedures Allowed for Females Only.'' In order to correct 
this omission, we are proposing to add codes 75.37 and 75.38 and to the 
edit for procedures allowed for females only.
4. 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 ``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 costs of MS-DRG 1 is higher 
than that of MS-DRG 3, but the average costs of MS-DRGs 4 and 5 are 
higher than the average costs 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 costs 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 cost is 
ordered above a surgical class with a higher average cost. 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 costs for the MS-DRG or MS-DRGs in that 
surgical class may be higher than those 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 
costs for two surgical classes is very small. We have found that small 
differences

[[Page 24111]]

generally do not warrant reordering of the hierarchy because, as a 
result of reassigning cases on the basis of the hierarchy change, the 
average costs are likely to shift such that the higher-ordered surgical 
class has a lower average costs than the class ordered below it.
    For FY 2010, we are not proposing any revisions to the surgical 
hierarchy.
5. Complications or Comorbidity (CC) Exclusions List
a. Background
    As indicated earlier in the preamble of this proposed 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 47121 through 47152).
b. CC Exclusions List for FY 2010
    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.\2\
---------------------------------------------------------------------------

    \2\ 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; the FY 2008 final rule (72 
FR 47130) for the FY 2008 revisions, and the FY 2009 final rule (73 
FR 48510). 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 2010, we are proposing to make 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, 2009. (See 
section II.G.7. of the preamble of this proposed rule for a discussion 
of ICD-9-CM changes.) We are proposing to make these changes in 
accordance with the principles established when we created the CC 
Exclusions List in 1987.
    Tables 6G and 6H, Additions to and Deletions from the CC Exclusion 
List, respectively, which would be effective for discharges occurring 
on or after October 1, 2009, are not being published in this proposed 
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, 2009, 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 of the Addendum to this proposed 
rule, we are providing the following summaries of those MCC and CC 
changes.

         Summary of Additions to the MS-DRG MCC List--Table 6I.1
------------------------------------------------------------------------
               Code                              Description
------------------------------------------------------------------------
277.88............................  Tumor lysis syndrome.
670.22............................  Puerperal sepsis, delivered, with
                                     mention of postpartum complication.
670.24............................  Puerperal sepsis, postpartum
                                     condition or complication.
670.32............................  Puerperal septic thrombophlebitis,
                                     delivered, with mention of
                                     postpartum complication.
670.34............................  Puerperal septic thrombophlebitis,
                                     postpartum condition or
                                     complication.
670.80............................  Other major puerperal infection,
                                     unspecified as to episode of care
                                     or not applicable.
670.82............................  Other major puerperal infection,
                                     delivered, with mention of
                                     postpartum complication.
670.84............................  Other major puerperal infection,
                                     postpartum condition or
                                     complication.
756.72............................  Omphalocele.
756.73............................  Gastroschisis.
768.73............................  Severe hypoxic-ischemic
                                     encephalopathy.
779.32............................  Bilious vomiting in newborn.
------------------------------------------------------------------------


[[Page 24112]]


        Summary of Deletions From the MS-DRG MCC List--Table 6I.2
------------------------------------------------------------------------
               Code                              Description
------------------------------------------------------------------------
768.7.............................  Hypoxic-ischemic encephalopathy
                                     (HIE).
------------------------------------------------------------------------


         Summary of Additions to the MS-DRG CC List--Table 6J.1
------------------------------------------------------------------------
               Code                              Description
------------------------------------------------------------------------
209.71............................  Secondary neuroendocrine tumor of
                                     distant lymph nodes.
209.72............................  Secondary neuroendocrine tumor of
                                     liver.
209.73............................  Secondary neuroendocrine tumor of
                                     bone.
209.74............................  Secondary neuroendocrine tumor of
                                     peritoneum.
209.79............................  Secondary neuroendocrine tumor of
                                     other sites.
416.2.............................  Chronic pulmonary embolism.
453.50............................  Chronic venous embolism and
                                     thrombosis of unspecified deep
                                     vessels of lower extremity.
453.51............................  Chronic venous embolism and
                                     thrombosis of deep vessels of
                                     proximal lower extremity.
453.52............................  Chronic venous embolism and
                                     thrombosis of deep vessels of
                                     distal lower extremity.
453.6.............................  Venous embolism and thrombosis of
                                     superficial vessels of lower
                                     extremity.
453.71............................  Chronic venous embolism and
                                     thrombosis of superficial veins of
                                     upper extremity.
453.72............................  Chronic venous embolism and
                                     thrombosis of deep veins of upper
                                     extremity.
453.73............................  Chronic venous embolism and
                                     thrombosis of upper extremity,
                                     unspecified.
453.74............................  Chronic venous embolism and
                                     thrombosis axillary veins.
453.75............................  Chronic venous embolism and
                                     thrombosis of subclavian veins.
453.76............................  Chronic venous embolism and
                                     thrombosis of internal jugular
                                     veins.
453.77............................  Chronic venous embolism and
                                     thrombosis of other thoracic veins.
453.79............................  Chronic venous embolism and
                                     thrombosis of other specified
                                     veins.
453.81............................  Acute venous embolism and thrombosis
                                     of superficial veins of upper
                                     extremity.
453.82............................  Acute venous embolism and thrombosis
                                     of deep veins of upper extremity.
453.83............................  Acute venous embolism and thrombosis
                                     of upper extremity, unspecified.
453.84............................  Acute venous embolism and thrombosis
                                     of axillary veins.
453.85............................  Acute venous embolism and thrombosis
                                     of subclavian veins.
453.86............................  Acute venous embolism and thrombosis
                                     of internal jugular veins.
453.87............................  Acute venous embolism and thrombosis
                                     of other thoracic veins.
453.89............................  Acute venous embolism and thrombosis
                                     of other specified veins.
569.71............................  Pouchitis.
569.79............................  Other complications of intestinal
                                     pouch.
670.10............................  Puerperal endometritis, unspecified
                                     as to episode of care or not
                                     applicable.
670.12............................  Puerperal endometritis, delivered,
                                     with mention of postpartum
                                     complication.
670.14............................  Puerperal endometritis, postpartum
                                     condition or complication.
670.20............................  Puerperal sepsis, unspecified as to
                                     episode of care or not applicable.
670.30............................  Puerperal septic thrombophlebitis,
                                     unspecified as to episode of care
                                     or not applicable.
768.70............................  Hypoxic-ischemic encephalopathy,
                                     unspecified.
768.71............................  Mild hypoxic-ischemic
                                     encephalopathy.
768.72............................  Moderate hypoxic-ischemic
                                     encephalopathy.
813.46............................  Torus fracture of ulna (alone).
813.47............................  Torus fracture of radius and ulna.
------------------------------------------------------------------------


        Summary of Deletions From the MS-DRG CC List--Table 6J.2
------------------------------------------------------------------------
               Code                              Description
------------------------------------------------------------------------
453.8.............................  Other venous embolism and thrombosis
                                     of other specified veins.
------------------------------------------------------------------------

    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 MS-DRG Definitions Manual, Version 26.0, is available for 
$250.00, which includes shipping and handling. 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. Version 27.0 of this manual, which 
will include the final FY 2010 MS-DRG changes, will be available in CD 
only for $225.00. 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, or by obtaining an order form at the Web site: 
http://www.3MHIS.com. Please specify the revision or revisions 
requested.
6. Review of Procedure Codes in MS DRGs 981 through 983; 984 through 
986; and 987 through 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

[[Page 24113]]

     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.\3\
---------------------------------------------------------------------------

    \3\ 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 FYs 2008 and 2009, no 
procedures were moved, as noted in the FY 2008 final rule with 
comment period (72 FR 46241), and in the FY 2009 final rule (73 FR 
48513).
---------------------------------------------------------------------------

    For FY 2010, we are not proposing to change the procedures assigned 
among these MS-DRGs.
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 MS-DRGs 
into one of the surgical MS-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 2010, we are not proposing to remove any procedures from MS-DRGs 981 
through 983 or MS-DRGs 987 through 989.
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 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 MS-DRGs to another of the three MS-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 MS-DRG assignment illogical. If we find these shifts, we 
would propose to move cases to keep the MS-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 2010, we are not proposing to move any procedure codes among 
these MS-DRGs.
c. Adding Diagnosis or Procedure Codes to MDCs
    Based on our review this year, we are not proposing to add any 
diagnosis codes to MDCs for FY 2010.
7. Changes to the ICD-9-CM Coding System
    As described in section II.B.1. of the preamble of this proposed 
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 $19.00 by 
calling (202) 512-1800.) Complete information on ordering the CD-ROM is 
also available at: http://www.cms.hhs.gov/ICD9ProviderDiagnosticCodes/05_CDROM.asp#TopOfPage. 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 2010 at a public meeting held on September 24-25, 
2008 and finalized the coding changes after consideration of comments 
received at the meetings and in writing by December 5, 2008. Those 
coding changes are announced in Tables 6A through 6F in the Addendum to 
this proposed rule. The Committee held its 2009 meeting on March 11-12, 
2009. New codes for which there was a

[[Page 24114]]

consensus of public support and for which complete tabular and indexing 
changes are made by May 2009 will be included in the October 1, 2009 
update to ICD-9-CM. Code revisions that were discussed at the March 11-
12, 2009 Committee meeting but that could not be finalized in time to 
include them in the Addendum to this proposed rule are not included in 
Tables 6A through 6F. These additional codes will be included in Tables 
6A through 6F of the final rule and will be marked with an asterisk 
(*).
    Copies of the minutes of the procedure codes discussions at the 
Committee's September 24-25, 2008 meeting and March 11-12, 2009 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 24-25, 2008 meeting and 
March 11-12, 2009 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, 2009. The new ICD-9-CM codes are listed, along 
with their DRG classifications, in Tables 6A and 6B (New Diagnosis 
Codes and New Procedure Codes, respectively) in the Addendum to this 
proposed rule. As we stated above, the code numbers and their titles 
were presented for public comment at the ICD-9-CM Coordination and 
Maintenance Committee meetings. Both oral and written comments were 
considered before the codes were approved. In this FY 2010 IPPS 
proposed rule, we are only soliciting comments on the proposed 
classification of these new codes.
    For codes that have been replaced by new or expanded codes, the 
corresponding new or expanded diagnosis codes are included in Table 6A 
in the Addendum to this proposed rule. New procedure codes are shown in 
Table 6B in the Addendum to this proposed rule. Diagnosis codes that 
have been replaced by expanded codes or other codes or have been 
deleted are in Table 6C (Invalid Diagnosis Codes) in the Addendum to 
this proposed rule. These invalid diagnosis codes will not be 
recognized by the GROUPER beginning with discharges occurring on or 
after October 1, 2009. Table 6D in the Addendum to this proposed rule 
contains invalid procedure codes. These invalid procedure codes will 
not be recognized by the GROUPER beginning with discharges occurring on 
or after October 1, 2009. Revisions to diagnosis code titles are in 
Table 6E (Revised Diagnosis Code Titles) in the Addendum to this 
proposed rule, which also includes the MS-DRG assignments for these 
revised codes. Table 6F in the Addendum to this proposed rule includes 
revised procedure code titles for FY 2010.
    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 11-12, 2009 Committee meeting 
that receive consensus and that were finalized by May 2009 will be 
included in Tables 6A through 6F in the Addendum to the final rule.
    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

[[Page 24115]]

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 1, 2009 implementation of an ICD-9-CM 
code at the September 24-25, 2008 Committee meeting. Therefore, there 
were no new ICD-9-CM codes implemented on April 1, 2009.
    Current addendum and code title information is published on the CMS 
Web site at: http://www.cms.hhs.gov/icd9ProviderDiagnosticCodes/01_overview.aspTopofPage. 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/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 
Medicare 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.

H. Recalibration of MS-DRG Weights

    In section II.E. of the preamble of this proposed rule, we state 
that we fully implemented the cost-based DRG relative weights for FY 
2009, which was 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.
    In developing the FY 2010 proposed 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 2008 MedPAR data used in this proposed rule include 
discharges occurring on October 1, 2007, through September 30, 2008, 
based on bills received by CMS through December 31, 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 2008 MedPAR file used in calculating the 
relative weights includes data for approximately 11,648,471 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 2007 Medicare cost report data files from HCRIS 
(that is, cost reports beginning on or after October 1, 2006, and 
before October 1, 2007), which represents the most recent full set of 
cost report data available. We used the December 31, 2008 update of the 
HCRIS cost report files for FY 2007 in setting the relative cost-based 
weights.
    The methodology we used to calculate the DRG cost-based relative 
weights from the FY 2008 MedPAR claims data and FY 2007 Medicare cost 
report data is as follows:
     To the extent possible, all the claims were regrouped 
using the proposed FY 2010 MS-DRG classifications discussed in sections 
II.B. and G. of the preamble of this proposed 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 2008 MedPAR file. (Medicare coverage for heart, heart-
lung, liver and/or intestinal, and lung transplants is limited to those 
facilities that have received approval from CMS as transplant centers.)
     Organ acquisition costs for kidney, heart, heart-lung, 
liver, lung, pancreas, and intestinal (or multivisceral organs) 
transplants continue to be paid on a reasonable cost basis. Because 
these acquisition costs are paid separately from the prospective 
payment rate, it is necessary to subtract the acquisition charges from 
the total charges on each transplant bill that showed acquisition 
charges before computing the average cost for each MS-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

[[Page 24116]]

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 MS-DRG.
     Effective October 1, 2008, because hospital inpatient 
claims include a POA indicator field for each diagnosis present on the 
claim, the POA indicator field was reset to ``Y'' for ``Yes'' just for 
relative weight-setting purposes for all claims that otherwise have an 
``N'' (No) or a ``U'' (documentation insufficient to determine if the 
condition was present at the time of inpatient admission) in the POA 
field.
    Under current payment policy, the presence of specific HAC codes, 
as indicated by the POA field values, can generate a lower payment for 
the claim. Specifically, if the particular condition is present on 
admission (that is, a ``Y'' indicator is associated with the diagnosis 
on the claim), then it is not a ``HAC,'' and the hospital is paid with 
the higher severity (and, therefore, higher weighted MS-DRG). If the 
particular condition is not present on admission (that is, an ``N'' 
indicator is associated with the diagnosis on the claim) and there are 
no other complicating conditions, the DRG GROUPER assigns the claim to 
a lower severity (and, therefore, lower weighted) MS-DRG as a penalty 
for allowing a Medicare inpatient to contract a ``HAC.'' While this 
meets policy goals of encouraging quality care and generates program 
savings, it presents an issue for the relative weight-setting process. 
Because cases identified as HACs are likely to be more complex than 
similar cases that are not identified as HACs, the charges associated 
with HACs are likely to be higher as well. Thus, if the higher charges 
of these HAC claims are grouped into lower severity MS-DRGs prior to 
the relative weight-setting process, the relative weights of these 
particular MS-DRGs would become artificially inflated, potentially 
skewing the relative weights. In addition, we want to protect the 
integrity of the budget neutrality process by ensuring that, in 
estimating payments, no increase to the standardized amount occurs as a 
result of lower overall payments in a previous year that stem from 
using weights and case-mix that are based on lower severity MS-DRG 
assignments. If this would occur, the anticipated cost savings from the 
HAC policy would be lost. To avoid these problems, we are proposing to 
reset the POA indicator field to ``Y'' just for relative weight-setting 
purposes for all claims that otherwise have an ``N'' or a ``U'' in the 
POA field. This ``forces'' the more costly HAC claims into the higher 
severity MS-DRGs as appropriate, and the relative weights calculated 
for each MS-DRG more closely reflect the true costs of those cases.
    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, and DSH payments under the capital 
IPPS as well. Charges were then summed by MS-DRG for each of the 15 
cost groups so that each MS-DRG had 15 standardized charge totals. 
These charges were then adjusted to cost by applying the national 
average CCRs developed from the FY 2007 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.
BILLING CODE 4120-01-P

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[GRAPHIC] [TIFF OMITTED] TP22MY09.004


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[GRAPHIC] [TIFF OMITTED] TP22MY09.005


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[GRAPHIC] [TIFF OMITTED] TP22MY09.007


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[GRAPHIC] [TIFF OMITTED] TP22MY09.008


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[GRAPHIC] [TIFF OMITTED] TP22MY09.009


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[GRAPHIC] [TIFF OMITTED] TP22MY09.010

BILLING CODE 4120-01-C
    We developed the national average CCRs as follows:
    Taking the FY 2007 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 MS-DRG in each of 
the 15 cost centers by the corresponding national average CCR, we 
summed the 15 ``costs'' across each MS-DRG to produce a total 
standardized cost for the MS-DRG. The average standardized cost for 
each MS-DRG was then computed as the total standardized cost for the 
MS-DRG divided by the transfer-adjusted case count for the MS-DRG. The 
average cost for each MS-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 1.54005 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 proposed national average CCRs for FY 2010 are as follows:

------------------------------------------------------------------------
                           Group                                 CCR
------------------------------------------------------------------------
Routine Days...............................................        0.534
Intensive Days.............................................        0.469
Drugs......................................................        0.199
Supplies & Equipment.......................................        0.344
Therapy Services...........................................        0.408
Laboratory.................................................        0.160
Operating Room.............................................        0.281
Cardiology.................................................        0.178
Radiology..................................................        0.161
Emergency Room.............................................        0.276
Blood and Blood Products...................................        0.426
Other Services.............................................        0.418
Labor & Delivery...........................................        0.460
Inhalation Therapy.........................................        0.199
Anesthesia.................................................        0.134
------------------------------------------------------------------------

    As we explained in section II.E. of the preamble of this proposed 
rule, we have completed 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 were based on 100 percent cost 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 proposing to use that same case 
threshold in recalibrating the MS-DRG weights for FY 2010. Using the FY 
2008 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. Newborns are unique and 
require separate MS-DRGs that are not mirrored in the adult population. 
Therefore, it remains necessary to retain separate MS-DRGs for 
newborns. All of the low-volume MS-DRGs listed below are for newborns. 
In FY 2010, because we do not have sufficient MedPAR data to set 
accurate and stable cost weights for these low-volume MS-DRGs, we are 
proposing to compute weights for the low-volume MS-DRGs by adjusting 
their FY 2009 weights by the percentage change in the average weight of 
the

[[Page 24124]]

cases in other MS-DRGs. The crosswalk table is shown below:

------------------------------------------------------------------------
    Low-volume MS-DRG          MS-DRG title         Crosswalk to MS-DRG
------------------------------------------------------------------------
768.....................  Vaginal Delivery with   FY 2009 FR weight
                           O.R. Procedure Except   (adjusted by percent
                           Sterilization and/or    change in average
                           D&C.                    weight of the cases
                                                   in other MS-DRGs).
789.....................  Neonates, Died or       FY 2009 FR weight
                           Transferred to          (adjusted by percent
                           Another Acute Care      change in average
                           Facility.               weight of the cases
                                                   in other MS-DRGs).
790.....................  Extreme Immaturity or   FY 2009 FR weight
                           Respiratory Distress    (adjusted by percent
                           Syndrome, Neonate.      change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
791.....................  Prematurity with Major  FY 2009 FR weight
                           Problems.               (adjusted by percent
                                                   change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
792.....................  Prematurity without     FY 2009 FR weight
                           Major Problems.         (adjusted by percent
                                                   change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
793.....................  Full-Term Neonate with  FY 2009 FR weight
                           Major Problems.         (adjusted by percent
                                                   change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
794.....................  Neonate with Other      FY 2009 FR weight
                           Significant Problems.   (adjusted by percent
                                                   change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
795.....................  Normal Newborn........  FY 2009 FR weight
                                                   (adjusted by percent
                                                   change in average
                                                   weight of the cases
                                                   in other MS-DRGs).
------------------------------------------------------------------------

I. Proposed 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.'' We note that beginning with FY 2008, CMS 
transitioned from CMS-DRGs to MS-DRGs.
    The regulations implementing these provisions specify three 
criteria for a new medical service or technology to receive an 
additional payment: (1) The medical service or technology must be new; 
(2) the medical service or technology must be costly such that the DRG 
rate otherwise applicable to discharges involving the medical service 
or technology is determined to be inadequate; and (3) the service or 
technology must demonstrate a substantial clinical improvement over 
existing services or technologies. These three criteria are explained 
below in the ensuing paragraphs in further detail.
    Under the first criterion, as reflected in 42 CFR 412.87(b)(2), 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 MS-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 MS-DRG weights. For example, data from discharges 
occurring during FY 2008 are used to calculate the FY 2010 MS-DRG 
weights in this proposed rule. Section 412.87(b)(2) of the regulations 
therefore 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 proposed 
rule, we generally 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 MS-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 (as 
specified under Sec.  412.87(b)(2)). For example, an approved new 
technology that received FDA approval in October 2008 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, 2011 (the start 
of FY 2012). Because the FY 2012 MS-DRG weights would be calculated 
using FY 2010 MedPAR data, the costs of such a new technology would be 
fully reflected in the FY 2012 MS-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 2012 and thereafter.
    Under the second criterion, Sec.  412.87(b)(3) further provides 
that, to be eligible for the add-on payment for new medical services or 
technologies,

[[Page 24125]]

the MS-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 MS-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 MS-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 MS-DRG to which the new 
medical service or technology is assigned (or the case-weighted average 
of all relevant MS-DRGs, if the new medical service or technology 
occurs in more than one MS-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 Public Law 108-173.) Table 10 that was 
included in the notice published in the Federal Register on October 3, 
2008, contains the final thresholds that are being used to evaluate 
applications for new technology add-on payments for FY 2010 (73 FR 
57888).
    We note that section 124 of Public Law 110-275 extended, 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 and 
49107) and extended under section 117 of Public Law 110-173 (the 
MMSEA). 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. Therefore, the thresholds reflected in Table 10 in the 
Addendum to the FY 2009 IPPS final rule were tentative. As noted 
earlier, on October 3, 2008, we published a Federal Register notice (73 
FR 57888) that contained a new Table 10 with revised thresholds that 
reflect the wage index rates for FY 2009 as a result of implementation 
of section 124 of Public Law 110-275. The revised thresholds also were 
published on the CMS Web site. The revised thresholds published in 
Table 10 in the October 3, 2008 Federal Register notice are being used 
to determine if an applicant for new technology add-on payments 
discussed in this FY 2010 proposed rule meets the cost criterion 
threshold for new technology add-on payments for FY 2010.
    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.)
    Under the third criterion, Sec.  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 cost to 
charge ratios (``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 MS-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 MS-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 MS-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

[[Page 24126]]

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.
    In the FY 2009 IPPS final rule (73 FR 48561 through 48563), we 
modified our regulations at Sec.  412.87 to codify our current practice 
of how CMS evaluates the eligibility criteria for new medical service 
or technology add-on payment applications. We also amended Sec.  
412.87(c) to specify that all applicants for new technology add-on 
payments must have FDA approval for their new medical service or 
technology by July 1 of each year prior to the beginning of the fiscal 
year that the application is being considered.
    Applicants for add-on payments for new medical services or 
technologies for FY 2011 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. To allow interested parties to identify the new 
medical services or technologies under review before the publication of 
the proposed rule for FY 2011, the Web site also will 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. At the same time, the CTI also works 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 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 has developed an ``innovator's guide'' to 
these processes. 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. This guide was 
published in August 2008 and is available on the CMS Web site at: 
http://www.cms.hhs.gov/CouncilonTechInnov/Downloads/InnovatorsGuide8_25_08.pdf.
    As we indicated in the FY 2009 IPPS final rule (73 FR 48554), we 
invite any product developers or manufacturers of new medical 
technologies to contact the agency 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/).
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 2010 prior 
to publication of this proposed rule, we published a notice in the 
Federal Register on November 28, 2008 (73 FR 72490), and held a town 
hall meeting at the CMS Headquarters Office in Baltimore, MD, on 
February 17, 2009. 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 2010 new medical service and technology add-on payment 
applications before the publication of the FY 2010 IPPS proposed rule.
    Approximately 90 individuals registered to attend the town hall 
meeting in person, while additional individuals listened over an open 
telephone line. Each of the five FY 2010 applicants presented 
information on its

[[Page 24127]]

technology, including a 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 2010 in 
this proposed rule.
    In response to the published notice and the new technology town 
hall meeting, we received two written comments regarding applications 
for FY 2010 new technology add-on payments. We have summarized these 
comments or, if applicable, indicated that there were no comments 
received, at the end of each discussion of the individual applications. 
We did not receive any general comments about the application of the 
substantial clinical improvement criterion.
    A further discussion of our evaluation of the applications and the 
documentation for new technology add-on payments submitted for FY 2010 
approval is provided under the specified areas under this section.
3. FY 2010 Status of Technologies Approved for FY 2009 Add-On Payments
    We approved one application for new technology add-on payments for 
FY 2009: CardioWestTM Temporary Total Artificial Heart 
System (CardioWestTM TAH-t).
    SynCardia Systems, Inc. submitted an application for approval of 
the CardioWest TM temporary Total Artificial Heart system 
(TAH-t). 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 May 1, 2008, CMS issued a final 
national coverage determination (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's 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.)
    We indicated in the FY 2009 IPPS final rule (73 FR 48555) that, 
because Medicare's previous coverage policy with respect to this device 
had precluded payment from Medicare, we did not expect the costs 
associated with this technology to be currently reflected in the data 
used to determine the relative weights of MS-DRGs. As we have indicated 
in the past, and as we discussed in the FY 2009 IPPS final 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 represented such a case. We also 
noted 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) since the time of its FDA approval, because the TAH-t had 
not been covered under the Medicare program (and, therefore, no 
Medicare payment had been made for this technology), this code could 
not be ``used with respect to inpatient hospital services for which 
payment'' is made under the IPPS, and thus we assumed that none of the 
costs associated with this technology would be reflected in the 
Medicare claims data used to recalibrate the MS-DRG relative weights 
for FY 2009. For this reason, as discussed in the FY 2009 IPPS final 
rule, despite the FDA approval date of the technology, we determined 
that TAH-t would still be eligible to be considered ``new'' for 
purposes of the new technology add-on payment because the TAH-t met the 
newness criterion on the date that Medicare coverage began, consistent 
with issuance of the final NCD, effective on May 1, 2008.
    After evaluation of the newness, costs, and substantial clinical 
improvement criteria for new technology add-on payments for the TAH-t 
and consideration of the public comments we received on the FY 2009 
IPPS proposed rule, we approved the TAH-t for new technology add-on 
payments for FY 2009 (73 FR 48557). We indicated that we believed the 
TAH-t offered a new treatment option that previously did not exist for 
patients with end-stage biventricular failure. However, we indicated 
that we recognized that Medicare coverage of the TAH-t 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. We remain interested in seeing whether the clinical evidence 
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 the TAH-t for FY 2009 is 
triggered by the presence of ICD-9-CM procedure code 37.52 
(Implantation of total heart replacement system), condition code 30, 
and the diagnosis code reflecting clinical trial--V70.7 (Examination of 
participant in clinical trial). For FY 2009 we finalized a maximum add-
on payment of $53,000 (that is 50 percent of the estimated operating 
costs of the device of $106,000) for cases that involve this 
technology. As noted above, the TAH-t is still eligible to be 
considered ``new'' for purposes of the new technology add-on payment 
because the TAH-t met the newness criterion on the date that Medicare 
coverage began, consistent with issuance of the final NCD, effective on 
May 1, 2008. Therefore, for FY 2010, we are proposing to continue new 
technology add-on payments for cases involving the TAH-t in FY 2010 
with a maximum add-on payment of $53,000.

[[Page 24128]]

4. FY 2010 Applications for New Technology Add-On Payments
    We received six applications to be considered for new technology 
add-on payment for FY 2010. However, one applicant withdrew its 
application. Emphasys Medical submitted an application for new 
technology add-on payments for FY 2010 for the Emphasys Medical 
Zephyr[supreg] Endobronchial Valve (Zephyr[supreg] EBV). However, 
Emphasys Medical withdrew its application from further review in 
December 2008. Since the Zephyr[supreg] EBV application was withdrawn 
prior to the town hall meeting and publication of the FY 2010 IPPS 
proposed rule, we are not discussing the application in this proposed 
rule.
    A discussion of the remaining five applications is presented below. 
At the time this proposed rule was developed, some of the technologies 
had not yet received FDA approval. Consequently, our discussion below 
of these cases may be limited.
a. The AutoLITT TM System
    Monteris Medical submitted an application for new technology add-on 
payments for FY 2010 for the AutoLITT TM. AutoLITT 
TM is a minimally invasive, MRI-guided catheter tipped laser 
designed to destroy malignant brain tumors with interstitial thermal 
energy and is designed to cause immediate coagulation and necrosis of 
diseased tissue. The applicant asserts that the AutoLITT TM 
delivers laser energy to the lesion with a proprietary 3mm diameter 
probe that directs the energy radially (that is, at right angle to the 
axis of the probe) toward the targeted tumor tissue in a narrow beam 
profile and at the same time, a proprietary probe cooling system 
removes heat from tissue not directly in the path of the laser beam, 
ostensibly protecting it from thermal damage and enabling the physician 
to selectively coagulate only targeted tissue. The applicant expects 
that AutoLITT TM will receive a 510K FDA clearance in early 
2009, and the FDA approval will be for use in patients with 
glioblastoma multiforme brain tumors. Because the technology is not yet 
approved by the FDA, we will limit our discussion of this technology to 
data and information that the applicant submitted, rather than make 
specific proposals with respect to whether the device would meet the 
new technology add-on payment criteria.
    With regard to the newness criterion, we are concerned that the 
AutoLITT TM may be substantially similar to the device that 
it listed as its predicate device in its application to the FDA for 
approval. The applicant identified Visual-ase as its predicate device, 
which is also used to treat tumors of the brain. Visual-ase was 
approved by the FDA in 2006. The applicant maintains that AutoLITT 
TM can be distinguished from the Visual-ase by its mechanism 
of action (that is, side-firing laser versus elliptical firing).
    A new ICD-9-CM procedure code, 17.61 (Laser interstitial thermal 
therapy [LITT] of lesion or tissue of brain under guidance), was 
recommended for approval at the September 2008 ICD-9-CM Coordination 
and Maintenance Committee meeting. If approved, the new code would 
become effective on October 1, 2009. We welcome comments from the 
public regarding whether or not the AutoLITT TM is 
substantially similar to the Visual-ase.
    In an effort to demonstrate that AutoLITT TM meets the 
cost criterion, the applicant used 2006 Medicare data from the 
Healthcare Cost and Utilization Project (HCUP). We first note that the 
applicant believes that cases eligible for the AutoLITT TM 
will map to MS-DRGs 25 (Craniotomy and Endovascular Intracranial 
Procedures with MCC), 26 (Craniotomy and Endovascular Intracranial 
Procedures with CC), and 27 (Craniotomy and Endovascular Intracranial 
Procedures without CC or MCC). The applicant searched HCUP hospital 
data for cases potentially eligible for the AutoLITT TM that 
was assigned one of the following ICD-9-CM diagnosis codes: a diagnosis 
code that begins with a prefix of 191 (Malignant neoplasm of brain); 
diagnosis code 225.0 (Benign neoplasm of brain and other parts of 
nervous system); or diagnosis code 239.6 (Neoplasm of the brain of 
unspecified nature). The applicant found 39,295 cases and weighted the 
standardized charge per case based on the amount of cases found within 
each of the diagnosis codes listed above rather than the percentage of 
cases that would group to different MS-DRGs. Based on this analysis, 
the average standardized charge per case was $46,754. While the 
applicant's analysis established a case-weighted average charge per 
case, it did not determine a case-weighted average standardized charge 
per case by MS-DRG (as required by the application). Therefore, in 
order to determine a case-weighted average standardized charge per case 
by MS-DRG, the applicant used data from a Rand health report \4\ to 
first determine the percentage of cases that would map to MS-DRGs 25, 
26, and 27 and combined this analysis with the analysis above to 
determine a case-weighted average standardized charge per case by MS-
DRG. According to its report, Rand used 2006 MedPAR claims data and 
found 63,876 cases in CMS-DRG 1 (Craniotomy Age Greater Than 17 with 
CC) and 39,878 cases in CMS-DRG 2 (Craniotomy Age Greater Than 17 
without CC) for a total of 103,754 cases. Based on ICD-9-CM procedure 
and diagnosis codes, Rand converted these cases from CMS-DRGs 1 and 2 
to MS-DRGs 25, 26, and 27. Rand determined that, of the 63,876 cases in 
CMS-DRG 1, 24,116 of these cases would map to MS-DRG 25 (or 23.2 
percent of all cases) and 39,760 cases would map to MS-DRG 26 (or 38.4 
percent of all cases). All 39,878 cases from CMS-DRG 2 would map to MS-
DRG 27 (or 38.4 percent of all cases in CMS-DRGs 1 and 2). Using the 
percentages from Rand's analysis, the case-weighted average 
standardized charge per case by MS-DRG was $46,754. We note that, 
combining the Rand analysis with the HCUP analysis did not change the 
case-weighted average standardized charge per case from the results 
from the HCUP analysis (both analyses produced a case-weighted average 
standardized charge per case of $46,754). The applicant did identify 
the average standardized charge per case in the aggregate but has yet 
to identify cases within the MS-DRGs themselves and, therefore, the 
applicant has not determined the case-weighted average standardized 
charge per case by MS-DRG.
---------------------------------------------------------------------------

    \4\ Rand Corporation: Rand Health--Understanding Medicare 
Severity-DRGs. A presentation given by Barbara Wynn at the Florida 
Hospital Association Meeting on November 1, 2007.
---------------------------------------------------------------------------

    The applicant also noted that the case-weighted average 
standardized charge per case of $46,754 did not include charges related 
to the AutoLITT TM. Therefore, it is necessary to add the 
charges related to the device to the case-weighted average standardized 
charge per case in evaluating the cost threshold criterion. Although 
the applicant submitted data related to the estimated cost of the 
AutoLITT TM per case, the applicant stated that the cost of 
the device was proprietary information. Based on a study of charge 
compression data by RTI \5\ and charge master data from Stanford 
University and University of California, San Francisco, the applicant 
estimates $24,389 in charges related to the AutoLITT TM (we 
note that some of the data used a markup of 294 percent of the costs). 
Adding the estimated charges related to the device to the case-weighted 
average standardized charge

[[Page 24129]]

per case resulted in a case-weighted average standardized charge per 
case of $71,143 ($46,754 plus $24,389). Using the FY 2010 thresholds 
published in Table 10 (73 FR 58008), the case-weighted threshold for 
MS-DRGs 25, 26, and 27 was $58,069 (all calculations above were 
performed using unrounded numbers). Because the case-weighted average 
standardized charge per case for the applicable MS-DRGs exceeds the 
case-weighted threshold amount, the applicant maintains that the 
AutoLITT TM would meet the cost criterion.
---------------------------------------------------------------------------

    \5\ RTI International, A Study of Charge Compression in 
Calculating DRG Relative Weights, RTI Project No. 0207964.012.008; 
January 2007.
---------------------------------------------------------------------------

    We invite public comment on whether or not the AutoLITT 
TM meets the cost criterion for a new technology add-on 
payment, particularly in light of the fact that the applicant did not 
determine a case-weighted average standardized charge per case by MS-
DRG (as discussed above).
    With respect to the substantial clinical improvement criterion, the 
applicant maintains that it meets this criterion in its application. 
Specifically, the applicant stated that several non-AutoLITT \TM\ 
clinical trials have demonstrated that nonfocused LITT (and more 
recently, the use of LITT plus MRI) improved survival, quality of life, 
and recovery in patients with advanced glioblastoma multiforme tumors 
and advanced metastatic brain tumors that cannot be effectively treated 
with surgery, radiosurgery, radiation, chemotherapy, or any currently 
available clinical procedure. In a number of these patients, nonfocused 
LITT was the treatment of last resort, due to either the 
unresponsiveness or inability of these therapies to treat the brain 
tumor (due to tumor location, type, or size, among others). The 
applicant also maintains that improved clinical outcomes using 
nonfocused LITT have included reduced recovery time and a reduced rate 
of complications (that is, infection, brain edema). The applicant 
stated that these factors, as discussed in the FY 2001 final rule (66 
FR 46914 through 46915) demonstrate that the AutoLITT \TM\ meets the 
new technology criterion for substantial clinical improvement.
    The applicant further asserts that AutoLITT \TM\ would represent a 
substantial clinical improvement over existing standards of care for a 
number of reasons and should build upon less sophisticated, nonfocused 
LITT therapies. These clinical improvements cited by the applicant 
include: a less invasive method of tumor ablation, potentially leading 
to lower complication rates post procedure (infection, edema); an 
ability to employ multiple interventions over shorter periods of time 
and an ability to be used as a treatment of last resort (radiosurgery 
is limited due to radiation dosing and craniotomy is limited to 1 to 2 
procedures); an ability to be used in hard-to-reach brain tumors (the 
AutoLITT \TM\ may be used as a treatment of last resort); and a shorter 
recovery time (the possibility for same day surgery, which has been 
demonstrated above with non-focused LITT).
    We appreciate the applicant's summary of why this technology 
represents a substantial clinical improvement. While we recognize the 
future potential of this interesting therapy, we have concerns that, 
besides lacking FDA approval at this time, to date the AutoLITT \TM\ 
has been used for the treatment of only a few patients as part of a 
safety evaluation with no comparative efficacy data and, therefore, 
there may not be sufficient objective clinical evidence to determine if 
the AutoLITT \TM\ meets the substantial clinical improvement criteria. 
We invite public comment on whether or not the AutoLITT \TM\ meets the 
substantial clinical improvement criterion.
    We did not receive any written public comments regarding this 
application for new technology add-on payments concerning the new 
technology town hall meeting.
b. CLOLAR [supreg] (clofarabine) Injection
    Genzyme Oncology submitted an application for new technology add-on 
payments for FY 2010 for CLOLAR [supreg] (clofarabine) injection. 
CLOLAR [supreg] is a chemotherapeutic agent that is administered 
intravenously and is currently being evaluated for the treatment of 
patients with acute myeloid leukemia (AML). CLOLAR [supreg] was first 
granted FDA approval in December 2004 for the treatment of pediatric 
patients (ages 1-21 years), a population not typically eligible for 
Medicare, with acute lymphoblastic leukemia (ALL) who did not respond 
to at least two prior treatment attempts. Genzyme Oncology submitted a 
supplement to its pediatric application (sNDA) to the FDA in November 
2008, in which it requested approval for CLOLAR[supreg] use in 
previously untreated adult patients with AML with at least one 
unfavorable baseline prognostic factor. Unfavorable prognostic factors 
include: Age greater than or equal to 70 years; antecedent hematologic 
disorder (AHD); Easter Cooperative Oncology Group (ECOG) performance 
status (PS) of 2; or intermediate/unfavorable risk karyotype. CLOLAR 
[supreg] is expecting to receive sNDA approval from the FDA by May 
2009. Because the technology is not yet approved by the FDA, we are 
limiting our discussion of this technology to data that the applicant 
submitted, rather than making specific proposals with respect to 
whether the device would meet the new technology add-on payment 
criteria.
    With regard to the newness criterion, we note that, although the 
applicant has submitted an application to the FDA for an sNDA for the 
treatment of patients with AML, the FDA approval for the new indication 
alone does not necessarily demonstrate that CLOLAR [supreg] would meet 
the newness criterion for purposes of new technology add-on payments. 
The newness criterion is intended to apply to technologies that have 
been available to Medicare beneficiaries for no more than 2 to 3 years. 
Therefore, a technology that applies for a supplemental FDA approval 
must demonstrate that the new approval is not substantially similar to 
the prior approval.
    As discussed above, the new technology add-on payment is available 
to new medical services or technologies that satisfy the three criteria 
set forth in our regulations at Sec.  412.87(b) (that is, newness, 
high-costs, and substantial clinical improvement). Typically, we begin 
our analysis with an evaluation of whether an applicant's technology 
meets what we refer to as the ``newness criterion'' under Sec.  
412.87(b)(2) (that is, whether Medicare data are available to fully 
reflect the cost of the technology in the MS-DRG weights through 
recalibration). Generally, we believe that the costs of a technology 
begin to be reflected in the hospital charge data used to recalibrate 
the MS-DRG relative weights when the technology becomes available on 
the market, usually on or soon after the date on which it receives FDA 
approval. Unlike the typical applicant for the new technology add-on 
payment, however, CLOLAR [supreg] is not new to the market but has been 
available since it was first granted FDA approval in December 2004 for 
the treatment of pediatric patients with acute lymphoblastic leukemia 
(ALL). Therefore, we first must determine whether CLOLAR [supreg] 
nevertheless should be considered a new technology if approved by the 
FDA for a new indication, specifically for use in adult patients age 70 
and above with AML.
    Congress provided for the new technology add-on payment in order to 
ensure that Medicare beneficiaries have access to new technologies. As 
discussed previously, there often is a lag time of 2 to 3 years before 
the costs of new technologies are reflected in the recalibration of the 
relevant MS-DRGs. Because a new technology often has higher costs than 
existing technologies,

[[Page 24130]]

during this lag time the current MS-DRG payment may not adequately 
reflect the costs of the new technology. The new technology add-on 
payment addresses this concern by ensuring that hospitals receive an 
add-on payment under the IPPS for costly new technologies that 
represent a substantial clinical improvement over existing technologies 
until such time when the cost of the technology is reflected within the 
MS-DRG relative weights. When an existing technology receives FDA 
approval for a new indication, similar concerns may arise. If, prior to 
the FDA approval for the new indication, the technology has not been 
used to treat Medicare patients for purposes consistent with the new 
indication, the relevant MS-DRGs may not reflect the cost of the 
technology. Consequently, Medicare beneficiaries may not have adequate 
access to the technology when used for purposes consistent with the new 
indication. Allowing the new technology add-on payment for the 
technology when used for the new indication would address this concern. 
For these reasons, we believe that treating an existing technology as 
``new'' when approved by the FDA for a new indication may be warranted 
under certain circumstances.
    In the September 7, 2001 final Rule (66 FR 46915), we stated that a 
new use of an existing technology may be eligible for the new 
technology add-on payment under certain conditions. We believe it is 
appropriate to consider an existing technology for the new technology 
add-on payments when its new use is not substantially similar to 
existing uses of the technology. In the FY 2006 IPPS final rule (70 FR 
47351), we explained our policy regarding substantial similarity in 
detail and its relevance for assessing if the hospital charge data used 
in the development of the relative weights for the relevant DRGs 
reflect the costs of the technology. In that final rule, we stated 
that, for determining substantial similiarity, we consider (1) Whether 
a product uses the same or a similar mechanism of action to achieve a 
therapeutic outcome, and (2) whether a product is assigned to the same 
or a different DRG are relevant for determining substantial similarity. 
We indicated that both of the above criteria should be met in order for 
a technology to be considered ``substantially similar'' to an existing 
technology. However, in that same final rule, we also noted that, due 
to the complexity of issues regarding the substantial similarity 
component of the newness criterion, it may be necessary to exercise 
flexibility when considering whether technologies are substantially 
similar to one another. Specifically, we stated that we may consider 
additional criteria or factors in some contexts, but not others.
    We believe that in determining whether a new use of an existing 
technology is substantially similar to existing uses of the technology, 
it may be relevant to consider not only the two criteria discussed in 
the FY 2006 IPPS final rule, but also certain additional factors. 
Specifically, we believe it may also be appropriate to analyze whether, 
as compared to existing uses of the technology, the new use involves 
the treatment of the same or similar type of disease and the same or 
similar patient population. Accordingly, we would determine that the 
new use of an existing technology is substantially similar to one or 
more existing uses of the technology if (1) the new and existing uses 
of the technology use the same or a similar mechanism of action to 
achieve a therapeutic outcome, (2) the new use of the product is 
assigned to the same MS-DRG(s) as the existing uses, and (3) the new 
use of the technology involves the treatment of the same or similar 
type of disease and the same or similar patient population. If all 
three criteria are met and the new use is deemed substantially similar 
to one or more of the existing uses of the technology (that is beyond 
the newness period), we would conclude that the technology is not new 
and, therefore is not eligible for the new technology add-on payment. 
We note that we considered, but rejected, the inclusion of the third 
factor in the FY 2006 IPPS final rule on the grounds that we believed 
that it was more relevant to analyze whether the costs of the 
technology were already reflected in the relative weights of the MS-
DRGs. However, upon further consideration, we believe that both the 
type of disease and patient population for which a technology is used 
are also relevant in determining whether one indication of a technology 
is ``substantially similar'' to another.
    We note that the discussion of substantial similarity in the FY 
2006 IPPS final rule related to comparing two separate technologies 
made by different manufacturers. Nevertheless, we believe the criteria 
discussed in the FY 2006 IPPS final rule also are relevant when 
comparing the similarity between a new use and existing uses of the 
same technology (or a very similar technology manufactured by the same 
manufacturer). In other words, it is necessary to establish that the 
new indication for which the technology has received FDA approval is 
not substantially similar to that of the prior indication. Such a 
distinction is necessary to determine the appropriate start date of the 
newness period in evaluating whether the technology would qualify for 
add-on payments (that is, the date of the ``new'' FDA approval or that 
of the prior approval), or whether the technology could qualify for 
separate new technology add-on payments under each indication. We 
welcome comments on our proposed modification to analyzing whether a 
technology is substantially similar to another.
    With respect to CLOLAR[supreg], it is relevant to consider whether 
there is a clear distinction between the types of disease that 
CLOLAR[supreg] is intended to treat and the patient populations 
described in the indications in assessing whether the indication for 
which a supplemental FDA approval is pending is substantially similar 
to the indication related to the existing FDA approval for CLOLAR. 
Accordingly, we have analyzed both the current and pending FDA 
approvals and indications in order to determine whether or not 
CLOLAR[supreg] for the treatment of ALL in patients ages 1-21 should be 
deemed substantially similar to CLOLAR[supreg] when used for the 
treatment of AML in patients ages 70 and above. In this case, we 
compared the two indications against the substantial similarity factors 
that we outlined in the FY 2006 IPPS final rule (referenced above). We 
determined that CLOLAR[supreg] meets both factors of the substantial 
similarity criteria that we outlined in the FY 2006 IPPS final rule 
(that is, the use of CLOLAR[supreg] for either indication utilizes the 
same or a similar mechanism of effect to achieve a therapeutic outcome, 
and both indications map to the same MS-DRGs). We also analyzed both 
the current and pending FDA approvals and indications against the two 
additional factors we described above (that is, whether the new 
indication as compared to the old indication would involve the use of 
CLOLAR to treat the same or similar disease and the same or similar 
patient population). In the course of our analysis, we determined that, 
although ALL and AML are both types of leukemia, they are separate and 
distinct hematologic malignancies that typically affect different 
patient populations. Furthermore, patients ages 1-21 with ALL differ 
significantly from older patients ages 70 and above with AMI in terms 
of clinical factors, such as the presence of comorbid conditions, and 
expected prognosis. Accordingly, because the two indications do not 
meet the additional factors we included under substantial similarity, 
we do not

[[Page 24131]]

believe that CLOLAR[supreg] for the indication of treatment of ALL in 
patients ages 1-21 should be considered substantially similar to 
CLOLAR[supreg] for the indication of treatment of AML in older 
patients.
    With respect to application of the newness criterion under Sec.  
412.87(b)(2), our evaluation also considers whether the data for the 
relevant MS-DRGs reflect use of the new technology for one or more 
purposes outside the previously approved indication(s). To the extent 
that the data suggest that the technology has been used outside the 
previously approved indication for more than 2 or 3 years (for example, 
the technology has been used for a purpose that is the basis of the 
newly approved indication), we believe that the costs of the technology 
for the new use are reflected in the weights assigned to the relevant 
MS-DRGs. In this case, we will conclude that the technology does not 
meet the newness criterion under Sec.  412.87(b)(2) because its costs 
are already reflected within the relevant MS-DRGs. Therefore, even if 
we determine that the new use of CLOLAR[supreg] is not substantially 
similar to the existing use of CLOLAR[supreg], we believe it is 
relevant to assess whether the likelihood that the costs of this drug 
are included in the data that goes into determining the MS-DRG relative 
weights because CLOLAR[supreg] has not been FDA approved to treat the 
types of patients that are commonly found in the Medicare population. 
Regarding this point, the applicant maintains that because of the age 
group for which CLOLAR[supreg] is currently used to treat patients with 
ALL (that is, pediatric patients who are ages 1-21 years), ``it is 
statistically improbable that claims paid under the relevant MS-DRGs 
include CLOLAR[supreg] costs.'' Currently, ICD-9-CM procedure code 
99.25 (Injection or infusion of cancer chemotherapeutic substance) 
would be used to identify the administration of CLOLAR[supreg] for the 
treatment of both ALL and AML. We note that the applicant submitted an 
application for a unique ICD-9-CM procedure code that was discussed at 
the March 11, 2009 ICD-9-CM Coordination and Maintenance Committee 
meeting. In addition, cases involving the use of CLOLAR[supreg] for 
either indication would be expected to routinely map to MS-DRGs 837, 
838, and 839 (Chemotherapy with Acute Leukemia as Secondary Diagnosis 
or High Dose Chemotherapy Agent with MCC, Chemotherapy with Acute 
Leukemia as Secondary Diagnosis with CC or High Dose Chemotherapy 
Agent, and Chemotherapy with Acute Leukemia as Secondary Diagnosis 
without CC/MCC, respectively). Although we generally agree with the 
applicant's statement that it is statistically improbable that any 
Medicare patients received CLOLAR[supreg] under the currently approved 
indication for younger patients with ALL, the applicant has not, to 
date, demonstrated that none of the inpatients who received 
CLOLAR[supreg] for the treatment of patients with ALL were Medicare 
patients. The applicant maintains that no data are available to 
identify the exact number of Medicare beneficiaries who are age 21 
years or less (that is, those patients whose age identically matches 
that of the group for whom CLOLAR[supreg] is an approved treatment). 
However, the applicant conducted an analysis of the FY 2007 MedPAR 
claims data for the MS-DRGs associated with chemotherapy treatment for 
ALL (CMS-DRG 492 and MS-DRGs 837, 838, and 839) and found that less 
than 1 percent of all claims that map to those DRGs were for patients 
who are age 25 years or less. Therefore, the applicant asserts that, 
given the small number of patients eligible to receive CLOLAR[supreg] 
for its FDA approved indication, it is statistically improbable that 
claims paid under the relevant DRGs include or adequately reflect the 
costs of CLOLAR[supreg].
    We welcome comments from the public on whether the costs of 
CLOLAR[supreg] are already included in the data used to determine the 
relative weights for the MS-DRGs to which cases involving 
CLOLAR[supreg] map and on whether the current FDA-approved indication 
of CLOLAR[supreg] is substantially similar to that of the pending one.
    In an effort to demonstrate that CLOLAR[supreg] meets the cost 
criterion, the applicant searched the FY 2007 MedPAR file for cases 
potentially eligible for CLOLAR[supreg] that were assigned a 
combination of the following codes: any principal diagnosis code with a 
prefix of V58.1 (Encounter for antineoplastic chemotherapy and 
immunotherapy), or a principal diagnosis code of V67.2 (Chemotherapy 
follow up examination), or any diagnosis code that begins with a prefix 
of 205 (Acute promyelocytic leukemia). The applicant found 874 cases 
(or 30.3 percent of all cases) in MS-DRG 837 (Chemotherapy with Acute 
Leukemia as Secondary Diagnosis or with High Dose Chemotherapy Agent 
with MCC), 863 cases (or 29.9 percent of all cases) in MS-DRG 838 
(Chemotherapy with Acute Leukemia as Secondary Diagnosis with CC or 
with High Dose Chemotherapy Agent), and 1,148 cases (or 39.8 percent of 
all cases) in MS-DRG 839 (Chemotherapy with Acute Leukemia as Secondary 
Diagnosis without CC/MCC). The average standardized charge per case was 
$133,428 for MS-DRG 837, $66,997 for MS-DRG 838, and $28,453 for MS-DRG 
839, which result in a case-weighted average standardized charge per 
case of $71,785.
    The average standardized charge per case does not include charges 
related to CLOLAR[supreg]; therefore, it is necessary to add the 
charges related to CLOLAR[supreg] to the average standardized charge 
per case in evaluating the cost threshold criterion. Although the 
applicant submitted data related to the estimated cost of 
CLOLAR[supreg] per case, the applicant noted that the cost of the drug 
was proprietary information. The applicant estimates $63,364 in charges 
related to CLOLAR[supreg] (based on a 100-percent charge markup of the 
cost of the drug). Adding the charges related to the drug to the 
average standardized charge per case (based on the case distribution 
from the applicant's FY 2007 MedPAR claims data analysis) resulted in a 
case-weighted average standardized charge per case of $135,149 ($71,785 
plus $63,364). Using the FY 2010 thresholds published in Table 10 (73 
FR 58008), the case-weighted threshold for MS-DRGs 837, 838, and 839 
was $55,802 (all calculations above were performed using unrounded 
numbers). Because the case-weighted average standardized charge per 
case for the applicable MS-DRGs exceeds the case-weighted threshold 
amount, the applicant maintains that CLOLAR[supreg] would meet the cost 
criterion. We invite public comment on whether or not CLOLAR[supreg] 
meets the cost criterion.
    With regard to the substantial clinical improvement criterion, the 
applicant asserts that despite significant advances that have been made 
in the management of AML in younger adults (that is, persons under the 
age of 60 years), including the benefit of intensive remission 
induction therapy [often comprised of an anthracycline combined with 
intermediate or highdose cytarabine (``7 + 3'')] to either achieve or 
maintain a complete remission (CR) or CR with incomplete platelet 
recovery (CRp) that has been progressively demonstrated over the past 
several years, such success has not been achieved in persons over the 
age of 60 years. The applicant stated that for the older patient 
population, conventional induction therapy with ``7 + 3'' is poorly 
tolerated and often does not benefit older patients with unfavorable 
baseline prognostic factors. In addition, the applicant stated that 
older adult patients are also at high risk for early induction 
mortality. According to the applicant, depending on comorbidity 
factors, the rate of

[[Page 24132]]

induction mortality can be as high as 65 percent within 8 weeks 
following conventional intensive chemotherapy.
    The applicant also presented an analysis of some recent data that 
has emerged in connection with CLOLAR[supreg] use in older patients 
with AML. A Phase II study comparing single agent CLOLAR[supreg] to 
CLOLAR[supreg] combined with low-dose cytarabine (LDAC) in patients age 
60 years and older, found that 42 percent of the patients treated with 
CLOLAR[supreg] alone achieved a CR or CR with incomplete peripheral 
blood count recovery, and found that 59 percent of the patients treated 
with the combination therapy achieved a CR or CR with incomplete 
peripheral blood count recovery. Both treatment regimens were tolerated 
in this patient population without a distinction in terms of toxicity. 
The safety and efficacy of CLOLAR[supreg] was recently reported in 
another Phase II study of 66 older adult patients (over age 65 years) 
with untreated AML. All patients were considered unfit for conventional 
induction therapy due to the presence of one or more unfavorable 
prognostic factors. In the group of patients with adverse cytogenetic 
profiles, the overall response rate was 53 percent with a CR rate of 42 
percent. In addition, this group had a significantly prolonged median 
survival (more than 6 months) when compared to a similar group that had 
received LDAC.
    The applicant conducted a pivotal, multicenter clinical trial which 
serves as the basis for an sNDA to the FDA for approval of 
CLOLAR[supreg] as a treatment for adult AML. According to the 
applicant, the primary objective of this study was to assess the 
efficacy of CLOLAR[supreg] in previously untreated adults who were at 
least 60 years old with AML for whom standard induction chemotherapy 
was unlikely to be of benefit due to at least one unfavorable baseline 
prognostic factor. The results of this pivotal trial indicate that 
single agent CLOLAR[supreg] is active and well-tolerated when 
administered to previously untreated adults with AML and at least one 
adverse prognostic factor. The overall remission rate (CR + CRp = 45 
percent) with CLOLAR[supreg] compared favorably to historical studies 
with ``7 + 3'' regimens. Responses in patients receiving CLOLAR[supreg] 
were consistent regardless of the number or the type of unfavorable 
prognostic factor including a CR of 43 percent in patients with 
unfavorable cytogenetics, 50 percent in patients with AHD, 40 percent 
in patients more than the age of 70, and 38 percent in patients with an 
Eastern Cooperative Oncology Group (ECOG) PS of 2. In addition, it did 
not appear that response rates were affected by the presence of 
multiple adverse prognostic factors (50 percent, 48 percent, and 42 
percent in patients with one, two and three risk factors, 
respectively). The overall response rate was even higher in patients 
who were less than age 70 years (56 percent), and in patients with an 
ECOG PS of 0 (64 percent). Thirty-day mortality (for all causes) was 
9.6 percent. Drug-related adverse events were consistent with prior 
reports with single agent CLOLAR[supreg], and were manageable in the 
patient population studied. Five patients (4 percent) had to 
discontinue treatment due to toxicity, but many patients were able to 
receive subsequent consolidation CLOLAR[supreg] treatments. The 
applicant maintains that there is no standard treatment in older adult 
patients with comorbid conditions or adverse disease characteristics 
for whom conventional induction therapy is not considered an 
appropriate option. The applicant further asserts that the absence of 
treatment options, especially in a disease with onset at a median age 
of 67, clearly represents a significant unmet medical need.
    We are concerned that this drug may offer little to no increased 
survival benefit in a patient population whose overall prognosis is 
exceedingly poor. Therefore, it is not clear that the drug represents a 
substantial clinical improvement over existing therapies, such as 
increased benefit survival or reduced need for hospitalization or 
physician visits. (We refer readers to 66 FR 46941 for a more detailed 
discussion relating to the substantial clinical improvement criterion.) 
We welcome public comment about whether or not CLOLAR[supreg] 
represents a substantial clinical improvement.
    We did not receive any written public comments regarding this 
application for new technology add-on payments concerning the new 
technology town hall meeting.
c. LipiScanTM Coronary Imaging System
    InfraReDx, Inc. submitted an application for new technology add-on 
payments for FY 2010 for the LipiScanTM Coronary Imaging 
System (LipiScanTM). The LipiScanTM device is a 
diagnostic tool that uses Intravascular Near Infrared Spectroscopy 
(INIRS) during an invasive coronary catheterization to scan the artery 
wall in order to determine coronary plaque composition. The purpose of 
the device is to identify lipid-rich areas in the artery because such 
areas have been shown to be more prone to rupture. The procedure does 
not require flushing or occlusion of the artery. INIRS identifies the 
chemical content of plaque by focusing near infrared light at the 
vessel wall and measuring reflected light at different wavelengths 
(that is, spectroscopy). The LipiScanTM system collects 
approximately 1,000 measurements per 12.5 mm of pullback, with each 
measurement interrogating an area of 1 to 2 mm\2\ of lumen surface 
perpendicular to the longitudinal axis of the catheter. When the 
catheter is in position, the physician activates the pullback and 
rotation device and the scan is initiated providing 360 degree images 
of the length of the artery. The rapid acquisition speed for the image 
freezes the motion of the heart and permits scanning of the artery in 
less than 2 minutes. When the catheter pullback is completed, the 
console displays the scan results, which is referred to as a 
``chemogram'' image. The chemogram image requires reading by a trained 
user, but, according to the applicant was designed to be simple to 
interpret.
    With regard to the newness criterion, the LipiScanTM 
received a 510K FDA clearance for a new indication on April 25, 2008, 
and was available on the market immediately thereafter. On June 23, 
2006, InfraReDx, Inc. was granted a 510K FDA clearance for the 
``InfraReDx Near Infrared (NIR) Imaging System.'' Both devices are 
under the common name of ``Near Infrared Imaging System'' according to 
the 510K summary document from the FDA. However, the InfraReDx NIR 
Imaging System device that was approved by the FDA in 2006 was approved 
``for the near infrared imaging of the coronary arteries,'' whereas the 
LipiscanTM device cleared by the FDA in 2008 is for a 
modified indication. The modified indication specified that 
LipiscanTM is ``intended for the near-infrared examination 
of coronary arteries * * *, the detection of lipid-core-containing 
plaques of interest * * * [and] for the assessment of coronary artery 
lipid core burden.''
    We have concerns regarding whether LipiscanTM is 
substantially similar to its predicate device that was approved by FDA 
in 2006. Specifically, it appears that the two devices, which are 
manufactured by the same company, do not differ in either design or 
functionality, according to the approval order documents from the FDA. 
In the 2008 approval order, the FDA stated, ``The LipiScan Coronary 
Imaging System utilizes the same basic catheter design as the 
predicate, the InfraReDx NIR Imaging System (June 23, 2006). These 
devices have a similar intended use, use the same operating principal, 
incorporate the same basic catheter design, have the same shelf life, 
and are

[[Page 24133]]

packaged using the same materials and processes. The modifications from 
the lnfraReDx NIR Imaging System to the LipiScan Coronary Imaging 
System are the improved catheter design, improved user interface 
(including PBR and console), and the additional testing required to 
support an expanded indication for use.'' Therefore, it appears that 
the only difference between the two approvals may be a modification of 
the intended use.
    As mentioned earlier in our discussion of the CLOLAR[supreg] 
application in section II.I.4.b. of this proposed rule, our policy 
regarding substantial similarity discussed in the FY 2006 final rule 
(70 FR 47351 through 47532) outlined two criteria as it relates to two 
separate technologies that are made by different manufacturers that 
were used to guide our determination of whether two technologies were 
substantially similar to one another. Although the LipicanTM 
is a diagnostic device and not a therapeutic device we believe that the 
substantial similarity component of the newness criterion still 
applies.
    Both the prior and the new FDA indications for 
LipiScanTM use the same or a similar mechanism of action to 
achieve a desired therapeutic outcome, and both treat patients that 
would generally be assigned to the same MS-DRG. Similarly, both 
indications of LipiScanTM are intended to treat the same 
disease in the same patient population. Consequently, we have concerns 
as to whether or not the two intended uses are substantially similar, 
especially considering that the technologies appear essentially 
identical. We welcome public comment on whether or not the latest 510K 
FDA clearance should be considered ``substantially similar'' to its 
predicate technology approved by the FDA in 2006.
    We note that the LipiscanTM technology is identified by 
ICD-9-CM procedure code 38.23 (Intravascular spectroscopy), which 
became effective October 1, 2008, and cases involving the use of this 
device generally map to MS-DRG 246 (Percutaneous Cardiovascular 
Procedures with Drug-Eluting Stent(s) with MCC or 4+ Vessels/Stents); 
MS-DRG 247 (Percutaneous Cardiovascular Procedures with Drug-Eluting 
Stent(s) without MCC); MS-DRG 248 (Percutaneous Cardiovascular 
Procedures with Non-Drug-Eluting Stent(s) with MCC or 4+ Vessels/
Stents); MS-DRG 249 (Percutaneous Cardiovascular Procedures with Non-
Drug-Eluting Stent(s) without MCC); MS-DRG 250 (Percutaneous 
Cardiovascular Procedures without Coronary Artery Stent with MCC); and 
MS-DRG 251 (Percutaneous Cardiovascular Procedures without Coronary 
Artery Stent without MCC).
    In an effort to demonstrate that the technology meets the cost 
criterion, the applicant used the FY 2009 After Outliers Removed (AOR) 
file (posted on the CMS Web site) for cases potentially eligible for 
LipiscanTM. The applicant believes that every case within 
DRGs 246, 247, 248, 249, 250, and 251 are eligible for 
LipiscanTM. In addition, the applicant believes that 
LipiscanTM will be evenly distributed across patients in 
each of the six MS-DRGs (16.6 percent within each MS-DRG). Using data 
from the AOR file, the applicant found the average standardized charge 
per case for MS-DRGs 246, 247, 248, 249, 250, and 251 was $65,364, 
$42,162, $58,754, $37,048, $61,016, and $35,878 respectively, equating 
to an average standardized charge per case of $50,037. The applicant 
indicated that the average standardized charge per case does not 
include charges related to LipiscanTM; therefore, it is 
necessary to add the charges related to the device to the average 
standardized charge per case in evaluating the cost threshold 
criterion. Although the applicant submitted data related to the 
estimated cost of LipiscanTM per case, the applicant noted 
that the cost of the device was proprietary information. Based on a 
sampling of two hospitals that have used the device, the applicant used 
a markup of 120 percent of the costs and estimates $5,280 in charges 
related to LipiscanTM. Because the applicant lacked a 
significant sample of cases to determine the charges associated with 
the device, we have concerns as to whether or not the estimate of 
$5,280 in charges related to the device is a valid estimate. Adding the 
estimated charges related to the drug to the average standardized 
charge per case (based on the case distribution from the applicant's 
2009 AOR analysis) results in a case-weighted average standardized 
charge per case of $55,317 ($50,037 plus $5,280). Using the FY 2010 
thresholds published in Table 10 (73 FR 58008), the case-weighted 
threshold for MS-DRGs 246, 247, 248, 249, 250, and 251 was $53,847 (all 
calculations above were performed using unrounded numbers). Because the 
case-weighted average standardized charge per case for the applicable 
MS-DRGs exceeds the case-weighted threshold amount, the applicant 
maintains that LipiscanTM would meet the cost criterion. We 
invite public comment on whether or not LipiscanTM meets the 
cost criterion.
    With regard to substantial clinical improvement, the applicant 
maintains that the device meets this criterion for the following 
reasons. The applicant noted that the September 1, 2001 final rule 
states that one facet of the criterion for substantial clinical 
improvement is ``the device offers the ability to diagnose a medical 
condition in a patient population where the medical condition is 
currently undetectable or offers the ability to diagnose a medical 
condition earlier in a patient population than allowed by currently 
available methods. There must also be evidence that use of the device 
to make a diagnosis affects the management of the patient'' (66 FR 
46914). The applicant believes that LipiscanTM meets all 
facets of this criterion. The applicant asserted that the device is 
able to detect a condition that is not currently detectable. The 
applicant explained that LipiScanTM is the first device of 
its kind to be able to detect lipid-core-containing plaques of interest 
and to assess of coronary artery lipid core burden. The applicant 
further noted that FDA, in its approval documentation, has indicated 
that ``This is the first device that can help assess the chemical 
makeup of coronary artery plaques and help doctors identify those of 
particular concern.''
    In addition, the applicant stated that the LipiScanTM 
chemogram permits a clinician to detect lipid-core-containing plaques 
in the coronary arteries compared to other currently available devices 
that do not have this ability. The applicant explained that the 
angiogram, the conventional test for coronary atherosclerosis, shows 
only minimal coronary narrowing. However, the applicant indicated that 
the LipiScanTM chemogram has the ability to reveal when an 
artery contains extensive lipid-core-containing plaque at an earlier 
stage.
    The applicant also noted that the device has the ability to make a 
diagnosis that better affects the management of the patient. 
Specifically, the applicant explained that the chemogram results are 
available to the interventional cardiologist during the PCI procedure, 
and have been found to be useful in decision-making. Physicians have 
reported changes in therapy based on LipiScanTM findings in 
20 to 50 percent of patients. The most common use of 
LipiScanTM results has been for selection of the length of 
artery to be stented. In some cases a longer stent has been used when 
there is a lipid-core-containing plaque adjacent to the area that is 
being stented because a flow-limiting stenosis is present. Therefore, 
the applicant contends that the use of LipiScanTM by 
clinicians to select the length of artery to be stented and as an aid 
in selection of intensity of lipid-altering therapy, demonstrates that

[[Page 24134]]

LipiScanTM affects the management of patients.
    While we recognize that the identification of lipid-rich plaques in 
the coronary vasculature holds promise in the management of coronary 
artery disease, we are concerned that statements in the FDA approval 
documents, as well as statements made by investigators in the 
literature, suggest that the clinical implications of identifying these 
lipid-rich plaques are not yet certain and that further studies need to 
be done to understand the clinical implications of obtaining this 
information. We are also concerned that there are no outcome data 
regarding the use of the LipiScanTM technology.
    The applicant also submitted commentary from Interventional 
Cardiologists (a group of clinicians who currently utilize the 
LipiScanTM device) explaining the clinical benefits of the 
device. The applicant further noted that the device may have other 
potential uses that would be of clinical benefit, and studies are 
currently being conducted to investigate these other potential uses. 
The applicant explained that LipiScanTM offers promise as a 
means to enhance progress against the two leading problems in coronary 
disease management: (1) The unacceptably high rate of second events 
that occur even after catheterization, revascularization, and the 
institution of optimal medical therapy; and (2) the failure to diagnose 
coronary disease early, which results in sudden death or myocardial 
infarction being the first sign of the disease in most patients. The 
applicant further stated that the identification of coronary lipid-
core-containing plaques, which can most readily be done in those 
already undergoing catheterization, is likely to be of benefit in the 
prevention of second events. In the longer term, the applicant stated 
that the identification of lipid-core-containing plaques by 
LipiScanTM may contribute to the important goal of primary 
prevention of coronary events, which, in the absence of adequate 
diagnostic methods, continue to cause extensive morbidity, mortality 
and health care expenditures in Medicare beneficiaries and the general 
population.
    We welcome public comment regarding whether or not the 
LipiScanTM technology represents a substantial clinical 
improvement in the Medicare population.
    Below we summarize the written comments we received in response to 
the town hall meeting.
    Comment: The manufacturer of LipiScanTM stated that, 
prior to the availability of LipiScanTM, current methods of 
diagnosis could not detect that a patient has a lipid-core plaque prior 
to the occurrence of a myocardial infarction. In April 2008, the FDA 
approved the LipiScanTM Coronary Imaging System for 
identification of these lipid-core plaques in patients undergoing 
coronary angiography, thereby allowing the detection of this condition 
in patients prior to the occurrence of a myocardial infarction.
    The manufacturer stated that, since its FDA approval, 
LipiScanTM has been used in over 110 patients and has 
identified lipid-core plaques that were previously undetectable, 
thereby revealing earlier stages of the disease. The manufacturer noted 
that physicians have used this diagnostic information to provide 
clinical benefits to their patients, including improved identification 
of the length of the artery to be stented and selection of the 
appropriate intensity of pharmacologic therapy designed to alter plasma 
lipids.
    In addition to these early diagnostic uses, the manufacturer 
believes that LipiScanTM opens the possibility of eventual 
detection and treatment of lipid-core plaques before they cause a 
stenosis and/or a clinical event. The manufacturer added that the use 
of this technology could lead to prevention of myocardial infarction, 
which in turn would reduce the occurrence of heart failure and 
arrhythmias--two conditions responsible for severe morbidity and 
massive health care expenditures.
    In addition, the manufacturer reiterated its assertion that 
LipiScanTM meets the newness criterion. The manufacturer 
explained that FDA, in its approval documentation, has indicated that 
``This is the first device that can help assess the chemical makeup of 
coronary artery plaques and help doctors identify those of particular 
concern.'' The manufacturer further noted that, while 
LipiScanTM is equivalent to the predicate intravascular 
ultrasound (IVUS) device, the features of the LipiScanTM 
system produce different information because it permits the physician 
to detect lipid-core plaques of interest and the lipid burden index.
    The manufacturer also noted that the case-weighted average 
standardized charge per case exceeds the case-weighted threshold (as 
discussed above) and, therefore, the manufacturer believes that the 
technology meets the cost criterion. In addition, the manufacturer 
reasserted that it meets the substantial clinical improvement criterion 
by the arguments it put forth in its application regarding substantial 
clinical improvement (which are presented above in this section of the 
preamble).
    Finally, in its comment, the manufacturer concluded that 
LipiScanTM is a novel diagnostic method that meets the three 
criteria for a new technology add-on payment and that more frequent 
utilization of LipiScanTM would occur with additional 
reimbursement resulting in possible improved outcomes for patients 
undergoing stenting. The manufacturer stated that LipiScanTM 
has the added potential of contributing to the prevention of acute 
coronary syndromes.
    Response: We thank the manufacturer for its comments that were 
submitted concerning the town hall meeting. We have considered these 
comments in our evaluation of the technology in this proposed rule. As 
stated above, we invite additional public comment relating to objective 
data regarding the assertions presented by the manufacturer.
d. Spiration[supreg] IBV[supreg] Valve System
    Spiration, Inc. submitted an application for new technology add-on 
payments for FY 2010 for the Spiration[supreg] IBV[supreg] Valve System 
(Spiration[supreg] IBV[supreg]). The Spiration[supreg] IBV[supreg] is a 
device that is used to place, via bronchoscopy, small, one-way valves 
into selected small airways in the lung in order to limit airflow into 
selected portions of lung tissue that have prolonged air leaks 
following surgery while still allowing mucus, fluids, and air to exit, 
thereby reducing the amount of air that enters the pleural space. The 
device is intended to control prolonged air leaks following three 
specific surgical procedures: lobectomy; segmentectomy; or lung volume 
reduction surgery. According to the applicant, an air leak that is 
present on postoperative day 7 is considered ``prolonged'' unless 
present only during forced exhalation or cough. In order to help 
prevent valve migration, there are five anchors with tips that secure 
the valve to the airway. The implanted valves are intended to be 
removed no later than 6 weeks after implantation.
    With regard to the newness criterion, the Spiration[supreg] 
IBV[supreg] received a Humanitarian Device Exemption (HDE) approval 
from the FDA on October 24, 2008. We are unaware of any previously FDA-
approved predicate devices, or otherwise similar devices, that could be 
considered substantially similar to the Spiration[supreg] IBV[supreg]. 
However, the applicant asserted that the FDA has precluded the device 
from being used in the treatment of any patients until Institutional 
Review Board (IRB)

[[Page 24135]]

approvals regarding its study sites. Therefore, it would appear that 
the Spiration[supreg] IBV[supreg] would meet the newness criterion once 
it has obtained at least one IRB approval because the device would then 
be available on the market to treat Medicare beneficiaries. We welcome 
public comments about the date on which the newness period should begin 
for this technology should it meet the other criteria to be approved 
for new technology add-on payments. We note that the Spiration[supreg] 
IBV[supreg] is currently described by ICD-9-CM procedure code 33.71 
(Endoscopic insertion or replacement of bronchial valve(s)). At the 
September 2008 ICD-9-CM Coordination and Maintenance Committee meeting, 
we discussed a proposal to revise the existing code and create a new 
code for endoscopic bronchial valve insertion in single and multiple 
lobes.
    In an effort to demonstrate that the technology meets the cost 
criterion, the applicant searched the FY 2007 MedPAR file for cases 
potentially eligible for use of the Spiration[supreg] IBV[supreg]. 
Specifically, the applicant searched for cases with one of the 
following procedure codes: 32.4 (Lobectomy of lung); 32.3 (Segmental 
resection of lung); or 32.22 (Long volume reduction surgery). The 
applicant found 4,225 cases (or 21.6 percent of all cases) in MS-DRG 
163 (Major Chest Procedure with MCC), 8,960 cases (or 45.8 percent of 
all cases) in MS-DRG 164 (Major Chest Procedure with CC), and 6,358 
cases (or 32.5 percent of all cases) in MS-DRG 165 (Major Chest 
Procedure without CC/MCC). The average standardized charge per case was 
$88,326 for MS-DRG 163, $48,494 for MS-DRG 164, and $38,463 for MS-DRG 
165, equating to a case-weighted average standardized charge per case 
of $53,842.
    The average standardized charge per case does not include charges 
related to the Spiration[supreg] IBV[supreg]; therefore, it is 
necessary to add the charges related to the device to the average 
standardized charge per case in evaluating the cost threshold 
criterion. Although the applicant submitted data related to the 
estimated cost of the Spiration[supreg] IBV[supreg] per case, the 
applicant noted that the cost of the device was proprietary 
information. The applicant estimates $21,450 in charges related to the 
Spiration[supreg] IBV[supreg] (based on a 100-percent charge markup of 
the cost of the device). The applicant based this amount on seven 
actual cases that received the device. Because the applicant lacked a 
significant sample of cases to determine the charges associated with 
the device, we have concerns as to whether or not the $21,450 in 
charges related to the device is a valid estimate. In addition, based 
on the seven cases, the applicant made an estimate of the number of 
valves used per case (the applicant noted that the number of valves 
used per case is proprietary). We also have concerns that the applicant 
lacked a significant sample of cases to determine a valid estimate of 
the number of valves per case. Adding the estimated charges related to 
the device to the average standardized charge per case (based on the 
case distribution from the applicant's FY 2007 MedPAR claims data 
analysis) resulted in a case-weighted average standardized charge per 
case of $75,292 ($53,842 plus $21,450). Using the FY 2010 thresholds 
published in Table 10 (73 FR 58008), the case-weighted threshold for 
MS-DRGs 163, 164, and 165 was $54,715 (all calculations above were 
performed using unrounded numbers). Because the case-weighted average 
standardized charge per case for the applicable MS-DRGs exceeds the 
case-weighted threshold amount, the applicant maintains that the 
Spiration[supreg] IBV[supreg] would meet the cost criterion. We invite 
public comment on whether or not the Spiration[supreg] IBV[supreg] 
meets the cost criterion.
    With respect to how the device would meet the substantial clinical 
improvement criterion, the applicant submitted information that was 
based on the Summary of Safety and Probable Benefit (SSPB) from the 
FDA's HDE approval order for the device. The clinical results indicate 
the Spiration[supreg] IBV[supreg] can be deployed in the intended 
airway reasonably safely with a minimally invasive bronchoscopy 
procedure. There have been a limited number of device complications and 
no occurrences of device erosion or migration. The Spiration[supreg] 
IBV[supreg] can be removed using a bronchoscope. Laboratory results 
indicate that the Spiration[supreg] IBV[supreg] significantly reduces 
airflow to the lung tissue beyond the treated airway. A significant 
reduction in distal airflow is anticipated to augment the resolution of 
air leaks of the lung. Therefore, the applicant asserts, it is 
reasonable to conclude that the probable benefit to health associated 
with using the device for the target population outweighs the risk of 
illness or injuries, taking into account the probable risks and 
benefits of currently available devices or alternative forms of 
treatment when used as indicated in accordance with the directions for 
use.
    We recognize that prolonged air leaks after these types of lung 
surgery can be a significant problem, and that Spiration[supreg] 
IBV[supreg] therapy may represent a new alternative in treating 
properly selected patients. However, we have concerns that the outcome 
data presented is from a sample set of only seven patients, and the FDA 
HDE did not require demonstration of either safety or effectiveness. 
Therefore, we welcome public comment as to whether or not the 
Spiration[supreg] IBV[supreg] represents a substantial clinical 
improvement for Medicare beneficiaries.
    We did not receive any written public comments regarding this 
application for new technology add-on payments concerning the new 
technology town hall meeting.
e. TherOx Downstream[supreg] System
    TherOx, Inc. submitted an application for new technology add-on 
payments for FY 2010 for the TherOx 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 laboratory area averages 100 
minutes. The applicant claimed that the SSO2 therapy duration lasts 90 
minutes and requires an additional 10 minutes post-procedure 
preparation for transfer time. We note that the TherOx 
DownStream[supreg] System is currently identified by ICD-9-CM procedure 
code 00.49 (Supersaturated oxygen therapy). TherOx, Inc. submitted an 
application for new technology add-on payments for FY 2009 for this 
technology. However, although FDA approval was expected in the second 
quarter of 2008, it had not received FDA approval at the time the 
proposed rule for FY 2009 was published. Because the technology was

[[Page 24136]]

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 payment criteria.
    For its FY 2010 new technology add on payment application, the 
applicant has indicated to CMS that it expects to receive FDA approval 
in the second quarter of 2009. However, because the technology has not 
yet received approval by the FDA, we are limiting our discussion of 
this technology to data that the applicant submitted rather than making 
specific proposals with respect to whether the device would meet the 
new technology add-on payment criteria in this proposed rule.
    In an effort to demonstrate that TherOx Downstream[supreg] System 
would meet the cost criterion, the applicant submitted two analyses. 
The applicant stated that it believed that the cases that would be 
eligible for the TherOx 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 remaining five cases grouped to MS-DRGs that the technology would 
not frequently group to and, therefore, are not included in this 
analysis.) The data showed that 32 of these patients were 65 years old 
or older. There were 12 cases (or 15.4 percent of the 78 cases) in MS-
DRG 246, 56 cases (or 71.8 percent of the 78 cases) in MS-DRG 247, 2 
cases (or 2.6 percent of the 78 cases) in MS-DRG 248, and 8 cases (or 
10.3 percent of the 78 cases) in MS-DRG 249. The average standardized 
charge per case for MS-DRGs 246, 247, 248, and 249 was $71,955, 
$60,790, $55,238, and $42,723, respectively, equating to a case-
weighted average standardized charge per case of $60,512. The average 
standardized charge per case does not include charges related to the 
TherOx Downstream[supreg] System. Therefore, it is necessary to add the 
charges related to the device to the average standardized charge per 
case in evaluating the cost threshold criterion. Although the applicant 
submitted data related to the estimated cost of the TherOx 
Downstream[supreg] System per case, the applicant noted that the cost 
of the device was proprietary information. The applicant estimates 
$22,739.40 in charges related to the TherOx Downstream[supreg] System 
(based on a 100-percent charge markup of the cost of the drug). Adding 
the charges related to the device to the average standardized charge 
per case resulted in a case-weighted average standardized charge per 
case of $83,251 ($60,512 plus $22,739). Based on the FY 2010 threshold 
from Table 10 (73 FR 58008), the case-weighted threshold for the four 
MS-DRGs listed above was $51,564 (all calculations above were performed 
using unrounded numbers).
    The applicant also searched the FY 2007 MedPAR file to identify 
cases that would be eligible for the TherOx 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 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 12,345 cases within MS-DRGs 
246, 247, 248, and 249 distributed as follows: 1,591 cases (or 12.9 
percent of cases) in MS-DRG 246; 6,203 cases (or 50.2 percent of cases) 
in MS-DRG 247; 1,132 cases (or 9.2 percent of cases) in MS-DRG 248; and 
3,419 cases (or 27.7 percent of cases) in MS-DRG 249. Not including the 
charges associated with the technology, the average standardized charge 
per case for MS-DRGs 246, 247, 248, and 249 was $65,967, $46,828, 
$56,807 and $40,107, respectively, equating to a case-weighted average 
standardized charge per case of $48,348. The applicant estimated that 
it was necessary to add an additional $22,739 in charges to the total 
case-weighted average standardized charge per case (as described 
above). 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 average standardized charge per case of 
$71,087. The case-weighted threshold for MS-DRGs 246, 247, 248, and 249 
(from Table 10 (73 FR 58008)) was $51,073 (all calculations above were 
performed using unrounded numbers). Because the total case-weighted 
average standardized charge per case from the first analysis of 
clinical trial patients and the case-weighted standardized charge per 
case from the second analysis of the FY 2006 MedPAR claims data exceeds 
the applicable case-weighted thresholds, the applicant maintained the 
TherOx Downstream[supreg] System would meet the cost criterion.
    We invite public comment on whether or not the TherOx 
Downstream[supreg] System meets the cost criterion.
    With respect to the substantial clinical improvement criterion, the 
applicant asserts that their technology represents a substantial 
clinical improvement in the treatment of acute anterior myocardial 
infarction in conjunction with percutaneous coronary intervention (PCI) 
with stent placement within 6 hours of onset of symptoms compared to 
PCI and stent placement alone. Specifically, the applicant asserts that 
there is a 6.5 percent absolute reduction in infarct size using the 
TherOx Downstream[supreg] System as assessed using Tc-99m Sestamibi 
SPECT nuclear imaging in the Acute Myocardial Infarction Hyperbaric 
Oxygen Treatment (AMIHOT) II clinical trial, and such a reduction has 
been correlated with both short-term (less than 30 day) and long-term 
(greater than 30 day) mortality reductions.
    Although the TherOx Downstream[supreg] System remains 
investigational and has not yet received approval from the FDA at this 
time, we do recognize that a clear reduction of infarct size in acute 
anterior myocardial infarction may represent a substantial clinical 
improvement. However, we have concerns that the data presented by the 
applicant in the application are derived from a Bayesian methodology, 
which includes data from a subgroup of an earlier trial (AMIHOT I), 
that showed no overall benefit of using the technology, and that the 
AMIHOT II trial has yet to be published in any peer reviewed 
literature. We also are concerned that there were a higher number of 
adverse bleeding events in patients who had been treated in the group 
of AMIHOT II clinical trial, and the study did not demonstrate any 
specific improved clinical outcomes.
    We invite public comment on whether or not the TherOx 
Downstream[supreg] System meets the

[[Page 24137]]

substantial clinical improvement criterion.
    Below we summarize the written comments we received concerning the 
town hall meeting.
    Comment: The physician who presented information at the town hall 
meeting on behalf of the applicant also submitted additional written 
comments in response to questions raised during the town hall meeting. 
Specifically, the physician addressed questions relating to the study 
of additional functional endpoints, such as ejection fraction a year 
after a patient received therapy using the TherOx Downstream[supreg] 
System or New York Heart Association (NYHA) functional class, and why 
the AMIHOT I study design included patients who presented up to 24 
hours after infarction (instead of up to 6 hours). With regard to 
studying ejection fraction out to one year, the physician acknowledged 
that such an endpoint was considered during the design of the AMIHOT II 
trial, but that it was ultimately rejected because it was not required 
by the FDA.
    The physician further acknowledged that the AMIHOT I trial failed 
to meet its overall primary efficacy endpoint, but asserted that when 
analyzing the subset of 105 patients from the trial who had an anterior 
myocardial infarction and were reperfused within 6 hours, ``substantial 
clinical benefit'' was observed. The physician noted that, although 
some people may have considered the subset of the anterior myocardial 
infarction patients a ``post hoc'' analysis, the subset was actually a 
``pre-specified data set.'' In addition, the physician maintained that 
the analysis of the subset of data was the basis for the second 
randomized trial (AMIHOT II), and that the FDA ``was unambiguous in its 
contention that infarct size by single photon emission computed 
tomography (SPECT) imaging had been thoroughly validated as a surrogate 
endpoint* * *.''
    Finally, the physician emphasized information regarding the 
technology's efficacy that was presented in its application. First, the 
physician stated that patients with an ejection fraction of less than 
40 percent who received supersaturated oxygen therapy had an absolute 
difference in infarct size of 12.5 percent when compared to the control 
arm. The physician further asserted that such outcomes support that 
``among the sickest acute MI patients* * * supersaturated oxygen is of 
the greatest benefit.'' Secondly, the physician noted that the pooled, 
adjusted data for AMIHOT II and the anterior MI patients from AMIHOT I 
show that there were nearly twice as many supersaturated oxygen 
patients with an imperceptible infarct compared to controls (18.2 
percent versus 10.3 percent, respectively). The physician described an 
``imperceptible'' infarct as that which is nearly undetectable upon 
SPECT imaging after an acute myocardial infarction patient undergoes 
primary coronary intervention at the hospital.
    Response: In response to the physician's statements regarding the 
FDA rejecting the use of ejection fraction as a primary endpoint for 
the AMIHOT II trial, we note that the standards used in the 
determination of whether a new technology is ``safe and effective'' 
(FDA standards for approval) are not necessarily equivalent to the 
standards that are used to determine whether a new technology 
represents a substantial clinical improvement to the Medicare 
beneficiary patient population over existing technologies. While we 
welcome insight and data obtained during the FDA approval process, we 
are charged with going beyond the ``safe and effective'' standards of 
FDA for purposes of deeming that a new technology represents a 
substantial clinical improvement to the Medicare beneficiary patient 
population.
    We have considered the comments concerning the town hall meeting 
and in response to questions raised at the town hall meeting in our 
evaluation of this technology in this proposed rule. As stated above, 
we invite additional public comment on objective data regarding the 
assertions presented by the physician.
5. Technical Correction to the Regulations
    In the FY 2009 IPPS final rule, when we revised the regulations at 
Sec.  412.87 to incorporate changes relating to the announcement of 
determinations and deadline for consideration of new medical service or 
technology applications, we made a change to paragraph (b)(1) (73 FR 
48755). In paragraph (b)(1), we inadvertently used the incorrect word 
``relating'' in the provision that read ``A new medical service or 
technology represents an advance that substantially improves, relating 
to technologies previously available, the diagnosis or treatment of 
Medicare beneficiaries'' (emphasis added). The correct word should have 
been ``relative''. We are proposing to make this technical change to 
Sec.  412.87(b)(1).

III. Proposed Changes to the Hospital Wage Index for Acute Care 
Hospitals

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 proposed FY 2010 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 proposed adjustment for FY 2010 is 
discussed in section II.B. of the Addendum to this proposed 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 proposed budget neutrality 
adjustment for FY 2010 is discussed in section II.A.4.b. of the 
Addendum to this proposed 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 proposing to 
apply beginning October 1, 2009 (the FY 2010 wage

[[Page 24138]]

index) appears under section III.D. 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 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.
    In the FY 2009 IPPS final rule (73 FR 48563 through 48567), we 
discussed the MedPAC's study and recommendations, the CMS contract with 
Acumen, L.L.C. for assistance with impact analysis and study of wage 
index reform, and public comments we received on the MedPAC 
recommendations and the CMS/Acumen study and analysis.
b. Interim and Final Reports on Results of Acumen's Study
(1) Interim Report on Impact Analysis of Using MedPAC's Recommended 
Wage Index
    In the FY 2009 IPPS final rule (73 FR 48566 through 48567), we 
discussed the analysis conducted by Acumen comparing use of the MedPAC 
recommended wage indices to the current CMS wage index. We refer 
readers to section III.B.1.e. of that final rule for a full discussion 
of the impact analysis as well as to Acumen's interim report available 
on the Web site: http://www.acumenllc.com/reports/cms.
(2) Acumen's Final Report on Analysis of the Wage Index Data and 
Methodology
    Acumen's final report addressing the issues in section 106(b)(2) of 
the MIEA-TRHCA is divided into two parts. The first part analyzes the 
strengths and weaknesses of the data sources used to construct the 
MedPAC and CMS indexes. This part of Acumen's study is complete and 
will be published immediately after the publication of this proposed 
rule. The second part, which is expected to be released after the 
publication of the FY 2010 IPPS final rule, will focus on the 
methodology of wage index construction and covers issues related to the 
definition of wage areas and methods of adjusting for differences among 
neighboring wage areas, as well as reasons for differential impacts of 
shifting to a new index. Both reports, when available, will be 
accessible at the Web site: http://www.acumenllc.com/reports/cms.
    The following is a description of the analyses for both parts of 
Acumen's final report.
Part I: Wage Data Analysis
     Differences between the BLS data and the CMS wage data--
Acumen assessed the strengths and weaknesses of the data used to 
construct the CMS wage index and the MedPAC compensation index by 
examining the differences between the BLS and the CMS wage data. Acumen 
also evaluated the importance of accounting for self-employed workers, 
part-time workers, and industry wage differences.
     Employee benefit (wage-related) cost--Acumen considered 
whether benefit costs need to be included in the hospital wage index 
and discussed the differences between Worksheet A benefits data 
(proposed by MedPAC to use with BLS wage data) and Worksheet S-3 
benefit data. Acumen also analyzed the possibility of using BLS' 
Employer Costs for Employee Compensation (ECEC) series as an 
alternative to Worksheet A or Worksheet S-3 benefits data that would 
pose less of a data collection burden for providers.
     Impact of the fixed national occupational weights--Acumen 
assessed MedPAC's and CMS' methods for adjusting for occupational mix 
differences. While the proposed MedPAC compensation index uses fixed 
weights for occupations representative of the hospital industry 
nationally, the CMS wage index incorporates an occupational mix 
adjustment (OMA) from a separate data collection.
     Year-to-year volatility in the CMS and BLS wage data--
Acumen calculated the extent of volatility in the CMS and BLS wage 
indexes using several measures of volatility. Acumen also explored 
potential causes of volatility, such as the number of hospitals and the 
annual change in the number of hospitals in a wage area. Finally, 
Acumen evaluated the impact on annual volatility of using a 2-year 
rolling average of CMS wage index values.
Part II: Wage Index Construction
     Alternative wage area definitions--Acumen will explore the 
conceptual basis for defining wage areas and investigate alternative 
wage area definitions that have been considered in prior literature to 
reduce differences between areas.
     Differences between and within contiguous wage areas--
Acumen will estimate different methods for smoothing wage index values 
between geographically proximate areas and examine the justification 
for and sensitivity to assumptions used by MedPAC in its smoothing 
method.
     Reasons for differential impacts of shifting to a new 
index--Acumen will analyze the impact on hospitals if CMS were to adopt 
MedPAC's proposed compensation index, with a focus on hospitals that 
would no longer qualify for exceptions such as geographic 
reclassification and the rural floor. Acumen will also determine if 
there are identifiable reasons for the different impacts.
    As of the publication date of this proposed rule, Acumen has not 
completed its analysis for the second part of its final report.
    We indicated in the FY 2009 IPPS final rule that, in developing any 
proposal(s) for additional wage index reform that may be included in 
the FY

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2010 IPPS proposed rule, we would consider all of the public comments 
on the MedPAC recommendations that we had received in that proposed 
rulemaking cycle, along with the interim and final reports to be 
submitted to us by Acumen. As Acumen's study is not yet complete, we 
are not proposing any additional changes to the hospital wage index for 
acute care hospitals in this proposed rule.
2. FY 2009 Policy Changes in Response to Requirements Under Section 
106(b) of the MIEA-TRHCA
    To implement the requirements of section 106(b) of the MIEA-TRHCA 
and respond to MedPAC's recommendations in its June 2007 report to 
Congress, in the FY 2009 IPPS final rule (73 FR 48567 through 48574), 
we made the following policy changes relating to the hospital wage 
index. (We refer readers to the FY 2009 IPPS final rule for a full 
discussion of the basis for the proposals, the public comments 
received, and the FY 2009 final policy.)
a. Reclassification Average Hourly Wage Comparison Criteria
    In the FY 2009 IPPS final rule, we adopted 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. We provided for a phase-in of the adjustment over 2 
years. For applications for reclassification for the first transitional 
year, FY 2010, the average hourly wage standards were set at 86 percent 
for urban hospitals and group reclassifications and 84 percent for 
rural hospitals. For applications for reclassification for FY 2011 (for 
which the application deadline is September 1, 2009) and for subsequent 
fiscal years, the average hourly wage standards will be 88 percent for 
urban and group reclassifications and 86 percent for rural hospitals 
(Sec. Sec.  412.230, 412.232, and 412.234 of the regulations). As 
stated above, these policies were adopted in the FY 2009 IPPS final 
rule.
b. Within-State Budget Neutrality Adjustment for the Rural and Imputed 
Floors
    In the FY 2009 IPPS final rule, we adopted State level budget 
neutrality (rather than the national budget neutrality adjustment) for 
the rural and imputed floors, to be effective beginning with the FY 
2009 wage index. The transition from the national budget neutrality 
adjustment to the State level budget neutrality adjustment is being 
phased in over a 3-year period. In FY 2009, hospitals received a 
blended wage index that was 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.
    In the FY 2009 IPPS final rule, we incorporated this policy in our 
regulation at Sec.  412.64(e)(4). Specifically, we provided 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 and that, beginning 
October 1, 2008, CMS would transition from a nationwide adjustment to a 
statewide adjustment, with a statewide adjustment fully in place by 
October 1, 2010. We note that the imputed floor expires on September 
30, 2011 (as discussed in section III.H. of this preamble).

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 (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 2009 final rule, for FY 2010, we are proposing to 
provide that hospitals receive 100 percent of their wage index based 
upon the CBSA configurations. Specifically, for each hospital, we are 
proposing to determine a wage index for FY 2010 employing wage index 
data from hospital cost reports for cost reporting periods beginning 
during FY 2006 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) (regulations at Sec.  
412.64(b)(1)(ii)(A)).
    On November 20, 2008, OMB announced three Micropolitan Statistical 
Areas that now qualify as MSAs (OMB Bulletin No. 09-01). The new urban 
CBSAs are as follows:
     Cape Girardeau-Jackson, Missouri-Illinois (CBSA 16020). 
This CBSA is comprised of the principal cities of Cape Girardeau and 
Jackson, Missouri in Alexander County, Illinois; Bollinger County, 
Missouri, and Cape Girardeau County, Missouri.
     Manhattan, Kansas (CBSA 31740). This CBSA is comprised of 
the principal city of Manhattan, Kansas in Geary County, Pottawatomie 
County, and Riley County.
     Mankato-North Mankato, Minnesota (CBSA 31860). This CBSA 
is comprised of the principal cities of Mankato and North Mankato, 
Minnesota in Blue Earth County and Nicollet County.
    OMB also changed the principal cities and titles of a number of 
CBSAs and a Metropolitan Division, as follows:
     Broomfield, Colorado qualifies as a new principal city of 
the Denver-Aurora, Colorado CBSA. The new title is Denver-Aurora-
Broomfield, Colorado CBSA.
     Chapel Hill, North Carolina qualifies as a new principal 
city of the Durham, North Carolina CBSA. The new title is Durham-Chapel 
Hill, North Carolina CBSA.
     Chowchilla, California qualifies as a new principal city 
of the Madera, California CBSA. The new title is Madera-Chowchilla, 
California CBSA.
     Panama City Beach, Florida qualifies as a new principal 
city of the Panama City-Lynn Haven, Florida CBSA. The new title is 
Panama City-Lynn Haven-Panama City Beach, Florida CBSA.
     East Wenatchee, Washington qualifies as a new principal 
city of the Wenatchee, Washington CBSA. The new title is Wenatchee-East 
Wenatchee, Washington CBSA.
     Rockville, Maryland replaces Gaithersburg, Maryland as the 
third most populous city of the Bethesda-Frederick-Gaithersburg, 
Maryland Metropolitan Division. The new title is Bethesda-Frederick-
Rockville, Maryland Metropolitan Division.
    The OMB bulletin is available on the OMB Web site at http://www.whitehouse.gov/OMB--go to ``Bulletins'' or ``Statistical Programs 
and

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Standards.'' CMS will apply these changes to the IPPS beginning October 
1, 2009.

D. Proposed Occupational Mix Adjustment to the Proposed FY 2010 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 Proposed FY 2010 Occupational Mix 
Adjustment Based on the 2007-2008 Occupational Mix Survey
    As provided for under section 1886(d)(3)(E) of the Act, we collect 
data every 3 years on the occupational mix of employees for each short-
term, acute care hospital participating in the Medicare program. For 
the FY 2009 hospital wage index, we used data from the 2006 Medicare 
Wage Index Occupational Mix Survey (the 2006 survey) to calculate the 
occupational mix adjustment. In the 2006 survey, we included several 
modifications to the original occupational mix survey, 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.
    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. The 2006 survey included only 
two general occupational categories: Nursing and ``all other 
occupations.'' The nursing category had four subcategories: Registered 
nurses, licensed practical nurses, aides, orderlies, attendants, and 
medical assistants. The registered nurse subcategory included 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. To 
allow flexibility for the reporting period beginning and ending dates 
to accommodate some hospitals' biweekly payroll and reporting systems, 
we modified the 6-month data collection period for the 2006 survey from 
January 1, 2006 through June 30, 2006, to a 6-month reporting period 
that began on or after December 25, 2005, and end before July 9, 2006. 
OMB approved the revised 2006 occupational mix survey (Form CMS-10079 
(2006)) on April 25, 2006. 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).
    For the proposed FY 2010 hospital wage index, we are using 
occupational mix data collected on a revised 2007-2008 Medicare Wage 
Index Occupational Mix Survey (the 2007-2008 survey) to compute the 
proposed occupational mix adjustment for FY 2010. In the FY 2008 IPPS 
final rule with comment period (72 FR 47315), we discussed how we 
modified the 2006 occupational mix survey. The revised 2007-2008 
occupational mix survey provided 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.
    On February 2, 2007, we published in the Federal Register a notice 
soliciting comments on the proposed revisions to the 2006 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/MACs. Hospitals were required to submit their 
completed surveys to their fiscal intermediaries/MACs by September 2, 
2008. The preliminary, unaudited 2007-2008 occupational mix survey data 
was 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.
2. Calculation of the Proposed Occupational Mix Adjustment for FY 2010
    For FY 2010 (as we did for FY 2009), we are proposing to calculate 
the occupational mix adjustment factor using the following steps:
    Step 1--For each hospital, determine the percentage of the total 
nursing category attributable to a nursing subcategory by dividing the 
nursing subcategory hours by the total nursing category's hours. Repeat 
this computation for each of the four nursing subcategories: Registered 
nurses; 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 four 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

[[Page 24141]]

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 
proposed FY 2010 occupational mix adjusted national average hourly wage 
is $33.4935.
    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 proposed FY 
2010 occupational mix adjusted Puerto Rico specific average hourly wage 
is $14.2555.
    The table below is an illustrative example of the proposed 
occupational mix adjustment.
BILLING CODE 4120-01-P

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BILLING CODE 4120-01-C

[[Page 24144]]

    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 proposed FY 
2010 wage index. For the FY 2007-2008 survey, the response rate was 89 
percent.
    In computing the proposed FY 2010 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. 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 proposed 
occupational mix adjustment, we applied the national occupational mix 
factor of 1.0000 in calculating the area's proposed FY 2010 
occupational mix adjusted wage index. (We indicated in the FY 2008 and 
FY 2009 IPPS final rules that we reserve the right to apply a different 
approach in future years, including potentially penalizing 
nonresponsive hospitals (72 FR 47314).) In addition, if a hospital 
submitted a survey, but that survey data cannot be used because we 
determine it to be aberrant, we also are proposing to assign 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 salaries 
or hours data, we are proposing to assign 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 
0.8452 (CBSA 17780, College Station-Bryan, TX), to a high of 1.0939 
(CBSA 29700, Laredo, TX). 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 2010, there are 8 CBSAs (that 
include 16 hospitals) for which we did not have occupational mix data 
for any of its hospitals. The CBSAs are:
     CBSA 16220--Casper, WY (one hospital)
     CBSA 21940--Fajardo, PR (one hospital)
     CBSA 22140--Farmington, NM (one hospital)
     CBSA 25020--Guayama, PR (three hospitals)
     CBSA 36140--Ocean City, NJ (one hospital)
     CBSA 38660--Ponce, PR (six hospitals)
     CBSA 41900--San German-Cabo Rojo, PR (two hospitals)
     CBSA 49500--Yauco, PR (one hospital)
    Since the FY 2007 IPPS final rule, we have periodically discussed 
applying a hospital-specific penalty to hospitals that fail to submit 
occupational mix survey data (71 FR 48013 through 48014; 72 FR 47314 
through 47315; and 73 FR 48580). During the FY 2008 rulemaking cycle, 
some commenters suggested a penalty equal to a 1- to 2-percent 
reduction in the hospital's wage index value or a set percentage of the 
standardized amount. During the FY 2009 rulemaking cycle, several 
commenters reiterated their view that full participation in the 
occupational mix survey is critical, and that CMS should develop a 
methodology that encourages hospitals to report occupational mix survey 
data but does not unfairly penalize neighboring hospitals. However, to 
date, we have not adopted a penalty for hospitals that fail to submit 
occupational mix data.
    After review of the data for the proposed FY 2010 wage index, we 
became concerned about the increasing number of hospitals that fail to 
submit occupational mix data and the impact it may have on area wage 
indices. The survey response rate has dropped significantly from 93.8 
percent for the 2003 survey to 90.7 percent for the 2006 survey and 89 
percent for the 2007-2008 survey. In 43 areas, the response rate was 
only 66.7 percent or less. In addition, for 46 areas, including New 
York-White Plains-Wayne, New York-New Jersey (35644), Oklahoma City, 
Oklahoma (36420), Rural Georgia (11), and Rural Oklahoma (37), the area 
response rate decreased 20 percent or more between the 2006 survey and 
the 2007-2008 survey. In all of Puerto Rico, only 21.6 percent of 
hospitals submitted 2007-2008 survey data. If we had proposed to apply 
a penalty for nonresponsive hospitals for the FY 2010 wage index, 
Puerto Rico hospitals would have been significantly adversely affected 
in both the proposed national and Puerto Rico-specific wage indices. 
While we are not proposing a penalty at this time, we will consider the 
public comments we previously received, as well as any public comments 
on this proposed rule, as we develop the proposed FY 2011 wage index. 
One approach that we will explore is to assign any nonresponsive 
hospital the occupational mix factor deriving from the survey that 
would result in the greatest negative adjustment to the hospital's wage 
index. We also will consider applying the same penalty to hospitals 
that submit unusable occupational mix data. Although we would apply 
this penalty factor in establishing the hospital's payment rate, we 
would not use this factor in computing the area's wage index. Rather, 
in computing the area wage index, we would apply the same methodology 
as described above (that is, assign the nonresponsive hospital the 
average occupational mix adjustment factor for the labor market area) 
so that other hospitals in the area are minimally impacted by the 
hospital's failure to submit occupational mix data. Again, we note that 
we reserve the right to penalize nonresponsive hospitals in the future. 
We welcome public comments on this matter and look forward to 
addressing this issue in next year's IPPS proposed rule.

E. Worksheet S-3 Wage Data for the Proposed FY 2010 Wage Index

    The proposed FY 2010 wage index values are based on the data 
collected from the Medicare cost reports submitted by hospitals for 
cost reporting periods beginning in FY 2006 (the FY 2009 wage index was 
based on FY 2005 wage data).
1. Included Categories of Costs
    The proposed FY 2010 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

[[Page 24145]]

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 IPPS final rule (70 FR 
47369).
2. Excluded Categories of Costs
    Consistent with the wage index methodology for FY 2009, the 
proposed wage index for FY 2010 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 proposed FY 2010 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, other 
than for LTCHs. (Beginning with the FY 2010 IPPS rule, for the RY 2010, 
we are including in the same document updates to the LTCH PPS.) 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 proposed FY 2010 wage index were obtained 
from Worksheet S-3, Parts II and III of the FY 2006 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 2006 data submitted to us as of March 2, 2009. 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/MACs to revise or verify data 
elements that resulted in specific edit failures. For the proposed FY 
2010 wage index, we identified and excluded 34 providers with data that 
was too aberrant to include in the proposed wage index, although if 
data elements for some of these providers are corrected, we intend to 
include some of these providers in the FY 2010 final 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 15, 2009. We believe all 
unresolved data elements will be resolved by the date the final rule is 
issued. The revised data will be reflected in the FY 2010 IPPS final 
rule.
    In constructing the proposed FY 2010 wage index, we included the 
wage data for facilities that were IPPS hospitals in FY 2006, 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. 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 proposed rule, we 
removed 11 hospitals that converted to CAH status between February 18, 
2008, the cut-off date for CAH exclusion from the FY 2009 wage index, 
and February 16, 2009, the cut-off date for CAH exclusion from the FY 
2010 wage index. After removing hospitals with aberrant data and 
hospitals that converted to CAH status, the proposed FY 2010 wage index 
is calculated based on 3,521 hospitals.
    In the FY 2008 final rule with comment period (72 FR 47317) and the 
FY 2009 IPPS final rule (73 FR 48582), 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 2010 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 proposed FY 2010 wage index in this 
proposed rule includes separate wage data for campuses of three 
multicampus hospitals.
    For FY 2010, 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 2010 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 proposed rule.

G. Method for Computing the Proposed FY 2010 Unadjusted Wage Index

    The method used to compute the proposed FY 2009 wage index without 
an occupational mix adjustment follows:
    Step 1--As noted above, we are basing the proposed FY 2010 wage 
index on wage data reported on the FY 2006 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, 2005, and before October 1, 
2006. In addition, we included data from some hospitals that had cost 
reporting periods beginning

[[Page 24146]]

before October 2005 and reported a cost reporting period covering all 
of FY 2005. 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 2006 (for example, a 
hospital had two short cost reporting periods beginning on or after 
October 1, 2005, and before October 1, 2006), 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 2010 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, 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 do not propose to make any changes to the usage for FY 2010. 
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
------------------------------------------------------------------------
10/14/2005..............................      11/15/2005         1.04966
11/14/2005..............................      12/15/2005         1.04632
12/14/2005..............................      01/15/2006         1.04296
01/14/2006..............................      02/15/2006         1.03955
02/14/2006..............................      03/15/2006         1.03610
03/14/2006..............................      04/15/2006         1.03269
04/14/2006..............................      05/15/2006         1.02936
05/14/2006..............................      06/15/2006         1.02613
06/14/2006..............................      07/15/2006         1.02298
07/14/2006..............................      08/15/2006         1.01990
08/14/2006..............................      09/15/2006         1.01688
09/14/2006..............................      10/15/2006         1.01391
10/14/2006..............................      11/15/2006         1.01098
11/14/2006..............................      12/15/2006         1.00808
12/14/2006..............................      01/15/2007         1.00526
01/14/2007..............................      02/15/2007         1.00257
02/14/2007..............................      03/15/2007         1.00000
03/14/2007..............................      04/15/2007         0.99745
------------------------------------------------------------------------

    For example, the midpoint of a cost reporting period beginning 
January 1, 2006, and ending December 31, 2006, is June 30, 2006. An 
adjustment factor of 1.02298 would be applied to the wages

[[Page 24147]]

of a hospital with such a cost reporting period. In addition, for the 
data for any cost reporting period that began in FY 2006 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 
proposed national average hourly wage (unadjusted for occupational mix) 
is $33.5184.
    Step 9--For each urban or rural labor market area, we calculate the 
hospital wage index value, unadjusted for occupational mix, by dividing 
the area average hourly wage obtained in Step 7 by the national average 
hourly wage computed in Step 8.
    Step 10--Following the process set forth above, we develop a 
separate Puerto Rico-specific wage index for purposes of adjusting the 
Puerto Rico standardized amounts. (The national Puerto Rico 
standardized amount is 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 proposed average hourly 
wage (unadjusted for occupational mix) of $14.2462 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 are 
identified in Table 4D-2 of the Addendum to this proposed 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 extended it an additional year in the FY 2008 IPPS final rule with 
comment period (72 FR 47321). In the FY 2009 IPPS final rule (73 FR 
48570 through 48574 and 48584), we extended the imputed floor for an 
additional 3 years, through FY 2011.

H. Analysis and Implementation of the Proposed Occupational Mix 
Adjustment and the Proposed FY 2010 Occupational Mix Adjusted Wage 
Index

    As discussed in section III.D. of this preamble, for FY 2010, we 
are proposing to apply the occupational mix adjustment to 100 percent 
of the FY 2010 wage index. We calculated the proposed occupational mix 
adjustment using data from the 2007-2008 occupational mix survey data, 
using the methodology described in section III.D.3. of this preamble.
    Using the occupational mix survey data and applying the 
occupational mix adjustment to 100 percent of the proposed FY 2010 wage 
index results in a proposed national average hourly wage of $33.4935 
and a Puerto-Rico specific average hourly wage of $14.2555. After 
excluding data of hospitals that either submitted aberrant data that 
failed critical edits, or that do not have FY 2006 Worksheet S-3 cost 
report data for use in calculating the proposed FY 2010 wage index, we 
calculated the proposed FY 2010 wage index using the occupational mix 
survey data from 3,135 hospitals. Using the Worksheet S-3 cost report 
data of 3,521 hospitals and occupational mix survey data from 3,135 
hospitals represents an 89-percent survey response rate. The proposed 
FY 2010 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..........................................      $36.067749019
National LPN and Surgical Technician.................       20.908955714
National Nurse Aide, Orderly, and Attendant..........       14.610222480
National Medical Assistant...........................       16.358327509
National Nurse Category..............................       30.484719916
------------------------------------------------------------------------

    The proposed national average hourly wage for the entire nurse 
category as computed in Step 5 of the occupational mix calculation is 
$30.484719916. 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 July 2007 through June 2008 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 44.32 percent, and the national percentage of hospital 
employees in the all other occupations category is 55.68 percent. At 
the CBSA level, the percentage of hospital employees in the nurse 
category ranged from a low of 29.08 percent in one CBSA, to a high of 
70.76 percent in another CBSA.
    We compared the proposed FY 2010 occupational mix adjusted wage 
indices for each CBSA to the proposed unadjusted wage indices for each 
CBSA. As a result of applying the occupational mix adjustment to the 
wage data, the proposed wage index values for 205 (46.8 percent) urban 
areas and 33 (70.2 percent) rural areas would increase. One hundred and 
nine (24.9 percent) urban areas would increase by 1 percent or more, 
and 5 (1.1 percent) urban areas would increase by 5 percent or more. 
Nineteen (40.4 percent) rural areas would increase by 1 percent or 
more, and no rural areas would increase by 5 percent or more. However, 
the proposed wage index values for 185 (42.2 percent) urban areas and 
14 (29.8 percent) rural areas would decrease. Eighty-nine (20.3 
percent) urban areas would decrease by 1 percent or more, and 1 (0.23 
percent) urban area would decrease by 5 percent or more. Six (12.8 
percent) rural areas would decrease by 1 percent or more,

[[Page 24148]]

and no rural areas would decrease by 5 percent or more. The largest 
positive impacts are 7.86 percent for an urban area and 2.98 percent 
for a rural area. The largest negative impacts are 5.68 percent for an 
urban area and 2.07 percent for a rural area. One urban area would be 
unaffected. These results indicate that a larger percentage of rural 
areas (70.2 percent) benefit from the occupational mix adjustment than 
do urban areas (46.8 percent). While these results are more positive 
overall for rural areas than under the previous occupational mix 
adjustment that used survey data from 2006, approximately one-third 
(29.8 percent) of rural CBSAs would still experience a decrease in 
their wage indices as a result of the occupational mix adjustment.
    We also compared the proposed FY 2010 wage data adjusted for 
occupational mix from the 2007-2008 survey to the proposed FY 2010 wage 
data adjusted for occupational mix from the 2006 survey. This analysis 
illustrates the effect on area wage indices of using the 2007-2008 
survey data compared to the 2006 survey data; that is, it shows whether 
hospitals' wage indices are increasing or decreasing under the current 
survey data as compared to the prior survey data. Our analysis shows 
that the FY 2010 proposed wage index values for 186 (47.6 percent) 
urban areas and 18 (38.3 percent) rural areas would increase. Sixty-
three (16.1 percent) urban areas would increase by 1 percent or more, 
and no urban areas would increase by 5 percent or more. One (2.1 
percent) rural area would increase by 1 percent or more, and no rural 
areas would increase by 5 percent or more. However, the proposed wage 
index values for 201 (51.4 percent) urban areas and 28 (59.6 percent) 
rural areas would decrease using the 2007-2008 data. Fifty-six (14.3 
percent) urban areas would decrease by 1 percent or more, and one (0.26 
percent) urban area would decrease by 5 percent or more. Four (8.5 
percent) rural areas would decrease by 1 percent or more, and no rural 
areas would decrease by 5 percent or more. The largest positive impacts 
using the 2007-2008 data compared to the 2006 data are 4.36 percent for 
an urban area and 2.39 percent for a rural area. The largest negative 
impacts are 6.46 percent for an urban area and 4.39 percent for a rural 
area. Four urban areas and one rural area would be unaffected. These 
results indicate that a larger percentage of urban areas (47.6 percent) 
would benefit from the 2007-2008 occupational mix survey as compared to 
the 2006 survey than would rural areas (38.3 percent). Further, the 
wage indices of more CBSAs overall (52.3 percent) would be decreasing 
due to application of the 2007-2008 occupational mix survey data as 
compared to the 2006 survey data to the wage index. However, as noted 
in the analysis above, a greater percentage of rural areas (70.2 
percent) would benefit from the application of the occupational mix 
adjustment than would urban areas.
    The proposed wage index values for FY 2010 (except those for 
hospitals receiving wage index adjustments under section 1886(d)(13) of 
the Act) included in Tables 4A, 4B, 4C, and 4F of the Addendum to this 
proposed rule include the proposed occupational mix adjustment.
    Tables 3A and 3B in the Addendum to this proposed rule list the 3-
year average hourly wage for each labor market area before the 
redesignation of hospitals based on FYs 2008, 2009, and 2010 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 proposed rule includes the adjusted average hourly 
wage for each hospital from the FY 2004 and FY 2005 cost reporting 
periods, as well as the FY 2006 period used to calculate the proposed 
FY 2010 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 average hourly wages in Tables 
2, 3A, and 3B in the Addendum to this proposed rule include the 
occupational mix adjustment. The proposed wage index values in Tables 
4A, 4B, 4C, and 4D-1 also include the proposed State-specific rural 
floor and imputed floor budget neutrality adjustments.

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 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 labor market area 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

[[Page 24149]]

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 also has adopted the following policies:
     The wage data for a reclassified urban hospital is 
included in both the wage index calculation of the urban 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 hospitals have reclassified to rural areas, 
such as urban hospitals reclassifying to rural areas under 42 CFR 
412.103, the hospital's 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. The effect of this policy, in combination with the statutory 
requirement at section 1886(d)(8)(C)(ii) of the Act, is that rural 
areas may receive a wage index based upon the highest of: (1) Wage data 
from hospitals geographically located in the rural area; (2) wage data 
from hospitals geographically located in the rural area, but excluding 
all data associated with hospitals reclassifying out of the rural area 
under section 1886(d)(8)(B) or section 1886(d)(10) of the Act; or (3) 
wage data associated with hospitals geographically located in the area 
plus all hospitals reclassified into the rural area.
    In addition, in accordance with the statutory language referring to 
``hospitals'' in the plural under sections 1886(d)(8)(C)(i) and 
1886(d)(8)(C)(ii) of the Act, our longstanding policy is to consider 
reclassified hospitals as a group when deciding whether to include or 
exclude them from both urban and rural wage index calculations.
3. FY 2010 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 proposed rule was constructed, the MGCRB had 
completed its review of FY 2010 reclassification requests. Based on 
such reviews, there were 292 hospitals approved for wage index 
reclassifications by the MGCRB for FY 2010. Because MGCRB wage index 
reclassifications are effective for 3 years, for FY 2010, hospitals 
reclassified during FY 2008 or FY 2009 are eligible to continue to be 
reclassified to a particular labor market area based on such prior 
reclassifications. There were 313 hospitals approved for wage index 
reclassifications in FY 2008 and 271 hospitals approved for wage index 
reclassifications in FY 2009. Of all of the hospitals approved for 
reclassification for FY 2008, FY 2009, and FY 2010, based upon the 
review at the time of the proposed rule, 876 hospitals are in a 
reclassification status for FY 2010.
    Under 42 CFR 412.273, hospitals that have been reclassified by the 
MGCRB are permitted to withdraw their applications within 45 days of 
the publication of a 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 2010 
must be received by the MGCRB within 45 days of the publication of the 
proposed rule. 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 FY 2002 
IPPS final rule (66 FR 39887) and the FY 2003 IPPS final rule (67 FR 
50065).
    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 the FY 2010 IPPS final rule. 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 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 be affected.
    Applications for FY 2011 reclassifications are due to the MGCRB by 
September 1, 2009 (the first working day of September 2009). 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 2009, 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. 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 2010 chart below with the listing 
of the rural counties containing the hospitals designated as urban 
under section

[[Page 24150]]

1886(d)(8)(B) of the Act. For discharges occurring on or after October 
1, 2009, 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.
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 market area in Table 4C in the Addendum to 
this 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 may withdraw from an MGCRB 
reclassification within 45 days of the publication of this proposed 
rule.
5. Reclassifications Under Section 1886(d)(8)(B) of the Act
    As discussed in the FY 2009 IPPS final rule (73 FR 48588), Lugar 
hospitals are treated like reclassified hospitals for purposes of 
determining their applicable wage index and receive the reclassified 
wage index 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 MGCRB, 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

[[Page 24151]]

(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)). In accordance with policy adopted in the FY 
2009 IPPS final rule (73 FR 48568 and 48569), beginning with 
reclassifications for the FY 2010 wage index, a Lugar hospital must 
also demonstrate that its average hourly wage is equal to at least 84 
percent (for FY 2010 reclassifications) and 86 percent (for 
reclassifications for FY 2011 and subsequent fiscal years) 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. We treat New 
England deemed counties in a manner consistent with how we treat Lugar 
counties. (We refer readers to FY 2008 IPPS final rule with comment 
period (72 FR 47337) for a discussion of this policy.)
6. Reclassifications Under Section 508 of Public Law 108-173
    Section 508 of Public Law 108-173 allowed certain qualifying 
hospitals to receive wage index reclassifications and assignments that 
they otherwise would not have been eligible to receive under the law. 
Although section 508 originally was scheduled to expire after a 3-year 
period, Congress extended the provision several times, as well as 
certain special exceptions that would have otherwise expired. For a 
discussion of the original section 508 provision and its various 
extensions, we refer readers to the FY 2009 IPPS final rule (73 FR 
48443). The most recent extension of the provision was included in 
section 124 of Public Law 110-275 (MIPPA). Section 124 extended, 
through FY 2009, section 508 reclassifications as well as certain 
special exceptions. Because the latest extension of these provisions 
expires on September 30, 2009, and will not be applicable in FY 2010, 
in this proposed rule, we are not proposing to make any changes related 
to these provisions.

J. Proposed FY 2010 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 2010 wage index, we are proposing to 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 2009 will be eligible to retain the adjustment for 
FY 2010. 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, 2009.
    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, 2008, 
and 2009 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 adjustment, should follow the termination/withdrawal 
procedures specified in 42 CFR 412.273 and section III.I.3. of the 
preamble of this proposed rule. Otherwise, they will be deemed to have 
waived the out-migration adjustment. Hospitals redesignated under 
section 1886(d)(8) of the Act will be deemed to have waived the out-
migration adjustment unless they explicitly notify CMS within 45 days 
from the publication of this proposed rule that they elect to receive 
the out-migration adjustment instead. These notifications should be 
sent to the following address: Centers for Medicare and Medicaid 
Services, Center for Medicare Management, Attention: Wage Index 
Adjustment Waivers, Division of

[[Page 24152]]

Acute Care, room C4-08-06, 7500 Security Boulevard, Baltimore, MD 
21244-1850.
    Table 4J in the Addendum to this proposed rule lists the proposed 
out-migration wage index adjustments for FY 2010. Hospitals that are 
not otherwise reclassified or redesignated under section 1886(d)(8) or 
section 1886(d)(10) of the Act will automatically receive the listed 
adjustment. In accordance with the procedures discussed above, 
redesignated/reclassified hospitals will be deemed to have waived the 
out-migration adjustment unless CMS is otherwise notified within the 
necessary timeframe. In addition, hospitals eligible to receive the 
out-migration wage index adjustment and that withdraw their application 
for reclassification would automatically receive the wage index 
adjustment listed in the final Table 4J in the Addendum to this 
proposed rule.

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 2010 wage index were made available on 
October 6, 2008, 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 post 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 does 
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 encourage 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 6, 2008, 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 6, 2008 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 8, 2008. 
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 6, 2008 memorandum referenced above.
    In the October 6, 2008 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 
2007-2008 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 8, 2008.
    The fiscal intermediaries/MACs notified the hospitals by mid-
February 2009 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 2009. CMS published the proposed 
wage index public use files that included hospitals' revised wage index 
data on February 23, 2009. In a memorandum also dated February 23, 
2009, 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 10, 2009, 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 also were required to submit sufficient 
documentation to support their requests.
    After reviewing requested changes submitted by hospitals, fiscal 
intermediaries/MACs are to transmit any additional revisions resulting 
from the hospitals' reconsideration requests by April 15, 2009. The 
deadline for a hospital to request CMS intervention in cases where the 
hospital disagrees with the fiscal intermediary's (or, if applicable, 
the MAC's) policy interpretations is April 15, 2009.
    Hospitals should also examine Table 2 in the Addendum to this 
proposed rule. Table 2 in the Addendum to this proposed rule contains 
each hospital's adjusted average hourly wage used to construct the wage 
index values for the past 3 years, including the FY 2006 data used to 
construct the proposed FY 2010 wage index. We noted that the hospital 
average hourly wages shown in Table 2 only reflect changes made to a 
hospital's data and transmitted to CMS by March 2, 2009.
    We will release the final wage index data public use files in early 
May 2009 on the Internet at http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage. The May 2009 public use files will be 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 15, 2009). If, after reviewing the May 
2009 final files, a hospital believes that its wage or occupational mix 
data are incorrect due to a fiscal intermediary/MAC or CMS error in the 
entry or tabulation of the final data, the hospital should send a 
letter to both its fiscal intermediary/MAC and CMS that outlines why 
the hospital believes 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, the MACs) must receive these requests no later than June 8, 
2009.
    Each request also must be sent to the fiscal intermediary/MAC. The 
fiscal intermediary/MAC will review requests upon receipt and contact 
CMS immediately to discuss any findings.
    At this point in the process, that is, after the release of the May 
2009 wage index data files, changes to the wage and occupational mix 
data will only be made 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 will approve 
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 15, 2009.
     Requests for correction of errors that were not, but could 
have been, identified during the hospital's review

[[Page 24153]]

of the February 23, 2009 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 8, 2009) 
will be incorporated into the final wage index in the FY 2010 IPPS 
final rule, which will be effective October 1, 2009.
    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 2010 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 will 
have access to the final wage index data by early May 2009, they have 
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 2010 wage index by August 1, 2009, and the 
implementation of the FY 2010 wage index on October 1, 2009. 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 8, 2009, 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 8 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 8, 
2009 deadline for the FY 2010 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 8, 2009 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.

IV. Proposed Rebasing and Revision of the Hospital Market Baskets for 
Acute Care Hospitals

A. Background

    Effective for cost reporting periods beginning on or after July 1, 
1979, we developed and adopted a hospital input price index (that is, 
the hospital market basket for operating costs). Although ``market 
basket'' technically describes the mix of goods and services used in 
providing hospital care, this term is also commonly used to denote the 
input price index (that is, cost category weights and price proxies 
combined) derived from that market basket. Accordingly, the term 
``market basket'' as used in this document refers to the hospital input 
price index.
    The percentage change in the market basket reflects the average 
change in the price of goods and services hospitals purchase in order 
to provide inpatient care. We first used the market basket to adjust 
hospital cost limits by an amount that reflected the average increase 
in the prices of the goods and services used to provide hospital 
inpatient care. This approach linked the increase in the cost limits to 
the efficient utilization of resources.
    Since the inception of the IPPS, the projected change in the 
hospital market basket has been the integral component of the update 
factor by which the prospective payment rates are updated every year. 
An explanation of the hospital market basket used to develop the 
prospective payment rates was

[[Page 24154]]

published in the Federal Register on September 1, 1983 (48 FR 39764). 
We also refer readers to the FY 2006 IPPS final rule (70 FR 47387) in 
which we discussed the most recent previous rebasing of the hospital 
input price index.
    The hospital market basket is a fixed-weight, Laspeyres-type price 
index that is constructed in three steps. A Laspeyres price index 
measures the change in price, over time, of the same mix of goods and 
services purchased in the base period. Any changes in the quantity or 
mix of goods and services (that is, intensity) purchased over time are 
not measured.
    The index itself is constructed in three steps. First, a base 
period is selected (in this proposed rule, the base period is FY 2006) 
and total base period expenditures are estimated for a set of mutually 
exclusive and exhaustive spending categories based upon type of 
expenditure. Then the proportion of total operating costs that each 
category represents is determined. These proportions are called cost or 
expenditure weights. Second, each expenditure category is matched to an 
appropriate price or wage variable, referred to as a price proxy. In 
nearly every instance, these price proxies are price levels derived 
from publicly available statistical series that are published on a 
consistent schedule (preferably at least on a quarterly basis). 
Finally, the expenditure weight for each cost category is multiplied by 
the level of its respective price proxy. The sum of these products 
(that is, the expenditure weights multiplied by their price levels) for 
all cost categories yields the composite index level of the market 
basket in a given period. Repeating this step for other periods 
produces a series of market basket levels over time. Dividing an index 
level for a given period by an index level for an earlier period 
produces a rate of growth in the input price index over that timeframe.
    The market basket is described as a fixed-weight index because it 
represents the change in price over time of the same mix (quantity and 
intensity) of goods and services purchased to provide hospital services 
in a base period. The effects on total expenditures resulting from 
changes in the mix of goods and services purchased subsequent to the 
base period are not measured. For example, shifting a traditionally 
inpatient type of care to an outpatient setting might affect the volume 
of inpatient goods and services purchased by the hospital, but would 
not be factored into the price change measured by a fixed-weight 
hospital market basket. In this manner, the market basket measures pure 
price change only. Only when the index is rebased would changes in the 
quantity and intensity be captured in the cost weights. Therefore, we 
rebase the market basket periodically so the cost weights reflect 
recent changes in the mix of goods and services that hospitals purchase 
(hospital inputs) to furnish inpatient care between base periods. We 
last rebased the hospital market basket cost weights effective for FY 
2006 (70 FR 47387), with FY 2002 data used as the base period for the 
construction of the market basket cost weights.
    We are inviting public comments on our proposed methodological 
changes to both the IPPS operating market basket and the capital input 
price index (CIPI). We note that this section addresses only the 
rebasing and revision of the IPPS market basket and CIPI for acute care 
hospitals and for children's and cancer hospitals and RNHCIs, which are 
excluded from the IPPS. We address the proposed market basket that 
would be applicable to LTCHs in section VIII.C.2. of the preamble of 
this proposed rule. Separate documents will address the market basket 
for other hospitals that are excluded from the IPPS.

B. Rebasing and Revising the IPPS Market Basket

    The terms ``rebasing'' and ``revising,'' while often used 
interchangeably, actually denote different activities. ``Rebasing'' 
means moving the base year for the structure of costs of an input price 
index (for example, in this proposed rule, we are shifting the base 
year cost structure for the IPPS hospital index from FY 2002 to FY 
2006). ``Revising'' means changing data sources, or price proxies, used 
in the input price index. As published in the FY 2006 IPPS final rule 
(70 FR 47387), in accordance with section 404 of Public Law 108-173, 
CMS determined a new frequency for rebasing the hospital market basket. 
We established a rebasing frequency of every 4 years and, therefore, 
for the FY 2010 IPPS update, we are proposing to rebase and revise the 
IPPS market basket and the CIPI.
1. Development of Cost Categories and Weights
a. Medicare Cost Reports
    The major source of expenditure data for developing the rebased and 
revised hospital market basket cost weights is the FY 2006 Medicare 
cost reports. As was done in previous rebasings, these cost reports are 
from IPPS hospitals only (hospitals excluded from the IPPS and CAHs are 
not included) and are based on IPPS Medicare-allowable operating costs. 
IPPS Medicare-allowable operating costs are costs that are eligible to 
be paid for under the IPPS. For example, the IPPS market basket 
excludes home health agency (HHA) costs as these costs would be paid 
under the HHA PPS and, therefore, these costs are not IPPS Medicare-
allowable costs.
    The IPPS cost reports yield seven major expenditure or cost 
categories--the same as in the FY 2002-based hospital market basket: 
Wages and salaries, employee benefits, contract labor, pharmaceuticals, 
professional liability insurance (malpractice), blood and blood 
products, and a residual ``all other.'' The cost weights that were 
obtained directly from the Medicare cost reports are reported in Chart 
1. These Medicare cost report cost weights are then supplemented with 
information obtained from other data sources to derive the proposed 
IPPS market basket cost weights.

 Chart 1.--Major Cost Categories and Their Respective Cost Weights Found
                      in the Medicare Cost Reports
------------------------------------------------------------------------
                                                         Proposed 2006-
        Major cost categories           FY 2002-based     based market
                                        market basket        basket
------------------------------------------------------------------------
Wages and salaries..................            45.590            45.156
Employee benefits...................            11.189            11.873
Contract labor......................             3.214             2.598
Professional liability insurance                 1.589             1.661
 (malpractice)......................
Pharmaceuticals.....................             5.855             5.380
Blood and blood products............             1.082             1.078
All other...........................            31.481            32.254
------------------------------------------------------------------------


[[Page 24155]]

b. Other Data Sources
    In addition to the Medicare cost reports, the other data source we 
used to develop the IPPS market basket cost weights was the Benchmark 
Input-Output (I-O) Tables created by the Bureau of Economic Analysis 
(BEA), U.S. Department of Commerce. The BEA Benchmark I-O data are 
scheduled for publication every 5 years. The most recent data available 
are for 2002. BEA also produces Annual I-O estimates; however, the 2002 
Benchmark I-O data represent a much more comprehensive and complete set 
of data that are derived from the 2002 Economic Census. The Annual I-O 
is simply an update of the Benchmark I-O tables. For the FY 2006 market 
basket rebasing, we used the 1997 Benchmark I-O data. We are proposing 
to use the 2002 Benchmark I-O data in the FY 2006-based IPPS market 
basket, to be effective for FY 2010. Instead of using the less 
detailed, less accurate Annual I-O data, we aged the 2002 Benchmark I-O 
data forward to FY 2006. The methodology we used to age the data 
forward involves applying the annual price changes from the respective 
price proxies to the appropriate cost categories. We repeat this 
practice for each year.
    The ``all other'' cost category obtained directly from the Medicare 
cost reports is divided into other hospital expenditure category shares 
using the 2002 Benchmark I-O data. Therefore, the ``all other'' cost 
category expenditure shares are proportional to their relationship to 
``all other'' totals in the 2002 Benchmark I-O data. For instance, if 
the cost for telephone services was to represent 10 percent of the sum 
of the ``all other'' Benchmark I-O (see below) hospital expenditures, 
then telephone services would represent 10 percent of the IPPS market 
basket's ``all other'' cost category. Following publication of this FY 
2010 IPPS proposed rule, and in an effort to provide greater 
transparency, we will be posting on the CMS market basket Web page at 
http://www.cms.hhs.gov/MedicareProgramRatesStats/05_MarketBasketResearch.asp#TopOfPage an illustrative spreadsheet that 
shows how the detailed cost weights (that is, those not calculated 
using Medicare cost reports) are determined using the 2002 Benchmark I-
O data.
2. Final Cost Category Computation
    As stated previously, for this rebasing we used the Medicare cost 
reports to derive seven major cost categories. The proposed FY 2006-
based IPPS market basket includes three additional cost categories that 
were not broken out separately in the FY 2002-based IPPS market basket. 
The first is lifted directly from the Medicare cost reports: Blood and 
blood products. The remaining two are derived using the Benchmark I-O 
data: Administrative and business support services and financial 
services. We are proposing to break out the latter two categories so we 
can better match their respective expenses with price proxies. A 
thorough discussion of our rationale for each of these cost categories 
is provided in the section IV.B.3. of this proposed rule. Also, the 
proposed FY 2006-based IPPS market basket excludes one cost category: 
Photo supplies. The 2002 Benchmark I-O weight for this category is 
considerably smaller than the 1997 Benchmark I-O weight, presently 
accounting for less than one-tenth of one percentage point of the IPPS 
market basket. Therefore, we are proposing to include the photo 
supplies costs in the chemical cost category weight with other similar 
chemical products.
    We are not proposing to change our definition of the labor-related 
share. However, we are proposing to rename our aggregate cost 
categories from ``labor-intensive'' and ``non-labor-intensive'' 
services to ``labor-related'' and ``nonlabor-related'' services. As 
discussed in more detail below and similar to the previous rebasing, we 
classify a cost category as labor-related and include it in the labor-
related share if the cost category is defined as being labor-intensive 
and its cost varies with the local labor market. In previous 
regulations, we grouped cost categories that met both of these criteria 
into labor-intensive services. We believe the proposed new labels more 
accurately reflect the concepts that they are intended to convey. We 
are not proposing to change to our definition of the labor-related 
share because we continue to classify a cost category as labor-related 
if the costs are labor-intensive and vary with the local labor market.
3. Selection of Price Proxies
    After computing the FY 2006 cost weights for the proposed rebased 
hospital market basket, it was necessary to select appropriate wage and 
price proxies to reflect the rate of price change for each expenditure 
category. With the exception of the proxy for professional liability, 
all the proxies are based on Bureau of Labor Statistics (BLS) data and 
are grouped into one of the following BLS categories:
     Producer Price Indexes--Producer Price Indexes (PPIs) 
measure price changes for goods sold in markets other than the retail 
market. PPIs are preferable price proxies for goods and services that 
hospitals purchase as inputs because these PPIs better reflect the 
actual price changes faced by hospitals. For example, we use a special 
PPI for prescription drugs, rather than the Consumer Price Index (CPI) 
for prescription drugs, because hospitals generally purchase drugs 
directly from a wholesaler. The PPIs that we use measure price changes 
at the final stage of production.
     Consumer Price Indexes--Consumer Price Indexes (CPIs) 
measure change in the prices of final goods and services bought by the 
typical consumer. Because they may not represent the price faced by a 
producer, we used CPIs only if an appropriate PPI was not available, or 
if the expenditures were more similar to those faced by retail 
consumers in general rather than by purchasers of goods at the 
wholesale level. For example, the CPI for food purchased away from home 
is used as a proxy for contracted food services.
     Employment Cost Indexes--Employment Cost Indexes (ECIs) 
measure the rate of change in employee wage rates and employer costs 
for employee benefits per hour worked. These indexes are fixed-weight 
indexes and strictly measure the change in wage rates and employee 
benefits per hour. Appropriately, they are not affected by shifts in 
employment mix.
    We evaluated the price proxies using the criteria of reliability, 
timeliness, availability, and relevance. Reliability indicates that the 
index is based on valid statistical methods and has low sampling 
variability. Timeliness implies that the proxy is published regularly, 
preferably at least once a quarter. Availability means that the proxy 
is publicly available. Finally, relevance means that the proxy is 
applicable and representative of the cost category weight to which it 
is applied. The CPIs, PPIs, and ECIs selected meet these criteria.
    Chart 2 sets forth the proposed FY 2006-based IPPS market basket 
including cost categories, weights, and price proxies. For comparison 
purposes, the corresponding FY 2002-based IPPS market basket is listed 
as well. A summary outlining the choice of the various proxies follows 
the chart.

[[Page 24156]]



Chart 2.--Proposed FY 2006-Based IPPS Hospital Market Basket Cost Categories, Weights, and Price Proxies with FY
                              2002-Based IPPS Market Basket Included for Comparison
----------------------------------------------------------------------------------------------------------------
                                                                Proposed
                                              FY 2002-based    rebased FY
                                                hospital       2006-based       Proposed rebased FY 2006-based
              Cost categories                 market basket     hospital         hospital market basket price
                                              cost weights    market basket                proxies
                                                              cost weights
----------------------------------------------------------------------------------------------------------------
1. Compensation............................          59.993          59.627
    A. Wages and Salaries (1)..............          48.171          47.213  ECI for Wages and Salaries,
                                                                              Civilian Hospital Workers.
    B. Employee Benefits (1)...............          11.822          12.414  ECI for Benefits, Civilian Hospital
                                                                              Workers.
2. Utilities...............................           1.251           2.180
    A. Fuel, Oil, and Gasoline.............           0.206           0.418  PPI for Petroleum Refineries.
    B. Electricity.........................           0.669           1.645  PPI for Commercial Electric Power.
    C. Water and Sewage....................           0.376           0.117  CPI-U for Water & Sewerage
                                                                              Maintenance.
3. Professional Liability Insurance........           1.589           1.661  CMS Professional Liability
                                                                              Insurance Premium Index.
4. All Other...............................          37.167          36.533
    A. All Other Products..................          20.336          19.473
    (1) Pharmaceuticals....................           5.855           5.380  PPI for Pharmaceutical Preparations
                                                                              (Prescriptions).
    (2) Food: Direct Purchases.............           1.664           3.982  PPI for Processed Foods & Feeds.
    (3) Food: Contract Services............           1.180           0.575  CPI-U for Food Away From Home.
    (4) Chemicals (2)......................           2.096           1.538  Blend of Chemical PPIs.
    (5) Blood and Blood Products (3).......  ..............           1.078  PPI for Blood and Organ Banks.
    (6) Medical Instruments................           1.932           2.762  PPI for Medical, Surgical, and
                                                                              Personal Aid Devices.
    (7) Photographic Supplies..............           0.183  ..............
    (8) Rubber and Plastics................           2.004           1.659  PPI for Rubber & Plastic Products.
    (9) Paper and Printing Products........           1.905           1.492  PPI for Converted Paper &
                                                                              Paperboard Products.
    (10) Apparel...........................           0.394           0.325  PPI for Apparel.
    (11) Machinery and Equipment...........           0.565           0.163  PPI for Machinery & Equipment.
    (12) Miscellaneous Products (3)........           2.558           0.519  PPI for Finished Goods less Food
                                                                              and Energy.
    B. Labor-related Services..............           9.738           7.435
    (1) Professional Fees: Labor-related              5.510           3.616  ECI for Compensation for
     (4).                                                                     Professional and Related
                                                                              Occupations.
    (2) Administrative and Business Support             n/a           0.626  ECI for Compensation for Office and
     Services (5).                                                            Administrative Services.
    (3) All Other: Labor-Related Services             4.228           3.193  ECI for Compensation for Private
     (5).                                                                     Service Occupations.
    C. Nonlabor-Related Services...........           7.093           9.625
    (1) Professional Fees: Nonlabor-Related             n/a           5.814  ECI for Compensation for
     (4).                                                                     Professional and Related
                                                                              Occupations.
    (2) Financial Services (6).............             n/a           1.281  ECI for Compensation for Financial
                                                                              Activities.
    (3) Telephone Services.................           0.458           0.627  CPI-U for Telephone Services.
    (4) Postage............................           1.300           0.963  CPI-U for Postage.
    (5) All Other: Nonlabor-Related                   5.335           0.940  CPI-U for All Items less Food and
     Services (6).                                                            Energy.
                                            --------------------------------
        Total..............................         100.000         100.000
----------------------------------------------------------------------------------------------------------------
Note: Detail may not add to total due to rounding.
(1) Contract labor is distributed to wages and salaries and employee benefits based on the share of total
  compensation that each category represents.
(2) To proxy the ``chemicals'' cost category, we are proposing to use a blended PPI composed of the PPI for
  industrial gases, the PPI for other basic inorganic chemical manufacturing, the PPI for other basic organic
  chemical manufacturing, and the PPI for soap and cleaning compound manufacturing. For more detail about this
  proxy, see section IV.B.3.j. of the preamble of this proposed rule.
(3) The ``blood and blood products'' cost category was contained within ``miscellaneous products'' cost category
  in the FY 2002-based IPPS market basket.
(4) The ``professional fees: labor-related'' and ``professional fees: nonlabor-related'' cost categories were
  included in one cost category called ``professional fees'' in the FY 2002-based IPPS market basket. For more
  detail about how these new categories were derived, we refer readers to sections IV.B.3.s. and v. of the
  preamble of this proposed rule, on the labor-related share.
(5) The ``administrative and business support services'' cost category was contained within ``all other: labor-
  intensive services'' cost category in the FY 2002-based IPPS market basket. The ``all other: labor-intensive
  services'' cost category is renamed the ``all other: labor-related services'' cost category for the proposed
  FY 2006-based IPPS market basket.
(6) The ``financial services'' cost category was contained within the ``all other: non-labor intensive
  services'' cost category in the FY 2002-based IPPS market basket. The ``all other: nonlabor intensive
  services'' cost category is renamed the ``all other: nonlabor-related services'' cost category for the
  proposed FY 2006-based IPPS market basket.

a. Wages and Salaries
    We are proposing to use the ECI for wages and salaries for hospital 
workers (all civilian) (series code CIU1026220000000I) to 
measure the price growth of this cost category. This same proxy was 
used in the FY 2002-based IPPS market basket.
b. Employee Benefits
    We are proposing to use the ECI for employee benefits for hospital 
workers (all civilian) to measure the price growth of this cost 
category. This same proxy was used in the FY 2002-based IPPS market 
basket.
c. Fuel, Oil, and Gasoline
    For the FY 2002-based market basket, this category only included 
expenses classified under North American Industry Classification System 
(NAICS)

[[Page 24157]]

21 (Mining). We proxied this category using the PPI for commercial 
natural gas (series code WPU0552). For the proposed FY 2006-
based market basket, we are proposing to add costs to this category 
that had previously been grouped in other categories. The added costs 
include petroleum-related expenses under NAICS 324110 (previously 
captured in the miscellaneous category), as well as petrochemical 
manufacturing classified under NAICS 325110 (previously captured in the 
chemicals category). These added costs represent 80 percent of the 
hospital industry's fuel, oil, and gasoline expenses (or 80 percent of 
this category). Because the majority of the industry's fuel, oil, and 
gasoline expenses originate from petroleum refineries (NAICS 324110), 
we are proposing to use the PPI for petroleum refineries (series code 
PCU324110) as the proxy for this cost category.
d. Electricity
    We are proposing to use the PPI for commercial electric power 
(series code WPU0542). This same proxy was used in the FY 
2002-based IPPS market basket.
e. Water and Sewage
    We are proposing to use the CPI for water and sewerage maintenance 
(all urban consumers) (series code CUUR0000SEHG01) to measure 
the price growth of this cost category. This same proxy was used in the 
FY 2002-based IPPS market basket.
f. Professional Liability Insurance
    We are proposing to proxy price changes in hospital professional 
liability insurance premiums (PLI) using percentage changes as 
estimated by the CMS Hospital Professional Liability Index. To generate 
these estimates, we collect commercial insurance premiums for a fixed 
level of coverage while holding nonprice factors constant (such as a 
change in the level of coverage). This method is also used to proxy PLI 
price changes in the Medicare Economic Index (68 FR 63244). This same 
proxy was used in the FY 2002-based IPPS market basket.
g. Pharmaceuticals
    We are proposing to use the PPI for pharmaceutical preparations 
(prescription) (series code PCU32541DRX) to measure the price 
growth of this cost category. This is a special index produced by BLS 
and is the same proxy used in the FY 2002-based IPPS market basket.
h. Food: Direct Purchases
    We are proposing to use the PPI for processed foods and feeds 
(series code WPU02) to measure the price growth of this cost 
category. This same proxy was used in the FY 2002-based IPPS market 
basket.
i. Food: Contract Services
    We are proposing to use the CPI for food away from home (all urban 
consumers) (series code CUUR0000SEFV) to measure the price 
growth of this cost category. This same proxy was used in the FY 2002-
based IPPS market basket.
j. Chemicals
    We are proposing to use a blended PPI composed of the PPI for 
industrial gases (NAICS 325120), the PPI for other basic inorganic 
chemical manufacturing (NAICS 325180), the PPI for other basic organic 
chemical manufacturing (NAICS 325190), and the PPI for soap and 
cleaning compound manufacturing (NAICS 325610). Using the 2002 
Benchmark I-O data, we found that these NAICS industries accounted for 
approximately 90 percent of the hospital industry's chemical expenses. 
Therefore, we are proposing to use this blended index because we 
believe its composition better reflects the composition of the 
purchasing patterns of hospitals than does the PPI for industrial 
chemicals (series code WPU061), the proxy used in the FY 2002-
based IPPS market basket. Chart 3 below shows the weights for each of 
the four PPIs used to create the blended PPI, which we determined using 
the 2002 Benchmark I-O data.

                  Chart 3--Blended Chemical PPI Weights
------------------------------------------------------------------------
                                                  Weights
                     Name                           (in         NAICS
                                                  percent)
------------------------------------------------------------------------
PPI for Industrial Gases......................           35       325120
PPI for Other Basic Inorganic Chemical                   25       325180
 Manufacturing................................
PPI for Other Basic Organic Chemical                     30       325190
 Manufacturing................................
PPI for Soap and Cleaning Compound                       10       325610
 Manufacturing................................
------------------------------------------------------------------------

k. Blood and Blood Products
    In the FY 2002-based IPPS market basket, we classified blood and 
blood products into the miscellaneous products category and used the 
PPI for finished goods less food and energy to proxy the price changes 
associated with these expenses. At the time of the rebasing of the FY 
2002-based IPPS market basket, we noticed an apparent divergence 
between the PPI for blood and blood derivatives, the price proxy used 
in the FY 1997-based IPPS market basket, and blood costs faced by 
hospitals over the recent time period. A thorough discussion of this 
analysis is found in the FY 2006 IPPS final rule (70 FR 47390).
    Since the last rebasing of the market basket, BLS began collecting 
data and publishing an industry PPI for blood and organ banks (NAICS 
621991). For the proposed FY 2006-based IPPS market basket, we are 
proposing to incorporate this series (series code PCU621991) 
into the market basket and use it to proxy the blood and blood products 
cost category.
l. Medical Instruments
    We are proposing to use the PPI for medical, surgical, and personal 
aid devices (series code WPU156) to measure the price growth 
of this cost category. In the 1997 Benchmark I-O data, approximately 
half of the expenses classified in this category were for surgical and 
medical instruments. Thus, we used the PPI for surgical and medical 
instruments and equipment (series code WPU1562) to proxy this 
category in the FY 2002-based IPPS market basket. The 2002 Benchmark I-
O data show that this category now represents only 33 percent of these 
expenses and the largest expense category is surgical appliance and 
supplies manufacturing (corresponding to series code WPU1563). 
Due to this reallocation of costs over time, we are proposing to change 
the price proxy for this cost category to the more aggregated PPI for 
medical, surgical, and personal aid devices.
m. Photographic Supplies
    We are proposing to eliminate the cost category specific to 
photographic supplies for the proposed FY 2006-based IPPS market 
basket. These costs will now be included in the chemicals cost category 
because the costs are presently reported as all other chemical 
products. Notably, although we are eliminating the specific cost 
category, these costs will still be accounted for within the IPPS 
market basket.
n. Rubber and Plastics
    We are proposing to use the PPI for rubber and plastic products 
(series code WPU07) to measure price growth of this cost 
category. This same proxy was

[[Page 24158]]

used in the FY 2002-based IPPS market basket.
o. Paper and Printing Products
    We are proposing to use the PPI for converted paper and paperboard 
products (series code WPU0915) to measure the price growth of 
this cost category. This same proxy was used in the FY 2002-based IPPS 
market basket.
p. Apparel
    We are proposing to use the PPI for apparel (series code 
WPU0381) to measure the price growth of this cost category. 
This same proxy was used in the FY 2002-based IPPS market basket.
q. Machinery and Equipment
    We are proposing to use the PPI for machinery and equipment (series 
code WPU11) to measure the price growth of this cost category. 
This same proxy was used in the FY 2002-based IPPS market basket.
r. Miscellaneous Products
    We are proposing to use the PPI for finished goods less food and 
energy (series code WPUSOP3500) to measure the price growth of 
this cost category. Using this index removes the double-counting of 
food and energy prices, which are already captured elsewhere in the 
market basket. This same proxy was used in the FY 2002-based IPPS 
market basket.
s. Professional Fees: Labor-Related
    We are proposing to use the ECI for compensation for professional 
and related occupations (private industry) (series code 
CIS2020000120000I) to measure the price growth of this 
category. It includes occupations such as legal, accounting, and 
engineering services. This same proxy was used in the FY 2002-based 
IPPS market basket.
t. Administrative and Business Support Services
    We are proposing to use the ECI for compensation for office and 
administrative support services (private industry) (series code 
CIU2010000220000I) to measure the price growth of this 
category. Previously these costs were included in the ``all other: 
Labor-intensive cost'' category (now renamed the ``all other: Labor-
related cost'' category), and were proxied by the ECI for compensation 
for service occupations. We believe that this compensation index better 
reflects the changing price of labor associated with the provision of 
administrative services and its incorporation represents a technical 
improvement to the market basket.
u. All Other: Labor-Related Services
    We are proposing to use the ECI for compensation for service 
occupations (private industry) (series code CIU2010000300000I) 
to measure the price growth of this cost category. This same proxy was 
used in the FY 2002-based IPPS market basket.
v. Professional Fees: Nonlabor-Related
    We are proposing to use the ECI for compensation for professional 
and related occupations (private industry) (series code 
CIS2020000120000I) to measure the price growth of this 
category. This is the same price proxy that we are proposing to use for 
the professional fees: Labor-related cost category.
w. Financial Services
    We are proposing to use the ECI for compensation for financial 
activities (private industry) (series code CIU201520A000000I) 
to measure the price growth of this cost category. Previously these 
costs were included in the ``all other: Nonlabor-intensive cost'' 
category (now renamed the ``all other: nonlabor-related cost'' 
category), and were proxied by the CPI for all items. We believe that 
this compensation index better reflects the changing price of labor 
associated with the provision of financial services and its 
incorporation represents a technical improvement to the market basket.
x. Telephone Services
    We are proposing to use the CPI for telephone services (series code 
CUUR0000SEED) to measure the price growth of this cost 
category. This same proxy was used in the FY 2002-based IPPS market 
basket.
y. Postage
    We are proposing to use the CPI for postage (series code 
CUUR0000SEEC01) to measure the price growth of this cost 
category. This same proxy was used in the FY 2002-based IPPS market 
basket.
z. All Other: Nonlabor-Related Services
    We are proposing to use the CPI for all items less food and energy 
(series code CUUR0000SA0L1E) to measure the price growth of 
this cost category. Previously these costs were proxied by the CPI for 
all items in the FY 2002-based IPPS market basket. We believe that 
using the CPI for all items less food and energy will remove any 
double-counting of food and energy prices, which are already captured 
elsewhere in the market basket. Consequently, we believe that the 
incorporation of this proxy represents a technical improvement to the 
market basket.
    Chart 4 compares both the historical and forecasted percent changes 
in the FY 2002-based IPPS market basket and the proposed FY 2006-based 
IPPS market basket.

 Chart 4--FY 2002-Based and Proposed FY 2006-Based Prospective Payment Hospital Operating Index Percent Change,
                                             FY 2004 Through FY 2012
----------------------------------------------------------------------------------------------------------------
                                                                                          Proposed FY 2006-based
                                                                   FY 2002-based IPPS      IPPS market  basket
                       Fiscal year (FY)                         market basket operating      operating index
                                                                  index percent change        percent change
----------------------------------------------------------------------------------------------------------------
Historical data:
  FY 2004.....................................................                      4.0                      4.0
  FY 2005.....................................................                      4.3                      3.9
  FY 2006.....................................................                      4.3                      4.0
  FY 2007.....................................................                      3.4                      3.6
  FY 2008.....................................................                      4.3                      4.0
  Average FYs 2004-2008.......................................                      4.1                      3.9
Forecast:
  FY 2009.....................................................                      2.0                      2.5
  FY 2010.....................................................                      2.3                      2.1
  FY 2011.....................................................                      2.9                      2.8
  FY 2012.....................................................                      3.1                      3.0

[[Page 24159]]

 
  Average FYs 2009-2012.......................................                      2.6                      2.6
----------------------------------------------------------------------------------------------------------------
Source: IHS Global Insight, Inc.1st Quarter 2009, USMACRO/CONTROL0209@CISSIM/TL0505.SIM.

    The differences between the FY 2002-based and the proposed FY 2006-
based IPPS market basket increases are mostly stemming from the 
proposal to revise the proxy used for the chemicals cost category. As 
stated earlier, we are proposing to adopt a blended chemical index that 
is comprised of four industry-based chemical price proxies that 
represent approximately 90 percent of the hospital's industry chemical 
expenses. The FY 2002-based IPPS market basket used the PPI for 
industrial chemicals. The PPI for industrial chemicals attributes more 
weight to direct petroleum expenses, which is not consistent with a 
hospital's most recent purchasing pattern according to the 2002 
Benchmark I-O data. The lower weight for direct petroleum expenses in 
the blended chemical index results in less volatile price movements. We 
believe the proposed blended index represents a technical improvement 
because it better reflects the purchasing patterns of hospitals.
    Also contributing to the differences between the FY 2002-based and 
the proposed FY 2006-based IPPS market basket increases is the larger 
weight associated with the professional fees category. In both market 
baskets, these expenditures are proxied by the ECI for compensation for 
professional and related services. The weight for professional fees in 
the FY 2002-based IPPS market basket is 5.5 percent compared to 9.4 
percent in the proposed FY 2006-based IPPS market basket.
4. Labor-Related Share
    Under section 1886(d)(3)(E) of the Act, the Secretary estimates 
from time to time the proportion of payments that are labor-related. 
``The Secretary shall adjust the proportion (as estimated by the 
Secretary from time to time) of hospitals' costs which are attributable 
to wages and wage-related costs of the DRG prospective payment rates * 
* * .'' We refer to the proportion of hospitals' costs that are 
attributable to wages and wage-related costs as the ``labor-related 
share.''
    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. 
We continue to classify a cost category as labor-related if the costs 
are labor-intensive and vary with the local labor market. Given this, 
based on our definition of the labor-related share, we are proposing to 
include in the labor-related share the national average proportion of 
operating costs that are attributable to wages and salaries, employee 
benefits, contract labor, the labor-related portion of professional 
fees, administrative and business support services, and all other: 
Labor-related services (previously referred to in the FY 2002-based 
IPPS market basket as labor-intensive). Consistent with previous 
rebasings, the ``all other: Labor-related services'' cost category is 
mostly comprised of building maintenance and security services 
(including, but not limited to, commercial and industrial machinery and 
equipment repair, nonresidential maintenance and repair, and 
investigation and security services). Because these services tend to be 
labor-intensive and are mostly performed at the hospital facility (and, 
therefore, unlikely to be purchased in the national market), we believe 
that they meet our definition of labor-related services.
    For the rebasing of the FY 2002-based IPPS market basket in the FY 
2006 IPPS final rule, we included in the labor-related share the 
national average proportion of operating costs that are attributable to 
wages and salaries, employee benefits, contract labor, professional 
fees, and labor-intensive services (70 FR 47393). For the proposed FY 
2006-based IPPS market basket rebasing, the proposed inclusion of the 
administrative and business support services cost category into the 
labor-related share remains consistent with the current labor-related 
share because this cost category was previously included in the labor-
intensive cost category. As previously stated, we are proposing to 
establish a separate administrative and business support service cost 
category so that we can use the ECI for compensation for office and 
administrative support services to more precisely proxy these specific 
expenses.
    For the FY 2002-based IPPS market basket, we assumed that all 
nonmedical professional services (including accounting and auditing 
services, engineering services, legal services, and management and 
consulting services) were purchased in the local labor market and, 
therefore, all of their associated fees varied with the local labor 
market. As a result, we previously included 100 percent of these costs 
in the labor-related share. In an effort to more accurately determine 
the share of professional fees that should be included in the labor-
related share, we surveyed hospitals regarding the proportion of those 
fees that go to companies that are located beyond their own local labor 
market (the results are discussed below).
    We continue to look for ways to refine our market basket approach 
to more accurately account for the proportion of costs influenced by 
the local labor market. To that end, we conducted a survey of hospitals 
to empirically determine the proportion of contracted professional 
services purchased by the industry that are attributable to local firms 
and the proportion that are purchased from national firms. We notified 
the public of our intent to conduct this survey on December 9, 2005 (70 
FR 73250) and received no comments (71 FR 8588).
    With approval from the OMB, we contacted the industry and received 
responses to our survey from 108 hospitals. Using data on FTEs to 
allocate responding hospitals across strata (region of the country and 
urban/rural status), we calculated poststratification weights. Based on 
these weighted results, we determined that hospitals purchase, on 
average, the following portions of contracted professional services 
outside of their local labor market:
     34 percent of accounting and auditing services;
     30 percent of engineering services;
     33 percent of legal services; and
     42 percent of management consulting services.
    We applied each of these percentages to its respective Benchmark I-
O cost category underlying the professional

[[Page 24160]]

fees cost category. This is the methodology that we used to separate 
the FY 2006-based IPPS market basket professional fees category into 
professional fees: Labor-related and professional fees: Nonlabor-
related cost categories. In addition to the professional services 
listed above, we also classified expenses under NAICS 55, Management of 
Companies and Enterprises, into the professional fees cost category as 
was done in previous rebasings. The NAICS 55 data are mostly comprised 
of corporate, subsidiary, and regional managing offices, or otherwise 
referred to as home offices. Formerly, all of the expenses within this 
category were considered to vary with, or be influenced by, the local 
labor market and were thus included in the labor-related share. Because 
many hospitals are not located in the same geographic area as their 
home office, we analyzed data from a variety of sources in order to 
determine what proportion of these costs should be appropriately 
included in the labor-related share.
    Using data primarily from the Medicare cost reports and a CMS 
database of Home Office Medicare Records (HOMER) (a database that 
provides city and state information (addresses) for home offices), we 
were able to determine that 27 percent of hospitals that had home 
offices had those home offices located in their respective local labor 
markets--defined as being in the same MSA.
    The Medicare cost report requires hospitals to report their home 
office provider numbers. Using the HOMER database to determine the home 
office location for each home office provider number, we compared the 
location of the hospital with the location of the hospital's home 
office. We then placed hospitals into one of the following three 
groups:
     Group 1--Hospital and home office are located in different 
States;
     Group 2--Hospital and home office are located in the same 
State and same city; and
     Group 3--Hospital and home office are located in the same 
State and different city.
    We found that 54 percent of the hospitals with home offices were 
classified into Group 1 (that is, different State) and, thus, these 
hospitals were determined to not be located in the same local labor 
market as their home office. Although there were a very limited number 
of exceptions (that is, hospitals located in different States but the 
same MSA as their home office), the 54 percent estimate was unchanged.
    We found that 13 percent of all hospitals with home offices were 
classified into Group 2 (that is, same State and same city and, 
therefore, the same MSA). Consequently, these hospitals were determined 
to be located in the same local labor market as their home offices.
    We found that 33 percent of all hospitals with home offices were 
classified into Group 3 (that is, same State and different city). Using 
data from the Census Bureau to determine the specific MSA for both the 
hospital and its home office, we found that 14 percent of all hospitals 
with home offices were identified as being in the same State, a 
different city, but the same MSA.
    Pooling these results, we were able to determine that approximately 
27 percent of hospitals with home offices had home offices located 
within their local labor market (that is, 13 percent of hospitals with 
home offices had their home offices in the same State and city (and, 
thus, the same MSA), and 14 percent of hospitals with home offices had 
their home offices in the same State, a different city, but the same 
MSA). We are proposing to apportion the NAICS 55 expense data by this 
percentage. Thus, we are proposing to classify 27 percent of these 
costs into the professional fees: labor-related cost category and the 
remaining 73 percent into the professional fees: nonlabor-related cost 
category.
    Below is a chart comparing the proposed FY 2006-based and the FY 
2002-based labor-related share.

Chart 5--Comparison of the Proposed FY 2006-Based Labor-Related Share and the FY 2002-Based Labor-Related Shares
----------------------------------------------------------------------------------------------------------------
                                                                                          Proposed FY 2006-based
                                                                  FY 2002-based market      market basket cost
                                                                  basket cost weights            weights
----------------------------------------------------------------------------------------------------------------
Wages and Salaries............................................                   48.171                   47.213
Employee Benefits.............................................                   11.822                   12.414
Professional Fees: Labor-Related..............................                    5.510                    3.616
Administrative and Business Support Services..................  .......................                    0.626
All Other: Labor-Related Services.............................                    4.228                    3.193
                                                               -------------------------------------------------
    Total Labor-Related Share.................................                   69.731                   67.062
----------------------------------------------------------------------------------------------------------------

    Using the proposed cost category weights from the proposed FY 2006-
based IPPS market basket, we calculated a labor-related share of 67.062 
percent, approximately 3 percentage points lower than the current 
labor-related share of 69.731.
    We continue to believe, as we have stated in the past, that these 
operating cost categories are related to, influenced by, or vary with 
the local markets. Therefore, our definition of the labor-related share 
continues to be consistent with section 1886(d)(3) of the Act.
    Using the cost category weights that we determined in section 
IV.B.1. of this preamble, we calculated a labor-related share of 67.062 
percent, using the proposed FY 2006-based IPPS market basket. 
Accordingly, we are proposing to implement a labor-related share of 
67.1 percent for discharges occurring on or after October 1, 2009. 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 than would otherwise be 
made.''
    We also are proposing to update the labor-related share for Puerto 
Rico. Consistent with our methodology for determining the national 
labor-related share, we add the Puerto Rico-specific relative weights 
for wages and salaries, employee benefits, and contract labor. Because 
there are no Puerto Rico-specific relative weights for professional 
fees and labor intensive services, we use the national weights. Below 
is a chart comparing the proposed FY 2006-based Puerto Rico-specific 
labor-related share and the FY 2002-based Puerto Rico-specific labor-
related share.

[[Page 24161]]



  Chart 6--Comparison of the Proposed FY 2006-Based Puerto Rico-Specific Labor-Related Share and FY 2002-Based
                                    Puerto Rico-Specific Labor-Related Share
----------------------------------------------------------------------------------------------------------------
                                                                                          Proposed FY 2006-based
                                                                  FY 2002-based market      market basket cost
                                                                  basket cost weights            weights
----------------------------------------------------------------------------------------------------------------
Wages and Salaries............................................                   40.201                   44.221
Benefits......................................................                    8.782                    8.691
Professional Fees: Labor-Related..............................                    5.510                    3.616
Administrative and Business Support Services..................  .......................                    0.626
All Other: Labor-Related Services.............................                    4.228                    3.193
                                                               -------------------------------------------------
    Total Labor-Related Share.................................                   58.721                   60.347
----------------------------------------------------------------------------------------------------------------

    Using the proposed FY 2006-based Puerto Rico cost category weights, 
we calculated a labor-related share of 60.347 percent, approximately 2 
percentage points higher than the current Puerto-Rico specific labor-
related share of 58.721. Accordingly, we are proposing to adopt an 
updated Puerto Rico labor-related share of 60.3 percent.

C. Separate Market Basket for Certain Hospitals Presently Excluded from 
the IPPS

    In the FY 2006 IPPS final rule (70 FR 47396), we adopted the use of 
the FY 2002-based IPPS operating market basket to update the target 
amounts for children's and cancer hospitals and religious nonmedical 
health care institutions (RNHCIs). Children's and cancer hospitals and 
RNHCIs are still reimbursed solely under the reasonable cost-based 
system, subject to the rate-of-increase limits. Under these limits, an 
annual target amount (expressed in terms of the inpatient operating 
cost per discharge) is set for each hospital based on the hospital's 
own historical cost experience trended forward by the applicable rate-
of-increase percentages.
    Under the broad authority in sections 1886(b)(3)(A) and (B), 
1886(b)(3)(E), and 1871 of the Act and section 4454 of the BBA, 
consistent with our use of the IPPS operating market basket percentage 
increase to update target amounts, we are proposing to use the proposed 
FY 2006-based IPPS operating market basket percentage increase to 
update the target amounts for children's and cancer hospitals and 
RNHCIs.
    Due to the small number of children's and cancer hospitals and 
RNHCIs that receive, in total, less than 1 percent of all Medicare 
payments to hospitals and because these hospitals provide limited 
Medicare cost report data, we are unable to create a separate market 
basket specifically for these hospitals. Based on the limited data 
available, we believe that the proposed FY 2006-based IPPS operating 
market basket most closely represents the cost structure of children's 
and cancer hospitals and RNHCIs. Therefore, we believe that the 
percentage change in the FY 2006-based IPPS operating market basket is 
the best available measure of the average increase in the prices of the 
goods and services purchased by cancer and children's hospitals and 
RNHCIs in order to provide care.

D. Rebasing and Revising the Capital Input Price Index (CIPI)

    The CIPI was originally described in the FY 1993 IPPS final rule 
(57 FR 40016). There have been subsequent discussions of the CIPI 
presented in the IPPS proposed and final payment rules. The FY 2006 
IPPS final rule (70 FR 47387) discussed the most recent rebasing and 
revision of the CIPI to a FY 2002 base year, which reflected the 
capital cost structure of the hospital industry in that year.
    We are proposing to rebase and revise the CIPI to a FY 2006 base 
year to reflect the more current structure of capital costs in 
hospitals. As with the FY 2002-based index, we have developed two sets 
of weights in order to calculate the proposed FY 2006-based CIPI. The 
first set of weights identifies the proportion of hospital capital 
expenditures attributable to each expenditure category, while the 
second set of weights is a set of relative vintage weights for 
depreciation and interest. The set of vintage weights is used to 
identify the proportion of capital expenditures within a cost category 
that is attributable to each year over the useful life of the capital 
assets in that category. A more thorough discussion of vintage weights 
is provided later in this section.
    Both sets of weights are developed using the best data sources 
available. In reviewing source data, we determined that the Medicare 
cost reports provided accurate data for all capital expenditure cost 
categories. We used the FY 2006 Medicare cost reports for IPPS 
hospitals to determine weights for all three cost categories: 
depreciation, interest, and other capital expenses.
    Lease expenses are unique in that they are not broken out as a 
separate cost category in the CIPI, but rather are proportionally 
distributed among the cost categories of depreciation, interest, and 
other, reflecting the assumption that the underlying cost structure of 
leases is similar to that of capital costs in general. As was done in 
previous rebasings of the CIPI, we first assumed 10 percent of lease 
expenses represents overhead and assigned them to the other capital 
expenses cost category accordingly. The remaining lease expenses were 
distributed across the three cost categories based on the respective 
weights of depreciation, interest, and other capital not including 
lease expenses.
    Depreciation contains two subcategories: (1) Building and fixed 
equipment; and (2) movable equipment. The apportionment between 
building and fixed equipment and movable equipment was determined using 
the Medicare cost reports. This methodology was also used to compute 
the apportionment used in the FY 2002-based index.
    The total interest expense cost category is split between 
government/nonprofit interest and for-profit interest. The FY 2002-
based CIPI allocated 75 percent of the total interest cost weight to 
government/nonprofit interest and proxied that category by the average 
yield on domestic municipal bonds. The remaining 25 percent of the 
interest cost weight was allocated to for-profit interest and was 
proxied by the average yield on Moody's Aaa bonds (70 FR 47387).
    For this rebasing, we derived the split using the relative FY 2006 
Medicare cost report data on interest expenses for government/nonprofit 
and for-profit hospitals. Based on these data, we calculated an 85/15 
split between government/nonprofit and for-profit interest. We believe 
it is important that

[[Page 24162]]

this split reflects the latest relative cost structure of interest 
expenses.
    Chart 7 presents a comparison of the proposed FY 2006-based CIPI 
cost weights and the FY 2002-based CIPI cost weights.

Chart 7--Proposed FY 2006-Based CIPI Cost Categories, Weights, and Price
         Proxies With FY 2002-Based CIPI Included for Comparison
------------------------------------------------------------------------
                                            Proposed FY
       Cost categories           FY 2002        2006       Price proxy
                                 weights      weights
------------------------------------------------------------------------
Total........................       100.00       100.00
Total depreciation...........       74.583       75.154
Building and fixed equipment        36.234       35.789  BEA chained
 depreciation.                                            price index
                                                          for
                                                          nonresidential
                                                          construction
                                                          for hospitals
                                                          and special
                                                          care
                                                          facilities--vi
                                                          ntage weighted
                                                          (25 years).
Movable equipment                   38.349       39.365  PPI for
 depreciation.                                            machinery and
                                                          equipment--vin
                                                          tage weighted
                                                          (12 years).
Total interest...............       19.863       17.651
Government/nonprofit interest       14.896       15.076  Average yield
                                                          on domestic
                                                          municipal
                                                          bonds (Bond
                                                          Buyer 20
                                                          bonds)--vintag
                                                          e-weighted (25
                                                          years).
For-profit interest..........        4.967        2.575  Average yield
                                                          on Moody's Aaa
                                                          bonds--vintage-
                                                          weighted (12
                                                          years).
Other........................        5.554        7.195  CPI-U for
                                                          residential
                                                          rent.
------------------------------------------------------------------------

    Because capital is acquired and paid for over time, capital 
expenses in any given year are determined by both past and present 
purchases of physical and financial capital. The vintage-weighted CIPI 
is intended to capture the long-term consumption of capital, using 
vintage weights for depreciation (physical capital) and interest 
(financial capital). These vintage weights reflect the proportion of 
capital purchases attributable to each year of the expected life of 
building and fixed equipment, movable equipment, and interest. We used 
the vintage weights to compute vintage-weighted price changes 
associated with depreciation and interest expense. Following 
publication of this FY 2010 IPPS proposed rule, and in order to provide 
greater transparency, we will be posting on the CMS market basket Web 
page at http://www.cms.hhs.gov/MedicareProgramRatesStats/05_MarketBasketResearch.asp#TopOfPage an illustrative spreadsheet that 
contains an example of how the vintage-weighted price indexes are 
calculated.
    Vintage weights are an integral part of the CIPI. Capital costs are 
inherently complicated and are determined by complex capital purchasing 
decisions, over time, based on such factors as interest rates and debt 
financing. In addition, capital is depreciated over time instead of 
being consumed in the same period it is purchased. The CIPI accurately 
reflects the annual price changes associated with capital costs, and is 
a useful simplification of the actual capital investment process. By 
accounting for the vintage nature of capital, we are able to provide an 
accurate, stable annual measure of price changes. Annual nonvintage 
price changes for capital are unstable due to the volatility of 
interest rate changes and, therefore, do not reflect the actual annual 
price changes for Medicare capital-related costs. The CIPI reflects the 
underlying stability of the capital acquisition process and provides 
hospitals with the ability to plan for changes in capital payments.
    To calculate the vintage weights for depreciation and interest 
expenses, we needed a time series of capital purchases for building and 
fixed equipment and movable equipment. We found no single source that 
provides a uniquely best time series of capital purchases by hospitals 
for all of the above components of capital purchases. The early 
Medicare cost reports did not have sufficient capital data to meet this 
need. Data we obtained from the American Hospital Association (AHA) do 
not include annual capital purchases. However, AHA does provide a 
consistent database back to 1963. We used data from the AHA Panel 
Survey and the AHA Annual Survey to obtain a time series of total 
expenses for hospitals. We then used data from the AHA Panel Survey 
supplemented with the ratio of depreciation to total hospital expenses 
obtained from the Medicare cost reports to derive a trend of annual 
depreciation expenses for 1963 through 2006.
    In order to estimate capital purchases using data on depreciation 
expenses, the expected life for each cost category (building and fixed 
equipment, movable equipment, and interest) is needed to calculate 
vintage weights. We used FY 2006 Medicare cost reports to determine the 
expected life of building and fixed equipment and of movable equipment. 
The expected life of any piece of equipment can be determined by 
dividing the value of the asset (excluding fully depreciated assets) by 
its current year depreciation amount. This calculation yields the 
estimated useful life of an asset if depreciation were to continue at 
current year levels, assuming straight-line depreciation. From the FY 
2006 Medicare cost reports, the expected life of building and fixed 
equipment was determined to be 25 years, and the expected life of 
movable equipment was determined to be 12 years. The FY 2002-based CIPI 
was based on an expected life of building and fixed equipment of 23 
years. It used 11 years as the expected life for movable equipment.
    We are proposing to use the building and fixed equipment and 
movable equipment weights derived from FY 2006 Medicare cost reports to 
separate the depreciation expenses into annual amounts of building and 
fixed equipment depreciation and movable equipment depreciation. Year-
end asset costs for building and fixed equipment and movable equipment 
were determined by multiplying the annual depreciation amounts by the 
expected life calculations from the FY 2006 Medicare cost reports. We 
then calculated a time series back to 1963 of annual capital purchases 
by subtracting the previous year asset costs from the current year 
asset costs. From this capital purchase time series, we were able to 
calculate the vintage weights for building and fixed equipment and for 
movable equipment. Each of these sets of vintage weights is explained 
in more detail below.
    For building and fixed equipment vintage weights, we used the real 
annual capital purchase amounts for building and fixed equipment to 
capture the

[[Page 24163]]

actual amount of the physical acquisition, net of the effect of price 
inflation. This real annual purchase amount for building and fixed 
equipment was produced by deflating the nominal annual purchase amount 
by the building and fixed equipment price proxy, BEA's chained price 
index for nonresidential construction for hospitals and special care 
facilities. Because building and fixed equipment have an expected life 
of 25 years, the vintage weights for building and fixed equipment are 
deemed to represent the average purchase pattern of building and fixed 
equipment over 25-year periods. With real building and fixed equipment 
purchase estimates available back to 1963, we averaged nineteen 25-year 
periods to determine the average vintage weights for building and fixed 
equipment that are representative of average building and fixed 
equipment purchase patterns over time. Vintage weights for each 25-year 
period are calculated by dividing the real building and fixed capital 
purchase amount in any given year by the total amount of purchases in 
the 25-year period. This calculation is done for each year in the 25-
year period, and for each of the nineteen 25-year periods. We used the 
average of each year across the nineteen 25-year periods to determine 
the average building and fixed equipment vintage weights for the 
proposed FY 2006-based CIPI.
    For movable equipment vintage weights, the real annual capital 
purchase amounts for movable equipment were used to capture the actual 
amount of the physical acquisition, net of price inflation. This real 
annual purchase amount for movable equipment was calculated by 
deflating the nominal annual purchase amounts by the movable equipment 
price proxy, the PPI for machinery and equipment. Based on our 
determination that movable equipment has an expected life of 12 years, 
the vintage weights for movable equipment represent the average 
expenditure for movable equipment over a 12-year period. With real 
movable equipment purchase estimates available back to 1963, thirty-two 
12-year periods were averaged to determine the average vintage weights 
for movable equipment that are representative of average movable 
equipment purchase patterns over time. Vintage weights for each 12-year 
period are calculated by dividing the real movable capital purchase 
amount for any given year by the total amount of purchases in the 12-
year period. This calculation was done for each year in the 12-year 
period and for each of the thirty-two 12-year periods. We used the 
average of each year across the thirty-two 12-year periods to determine 
the average movable equipment vintage weights for the proposed FY 2006-
based CIPI.
    For interest vintage weights, the nominal annual capital purchase 
amounts for total equipment (building and fixed, and movable) were used 
to capture the value of the debt instrument. Because we have determined 
that hospital debt instruments have an expected life of 25 years, the 
vintage weights for interest are deemed to represent the average 
purchase pattern of total equipment over 25-year periods. With nominal 
total equipment purchase estimates available back to 1963, nineteen 25-
year periods were averaged to determine the average vintage weights for 
interest that are representative of average capital purchase patterns 
over time. Vintage weights for each 25-year period are calculated by 
dividing the nominal total capital purchase amount for any given year 
by the total amount of purchases in the 25-year period. This 
calculation is done for each year in the 25-year period and for each of 
the nineteen 25-year periods. We used the average of each year across 
the nineteen 25-year periods to determine the average interest vintage 
weights for the proposed FY 2006-based CIPI. The vintage weights for 
the FY 2002-based CIPI and the proposed FY 2006-based CIPI are 
presented in Chart 8.

                         Chart 8--FY 2002 Vintage Weights and Proposed FY 2006 Vintage Weights for Capital-Related Price Proxies
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           Building and fixed equipment          Movable equipment                   Interest
                                                         -----------------------------------------------------------------------------------------------
                          Year                              FY 2002 23      Proposed FY     FY 2002 11      Proposed FY     FY 2002 23      Proposed FY
                                                               years       2006 25 years       years       2006 12 years       years       2006 25 years
--------------------------------------------------------------------------------------------------------------------------------------------------------
1.......................................................           0.021           0.021           0.065           0.063           0.010           0.010
2.......................................................           0.022           0.023           0.071           0.067           0.012           0.012
3.......................................................           0.025           0.025           0.077           0.071           0.014           0.014
4.......................................................           0.027           0.027           0.082           0.075           0.016           0.016
5.......................................................           0.029           0.029           0.086           0.079           0.019           0.018
6.......................................................           0.031           0.031           0.091           0.082           0.023           0.020
7.......................................................           0.033           0.032           0.095           0.085           0.026           0.023
8.......................................................           0.035           0.033           0.100           0.086           0.029           0.025
9.......................................................           0.038           0.036           0.106           0.090           0.033           0.028
10......................................................           0.040           0.038           0.112           0.093           0.036           0.031
11......................................................           0.042           0.040           0.117           0.102           0.039           0.034
12......................................................           0.045           0.042  ..............           0.106           0.043           0.038
13......................................................           0.047           0.044  ..............  ..............           0.048           0.041
14......................................................           0.049           0.045  ..............  ..............           0.053           0.044
15......................................................           0.051           0.046  ..............  ..............           0.056           0.047
16......................................................           0.053           0.047  ..............  ..............           0.059           0.050
17......................................................           0.056           0.048  ..............  ..............           0.062           0.053
18......................................................           0.057           0.050  ..............  ..............           0.064           0.057
19......................................................           0.058           0.050  ..............  ..............           0.066           0.059
20......................................................           0.060           0.050  ..............  ..............           0.070           0.060
21......................................................           0.060           0.048  ..............  ..............           0.071           0.060
22......................................................           0.061           0.048  ..............  ..............           0.074           0.062
23......................................................           0.061           0.047  ..............  ..............           0.076           0.063
24......................................................  ..............           0.049  ..............  ..............  ..............           0.068
25......................................................  ..............           0.048  ..............  ..............  ..............           0.069
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 24164]]

 
    Total...............................................           1.000           1.000           1.000           1.000           1.000           1.000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Detail may not add to total due to rounding.

    After the capital cost category weights were computed, it was 
necessary to select appropriate price proxies to reflect the rate-of-
increase for each expenditure category. We are proposing to use the 
same price proxies for the proposed FY 2006-based CIPI that were used 
in the FY 2002-based CIPI with the exception of the Boeckh Construction 
Index. We are proposing to replace the Boeckh Construction Index with 
BEA's chained price index for nonresidential construction for hospitals 
and special care facilities. The BEA index represents construction of 
facilities such as hospitals, nursing homes, hospices, and 
rehabilitation centers. Although these price indices move similarly 
over time, we believe that it is more technically appropriate to use an 
index that is more specific to the hospital industry. We believe these 
are the most appropriate proxies for hospital capital costs that meet 
our selection criteria of relevance, timeliness, availability, and 
reliability. The rationale for selecting the price proxies, excluding 
the building and fixed equipment price proxy, was explained more fully 
in the FY 1997 IPPS final rule (61 FR 46196). The price proxies are 
presented in Chart 7.
    Chart 9 below compares both the historical and forecasted percent 
changes in the FY 2002-based CIPI and the proposed FY 2006-based CIPI.

 Chart 9--Comparison of FY 2002-Based and Proposed FY 2006-Based Capital
       Input Price Index, Percent Change, FY 2004 Through FY 2012
------------------------------------------------------------------------
                                                                CIPI,
                  Fiscal year                     CIPI, FY   proposed FY
                                                 2002-based   2006-based
------------------------------------------------------------------------
  FY 2004.....................................          0.5          0.8
  FY 2005.....................................          0.6          0.9
  FY 2006.....................................          0.9          1.1
  FY 2007.....................................          1.2          1.3
  FY 2008.....................................          1.4          1.4
Forecast:
  FY 2009.....................................          1.6          1.5
  FY 2010.....................................          1.5          1.2
  FY 2011.....................................          1.6          1.5
  FY 2012.....................................          1.6          1.5
Average:
  FYs 2004-2009...............................          0.9          1.1
  FYs 2010-2012...............................          1.6          1.4
------------------------------------------------------------------------
Source: IHS Global Insight, Inc, 1st Quarter 2009; USMACRO/
  CONTROL0209@CISSIM/TL0209.SIM.

    IHS Global Insight, Inc. forecasts a 1.2 percent increase in the 
proposed FY 2006-based CIPI for FY 2010, as shown in Chart 9. The 
underlying vintage-weighted price increases for depreciation (including 
building and fixed equipment and movable equipment) and interest 
(including government/nonprofit and for-profit) are included in Chart 
10.

  Chart 10--CMS Capital Input Price Index Percent Changes, Total and Depreciation and Interest Components, FYs
                                                2004 Through 2012
----------------------------------------------------------------------------------------------------------------
                           Fiscal year                                 Total       Depreciation      Interest
----------------------------------------------------------------------------------------------------------------
  FY 2004.......................................................             0.8             1.5            -2.6
  FY 2005.......................................................             0.9             1.7            -3.1
  FY 2006.......................................................             1.1             2.0            -3.2
  FY 2007.......................................................             1.3             2.1            -3.4
  FY 2008.......................................................             1.4             2.1            -2.6
Forecast:
  FY 2009.......................................................             1.5             2.0            -1.8
  FY 2010.......................................................             1.2             1.7            -1.7
  FY 2011.......................................................             1.5             1.8            -0.3
  FY 2012.......................................................             1.5             1.7            -0.2
----------------------------------------------------------------------------------------------------------------

    Rebasing the CIPI from FY 2002 to FY 2006 decreased the percent 
change in the FY 2010 forecast by 0.3 percentage point, from 1.5 to 
1.2, as shown in Chart 9. The difference in the forecast of the 
proposed FY 2010 market basket increase is primarily due to the 
proposed change in the price proxy for building and fixed equipment as 
well as the proposed change in the vintage weights applied to the price 
proxy for interest. As mentioned above, we are proposing to change the 
price proxy used for building and fixed equipment to BEA's chained 
price index for nonresidential construction for hospitals and special 
care facilities. We believe this proposed change represents a technical 
improvement as the BEA price index is an index that is more 
representative of the hospital industry. For the proposed FY 2010 
update, the result of this proposed change is a forecasted price change 
in total depreciation of 1.7 percent in the proposed FY 2006-based CIPI 
compared to 1.9 percent in the FY 2002-based CIPI. The other primary 
factor contributing to the difference is the proposed change in the 
vintage weights used to calculate the vintage-weighted price proxy for 
interest. The forecasted price change in total interest is -1.7

[[Page 24165]]

percent in the proposed FY 2006-based CIPI compared to -1.2 percent in 
the FY 2002-based CIPI. This is a result of changing the expected life 
of hospital debt instruments from 23 years to 25 years.

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

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

1. Background
a. Overview
    CMS is seeking to promote higher quality and more efficient health 
care for Medicare beneficiaries. This effort is supported by the 
adoption of an increasing number of widely-agreed upon quality 
measures. CMS has worked with relevant stakeholders to define measures 
of quality in almost every setting and currently measures some aspect 
of care for almost all Medicare beneficiaries. These measures assess 
structural aspects of care, clinical processes, patient experiences 
with care, and, increasingly, outcomes.
    CMS has implemented quality measure reporting programs for multiple 
settings of care. The Reporting Hospital Quality Data for Annual 
Payment Update (RHQDAPU) program implements a quality reporting program 
for hospital inpatient services. In addition, CMS has implemented 
quality reporting programs for hospital outpatient services, the 
Hospital Outpatient Quality Data Reporting Program (HOP QDRP), and for 
physicians and other eligible professionals, the Physician Quality 
Reporting Initiative (PQRI). CMS has also implemented quality reporting 
programs for home health agencies and skilled nursing facilities that 
are based on conditions of participation, and an end-stage renal 
disease quality reporting program that is based on conditions for 
coverage.
b. Hospital Quality Data Reporting Under Section 501(b) of Public Law 
108-173
    Section 501(b) of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA), Public Law 108-173, added section 
1886(b)(3)(B)(vii) of the Act. This section established the authority 
for the RHQDAPU program and revised the mechanism used to update the 
standardized payment amount for inpatient hospital operating costs. 
Specifically, section 1886(b)(3)(B)(vii)(I) of the Act, before it was 
amended by section 5001(a) of Public Law 109-171, provided for a 
reduction of 0.4 percentage points to the update percentage increase 
(also known as the market basket update) for FY 2005 through FY 2007 
for any subsection (d) hospital that did not submit data on a set of 10 
quality indicators established by the Secretary as of November 1, 2003. 
It also provides 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. The 
statute thereby established an incentive for IPPS hospitals to submit 
data on the quality measures established by the Secretary, and also 
built upon the previously established Voluntary Hospital Quality Data 
Reporting Program that we described in the FY 2009 IPPS final rule (73 
FR 48598).
    We implemented section 1886(b)(3)(B)(vii) of the Act in the FY 2005 
IPPS final rule (69 FR 49078) and codified the applicable percentage 
change in Sec.  412.64(d) of our regulations. We adopted additional 
requirements under the RHQDAPU program in the FY 2006 IPPS final rule 
(70 FR 47420).
c. Hospital Quality Data Reporting under Section 5001(a) of Public Law 
109-171
    Section 5001(a) of the Deficit Reduction Act of 2005 (DRA), Public 
Law 109-171, further amended section 1886(b)(3)(B) of the Act to revise 
the mechanism used to update the standardized payment amount for 
hospital inpatient operating costs, in particular, by adding new 
section 1886(b)(3)(B)(viii) to the Act. 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 
quality data in a form and manner, and at a time, specified by the 
Secretary. 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 Sec.  412.64(d)(2) to reflect the 2.0 percentage 
point reduction in the payment update for FY 2007 and subsequent fiscal 
years for 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.
(1) Quality Measures
    Section 1886(b)(3)(B)(viii)(III) of the Act requires that the 
Secretary expand the ``starter set'' of 10 quality measures that was 
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 report 
issued by the Institute of Medicine (IOM) of the National Academy of 
Sciences under section 238(b) of Public Law 108-173.\6\
---------------------------------------------------------------------------

    \6\ Institute of Medicine, ``Performance Measurement: 
Accelerating Improvement,'' December 1, 2005, available at: http://www.iom.edu/CMS/3809/19805/31310.aspx. IOM set forth these baseline 
measures in a November 2005 report. However, the IOM report was not 
released until December 1, 2005 on the IOM Web site.
---------------------------------------------------------------------------

    The IOM measures include: 21 Hospital Quality Alliance (HQA) 
quality measures (including the ``starter set'' of 10 quality 
measures); the Hospital Consumer Assessment of Health Providers and 
Systems (HCAHPS) patient experience of care survey; and 3 structural 
measures.\7\ The structural measures are: (1) Adoption 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 National Quality Forum's (NQF's) 
30 Safe Practices for Better Healthcare.
---------------------------------------------------------------------------

    \7\ Structural measures assess characteristics linked to the 
capacity of the provider to deliver quality healthcare. Institute of 
Medicine: Division of Health Care Services. Measuring the Quality of 
Health Care: A Statement by the National Roundtable on Healthcare 
Quality. National Academy Press; Washington D.C. 1999.
---------------------------------------------------------------------------

    Section 1886(b)(3)(B)(viii)(V) of the Act requires 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. The NQF is a voluntary consensus 
standard-setting organization with a diverse representation of 
consumer, purchaser, provider, academic, clinical, and other health 
care stakeholder organizations. NQF was established to standardize 
health care quality measurement and reporting through its consensus 
development process. We have generally adopted NQF-endorsed

[[Page 24166]]

measures. However, we believe that consensus among affected parties 
also can be reflected by other means, including, consensus achieved 
during the measure development process, consensus shown through broad 
acceptance and use of measures, and consensus through public comment.
    Section 1886(b)(3)(B)(viii)(VI) of the Act authorizes the Secretary 
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.
    In the FY 2007 IPPS final rule, we began to expand the RHQDAPU 
program measures by adding 11 quality measures to the 10-measure 
starter set to establish an expanded set of 21 quality measures for the 
FY 2007 payment determination (71 FR 48033 through 48037, 48045).
    In the CY 2007 OPPS/ASC final rule (71 FR 68201), we adopted six 
additional quality measures for the FY 2008 payment determination, for 
a total of 27 measures. Two of these measures (30-Day Risk Standardized 
Mortality Rates for Heart Failure and 30-Day Risk Standardized 
Mortality Rates for AMI) were calculated using existing administrative 
Medicare claims data; thus, no additional data submission by hospitals 
was required for these two measures. The measures used for the FY 2008 
payment determination included, for the first time, the HCAHPS patient 
experience of care survey.
    In the FY 2008 IPPS final rule (72 FR 47348 through 47358) and the 
CY 2008 OPPS/ASC final rule with comment period (72 FR 66875 through 
66877), we added three additional process measures to the RHQDAPU 
program measure set. (These three measures are SCIP-Infection-4: 
Cardiac Surgery Patients with Controlled 6AM Postoperative Serum 
Glucose, SCIP-Infection-6: Surgery Patients with Appropriate Hair 
Removal, and Pneumonia 30-day mortality (Medicare patients).) The 
addition of these three measures brought the total number of RHQDAPU 
program measures to be used for the FY 2009 payment determination to 30 
(72 FR 66876). The 30 measures used for the FY 2009 annual payment 
determination are listed in the FY 2009 IPPS final rule (73 FR 48600 
through 48601).
    For the FY 2010 payment determination, we added 15 new measures to 
the RHQDAPU program measure set and retired one. Of the new measures, 
13 were adopted in the FY 2009 IPPS final rule (73 FR 48602 through 
48611) and two additional measures were finalized in the CY 2009 OPPS/
ASC final rule with comment period (73 FR 68780 through 68781). This 
resulted in an expansion of the RHQDAPU program measures from 30 
measures for the FY 2009 payment determination to 44 measures for the 
FY 2010 payment determination. The RHQDAPU program measures for the FY 
2010 payment determination consist of: 26 chart-abstracted process 
measures, which measure care provided for Acute Myocardial Infarction 
(AMI), Heart Failure (HF), Pneumonia (PN), or Surgical Infection 
Prevention (SCIP); 6 claims-based measures, which evaluate 30-day 
mortality or 30-day readmission rates for AMI, HF, or PN; 9 AHRQ 
claims-based patient safety/inpatient quality indicator measures; 1 
claims-based nursing sensitive measure; 1 structural measure that 
assesses participation in a systematic database for cardiac surgery; 
and the HCAHPS patient experience of care survey. The measures are 
listed below.

------------------------------------------------------------------------
                                RHQDAPU program quality measures for the
            Topic                    FY 2010 payment determination
------------------------------------------------------------------------
Acute Myocardial Infarction
 (AMI)
                                AMI-1 Aspirin at 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-4 Adult smoking cessation
                                advice/counseling.
                                AMI-5 Beta blocker prescribed at
                                discharge.
                                AMI-6 Beta blocker at arrival.
                                AMI-7a Fibrinolytic
                                (thrombolytic) agent received within 30
                                minutes of hospital arrival.
                                AMI-8a Timing of Receipt of
                                Primary Percutaneous Coronary
                                Intervention (PCI).
Heart Failure (HF)
                                HF-1 Discharge instructions.
                                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-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-5c Timing of receipt of
                                initial antibiotic following hospital
                                arrival.
                                PN-6 Appropriate initial
                                antibiotic selection.
                                PN-7 Influenza vaccination
                                status.
Surgical Care Improvement
 Project (SCIP)
                                SCIP-1 Prophylactic antibiotic
                                received within 1 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.

[[Page 24167]]

 
                                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)
                                READ-30-HF: Heart Failure 30-Day
                                Risk Standardized Readmission Measure
                                (Medicare patients).
                                READ-30-AMI: Acute Myocardial
                                Infarction 30-Day Risk Standardized
                                Readmission Measure (Medicare patients).
                                READ-30-PN: Pneumonia 30-Day
                                Risk Standardized Readmission Measure
                                (Medicare patients).
AHRQ Patient Safety
 Indicators (PSIs), Inpatient
 Quality Indicators (IQIs)
 and Composite Measures
                                PSI 04: Death among surgical
                                patients with treatable serious
                                complications.
                                PSI 06: Iatrogenic pneumothorax,
                                adult.
                                PSI 14: Postoperative wound
                                dehiscence.
                                PSI 15: Accidental puncture or
                                laceration.
                                IQI 11: Abdominal aortic
                                aneurysm (AAA) mortality rate (with or
                                without volume).
                                IQI 19: 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.
------------------------------------------------------------------------

    On December 31, 2008, CMS advised hospitals that they would no 
longer be required to submit data for the RHQDAPU program measure AMI-6 
Beta blocker at arrival, beginning with discharges occurring on April 
1, 2009. This change was based on the evolving evidence regarding AMI 
patient care, as well as changes in the American College of Cardiology/
American Heart Association (ACC/AHA) practice guidelines for ST-segment 
elevation myocardial infarction and non-ST segment elevation myocardial 
infarction, upon which AMI-6 is based. The new guideline recommends 
that early intravenous beta-blockers specifically should be avoided in 
certain patient populations due to increased mortality risk. These 
patients are identified by a complex set of contraindications that we 
believe would make revision of the measure impractical and might result 
in unintended consequences, including harm to patients based on 
misinterpretation of an overly complex measure in the clinical setting. 
Based on the new studies, the ACC/AHA Task Force on Performance 
Measures removed this measure from the set of AMI performance measures 
as of November 10, 2008 and did not replace the measure. CMS took 
action to remove the measure from reporting initiatives based on the 
lack of support by the measure developer and the considerations 
identified above.
    We discussed considerations relating to retiring or replacing 
measures in the FY 2008 final rule with comment period and the FY 2009 
IPPS final rule, including the ``topping out'' of hospitals' 
performance under a measure (72 FR 47358-47359, and 73 FR 48603-48604). 
In this instance, however, the measure no longer ``represent[s] the 
best clinical practice,'' an additional basis under section 
1886(b)(3)(B)(viii)(VI) of the Act for retiring a measure. For the FY 
2010 payment determination and subsequent payment determinations, we 
have formally retired the AMI-6 measure from the RHQDAPU program. 
Therefore, hospitals participating in the RHQDAPU program are not 
required to submit data on the AMI-6 measure beginning with April 1, 
2009 discharges. However, we are seeking public comment on the 
retirement of the AMI-6 measure.
(2) Maintenance of Technical Specifications for Quality Measures
    The technical specifications for each RHQDAPU program measure are 
listed in the CMS/Joint Commission Specifications Manual for National 
Hospital Inpatient Quality Measures (Specifications Manual). This 
Specifications Manual is posted on the CMS QualityNet Web site at 
https://www.QualityNet.org/. We maintain the technical specifications 
by updating this Specifications Manual semiannually, or more frequently 
in unusual cases, and include detailed instructions and calculation 
algorithms for hospitals to use when collecting and submitting data on 
required measures. We are inviting public comment on our process of 
notifying the public about the technical specifications for RHQDAPU 
program quality measures and whether it can be improved to enable more 
meaningful public comment on our proposed measures. We also are 
inviting public comment on whether the information posted on the 
https://www.QualityNet.org Web site--including the frequency with which 
this information is updated--provides hospitals enough information and 
time to implement the collection of data necessary for these required 
quality measures.
(3) Public Display of Quality Measures
    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 has the opportunity to review its 
data before these data are made public. Data from the RHQDAPU program 
are included on the Hospital Compare Web site, http://www.hospitalcompare.hhs.gov. The RHQDAPU program includes process of 
care measures, risk adjusted outcome measures, the HCAHPS patient 
experience of care survey, and a structural measure regarding cardiac 
surgery registry participation. This Web site assists beneficiaries and 
the general public by providing information on hospital quality of care 
to consumers who need to select a hospital. It further serves to 
encourage consumers to work with their doctors and hospitals to

[[Page 24168]]

discuss the quality of care hospitals provide to patients, thereby 
providing an additional incentive to hospitals to improve the quality 
of care that they furnish.
2. Retirement of RHQDAPU Program Measures
    As stated above, we retired AMI-6 from the RHQDAPU program measure 
set on December 1, 2008 because we believed, based on new evidence, 
that the continued use of the measure raised specific patient safety 
concerns. In situations such as this, we do not believe that it is 
appropriate to wait for the annual rulemaking cycle. Rather, we propose 
to promptly retire the measure and notify hospitals and the public of 
the retirement of the measure and the reasons for its retirement 
through the usual hospital and QIO communication channels used for the 
RHQDAPU program, which include e-mail blasts to hospitals and the 
dissemination of Standard Data Processing System (SDPS) memoranda to 
QIOs, as well as posting the information on the QualityNet Web site. We 
propose to confirm the retirement of the measure in the next IPPS 
rulemaking. In other circumstances where we do not believe that 
continued use of a measure raises specific patient safety concerns, we 
intend to use the regular rulemaking process to retire a measure.
    We are inviting public comment on whether any other RHQDAPU program 
measures should be retired from the RHQDAPU program, as well as on the 
criteria that should be used in retiring measures. To the extent that 
performance has improved because of the collection and public display 
of quality measures, we also are inviting public comment on how 
performance could be maintained on the topped out measures once they 
are retired. We note that many of the measures in the existing program 
have experienced improved performance rates over the years. On our Web 
site, http://www.cms.hhs.gov/HospitalQualityInits/, we have posted the 
performance rates for the existing measures over the years that they 
have been collected through the RHQDAPU program. However, thus far, 
only one measure, the pneumonia oxygenation assessment measure, has 
reached such a high level of compliance (nearly 100 percent for the 
vast majority of hospitals) that we retired the measure.
3. Quality Measures for the FY 2011 Payment Determination and 
Subsequent Years
a. Considerations in Expanding and Updating Quality Measures under the 
RHQDAPU Program
    In the FY 2009 IPPS proposed rule, we solicited comments on several 
considerations related to expanding and updating quality measures, 
including how to reduce the burden on the hospitals participating in 
the RHQDAPU program and which approaches to measurement and collection 
would be most useful while minimizing burden (73 FR 23653 through 
23654).
    In the FY 2009 IPPS final rule, we responded to public comments we 
received on these issues (73 FR 48613 through 48616). We also stated 
that in future expansions and updates to the RHQDAPU program measure 
set, we would be taking into consideration several important goals. 
These goals include: (a) Expanding the types of measures beyond process 
of care measures to include an increased number of outcome measures, 
efficiency measures, and patients' 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 reported by many hospitals, such as 
data that hospitals report to clinical data registries, or all-payer 
claims data bases; and (f) weighing the relevance and utility of the 
measures compared to the burden on hospitals in submitting data under 
the RHQDAPU program. Specifically, we give priority to quality measures 
that assess performance on: (a) Conditions that result in the greatest 
mortality and morbidity in the Medicare population; (b) conditions that 
are high volume and high cost for the Medicare program; and (c) 
conditions for which wide cost and treatment variations have been 
reported, despite established clinical guidelines. We have used and 
continue to use these criteria to guide our decisions regarding what 
measures to add to the RHQDAPU program measure set.
    Although RHQDAPU program payment decisions were initially based 
solely on a hospital's submission of chart-abstracted quality measure 
data, in recent years we have adopted measures, including structural 
and claims-based quality measures that do not require a hospital to 
submit chart-abstracted clinical data. This supports our stated goal to 
expand the measures for the RHQDAPU program while minimizing the burden 
on hospitals and, in particular, without significantly increasing the 
chart abstraction burden.
    In addition to claims-based measures, we are considering registries 
\8\ and electronic health records (EHRs) as alternative ways to collect 
data from hospitals. Many hospitals submit data to and participate in 
existing registries. In addition, registries often capture outcome 
information and provide ongoing quality improvement feedback to 
registry participants. Instead of requiring hospitals to submit the 
same data to CMS that they are already submitting to registries, we 
believe that we could collect the data directly from the registries, 
thereby enabling us to expand the RHQDAPU program measure set without 
increasing the burden of data collection for those hospitals 
participating in the registries. Examples of registries actively used 
by hospitals include the Society of Thoracic Surgeons (STS) Cardiac 
Surgery Registry (with approximately 90 percent participation by 
cardiac surgery programs), the AHA Stroke Registry (with approximately 
1200 hospitals participating), and the American Nursing Association 
(ANA) Nursing Sensitive Measures Registry (with approximately 1400 
hospitals participating). In the FY 2009 IPPS final rule, we adopted 
the first RHQDAPU program measure related to registries: Participation 
in a Systematic Database for Cardiac Surgery. We continue to evaluate 
whether it is feasible to adopt measures that rely on one or more 
registries as a source for data collection.
---------------------------------------------------------------------------

    \8\ A registry is a collection of clinical data for purposes of 
assessing clinical performance, quality of care, and opportunities 
for quality improvement.
---------------------------------------------------------------------------

    We also stated our intention to explore mechanisms for data 
submission using EHRs (73 FR 48614). Establishing such a system will 
require interoperability between EHRs and CMS data collection systems, 
additional infrastructure development on the part of hospitals and CMS 
and the adoption of standards for the capturing, formatting, and 
transmission of data elements that make up the measures. However, once 
these activities are accomplished, the adoption of measures that rely 
on data obtained directly from EHRs will enable us to expand the 
RHQDAPU program measure set with less cost and burden to hospitals.

[[Page 24169]]

    In the FY 2009 IPPS final rule, we adopted nine AHRQ measures for 
the RHQDAPU program. Although we stated that we would initially 
calculate the measures using Medicare claims data (73 FR 48608), we 
also stated that we remained interested in using all-payer claims data 
to calculate them and that we might propose to collect such data in the 
future. We invite input and suggestions on how all-payer claims data 
can be collected and used by CMS to calculate these measures, as well 
as on additional AHRQ measures that we should consider adopting for 
future RHQDAPU program payment determinations.
    We continue to use these criteria to guide our decisions on what 
measures to propose for the RHQDAPU program measure set. Therefore, in 
commenting on the new quality measures we have proposed to include in 
future payment years and on measures to retire, we are inviting public 
comments on these criteria.
b. Proposed RHQDAPU Program Quality Measures for the FY 2011 Payment 
Determination
(1) Proposed Retention of Existing RHQDAPU Program Quality Measures
    For the FY 2011 payment determination, we are proposing to retain 
the following RHQDAPU program quality measures that we are using for 
the FY 2010 payment determination:

------------------------------------------------------------------------
                                RHQDAPU program quality measures for FY
            Topic               2010 payment determination proposed for
                                     FY 2011 payment determination
------------------------------------------------------------------------
Acute Myocardial Infarction     AMI-1 Aspirin at arrival.
 (AMI)
                                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-4 Adult smoking cessation
                                advice/counseling.
                                AMI-5 Beta blocker prescribed at
                                discharge.
                                AMI-7a Fibrinolytic
                                (thrombolytic) agent received within 30
                                minutes of hospital arrival.
                                AMI-8a Timing of Receipt of
                                Primary Percutaneous Coronary
                                Intervention (PCI).
Heart Failure (HF)
                                HF-1 Discharge instructions.
                                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-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-5c Timing of receipt of
                                initial antibiotic following hospital
                                arrival.
                                PN-6 Appropriate initial
                                antibiotic selection.
                                PN-7 Influenza vaccination
                                status.
Surgical Care Improvement
 Project (SCIP)
                                SCIP-1 Prophylactic antibiotic
                                received within 1 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)
                                READ-30-HF: Heart Failure 30-Day
                                Risk Standardized Readmission Measure
                                (Medicare patients).
                                READ-30-AMI: Acute Myocardial
                                Infarction 30-Day Risk Standardized
                                Readmission Measure (Medicare patients).
                                READ-30-PN: Pneumonia 30-Day
                                Risk Standardized Readmission Measure
                                (Medicare patients).
AHRQ Patient Safety
 Indicators (PSIs), Inpatient
 Quality Indicators (IQIs)
 and Composite Measures.
                                PSI 06: Iatrogenic pneumothorax,
                                adult.
                                PSI 14: Postoperative wound
                                dehiscence.
                                PSI 15: Accidental puncture or
                                laceration.
                                IQI 11: Abdominal aortic
                                aneurysm (AAA) mortality rate (with or
                                without volume).
                                IQI 19: Hip fracture mortality
                                rate.
                                Mortality for selected surgical
                                procedures (composite).
                                Complication/patient safety for
                                selected indicators (composite).
                                Mortality for selected medical
                                conditions (composite).
Cardiac Surgery

[[Page 24170]]

 
                                Participation in a Systematic
                                Database for Cardiac Surgery.
------------------------------------------------------------------------

    As we discussed above, we retired AMI-6 Beta blocker at arrival 
from the RHQDAPU program measure set for the FY 2010 payment 
determination and subsequent years. In addition, as discussed below, we 
propose to harmonize two current RHQDAPU program measures for the FY 
2011 payment determination: PSI 04: Death among surgical patients with 
treatable serious complications; and Nursing Sensitive--Failure to 
Rescue.
(2) NQF Harmonization of Two Existing RHQDAPU Program Measures
    In May 2008, the NQF reviewed the specifications for two of the 
RHQDAPU program measures that we adopted for the FY 2010 payment 
determination: PSI 04-Death among surgical patients with treatable 
serious complications; and Nursing Sensitive--Failure to rescue 
(Medicare claims only). This was part of an NQF project titled 
``National Voluntary Consensus Standards for Hospital Care 2007: 
Performance Measures.'' As a result of this project by the NQF, these 
two measures now have the same name: ``Death among surgical inpatients 
with serious, treatable complications'' and share a single set of 
measure specifications.
    In order to maintain consistency with national voluntary consensus 
standards with respect to referencing the measure, we are proposing to 
combine PSI 04-Death among surgical patients with treatable serious 
complications; and Nursing Sensitive--Failure to rescue (Medicare 
claims only) into a single measure, Death among surgical inpatients 
with serious, treatable complications, and to list the measure under 
proposed topic name--AHRQ PSI and Nursing Sensitive Care. This measure, 
as well as its specifications, would replace, for purposes of hospital 
reporting, the two RHQDAPU program measures that we adopted for the FY 
2010 payment determination: PSI 04: Death among surgical patients with 
treatable serious complications; and Nursing Sensitive--Failure to 
rescue (Medicare claims only). However, we may continue to publicly 
report the measure in two different topics areas on Hospital Compare--
Nursing Sensitive Care and AHRQ PSIs, IQIs and Composite Measures. We 
are inviting public comment on this proposal.
(3) Proposed New Chart-Abstracted Measures
    For the FY 2011 payment determination, we are proposing to add two 
new chart-abstracted measures. These proposed new measures, SCIP-
Infection-9 Postoperative Urinary Catheter Removal on Post Operative 
Day 1 or 2, and SCIP-Infection-10: Perioperative Temperature 
Management, are additions to the existing SCIP measure set. The SCIP 
Infection measures are designed to assess practices that reduce the 
risk of infections that surgical patients could acquire in the 
hospital. They have high relevance to the Medicare population, and 
address the growing concern regarding hospital acquired infections.\9\
---------------------------------------------------------------------------

    \9\ U.S. Government Accountability Office. Health-Care 
Associated Infections in Hospitals: An Overview of State Reporting 
Programs and Individual Hospital Initiatives to Reduce Certain 
Infections. September 2008.
---------------------------------------------------------------------------

    Although these two measures require that hospitals abstract data 
from medical records, they add to the scope of the existing SCIP 
measurement set. Hospitals currently collect and report data elements 
for eight SCIP measures. Additional data elements required for these 
two proposed new SCIP measures are minimal, and would be abstracted 
from the same records hospitals use to abstract data for the other SCIP 
measures. Therefore, we expect the additional burden on hospitals to be 
minimal. The two measures are NQF-endorsed. We are inviting public 
comment on our proposal to include SCIP-Infection-9 and SCIP-Infection-
10 as RHQDAPU program measures to be used for the FY 2011 payment 
determination. The collection of new chart-abstracted measures for the 
FY 2011 payment determination would begin with 1st calendar quarter 
2010 discharges, for which the submission deadline would be August 15, 
2010.
(4) Proposed New Structural Measures
    We also are proposing to adopt two additional structural measures 
for the FY 2011 payment determination. Structural measures assess the 
characteristics and capacity of the provider to deliver quality health 
care. We are proposing to add two additional registry participation 
measures. The two structural measures are: (1) Participation in a 
Systematic Clinical Database Registry for Stroke Care; and (2) 
Participation in a Systematic Clinical Database Registry for Nursing 
Sensitive Care. These measures are specific applications for the 
inpatient setting of a structural measure entitled ``Participation by a 
physician or other clinician in a systematic clinical database registry 
that includes consensus endorsed measures,'' which received NQF 
endorsement under a project titled ``National Voluntary Consensus 
Standards for Health IT: Structural Measures 2008.'' The proposed 
measures are appropriate applications of the NQF-endorsed measure 
because the NQF has endorsed measures for Stroke Care and Nursing 
Sensitive Care which are currently being collected by widely used 
stroke and nursing sensitive care registries. Therefore, we believe 
that the proposed Stroke Registry Participation structural measure and 
Nursing Sensitive Care Registry Participation structural measure meet 
the consensus requirement in section 1886(b)(3)(B)(viii)(V) of the Act.
    As we have previously stated, we also believe that participation in 
registries reflects a commitment to assessing the quality of care 
provided and identifying opportunities for improvement. Many registries 
also collect outcome data and provide feedback to hospitals about their 
performance. Moreover, registries offer a potential future data source 
from which we can collect quality data.
    The Participation in a Systematic Clinical Database Registry for 
Stroke structural measure would require each hospital that participates 
in the RHQDAPU program to indicate whether it is participating in a 
systematic qualified clinical database registry for inpatient stroke 
care and, if so, to identify the registry.
    The Participation in a Systematic Clinical Database Registry for 
Nursing Sensitive Care structural measure would similarly require each 
hospital participating in the RHQDAPU program to indicate whether it is 
participating in a systematic qualified clinical database registry 
measuring nursing sensitive care quality for inpatient care and, if so, 
to identify the registry.
    We are soliciting public comment on these registry structural 
measures. Specifically, we are inviting public comment on whether 
``systematic qualified clinical database registry'' is adequately 
defined and, if not, how it should be defined. In defining

[[Page 24171]]

``systematic qualified clinical database registry,'' should registries 
that do not collect outcome measures and/or do not provide feedback to 
hospitals about their performance be excluded? Are there other 
registries that we should consider in future rulemakings, beyond stroke 
and nursing sensitive registries, particularly for conditions where 
there is high mortality/morbidity in the Medicare population, high cost 
to the health care system, and widespread treatment variations despite 
established clinical guidelines? Finally, we welcome more precise data 
on what percentage of hospitals already participate in a stroke 
registry or a nursing sensitive registry.\10\ Because we also retire 
measures when performance has reached a sufficiently high level, we are 
inviting public comment on whether reporting on stroke registry and 
nursing sensitive care registry structural measures has sufficient 
relevance and utility to justify the reporting burden, if a substantial 
proportion of hospitals already participate in these registries.
---------------------------------------------------------------------------

    \10\ Examples of registries that we are aware of that are being 
actively used by hospitals include the Society of Thoracic Surgeons 
(STS) Cardiac Surgery Registry (with approximately 90 percent 
participation by cardiac surgery programs), the AHA Stroke Registry 
(with approximately 1200 hospitals participating), and the American 
Nursing Association (ANA) Nursing Sensitive Measures Registry (with 
approximately 1400 hospitals participating).
---------------------------------------------------------------------------

    Both proposed structural measures can be submitted using a Web-
based collection tool that we will make available on the QualityNet Web 
site. We are inviting public comment on our proposal to adopt these two 
structural measures for the FY 2011 payment determination.
    In summary, we are proposing for the FY 2011 payment determination 
to retain 41 of the measures we adopted for the FY 2010 payment 
determination. With respect to the other three measures we adopted for 
the FY 2010 payment determination, we retired AMI-6 Beta blocker at 
arrival measure and are proposing to harmonize an AHRQ measure and a 
Nursing Sensitive measure by combining these measures into a single 
measure entitled Death among surgical inpatients with serious, 
treatable complications. Finally, we are proposing to add four measures 
(two SCIP Infection measures and two structural measures) to the 
RHQDAPU program measure set. Set out below are the 46 RHQDAPU program 
quality measures proposed for the FY 2011 payment determination:

------------------------------------------------------------------------
                               Proposed RHQDAPU program quality measures
            Topic                for the FY 2011 payment determination
------------------------------------------------------------------------
Acute Myocardial Infarction
 (AMI)
                                AMI-1 Aspirin at 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-4 Adult smoking cessation
                                advice/counseling.
                                AMI-5 Beta blocker prescribed at
                                discharge.
                                AMI-7a Fibrinolytic
                                (thrombolytic) agent received within 30
                                minutes of hospital arrival.
                                AMI-8a Timing of Receipt of
                                Primary Percutaneous Coronary
                                Intervention (PCI).
Heart Failure (HF)
                                HF-1 Discharge instructions.
                                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-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-5c Timing of receipt of
                                initial antibiotic following hospital
                                arrival.
                                PN-6 Appropriate initial
                                antibiotic selection.
                                PN-7 Influenza vaccination
                                status.
Surgical Care Improvement
 Project (SCIP)
                                SCIP-1 Prophylactic antibiotic
                                received within 1 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-Infection-9: Postoperative
                                Urinary Catheter Removal on Post
                                Operative Day 1 or 2.*
                                SCIP-Infection-10: Perioperative
                                Temperature Management.*
                                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)
                                READ-30-HF: Heart Failure 30-Day
                                Risk Standardized Readmission Measure
                                (Medicare patients).
                                READ-30-AMI: Acute Myocardial
                                Infarction 30-Day Risk Standardized
                                Readmission Measure (Medicare patients).

[[Page 24172]]

 
                                READ-30-PN: Pneumonia 30-Day
                                Risk Standardized Readmission Measure
                                (Medicare patients).
AHRQ Patient Safety
 Indicators (PSIs), Inpatient
 Quality Indicators (IQIs)
 and Composite Measures.
                                PSI 06: Iatrogenic pneumothorax,
                                adult.
                                PSI 14: Postoperative wound
                                dehiscence.
                                PSI 15: Accidental puncture or
                                laceration.
                                IQI 11: Abdominal aortic
                                aneurysm (AAA) mortality rate (with or
                                without volume).
                                IQI 19: Hip fracture mortality
                                rate.
                                Mortality for selected surgical
                                procedures (composite).
                                Complication/patient safety for
                                selected indicators (composite).
                                Mortality for selected medical
                                conditions (composite).
AHRQ PSI and Nursing
 Sensitive Care**
                                Death among surgical inpatients
                                with serious, treatable complications.
Cardiac Surgery
                                Participation in a Systematic
                                Database for Cardiac Surgery.
Stroke Care
                                Participation in a Systematic
                                Clinical Database Registry for Stroke
                                Care.*
Nursing Sensitive Care
                                Participation in a Systematic
                                Clinical Database Registry for Nursing
                                Sensitive Care.*
------------------------------------------------------------------------
* Proposed new measure for FY 2011 payment determination.
** Proposed harmonized measure. This measure may be publicly reported
  under two topics--the AHRQ PSIs, IQIs, and Composite Measures topic
  and the Nursing Sensitive Care topic.

4. Possible New Quality Measures for the FY 2012 Payment Determination 
and Subsequent Years
    We are inviting public comment on the following quality measures 
and topics that we might consider adopting beginning with the FY 2012 
payment determination. We also are seeking suggestions and rationales 
to support the adoption of measures and topics for the RHQDAPU program 
that are not included in this list.

------------------------------------------------------------------------
            Measure topic                     Measure description
------------------------------------------------------------------------
AMI..................................  Statin at discharge.
ED--Throughput.......................  Median time from admit decision
                                        time to time of departure from
                                        the emergency department for
                                        emergency department patients
                                        admitted to inpatient status.
ED--Throughput.......................  Median time from emergency
                                        department arrival to time of
                                        departure from the emergency
                                        room for patients admitted to
                                        the facility from the emergency
                                        department.
Complications........................  Lower Extremity Bypass
                                        Complications.
Complications........................  Comorbidity Adjusted Complication
                                        Index.
PCI..................................  PCI mortality rate for patients
                                        without ST segment elevation
                                        myocardial infarction (STEMI)
                                        and without cardiogenic shock.
Stroke...............................  Patients with an ischemic stroke
                                        or a hemorrhagic stroke and who
                                        are non-ambulatory should start
                                        receiving DVT prophylaxis by end
                                        of hospital day two.
Stroke...............................  Patients with an ischemic stroke
                                        prescribed antithrombotic
                                        therapy at discharge.
Stroke...............................  Patients with an ischemic stroke
                                        with atrial fibrillation
                                        discharged on anticoagulation
                                        therapy.
Stroke...............................  Acute ischemic stroke patients
                                        who arrive at the hospital
                                        within 120 minutes (2 hours) of
                                        time last known well and for
                                        whom IV t-PA was initiated at
                                        this hospital within 180 minutes
                                        (3 hours) of time last known
                                        well.
Stroke...............................  Patients with ischemic stroke who
                                        receive antithrombotic therapy
                                        by the end of hospital day two.
Stroke...............................  Ischemic stroke patients with LDL
                                        >/= 100 mg/dL, or LDL not
                                        measured, or, who were on
                                        cholesterol reducing therapy
                                        prior to hospitalization are
                                        discharged on a statin
                                        medication.
Stroke...............................  Patients with ischemic or
                                        hemorrhagic stroke or their
                                        caregivers who were given
                                        education or educational
                                        materials during the hospital
                                        stay addressing all of the
                                        following: personal risk factors
                                        for stroke, warning signs for
                                        stroke, activation of emergency.
Stroke...............................  Patients with an ischemic stroke
                                        or hemorrhagic stroke who were
                                        assessed for rehabilitation
                                        services.
VTE..................................  This measure assesses the number
                                        of patients that receive VTE
                                        prophylaxis or have
                                        documentation why no VTE
                                        prophylaxis was given within 24
                                        hours after the initial
                                        admission (or transfer) to the
                                        Intensive Care Unit (ICU) or
                                        surgery end time.
VTE..................................  Patients who received parenteral
                                        and warfarin therapy (overlap
                                        therapy):
                                       (1) For at least 5 days, with an
                                        INR greater than or equal to 2
                                        prior to discontinuation of
                                        parenteral therapy OR (2) For
                                        more than 5 days, with an INR
                                        less than 2, but were discharged
                                        on overlap therapy OR (3) Who
                                        were discharged in less than
                                        five days on overlap therapy.
VTE..................................  This measure assesses the number
                                        of patients receiving
                                        intravenous (IV) UFH therapy
                                        with documentation that the
                                        dosages and platelet counts are
                                        monitored by protocol (or
                                        nomogram).
VTE..................................  This measure assesses the number
                                        of VTE patients that are
                                        discharged home, home care, or
                                        home hospice on warfarin with
                                        written discharge instructions
                                        that addresses all four
                                        criteria: Follow-up Monitoring;
                                        Compliance Issues; Dietary
                                        Restrictions; and, Potential for
                                        Adverse Drug Reactions/
                                        Interactions.

[[Page 24173]]

 
VTE..................................  This measure assesses the number
                                        of patients that were diagnosed
                                        with VTE during hospitalization
                                        (not present at admission) that
                                        did not receive VTE prophylaxis.
Cardiac Surgery......................  Post-operative Renal Failure.
Cardiac Surgery......................  Surgical Re-exploration.
Cardiac Surgery......................  Anti-Platelet Medication at
                                        Discharge.
Cardiac Surgery......................  Beta Blockade at Discharge.
Cardiac Surgery......................  Anti-Lipid Treatment Discharge.
Cardiac Surgery......................  Risk-Adjusted Operative Mortality
                                        for CABG.
Cardiac Surgery......................  Risk-Adjusted Operative Mortality
                                        for Aortic Valve Replacement
                                        (AVR).
Cardiac Surgery......................  Risk-Adjusted Operative Mortality
                                        for Mitral Valve Replacement/
                                        Repair (MVR).
Cardiac Surgery......................  Risk-Adjusted Operative Mortality
                                        MVR+CABG Surgery.
Cardiac Surgery......................  Risk-Adjusted Operative Mortality
                                        for AVR+CABG.
Cardiac Surgery......................  Pre-Operative Beta Blockade.
Cardiac Surgery......................  Duration of Prophylaxis for
                                        Cardiac Surgery Patients.
Cardiac Surgery......................  Prolonged Intubation
                                        (ventilation).
Cardiac Surgery......................  Deep Sternal Wound Infection
                                        Rate.
Cardiac Surgery......................  Stroke/Cerebrovascular Accident.
Nursing Sensitive....................  Patient Falls: All documented
                                        falls with or without injury,
                                        experienced by patients on an
                                        eligible unit in a calendar
                                        month.
Nursing Sensitive....................  Falls with Injury: All documented
                                        patient falls with an injury
                                        level of minor or greater.
Nursing Sensitive/HAI................  Catheter Associated Urinary Tract
                                        Infection.
Nursing Sensitive/HAI................  Central Line Associated Blood
                                        Stream Infection in the ICU and
                                        high risk neonatal intensive
                                        care unit.
Nursing Sensitive/HAI................  Ventilator Associated Pneumonia
                                        in the ICU.
Nursing Sensitive....................  Pressure Ulcer Prevalence.
Nursing Sensitive....................  Restraint Prevalence (vest and
                                        limb).
Nursing Sensitive....................  Skill Mix: Percentage of hours
                                        worked by: RN, LPN/LVN, UAP,
                                        Contract/Agency.
Nursing Sensitive....................  Hours per patient day worked by
                                        RN, LPN, and UAP.
Nursing Sensitive....................  Practice Environment Scale-
                                        Nursing Work Index.
Nursing Sensitive....................  Voluntary turnover for RN, APN,
                                        LPN, UAP.
Outcomes.............................  PSI 03: Decubitus Ulcer.
Outcomes.............................  PSI 07: Infection Due to Medical
                                        Care.
Outcomes.............................  PSI 08: Post Operative Hip
                                        Fracture.
Outcomes.............................  PSI 09: Post Operative Hemorrhage
                                        or Hematoma*.
Outcomes.............................  PSI 10: Post Operative
                                        Physiologic Metabolic
                                        Derangement*.
Outcomes.............................  PSI 11: Post Operative
                                        Respiratory Failure.
Outcomes.............................  PSI 12: Post Operative PE or DVT.
Outcomes.............................  PSI 13: Post Operative Sepsis.
Outcomes.............................  IQI 08: In-hospital Mortality for
                                        Esophageal Resection.
Outcomes.............................  IQI 09: In-hospital Mortality for
                                        Pancreatic Resection.
Outcomes.............................  IQI 12: In-hospital Mortality for
                                        CABG.
Outcomes.............................  IQI 13: In-hospital Mortality for
                                        Craniotomy*.
Outcomes.............................  IQI 14: In-hospital Mortality for
                                        Hip Replacement.
Outcomes.............................  IQI 15: In-hospital Mortality for
                                        AMI.
Outcomes.............................  IQI 16: In-hospital Mortality for
                                        CHF.
Outcomes.............................  IQI 17: In-hospital Mortality for
                                        Stroke.
Outcomes.............................  IQI 18: In-hospital Mortality for
                                        GI Hemorrhage*.
Outcomes.............................  IQI 20: In-hospital Mortality for
                                        Pneumonia.
SCIP.................................  Short Half-Life prophylactic
                                        administered preoperatively
                                        redosed within 4 hours after
                                        preoperative dose.
PCI Readmission......................  Hospital-specific 30-day risk-
                                        standardized readmission rate
                                        following Percutaneous Coronary
                                        Intervention (PCI) among
                                        patients aged 18 years or older.
                                       PCI Mortality for STEMI/shock
                                        patients: Hospital-specific 30-
                                        day all-cause risk-standardized
                                        mortality rate following
                                        Percutaneous Coronary
                                        Intervention (PCI) among
                                        patients aged 18 years or older
                                        with ST segment elevation
                                        myocardial infarction (STEMI) or
                                        cardiogenic shock at the time of
                                        procedure.
PCI Mortality........................  PCI Mortality for non-STEMI/non-
                                        shock patients: Hospital-
                                        specific 30-day all-cause risk-
                                        standardized mortality rate
                                        following Percutaneous Coronary
                                        Intervention (PCI) among
                                        patients aged 18 years or older
                                        without ST segment elevation
                                        myocardial infarction (STEMI)
                                        and without cardiogenic shock at
                                        the time of procedure.
ICD Complications....................  Hospital-specific risk-
                                        standardized complication rate
                                        following implantable
                                        cardioverter defibrillator (ICD)
                                        implantation among patients aged
                                        18 years or older.
Hospital Acquired Infections.........  Methicillin-Resistant
                                        Staphylococcus Aureus (MRSA).
Hospital Acquired Infections.........  Clostridium Difficile Associated
                                        Diseases (CDAD).
------------------------------------------------------------------------
* AHRQ is currently working with to improve and refine these measures,
  after which they will be updated to reflect the most current evidence
  learned as a result of validation efforts and empirical analyses.

    We are inviting public comment on these measures for potential 
future use in the RHQDAPU program, as well as suggestions and 
supporting rationales for additional measures to consider using in the 
program at a future time.
5. Form, Manner, and Timing of Quality Data Submission
    Section 1886(b)(3)(B)(viii)(I) of the Act requires that subsection 
(d)

[[Page 24174]]

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 data submission requirements, 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.
    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 protected health information.
a. Proposed RHQDAPU Program Procedures for the FY 2011 Payment 
Determination
    For the FY 2011 payment determination, we are proposing that the 
following procedures will apply to hospitals participating in the 
RHQDAPU program. These procedures are, for the most part, the same as 
the procedures that apply to the FY 2010 payment determination. We 
identify below where we have proposed to modify a procedure.
     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).
     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'' form (Notice 
of Participation form) that includes the name and address of each 
hospital campus that shares the same CMS Certification Number (CCN).
    We are proposing that any hospital that receives a new CCN on or 
after October 15, 2009 (including new subsection (d) hospitals and 
hospitals that have merged) that wishes to participate in the RHQDAPU 
program and has not otherwise submitted a Notice of Participation form 
using that CCN must submit a completed Notice of Participation form no 
later than 180 days from the date identified as the ``open date'' on 
the approved CMS Online System Certification and Reporting (OSCAR) 
system. We believe that this deadline will give these hospitals a 
sufficient amount of time to get their operations up and running while 
simultaneously providing CMS with clarity regarding whether they intend 
to participate in the RHQDAPU program for FY 2011.
    We also are proposing that hospitals having an open date (as noted 
on the approved CMS OSCAR system) before October 15, 2009 that did not 
participate in the RHQDAPU program in FY 2010 but that wish to 
participate in the RHQDAPU program for the FY 2011 payment 
determination must submit a completed Notice of Participation form to 
CMS on or before December 31, 2009. These hospitals, unlike hospitals 
that receive a new CCN, do not need to get their operations up and 
running. Therefore, we believe this is a reasonable deadline that will 
enable these hospitals to decide whether they want to participate in 
the RHQDAPU program while also enabling CMS to collect enough data from 
them to make an accurate FY 2011 payment determination.
    We note that under our current requirements, hospitals must begin 
submitting RHQDAPU program data starting with the first day of the 
quarter following the date when the hospital registers to participate 
in the program. For purposes of meeting this requirement, we interpret 
the registration date to be the date that the hospital submits a 
completed Notice of Participation form. As proposed previously in this 
section, hospitals must also register with QualityNet and identify a 
QualityNet Administrator who follows the QualityNet registration 
process before submitting RHQDAPU program data.
     Collect and report data for each of the quality measures 
under the topic areas that require chart abstraction. For the FY 2011 
payment determination, these topic areas are AMI, HF, PN, and SCIP. 
Hospitals must report these data by each quarterly deadline. 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 meets the measurement specification requirements for 
data transmission to QualityNet. All submissions will be executed 
through My QualityNet, the secure part of the QualityNet Web site. 
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 for each quality measure that 
requires chart abstraction in accordance with the joint CMS/Joint 
Commission sampling requirements located on the QualityNet Web site. 
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 
topic areas for which chart-abstracted data must be submitted 
(currently AMI, HF, PN, and SCIP). However, in order to reduce the 
burden on hospitals that treat a low number of patients in a RHQDAPU 
program topic area, a hospital that has five or fewer discharges 
(Medicare and non-Medicare combined) in a topic area during a quarter 
in which data must be submitted is not required to submit patient-level 
data for that topic area for the quarter. The hospital must still 
submit its aggregate population and sample size counts for Medicare and 
non-Medicare discharges for the four topic areas each quarter. We also 
note that hospitals meeting the five or fewer patient discharge 
exception may voluntarily submit these data.
     Continuously collect and submit HCAHPS data in accordance 
with the HCAHPS Quality Assurance Guidelines, V4.0 (the most current 
version of the guidelines), located at the Web site http://www.hcahpsonline.org. The QIO Clinical Warehouse will accept zero 
HCAHPS-eligible discharges. However, in order to reduce the burden on 
hospitals that treat a low number of patients that would be otherwise 
covered by the HCAHPS submission requirements, a hospital that has five 
or fewer HCAHPS-eligible discharges during a month is not required to 
submit HCAHPS surveys for that month. However, hospitals that meet this 
exception may voluntarily submit this data. The hospital must still 
submit its total number of HCAHPS-eligible cases for that month as part 
of its quarterly HCAHPS data submission.
     The quarterly data submission deadline for hospitals to 
submit patient level data for the proposed measures that require chart 
abstraction is 4\1/2\ months following the last discharge date in the 
calendar quarter. CMS will post the quarterly submission deadline

[[Page 24175]]

schedule on the QualityNet Web site (http://www.QualityNet.org). The 
collection of new chart-abstracted measures for FY 2011 payment 
determination would begin with 1st calendar quarter 2010 discharges, 
for which the submission deadline would be August 15, 2010.
     The data submission deadline for hospitals to submit 
aggregate population and sample size count data for the measures 
requiring chart abstraction is four months following the last discharge 
date in the calendar quarter. This requirement allows CMS to advise 
hospitals regarding their submission status in enough time for them to 
make appropriate revisions before the data submission deadline. We will 
post the aggregate population and sample size count data submission 
deadlines on the QualityNet Web site (http://www.QualityNet.org).
    CMS strongly recommends that hospitals review the QIO Clinical 
Warehouse Feedback Reports and the RHQDAPU Program Provider 
Participation Reports that are available after patient level data are 
submitted to the QIO Clinical Warehouse. CMS generally updates these 
reports on a daily basis to provide accurate information to hospitals 
about their submissions. These reports enable hospitals to ensure that 
their data were submitted on time and accepted into the QIO Clinical 
Warehouse.
    Hospitals are encouraged to regularly check the QualityNet Web 
site, http://www.QualityNet.org for program updates and information.
     The following RHQDAPU program claims-based measures will 
be calculated using Medicare claims:

------------------------------------------------------------------------
                                         FY 2011 Payment determination:
                                         proposed claims-based  quality
                Topic                      measures (no hospital data
                                              submission required)
------------------------------------------------------------------------
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 Measures (Medicare Patients)
------------------------------------------------------------------------
                                        READ-30-HF Heart Failure
                                        (HF) 30-Day Risk Standardized
                                        Readmission Measure (Medicare
                                        patients).
                                        READ-30-AMI Acute
                                        Myocardial Infarction (AMI) 30-
                                        Day Risk Standardized
                                        Readmission Measure (Medicare
                                        patients).
                                        READ-30-PN Pneumonia
                                        (PN) 30-Day Risk Standardized
                                        Readmission Measure (Medicare
                                        patients).
------------------------------------------------------------------------
AHRQ Patient Safety Indicators (PSIs), Inpatient Quality Indicators
 (IQIs) and Composite Measures
------------------------------------------------------------------------
                                        PSI 06: Iatrogenic
                                        pneumothorax, adult.
                                        PSI 14: Postoperative
                                        wound dehiscence.
                                        PSI 15: Accidental
                                        puncture or laceration.
                                        IQI 11: Abdominal aortic
                                        aneurysm (AAA) mortality rate
                                        (with or without volume).
                                        IQI 19: Hip fracture
                                        mortality rate.
                                        Mortality for selected
                                        surgical procedures (composite).
                                        Complication/patient
                                        safety for selected indicators
                                        (composite).
                                        Mortality for selected
                                        medical conditions (composite).
------------------------------------------------------------------------
AHRQ Patient Safety Indicator (PSI) and Nursing Sensitive Care
------------------------------------------------------------------------
                                        Death among surgical
                                        inpatients with serious,
                                        treatable complications.
------------------------------------------------------------------------

    For the claims-based RHQDAPU program measures listed in the table 
above, hospitals are not required to submit the data to the QIO 
Clinical Warehouse. CMS uses the existing Medicare fee-for-service 
claims to calculate the measures. For the FY 2011 payment 
determination, CMS will use three years of discharges from July 1, 2006 
through June 30, 2009 for the 30-day mortality and 30-day readmission 
measures. For the AHRQ PSI, IQI and Composite measures (including the 
AHRQ PSI and Nursing Sensitive Care measure, Death among surgical 
inpatients with serious, treatable complications), we will use one year 
of claims from July 1, 2008 through June 30, 2009 to calculate these 
measures.
     We are proposing that hospitals report the information 
needed to calculate the three proposed structural measures directly 
onto the QualityNet Web site on a quarterly basis starting with 1st 
calendar quarter 2010. The quarterly submission deadline for reporting 
these measures will be 4\1/2\ months following the last date in the 
quarter covered by the data report. For example, the reporting deadline 
for these structural measures covering 1st calendar quarter 2010 is 
August 15, 2010. The 4\1/2\ month lag between the end of the quarter 
and the reporting deadline is intended to provide hospitals with 
sufficient time to collect the information needed to accurately report 
the proposed structural measures, and aligns with the quarterly 
submission deadlines for the measures for which chart-abstraction is 
required.
    The following is the list of three structural measures proposed for 
the FY 2011 payment determination:

------------------------------------------------------------------------
                                         FY 2011 Payment determination:
                Topic                     proposed structural measures
------------------------------------------------------------------------
Cardiac Surgery
------------------------------------------------------------------------
                                        Participation in a
                                        Systematic Database for Cardiac
                                        Surgery.
------------------------------------------------------------------------

[[Page 24176]]

 
Stroke Care
------------------------------------------------------------------------
                                        Participation in a
                                        Systematic Clinical Database
                                        Registry for Stroke Care.
------------------------------------------------------------------------
Nursing Sensitive Care
------------------------------------------------------------------------
                                        Participation in a
                                        Systematic Clinical Database
                                        Registry for Nursing Sensitive
                                        Care.
------------------------------------------------------------------------

    We will add a link on the QualityNet Web site to the Web page(s) 
hospitals can use to report the proposed structural measures after we 
issue the FY 2010 IPPS final rule.
b. RHQDAPU Program Disaster Extensions and Waivers
    We are soliciting public comment about rules we could adopt that 
would enable hospitals to request either an extension or a waiver of 
various RHQDAPU program requirements in the event of a disaster (such 
as a hurricane that damages or destroys the hospital).
    Specifically, we welcome public comment on the following issues:
     Recommendations for rules that we could follow when 
considering whether to grant an extension or waiver of RHQDAPU program 
requirements in the event of a disaster, including suggested criteria 
that we should take into account (for example, specific hospital 
infrastructure damage, hospital closure time period, degree of 
destruction of medical records, impact on data vendors, long-term 
evacuation of discharged patients impacting HCAHPS survey 
participation).
     The role that QIOs and QIO support contractors should play 
in the event of a disaster, including communicating with affected 
hospitals, communicating with State hospital associations, and 
collecting information directly from hospitals.
     How CMS extension or waiver decisions should be 
communicated to affected hospitals.
     Any other issues commenters deem relevant to a hospital's 
request for an extension or waiver of RHQDAPU program requirements in 
the event of a disaster.
c. HCAHPS Requirements for the FY 2011 Payment Determination
    We are proposing that, for the FY 2011 payment determination, the 
RHQDAPU program HCAHPS requirements we adopted for FY 2010 would 
continue to apply. Under these requirements, a hospital must 
continuously collect and submit HCAHPS data in accordance with the 
current HCAHPS Quality Assurance Guidelines and the quarterly data 
submission deadlines, both of which are posted at http://www.hcahpsonline.org. In order for a hospital to participate in the 
collection of HCAHPS data, a hospital must either: (1) 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 (2) 
self-administer the survey without using a survey vendor provided that 
the hospital attends HCAHPS training and 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 HCAHPS Web site at: http://www.hcahpsonline.org.
    Every hospital choosing to contract with a survey vendor should 
provide the sample frame of HCAHPS-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 located 
at http://www.hcahpsonline.org for details about HCAHPS eligibility and 
sample frame creation.) In addition, the hospital must authorize the 
survey vendor to submit data via My QualityNet, the secure part of the 
QualityNet Web site, on the hospital's behalf.
    After the survey vendor submits the data to the QIO Clinical 
Warehouse, we strongly recommend that 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. These reports enable a hospital to ensure that its 
survey vendor has submitted the data on time and the data has been 
accepted into the QIO Clinical Warehouse.
    As we stated above, any hospital that has five or fewer HCAHPS-
eligible discharges in any month is no longer required to submit HCAHPS 
surveys for that month, although the hospital may voluntarily choose to 
submit these data. However, the hospital must still submit its total 
number of HCAHPS-eligible cases for that month as part of its quarterly 
HCAHPS data submission.
    In order to ensure compliance with HCAHPS survey and administration 
protocols, hospitals and survey vendors must participate in all 
oversight activities. As part of the oversight process, during the 
onsite visits or conference calls, the HCAHPS Project Team will review 
the hospital's or survey vendor's survey systems and assess protocols 
based upon the most recent HCAHPS Quality Assurance Guidelines. All 
materials relevant to survey administration will be subject to review. 
The systems and program review includes, but is not limited to: (a) 
Survey management and data systems; (b) printing and mailing materials 
and facilities; (c) telephone and 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. As needed, hospitals 
and survey vendors will be subject to follow-up site visits or 
conference calls. If CMS determines that a hospital is not compliant 
with HCAHPS program requirements, CMS may determine that the hospital 
is not submitting HCAHPS data that meet the requirements of the RHQDAPU 
program.
    We continue to strongly recommend 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. New hospitals can conduct a dry run in the last month of 
a calendar quarter. 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 My QualityNet, the secure portion of QualityNet.
    For FY 2011, we are again encouraging hospitals to regularly check

[[Page 24177]]

the HCAHPS Web site at http://www.hcahpsonline.org, for program updates 
and information.
6. Proposed Chart Validation Requirements
a. Proposed Chart Validation Requirements and Methods for the FY 2011 
Payment Determination
    For the FY 2011 payment determination, we are proposing to 
generally continue using the following existing requirements 
implemented in previous years. We note below where we are proposing to 
modify a requirement. These requirements, as well as additional 
information on these requirements, will be posted on the QualityNet Web 
site after we issue the FY 2010 final rule.
     The Clinical Data Abstraction Center (CDAC) contractor 
will, each quarter, ask every participating hospital to submit five 
randomly selected medical charts from which the hospital previously 
abstracted and submitted data to the QIO Clinical Warehouse.
    We are proposing the following timeline with respect to CDAC 
contractor requests for paper medical records for the purpose of 
validating RHQDAPU program data. Beginning with CDAC requests for 
second calendar quarter 2009 paper medical records, the CDAC will 
request paper copies of the randomly selected medical charts from each 
hospital via certified mail, and the hospital will have 45 days from 
the date of the request (as documented on the request letter) to submit 
the requested records to the CDAC. If the hospital does not comply 
within 30 days, the CDAC will send a second certified letter to the 
hospital, reminding the hospital that it must return paper copies of 
the requested medical records within 45 calendar days following the 
date of the initial CDAC medical record request. If the hospital still 
does not comply, then the CDAC will assign a ``zero'' score to each 
data element in each missing record.
    We are proposing this timeline to provide hospitals with 
transparent and documented correspondence about RHQDAPU program 
validation paper medical record requests. Hospitals have submitted 
numerous questions to CMS about this process, and we believe this 
timeline will provide hospitals with adequate notice and time to submit 
paper copies of requested medical records to the CDAC contractor. We 
also believe that this timeline does not unduly burden hospitals. We 
remind hospitals that CMS reimburses up to 12 cents per copied page to 
copy the requested medical records, and CMS also pays United States 
Postal Service fees for hospitals to mail back a paper copy of the 
requested medical records.
     Once the CDAC contractor receives the charts, it will 
reabstract the same data submitted by the hospitals and calculate the 
percentage of matching RHQDAPU program data element values for all of 
that data.
     The hospital must pass our validation requirement of a 
minimum of 80 percent reliability. We use appropriate confidence 
intervals to determine if a hospital has achieved 80 percent 
reliability. The use of confidence intervals allows us to establish an 
appropriate range below the 80 percent reliability threshold that 
demonstrates a sufficient level of reliability to allow the data to 
still be considered validated. We estimate the percent reliability 
based upon a review of the sampled charts, and then calculate the upper 
95 percent confidence limit for that estimate. If this upper limit is 
above the required 80 percent reliability, the hospital data are 
considered validated.
     We will pool the quarterly validation estimates for the 
four most recently validated quarters (except for the SCIP-
Cardiovascular-2 measure discussed below). For the FY 2011 payment 
update, we propose to validate 4th quarter CY 2008 through 3rd quarter 
2009 discharge data for the following measures:

------------------------------------------------------------------------
                                   Quality measures
                                 validated using data
                                 from 4th quarter CY   Measure ID
                                   quarter CY 2009
                                      discharges
------------------------------------------------------------------------
AMI (Acute Myocardial           Aspirin at Arrival...  AMI-1.
 Infarction).
                                Aspirin Prescribed at  AMI-2.
                                 Discharge.
                                ACEI or ARB for LVSD.  AMI-3.
                                Adult Smoking          AMI-4.
                                 Cessation Advice/
                                 Counseling.
                                Beta-Blocker           AMI-5.
                                 Prescribed at
                                 Discharge.
                                Fibrinolytic Therapy   AMI-7a.
                                 Received Within 30
                                 Minutes of Hospital
                                 Arrival.
                                Primary PCI Received   AMI-8a.
                                 Within 90 Minutes of
                                 Hospital Arrival.
HF (Heart Failure)............  Discharge              HF-1.
                                 Instructions.
                                Evaluation of LVS      HF-2.
                                 Function.
                                ACEI or ARB for LVSD.  HF-3.
                                Adult Smoking          HF-4.
                                 Cessation Advice/
                                 Counseling.
PN (Pneumonia)................  Pneumococcal           PN-2.
                                 Vaccination.
                                Blood Cultures         PN-3b.
                                 Performed in the
                                 Emergency Department
                                 Prior to Initial
                                 Antibiotic Received
                                 in Hospital.
                                Adult Smoking          PN-4.
                                 Cessation Advice/
                                 Counseling.
                                Initial Antibiotic     PN-5c.
                                 Received Within 6
                                 Hours of Hospital
                                 Arrival.
                                Initial Antibiotic     PN-6.
                                 Selection for
                                 Community-Acquired
                                 Pneumonia (CAP) in
                                 Immunocompetent
                                 Patients.
                                Influenza Vaccination  PN-7.
SCIP (Surgical Care             Prophylactic           SCIP-Inf-1.
 Improvement Project)--named     Antibiotic Received
 SIP for discharges prior to     Within One Hour
 July 2006 (3Q06).               Prior to Surgical
                                 Incision.
                                Prophylactic           SCIP-Inf-2.
                                 Antibiotic Selection
                                 for Surgical
                                 Patients.
                                Prophylactic           SCIP-Inf-3.
                                 Antibiotics
                                 Discontinued Within
                                 24 Hours After
                                 Surgery End Time.
                                Cardiac Surgery        SCIP-Inf-4.
                                 Patients With
                                 Controlled 6 A.M.
                                 Postoperative Blood
                                 Glucose.
                                Surgery Patients with  SCIP-Inf-6.
                                 Appropriate Hair
                                 Removal.
                                Surgery Patients with  SCIP-VTE-1.
                                 Recommended Venous
                                 Thromboembolism
                                 Prophylaxis Ordered.
                                Surgery Patients Who   SCIP-VTE-2.
                                 Received Appropriate
                                 Venous
                                 Thromboembolism
                                 Prophylaxis Within
                                 24 Hours Prior to
                                 Surgery to 24 Hours
                                 After Surgery.
------------------------------------------------------------------------


[[Page 24178]]

     SCIP-Cardiovascular-2 will be validated using data from 
2nd and 3rd calendar quarter 2009 discharges. CMS adopted this measure 
in the FY 2009 IPPS final rule and hospitals began submitting data for 
this measure starting with 1st calendar quarter 2009 discharges (73 FR 
48605). However, because we generally strive to provide hospitals with 
ample notice before we add a new measure to the list of measures for 
which we will validate data, we believe that 2nd quarter discharge data 
is an appropriate validation starting point for this measure (these 
data are not due to the QIO Clinical Warehouse until November 15, 
2009).
     We will continue using the design-specific estimate of the 
variance for the confidence interval calculation, which, in this case, 
is a stratified single stage cluster sample, with unequal cluster 
sizes. (For reference, see Cochran, William G.: Sampling Techniques, 
John Wiley & Sons, New York, chapter 3, section 3.12 (1977); and Kish, 
Leslie.: Survey Sampling, John Wiley & Sons, New York, chapter 3, 
section 3.3 (1964).) Each quarter is treated as a stratum for variance 
estimation purposes.
b. Proposed Chart Validation Requirements and Methods for the FY 2012 
Payment Determination and Subsequent Years
    RHQDAPU program data are currently validated by re-abstracting on a 
quarterly basis a random sample of five medical records for each 
hospital. This quarterly sample generally results in an annual combined 
sample of 20 patient records across four calendar quarters per 
hospital, but because each sample is random, it might not include 
medical records from each of the measure topics (for example, AMI, 
SCIP, etc.). As a result, data submitted by a hospital for one or more 
measure topics might not be validated for a given quarter or, in some 
cases, for an entire year or longer.
    In the FY 2009 IPPS proposed rule (73 FR 23658), we solicited 
public comments on the impact of adding measures to the validation 
process, as well as on modifications to the current validation process 
that could improve the reliability and validity of the methodology. We 
specifically requested input concerning the following:
     Which of the measures or measure sets should be included 
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 the 
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?
    In the FY 2009 IPPS final rule, we summarized and responded to 
commenters' views on these issues and stated that we will consider the 
issues raised by these commenters if we decide to make changes to the 
RHQDAPU program chart validation methodology.
    Our objective is to validate the accuracy of RHQDAPU program data 
collected by hospitals using medical record abstraction. Accurate data 
provide consumers with objective publicly reported information about 
hospital quality for more informed decision making. Consistent with the 
public comments we received in response to the FY 2009 IPPS proposed 
rule (73 FR 23658-9) and discussed in the FY 2009 IPPS final rule (73 
FR 48623), we believe that the methodology recommended in the CMS 
Hospital Value-Based Purchasing Report to Congress is a promising 
approach worth consideration in the RHQDAPU program. This approach is 
designed to validate the accuracy of hospital reported quality measure 
data, and is also directly applicable to validating RHQDAPU program 
chart-abstracted quality data.
    We recognize that hospitals need ample notification regarding 
proposed changes to the current RHQDAPU program validation process. We 
believe that the FY 2012 RHQDAPU program annual payment determination 
is the earliest opportunity to make significant modifications to our 
validation process.
    Therefore, we are proposing the following modifications to the 
RHQDAPU program validation methodology beginning with the FY 2012 
payment determination. Specifically, we propose to do the following:
     Randomly select on an annual basis 800 participating 
hospitals that submitted chart-abstracted data for at least 100 
discharges combined in the measure topics to be validated. To determine 
whether a hospital meets this ``100 chart threshold,'' we will look to 
the discharge data submitted by the hospital during the calendar year 
three years prior to the fiscal year of the relevant payment 
determination. For example, if the 100 case threshold applied for the 
FY 2011 payment determination (which it will not), the applicable 
measure topics would be AMI, HF, PN, and SCIP, and we would choose 800 
hospitals that submitted discharge data for at least 100 cases combined 
in these topics during calendar year 2008. If a hospital did not submit 
discharge data for at least 100 cases in these topics during CY 2008, 
we would not select the hospital for validation. We will announce the 
topic areas that apply for the FY 2012 payment determination at a later 
date, and we plan to select the first 800 hospitals in July 2010. We 
will select hospitals for the FY 2012 validation if they meet the 100 
chart threshold during CY 2009. We have proposed this 100-chart 
threshold because we believe that it strikes the appropriate balance 
between ensuring that the selected hospitals have a large enough 
patient population to be able to submit sufficient data to allow us to 
complete an accurate validation, while not requiring validation for 
hospitals with a low number of submitted quarterly cases and relatively 
unreliable measure estimates. Based on previously submitted data, we 
estimate that 98 percent of participating RHQDAPU program hospitals 
will meet this threshold and, thus, be eligible for validation. As 
noted below, we are soliciting comments and suggestions on how we might 
be able to target the remaining 2 percent of hospitals for validation.
     Randomly validate for each of the 800 selected hospitals a 
stratified sample each quarter of the validation period. Each quarterly 
sample will include 12 cases, with at least one but no more than three 
cases per topic for which chart-abstracted data was submitted by the 
hospital. However, we recognize that some selected hospitals might not 
have enough cases in all of the applicable topics to submit data (for 
example, if they have 5 or fewer discharges in a topic area in a 
quarter). For those hospitals, we would validate measures in only those 
topic areas for which they have submitted data. We have proposed this 
100-chart threshold because we believe that it strikes the appropriate 
balance between ensuring that the selected hospitals have a large 
enough patient population to be able to submit sufficient data to allow 
us to complete an accurate validation, while not requiring validation 
for hospitals with a low number of submitted quarterly cases and 
relatively unreliable measure estimates.
    For the FY 2012 payment determination, we will validate 1st

[[Page 24179]]

calendar quarter 2010 through 3rd calendar quarter 2010 discharge data. 
We are proposing to validate 3 quarters of data for FY 2012 in order to 
provide hospitals with enough time to assess their medical record 
documentation and abstraction practices, and to take necessary 
corrective actions to improve these practices, before documenting their 
1st calendar quarter 2010 discharges into medical records that may be 
sampled as part of this proposed validation process.
    Beginning with the FY 2013 payment determination, we propose 
validating data submitted by hospitals during the four quarters that 
make up the fiscal year that occurs two years prior to the year that 
applies to the payment determination. For example, for FY 2013, we 
would validate 4th calendar quarter 2010 through 3rd quarter 2011 
discharge data. This lag between the time a hospital submits data and 
the time we can validate that data is necessary because data is not due 
to the QIO Clinical Warehouse until 4\1/2\ months after the end of each 
quarter, and we need additional time to select hospitals and complete 
the validation process.
     We are proposing that the CDAC contractor will, each 
quarter that applies to the validation, ask each of the 800 selected 
hospitals to submit 12 randomly selected medical charts from which data 
was abstracted and submitted by the hospital to the QIO Clinical 
Warehouse. We note that, under our current requirements, hospitals must 
begin submitting RHQDAPU program data starting with the first day of 
the quarter following the date when the hospital registers to 
participate in the program. For purposes of meeting this requirement, 
we interpret the registration date to be the date that the hospital 
submits a completed Notice of Participation form. As proposed 
previously in this section, hospitals must also register with 
QualityNet and identify a QualityNet Administrator who follows the 
QualityNet registration process before submitting RHQDAPU program data.
    In addition, we are proposing to continue the following timeline 
with respect to CDAC contractor requests for paper medical records for 
the purpose of validating RHQDAPU program data. Beginning with CDAC 
requests for second calendar quarter 2009 paper medical records, the 
CDAC will request paper copies of the randomly selected medical charts 
from each hospital via certified mail, and the hospital will have 45 
days from the date of the request (as documented on the request letter) 
to submit the requested records to the CDAC. If the hospital does not 
comply within 30 days, the CDAC will send a second certified letter to 
the hospital, reminding the hospital that it must return paper copies 
of the requested medical records within 45 calendar days following the 
date of the initial CDAC medical record request. If the hospital still 
does not comply, then the CDAC will assign a ``zero'' score to each 
measure in each missing record.
     Once the CDAC contractor receives the charts, it will re-
abstract the same data submitted by the hospitals and calculate the 
percentage of matching RHQDAPU program measure numerators and 
denominators for each measure within each chart submitted by the 
hospital. Specifically, we will estimate the accuracy by calculating a 
match rate percent agreement for all of the variables submitted in all 
of the charts. For any selected record, a measure's numerator and 
denominator can have two possible states, included or excluded, 
depending on whether the hospital accurately included the cases in the 
measure numerator(s) and denominator(s). We will count each measure in 
a selected record as a match if the hospital submitted measure 
numerator and denominator sets match the measure numerator and 
denominator states independently abstracted by our contractor. For 
example, one heart failure case from which data has been abstracted for 
four RHQDAPU program chart-abstracted measures (that is, HF-1, HF-2, 
HF-3, and HF-4) would receive a 75 percent match if three out of four 
of the hospital-reported heart failure measure numerator and 
denominator states matched the re-abstracted numerator and denominator 
states. This proposed scoring approach is the same as recommended in 
the CMS Hospital Value-Based Purchasing Report to Congress, and is 
illustrated in further detail using an example in pages 83-4 of the 
report (http://www.cms.hhs.gov/AcuteInpatientPPS/downloads/HospitalVBPPlanRTCFINALSUBMITTED2007.pdf). We believe that this 
approach is appropriate, as supported by many commenters' support in 
the FY 2009 IPPS final rule to our request for input about the RHQDAPU 
program validation process (73 FR 48622-3).
     Use, as we currently do, each selected case as a cluster 
comprising one or multiple measures utilized in a validation score 
estimate. Each selected case will have multiple measures included in 
the validation score (for example, for the FY 2012 payment 
determination, a heart failure record will include 4 heart failure 
measures). Specifically, we propose to continue using the design-
specific estimate of the variance for the confidence interval 
calculation, which, in this case, is a stratified single stage cluster 
sample, with unequal cluster sizes. (For reference, see Cochran, 
William G.: Sampling Techniques, John Wiley & Sons, New York, chapter 
3, section 3.12 (1977); and Kish, Leslie: Survey Sampling, John Wiley & 
Sons, New York, chapter 3, section 3.3 (1964).) Each quarter and 
clinical topic is treated as a stratum for variance estimation 
purposes.
    We believe that the proposed clustering approach is a statistically 
appropriate technique for calculating the annual validation confidence 
interval. Since CMS will not be validating all hospital records, we 
need to calculate a confidence interval that incorporates a potential 
sampling error. Our clustering approach incorporates the degree of 
correlation at the individual data record level, because our previous 
validation experience indicates that hospital data mismatch errors tend 
to be clustered in individual data records. CMS has used this 
clustering since the inception of the RHQDAPU program validation 
requirement to calculate variability estimates needed for calculating 
confidence intervals (70 FR 47423).
     Use the upper bound of a one-tailed 95 percent confidence 
interval to estimate the validation score; and
     Require all RHQDAPU program participating hospitals 
selected for validation to attain at least a 75 percent validation 
score per quarter to pass the validation requirement.
    We believe that this proposal incorporates many of the principles 
supported by the vast majority of commenters in response to our 
solicitation for public comments in the FY 2009 IPPS proposed rule (73 
FR 23658 through 23659). Specifically, we believe that the increased 
annual sample size per hospital will provide more reliable estimates of 
validation accuracy. The proposed sample size of 12 records per quarter 
would provide a total of 36 records across the three sampled quarters 
for the FY 2012 payment determination, and 48 records in subsequent 
years. This estimate would improve the reliability of our validation 
estimate, as compared to the current RHQDAPU program annual validation 
sample of 20 cases per year. We also believe that modifying the 
validation score to reflect measure numerator and denominator accuracy 
will ensure that accurate data are posted on the Hospital Compare Web 
site.

[[Page 24180]]

    In addition, we believe that stratified quarterly samples by topic 
will improve the feedback provided to hospitals. CMS would provide 
validation feedback to hospitals about all sampled topics submitted by 
the hospitals each quarter. Because all relevant data elements 
submitted by the hospital must match the independently re-abstracted 
data elements to count as a match, we have proposed to reduce the 
passing threshold from 80 percent to 75 percent. We are proposing to 
use a one-tail confidence interval to calculate the validation score 
because we strongly believe that a one-tail test most appropriately 
reflects the pass or fail dichotomous nature of the statistical test 
regarding whether the confidence interval includes or is completely 
above the 75 percent passing validation score.
    We are also proposing to continue to allow hospitals that fail to 
meet the passing threshold for the quarterly validation an opportunity 
to appeal the validation results to their State QIO. QIOs are currently 
tasked by CMS to provide education and technical assistance about 
RHQDAPU program data abstraction and measures to hospitals, and the 
quarterly validation appeals process will provide hospitals with an 
opportunity to both appeal their quarterly results and receive 
education free of charge from their State QIO. This State QIO quarterly 
validation appeals process is independent of the proposed RHQDAPU 
program reconsideration procedures for hospital reconsideration 
requests involving validation for the FY 2010 payment update proposed 
below in section V.A.9. of this proposed rule.
c. Possible Supplements to the Chart Validation Process for the FY 2013 
Payment Determination and Subsequent Years
    We also are soliciting public comment about criteria we could use 
to target hospitals for validation in the future. These targeting 
criteria could include abnormal data patterns identified by analyzing 
hospital-submitted measure rates and counts for RHQDAPU program 
measures. For example:
     A high number of years a hospital was not randomly 
selected for annual validation (for example, at least 5 years);
     Consistently high measure denominator exclusion rates 
resulting in unexpectedly low denominator counts;
     Consistently high measure rates, relative to national 
averages;
     Small annual submission number of cases in previous years 
resulting in hospital exclusion from RHQDAPU program validation sample;
     Failing multiple previous years' RHQDAPU program 
validations.
7. Data Accuracy and Completeness Acknowledgement Requirements for the 
FY 2011 Payment Determination and Subsequent Years
    For the FY 2011 payment determination and subsequent years, we are 
proposing to require hospitals to electronically acknowledge on an 
annual basis the completeness and accuracy of the data submitted for 
the RHQDAPU program payment determination. Hospitals will be able to 
submit this acknowledgement on the same Web page that they use to 
submit data necessary to calculate the structural measures, and we 
believe that this Web page will provide a secure vehicle for hospitals 
to directly acknowledge that their information is complete and accurate 
to the best of their knowledge. A single annual electronic 
acknowledgement will provide us with explicit documentation 
acknowledging that the hospital's data is accurate and complete, but 
will not unduly burden hospitals. We note that commenters generally 
supported the idea of electronic attestation in the FY 2009 IPPS final 
rule (73 FR 48625) at the point of data submission to the QIO Clinical 
Warehouse.
    In addition, the Government Accountability Office (GAO) recommended 
in a 2006 report (GAO-06-54) that hospitals self-report that their data 
are complete and accurate. Therefore, for the FY 2011 payment 
determination, we are proposing to require hospitals to electronically 
acknowledge their data accuracy and completeness once between January 
1, 2010, and August 15, 2010. Hospitals will acknowledge that all 
information that is, or will be, submitted as required by the RHQDAPU 
program for the FY 2011 payment determination is complete and accurate 
to the best of their knowledge.
8. Public Display Requirements for the FY 2011 Payment Determination 
and Subsequent Years
    For the FY 2011 payment determination, we are proposing to 
generally continue using the following existing requirements 
implemented in previous years. Our continued goal for the chart 
validation requirements is to validate the reliability of RHQDAPU 
program chart-abstracted data. Accurate data are needed to calculate 
accurate publicly reported quality measures that are posted on the 
Hospital Compare Web site. We added the validation requirement in the 
FY 2006 IPPS final rule (70 FR 47421 through 47422) to ensure that 
hospitals submit reliable data for RHQDAPU program chart-abstracted 
measures, based on our experience in FY 2005 that hospitals vastly 
differed in their data reliability. We modified the validation 
requirements in the FY 2008 IPPS final rule with comment period (72 FR 
47366 and 47367) to update the RHQDAPU program list of validated 
measures for FY 2008, and pooled multiple quarterly validation 
estimates into a single annual estimate to improve reliability. We 
modified these requirements to reflect the changing RHQDAPU list of 
chart-abstracted measures and validate all available RHQDAPU program 
data.
    We note below the circumstances under which we are proposing to 
modify a requirement. We are proposing to update the list of validated 
RHQDAPU program measures for the FY 2011 payment determination to 
incorporate changes to our list of required chart-abstracted RHQDAPU 
program measures for CY 2009 discharges. These requirements, as well as 
additional information on these requirements, will be posted on the 
QualityNet Web site after we issue the FY 2010 IPPS final rule.
    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). We require that hospitals sign a 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 included in the RHQDAPU program.
    We will continue to display quality information for public viewing 
as required by section 1886(b)(3)(B)(viii)(VII) of the Act. 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 HCAHPS). These measures are then publicly 
reported on Hospital Compare 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. To

[[Page 24181]]

increase transparency in public reporting and improve the usefulness of 
the Hospital Compare Web site, we propose note on the Web site 
instances where publicly reported measures combine results from two or 
more hospitals.
9. Proposed Reconsideration and Appeal Procedures for the FY 2010 
Payment Determination
    The general deadline for submitting a request for reconsideration 
in connection with the FY 2010 payment determination is November 1, 
2009. As discussed more fully below, we are proposing that all 
hospitals submit a request for reconsideration and receive a decision 
on that request before they can file an appeal with the Provider 
Reimbursement Review Board (PRRB).
    For the FY 2010 payment determination, we are proposing to continue 
utilizing most of the same procedures that we utilized in FY 2009. 
Under these proposed procedures, the hospital must--
     Submit to CMS, via QualityNet, a Reconsideration Request 
form (available on the QualityNet Web site) containing the following 
information:

--Hospital CMS Certification number (CCN).
--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 2010 IPPS annual payment 
update.
--CEO contact information, including name, e-mail address, telephone 
number, and mailing address (must include the physical address, not 
just the post office box). We are proposing to no longer require that 
the hospital's CEO sign the RHQDAPU program reconsideration request. We 
have found that this requirement increases the burden for hospitals 
because it prevents them from electronically submitting the RHQDAPU 
program reconsideration request forms. In addition, to the extent that 
a hospital can submit a request for reconsideration on-line, the burden 
on our staff is reduced and, as a result, we can more quickly review 
the request.
--QualityNet System Administrator contact information, including name, 
e-mail address, telephone number, and mailing address (must include the 
physical address, not just the post office box).
--Paper medical record requirement for reconsideration requests 
involving validation. We are proposing that if a hospital asks us to 
reconsider an adverse RHQDAPU program payment decision made because the 
hospital failed the validation requirement, the hospital must submit 
paper copies of all the medical records that it submitted to the CDAC 
contractor each quarter for purposes of the validation. Hospitals must 
submit this documentation to a CMS contractor, which will redact all 
patient identifying information and forward the redacted copies to CMS. 
The contractor will be a QIO support contractor, which has authority to 
review patient level information under 42 CFR Part 480. We will post 
the address where hospitals can ship the paper charts on the QualityNet 
Web site after we issue the FY 2010 IPPS final rule. Hospitals 
submitting a RHQDAPU program validation reconsideration request will 
have all mismatched data reviewed by CMS, and not their State QIO. (As 
discussed in section V.A.6.b. of this preamble, the State QIO is 
available to conduct a quarterly validation appeal if so requested by a 
hospital.)

    For the FY 2010 payment determination, the RHQDAPU program data 
that will be validated is 4th calendar quarter 2007 through 3rd quarter 
calendar year 2008 discharge data, except for SCIP-Infection-4 and 
Infection-6, which will be validated using 2nd and 3rd calendar quarter 
2008 discharges (73 FR 48621-2). Hospitals must provide a written 
justification for each appealed data element classified during the 
validation process as a mismatch. We will review the data elements that 
were labeled as mismatched, as well as the written justifications 
provided by the hospitals, and make a decision on the reconsideration 
request. As we mentioned above, we are proposing that all hospitals 
submit a reconsideration request to CMS and receive a decision on that 
request prior to submitting a PRRB appeal. We believe that the 
reconsideration process is less costly for both CMS and hospitals, and 
that this requirement will decrease the number of PRRB appeals by 
resolving issues earlier in the appeals process.
    Following receipt of a request for reconsideration, we will--
     Provide an e-mail acknowledgement, using the contact 
information provided in the reconsideration request, to the CEO and the 
QualityNet Administrator that the request has been received.
     Provide written notification to the hospital CEO, using 
the contact information provided in the reconsideration request, 
regarding our decision. We expect the process to take approximately 60 
to 90 days from the reconsideration request due date of November 1, 
2009.
    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 PRRB appeal). We are soliciting public comments 
on the extent to which these proposed procedures will be less costly 
for hospitals, and whether they will lead to fewer PRRB appeals.
10. RHQDAPU Program Withdrawal Deadlines
    We are proposing to accept RHQDAPU program withdrawal forms for the 
FY 2011 payment determination from hospitals until August 15, 2010. We 
are proposing this deadline to provide CMS with sufficient time to 
update the FY 2011 payment to hospitals starting on October 1, 2010. If 
a hospital withdraws from the program for the FY 2011 payment 
determination, it will receive a 2.0 percentage point reduction in its 
FY 2011 annual payment update. We note that once a hospital has 
submitted a Notice of Participation form, it is considered to be an 
active RHQDAPU program participant until such time as the hospital 
submits a withdrawal form to CMS.
11. Electronic Health Records
a. Background
    Starting with the FY 2006 IPPS final rule, we have encouraged 
hospitals to take steps toward the adoption of EHRs (also referred to 
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 through 47421). We 
encouraged hospitals that are implementing, upgrading, or developing 
EHR systems to ensure that the technology obtained, upgraded, or 
developed conforms to standards adopted by HHS. We suggested that 
hospitals also take due care and diligence to ensure that the EHR 
systems accurately capture quality data and that, ideally, such systems 
provide point-of-care decision support that promotes optimal levels of 
clinical performance.
    In the FY 2008 IPPS final rule with comment period (72 FR 47366), 
we responded to comments we received on EHRs and noted that CMS planned 
to

[[Page 24182]]

continue participating in the American Health Information Community 
(which has now sunset and is replaced by the National eHealth 
Collaborative) and other entities to explore processes through which an 
EHR could speed the collection of data and minimize the resources 
necessary for quality reporting.
    Recently, we initiated work directed toward enabling EHR submission 
of quality measures through EHR standards development and adoption. We 
are working under an inter-agency agreement between CMS and the Office 
of the National Coordinator for Healthcare Information Technology (ONC) 
to identify and harmonize standards for the EHR-based submission of 
Emergency Department Throughput measures, Stroke measures, and Venous 
Thromboembolism measures. These measures have received NQF endorsement 
and are potential measures for future inclusion in the RHQDAPU program. 
Pursuant to this agreement, the Healthcare Information Technology 
Standards Panel (HITSP) has been tasked with harmonizing the EHR data 
element standards for the measure sets. The work for these three 
measure sets began in September 2008 and is due to be completed in a 
little more than 1 year. It is expected that interoperable standards 
will be developed and fully vetted by October 2009. When HITSP posts 
the standards, we anticipate that EHR vendors will be able to code 
their EHR systems with the new specifications and begin collecting this 
data electronically. We expect that these standards will be provided to 
its Certification Commission for Healthcare Information Technology 
(CCHIT) for inclusion in the criteria for certification of inpatient 
EHRs.
b. EHR Testing of Quality Measures Submission
    As we have previously stated, we are interested in the reporting of 
quality measures using EHRs, and we continue to encourage hospitals to 
adopt and use EHRs that conform to industry standards. We believe that 
the testing of EHR submission is an important and necessary step to 
establish the ability of EHRs to report clinical quality measures and 
the capacity of CMS to receive such data.
    Through CMS' interagency agreement with ONC previously described, 
the interoperable standards for EHR-based submission of the Emergency 
Department (ED) Throughput, Stroke, and Venous Thromboembolism (VTE) 
measures are scheduled to be finalized in late 2009 and will be 
available for review and testing. We anticipate testing the components 
required for the submission of clinical quality data extracted from 
EHRs for these measures, and are exploring different mechanisms and 
formats that will aid the submission process, as well as ensure that 
the summary measure results extracted from the EHRs are reliable. When 
the interoperable for EHR-based submission standards become available, 
EHR vendors will be able to employ them in EHR systems and begin 
testing how they facilitate the electronic collection of these data. We 
intend to follow similar processes and procedures to those we are using 
for the PQRI EHR testing being conducted as described in the CY 2009 
Medicare Physician Fee Schedule final rule with comment period (73 FR 
69828 through 69830).
    We anticipate moving forward with testing CMS' technical ability to 
accept data from EHRs for the ED, Stroke, and VTE measures as early as 
July 1, 2010. Pursuant to the Paperwork Reduction Act, prior to the 
beginning of testing EHR-based data submission, we will publish a 
Federal Register notice seeking public comments on the process we 
intend to follow to select EHR vendors/hospitals and the methodology we 
plan to use for testing EHR-based data submissions.
    The test measures described above are not currently required under 
the RHQDAPU program. As long as that remains the case, EHR test data 
that is received for these measures will not be used to make RHQDAPU 
program payment decisions. In addition, the posting of the electronic 
specifications for any particular measure should not be interpreted as 
a signal that we intend to select the measure for inclusion in the 
RHQDAPU program measure set.
    We intend to select several EHR vendors/hospitals to develop and 
test EHR clinical quality data submission. EHR vendors/hospitals that 
wish to participate in the development and testing process will be able 
to self-nominate by sending a letter of interest to: ``RHQDAPU Program 
IT Testing Nomination'' Centers for Medicare and Medicaid Services, 
Office of Clinical Standards and Quality, Quality Measurement and 
Health Assessment Group, 7500 Security Boulevard, Mail Stop S3-02-01, 
Baltimore, MD 21244-8532. The letter must be received by CMS by 6 p.m., 
E.S.T. on December 31, 2009. Vendors/hospitals will be selected based 
on the following criteria: (1) They are able to submit clinical EHR 
data using interoperability standards such as Cross Document Sharing 
(XDS), Cross Community Access (XCA), Clinical Data Architecture (CDA), 
and Health Level 7 Version 3 to a CMS-designated clinical data 
repository; and (2) they have established or have applied for a 
QualityNet account. More information regarding these capabilities will 
be made available on the Hospital Quality Initiative section of the CMS 
Web site at: www.cms.hhs.gov/HospitalQualityInits/. Preference may be 
given to EHR vendors/hospitals that utilize EHRs that are currently 
certified by the CCHIT, use the National Health Information Network 
(NHIN), and/or utilize Health Information Technology Standards Panel 
(HITSP)/Integrating the Healthcare Environment (IHE) standards.
    EHR vendors/hospitals that would like to test the submission of 
inpatient EHR data to the CMS-designated clinical data repository 
should update their EHR products or otherwise ensure that those 
products can capture and submit the necessary data elements identified 
for an EHR-based submission once the standardized format has been 
determined. We suggest that these entities begin submitting EHR data 
promptly after CMS announces that the clinical data repository is ready 
to accept such data so that problems that may complicate or preclude a 
successful quality measure data submission can be corrected.
    We welcome comments on this discussion of EHR-based data submission 
testing.
c. HITECH Act EHR Provisions
    On February 17, 2009, the President signed into law the ARRA, 
Public Law 111-5. The HITECH Act (Title IV of Division B of the ARRA, 
together with Title XIII of Division A of the ARRA), authorizes payment 
incentives under Medicare for the adoption and use of certified EHR 
technology beginning in FY 2011. Hospitals are eligible for these 
payment incentives if they meet the following three requirements: 
meaningful use of certified EHR technology; electronic exchange of 
health information; and reporting on measures using certified EHR 
technology (provided the Secretary has the capacity to receive such 
information electronically). With respect to this requirement, under 
section 1886(n)(3)(A)(ii) of the Act, as added by section 4102 of the 
HITECH Act, the Secretary shall select measures, including clinical 
quality measures, that hospitals must provide to CMS in order to be 
eligible for the EHR incentive payments. With respect to the clinical 
quality measures, section 1886(n)(3)(B)(i) of the Act requires the 
Secretary to give preference to those clinical quality measures that 
have been selected for the RHQDAPU program

[[Page 24183]]

under section 1886(b)(3)(B)(viii) of the Act or that have been endorsed 
by the entity with a contract with the Secretary under section 1890(a) 
of the Act. Any measures must be proposed for public comment prior to 
their selection, except in the case of measures previously selected for 
the RHQDAPU program under section 1886(b)(3)(B)(viii) of the Act.
    Thus, the RHQDAPU program and the HITECH Act have important areas 
of overlap and synergy with respect to the reporting of quality 
measures using EHRs. We believe the financial incentives under the 
HITECH Act for the adoption and meaningful use of certified EHR 
technology by hospitals will encourage the adoption and use of 
certified EHRs for the reporting of clinical quality measures under the 
RHQDAPU program. Further, these efforts to test the submission of 
quality data through EHRs may provide a foundation for establishing the 
capacity of hospitals to send, and for CMS to receive, quality measures 
via hospital EHRs for future RHQDAPU program measures. We again note 
that the provisions in this proposed rule do not implicate or implement 
any HITECH statutory provisions. Those provisions will be implemented 
in a future rulemaking.

B. Sole Community Hospitals (SCHs) and Medicare-Dependent, Small Rural 
Hospitals (MDHs): Budget Neutrality Adjustment Factors for FY 2002-
Based Hospital-Specific Rate for MDHs (Sec.  412.79(j))

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 at 42 CFR 
412.92. Section 1886(d)(5)(D)(iii)(III) of the Act and the 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.
    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 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 at 42 CFR 412.108.
    Although SCHs and MDHs are paid under special payment 
methodologies, they are still 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 
prior to January 1, 2009, section 1886(d)(5)(D)(i) of the Act (as 
amended by section 6003(e) of Pub. L. 101-239 (OBRA 1989)) and section 
1886(b)(3)(I) of the Act (as added by section 405 of Public Law 106-113 
(BBRA 1999) and further amended by section 213 of Public Law 106-554 
(BIPA 2000) provide that SCHs are paid based on whichever of four 
statutorily specified rates (listed below) yields the greatest 
aggregate payment to the hospital for the cost reporting period. For 
cost reporting periods beginning on or after January 1, 2009, section 
122 of Public Law 110-275 (MIPPA 2008) further amended the Act to 
specify that 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, 
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;
     The updated hospital-specific rate based on FY 1996 costs 
per discharge; or
     The updated hospital-specific rate based on FY 2006 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.
    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 amount by which the Federal rate is 
exceeded by the updated hospital-specific rates based on FY 1982 or FY 
1987 costs per discharge, whichever of these hospital-specific rates is 
higher. Section 5003(b) of Public Law 109-171 (DRA 2005) amended 
section 1886(d)(5)(G) of the Act to provide that, for discharges 
occurring on or after October 1, 2006, MDHs are paid based on the 
Federal rate or, if higher, the Federal rate plus 75 percent of the 
amount by which the Federal rate is exceeded by the updated hospital-
specific rate based on FY 1982, FY 1987, or FY 2002 costs per 
discharge, whichever of these hospital-specific rates is the highest. 
Unlike SCHs, MDHs do not have the option to use their FY 1996 hospital-
specific rate.
    For each cost reporting period, the fiscal intermediary or 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 or MAC makes the determination. However, it may not be 
possible for the fiscal intermediary or 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 or 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 the 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 
the MAC's decision in accordance with the procedures set forth in 42 
CFR Part 405, Subpart R, which govern provider payment determinations 
and appeals.
2. FY 2002-Based Hospital-Specific Rate
    Acute care hospitals, including MDHs and SCHs, are paid under the 
IPPS. As mentioned earlier, under the special

[[Page 24184]]

payment methodologies for MDHs and SCHs, Medicare payments per 
discharge are made based on DRG weights, just like all other acute care 
hospitals paid under the IPPS. (We note that the MS-DRGs are currently 
used under the IPPS, effective beginning in FY 2008.) As discussed 
above, although the payment formulas for MDHs and SCHs differ slightly, 
it is common to both types of hospitals that they may be paid based on 
an updated hospital-specific rate determined from their costs per 
discharge in a specified base year.
    Section 1886(d)(4)(C)(iii) of the Act requires that aggregate IPPS 
payments be projected to neither increase nor decrease as a result of 
the annual changes to the DRG classifications and weighting factors. 
Beginning in FY 1994, in applying the current year's budget neutrality 
adjustment factor to both the standard Federal rate and hospital 
specific rates, we do not remove the prior years' budget neutrality 
adjustment factors when applying the current year budget neutrality 
adjustment factor to assure that estimated aggregate payments after the 
DRG changes are equal to estimated aggregate payments prior to the 
changes (48 FR 46345). As we explained, if we were to remove the prior 
year adjustment(s), we would not satisfy this condition. As we have 
previously explained (for example, in the FY 2006 IPPS final rule (70 
FR 47429)), all section 1886(d) hospitals, including hospitals that are 
paid based on a hospital-specific rate, are subject to a DRG budget 
neutrality adjustment factor. As is the case for all other IPPS 
hospitals, these hospitals are paid based on DRG classification and 
weighting factors that must be considered when we determine whether 
aggregate IPPS payments are projected to increase or decrease as a 
result of the annual changes to the DRG classifications and weighting 
factors.
    In order to comply with the statutory requirement that the DRG 
changes be budget neutral, we compute a budget neutrality adjustment 
factor based on a comparison of estimated aggregate payments using the 
current year's relative weights and factors to aggregate payments using 
the prior year's relative weights and factors. This budget neutrality 
adjustment factor is then applied to the standardized per discharge 
payment amounts (that is, the Federal rates and the hospital-specific 
rates). Cumulative budget neutrality factors, beginning with the 
adjustment factor for FY 1993, apply to all rebased hospital-specific 
rate amounts derived from base years later than FY 1993. As discussed 
in the FY 2001 IPPS proposed rule (55 FR 19466), we normalize DRG 
weights by an adjustment factor in order to ensure that the average 
case weight after recalibration is equal to the average case weight 
prior to recalibration. While this adjustment is intended to ensure 
that recalibration does not affect total payments to hospitals under 
section 1886(d) of the Act, our analysis has indicated that the 
normalization adjustment does not achieve budget neutrality with 
respect to aggregate payments to hospitals under section 1886(d) of the 
Act. Thus, in order to comply with the requirement of section 
1886(d)(4)(C)(iii) of the Act that the DRG reclassification changes and 
recalibration of the relative weights be budget neutral, we also 
compute a budget neutrality adjustment factor that applies to both the 
standardized amounts and the hospital-specific rates. This budget 
neutrality adjustment ensures that the recalibration process does not 
inadvertently increase total payments to hospitals. If we were to 
remove this budget neutrality adjustment factor for years prior to the 
base year, we believe the normalized DRG weights applied to the 
hospital-specific amounts would be artificially high, thus resulting in 
higher aggregate payments than permitted under the statute.
    Section 1886(b)(3)(I) of the Act (as added by section 405 of Pub. 
L. 106-113 (BBRA 1999) and further amended by section 213 of Public Law 
106-554 (BIPA 2000)) contains a provision for SCHs to rebase their 
hospital-specific rate using the hospital's FY 1996 cost per discharge 
data. Specifically, beginning in FY 2001, SCHs can use their allowable 
FY 1996 operating costs for inpatient hospital services as the basis 
for their hospital-specific rate rather than only their FY 1982 or FY 
1987 costs, if using FY 1996 costs would result in higher payments. 
Effective for cost reporting periods beginning on or after January 1, 
2009, SCHs will be paid based on their hospital-specific rate using FY 
2006 costs, if this rate yields higher payments (as provided for under 
section 122 of Pub. L. 110-275 (MIPPA 2008)). For the reasons explained 
above, the instructions for implementing both the FY 1996 and FY 2006 
SCH rebasing provisions direct the fiscal intermediary or MAC to apply 
cumulative budget neutrality adjustment factors to account for DRG 
changes since FY 1993 in determining an SCH's hospital-specific rate 
based on either FY 1996 or FY 2006 cost data. (The FY 1996 SCH rebasing 
provision was implemented in Transmittal A-00-66 (Change Request 1331) 
dated September 18, 2000, and the FY 2006 SCH rebasing provision was 
implemented in a Joint Signature Memorandum (JSM/TDL-09052), dated 
November 17, 2008.)
    As stated previously, section 5003(b) of Public Law 109-171 (DRA 
2005) allows MDHs to use the hospital's FY 2002 costs per discharge 
(that is, the FY 2002 updated hospital-specific rate) for discharges 
occurring on or after October 1, 2006, if that results in a higher 
payment. To implement this provision, CMS issued Transmittal 1067 
(Change Request 5276 dated September 25, 2006) with instructions to 
fiscal intermediaries to determine and update the FY 2002 hospital-
specific rate for qualifying MDHs. To calculate an MDH's FY 2002 
hospital-specific rate and update it to FY 2007, the instructions 
directed fiscal intermediaries to apply cumulative budget adjustment 
factors for FYs 2003 through 2007. However, the instructions did not 
include the cumulative budget neutrality adjustment factor to account 
for changes in the DRGs from FYs 1993 through 2002. Consequently, any 
MDH that has been paid based on its FY 2002 hospital-specific rate 
since FY 2007 was paid based on a hospital-specific rate that was 
computed inconsistent with CMS' stated policy of applying a cumulative 
budget neutrality adjustment factor to account for DRG changes as a 
result of annual updates. As a result, effective beginning in FY 2007, 
any MDH that was paid based on its FY 2002 hospital-specific rate 
(calculated in accordance with the instructions provided in Transmittal 
1067) has been paid based on a hospital-specific rate that failed to 
include a cumulative budget neutrality adjustment factor to account for 
DRG changes from FYs 1993 through 2002 (a cumulative budget neutrality 
adjustment factor of 0.982557 (or about -1.74 percent)), in addition to 
the cumulative budget neutrality adjustment factors applied for FYs 
2003 through 2007 that have already been applied as specified in the 
implementing instructions. In order to conduct a meaningful comparison 
between payments under the Federal rate, which is adjusted by the 
cumulative budget neutrality factor, and payments based on the 
hospital-specific rate, consistent with our established policy of 
applying a cumulative budget neutrality adjustment factor to account 
for DRG changes since FY 1993, for discharges beginning on or after 
October 1, 2009, we will include the cumulative budget neutrality 
adjustment factors for the DRG changes from FYs 1993 through 2002 in 
addition to the cumulative

[[Page 24185]]

budget neutrality adjustment factors for FYs 2003 forward. The 
cumulative budget neutrality adjustment factor of 0.982557 is 
calculated as the product of the following budget neutrality adjustment 
factors to account for DRG changes from FYs 1993 through 2002: 0.999851 
for FY 1993; 0.999003 for FY 1994; 0.998050 for FY 1995; 0.999306 for 
FY 1996; 0.998703 for FY 1997; 0.997731 for FY 1998; 0.998978 for FY 
1999; 0.997808 for FY 2000; 0.997174 for FY 2001; and 0.995821 for FY 
2002.
    We considered applying a factor of 0.982557 to any MDH's FY 2002 
hospital-specific rate to account for the cumulative budget neutrality 
adjustment for DRG changes from FYs 1993 through 2002, either effective 
for discharges occurring on or after October 1, 2006 (the initial 
effective date of the FY 2002 rebasing) or, alternatively, effective 
upon the issuance of the correction. However, consistent with the 
prospective nature of the rates under the IPPS, we are applying the 
adjustment on a prospective basis only, effective for discharges 
occurring on or after October 1, 2009 (FY 2010). This effective date 
would give affected MDHs sufficient notice of the change to their 
hospital-specific rate. We estimate that approximately 50 MDHs would be 
affected by the application of the cumulative budget neutrality 
adjustment for DRG changes from FYs 1993 through 2002. Based on the 
current cumulative budget neutrality adjustment factor of 0.982557 to 
account for DRG changes from FYs 1993 through 2002, we estimate that, 
in some instances, application of the cumulative budget neutrality 
adjustment factor would lower the hospital-specific rate to the point 
that the Federal rate would result in higher payments.

C. 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 (as discussed in the FY 1993 IPPS final rule (59 FR 
45404 through 45409). 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 
RRCs such that they are not subject to the 12-percent cap on DSH 
payments that is applicable to other rural hospitals. RRCs are also not 
subject to the proximity criteria when applying for geographic 
reclassification. In addition, 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.
    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 IPPS final rule with comment 
period (62 FR 45999), CMS reinstated RRC status for all hospitals that 
lost the status due to triennial review or MGCRB reclassification. 
However, CMS 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 IPPS 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 all of the other 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 an 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). (We refer readers to Sec.  412.96(c)(1) through (c)(5) and the 
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 proposed national 
median CMI value for FY 2010 includes data from all urban hospitals 
nationwide, and the proposed regional values for FY 2010 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 proposed values are based on discharges 
occurring during FY 2008 (October 1, 2007 through September 30, 2008), 
and include bills posted to CMS' records through December 2008.
    We are proposing 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, 
2009, they must have a CMI value for FY 2008 that is at least--
     1.4667; 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 proposed median CMI values by region are set forth in the 
following table:

------------------------------------------------------------------------
                                                               Case-mix
                           Region                            index value
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)....................       1.2609
2. Middle Atlantic (PA, NJ, NY)............................       1.2993
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV).....       1.4159
4. East North Central (IL, IN, MI, OH, WI).................       1.4013
5. East South Central (AL, KY, MS, TN).....................       1.3377
6. West North Central (IA, KS, MN, MO, NE, ND, SD).........       1.4010
7. West South Central (AR, LA, OK, TX).....................       1.4667
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)...............       1.5233

[[Page 24186]]

 
9. Pacific (AK, CA, HI, OR, WA)............................       1.4390
------------------------------------------------------------------------

    The preceding numbers will be revised in the FY 2010 IPPS final 
rule to the extent required to reflect the updated FY 2008 MedPAR file, 
which will contain data from additional bills received through March 
2009.
    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 
intermediary or MAC. 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 MS-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. We are proposing to update the 
regional standards based on discharges for urban hospitals' cost 
reporting periods that began during FY 2007 (that is, October 1, 2006 
through September 30, 2007), which were the latest cost report data 
available at the time this proposed rule was developed.
    Therefore, we are proposing 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, 2009, must have 
as the number of discharges for its cost reporting period that began 
during FY 2007 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, as indicated in the 
following table.

------------------------------------------------------------------------
                                                              Number of
                           Region                             discharges
------------------------------------------------------------------------
1. New England (CT, ME, MA, NH, RI, VT)....................        8,329
2. Middle Atlantic (PA, NJ, NY)............................       10,655
3. South Atlantic (DE, DC, FL, GA, MD, NC, SC, VA, WV).....       10,038
4. East North Central (IL, IN, MI, OH, WI).................        9,262
5. East South Central (AL, KY, MS, TN).....................        6,311
6. West North Central (IA, KS, MN, MO, NE, ND, SD).........        8,764
7. West South Central (AR, LA, OK, TX).....................        6,222
8. Mountain (AZ, CO, ID, MT, NV, NM, UT, WY)...............       10,452
9. Pacific (AK, CA, HI, OR, WA)............................        8,763
------------------------------------------------------------------------

    These numbers will be revised in the FY 2010 IPPS final rule based 
on the latest available cost report data.
    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, 
2009, the hospital would be required to have at least 3,000 discharges 
for its cost reporting period that began during FY 2007.

D. 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 education (IME) 
adjustment, are located at Sec.  412.105.
    Public Law 105-33 (BBA 1987) 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 2010
    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 2010, the formula 
multiplier is 1.35. We estimate that application of this formula 
multiplier for the FY 2010 IME adjustment will result in an increase in 
IPPS payment of 5.5 percent for every approximately 10-percent increase 
in the hospital's resident-to-bed ratio.
3. IME-Related Proposed Changes in Other Sections of This Proposed Rule
    We refer readers to section V.E.2. and 4. of the preamble of this 
proposed rule for a discussion of proposed changes to the policies for 
counting beds and patient days in relation to the calculations for the 
IME adjustment at Sec.  412.105(b) and the DSH payment adjustment at 
Sec.  412.106(a)(1)(ii). The regulations relating to the DSH payment 
adjustment at Sec.  412.106(a)(1)(i) cross-reference the IME regulation 
at Sec.  412.105(b), which specifies how the number of beds in a 
hospital is determined for purposes of calculating a teaching 
hospital's IME adjustment. Specifically, we are proposing to change

[[Page 24187]]

our policies with respect to counting bed days for patients receiving 
observation services.
    We also refer readers to section V.G.2. of the preamble of this 
proposed rule for a discussion of our proposed clarification of the 
definition of a new medical residency training program for purposes of 
Medicare direct GME payment. This proposed clarification would also 
apply for purposes of IME payment and could affect IME FTE resident cap 
adjustments for new medical residency training programs.

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

1. Background
    Section 1886(d)(5)(F) of the Act provides for additional Medicare 
payments to subsection (d) hospitals that serve a significant 
disproportionate number of low-income patients. The Act specifies two 
methods by which a hospital may qualify for the Medicare 
disproportionate share hospital (DSH) adjustment. Under the first 
method, hospitals that are located in an urban area and have 100 or 
more beds may receive a Medicare DSH payment adjustment if the hospital 
can demonstrate that, during its cost reporting period, more than 30 
percent of its net inpatient care revenues are derived from State and 
local government payments for care furnished to needy patients with low 
incomes. This method is commonly referred to as the ``Pickle method.'' 
The second method for qualifying for the DSH adjustment, which is the 
most common, is based on a complex statutory formula under which the 
DSH payment adjustment is based on the hospital's geographic 
designation, the number of beds in the hospital, and the level of the 
hospital's disproportionate patient percentage (DPP). A hospital's DPP 
is the sum of two fractions: the ``Medicare fraction'' and the 
``Medicaid fraction.'' The Medicare fraction is computed by dividing 
the number of the hospital's inpatient days that are furnished to 
patients who were entitled to both Medicare Part A (including patients 
who are enrolled in a Medicare Advantage (Part C) plan) and 
Supplemental Security Income (SSI) benefits by the hospital's total 
number of patient days furnished to patients entitled to benefits under 
Medicare Part A (including patients who are enrolled in a Medicare 
Advantage (Part C) plan). The Medicaid fraction is computed by dividing 
the hospital's number of inpatient days furnished to patients who, for 
such days, were eligible for Medicaid, but were not entitled to 
benefits under Medicare Part A, by the hospital's total number of 
inpatient days in the same period.
    Because the DSH payment adjustment is part of the IPPS, the DSH 
statutory references (under section 1886(d)(5)(F) of the Act) to 
``days'' apply only to inpatient days. Regulations located at 42 CFR 
412.106 govern the Medicare DSH payment adjustment and specify how the 
DPP is calculated as well as how beds and patient days are counted in 
determining the Medicare DSH payment adjustment. Under Sec.  
412.106(a)(1)(i), the number of beds for the Medicare DSH payment 
adjustment is determined in accordance with bed counting rules for the 
IME adjustment under Sec.  412.105(b).
    In section V.E.4. of this preamble, we are combining our discussion 
of proposed changes to the policies for counting beds in relation to 
the calculations for the IME adjustment at Sec.  412.105(b) and the DSH 
payment adjustment at Sec.  412.106(a)(1)(ii) because the underlying 
concepts are similar and we believe they should generally be 
interpreted in a consistent manner for both purposes. Specifically, we 
are proposing to change our policies with respect to counting patient 
days and bed days for patients receiving observation services.
2. Proposed Policy Change Relating to the Inclusion of Labor and 
Delivery Patient Days in the Medicare DSH Calculation
a. Background
    As discussed in the FY 2004 IPPS final rule (68 FR 45419 through 
45420), prior to December 1991, Medicare's policy on counting days for 
purposes of allocating costs on the cost report and for purposes of the 
DSH payment adjustment for maternity patients was to count an inpatient 
day for an admitted maternity patient in a labor and delivery room at 
the census-taking hour. This pre-December 1991 policy is consistent 
with current Medicare policy for counting days for admitted patients in 
any other ancillary department at the census-taking hour. However, 
based on decisions in a number of Federal Courts of Appeal, including 
the United States Court of Appeals for the District of Columbia 
Circuit, relating to Medicare's policy for allocating costs, the policy 
regarding the counting of inpatient days for maternity patients was 
revised to reflect our current policy for purposes of both cost 
allocation and the DSH calculation.
    Under the existing regulations at Sec.  412.106(a)(1)(ii)(B), 
patient days associated with beds used for ancillary labor and delivery 
are excluded from the Medicare DSH calculation. This policy, in part, 
is based on cost allocation rules (that is, rules for counting days for 
admitted patients in ancillary and routine cost centers for purposes of 
allocating costs on the Medicare cost report). In particular, section 
2205.2 of the Provider Reimbursement Manual (PRM) provides the 
following: ``a maternity patient in the labor/delivery room ancillary 
area at midnight is included in the census of the inpatient routine 
(general or intensive) care area only if the patient has occupied an 
inpatient routine bed at some time since admission. No days of 
inpatient routine care are counted for a maternity inpatient who is 
discharged (or dies) without ever occupying an inpatient routine bed. 
However, once a maternity patient has occupied an inpatient routine 
bed, at each subsequent census the patient is included in the census of 
the inpatient routine care area to which assigned even if the patient 
is located in an ancillary area (labor/delivery room or another 
ancillary area) at midnight. In some cases, a maternity patient may 
occupy an inpatient bed only on the day of discharge, where the day of 
discharge differs from the day of admission. For purposes of 
apportioning the cost of inpatient routine care, this single day of 
routine care is counted as the day of admission (to routine care) and 
discharge and, therefore, is counted as one day of inpatient routine 
care.''
    In applying the rules discussed above, if, for example, a Medicaid 
patient is in the labor room at the census-taking hour and has not yet 
occupied a routine inpatient bed, the day would not be counted as an 
inpatient day in the numerator or the denominator of the Medicaid 
fraction of the Medicare DPP. If, instead, the same patient were in the 
labor room at the census-taking hour, but had first occupied a routine 
inpatient bed, the day would be counted as an inpatient patient day in 
both the numerator and the denominator of the Medicaid fraction of the 
Medicare DPP for purposes of the DSH payment adjustment (and for 
apportioning the cost of routine care on the Medicare cost report).
    We further clarified this policy in the FY 2004 IPPS final rule (68 
FR 45419 through 45420), given that hospitals had increasingly begun 
redesigning their maternity areas from separate labor and delivery 
rooms and postpartum rooms to single multipurpose labor, delivery, and 
postpartum (LDP) rooms. In order to appropriately track the days and 
costs associated with LDP rooms under our existing Medicare DSH policy, 
we stated

[[Page 24188]]

that it was necessary to apportion them between the labor and delivery 
cost center, which is an ancillary cost center, and the routine adults 
and pediatrics cost center (68 FR 45420). This is done by determining 
the proportion of a patient's stay in the LDP room that is associated 
with the patient receiving ancillary services (labor and delivery), as 
opposed to routine adult and pediatric services (postpartum).
    Therefore, under the current policy, days associated with labor and 
delivery services furnished to patients who did not occupy a routine 
bed prior to occupying an ancillary labor and delivery bed before the 
census-taking hour are not included as inpatient days for purposes of 
the DSH calculation. This policy is applicable whether the hospital 
maintains separate labor and delivery rooms and postpartum rooms, or 
whether it maintains ``maternity suites'' in which labor, delivery, and 
postpartum services all occur in the same bed. However, in the latter 
case, patient days are counted proportionally based on the proportion 
of (routine/ancillary) services furnished. (We refer readers to the 
example provided in the FY 2004 IPPS final rule (68 FR 45420) that 
describes how routine and ancillary days are allocated under this 
policy.)
b. Proposed Policy Change
    Upon further examination of our existing policy on counting patient 
days, we no longer believe that it is appropriate to apply the cost 
allocation rules for purposes of counting labor and delivery patient 
days in the Medicare DSH calculation. That is, we believe that even if 
a particular labor and delivery patient day is not included in the 
inpatient routine care census-taking for purposes of apportioning 
routine costs, it may still reasonably be considered to be an inpatient 
day for purposes of determining the DPP, provided that the unit or ward 
in which the labor and delivery bed is located is generally providing 
services that are payable under the IPPS. In general, we believe that 
labor and delivery patient days (regardless of whether they are 
associated with patients who occupied a routine bed prior to occupying 
an ancillary labor and delivery bed) are generally payable under the 
IPPS. Therefore, we believe that such patient days should be included 
in the DPP as inpatient days once the patient has been admitted to the 
hospital an as inpatient. Accordingly, for cost reporting periods 
beginning on or after October 1, 2009, we are proposing to change our 
existing policy regarding patient days to include, in the DPP 
calculation, patient days associated with maternity patients who were 
admitted as inpatients and were receiving ancillary labor and delivery 
services at the time the inpatient routine census is taken, regardless 
of whether the patient occupied a routine bed prior to occupying a bed 
in a distinct ancillary labor and delivery room and regardless of 
whether the patient occupied a routine bed prior to occupying an 
ancillary labor and delivery bed and regardless of whether the patient 
occupies a ``maternity suite'' in which labor, delivery, recovery, and 
postpartum care all take place in the same room. This proposed policy 
would be consistent with our existing policy under section 2205 of the 
PRM regarding counting patient days associated with other ancillary 
areas (such as surgery and postanesthesia).
    We note that we are not proposing to change our policy on patient 
days for labor and delivery patients who are not admitted to the 
hospital as inpatients. For example, if a woman presents at a hospital 
for labor and delivery services, but is determined by medical staff to 
be in false labor and is sent home without ever being admitted to the 
hospital as an inpatient, any days associated with such services 
furnished by the hospital would not be included in the DPP for purposes 
of the Medicare DSH calculation. That is, because the patient would be 
considered an outpatient, the day (or days) associated with the 
hospital visit would not be counted for purposes of the Medicare DSH 
calculation because such days would not be considered inpatient days. 
In addition, this proposed policy does not affect existing policies 
relating to the allocation of costs for Medicare cost reporting 
purposes or for determining the number of available beds under Sec.  
412.105(b)(4) or Sec.  412.106(a)(1)(i). In other words, our hospital 
instructions in the PRM for those purposes remain unchanged and 
unaffected by this proposed policy.
3. Proposed Policy Change Relating to Calculation of Inpatient Days in 
the Medicaid Fraction in the Medicare DSH Calculation
a. Background
    As stated under section V.E.1. of this preamble, a hospital can 
qualify for the Medicare DSH payment adjustment based on its Medicare 
DPP, which is equal to the sum of the percentage of total Medicare 
inpatient days attributable to patients entitled to both Medicare Part 
A (including patients enrolled in Medicare Advantage (Part C)) and SSI 
and the percentage of total inpatient days attributable to patients 
eligible for Medicaid, but not entitled for Medicare Part A.
[GRAPHIC] [TIFF OMITTED] TP22MY09.013

    Our existing policy of aggregating days for the Medicare fraction 
of the DSH calculation is to count days by the date of discharge. This 
policy, which is specified in the regulations at Sec.  
412.106(b)(2)(i)(A), applies to how days are counted in both the 
numerator and denominator of the Medicare fraction.
    Under the existing Medicare DSH payment adjustment policy, a 
hospital is required to report its Medicaid inpatient days (that is, 
the ``numerator'' of the Medicaid fraction) in the cost reporting 
period in which the patient was discharged. However, despite our 
existing policy to count the days in the numerator of the Medicaid 
fraction based on the date of discharge, we believe that there may have 
been confusion about the existing policy that may have led hospitals to 
vary in the methodology they use to aggregate days in the numerator of 
the Medicaid fraction for patients who were eligible for Medicaid. In 
many cases, we have found that hospitals are reporting these days to 
their fiscal intermediary or MAC based on the method by which their 
respective State Medicaid agencies have chosen to collect and report 
Medicaid-eligible days to the hospital. We understand that State 
Medicaid agencies differ in how they collect and report Medicaid-
eligible days. As a result, hospitals may be counting Medicaid-eligible 
days in the numerator of the Medicaid fraction of the DPP based on one 
of several possible methodologies, rather than consistently counting 
days based on the date of discharge, as required under the existing 
policy. The various methodologies being used by State Medicaid agencies 
include date of discharge, date of admission, date of

[[Page 24189]]

Medicaid payment, and dates of service. With the exception of the 
methodology that accumulates days in the numerator of the Medicaid 
fraction by the date of Medicaid payment, we believe that any of these 
methodologies could appropriately capture all inpatient days in which 
an individual was Medicaid-eligible for a hospital for the purpose of 
counting days in the numerator of the Medicaid fraction used in the 
DPP. We do not believe that the date of Medicaid payment is appropriate 
because our policy is to include inpatient days for which the patient 
was eligible for Medicaid, regardless of whether Medicaid paid for the 
days. Therefore, we believe that the date of Medicaid payment 
methodology may not capture all of the days that a hospital would be 
allowed to include in the numerator of its Medicaid fraction. With 
respect to the other possible alternatives to counting days in the 
numerator of the Medicaid fraction, we believe that it becomes 
problematic when hospitals change the methodology they use to count 
days in the numerator of the Medicaid fraction from one cost reporting 
period to the next. Such changes in the methodology of counting days 
may result in ``double counting'' of the same patient days in more than 
one cost reporting period for a hospital.
b. Proposed Policy Change
    To address the issue of hospitals reporting days in the numerator 
for the Medicaid fraction of the DPP in the Medicare DSH calculation 
based on data they receive from their respective State Medicaid agency 
and the fact that the State Medicaid agency may report such days based 
on one of several different methodologies, we are proposing to revise 
our existing policy by adding a new paragraph (iv) to Sec.  
412.106(b)(4) to allow hospitals to report days in the numerator of the 
Medicaid fraction of the DPP based on one of three methodologies. 
Specifically, we are proposing that, effective for cost reporting 
periods beginning on or after October 1, 2009, a hospital may report 
Medicaid-eligible days in the numerator of the Medicaid fraction of the 
DPP of a cost reporting period based on date of admission, date of 
discharge, or dates of service. However, under the proposed revised 
policy, a hospital would be required to notify CMS (through the fiscal 
intermediary or MAC) in writing if the hospital chooses to change its 
methodology of counting days in the numerator of the Medicaid fraction 
of the DPP. The written notification would have to be submitted at 
least 30 days prior to the beginning of the cost reporting period to 
which the requested change would apply. The written notification must 
specify the changed methodology the hospital wishes to use and the cost 
reporting period to which the requested change would apply. A hospital 
would only be able to make such a change effective on the first day of 
the beginning of a cost reporting period and the change would have to 
be effective for the entire cost reporting period; that is, a hospital 
would not be permitted to change its methodology in the middle of a 
cost reporting period. This change would also be effective for all 
subsequent cost reporting periods unless the hospital submits a 
subsequent notification to change its methodology for a future cost 
reporting period. We note that we would expect that a hospital would 
rarely decide to change the methodology it uses to count days in the 
numerator of the Medicaid fraction of the DPP and that such a change 
would be prompted out of necessity (for example, the State Medicaid 
agency changes the methodology it uses to provide patient Medicaid 
eligibility information to hospitals). In addition, we are proposing 
that if a hospital changes its methodology for counting days in the 
numerator of the Medicaid fraction, CMS, or the fiscal intermediary or 
MAC, would have the authority to adjust the inpatient days reported by 
the hospital in a cost reporting period to prevent ``double counting'' 
of days in the numerator of the Medicaid fraction of the DPP of the 
Medicare DSH calculation reported in another cost reporting period.
4. Proposed Policy Change Relating to the Exclusion of Observation Beds 
and Patient Days From the Medicare DSH Calculation
a. Background
    Observation services are defined in the Medicare Benefit Policy 
Manual (Publication No. 100-02, Chapter 6, section 20.6A) as a ``well-
defined set of specific, clinically appropriate services, which include 
ongoing short-term treatment, assessment, and reassessment before a 
decision can be made regarding whether patients will require further 
treatment.'' Observation services are furnished by a hospital and 
include the use of a bed and periodic monitoring by a hospital's 
nursing or other staff in order to evaluate an outpatient's condition 
and/or to determine the need for a possible admission to the hospital 
as an inpatient. As discussed in section 20.6A of the Medicare Benefit 
Policy Manual, when a physician orders that a patient be placed under 
observation care but has not formally admitted him or her as an 
inpatient, the patient initially is treated as an outpatient. 
Consequently, the costs incurred for patients receiving observation 
services are not generally recognized under the IPPS as part of the 
inpatient operating costs of the hospital. In some circumstances, 
observation services, although furnished to outpatients, are paid as 
part of an MS-DRG under the IPPS. In particular, section 1886(d) of the 
Act sets forth the payment system, based on prospectively determined 
rates, for the operating costs of inpatient hospital services, which 
are defined under section 1886(a)(4) of the Act to include ``the costs 
of all services for which payment may be made under this title that are 
provided by the hospital (or by an entity wholly owned or operated by 
the hospital) to the patient during the 3 days immediately preceding 
the date of the patient's admission if such services are diagnostic 
services (including clinical diagnostic laboratory tests) or are other 
services related to the admission (as defined by the Secretary).'' As 
further explained in section 40.3 of Chapter 3 of the Medicare Claims 
Processing Manual (Publication 100-04), if a hospital outpatient 
receives diagnostic preadmission services that are related to a 
patient's hospital admission such that there is an exact match between 
the principal diagnosis for both the hospital outpatient claim and the 
inpatient stay, there is no payment for the diagnostic preadmission 
services under the hospital OPPS. Rather, these preadmission outpatient 
services are rolled into the particular MS-DRG and paid under the IPPS.
    Our policy prior to October 1, 2003, as discussed in the FY 2004 
IPPS final rule (68 FR 45418), had been to exclude all observation days 
from the available bed and the patient day counts. CMS clarified that 
if a hospital provides observation services in beds that are generally 
used to provide hospital inpatient services, the days that those beds 
are used for observation services are to be excluded from the bed day 
count (even if the patient is ultimately admitted as an acute 
inpatient).
    In the FY 2004 IPPS proposed rule (68 FR 27205 through 27206), we 
also proposed to amend our policy with respect to observation days for 
patients who are ultimately admitted for inpatient acute care. 
Specifically, we are proposing that if a patient is admitted as an 
acute inpatient subsequent to receiving outpatient observation 
services, the days associated with the observation services would be 
included in the available bed and patient day counts. We did not 
finalize this policy

[[Page 24190]]

until the FY 2005 IPPS final rule (69 FR 49096 through 49098) when we 
revised our regulations at Sec.  412.105(b)(4) and Sec.  
412.106(a)(1)(ii) to specify that observation days are to be excluded 
from the counts of both available beds and patient days, unless a 
patient who receives outpatient observation services is ultimately 
admitted for acute inpatient care, in which case the bed days and 
patient days would be included in those counts. In implementing this 
policy, we revised Worksheet S-3, Part I of the Medicare hospital cost 
report by subscripting columns 5 and 6 to create columns 5.01 and 5.02, 
and 6.01 and 6.02, to allow for separate reporting of observation days 
for patients who are subsequently admitted as inpatients and a separate 
line for observation days for patients not admitted. This policy change 
applied to all cost reporting periods beginning on or after October 1, 
2004.
b. Proposed Policy Change
    As we previously indicated, a patient who is receiving observation 
services is a hospital outpatient, and the costs associated with those 
services are paid under the OPPS in most circumstances. If, however, a 
patient receives observation services from a hospital within 3 days of 
an inpatient admission and the outpatient observation care that he or 
she receives is related to the admission such that there is an exact 
match between the principal diagnosis for both the hospital outpatient 
claim and the inpatient stay, a payment is not made to the hospital 
under the OPPS, as explained in section 40.3-C of Chapter 3 of the 
Medicare Claims Processing Manual. According to section 40.3-C of the 
Medicare Claims Processing Manual, these preadmission outpatient 
diagnostic and nondiagnostic services are ``deemed to be inpatient 
services, and included in the inpatient payment, unless there is no 
Part A coverage.'' By this we mean that such preadmission services are 
considered operating costs of hospital inpatient services for payment 
purposes only, as described in section 1886(a)(4) of the Act. That is 
to say that payment for these preadmission services, including 
observation services furnished to hospital outpatients who are later 
admitted as inpatients, is included within the per case inpatient 
payment if the services meet the statutory criteria described in 
section 1886(a)(4) of the Act, but they are still services furnished to 
patients who are outpatients of the hospital at the time those services 
are furnished. We note that although these preadmission services may be 
considered operating costs for hospital inpatient services for payment 
purposes, such services are not furnished to an inpatient because these 
services are furnished prior to the patient being formally admitted 
and, therefore, the associated day is not considered to be an inpatient 
day. Thus, even if payment for these preadmission services is included 
in the inpatient payment, the admission date for the inpatient stay 
begins when the patient is formally admitted. Because observation 
services are services furnished to outpatients of the hospital, we are 
proposing that the patient days during which observation services are 
furnished are not included in the DSH calculation, regardless of 
whether the patients under observation are later admitted. We believe 
that patient days during which observation services are furnished, like 
the days during which all other preadmission diagnostic and 
nondiagnostic services are furnished, are not inpatient days and, 
therefore, we are proposing to exclude such patient days from the DPP 
of the Medicare DSH calculation.
    In accordance with section 1812(a) of the Act, for a patient day to 
be considered part of a beneficiary's spell of illness, the patient 
must have had ``inpatient hospital services furnished to him during 
such spell.'' In addition, section 1861(a) of the Act defines a ``spell 
of illness'' as beginning on the first day on which such ``individual 
is furnished inpatient hospital services.'' Section 1861(b) of the Act 
defines ``inpatient hospital services'' as ``services furnished to an 
inpatient of the hospital.'' Thus, with respect to a spell of illness, 
even if observation services are eventually bundled into the inpatient 
payment, the patient is not admitted as an inpatient while he or she 
remains under observation and the days under observation are not 
considered to be inpatient days that count toward a beneficiary's spell 
of illness. In addition, with respect to the 3-day inpatient stay 
requirement for patients to secure Medicare coverage of SNF benefits, 
section 20.1 of Chapter 8 of the Medicare Benefit Policy Manual 
(Publication No. 100-02) states: ``Time spent in observation status or 
in the emergency room prior to (or in lieu of) an inpatient admission 
to the hospital does not count toward the 3-day qualifying inpatient 
hospital stay, as a person who appears at a hospital's emergency room 
seeking examination or treatment or is placed on observation has not 
been admitted to the hospital as an inpatient; instead, the person 
receives outpatient services. For purposes of the SNF benefit's 
qualifying hospital stay requirement, inpatient status commences with 
the calendar day of hospital admission.'' Other Medicare policies do 
not consider observation days to be inpatient days because observation 
services are outpatient services furnished to outpatients of the 
hospital. While other Medicare policies do not necessarily dictate how 
we treat patient days for DSH payment purposes, we believe it is 
important that patient days be treated consistently among the various 
Medicare policies. We believe that because observation days are not 
considered inpatient days for a beneficiary's spell of illness or for 
qualifying for SNF benefits, this policy provides additional support 
for our proposal to no longer include any observation day as an 
inpatient day in the calculation of the DPP of the Medicare DSH 
calculation, nor should the associated observation bed days be included 
in determining the number of available inpatient beds used for purposes 
of determining a hospital's IME and DSH payment adjustments.
    As we indicated above, the DSH regulations at Sec.  412.106 explain 
how the DPP is calculated. Specifically, the DPP is based on the 
hospital's patient days where patient days apply only to inpatient 
days. Because a patient under observation in the hospital is considered 
to be an outpatient of the hospital and receives services prior to 
being admitted as an inpatient, we believe that observation days, even 
for a patient who is subsequently admitted, should not be considered 
inpatient days. Accordingly, we are proposing to revise the regulations 
at Sec.  412.106(a)(1)(ii) to exclude patient days associated with beds 
used for outpatient observation services, even if the patient is later 
admitted as an inpatient. We are proposing to exclude all observation 
patient days from the DPP of the Medicare DSH calculation. This 
proposal would be effective for cost reporting periods beginning on or 
after October 1, 2009.
    For the same reasons, we also are proposing to eliminate from bed 
counting observation bed days for patients who are subsequently 
admitted as inpatients for purposes of both the DSH payment adjustment 
and the IME payment adjustment. The rules for counting hospital beds 
for the purposes of the IME adjustment are codified in the IME 
regulations at Sec.  412.105(b), which is cross-referenced in Sec.  
412.106(a)(1)(i) for purposes of the DSH payment adjustment. We believe 
it is important to apply a consistent definition for counting bed days 
for both the IME and DSH payment adjustments. Therefore, we are 
proposing to revise Sec.  412.105(b)(4) to state that observation

[[Page 24191]]

days are excluded from the counts of available beds, regardless of 
whether or not the patient under observation is ultimately admitted for 
acute inpatient care.
    As we stated earlier, when we implemented the policy to include 
observation days for admitted patients for DSH payment adjustment 
purposes for FY 2005, we revised the Medicare hospital cost report to 
include columns for hospitals to report their observation days for 
patients admitted as inpatients and observation days for patients not 
admitted. Under the proposal in this proposed rule, hospitals would no 
longer be required to distinguish on the cost report between 
observation bed days and patient days for patients who are ultimately 
admitted and observation bed days and patient days for patients who are 
not admitted because none of these bed days and patient days would be 
included in the DSH payment adjustment. We are proposing that, 
effective for cost reporting periods beginning on or after October 1, 
2009, hospitals would be required to report their total observation bed 
days so that the total observation days can be deducted from the bed 
day count for IME and DSH payment adjustment purposes.
    In summary, we are proposing to exclude observation patient days 
for admitted patients from the patient day count in Sec.  
412.106(a)(1)(ii) (for DSH) and the bed day count at Sec.  412.105(b) 
(for IME), as a cross-reference at Sec.  412.106(a)(1)(i) (for DSH), 
because observation services are defined as outpatient services 
furnished to outpatients of the hospital, regardless of whether or not 
the patient under observation is subsequently admitted.

F. Technical Correction to Regulations on Payments for Anesthesia 
Services Furnished by Hospital or CAH Employed Nonphysician 
Anesthetists or Obtained Under Arrangements (Sec.  412.113)

    Section 412.113(c) of the regulations contain our rules governing 
payments for anesthesia services furnished by a hospital or CAH by 
qualified nonphysician anesthetists employed by the hospital or CAH or 
obtained under arrangements. We have discovered that, under paragraph 
(c)(2)(i)(B) of Sec.  412.113, there is an incorrect cross-reference to 
``Sec.  410.66'' for the definition of a qualified nonphysician 
anesthetist. The correct cross-reference for the definition of a 
qualified nonphysician anesthetist is ``Sec.  410.69''. We are 
proposing to correct the cross-reference in Sec.  412.113(c)(2)(i)(B) 
to refer to ``Sec.  410.69''.

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

1. Background
    Under section 1886(a)(4) of the Act, costs of approved educational 
activities are excluded from the operating costs of hospital inpatient 
services. 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 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 a limit on the number 
of allopathic and osteopathic FTE residents that a hospital may include 
in its FTE resident count for purposes of calculating direct GME 
payments. For most hospitals, the limit, or cap, is the unweighted 
number of allopathic and osteopathic FTE residents training in the 
hospital's most recent cost reporting period ending on or before 
December 31, 1996.
2. Clarification of Definition of New Medical Residency Training 
Program
    For purposes of determining direct GME and IME payments, the 
Medicare statute establishes a cap on the number of allopathic and 
osteopathic FTE residents a hospital may count, which, for most 
hospitals, is based on the number of allopathic and osteopathic FTE 
residents the hospital was training in its most recent cost reporting 
period ending on or before December 31, 1996. Section 1886(h)(4)(H)(i) 
of the Act requires the Secretary to prescribe rules for the 
application of the FTE resident cap in the case of medical residency 
programs that are established on or after January 1, 1995. This 
statutory provision is also made applicable for purposes of the IME 
adjustment under the IPPS through section 1886(d)(5)(B)(viii) of the 
Act. The provision specifies that such rules must be consistent with 
the principles of the statutory provisions regarding the establishment 
of the FTE resident caps and regarding application of a 3-year rolling 
average count of FTE residents. The statute also requires the Secretary 
to give special consideration in such rules to facilities that meet the 
needs of underserved rural areas. In accordance with the statute, we 
issued regulations to permit adjustments to the FTE resident caps, 
under certain circumstances, for hospitals that establish new medical 
residency training programs on or after January 1, 1995. Section 
413.79(e)(1) of the regulations state that if a hospital had no 
allopathic or osteopathic residents in the base year, the hospital may 
receive an adjustment to its FTE resident cap (which would be zero) if 
it establishes one or more new medical residency training programs, but 
only for new programs established within 3 academic years after 
residents begin training in the first program. (Rural hospitals may 
receive FTE cap adjustments for newly established programs at any time 
under the regulations at Sec.  413.79(e)(1)(iii). Under Sec.  
413.79(e)(2), hospitals that had allopathic or osteopathic residents in 
the base year were only permitted to receive an adjustment for new 
programs established on or after January 1, 1995, and before August 5, 
1997. Section 413.79(l) defines a new medical residency training 
program as ``a medical residency that receives initial accreditation by 
the appropriate accrediting body or begins training residents on or 
after January 1, 1995.'' These regulations concerning cap adjustments 
for newly established medical residency training programs also apply 
for IME purposes as stated at Sec.  412.105(f)(1)(vii).
    It has come to our attention that there has been some 
misinterpretation or misunderstanding of these regulations among some 
hospitals and Medicare contractors despite previous discussions of the 
topic in the Federal Register. Specifically, some hospitals or 
contractors took the regulations to mean that, as long as the relevant 
accrediting body (either the Accreditation Council on Graduate Medical 
Education (ACGME) for allopathic programs or the American Osteopathic 
Association (AOA) for osteopathic programs) grants an ``initial'' 
accreditation or reaccredits a program as ``new,'' the hospital may 
receive an FTE cap adjustment for that program, regardless of whether 
that program may have been accredited

[[Page 24192]]

previously at another hospital. In other words, some hospitals and 
contractors appear to have read our regulations to mean that the 
Secretary would defer, in all circumstances, to the relevant 
accrediting body's identification of a particular accreditation as a 
``new'' or ``initial'' accreditation of a medical residency training 
program.
    In the FY 1998 IPPS final rule that established Sec.  413.79(l) of 
the regulations, we discussed both the meaning of this regulation and 
the rationale for establishing it:
    ``For purposes of this provision, a `program' will be considered 
newly established if it is accredited for the first time, including 
provisional accreditation on or after January 1, 1995, by the 
accrediting body. Although the Secretary of the Department of Health 
and Human Services has broad authority to prescribe rules for counting 
residents in new programs, the Conference Report for Public Law 105-33 
[House Conference Report No. 105-217, pp. 821-822] indicates concern 
that the aggregate number of FTE residents should not increase over 
current levels.'' (62 FR 46006)
    Similarly, in the FY 2000 IPPS final rule (64 FR 41519), we 
responded to a public comment suggesting that CMS include within the 
definition of ``new residency program'' a residency program that may 
have been in existence at other clinical sites in the past. We replied 
that ``the language `begins training residents on or after January 1, 
1995' [in the regulation at Sec.  413.79(l)] means that the program may 
have been accredited by the appropriate accrediting body prior to 
January 1, 1995, but did not begin training in the program until on or 
after January 1, 1995. The language does not mean that it is the first 
time a particular hospital began training residents in a program on or 
after January 1, 1995, but that program was in existence at another 
hospital prior to January 1, 1995, as the commenter suggests.'' 
(Emphasis added.)
    Accordingly, as we have suggested in discussions in our previous 
rules, rather than relying solely on the accrediting body's 
characterization of whether a program is new, we continue to believe it 
is appropriate that CMS require a hospital to evaluate whether a 
particular program is a newly established one for Medicare GME purposes 
by considering whether a program was initially accredited ``for the 
first time,'' and is not a program that existed previously at another 
hospital. In evaluating whether a program is truly new, as opposed to 
an existing program that is relocated to a new site, it is important to 
consider not only the characterization by the accrediting body, but 
also supporting factors such as (but not limited to) whether there are 
new program directors and/or new teaching staff, and/or whether there 
are only new residents training in the program(s) at the different 
site. In determining whether a particular program is a newly 
established one, it may also be necessary to consider factors such as 
the relationship between hospitals (for example, common ownership or a 
shared medical school or teaching relationship) and the degree to which 
the hospital with the original program continues to operate its own 
program in the same specialty. (Although this discussion of new 
programs is framed in the context of a hospital operating a program, we 
note that many programs are operated or sponsored by schools of 
medicine or other nonhospital entities. This section is intended to 
address all GME programs that were previously accredited at one 
operating entity, and that entity ceases to operate the program, but 
the program is then opened and operated at another entity and is 
accredited as a new program at the second entity. Such a program would 
not be treated as new at the second entity.) In any case, we believe it 
is appropriate to be deliberate in the determinations regarding FTE 
resident cap adjustments relating to residents in new programs. The 
statute clearly requires that our rules regarding adjustments to 
hospitals' FTE resident caps for newly established programs must adhere 
to the principles of the statutory provision limiting the count of FTE 
residents for direct GME and IME payments to the count for the most 
recent cost reporting period ending on or before December 31, 1996. In 
addition, as we indicated in our final rule establishing FTE cap 
adjustments for ``new programs,'' the Conference Report for the BBA 
explicitly indicates that the aggregate number of FTE residents should 
be held to the ``current'' levels at the time the BBA was enacted 
(House Conference Report No. 105-217, pp. 821-822).
    If we were to find that a program at one hospital is a newly 
established program after it was relocated from another hospital, the 
result would be that an FTE resident cap adjustment would be granted 
based on the same program at two different hospitals. Furthermore, as 
long as both hospitals continue to operate, the FTE resident cap slots 
that were vacated from the program at the first hospital could 
potentially be filled with residents from that hospital's other 
residency training programs. We do not believe such an increase in the 
aggregate number of FTE residents and the potential duplication of the 
FTE resident cap adjustment would be consistent with the statutory 
mandate to adhere to the principles of the base-year FTE resident caps 
when devising rules to account for newly established medical residency 
training programs. Therefore, we are proposing to clarify our policy 
that a new medical residency program is one that receives initial 
accreditation for the first time, as opposed to reaccreditation of a 
program that existed previously at the same or another hospital. 
Furthermore, we believe it is appropriate and necessary that CMS expect 
a hospital that wishes to claim an adjustment to its direct GME and IME 
FTE caps due to a new medical residency program to first evaluate 
whether the program is ``new'' for Medicare purposes, rather than to 
rely exclusively on the characterization of a particular program by the 
relevant accrediting body.
3. Participation of New Teaching Hospitals in Medicare GME Affiliation 
Groups
    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. Accordingly, effective October 1, 
1997, we established hospital-specific direct GME and IME FTE resident 
caps. Furthermore, under the authority granted by 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 elect to 
apply their direct GME and IME FTE resident caps on an aggregate basis. 
Accordingly, as specified in the regulations at Sec. Sec.  413.79(f) 
and 412.105(f)(1)(vi), hospitals that are part of the same Medicare GME 
affiliated group are permitted to apply their direct GME and IME FTE 
resident caps on an aggregate basis, and to temporarily adjust each 
hospital's caps to reflect the rotation of residents among affiliated 
hospitals during an academic year. Under Sec.  413.75(b), a Medicare 
GME affiliated group can be formed by two or more hospitals if they are 
under common ownership, or if they are jointly listed as program 
sponsors or major participating institutions in the same program. 
Furthermore, the existing regulations at Sec.  413.79(f)(1) specify 
that each hospital in a Medicare GME affiliated group must submit a 
Medicare GME affiliation agreement (as defined under Sec.  413.75(b)) 
to the CMS fiscal

[[Page 24193]]

intermediary or MAC servicing the hospital and send a copy to CMS' 
Central Office no later than July 1 of the residency program year 
during which the Medicare GME affiliation agreement will be in effect. 
For example, in order for a hospital to receive a temporary adjustment 
to its FTE resident caps to reflect participation in a Medicare GME 
affiliated group for the academic year beginning July 1, 2009, through 
June 30, 2010, each hospital in the affiliated group is required to 
submit a Medicare GME affiliation agreement to the fiscal intermediary 
or MAC servicing the hospital and to CMS' Central Office no later than 
July 1, 2009.
    It has recently come to CMS' attention that flexibility in the 
submission deadline for Medicare GME affiliation agreements due to an 
unanticipated need is warranted in situations where a hospital opens 
after July 1 and begins training residents for the first time, after 
July 1 of an academic year. That is, the new hospital, since it did not 
train residents in the FTE cap base year, would have FTE resident caps 
of zero. Currently, if a new hospital begins training residents from 
another hospital's existing program, the new hospital would not be able 
to receive a temporary FTE resident cap adjustment through 
participation in a Medicare GME affiliated group because the existing 
regulations do not provide flexibility for a hospital that begins 
training residents after the start of an academic year to enter into 
and submit a Medicare GME affiliation agreement after the July 1 
submission deadline. That is, a new hospital that opens after July 1 
would not be able to enter into a Medicare GME affiliation agreement 
because the hospital did not exist before the submission deadline. We 
understand that the new hospital is likely to incur GME costs during 
the first year of training residents, and we believe it is reasonable 
to permit the new hospital that receives a new Medicare provider 
agreement and begins training residents for the first time after July 1 
of an academic year to receive an adjustment to its FTE resident caps 
for IME and direct GME payments through participation in a Medicare GME 
affiliated group during its first year of training residents, even if 
the hospital completes and submits the Medicare GME affiliation 
agreement to CMS after July 1 of the academic year. Accordingly, we are 
proposing to amend Sec.  413.79(f) by revising paragraph (f)(1) and 
adding a new paragraph (f)(6) (the existing paragraph (f)(6) would be 
redesignated as paragraph (f)(7)). The proposed new paragraph (f)(6) 
would provide that a hospital that is new after July 1 and that begins 
training residents for the first time prior to the following July 1 
would be permitted to receive a temporary adjustment to its FTE 
resident caps to reflect its participation in an existing Medicare GME 
affiliated group if the new hospital submits a Medicare GME affiliation 
agreement prior to the end of the first cost reporting period during 
which the hospital begins training residents. For this purpose, a new 
hospital is one for which a new Medicare provider agreement takes 
effect in accordance with Sec.  489.13. We are proposing to require 
that the Medicare GME affiliation agreement specify the effective 
period for the agreement, which in any case would begin no earlier than 
the date the affiliation agreement is submitted to CMS. Furthermore, we 
are proposing that each of the other hospitals participating in the 
Medicare GME affiliated group with the new hospital would be required 
to submit an amended Medicare GME affiliation agreement that reflects 
the participation of the new hospital to the CMS contractor servicing 
the hospital and send a copy to the CMS Central Office no later than 
June 30 of the residency program year during which the Medicare GME 
affiliation agreement will be in effect.
4. Technical Corrections to Regulations
    We have discovered that in the existing Sec.  413.79(k), under the 
provision on residents training in rural track programs, paragraph 
(k)(7) incorrectly appears as regulation text after paragraph (l) of 
Sec.  413.79. To correct this error, we are proposing to move paragraph 
(l) so that it appears as the last paragraph of the section after 
paragraph (k)(7).
    In addition, the regulations at Sec.  413.75(b), paragraph (1), 
define an ``approved medical residency program'' as a program that is 
``approved by one of the national organizations listed in Sec.  
415.152''. Under Sec.  415.152, in the definition of an ``approved 
graduate medical education (GME) program'', we reference a residency 
program approved by the ``Committee on Hospitals of the Bureau of 
Professional Education of the American Osteopathic Association'' (AOA). 
It has come to our attention that the structure of the AOA has changed 
and that we should merely refer to a residency program approved by the 
AOA. Therefore, we are proposing to make a technical change to 
paragraph (1) of the definition of an ``approved graduate medical 
education (GME) program'' under Sec.  415.152, to remove the phrase 
``the Committee on Hospitals of the Bureau of Professional Education 
of''.

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

1. Background
    Sections 1866(a)(1)(I), 1866(a)(1)(N), and 1867 of the Act impose 
specific obligations on certain Medicare-participating hospitals and 
CAHs. (Throughout this section of this proposed rule, when we reference 
the obligation of a ``hospital'' under these sections of the Act and in 
our regulations, we mean to include CAHs as well.) These obligations 
concern an individual who comes to a hospital emergency department and 
requests examination or treatment for a medical condition, and apply to 
all 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. Section 9121 of the Consolidated 
Omnibus Budget Reconciliation Act of 1985 (COBRA), Public Law 99-272, 
incorporated the responsibilities of Medicare hospitals in emergency 
cases into the Social Security Act. Congress incorporated these 
antidumping provisions within the Act as a part of the hospital's 
provider agreement to ensure that any individual with an emergency 
medical condition is not denied essential lifesaving services. Under 
section 1866(a)(1)(I)(i) of the Act, 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 to the hospital 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 with an 
appropriate transfer to another medical facility.
    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

[[Page 24194]]

EMTALA are found at Appendix V of the CMS State Operations Manual.
2. Proposed Changes Relating to Applicability of Sanctions Under EMTALA
    Section 1135 of the Act authorizes the Secretary to temporarily 
waive or modify the application of several requirements of titles 
XVIII, XIX, or XXI of the Act (the Medicare, Medicaid, and State 
Children's Health Insurance Program provisions), and their implementing 
regulations in an emergency area during an emergency period. Section 
1135(g)(1) of the Act defines an ``emergency area'' as the geographical 
area in which there exists an emergency or disaster declared by the 
President pursuant to the National Emergencies Act or the Robert T. 
Stafford Disaster Relief and Emergency Assistance Act (subsection A) 
and a public health emergency declared by the Secretary pursuant to 
section 247d of Title 42 of the United States Code. Section 1135(g)(1) 
of the Act also defines an ``emergency period'' as the period during 
which such a disaster or emergency exists. Section 1135(b) of the Act 
lists the categories of otherwise applicable statutory and regulatory 
requirements that may be waived or modified. Included among these are 
the waiver of sanctions under EMTALA for, in subparagraph (b)(3)(A), a 
transfer of an individual who has not been stabilized (if the transfer 
arises out of the circumstances of the emergency) in violation of the 
EMTALA requirements governing transfer of an individual whose emergency 
medical condition has not been stabilized (section 1867(c) of the Act) 
and, in subparagraph (b)(3)(B), the direction or relocation of an 
individual to receive medical screening in an alternate location, 
pursuant to an appropriate State emergency preparedness plan. Section 
1135(b) of the Act further states that, except for certain emergencies 
involving pandemic infectious disease (described in further detail 
below), a waiver or modification provided for under section 1135(b)(3) 
of the Act shall be limited to a 72-hour period beginning upon 
implementation of a hospital disaster protocol.
    Section 302(b) of the Pandemic and All-Hazards Preparedness Act, 
Public Law 109-417, made two specific changes that affect EMTALA 
implementation in instances where the Secretary has invoked the section 
1135 waiver authority in an emergency area during an emergency period. 
Section 302(b)(1)(A) of Public Law 109-417 amended section 
1135(b)(3)(B) of the Act to state that sanctions for the direction or 
relocation of an individual for screening may be waived where, in the 
case of a public health emergency that involves a pandemic infectious 
disease, that direction or relocation occurs pursuant to a State 
pandemic preparedness plan, or to an appropriate State emergency 
preparedness plan. In addition, sections 302(b)(1)(B) and (b)(1)(C) of 
Public Law 109-417 amended section 1135(b) of the Act to further state 
that ``if a public health emergency involves a pandemic infectious 
disease (such as pandemic influenza), the duration of a waiver or 
modification for such emergency shall be determined in accordance with 
section 1135(e) of the Act as such subsection applies to public health 
emergencies.''
    In the FY 2008 IPPS final rule with comment period (72 FR 47413), 
we amended the regulations at Sec.  489.24(a)(2) (which refers to the 
nonapplicability of certain EMTALA provisions in an emergency area 
during an emergency period) to incorporate the changes made to section 
1135 of the Act by the Pandemic and All-Hazards Preparedness Act. We 
amended the regulations to specify that, under a section 1135 waiver, 
the sanctions that do not apply are either those for the inappropriate 
transfer of an individual who has not been stabilized or those for the 
direction or relocation of an individual to receive medical screening 
at an alternate location. We also added a second sentence to paragraph 
(a)(2) to state that a waiver of these sanctions for EMTALA violations 
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 duration of the waiver will be determined in accordance with 
section 1135(e) of the Act as it applies to public health emergencies. 
In the FY 2009 IPPS final rule (73 FR 28667), we made a technical 
change to the regulations at Sec.  489.24(a)(2) by adding section 1135 
language we had inadvertently left out when we made changes to the 
regulations at Sec.  489.24(a)(2) in the FY 2008 IPPS final rule with 
comment period. Specifically, we added the phrases ``pursuant to an 
appropriate State emergency preparedness plan or, in the case of a 
public health emergency that includes a pandemic infectious disease, 
pursuant to a State pandemic preparedness plan'' and ``during an 
emergency period,'' to make the regulatory language consistent with the 
statutory text. Existing Sec.  489.24(a)(2) states that ``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.''
    After further review of the revised regulatory language as compared 
to the statutory language at section 1135 of the Act, we believe that 
further revisions to the language of Sec.  489.24(a)(2) are necessary 
to make the language conform more closely to the language of section 
1135 of the Act and better reflect how the section 1135 authority has 
been used in practice. Specifically, we believe that the regulatory 
language should be revised to be more consistent with the language in 
the statute to state that EMTALA sanctions for an inappropriate 
transfer may be waived only if the inappropriate transfer arises out of 
the circumstances of the emergency. We are further proposing to amend 
the regulations to provide that the sanctions waived for both an 
inappropriate transfer and the redirection or relocation of an 
individual to receive a medical screening examination at an alternate 
location are only applicable if the hospital does not discriminate on 
the basis of an individual's source of payment or ability to pay. These 
additional requirements (which are underlined) are currently not 
included in the regulations text at Sec.  489.24(a)(2). To ensure that 
the language of the regulations is fully consistent with the statutory 
language at section 1135 of the Act, we believe the regulations need to 
be clarified to include these provisions.
    In addition, we believe the existing regulations do not adequately 
reflect the Secretary's authority under section 1135 of the Act to 
waive or modify requirements for a single health care provider, a class 
of health care providers, or a geographic subset of health care 
providers located within an

[[Page 24195]]

emergency area during an emergency period. The language at section 
1135(b) of the Act states:
    ``To the extent necessary to accomplish the purpose specified in 
subsection (a), the Secretary is authorized, subject to the provisions 
of this section, to temporarily waive or modify the application of, 
with respect to health care items and services furnished by a health 
care provider (or classes of health care providers) in any emergency 
area (or portion of such an area) during any portion of an emergency 
period, the requirements of titles XVIII, XIX, or XXI, or any 
regulation thereunder (and the requirements of this title other than 
this section, and regulations thereunder, insofar as they relate to 
such titles), pertaining to--'' (emphases added).
    Thus, it is clear from the emphasized text that waivers under the 
section 1135 authority may be tailored and applied to one or more 
hospitals in the emergency area (or portion thereof) during some or all 
of the emergency period, as necessary. However, the existing 
regulations may inadvertently imply, contrary to the flexibility 
clearly contemplated in the statute, that all hospitals in all portions 
of an emergency area during an entire emergency period automatically 
receive a waiver of EMTALA sanctions. We are proposing revisions to the 
regulation text to clarify this issue.
    We also are proposing to revise the regulations to further clarify 
that the Secretary has the authority to implement a section 1135 waiver 
as necessary to ensure that the purpose of section 1135(a) of the Act 
can be achieved. That is, the Secretary is authorized to apply a 
section 1135 waiver, for example, to one or more hospitals in the 
emergency area (or portion thereof) during some or all of the emergency 
period, as necessary. The Secretary may delegate implementation of a 
waiver of EMTALA sanctions to CMS (as the Secretary has done in every 
instance in which the section 1135 waiver authority has been invoked 
thus far.)
    In summary, we are proposing to revise the regulations at Sec.  
489.24(a)(2) to state that a waiver of EMTALA sanctions pursuant to an 
inappropriate transfer only applies if the transfer arises out of the 
circumstances of the emergency. We also are proposing to revise the 
regulations to provide that the sanctions waived for an inappropriate 
transfer or for the relocation or redirection of an individual to 
receive a medical screening examination at an alternate location are 
only in effect if the hospital to which the waiver applies does not 
discriminate on the source of an individual's payment or ability to 
pay. In addition, we are proposing to revise the regulations to state 
that the Secretary has the authority to apply the waiver of EMTALA 
sanctions to one or more hospitals in a portion of an emergency area or 
a portion of an emergency period. The proposed revised Sec.  
489.24(a)(2) reads as follows:
    ``When a waiver has been issued in accordance with section 1135 of 
the Act that includes a waiver under section 1135(b)(3) of the Act, 
sanctions under this section for an inappropriate transfer or for the 
direction or relocation of an individual to receive medical screening 
at an alternate location do not apply to a hospital with a dedicated 
emergency department if the following conditions are met:
    (i) If relating to an inappropriate transfer, the transfer arises 
out of the circumstances of the emergency.
    (ii) If relating to the direction or relocation of an individual to 
receive medical screening at an alternate location, the direction or 
relocation is 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.
    (iii) The hospital does not discriminate on the basis of an 
individual's source of payment or ability to pay.
    (iv) The hospital is located in an emergency area during an 
emergency period, as those terms are defined in section 1135(g)(1) of 
the Act.
    (v) There is a determination that a waiver of sanctions is 
necessary.
    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 under section 1135(e)(1)(B) 
of the Act.''

I. 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). Thirteen 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 became CAHs and withdrew 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. 
The February 6, 2008 notice specified the eligibility requirements for 
the demonstration program. Four additional hospitals were selected to 
participate under this solicitation. These four additional hospitals 
began under the demonstration payment methodology with the hospital's 
first cost reporting period starting on or after July 1, 2008. The end 
date of participation for these hospitals is September 30, 2010.
    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

[[Page 24196]]

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 hospitals do not 
exceed the amount that would be paid to those same hospitals 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 hospitals.
    In this proposed rule, we are proposing two measures to achieve 
budget neutrality for the demonstration program for FY 2010, which, 
when combined, would lead to an adjustment in the national inpatient 
PPS rates. We are proposing to adjust the national inpatient PPS rates 
by an amount sufficient to account for the added costs of this 
demonstration program. We are proposing to apply 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, FY 2008, and FY 2009 IPPS final rules (69 FR 
49183; 70 FR 47462; 71 FR 48100; 72 FR 47392; and 73 FR 48670), we 
believe that the language of the statutory budget neutrality 
requirements permits the agency to implement the budget neutrality 
provision in this manner.
    First, we are estimating the cost of the demonstration program for 
FY 2010 for the 13 currently participating hospitals. The estimate of 
the portion of the budget neutrality adjustment that accounts for the 
costs of the demonstration for FY 2010 for 9 of the 13 currently 
participating hospitals (that is, the 9 hospitals that have 
participated in the demonstration since its inception and that continue 
to participate in the demonstration) is based on data from their first 
and second year cost reports--that is, cost reporting periods beginning 
in CY 2005 and CY 2006. We are proposing to use these cost reports 
because they are the most recent complete cost reports and, thus, we 
believe they enable us to estimate FY 2010 costs as accurately as 
possible. In addition, we estimate the cost of the demonstration for FY 
2010 for the 4 hospitals that joined the demonstration in 2008 based on 
data for their cost reporting periods beginning October 1, 2005, 
through July 1, 2006 (that is, cost reporting periods that include CY 
2006). Cost reports for these periods were included along with the 
hospitals' applications for the demonstration program. When we add 
together the estimated costs of the demonstration for FY 2010 for the 9 
hospitals that have participated in the demonstration since its 
inception and the 4 new hospitals selected in 2008, the total estimated 
cost is $14,613,632. This estimated amount reflects the difference 
between the participating hospitals' estimated costs under the 
methodology set forth in Public Law 108-173 and the estimated amount 
the hospitals would have been paid under the IPPS.
    Second, because the cost reports of all hospitals participating in 
the demonstration in its first year (that is FY 2005) have been 
finalized, we are able to determine how much the cost of the 
demonstration program exceeded the amount that was offset by the budget 
neutrality adjustment for FY 2005. For all 13 hospitals that 
participated in the demonstration in FY 2005, the amount is $7,179,461.
    The total proposed budget neutrality offset amount to be applied 
for the demonstration for FY 2010 is the sum of these two amounts, or 
$21,793,093. We discuss the payment rate adjustment that is required to 
ensure the budget neutrality of the demonstration program for FY 2010 
in section II.A.4. of the Addendum to this proposed rule. We are 
proposing that the budget neutrality offset amount may be different in 
the FY 2010 IPPS final rule to the extent we have more recent data.

J. Technical Correction to Regulations Relating to Calculation of the 
Federal Rate Under the IPPS

    Section 412.63 of the regulations specifies the procedures for 
determining the standardized amounts for inpatient operating costs for 
Federal fiscal years 1984 through 2004. These standardized amounts 
included a ``large urban area'' standardized amount for large urban 
hospitals and an ``other area'' standardized amount for hospitals 
located in other areas. In the FY 1989 IPPS final rule, we established 
Sec.  412.63(c)(5). Consistent with section 1886(d)(3)(C)(ii) of the 
Act, Sec.  412.63(c)(5) states that, for FYs 1987 through 2004, CMS 
calculated the average standardized amounts by excluding an estimate 
for IME payments. Accordingly, beginning in FY 1989, we updated the 
standardized amounts using an IME adjustment factor that excludes an 
estimate of IME payments. For a complete discussion on this adjustment 
factor for IME, we refer readers to the FY 1989 IPPS final rule (53 FR 
38538 through 38539).
    Section 1886(d)(3)(A)(iv) of the Act, as amended by section 401(a) 
of Public Law 108-173, requires that, beginning with FY 2004 and 
thereafter, we compute the standardized amount for all hospitals in any 
area equal to the standardized amount for the previous fiscal year for 
large urban hospitals, updated by the applicable percentage update 
under section 1886(b)(3)(B)(i) of the Act. In other words, beginning in 
FY 2004, we no longer computed a ``large urban area'' standardized 
amount and a

[[Page 24197]]

separate ``other area'' standardized amount. As a result of this 
statutory change, we established new regulations at Sec.  412.64 to 
specify the computation of the single standardized amount for FY 2005 
and subsequent fiscal years (69 FR 49077). With the exception of 
removing a separate standardized amount for non-large urban hospitals, 
the regulation text at Sec.  412.64 virtually mirrors the regulation 
text at Sec.  412.63. For FY 2005 and subsequent fiscal years, we 
excluded an estimate for IME payments from the calculation of the 
standardized amount in accordance with section 1886(d)(3)(A)(iv) of the 
Act. However, we inadvertently omitted from Sec.  412.64 the language 
under paragraph (c)(5) of Sec.  412.63 that implements the exclusion of 
an estimate for IME payments from the calculation of the standardized 
amount in accordance with section 1886(d)(3)(A)(iv) of the Act. 
Therefore, we are proposing to revise Sec.  412.64(c) to include this 
language so that Sec.  412.64(c) reflects the statutory requirement 
under section 1886(d)(3)(A)(iv) of the Act that calculation of the 
standardized amount excludes IME payments.

VI. Proposed Changes to the IPPS for Capital-Related Costs

A. Overview

    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). (We refer readers to the FY 2002 IPPS final 
rule (66 FR 39910 through 39914) for additional information on the 
methodology used to determine capital IPPS payments to hospitals both 
during and after the transition period.) 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, currently 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).
    As discussed in the FY 2008 IPPS final rule with comment period (72 
FR 47393 through 47401), based on our analysis of data on hospital 
inpatient Medicare capital margins that we obtained through our 
monitoring and comprehensive review of the adequacy of IPPS payments 
for capital-related costs, we made changes in the payment structure 
under the capital IPPS beginning with FY 2008. (We also provided an 
extended capital IPPS margin analysis discussion in the FY 2009 IPPS 
final rule (73 FR 48671 through 48675).) Specifically, in the FY 2008 
IPPS final rule with comment period, we made two changes to the 
structure of payments under the capital IPPS: (1) We discontinued the 
3.0 percent additional payment that had been provided to hospitals 
located in large urban areas at Sec.  412.316(b) for FYs 2008 and 
beyond, (72 FR 47400 and 47412); and (2) we established a phase-out of 
the capital teaching adjustment (that is, the capital IME adjustment 
factor) at Sec.  412.322 over a 3-year period beginning in FY 2008 (72 
FR 47401 and 47412).
    Under the established 3-year phase-out of the capital teaching 
adjustment, we maintained the adjustment for FY 2008 in order to give 
teaching hospitals an opportunity to plan and make adjustments in 
correlation to the change. For the second year of the transition (FY 
2009), we revised the regulations at Sec.  412.322 by adding paragraph 
(c), which currently specifies that, for discharges occurring during FY 
2009, the formula for determining the amount of the capital IPPS 
teaching adjustment is half of the amount provided under the previous 
formula (at Sec.  412.322(b)). Furthermore, for the last year of the 
transition (FY 2010) and subsequent years, we added paragraph (d) to 
Sec.  412.322, which specifies that, for discharges occurring during FY 
2010 and after, hospitals will no longer receive an adjustment for 
teaching activity under the capital IPPS.
    Section 4301(b)(1) of the American Recovery and Reinvestment Act of 
2009 (ARRA), Public Law 111-5, enacted on February 17, 2009, directed 
the Secretary to not apply the 50-percent reduction in the capital IPPS 
teaching adjustment for FY 2009, thereby restoring the full capital IME 
adjustment for FY 2009. However, section 4301(b)(2) of Public Law 111-5 
specifies that the law will not affect the phase-out of the capital 
IPPS teaching adjustment for FY 2010 and subsequent fiscal years. The 
provisions of Public Law 111-5 related to the capital IPPS teaching 
adjustment are further discussed in section VI.E.2. of the preamble of 
this proposed rule.

B. 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

[[Page 24198]]

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 fiscal 
intermediary or MAC 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).)

C. 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 
example, the following hospitals are not considered new hospitals: (1) 
A hospital that builds new or replacement facilities at the same or 
another location, even if coincidental with a change of ownership, a 
change in management, or a lease arrangement; (2) a hospital that 
closes and subsequently reopens; (3) a hospital that has been in 
operation for more than 2 years but has participated in the Medicare 
program for less than 2 years; and (4) a hospital that changes its 
status from a hospital that is excluded from the IPPS to a hospital 
that is subject to the capital IPPS. 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 
full prospective payment based on 100 percent of the Federal rate. (We 
refer readers to the FY 2003 IPPS final rule (67 FR 50101 through 
50102) for a detailed discussion of the special payment provisions for 
new hospitals under the capital IPPS after the 10-year transition 
period.)

D. 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 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.

E. Proposed Changes

1. Proposed FY 2010 MS-DRG Documentation and Coding Adjustment
a. Background on the Prospective MS-DRG Documentation and Coding 
Adjustments for FY 2008 and FY 2009
    In the FY 2008 IPPS final rule with comment period (72 FR 47175 
through 47186), we adopted the MS-DRG patient classification system for 
the IPPS, effective October 1, 2007, to better recognize patients' 
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 (currently 746, including one additional MS-DRG created 
in FY 2009). By increasing the number of DRGs and more fully taking 
into account patients' severity of illness in Medicare payment rates, 
the MS-DRGs encourage hospitals to change their documentation and 
coding of patient diagnoses. In that same final rule with comment 
period (72 FR 47183), 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 changes in documentation and coding. 
Accordingly, we established adjustments to both the national operating 
standardized amount and the national capital Federal rate to eliminate 
the estimated effect of changes in documentation and coding resulting 
from the adoption of the MS-DRGs that do not reflect real changes in 
case-mix. Specifically, 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. However, to comply with section 
7(a) of Public Law 110-90, enacted on September 29, 2007, in a final 
rule published in the Federal Register on November 27, 2007 (72 FR 
66886 through 66888), we modified the documentation and coding 
adjustment for FY 2008 to -0.6 percent, and consequently revised the FY 
2008 IPPS operating and capital payment rates, factors, and thresholds 
accordingly, with these revisions effective October 1, 2007.
    For FY 2009, section 7(a) of Public Law 110-90 required 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 discussed in the FY 2008 IPPS final rule with 
comment period (72 FR 48447 and 48733 through 48774), we applied a 
documentation and coding adjustment of -0.9 percent to the FY 2009 IPPS 
national standardized amounts and the capital Federal rate. The 
documentation and coding adjustments established in the FY 2009 IPPS 
final rule, as amended by Pub. L. 110-90, are cumulative. As a result, 
the -0.9 percent documentation and coding adjustment in FY 2009 was in 
addition to the -0.6 percent adjustment in FY 2008, yielding a combined 
effect of -1.5 percent. (For additional details on the development and 
implementation of the documentation and coding adjustments for FY 2008 
and FY 2009, we refer readers to section II.D. of this preamble and the 
following rules published in the Federal Register August 22, 2007 (72 
FR 47175 through 47186 and 47431 through 47432); November 27, 2007 (72 
FR 66886 through 66888); and August 19, 2008 (73 FR 48447 through 48450 
and 48773 through 48775).)

[[Page 24199]]

b. Proposed Prospective MS-DRG Documentation and Coding Adjustment to 
the National Capital Federal Rate for FY 2010 and Subsequent Years
    Consistent with the prospective adjustment to the national average 
operating IPPS standardized amounts (discussed in section II.D. of this 
preamble), under the capital IPPS we also continue to believe that it 
is appropriate to make adjustments to the capital IPPS rates to 
eliminate the effect of any documentation and coding changes as a 
result of the implementation of the MS-DRGs. These adjustments are 
intended to ensure that future annual aggregate IPPS payments are the 
same as payments that otherwise would have been made had the 
prospective adjustments for documentation and coding applied in FY 2008 
and FY 2009 accurately reflected the change due to documentation and 
coding that occurred in those years. As noted above in section VI.A. of 
this preamble, under section 1886(g) of the Act, the Secretary has 
broad authority in establishing and implementing the IPPS for acute 
care hospital inpatient capital-related costs (that is, the capital 
IPPS). We have consistently stated since the initial implementation of 
the MS-DRG system that we do not believe it is appropriate for Medicare 
expenditures under the capital IPPS to increase due to MS-DRG related 
changes in documentation and coding. Accordingly, we believe that it is 
appropriate under the Secretary's broad authority under section 1886(g) 
of the Act, in conjunction with section 1886(d)(3)(A)(vi) of the Act 
and section 7(b) of Public Law 110-90, to make adjustments to the 
capital Federal rate to eliminate the full effect of the documentation 
and coding changes resulting from the adoption of the MS-DRGs. We 
believe that this is appropriate because, in absence of such 
adjustments, the effect of the documentation and coding changes 
resulting from the adoption of the MS-DRGs results in inappropriately 
high capital IPPS payments because that portion of the increase in 
aggregate payments is not due to an increase patient severity (and 
costs).
    We have performed a thorough retrospective evaluation of the most 
recent available claims data, and the results of this evaluation were 
used by our actuaries to determine any necessary payment adjustments 
beyond the cumulative -1.5 percent adjustment applied in determining 
the FY 2009 capital Federal rate to ensure budget neutrality for the 
implementation of MS-DRGs. Specifically, as discussed in greater detail 
in section II.D.4. of the preamble of this proposed rule, we performed 
a retrospective evaluation of the FY 2008 claims data updated through 
December 2008. Based on this evaluation, our actuaries have determined 
that the implementation of the MS-DRG system resulted in a 2.5 percent 
change in case-mix due to documentation and coding that did not reflect 
real changes in case-mix for discharges occurring during FY 2008. (As 
noted above, our analysis plan is described in greater detail in 
section II.D.4. of this preamble. As also noted in that section, the FY 
2008 MedPAR files are available to the public to allow independent 
analysis of the documentation and coding effect, and we are seeking 
public comment on our methodology and analysis.)
    The estimated 2.5 percent change in FY 2008 case-mix due to 
documentation and coding changes that did not reflect real changes in 
case-mix for discharges occurring during FY 2008 exceeds the -0.6 
percent prospective documentation and coding adjustment applied to the 
FY 2008 capital Federal rate (as established in the final rule 
published in the Federal Register on November 27, 2007 (72 FR 66886 
through 66888)) by 1.9 percentage points (2.5 percent minus 0.6 
percent). Therefore, in this proposed rule, under the Secretary's broad 
authority under section 1886(g) of the Act, in conjunction with section 
1886(d)(3)(A)(vi) of the Act and section 7(b) of Public Law 110-90, we 
are proposing to reduce the capital Federal rate in FY 2010 by -1.9 
percent to account for the amount by which the 2.5 percent change in FY 
2008 exceeds the established -0.6 percent adjustment. Furthermore, 
consistent with our proposal under the operating IPPS, we are proposing 
to leave that proposed -1.9 percent adjustment in place for subsequent 
fiscal years to account for the effect in FY 2010 and subsequent years 
of the amount by which the 2.5 percent change in FY 2008 exceeds the 
established -0.6 percent adjustment.
    We also examined the differences in case-mix between the FY 2008 
claims data in which cases were grouped through the FY 2008 GROUPER 
(Version 25.0) and the FY 2009 GROUPER (Version 26.0). As discussed in 
section II.D.5. of this preamble, this was to help inform our analysis 
of the potential for increase in the documentation and coding effect in 
FY 2009. In FY 2008, we were transitioning to the fully implemented MS-
DRG relative weights and the fully implemented cost-based weights. We 
found that the use of the transition weights mitigated the FY 2008 
documentation and coding effect on expenditures. Specifically, our 
analysis shows that, even assuming no additional changes in 
documentation and coding in FY 2009, the use of the FY 2009 MS-DRG 
relative weights (which no longer were based on a blend of the MS-DRGs 
and the CMS DRGs) results in an additional 0.7 percent documentation 
and coding effect in FY 2009. Based on these analyses and other 
factors, our actuaries continue to estimate that the cumulative overall 
effect of documentation and coding changes under the MS-DRG system will 
be 4.8 percent. Our actuaries also estimate that these changes will be 
substantially complete by the end of FY 2009. Therefore, our current 
estimate of the MS-DRG documentation and coding effect is 2.3 percent 
for discharges occurring during FY 2009. Consistent with the proposal 
for the national operating standardized amounts presented in section 
II.D.4. of this preamble, we will address any differences between the 
increase in FY 2009 case-mix due to documentation and coding that did 
not reflect real changes in case-mix for discharges occurring during FY 
2009 and the -0.9 percent prospective documentation and coding 
adjustment applied to the FY 2009 capital Federal rate (as established 
in the FY 2009 IPPS final rule (73 FR 48773 through 48774) in the FY 
2011 rulemkaing cycle after an evaluation of the extent of the overall 
national average changes in case-mix for FY 2009 based on a 
retrospective evaluation of all FY 2009 claims data.
    As we stated in section II.D. of this preamble, we are seeking 
public comment on the proposed -1.9 percent prospective adjustments to 
address the effect of documentation and coding changes unrelated to 
changes in real case-mix in FY 2008. In addition, as we discussed in 
section II.D. of the preamble of this proposed rule, we are seeking 
public comment on addressing in the FY 2011 rulemaking cycle any 
differences between the increase in FY 2009 case-mix due to 
documentation and coding changes that do not reflect real changes in 
case-mix for discharges occurring during FY 2009 and the -0.9 percent 
prospective documentation and coding adjustment applied in determining 
the FY 2009 capital Federal rate established in the FY 2009 IPPS final 
rule.
    In summary, in this proposed rule, we are proposing to adjust the 
FY 2010 capital Federal rate by a cumulative prospective reduction of 
3.4 percent to account for increased Medicare expenditures resulting 
from the changes

[[Page 24200]]

in documentation and coding practices with the adoption of the MS-DRGs. 
In addition, we are proposing to leave that adjustment in place for 
subsequent fiscal years to account for the effect in FY 2010 and 
subsequent years in order to ensure that changes in documentation and 
coding resulting from adoption of the MS-DRGs do not lead to an 
increase in aggregate payments not reflective of an increase in real 
case-mix. (In sections II.D.3. and 6. of this preamble, we discuss 
section 7(b)(1)(B) of Pub. L. 110-90 and the requirement to make an 
additional adjustment to the standardized amounts (referred to as 
recoupment or repayment adjustments in FYs 2010 through 2012 required 
by Pub. L. 110-90). We note that we are not proposing to apply section 
7(b)(1)(B) of Pub. L. 110-90 to the capital Federal rate.) The 
application of this proposed MS-DRG documentation and coding adjustment 
in the determination of the proposed FY 2010 capital Federal rate is 
shown in section III.A.5. of the Addendum of this proposed rule.
c. Proposed Documentation and Coding Adjustment to the Puerto Rico-
Specific Capital Rate
    Under Sec.  412.74, Puerto Rico hospitals are currently paid based 
on 75 percent of the national capital Federal rate and 25 percent of 
the Puerto Rico-specific capital rate. In the FY 2009 IPPS final rule 
(73 FR 48775), consistent with our development of the FY 2009 Puerto 
Rico-specific operating standardized amount, we did not apply the 
additional -0.9 percent documentation and coding adjustment (or the 
cumulative -1.5 percent adjustment) to the FY 2009 Puerto Rico-specific 
capital rate. However, we discussed that 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, and 
therefore 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. As we 
explained in that same final rule, to date we had not yet applied a 
documentation and coding adjustment to the Puerto Rico-specific capital 
rate because we have historically made changes to the capital IPPS 
consistent with those changes made to the operating IPPS. We also 
stated that we may propose to apply such an adjustment to the Puerto 
Rico capital rates in the future.
    As discussed in section II.D.10. of this preamble, when we 
performed a retrospective evaluation of the FY 2008 claims data of 
hospitals located in Puerto Rico using the same methodology discussed 
above, we found that the change in case-mix due to documentation and 
coding that did not reflect real changes in case-mix for discharges 
occurring during FY 2008 from hospitals located in Puerto Rico is 
approximately 1.1 percent. Given this case-mix increase due to changes 
in documentation and coding under the MS-DRGs, consistent with our 
proposal to adjust the FY 2010 capital Federal rate presented above and 
consistent with our proposed adjustment to the FY 2010 Puerto Rico-
specific standardized amount discussed in section II.D.10.of this 
preamble, in this proposed rule, under the Secretary's broad authority 
under section 1886(g) of the Act, we are proposing to adjust the Puerto 
Rico-specific capital rate by -1.1 percent in FY 2010 for the FY 2008 
increase in case-mix due to changes in documentation and coding under 
the MS-DRGs. In addition, consistent with our other proposals 
concerning prospective MS-DRG documentation and coding adjustments to 
the capital Federal rate and operating IPPS standardized amounts 
presented in this proposed rule, we are proposing to leave that 
proposed -1.1 percent adjustment in place for subsequent fiscal years 
in order to ensure that changes in documentation and coding resulting 
from the adoption of the MS-DRGs do not lead to an increase in 
aggregate payments not reflective of an increase in real case-mix. The 
proposed 1.1 percent adjustment would be applied to the capital Puerto 
Rico-specific rate that accounts for 25 percent of payments to 
hospitals located in Puerto Rico, with the remaining 75 percent based 
on the national capital Federal rate, which we are proposing to adjust 
as described above. Consequently, the proposed overall reduction to the 
FY 2010 payment rates for hospitals located in Puerto Rico to account 
for documentation and coding changes would be slightly less than the 
reduction for IPPS hospitals paid based on 100 percent of the national 
capital Federal rate. As noted above, the Puerto Rico-specific capital 
rate was not adjusted for the effects of documentation and coding 
changes in FY 2008 or FY 2009 as were the FY 2008 and FY 2009 national 
capital Federal rates.
    Similar to the analysis performed for all IPPS hospitals noted 
above, we also examined FY 2008 claims data from hospitals located in 
Puerto Rico to help inform analysis of the potential for increase in 
the documentation and coding effect in FY 2009. As discussed in greater 
detail in section II.D.10. of this preamble, based on this analysis, 
our actuaries estimate that the cumulative overall effect of 
documentation and coding changes under the MS-DRG system in FY 2009 for 
hospitals located in Puerto Rico will be 1.3 percent (1.1 percent plus 
an additional 0.2 percent). Consistent with the proposal for the 
operating Puerto Rico-specific standardized amounts presented in 
section II.D.10. of this preamble, we will address any increase in FY 
2009 case-mix due to documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FY 2009 in the FY 
2011 rulemaking cycle.
    As stated in section II.D.10. of this preamble, we are seeking 
public comment on the proposed -1.1 percent prospective adjustment to 
the Puerto Rico-specific IPPS rates in FY 2010 for the FY 2008 
documentation and coding effect, including the methodology for 
determining these adjustments. In addition, we are seeking public 
comment on addressing in the FY 2011 rulemaking cycle any increase in 
FY 2009 case-mix due to documentation and coding changes that did not 
reflect real changes in case-mix for discharges occurring during FY 
2009.
2. Revision to the FY 2009 IME Adjustment Factor
    As noted in section VI.A. of this preamble, section 4301(b)(1) of 
Public Law 111-5 requires that the phase-out of the capital IPPS 
teaching adjustment specified at Sec.  412.322(c) of the regulations 
(that is, the 50-percent reduction for FY 2009) shall not be applied, 
and the Secretary shall apply Sec.  412.322 without regard to paragraph 
(c) of that section. Furthermore, section 4301(b)(2) of the Pub. L. 
111-5 specifies that the law has no effect on Sec.  412.322(d), which 
eliminates the capital IPPS teaching adjustment for FY 2010 and 
thereafter. Therefore, in order to reflect the current statutory 
requirements as specified in section 4301(b)(1) of Public Law 111-5, in 
this proposed rule, we are proposing to delete Sec.  412.322(c) of the 
existing regulations. In the absence of existing Sec.  412.322(c), the 
capital IPPS teaching adjustment for FY 2009 will not be reduced by 50 
percent but will be as determined under Sec.  412.322(b) (that is, the 
full capital IME teaching adjustment). The elimination of the teaching 
adjustment for FY 2010, as currently specified at Sec.  412.322(d) of 
the regulations, will remain, consistent with section 4301(b)(2) of 
Public Law 111-5. We note that we have issued instructions (Change 
Request 6444

[[Page 24201]]

dated March 27, 2009) to fiscal intermediaries and MACs to implement 
the change to the capital teaching adjustment for FY 2009, as specified 
in section 4301(b)(1) of Public Law 111-5. As noted above, in this 
proposed rule, we are proposing to revise the existing regulations at 
Sec.  412.322 by deleting the language of paragraph (c) and labeling 
the paragraph ``Repealed.'' We are soliciting public comments on our 
proposed implementation of section 4301(b) of Public Law 111-5 
concerning capital IME payments.
3. Other Proposed Changes for FY 2010
    The proposed annual update to the capital IPPS national and Puerto 
Rico-specific rates, as provided for at Sec.  412.308(c), for FY 2010 
is discussed in section III. of the Addendum to this proposed rule.

VII. Proposed Changes for Hospitals Excluded From the IPPS

A. Excluded Hospitals

    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 to 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 this FY 2010 proposed rule, we are proposing 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 proposed 
FY 2010 IPPS operating market basket. In compliance with section 404 of 
the MMA, in this proposed rule, we are proposing to replace the FY 
2002-based IPPS operating and capital market baskets with the revised 
and rebased FY 2006-based IPPS operating and capital market baskets for 
FY 2010. Therefore, consistent with the current law, based on IHS 
Global Insight, Inc.'s 2009 first quarter forecast, with historical 
data through the 2008 fourth quarter, we are estimating that the FY 
2010 update to the IPPS operating market basket will be 2.1 percent 
(that is, the current estimate of the market basket rate-of-increase).
    Consistent with our historical approach, we calculate the proposed 
IPPS operating market basket for FY 2010 using the most recent data 
available. However, if more recent data become available for the final 
rule, we will use them to calculate the IPPS operating market basket 
for FY 2010. For cancer and children's hospitals and RNHCIs, the 
proposed FY 2010 rate-of-increase percentage that is applied to FY 2009 
target amounts in order to calculate the proposed FY 2010 target 
amounts is estimated to be 2.1 percent, in accordance with the 
applicable regulations in 42 CFR 413.40.
    We note that IRFs, IPFs, and LTCHs, which were paid previously 
under the reasonable cost methodology, now receive payment under their 
own prospective payment systems, in accordance with changes made to the 
statute. 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. (However, 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.
    The IRF PPS, the IPF PPS, and the LTCH PPS are updated annually. We 
refer readers to section IV. of the Addendum to this proposed rule for 
the proposed specific update changes to the Federal payment rates for 
LTCHs under the LTCH PPS for RY 2010. The annual updates for the IRF 
PPS and the IPF PPS are issued by the agency in separate Federal 
Register documents.

B. Criteria for Satellite Facilities of Hospitals

    The regulations at 42 CFR 412.22(e) specify the criteria that 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 (also known as a hospital-
within-hospital (HwH)) must meet in order to be excluded from the IPPS. 
Section 412.22(e)(1)(i) specifies that the HwH must have a governing 
body that is separate from the governing body of the hospital occupying 
space in the same building or on the same campus. The HwH's governing 
body must not be under the control of the hospital with which it shares 
space in a building or on a campus, nor can it be under the control of 
any third entity that controls both hospitals.
    It has come to our attention that there is an inadvertent 
inconsistency between the governance and control criteria at Sec.  
412.22(h)(2)(iii)(A) that satellite facilities must meet in order to be 
excluded from the IPPS and the separate governing body criteria at 
Sec.  412.22(e)(1)(i) that HwHs must meet in order to be excluded from 
the IPPS. Specifically, the separate governing body requirement for 
satellite facilities at Sec.  412.22(h)(2)(iii)(A) mistakenly omits 
language regarding a third entity. In particular, it fails to indicate 
that the governing body of the hospital of which the satellite facility 
is a part cannot be under the control of any third entity that controls 
both the hospital of which the satellite facility is a part and the 
hospital with which the satellite facility is co-located.
    As explained in past rulemaking, we believe satellite facilities 
are similar enough to HwHs to warrant application of more closely 
related criteria to both types of facilities (67 FR 49982 and 50105 
through 50106). Specifically, satellite facilities are like HwHs in 
that the satellite facilities are also physically located in acute care 
hospitals that are paid for inpatient services they furnish under the 
acute care IPPS. Moreover, both satellite facilities and HwHs provide 
hospital inpatient services that are generally paid for at higher rates 
than would apply if the facilities were treated by Medicare as part of 
the acute care hospitals. In view of these facts, we continue to 
believe that it is important to establish clear criteria for ensuring 
that a satellite facility is not merely a unit of the acute care 
hospital with which it is co-located, but rather is organizationally 
and functionally separate from the hospital. Therefore, we believe the 
separate governing body requirements for satellite facilities should 
include requirements that are similar to those we included at Sec.  
412.22(e)(1)(i) for HwHs; that is, that the governing body of the 
hospital of which the satellite facility is a part cannot be under the 
control of any third entity that controls both the hospital of

[[Page 24202]]

which the satellite facility is a part and the hospital with which the 
satellite facility is co-located. Accordingly, we are proposing to 
amend the criteria for satellite facilities at Sec.  
412.22(h)(2)(iii)(A) by adding language under paragraph (1) to state 
that, except as provided in proposed paragraph (h)(2)(iii)(A)(2), the 
governing body of the hospital of which the satellite facility is a 
part cannot be under the control of any third entity that controls both 
the hospital of which the satellite facility is a part and the hospital 
with which the satellite facility is co-located. We are proposing that 
the revised criteria would be effective with cost reporting periods 
beginning on or after October 1, 2009.
    In addition, we are proposing to add a ``grandfathering'' provision 
to the regulations at Sec.  412.22(h)(2)(iii)(A)(2). Currently, an 
IPPS-excluded hospital with a satellite facility that has its governing 
body under the control of a third entity that controls the hospital of 
which the satellite facility is a part and the hospital with which the 
satellite facility is co-located can retain its IPPS-excluded status. 
An IPPS-excluded hospital that currently has a satellite facility 
already has its organizational structure and financial systems in 
place. To require now that a hospital that currently has a satellite 
facility must meet the proposed new separate governance criteria with 
respect to that satellite facility could create undue financial and 
organizational difficulties. This could further result in the closure 
of the satellite facility and the discontinuation of services because 
of the inability of the hospital and its satellite facility to meet the 
proposed new separate governance criteria. Therefore, we are proposing 
that if a hospital and its satellite facility were excluded from the 
IPPS under the provision of Sec.  412.22(h) for the most recent cost 
reporting period beginning before October 1, 2009, the hospital would 
be required to meet the proposed new separate governance criteria at 
Sec.  412.22(h)(2)(iii)(A)(1) with respect to that satellite facility 
in order to retain its IPPS-excluded status (proposed Sec.  
412.22(h)(2)(iii)(A)(2)).
    However, because the proposed new separate governance criteria 
would be effective for cost reporting periods beginning on or after 
October 1, 2009, a hospital that establishes an additional satellite 
facility in a cost reporting period beginning on or after October 1, 
2009, will have knowledge of the requirements that must be met in order 
to retain its IPPS-excluded status prior to establishing the additional 
satellite facility, and it will be able to plan accordingly. 
Furthermore, no organizational or financial relationship would already 
be in place with respect to the additional satellite facility. Thus, 
there would not be a need for the hospital and its additional satellite 
facility to be grandfathered. This situation is distinguishable from a 
hospital with a satellite facility established in the most recent cost 
reporting period beginning prior to October 1, 2009, as discussed 
above.
    Therefore, we are proposing that if a hospital and its satellite 
facility were excluded from the IPPS under the provision of Sec.  
412.22(h) for the most recent cost reporting period prior to October 1, 
2009, and the hospital establishes an additional satellite facility in 
a cost reporting priod beginning on or after October 1, 2009, the 
hospital would not be required to meet the proposed new separate 
governance criteria at Sec.  412.22(h)(2)(iii)(A)(1), with respect to 
the additional satellite facility, in order to be excluded from the 
IPPS. (We note that the hospital and the new additional satellite 
facility also would be required to meet the other applicable 
requirements in Sec.  412.22(h), consistent with our longstanding 
policies.)
    We give the following example of how the proposed regulations at 
Sec.  412.22(h)(2)(iii)(A)(2) and (h)(2)(iii)(A)(3) would work. 
Hospital A established a satellite facility (s-B) at Hospital B in a 
cost reporting period beginning prior to October 1, 2009, under the 
applicable criteria for hospitals and satellite facilities at Sec.  
412.22(h), and therefore, the hospital and that satellite facility were 
excluded from the IPPS in the most recent cost reporting period 
beginning prior to October 1, 2009. If Hospital A establishes an 
additional satellite facility (s-C) at Hospital C in a cost reporting 
period beginning on or after October 1, 2009, Hospital A and its 
satellite facility at Hospital C must meet the applicable hospital and 
satellite facility criteria at Sec.  412.22(h), including the proposed 
new separate governance criteria at paragraph (h)(2)(iii)(A)(1), in 
order to be excluded from the IPPS. Thus, the governing body of 
Hospital A cannot be under the control of any third entity that 
controls both Hospital A and Hospital C. However, Hospital A and s-B 
must continue to meet the other applicable criteria in Sec.  412.22(h) 
to be excluded from the IPPS.

C. Critical Access Hospitals (CAHs)

1. Background
    Section 1820 of the Act provides for the establishment of Medicare 
Rural Hospital Flexibility Programs (MRHFPs) under which individual 
States may designate certain facilities as critical access hospitals 
(CAHs). Facilities that are so designated and meet the CAH conditions 
of participation under 42 CFR Part 485, Subpart F, will be certified as 
CAHs by CMS. Regulations governing payments to CAHs for services to 
Medicare beneficiaries are located in 42 CFR Part 413.
2. Payment for Clinical Diagnostic Laboratory Tests Furnished by CAHs
    Section 1834(g)(1) of the Act states that payment for outpatient 
services furnished by a CAH will be made at 101 percent of the 
reasonable costs to the CAH in providing those services, except for 
those CAHs that elect the optional reimbursement method outlined at 
section 1834(g)(2) of the Act. We refer to payment under the elective 
methodology described in section 1834(g)(2) of the Act as the 
``optional method.'' (We discuss proposed changes to the CAH optional 
method of payment regulations below in section VII.C.3. of this 
preamble.) Section 1834(g)(4) of the Act provides that there is no 
beneficiary cost-sharing for ``clinical diagnostic laboratory services 
furnished as an outpatient critical access hospital service.''
    Section 148 of Public Law 110-275 (MIPPA) amended section 
1834(g)(4) of the Act, effective for services furnished on or after 
July 1, 2009. Specifically, section 148(a)(1) of Public Law 110-275 
changed the heading of section 1834(g)(4) of the Act to read 
``Treatment of Clinical Diagnostic Laboratory Services.'' Section 
148(a)(2) of Public Law 110-275 amended section 1834(g)(4) of the Act 
by adding, in relevant part, that ``* * * clinical diagnostic 
laboratory services furnished by a critical access hospital shall be 
treated as being furnished as part of outpatient critical access 
services without regard to whether the individual with respect to whom 
such services are furnished is physically present in the critical 
access hospital, or in a skilled nursing facility or a clinic 
(including a rural health clinic) that is operated by a critical access 
hospital, at the time the specimen is collected.''
    Regulations implementing section 1834(g) of the Act are set forth 
at Sec.  413.70. Currently, the regulations at Sec.  413.70(b)(2)(iii) 
state that payment to a CAH for clinical diagnostic laboratory services 
is made at 101 percent of reasonable cost ``only if the individuals 
[for whom the tests are performed] are outpatients of the CAH, as 
defined in Sec.  410.2 * * * and are physically present in the CAH, at 
the time the specimens are collected.'' Clinical diagnostic

[[Page 24203]]

laboratory tests performed for individuals who are not physically 
present in the CAH when the specimen is collected are paid on the basis 
of the Clinical Laboratory Fee Schedule (CLFS) in accordance with the 
provisions of sections 1833(a)(1)(D) and 1833(a)(2)(D) of the Act.
    In this proposed rule, we are proposing to amend the regulations at 
Sec.  413.70(b) in order to implement the changes made by section 
148(a)(2) of Public Law 110-275. Section 148(a)(2) of Public Law 110-
275 mandates that, effective for services furnished on or after July 1, 
2009, individuals are no longer required to be physically present in 
the CAH at the time the specimen is collected in order for the CAH to 
receive payment based on reasonable cost for furnishing outpatient 
clinical diagnostic laboratory tests. Specifically, we believe the use 
of the phrase ``without regard to whether the individual with respect 
to whom such services are furnished is physically present in the 
critical access hospital'' means that as long as the tests are 
performed for individuals who are CAH outpatients as defined in Sec.  
410.2, payment based on reasonable cost must be made regardless of 
where the specimen is collected, even if the patient is not physically 
present in the CAH at the time the specimen is collected. Accordingly, 
we are proposing to implement section 148(a)(2) by revising the 
existing regulations to reflect our interpretation of the statutory 
change.
    We are proposing to amend the regulations at Sec.  413.70(b) by 
deleting existing Sec.  413.70(b)(2)(iii) and adding a new Sec.  
413.70(b)(7) to state that in order for a CAH to be paid for outpatient 
clinical diagnostic laboratory tests, a CAH outpatient is no longer 
required to be physically present in the CAH at the time the specimen 
is collected. However, if the individual is not physically present in 
the CAH at the time the specimen is collected, the individual must 
continue to be an outpatient of the CAH, as defined at Sec.  410.2. We 
consider an individual to be an outpatient of the CAH if the individual 
is receiving services directly from the CAH. This requirement is 
consistent with our definition of a CAH outpatient at Sec.  410.2, 
which states that outpatient ``means a person who has not been admitted 
as an inpatient but who is registered on the hospital or CAH records as 
an outpatient and receives services (rather than supplies alone) 
directly from the hospital or CAH.'' Consistent with section 1834(g)(4) 
of the Act, we are proposing, to amend the regulations to provide that, 
in order to be receiving services directly from the CAH, either the 
individual must be receiving outpatient services in the CAH on the same 
day the specimen is collected, or the specimen must be collected by an 
employee of the CAH. Accordingly, where the individual is an outpatient 
of the CAH as defined above, the individual would not be required to be 
physically present in the CAH at the time the specimen is collected.
    In addition, we do not believe that the enactment of section 148 of 
Public Law 110-275 has any effect on the applicability of the 
requirements at section 1862(a)(18) of the Act and the implementing 
regulations at Sec.  411.15(p), which set forth requirements for 
payment of services furnished to SNF patients. Accordingly, we are 
proposing that, in cases where Medicare rules otherwise require 
consolidated billing or bundling of payments (for example, for services 
furnished to SNF patients during a Medicare Part A covered stay), the 
CAH laboratory payment provision would only provide for separate 
payment to the CAH once consolidated billing no longer applies. Where 
consolidated billing is required by Medicare rules, a separate payment 
for bundled services furnished by another provider, including a CAH, is 
prohibited. For example, for purposes of payment to a CAH for 
performing a clinical laboratory test on a specimen collected from a 
SNF patient, the proposed new CAH payment rules would apply only once 
the consolidated billing rules for SNF payments no longer apply. 
Coverage under Medicare Part A for services furnished to a SNF patient 
is limited to 100 days in a benefit period. During that period, the 
collection of a specimen by a CAH employee in the SNF and the CAH's 
performance of a laboratory test on the specimen would be bundled into 
the SNF payment. Once the SNF patient has exhausted his or her Medicare 
Part A SNF days (that is, after 100 days), payment for the specimen 
collection by a CAH employee and the test performance by the CAH would 
no longer be bundled into the SNF payment and the CAH could receive a 
reasonable cost-based payment for the collection of a specimen by a CAH 
employee and the performance of the laboratory test by the CAH.
    In summary, we are proposing that a CAH may receive reasonable 
cost-based payment for outpatient clinical diagnostic laboratory tests 
furnished to an individual who is an outpatient of the CAH (and 
therefore receiving services directly from the CAH) even if the 
individual with respect to whom the laboratory services are furnished 
is not physically present in the CAH at the time the specimen is 
collected. In order for the individual to be determined to be receiving 
services directly from the CAH, we are proposing that the individual 
must either have received outpatient services in the CAH on the same 
day the specimen is collected or the specimen must be collected by an 
employee of the CAH. In either case, the individual would not need to 
be physically present in the CAH at the time the specimen is collected. 
We also note that if the individual is physically present in the CAH or 
a facility that is provider-based to the CAH when the specimen is 
collected, the CAH would also receive a reasonable cost-based payment. 
In this case, the specimen would not need to be collected by an 
employee of the CAH. (We refer readers to section VII.D. of this 
preamble for further discussion of CAH provider-based facilities.)
    Section 148 of Public Law 110-275 applies to all services furnished 
on or after July 1, 2009. Accordingly, we intend to issue guidance that 
will instruct Medicare contractors on the implementation of this 
statutory provision effective July 1, 2009. We expect the instructions 
in the guidance will parallel the proposed changes to the regulations 
described above. However, we will consider all public comments received 
in response to this proposal and make any necessary and appropriate 
modifications before finalizing revisions to our regulations. We also 
believe it will be important to develop a modifier that could assist 
CMS in tracking laboratory services paid to CAHs under this provision. 
When a modifier is developed, we will issue guidance regarding its use.
3. CAH Optional Method of Payment for Outpatient Services
    Section 1834(g) of the Act establishes the payment rules for 
outpatient services furnished by a CAH. Section 403(d) of Public Law 
106-113 (BBRA) amended section 1834(g) of the Act to provide for two 
methods of payment for outpatient services furnished by a CAH. 
Specifically, section 1834(g)(1) of the Act, as amended by Public Law 
106-113, provided that the amount of payment for outpatient services 
furnished by a CAH was equal to the reasonable cost of providing such 
services, unless the CAH made an election, under section 1834(g)(2) of 
the Act, to receive amounts that were equal to the reasonable cost of 
the CAH for facility services plus, with respect to the professional 
services, the amount otherwise paid for professional services under 
Medicare, less the applicable Medicare deductible and coinsurance

[[Page 24204]]

amount. The election made under section 1834(g)(2) of the Act is 
sometimes referred to as ``Method II.'' Throughout this section of this 
preamble, we refer to this election as the ``optional method.''
    Section 202 of Public Law 106-554 (BIPA) amended section 
1834(g)(2)(B) of the Act to increase the payment for professional 
services under the optional method to 115 percent of the amount 
otherwise paid for professional services under Medicare. In addition, 
section 405(a)(1) of Public Law 108-173 (MMA) amended section 
1834(g)(l) of the Act by inserting the phrase ``equal to 101 percent 
of'' before the phrase ``the reasonable costs''. However, section 
405(a)(1) of Public Law 108-173 did not amend the phrase ``reasonable 
costs'' under the optional method at section 1834(g)(2)(A) of the Act.
    Accordingly, section 1834(g) of the Act currently provides for two 
methods of payment for outpatient CAH services. Under the first method, 
as specified at section 1834(g)(1) of the Act, a CAH will be paid 101 
percent of reasonable costs, unless it elects to be paid under the 
methodology specified at section 1834(g)(2) of the Act. Under the 
method specified at section 1834(g)(1) of the Act, facility services 
are paid at 101 percent of reasonable costs to the CAH through the 
Medicare fiscal intermediary or the Medicare Part A/B MAC, while 
payments for physician and other professional services are made to the 
physician under the Medicare Physician Fee Schedule (MPFS) through the 
Medicare carriers. However, under section 1834(g)(2) of the Act (the 
optional method), a CAH submits bills for both the facility and the 
professional services to its Medicare fiscal intermediary or its 
Medicare Part A/B MAC. If a CAH chooses this optional method for 
outpatient services, the physician or other practitioner must reassign 
his or her billing rights to the CAH to bill the Medicare program for 
those services. In accordance with section 1834(g)(2)(A) of the Act, 
under this optional method, the CAH receives reasonable cost payment 
for its facility costs and, with respect to the professional services, 
115 percent of the amount otherwise paid for professional services 
under Medicare.
    Regulations implementing section 1834(g) of the Act are set forth 
at Sec.  413.70(b). Section 413.70(b) states that, unless a CAH elects 
the optional method, payment for outpatient CAH services is 101 percent 
of the reasonable costs of the CAH in providing CAH services to its 
outpatients. However, existing Sec.  413.70(b)(3)(ii)(A) states that a 
CAH may elect, under the optional method, to be paid at 101 percent of 
the reasonable costs for facility services. As a result, we believe 
that the existing regulation is not consistent with the plain reading 
of section 1834(g)(2) of the Act, which provides for payment under the 
optional method of reasonable cost for facility services.
    In order to ensure that the regulations are consistent with the 
plain reading of section 1834(g)(2)(A) of the Act, we are proposing to 
revise Sec.  413.70(b)(3)(ii)(A) to state that CAHs that elect the 
optional method will receive payment based on reasonable cost for 
outpatient facility services. The proposed change would not affect 
payment for the professional component as set forth under Sec.  
413.70(b)(3)(ii)(B).

D. Provider-Based Status of Facilities and Organizations: Proposed 
Policy Changes

1. Background
    Since the beginning of the Medicare program, some providers, which 
we refer to as ``main providers'', have functioned as a single entity 
while owning and operating multiple provider-based departments, 
locations, and facilities that were treated as part of the main 
provider for Medicare purposes. Therefore, we have maintained that 
having clear criteria for provider-based status is important because by 
failing to properly distinguish between a provider-based facility and a 
freestanding facility, we risk additional program payments and 
increased beneficiary coinsurance liability with no commensurate 
benefit to the Medicare program or its beneficiaries. In addition, we 
jeopardize the delivery of safe and appropriate health care services to 
beneficiaries.
    The Medicare policies regarding provider-based status of facilities 
and organizations are set forth at 42 CFR 413.65. The regulations at 
Sec.  413.65 have been revised and updated on numerous occasions since 
they were originally issued on April 7, 2000 (65 FR 18504). We note 
that the implementation of the April 7, 2000 regulations was delayed by 
Public Law 106-554 (BIPA) for many providers. Public Law 106-554 also 
made changes in the criteria for determining provider-based status, 
which we implemented in a final rule published in the Federal Register 
on November 30, 2001 (66 FR 59956). The most recent revisions of Sec.  
413.65 were included in the FY 2006 IPPS final rule (70 FR 47457 
through 47461 and 47487 through 47488) when we updated the rules with 
respect to the facilities for which provider-based determinations will 
not be made and clarified some of the provider-based definitions and 
requirements.
    Currently, Sec.  413.65(a) specifies the facilities and 
organizations for which provider-based status may be sought and lists 
those facilities for which determinations of provider-based status for 
Medicare payment purposes are not made. Section 413.65(b) describes the 
procedures for making provider-based determinations, and Sec.  
413.65(c) explains the requirements for reporting material changes in 
relationships between main providers and provider-based facilities and 
organizations. In Sec.  413.65(d), we specify all of the requirements 
that any facility or organization for which provider-based status is 
sought must meet, whether located on or off the campus of a potential 
main provider. Section 413.65(e) specifies additional requirements 
applicable to off-campus facilities or organizations. These 
requirements include: operation under the ownership and control of the 
main provider; administration and supervision; and location. Sections 
413.65(f) through (o) set forth the policies regarding provider-based 
status for joint ventures, obligations of hospital outpatient 
departments and hospital-based entities, management contracts, 
furnishing of all services under arrangement, inappropriate treatment 
of a facility or organization as provider-based, temporary treatment as 
provider-based, correction of errors, status of Indian Health Service 
and Tribal facilities and organizations, FQHCs and ``look alikes,'' and 
effective dates of provider-based status.
2. Proposed Changes to the Scope of the Provider-Based Status 
Regulations for CAHs
(a) CAH-Based Clinical Diagnostic Laboratory Facilities
    The provider-based status rules generally apply to situations where 
there is a financial incentive for a facility or organization to claim 
affiliation with a main provider. The provider-based status rules 
establish criteria for a facility or organization to demonstrate that 
it is integrated with the main provider for payment purposes. However, 
the regulation at Sec.  413.65(a)(1)(ii) lists specific types of 
facilities and organizations for which CMS will not make provider-based 
determinations. Included on this list of facilities exempt from 
provider-based determinations are facilities that furnish only clinical 
diagnostic laboratory services (Sec.  413.65(a)(1)(ii)(G)).
    As we have stated in previously issued rules (that is, the FY 2006 
IPPS final rule (70 FR 47457)), the list at

[[Page 24205]]

Sec.  413.65(a)(1)(ii) was created after we had concluded that 
``provider-based determinations should not be made for these facilities 
because the outcome of the determination (that is, whether a facility, 
unit, or department is found to be freestanding or provider-based) 
would not affect the methodology used to make Medicare or Medicaid 
payment, the scope of benefits available to a Medicare beneficiary in 
or at the facility, or the deductible or coinsurance liability of a 
Medicare beneficiary in or at the facility.'' We note that we excluded 
a facility that furnishes only clinical diagnostic laboratory services 
in Sec.  413.65(a)(1)(ii)(G) from the list in Sec.  413.65(a)(1)(ii) 
because these facilities are generally paid under the Clinical 
Laboratory Fee Schedule (CLFS), regardless of the setting in which the 
services are furnished. Consequently, we believed that whether a 
clinical diagnostic laboratory was freestanding or provider-based would 
not affect the amount of Medicare payment.
    However, upon further review of existing Sec.  413.65(a)(1)(ii), we 
believe that a clinical diagnostic laboratory, when operated as part of 
a CAH, generates a higher Medicare payment than when operating as a 
freestanding facility. When a clinical diagnostic laboratory is part of 
a CAH, the services furnished by the laboratory are generally paid at 
101 percent of reasonable cost. Otherwise, clinical diagnostic 
laboratory services provided by a freestanding diagnostic laboratory 
are paid under the CLFS. Currently, because the services of a clinical 
diagnostic laboratory of a CAH are paid at a higher rate by virtue of 
being provided by a CAH department, we believe they should be subject 
to the rules under the provider-based status regulations at Sec.  
413.65.
    Therefore, we are proposing to exclude a clinical diagnostic 
laboratory facility that operates as part of a CAH from the list of 
facilities for which we do not make provider-based determinations. That 
is, we are proposing to revise the regulations to require facilities 
furnishing only clinical diagnostic laboratory tests that operate as 
part of a CAH to meet the applicable provider-based criteria in Sec.  
413.65 in order for the CAH to receive payments for the services 
furnished at those facilities at 101 percent of reasonable cost. 
Specifically, we are proposing to revise the language of Sec.  
413.65(a)(1)(ii)(G) to state that CMS will not make a determination of 
provider-based status for payment purposes as to whether the following 
facilities are provider-based: ``Independent diagnostic testing 
facilities that furnish only services paid under a fee schedule, such 
as facilities that furnish only screening mammography services, 
facilities that furnish only clinical diagnostic laboratory tests, 
other than those clinical diagnostic laboratory facilities operating as 
parts of CAHs, or facilities that furnish only some combination of 
these services'' (emphasis added). In addition, we would specify that 
``Clinical diagnostic laboratories operating as parts of CAHs must meet 
the applicable provider-based requirements.''
    In proposing this change to the provider-based status rules, we 
recognize that there may be confusion between this proposal that a 
clinical diagnostic laboratory facility that is part of a CAH must meet 
provider-based rules in order to receive the higher reasonable cost-
based payment and the proposal discussed in section VII.C.2. of this 
preamble to implement section 148 of Public Law 110-275. In section 
VII.C.2. of this preamble, we are proposing to revise the regulations 
at Sec.  413.70 to specify that CAHs can bill for outpatient clinical 
diagnostic laboratory services furnished to patients who are 
outpatients of the CAH, regardless of whether they are physically 
present in the CAH at the time the specimen is collected. In the 
proposed revision of Sec.  413.70, we are proposing that, in order for 
a CAH to bill 101 percent of reasonable costs for outpatient clinical 
diagnostic laboratory services furnished to an individual, the 
individual must be an outpatient of the CAH, as defined at Sec.  410.2, 
and be receiving services directly from the CAH. That is, either the 
individual must be receiving outpatient services in the CAH on the same 
day that the specimen is collected or the specimen must be collected by 
an employee of the CAH. Under the proposed changes to the provider-
based status rules under Sec.  413.65 in this section of this proposed 
rule, if a CAH chooses to own or operate a clinical diagnostic 
laboratory facility, the facility must meet the provider-based status 
requirements under Sec.  413.65 in order for the facility to be 
considered part of the CAH and in order for the CAH to be eligible to 
be paid based on 101 percent of reasonable cost for the clinical 
diagnostic laboratory services furnished by the laboratory facility. 
According to our proposal in section VII.C.2. of this preamble, a CAH 
would have the option to bill for outpatient clinical diagnostic 
laboratory services at 101 percent of reasonable cost for patients 
receiving services in nonprovider-based facilities or locations as long 
as the patients are outpatients of the CAH as defined above and either 
the specimen is collected by an employee of the CAH or the individual 
is receiving outpatient services in the CAH on the same day that the 
specimen is collected. In addition, under our provider-based status 
proposal, a CAH can also bill for clinical diagnostic laboratory 
services at 101 percent of reasonable costs for patients who are 
furnished services in a clinical diagnostic laboratory facility that is 
owned and operated by the CAH as long as the clinical diagnostic 
laboratory facility meets the provider-based status requirements at 
Sec.  413.65.
    In summary, we believe that clinical diagnostic laboratory 
facilities could generate an increase in Medicare payments when they 
are part of a CAH compared to when they are freestanding or when they 
are part of a hospital. Therefore, we are proposing that these 
facilities, which are currently exempt from provider-based 
determinations, must meet the applicable provider-based status 
requirements at Sec.  413.65 when they are part of a CAH in order for 
the CAH to receive payment for their clinical diagnostic laboratory 
services based on reasonable cost. It is important to note that, in 
addition to meeting the provider-based status requirements at Sec.  
413.65, these provider-based facilities would also have to meet other 
requirements for provider-based facilities operated by CAHs, including 
distance requirements under Sec.  485.610(e). Generally, the 
regulations at Sec.  485.610(e) also provide that an off-campus 
provider-based department, remote location, or distinct part 
psychiatric or rehabilitation unit of a CAH that was created or 
acquired on or after January 1, 2008, cannot be within 35 miles of a 
hospital or another CAH if the CAH is to continue meeting the location 
requirements under Sec.  485.610(e).
b. CAH-Based Ambulance Services
    The existing regulations at Sec.  413.70(b)(5) provide that 
ambulance services are paid at reasonable cost if the services are 
furnished by a CAH or by an entity owned and operated by a CAH, but 
only if the CAH or entity is the only supplier or provider of ambulance 
service within a 35-mile drive of the CAH or entity. We are soliciting 
public comments regarding whether an ambulance service that is owned 
and operated by a CAH, and is eligible to receive reasonable cost-based 
payment should be required to meet the provider-based status rules. It 
is important to consider that the regulation at Sec.  413.70(b)(5) 
already specifies proximity criteria that CAH-owned and operated 
ambulance services must meet

[[Page 24206]]

in order to be paid at reasonable cost. However, these proximity 
requirements are used to ensure that CAH-owned and operated ambulance 
services do not receive higher payments in relation to a competing 
ambulance service that is not owned and operated by a CAH. It can be 
argued that CAH-owned and operated ambulance suppliers or providers 
should also be required to meet the provider-based status requirements 
to demonstrate that the ambulance services are integrated with the CAH 
because the CAH ambulance services are paid at a higher Medicare 
payment level when they are owned and operated by a CAH compared to 
when they are freestanding.
3. Technical Correction to Regulations
    Section 413.65(a)(1)(ii)(H) of the regulations specifies, among the 
facilities for which CMS does not make provider-based determinations 
for payment purposes, ``Facilities, other than those operating as parts 
of CAHs, furnishing only physical, occupational, or speech therapy to 
ambulatory patients, for as long as the $1,500 annual cap on coverage 
of physical, occupational, or speech therapy, as described in section 
1833(g)(2) of the Act, remains suspended by the action of the 
subsequent legislation.'' We are proposing two basic changes to the 
language of Sec.  413.65(a)(1)(ii)(H). First, we are proposing to 
delete the phrase ``$1,500 annual cap'' and replace it with the generic 
phrase ``annual financial cap amount''. We are proposing this change 
because we need to update our regulations to reflect that the $1,500 
annual financial cap is no longer applicable and has been replaced with 
the cap amount described in section 1833(g)(2)(B) of the Act. 
Specifically, the $1,500 cap amount described in section 1833(g)(2)(A) 
of the Act was limited to 3 years (1999 through 2001). For years after 
2001, in general, the amount of the annual cap on payment of physical, 
occupational, or speech therapy is the amount specified in the 
preceding year increased by the percentage increase in the Medicare 
economic index for the current year (section 1833(g)(2)(B) of the Act). 
However, we note that the annual cap amount did not apply to expenses 
incurred with respect to such therapy services during various years as 
set forth in the statute.
    Second, we are proposing to replace the phrase ``for as long as'' 
with the phrase ``throughout any period during which'' and to replace 
the phrase ``remains suspended by the action of subsequent 
legislation'' with the phrase ``is suspended by legislation''. We are 
proposing this change because Sec.  413.65(a)(1)(ii)(H), as currently 
written, may incorrectly suggest that the annual financial cap amounts 
on the therapy services described in sections 1833(g)(1) and 1833(g)(3) 
of the Act continue to be suspended. Although the financial caps on 
such services were suspended when the provision was added originally, 
they ceased to be suspended for a portion of 2003 and then beginning 
January 1, 2006. We believe the proposed change would eliminate any 
confusion about whether the therapy caps were or were not currently 
suspended as well as accomplish our goal of exempting facilities, other 
than those operating as parts of CAHs, that furnish only physical, 
occupational, or speech therapy to ambulatory patients from complying 
with the provider-based status requirements any time the annual 
financial cap amount as described in section 1883(g)(2) of the Act is 
suspended by legislation. In conclusion, we maintain that we would not 
make provider-based determinations for non-CAH operated facilities 
furnishing only physical, occupational, or speech therapy to ambulatory 
patients when the therapy cap is suspended.

VIII. Proposed Changes to the Long-Term Care Hospital Prospective 
Payment System (LTCH PPS) for RY 2010

A. Background of the LTCH PPS

1. Legislative and Regulatory Authority
    Section 123 of the Medicare, Medicaid, and SCHIP (State Children's 
Health Insurance Program) Balanced Budget Refinement Act of 1999 (BBRA) 
(Pub. L. 106-113) as amended by section 307(b) of the Medicare, 
Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 
(BIPA) (Pub. L. 106-554) provides for payment for both the operating 
and capital-related costs of hospital inpatient stays in long-term care 
hospitals (LTCHs) under Medicare Part A based on prospectively set 
rates. The Medicare prospective payment system (PPS) for LTCHs applies 
to hospitals that are described in section 1886(d)(1)(B)(iv) of the 
Social Security Act (the Act), effective for cost reporting periods 
beginning on or after October 1, 2002.
    Section 1886(d)(1)(B)(iv)(I) of the Act defines a LTCH as ``a 
hospital which has an average inpatient length of stay (as determined 
by the Secretary) of greater than 25 days.'' Section 
1886(d)(1)(B)(iv)(II) of the Act also provides an alternative 
definition of LTCHs: Specifically, a hospital that first received 
payment under section 1886(d) of the Act in 1986 and has an average 
inpatient length of stay (LOS) (as determined by the Secretary of 
Health and Human Services (the Secretary)) of greater than 20 days and 
has 80 percent or more of its annual Medicare inpatient discharges with 
a principal diagnosis that reflects a finding of neoplastic disease in 
the 12-month cost reporting period ending in FY 1997.
    Section 123 of the BBRA requires the PPS for LTCHs to be a ``per 
discharge'' system with a diagnosis-related group (DRG) based patient 
classification system that reflects the differences in patient 
resources and costs in LTCHs.
    Section 307(b)(1) of the BIPA, among other things, mandates that 
the Secretary shall examine, and may provide for, adjustments to 
payments under the LTCH PPS, including adjustments to DRG weights, area 
wage adjustments, geographic reclassification, outliers, updates, and a 
disproportionate share adjustment.
    In the August 30, 2002 Federal Register, we issued a final rule 
that implemented the LTCH PPS authorized under the BBRA and BIPA (67 FR 
55954). This system currently uses information from LTCH patient 
records to classify patients into distinct MS-long-term care diagnosis-
related groups (MS-LTC-DRGs) based on clinical characteristics and 
expected resource needs. Payments are calculated for each MS-LTC-DRG 
and provisions are made for appropriate payment adjustments. Payment 
rates under the LTCH PPS are updated annually and published in the 
Federal Register.
    The LTCH PPS replaced the reasonable cost-based payment system 
under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) 
(Pub. L. 97-248) for payments for inpatient services provided by a LTCH 
with a cost reporting period beginning on or after October 1, 2002. 
(The regulations implementing the TEFRA reasonable cost-based payment 
provisions are located at 42 CFR Part 413.) With the implementation of 
the PPS for acute care hospitals authorized by the Social Security 
Amendments of 1983 (Pub. L. 98-21), which added section 1886(d) to the 
Act, certain hospitals, including LTCHs, were excluded from the PPS for 
acute care hospitals and were paid their reasonable costs for inpatient 
services subject to a per discharge limitation or target amount under 
the TEFRA system. For each cost reporting period, a hospital-specific 
ceiling on payments was determined by multiplying the hospital's 
updated target amount by the number of total current year Medicare

[[Page 24207]]

discharges. (Generally, in section VIII. of this preamble, when we 
refer to discharges, the intent is to describe Medicare discharges.) 
The August 30, 2002 final rule further details the payment policy under 
the TEFRA system (67 FR 55954).
    In the August 30, 2002 final rule, we provided for a 5-year 
transition period. During this 5-year transition period, a LTCH's total 
payment under the PPS was based on an increasing percentage of the 
Federal rate with a corresponding decrease in the percentage of the 
LTCH PPS payment that is based on reasonable cost concepts. However, 
effective for cost reporting periods beginning on or after October 1, 
2006, total LTCH PPS payments are based on 100 percent of the Federal 
rate.
    In addition, in the August 30, 2002 final rule, we presented an in-
depth discussion of the LTCH PPS, including the patient classification 
system, relative weights, payment rates, additional payments, and the 
budget neutrality requirements mandated by section 123 of the BBRA. The 
same final rule that established regulations for the LTCH PPS under 42 
CFR Part 412, Subpart O also contained LTCH provisions related to 
covered inpatient services, limitation on charges to beneficiaries, 
medical review requirements, furnishing of inpatient hospital services 
directly or under arrangement, and reporting and recordkeeping 
requirements. We refer readers to the August 30, 2002 final rule for a 
comprehensive discussion of the research and data that supported the 
establishment of the LTCH PPS (67 FR 55954).
    In the June 6, 2003 Federal Register, we published a final rule 
that set forth the FY 2004 annual update of the payment rates for the 
Medicare PPS for inpatient hospital services furnished by LTCHs (68 FR 
34122). It also changed the annual period for which the payment rates 
were to be effective, such that the annual updated rates were effective 
from July 1 through June 30 instead of from October 1 through September 
30. We refer to the July through June time period as a ``long-term care 
hospital rate year'' (LTCH PPS rate year). In addition, we changed the 
publication schedule for the annual update to allow for an effective 
date of July 1. The payment amounts and factors used to determine the 
annual update of the LTCH PPS Federal rate are based on a LTCH PPS rate 
year. While the LTCH payment rate updates were to be effective July 1, 
the annual update of the DRG classifications and relative weights for 
LTCHs continued to be linked to the annual adjustments of the acute 
care hospital inpatient DRGs and were effective each October 1.
    As discussed in detail in section VIII.A.1. of the May 9, 2008 RY 
2009 LTCH PPS final rule (73 FR 26788), we again changed the schedule 
for the annual updates of the LTCH PPS Federal payment rates beginning 
with RY 2010. We consolidated the rulemaking cycle for the annual 
update of the LTCH PPS Federal payment rates and description of the 
methodology and data used to calculate these payment rates with the 
annual update of the MS-LTC-DRG classifications and associated 
weighting factors for LTCHs so that the updates to the rates and the 
weights now occur on the same schedule and appear in the same 
publication. As a result, the updates to the rates and the weights are 
now effective on October 1 (on a Federal fiscal year schedule), and the 
annual updates to the LTCH PPS Federal rates will no longer be 
published with a July 1 effective date (73 FR 26797 through 26798).
    Public Law 110-173 (MMSEA), enacted on December 29, 2007, included 
provisions that have various effects on the LTCH PPS. In addition to 
amending section 1861 of the Act to add a subsection (ccc) which 
provided an additional definition of LTCHs and facility criteria, 
Public Law 110-173 also required that no later than 18 months after the 
date of enactment of the law, the Secretary conduct a study and submit 
a report to Congress that included ``recommendations for such 
legislation and administrative actions, including timelines for the 
implementation of LTCH patient criteria or other actions, as the 
Secretary determines appropriate.'' The payment policy provisions under 
Public Law 110-173 also have varying timeframes of applicability. 
First, we note that certain provisions of Public Law 110-173 provided 
that the Secretary shall not apply, for cost reporting periods 
beginning on or after the date of the enactment of Public Law 110-173 
(December 29, 2007) for a 3-year period: The extension of payment 
adjustments at Sec.  412.534 to ``grandfathered LTCHs'' (a long-term 
care hospital identified by the amendment made by section 4417(a) of 
Pub. L. 105-33); and the payment adjustment at Sec.  412.536 to 
``freestanding'' LTCHs. In addition, Public Law 119-173 provided that 
the Secretary shall not apply, for the 3-year period beginning on the 
date of enactment of the Act the revision to the short-stay outlier 
(SSO) policy that was finalized in the RY 2008 LTCH PPS final rule (72 
FR 26904 and 26992) and the one-time adjustment to the payment rates 
provided for in Sec.  412.523(d)(3). The statute also provided that the 
base rate for RY 2008 be the same as the base rate for RY 2007 (the 
revised base rate, however, does not apply to discharges occurring on 
or after July 1, 2007, and before April 1, 2008); for a 3-year 
moratorium (with specified exceptions) on the establishment of new 
LTCHs, LTCH satellites, and on the increase in the number of LTCH beds. 
Public Law 110-173 also revised the threshold percentages for certain 
co-located LTCHs and LTCH satellites governed under Sec.  412.534. 
Finally, Public Law 110-173 provided for an expanded review of medical 
necessity for admission and continued stay at LTCHs.
    In the RY 2009 LTCH PPS final rule (73 FR 26801 through 26812), we 
established the applicable Federal rates for RY 2009 consistent with 
section 1886(m)(2) of the Act as amended by Public Law 110-173. We also 
revised the regulations at Sec.  412.523(d)(3) to change the 
methodology for the one-time budget neutrality adjustment and to comply 
with section 114(c)(4) of Public Law 110-173. Other policy revisions 
necessitated by the statutory changes of Public Law 110-173 were 
addressed in separate rulemaking documents (73 FR 24871 and 73 FR 
29699).
    Section 4302 of the American Recovery and Reinvestment Act of 2009 
(ARRA), Public Law 111-5, enacted on February 17, 2009, included 
several amendments to the provisions set forth in section 114 of Public 
Law 110-173 (MMSEA). We have issued instructions to the fiscal 
intermediaries and MACs interpreting the provisions of section 4302 of 
Public Law 111-5 (Change Request 6444). We intend to implement the 
provisions of section 4302 of Public Law 111-5 in an interim final rule 
with comment period as part of the FY 2010 IPPS and RY 2010 LTCH PPS 
final rule. In addition, we intend to finalize the regulatory 
provisions implementing section 114 of Public Law 110-173, as 
appropriate, in the same final rule.
2. Criteria for Classification as a LTCH
a. Classification as a LTCH
    Under the existing regulations at Sec.  412.23(e)(1) and (e)(2)(i), 
which implement section 1886(d)(1)(B)(iv)(I) of the Act, to qualify to 
be paid under the LTCH PPS, a hospital must have a provider agreement 
with Medicare and must have an average Medicare inpatient length of 
stay (LOS) of greater than 25 days. Alternatively, Sec.  
412.23(e)(2)(ii) states that for cost reporting periods beginning on or 
after August 5, 1997, a hospital that was first excluded from the PPS 
in 1986 and can

[[Page 24208]]

demonstrate that at least 80 percent of its annual Medicare inpatient 
discharges in the 12-month cost reporting period ending in FY 1997 have 
a principal diagnosis that reflects a finding of neoplastic disease 
must have an average inpatient length of stay for all patients, 
including both Medicare and non-Medicare inpatients, of greater than 20 
days.
b. Hospitals Excluded From the LTCH PPS
    The following hospitals are paid under special payment provisions, 
as described in Sec.  412.22(c), and therefore, are not subject to the 
LTCH PPS rules:
     Veterans' Administration hospitals.
     Hospitals that are reimbursed under State cost control 
systems approved under 42 CFR Part 403.
     Hospitals that are reimbursed in accordance with 
demonstration projects authorized under section 402(a) of the Social 
Security Amendments of 1967 (Pub. L. 90-248) (42 U.S.C. 1395b-1) or 
section 222(a) of the Social Security Amendments of 1972 (Pub. L. 92-
603) (42 U.S.C. 1395b-1 (note)) (Statewide all-payer systems, subject 
to the rate-of-increase test at section 1814(b) of the Act).
     Nonparticipating hospitals furnishing emergency services 
to Medicare beneficiaries.
3. Limitation on Charges to Beneficiaries
    In the August 30, 2002 final rule, we presented an in-depth 
discussion of beneficiary liability under the LTCH PPS (67 FR 55974 
through 55975). In the RY 2005 LTCH PPS final rule (69 FR 25676), we 
clarified that the discussion of beneficiary liability in the August 
30, 2002 final rule was not meant to establish rates or payments for, 
or define Medicare-eligible expenses. Under Sec.  412.507, if the 
Medicare payment to the LTCH is the full LTC-DRG payment amount, as 
consistent with other established hospital prospective payment systems, 
a LTCH may not bill a Medicare beneficiary for more than the deductible 
and coinsurance amounts as specified under Sec.  409.82, Sec.  409.83, 
and Sec.  409.87 and for items and services as specified under Sec.  
489.30(a). However, under the LTCH PPS, Medicare will only pay for days 
for which the beneficiary has coverage until the SSO threshold is 
exceeded. Therefore, if the Medicare payment was for a SSO case (Sec.  
412.529) that was less than the full LTC-DRG payment amount because the 
beneficiary had insufficient remaining Medicare days, the LTCH could 
also charge the beneficiary for services delivered on those uncovered 
days (Sec.  412.507).
4. Administrative Simplification Compliance Act (ASCA) and Health 
Insurance Portability and Accountability Act (HIPAA) Compliance
    Claims submitted to Medicare must comply with both the 
Administrative Simplification Compliance Act (ASCA) (Pub. L. 107-105), 
and the Health Insurance Portability and Accountability Act of 1996 
(HIPAA) (Pub. L. 104-191). Section 3 of the ASCA requires that the 
Medicare Program deny payment under Part A or Part B for any expenses 
incurred for items or services ``for which a claim is submitted other 
than in an electronic form specified by the Secretary.'' Section 
1862(h) of the Act (as added by section 3(a) of the ASCA) provides that 
the Secretary shall waive such denial in two specific types of cases 
and may also waive such denial ``in such unusual cases as the Secretary 
finds appropriate'' (68 FR 48805). Section 3 of the ASCA operates in 
the context of the HIPAA regulations, which include, among other 
provisions, the transactions and code sets standards requirements 
codified as 45 CFR parts 160 and 162, subparts A and I through R 
(generally known as the Transactions Rule). The Transactions Rule 
requires covered entities, including covered health care providers, to 
conduct certain electronic healthcare transactions according to the 
applicable transactions and code sets standards.

B. Proposed Medicare Severity Long-Term Care Diagnosis-Related Group 
(MS-LTC-DRG) Classifications and Relative Weights

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 this 
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 
relative weights under the LTCH PPS 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 under the IPPS and 
the LTCH PPS, respectively, effective beginning 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.
    The MS-DRGs adopted in FY 2008 represent an increase in the number 
of DRGs by 207 (that is, from 538 to 745) (72 FR 47171). In FY 2009, an 
additional MS-DRG was adopted for a total of 746 distinct groupings (73 
FR 48497). 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

[[Page 24209]]

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.
    In a departure from the IPPS, and as discussed in greater detail 
below in section VIII.B.3.e. of this preamble, we use low-volume MS-
LTC-DRGs (that is, MS-LTC-DRGs with less than 25 LTCH cases) in 
determining the MS-LTC-DRG relative weights because LTCHs do not 
typically treat the full range of diagnoses as do acute care hospitals. 
For purposes of determining the relative weights for the large number 
of low-volume MS-LTC-DRGs, we group all of the low-volume MS-LTC-DRGs 
into five quintiles based on average charge per discharge. (A detailed 
discussion of the application of the Lewin Group ``quintile'' model 
that was used to develop the LTC-DRGs appears in the August 30, 2002 
LTCH PPS final rule (67 FR 55978).) We also account for adjustments to 
payments for SSO cases (that is, cases where the covered LOS at the 
LTCH is less than or equal to five-sixths of the geometric ALOS for the 
MS-LTC-DRG). Furthermore, we make adjustments to account for 
nonmonotonically increasing weights, when necessary. That is, 
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 such that, in the severity levels within a 
base MS-LTC-DRG, the weights should increase monotonically with 
severity from the lowest to highest severity level. (We discuss 
nonmonotonicity in greater detail and our proposed methodology to 
adjust the proposed RY 2010 MS-LTC-DRG relative weights to account for 
nonmonotonically increasing relative weights in section VIII.B.3.f. 
(Step 6) of this preamble.)
2. Patient Classifications Into MS-LTC-DRGs
a. Background
    The MS-DRGs (used under the IPPS) and the MS-LTC-DRGs (used under 
the LTCH PPS) are based on the CMS DRG structure. As noted above in 
this section, we refer to the DRGs under the LTCH PPS as MS-LTC-DRGs 
although they are structurally identical to the DRGs used under the 
IPPS.
    The MS-DRGs are organized into 25 major diagnostic categories 
(MDCs), most of which are based on a particular organ system of the 
body; the remainder involve multiple organ systems (such as MDC 22, 
Burns). Within most MDCs, cases are then divided into surgical DRGs and 
medical DRGs. Surgical DRGs are assigned based on a surgical hierarchy 
that orders operating room (O.R.) procedures or groups of O.R. 
procedures by resource intensity. The GROUPER software program does not 
recognize all ICD-9-CM procedure codes as procedures affecting DRG 
assignment. That is, procedures that are not surgical (for example, 
EKG), or minor surgical procedures (for example, biopsy of skin and 
subcutaneous tissue (code 86.11)) do not affect the MS-LTC-DRG 
assignment based on their presence on the claim.
    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.
    To create the MS-DRGs (and by extension, the MS-LTC-DRGs), 
individual DRGs were subdivided according to the presence of specific 
secondary diagnoses designated as complications or comorbidities (CCs) 
into three, two, or one level, depending on the impact of the CCs on 
resources used for those cases. Specifically, there are sets of MS-DRGs 
that are split into 2 or 3 subgroups based on the presence or absence 
of a CC or a major complication and comorbidity (MCC). The original 
discussion about the creation of MS-DRGs and their severity levels is 
described in detail in the FY 2008 IPPS final rule with comment period 
(72 FR 47169). However, to reiterate the development of the CCs and 
MCCs, two of our major goals were 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. In designating an MS-DRG as 
one that will be divided into subgroups based on the presence of a CC 
or MCC, we developed a set of criteria to facilitate the decisionmaking 
process. The subgroup was required to meet all criteria, which are 
described in detail in the FY 2008 IPPS final rule with comment period 
(72 FR 47169). As a first step, each of the base MS-DRGs was subdivided 
into three subgroups: Non-CC, CC, and MCC. Each subgroup was then 
analyzed in relation to the other two subgroups, and the criteria were 
applied in the following hierarchical manner.
     If a three-way subdivision met the criteria, we divided 
the base MS-DRG into three CC subgroups.
     If only one type of two-way subdivisions met the criteria, 
we subdivided the base MS-DRG into two CC subgroups based on the type 
of two-way subdivision that met the criteria.
     If both types of two-way subdivisions met the criteria, we 
subdivided the base MS-DRG into two CC subgroups based on the type of 
two-

[[Page 24210]]

way subdivision with the highest R\2\ (most explanatory power to 
explain the difference in average charges).
     Otherwise, we did not subdivide the base MS-DRG into CC 
subgroups.
    For any given base MS-DRG, our evaluation in some cases showed that 
a subdivision between a non-CC and a combined CC/MCC subgroup was all 
that was warranted (that is, there was not a sufficient difference 
between the CC and MCC subgroups to justify separate CC and MCC 
subgroups). Conversely, in some cases, even though an MCC subgroup was 
warranted, there was not a sufficient difference between the non-CC and 
CC subgroups to justify separate subgroups.
    Based on this methodology, a base MS-DRG may be subdivided 
according to the following three alternatives:
     DRGs with three subgroups (MCC, CC, and non-CC).
     DRGs with two subgroups consisting of an MCC subgroup but 
with the CC and non-CC subgroups combined. These are referred to as 
``with MCC'' and ``without MCC.''
     DRGs with two subgroups consisting of a non-CC subgroup 
but with the CC and MCC subgroups combined. We refer to these two 
groups as ``with CC/MCC'' and ``without CC/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 in 
this section, further information on the development and implementation 
of the MS-DRGs and MS-LTC-DRGs can be found in the FY 2008 IPPS final 
rule with comment period (72 FR 47138 through 47175 and 47277 through 
47299).)
    In developing the first MS-DRG GROUPER program (that is, Version 
25.0 effective for FY 2008), the diagnoses comprising the CC list were 
completely redefined. The revised CC list is primarily comprised of 
significant acute disease, acute exacerbations of significant chronic 
diseases, advanced or end stage chronic diseases, and chronic diseases 
associated with extensive debility. In general, most chronic diseases 
were not included on the revised CC list. For a patient with a chronic 
disease, a significant acute manifestation of the chronic disease was 
required to be present and coded for the patient to be assigned a CC. 
In addition to the revision of the CC list, each CC was also 
categorized as an MCC or a CC based on relative resource use. 
Approximately 12 percent of all diagnoses codes were classified as an 
MCC, 24 percent as a CC, and 64 percent as a non-CC. Diagnoses closely 
associated with mortality (ventricular fibrillation, cardiac arrest, 
shock, and respiratory arrest) were assigned as an MCC if the patient 
lived, but as a non-CC if the patient died. The MCC, CC, and non-CC 
categorization was used to subdivide the surgical and medical DRGs into 
up to three levels, with a case being assigned to the most resource 
intensive level (for example, a case with two secondary diagnoses that 
are categorized as an MCC and a CC is assigned to the MCC level).
    Medicare contractors (that is, fiscal intermediaries and MACs) 
enter the clinical and demographic information submitted by LTCHs 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 on the 
basis of diagnosis and procedure codes and other demographic 
information (age, sex, and discharge status). The GROUPER software used 
under the LTCH PPS is the same GROUPER software program used under the 
IPPS. 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 LTCHs 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.
    Although the LTCH PPS RYs 2004 through 2009 annual payment rate 
update cycles were effective July 1 through June 30 instead of October 
1 through September 30 (with the exception of the 15-month RY 2009 
payment rate update cycle, which is effective July 1, 2008 through 
September 30, 2009), because the patient classification system utilized 
under the LTCH PPS uses the same DRGs as those used under the IPPS for 
acute care hospitals, the annual update of the LTC-DRG classifications 
and relative weights continued to remain linked to the annual 
reclassification and recalibration of the DRGs used under the IPPS. 
Therefore, the payment rate update to the MS-LTC-DRG classifications 
and relative weights are effective for discharges occurring on or after 
October 1 through September 30 of each year (RYs 2004 through 2009), 
and we published the annual proposed and final update of the MS-LTC-
DRGs in the same notice as the proposed and final update for the IPPS 
(69 FR 34122 through 34125).
    In the RY 2009 LTCH PPS final rule, we amended the regulations at 
Sec.  412.503 and Sec.  412.535 in order to consolidate the rate year 
and fiscal year rulemaking cycles, effective October 1, 2009 (73 FR 
26797 through 26798). Specifically, we revised the regulations to shift 
the payment rate update from a July 1 through June 30 cycle to an 
October 1 through September 30 cycle. We extended the 2009 rate year 
period to September 30, 2009, so that RY 2009 is

[[Page 24211]]

15 months; that is, July 1, 2008, through September 30, 2009. 
Consequently, after the conclusion of the 15-month RY 2009, both the 
annual update of the LTCH PPS payment rates (and the description of the 
methodology and data used to calculate these payment rates) and the 
annual update of the MS-LTC-DRG classifications and associated 
weighting factors for LTCHs will be updated on an October 1 through 
September 30 cycle and, thus, be effective on October 1 of each Federal 
fiscal year beginning October 1, 2009. Beginning with the RY 2010 LTCH 
PPS update, both the annual update of the LTCH PPS payment rate, 
including the annual update of the MS-LTC-DRGs, and policy changes will 
be presented along with the annual IPPS payment rate and policy changes 
in a single combined rulemaking document published in the Federal 
Register as is being done in this proposed rule.
    Prior to FY 2004, the annual update to the DRGs used under the IPPS 
had been based on the annual revisions to the ICD-9-CM codes and was 
effective each October 1. As discussed in past LTCH PPS and IPPS 
proposed and final rules (most recently in the FY 2009 IPPS final rule 
(73 FR 48530)), 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. 
Therefore, there is the possibility that one feature of the GROUPER 
software program may be updated twice during a Federal fiscal year 
(that is, October 1 and April 1). However, we note that as the 
legislation permits, the DRG relative weights in effect for that fiscal 
year will continue to be updated only once a year (October 1).
    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 due to 
the implementation of section 503(a) of Public Law 108-173 for the IPPS 
(as explained above). 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, consistent with the policy under the IPPS (discussed 
in section II.G.7. of the preamble of this proposed rule), 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. Any coding updates will be available through the 
Web sites provided in section II.G.7. of the preamble of this proposed 
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 Pub. L. 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.7. of the preamble of this proposed rule).
    There were no mid-year codes added to the ICD-9-CM coding system as 
a result of the September 24-25, 2008 meeting of the ICD-9-CM 
Coordination and Maintenance Committee. The next update to the ICD-9-CM 
coding system will occur on October 1, 2009 (FY 2010), and the ICD-9-CM 
coding set implemented on October 1, 2009, will continue through 
September 30, 2010 (FY 2010). The ICD-9-CM Coordination and Maintenance 
Committee met again on March 11-12, 2009. Because this meeting was for 
the purpose of informing the public of proposed changes to the ICD-9-CM 
code set as well as for requesting comment from the public, no 
decisions regarding coding changes were made at this meeting. 
Commenters were requested to submit comments by April 3, 2009, 
concerning the proposed code revisions discussed at the March 11-12, 
2009 meeting. Any new codes or other revisions created as a result of 
this meeting are not included in this proposed rule because of the 
short turnaround time required for the publication of the proposed 
rule. However, new codes and any other revisions will appear in the 
final rule in Tables 6A through 6F of the Addendum to that final rule. 
Those codes appearing for the first time in the final rule will be 
identified with an asterisk leading to the following notation: ``These 
codes were discussed at the March 11-12, 2009 ICD-9-CM Coordination and 
Maintenance Committee meeting and were not finalized in time to include 
in the proposed rule. However, they will be implemented on October 1, 
2009.'' The update to the ICD-9-CM coding system that is effective on 
October 1, 2009 is discussed in section II.G.7. of the preamble of this 
proposed rule.
b. Proposed Changes to the MS-LTC-DRGs for RY 2010
    Consistent with our historical practice of using the same patient 
classification system under the LTCH PPS as is used under the IPPS, in 
this proposed rule, we are proposing to modify and revise the MS-LTC-
DRG classifications effective October 1, 2009, through September 30, 
2010 (RY 2010) consistent with the proposed changes to specific MS-DRG 
classifications presented above in section II.G. of this proposed rule 
(that is, proposed GROUPER Version 27.0). Therefore, the proposed MS-
LTC-DRGs for RY 2010 presented in this proposed rule are the same as 
the proposed MS-DRGs that would be used under the IPPS for FY 2010 
(that is, GROUPER Version 27.0 as described in section II.G. of the 
preamble of this proposed rule). In addition, because the proposed MS-
LTC-DRGs for RY 2010 are the same as the proposed MS-DRGs for FY 2010, 
the other proposed changes that would affect MS-DRG (and by extension 
MS-LTC-DRG) assignments under the proposed Version 27.0 of the GROUPER 
discussed in section II.G. of the preamble of this proposed rule, 
including the proposed changes to the

[[Page 24212]]

MCE software and changes to the ICD-9-CM coding system, would also be 
applicable under the LTCH PPS for RY 2010.
3. Development of the Proposed RY 2010 MS-LTC-DRG Relative Weights
a. General Overview of the Development of the MS-LTC-DRG Relative 
Weights
    As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 
55984), 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 final rule (73 FR 48542 through 48550) and as detailed in the 
following sections, the basic methodology for developing the RY 2010 
proposed MS-LTC-DRG relative weights in this proposed rule continues 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 this proposed rule, to calculate the proposed MS-LTC-DRG 
relative weights for RY 2010, we are proposing to obtain total Medicare 
allowable charges from FY 2008 Medicare LTCH bill data from the 
December 2008 update of the MedPAR file, which are the best available 
data at this time, and to use the proposed Version 27.0 of the GROUPER 
to classify LTCH cases (as discussed above). We also are proposing that 
if more recent data become available, we would use those data and the 
finalized Version 27.0 of the GROUPER in establishing the RY 2010 MS-
LTC-DRG relative weights in the final rule.
    Consistent with our historical methodology, 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 2009 IPPS final rule (73 FR 
48532).) Therefore, in the development of the proposed RY 2010 MS-LTC-
DRG relative weights in this proposed rule, we have excluded the data 
of the 13 all-inclusive rate providers and the 2 LTCHs that are paid in 
accordance with demonstration projects that had claims in the FY 2008 
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 nonrandom 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, in this proposed 
rule, we are proposing to use a hospital-specific relative value (HSRV) 
methodology to calculate the proposed 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 proposed 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 proposed 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 VIII.B.3.f. (step 3) of the preamble of this proposed 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

[[Page 24213]]

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 the Proposed MS-LTC-DRG 
Relative Weights
    For purposes of determining the proposed MS-LTC-DRG relative 
weights, as we discussed in the FY 2009 IPPS final rule (73 FR 48532 
through 48533), there are 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 proposed relative weight; low-
volume proposed MS-LTC-DRGs (that is, proposed MS-LTC-DRGs that contain 
between 1 and 24 cases based on a given year's claims data) are grouped 
into quintiles (as described below) and assigned the proposed relative 
weight of the quintile. No-volume proposed MS-LTC-DRGs (that is, no 
cases in the given year's claims data were assigned to those proposed 
MS-LTC-DRGs) are crosswalked to other proposed MS-LTC-DRGs based on the 
clinical similarities and assigned the relative weight of the 
crosswalked MS-LTC-DRG (as described in greater detail below). (We 
provide in-depth discussions of our policy regarding weight-setting for 
low-volume MS-LTC-DRGs in section VIII.B.3.e. of the preamble of this 
proposed rule and for no-volume MS-LTC-DRGs, under Step 5 in section 
VIII.B.3.f. of the preamble of this proposed rule.)
    As noted above, in response to the need to account for severity and 
pay appropriately for cases, we developed a severity-adjusted patient 
classification system that 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 also noted above, while the LTCH PPS and the IPPS use the same 
patient classification system, the methodology that is used to set the 
DRG relative 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 established when we 
adopted the MS-LTC-DRGs in the FY 2008 IPPS final rule with comment 
period (72 FR 47278 through 47281), we are proposing to determine the 
proposed RY 2010 relative weights for the proposed MS-LTC-DRGs using 
the following steps: (1) If a proposed MS-LTC-DRG has at least 25 
cases, it is assigned its own proposed relative weight; (2) if a 
proposed MS-LTC-DRG has between 1 and 24 cases, it is assigned to a 
quintile for which we compute a proposed relative weight for all of the 
proposed MS-LTC-DRGs assigned to that quintile; and (3) if a proposed 
MS-LTC-DRG has no cases, it is crosswalked to another proposed MS-LTC-
DRG based upon clinical similarities to assign an appropriate proposed 
relative weight (as described below in detail in Step 5 of section 
VIII.B.3.f. of this preamble). Furthermore, in determining the proposed 
RY 2010 MS-LTC-DRG relative weights, when necessary, we are proposing 
to make adjustments to account for nonmonotonicity, as explained in 
greater detail below in Step 6 of section VIII.B.3.f. of this preamble.
    Our methodology for determining relative weights for the MS-LTC-
DRGs included an adjustment for nonmonotonicity because, 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 proposed relative weight methodology 
outlined above, the proposed MS-LTC-DRG with MCC would have a lower 
relative weight than one with CC, or the proposed 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), when 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 proposed 
methodology for making adjustments because of nonmonotonicity in 
determining the proposed RY 2010 MS-LTC-DRG relative weights is 
discussed in greater detail below in section VIII.B.3.f. (Step 6) of 
the preamble of this proposed rule.
e. Low-Volume MS-LTC-DRGs
    In order to account for proposed 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 (67 FR 55984 through 
55995) and the methodology that we established when we implemented the 
MS-LTC-DRGs in the FY 2008 IPPS final rule with comment period (72 FR 
47283 through 47288), for purposes of determining the MS-LTC-DRG 
relative weights, 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. In determining 
the proposed RY 2010 MS-LTC-DRG relative weights in this proposed rule, 
consistent with the methodology described above and the methodology we 
used to establish the FY 2009 MS-LTC-DRG relative weights in the FY 
2009 IPPS final rule (73 FR 48533 through 48540), we are proposing to 
continue to employ this quintile methodology for low-volume proposed 
MS-LTC-DRGs. In addition, in cases where the initial assignment of a 
low-volume proposed 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 proposing to make 
adjustments to the treatment of low-volume proposed MS-LTC-DRGs to 
preserve monotonicity, as discussed in detail below in section 
VIII.B.3.f. (Step 6) in this preamble.
    In this proposed rule, using LTCH cases from the December 2008 
update of the FY 2008 MedPAR file, we identified 282 MS-LTC-DRGs that 
contained between 1 and 24 cases. This list of proposed MS-LTC-DRGs was 
then

[[Page 24214]]

divided into one of the 5 low-volume quintiles, each containing a 
minimum of 56 proposed MS-LTC-DRGs (282/5 = 56 with 2 proposed MS-LTC-
DRGs as the remainder). We are proposing to assign a low-volume 
proposed MS-LTC-DRG to a specific low-volume quintile by sorting the 
low-volume proposed MS-LTC-DRGs in ascending order by average charge in 
accordance with our established methodology. Furthermore, because the 
number of proposed MS-LTC-DRGs with less than 25 cases is not evenly 
divisible by 5, the average charge of the low-volume quintile was used 
to determine which of the low-volume quintiles contain the 2 additional 
low-volume proposed MS-LTC-DRGs. Specifically, after sorting the 282 
low-volume proposed MS-LTC-DRGs by ascending order by average charge, 
we are proposing to assign the first fifth (1st through 56th) of low-
volume proposed MS-LTC-DRGs (with the lowest average charge) into 
Quintile 1. The proposed MS-LTC-DRGs with the highest average charge 
cases would be assigned into Quintile 5. Because the average charge of 
the 57th low-volume proposed MS-LTC-DRG in the sorted list is closer to 
the average charge of the 56th low-volume proposed MS-LTC-DRG (assigned 
to Quintile 1) than to the average charge of the 58th low-volume 
proposed MS-LTC-DRG (assigned to Quintile 2), we are proposing to place 
it into Quintile 1 (such that Quintile 1 would contain 57 low-volume 
proposed MS-LTC-DRGs before any adjustments for nonmonotonicity, as 
discussed below). This process was repeated through the remaining low-
volume proposed MS-LTC-DRGs so that 2 of the 5 low-volume quintiles 
contain 57 MS-LTC-DRGs (Quintiles 1 and 2) and 3 of the 5 low-volume 
quintiles contain 56 MS-LTC-DRGs (Quintiles 3, 4, and 5).
    Accordingly, in order to determine the proposed RY 2010 relative 
weights for the proposed MS-LTC-DRGs with low volume, we are proposing 
to use 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 proposed RY 2010 MS-LTC-DRG relative weights 
(as shown in Table 11 of the Addendum to this proposed rule). We 
determined a proposed relative weight and (geometric) average length of 
stay for each of the 5 low-volume quintiles using the methodology that 
we applied to the proposed MS-LTC-DRGs (25 or more cases), as described 
in section VIII.B.3.f. of the preamble of this proposed rule. We are 
proposing to assign the same proposed relative weight and average 
length of stay to each of the low-volume proposed 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 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 proposed relative weights based 
on our methodology.

        Proposed Composition of Low-Volume Quintiles for RY 2010
------------------------------------------------------------------------
  MS-LTC-DRG (Version 27.0)      MS-LTC-DRG Description (Version 27.0)
------------------------------------------------------------------------
                           Proposed Quintile 1
------------------------------------------------------------------------
026..........................  Craniotomy & endovascular intracranial
                                procedures w CC.
053..........................  Spinal disorders & injuries w/o CC/MCC.
060..........................  Multiple sclerosis & cerebellar ataxia w/
                                o CC/MCC.
066..........................  Intracranial hemorrhage or cerebral
                                infarction w/o CC/MCC.
068..........................  Nonspecific cva & precerebral occlusion w/
                                o infarct w/o MCC.
069..........................  Transient ischemia.
072..........................  Nonspecific cerebrovascular disorders w/o
                                CC/MCC.
078..........................  Hypertensive encephalopathy w CC.
081..........................  Nontraumatic stupor & coma w/o MCC.
089..........................  Concussion w CC.
090..........................  Concussion w/o CC/MCC.
093..........................  Other disorders of nervous system w/o CC/
                                MCC.
103..........................  Headaches w/o MCC.
115..........................  Extraocular procedures except orbit.
139..........................  Salivary gland procedures.
149..........................  Dysequilibrium.
184..........................  Major chest trauma w CC.
198..........................  Interstitial lung disease w/o CC/MCC.
201..........................  Pneumothorax w/o CC/MCC.
203..........................  Bronchitis & asthma w/o CC/MCC.
284..........................  Circulatory disorders w AMI, expired w
                                CC*.
310..........................  Cardiac arrhythmia & conduction disorders
                                w/o CC/MCC.
313..........................  Chest pain.
350..........................  Inguinal & femoral hernia procedures w
                                MCC.
358..........................  Other digestive system O.R. procedures w/
                                o CC/MCC.
370..........................  Major esophageal disorders w/o CC/MCC.
376..........................  Digestive malignancy w/o CC/MCC.
387..........................  Inflammatory bowel disease w/o CC/MCC.
437..........................  Malignancy of hepatobiliary system or
                                pancreas w/o CC/MCC.
440..........................  Disorders of pancreas except malignancy w/
                                o CC/MCC.
443..........................  Disorders of liver except malig, cirr,
                                alc hepa w/o CC/MCC.
446..........................  Disorders of the biliary tract w/o CC/
                                MCC.
534..........................  Fractures of femur w/o MCC.
536..........................  Fractures of hip & pelvis w/o MCC.
544..........................  Pathological fractures & musculoskelet &
                                conn tiss malig w/o CC/MCC.
547..........................  Connective tissue disorders w/o CC/MCC.
556..........................  Signs & symptoms of musculoskeletal
                                system & conn tissue w/o MCC.
578..........................  Skin graft &/or debrid exc for skin ulcer
                                or cellulitis w/o CC/MCC.
601..........................  Non-malignant breast disorders w/o CC/
                                MCC.

[[Page 24215]]

 
667..........................  Prostatectomy w/o CC/MCC.
694..........................  Urinary stones w/ot esw lithotripsy w/o
                                MCC.
696..........................  Kidney & urinary tract signs & symptoms w/
                                o MCC.
725..........................  Benign prostatic hypertrophy w MCC.
726..........................  Benign prostatic hypertrophy w/o MCC.
730..........................  Other male reproductive system diagnoses
                                w/o CC/MCC.
746..........................  Vagina, cervix & vulva procedures w CC/
                                MCC*.
803..........................  Other O.R. proc of the blood & blood
                                forming organs w CC.
826..........................  Myeloprolif disord or poorly diff neopl w
                                maj O.R. proc w MCC*.
869..........................  Other infectious & parasitic diseases
                                diagnoses w/o CC/MCC.
880..........................  Acute adjustment reaction & psychosocial
                                dysfunction.
881..........................  Depressive neuroses.
883..........................  Disorders of personality & impulse
                                control.
895..........................  Alcohol/drug abuse or dependence w
                                rehabilitation therapy.
897..........................  Alcohol/drug abuse or dependence w/o
                                rehabilitation therapy w/o MCC.
918..........................  Poisoning & toxic effects of drugs w/o
                                MCC.
964..........................  Other multiple significant trauma w CC.
965..........................  Other multiple significant trauma w/o CC/
                                MCC.
------------------------------------------------------------------------
                           Proposed Quintile 2
------------------------------------------------------------------------
032..........................  Ventricular shunt procedures w CC.
033..........................  Ventricular shunt procedures w/o CC/MCC.
042..........................  Periph & cranial nerve & other nerv syst
                                proc w/o CC/MCC.
067..........................  Nonspecific cva & precerebral occlusion w/
                                o infarct w MCC.
080..........................  Nontraumatic stupor & coma w MCC.
083..........................  Traumatic stupor & coma, coma >1 hr w
                                CC*.
087..........................  Traumatic stupor & coma, coma <1 hr w/o
                                CC/MCC***.
088..........................  Concussion w MCC.
096..........................  Bacterial & tuberculous infections of
                                nervous system w/o CC/MCC.
102..........................  Headaches w MCC.
125..........................  Other disorders of the eye w/o MCC.
156..........................  Nasal trauma & deformity w/o CC/MCC***.
159..........................  Dental & Oral Diseases w/o CC/MCC.
183..........................  Major chest trauma w MCC.
257..........................  Upper limb & toe amputation for circ
                                system disorders w/o CC/MCC.
259..........................  Cardiac pacemaker device replacement w/o
                                MCC.
284..........................  Circulatory disorders w AMI, expired w
                                CC**.
285..........................  Circulatory disorders w AMI, expired w/o
                                CC/MCC.
294..........................  Deep vein thrombophlebitis w CC/MCC.
311..........................  Angina pectoris.
379..........................  G.I. hemorrhage w/o CC/MCC.
384..........................  Uncomplicated peptic ulcer w/o MCC.
386..........................  Inflammatory bowel disease w CC.
390..........................  G.I. obstruction w/o CC/MCC.
418..........................  Laparoscopic cholecystectomy w/o c.d.e. w
                                CC.
433..........................  Cirrhosis & alcoholic hepatitis w CC.
436..........................  Malignancy of hepatobiliary system or
                                pancreas w CC.
479..........................  Biopsies of musculoskeletal system &
                                connective tissue w/o CC/MCC.
497..........................  Local excision & removal int fix devices
                                exc hip & femur w/o CC/MCC.
535..........................  Fractures of hip & pelvis w MCC.
553..........................  Bone diseases & arthropathies w MCC.
562..........................  Fx, sprn, strn & disl except femur, hip,
                                pelvis & thigh w MCC***.
598..........................  Malignant breast disorders w CC.
600..........................  Non-malignant breast disorders w CC/MCC.
644..........................  Endocrine disorders w CC.
645..........................  Endocrine disorders w/o CC/MCC.
663..........................  Minor bladder procedures w CC.
675..........................  Other kidney & urinary tract procedures w/
                                o CC/MCC.
685..........................  Admit for renal dialysis.
697..........................  Urethral stricture.
700..........................  Other kidney & urinary tract diagnoses w/
                                o CC/MCC.
722..........................  Malignancy, male reproductive system w
                                MCC.
723..........................  Malignancy, male reproductive system w
                                CC.
746..........................  Vagina, cervix & vulva procedures w CC/
                                MCC**.
747..........................  Vagina, cervix & vulva procedures w/o CC/
                                MCC.
755..........................  Malignancy, female reproductive system w
                                CC.
759..........................  Infections, female reproductive system w/
                                o CC/MCC.
802..........................  Other O.R. proc of the blood & blood
                                forming organs w MCC.
808..........................  Major hematol/immun diag exc sickle cell
                                crisis & coagul w MCC***.
815..........................  Reticuloendothelial & immunity disorders
                                w CC.
816..........................  Reticuloendothelial & immunity disorders
                                w/o CC/MCC.

[[Page 24216]]

 
837..........................  Chemo w acute leukemia as sdx or w high
                                dose chemo agent w MCC.
842..........................  Lymphoma & non-acute leukemia w/o CC/MCC.
864..........................  Fever of unknown origin.
882..........................  Neuroses except depressive.
894..........................  Alcohol/drug abuse or dependence, left
                                ama.
922..........................  Other injury, poisoning & toxic effect
                                diag w MCC*.
976..........................  HIV w major related condition w/o CC/MCC.
986..........................  Prostatic O.R. procedure unrelated to
                                principal diagnosis w/o CC/MCC.
------------------------------------------------------------------------
                           Proposed Quintile 3
------------------------------------------------------------------------
023..........................  Craniotomy w major device implant or
                                acute complex CNS PDX w MCC.
029..........................  Spinal procedures w CC.
030..........................  Spinal procedures w/o CC/MCC.
058..........................  Multiple sclerosis & cerebellar ataxia w
                                MCC.
075..........................  Viral meningitis w CC/MCC.
083..........................  Traumatic stupor & coma, coma >1 hr w
                                CC**.
084..........................  Traumatic stupor & coma, coma >1 hr w/o
                                CC/MCC**.
099..........................  Non-bacterial infect of nervous sys exc
                                viral meningitis w/o CC/MCC.
121..........................  Acute major eye infections w CC/MCC.
124..........................  Other disorders of the eye w MCC.
158..........................  Dental & Oral Diseases w CC.
182..........................  Respiratory neoplasms w/o CC/MCC***.
188..........................  Pleural effusion w/o CC/MCC***.
241..........................  Amputation for circ sys disorders exc
                                upper limb & toe w/o CC/MCC.
290..........................  Acute & subacute endocarditis w/o CC/MCC.
327..........................  Stomach, esophageal & duodenal proc w CC.
331..........................  Major small & large bowel procedures w/o
                                CC/MCC.
348..........................  Anal & stomal procedures w CC.
381..........................  Complicated peptic ulcer w CC.
382..........................  Complicated peptic ulcer w/o CC/MCC.
383..........................  Uncomplicated peptic ulcer w MCC.
424..........................  Other hepatobiliary or pancreas O.R.
                                procedures w CC.
472..........................  Cervical spinal fusion w CC.
476..........................  Amputation for musculoskeletal sys & conn
                                tissue dis w/o CC/MCC.
487..........................  Knee procedures w pdx of infection w/o CC/
                                MCC.
493..........................  Lower extrem & humer proc except hip,
                                foot, femur w CC.
499..........................  Local excision & removal int fix devices
                                of hip & femur w/o CC/MCC.
511..........................  Shoulder, elbow or forearm proc, exc
                                major joint proc w CC.
517..........................  Other musculoskelet sys & conn tiss O.R.
                                proc w/o CC/MCC.
555..........................  Signs & symptoms of musculoskeletal
                                system & conn tissue w MCC.
563..........................  Fx, sprn, strn & disl except femur, hip,
                                pelvis & thigh w/o MCC***.
581..........................  Other skin, subcut tiss & breast proc w/o
                                CC/MCC.
582..........................  Mastectomy for malignancy w CC/MCC.
597..........................  Malignant breast disorders w MCC.
620..........................  O.R. procedures for obesity w CC.
643..........................  Endocrine disorders w MCC.
656..........................  Kidney & ureter procedures for neoplasm w
                                MCC.
660..........................  Kidney & ureter procedures for non-
                                neoplasm w CC.
666..........................  Prostatectomy w CC.
668..........................  Transurethral procedures w MCC.
669..........................  Transurethral procedures w CC.
687..........................  Kidney & urinary tract neoplasms w CC.
693..........................  Urinary stones w/o esw lithotripsy w MCC.
695..........................  Kidney & urinary tract signs & symptoms w
                                MCC.
749..........................  Other female reproductive system O.R.
                                procedures w CC/MCC.
760..........................  Menstrual & other female reproductive
                                system disorders w CC/MCC.
781..........................  Other antepartum diagnoses w medical
                                complications.
809..........................  Major hematol/immun diag exc sickle cell
                                crisis & coagul w CC***.
821..........................  Lymphoma & leukemia w major O.R.
                                procedure w CC.
835..........................  Acute leukemia w/o major O.R. procedure w
                                CC.
843..........................  Other myeloprolif dis or poorly diff
                                neopl diag w MCC.
844..........................  Other myeloprolif dis or poorly diff
                                neopl diag w CC**.
858..........................  Postoperative or post-traumatic
                                infections w O.R. proc w/o CC/MCC.
866..........................  Viral illness w/o MCC.
896..........................  Alcohol/drug abuse or dependence w/o
                                rehabilitation therapy w MCC.
903..........................  Wound debridements for injuries w/o CC/
                                MCC.
905..........................  Skin grafts for injuries w/o CC/MCC.
906..........................  Hand procedures for injuries.
941..........................  O.R. proc w diagnoses of other contact w
                                health services w/o CC/MCC.
------------------------------------------------------------------------

[[Page 24217]]

 
                           Proposed Quintile 4
------------------------------------------------------------------------
028..........................  Spinal procedures w MCC.
077..........................  Hypertensive encephalopathy w MCC.
082..........................  Traumatic stupor & coma, coma >1 hr w
                                MCC.
084..........................  Traumatic stupor & coma, coma >1 hr w/o
                                CC/MCC*.
131..........................  Cranial/facial procedures w CC/MCC.
133..........................  Other ear, nose, mouth & throat O.R.
                                procedures w CC/MCC.
157..........................  Dental & Oral Diseases w MCC.
237..........................  Major cardiovascular procedures w MCC.
243..........................  Permanent cardiac pacemaker implant w CC.
244..........................  Permanent cardiac pacemaker implant w/o
                                CC/MCC.
254..........................  Other vascular procedures w/o CC/MCC***.
286..........................  Circulatory disorders except AMI, w card
                                cath w MCC.
287..........................  Circulatory disorders except AMI, w card
                                cath w/o MCC.
304..........................  Hypertension w MCC.
338..........................  Appendectomy w complicated principal diag
                                w MCC.
344..........................  Minor small & large bowel procedures w
                                MCC.
347..........................  Anal & stomal procedures w MCC.
353..........................  Hernia procedures except inguinal &
                                femoral w MCC.
354..........................  Hernia procedures except inguinal &
                                femoral w CC.
369..........................  Major esophageal disorders w CC***.
380..........................  Complicated peptic ulcer w MCC.
423..........................  Other hepatobiliary or pancreas O.R.
                                procedures w MCC.
466..........................  Revision of hip or knee replacement w
                                MCC**.
469..........................  Major joint replacement or reattachment
                                of lower extremity w MCC**.
471..........................  Cervical spinal fusion w MCC.
480..........................  Hip & femur procedures except major joint
                                w MCC**.
488..........................  Knee procedures w/o pdx of infection w CC/
                                MCC.
490..........................  Back & neck procedures except spinal
                                fusion w CC/MCC or disc devices.
502..........................  Soft tissue procedures w/o CC/MCC***.
503..........................  Foot procedures w MCC.
505..........................  Foot procedures w/o CC/MCC***.
510..........................  Shoulder, elbow or forearm proc, exc
                                major joint proc w MCC.
513..........................  Hand or wrist proc, except major thumb or
                                joint proc w CC/MCC.
514..........................  Hand or wrist proc, except major thumb or
                                joint proc w/o CC/MCC.
516..........................  Other musculoskelet sys & conn tiss O.R.
                                proc w CC.
537..........................  Sprains, strains, & dislocations of hip,
                                pelvis & thigh w CC/MCC.
577..........................  Skin graft &/or debrid exc for skin ulcer
                                or cellulitis w CC.
584..........................  Breast biopsy, local excision & other
                                breast procedures w CC/MCC.
624..........................  Skin grafts & wound debrid for endoc,
                                nutrit & metab dis w/o CC/MCC***.
671..........................  Urethral procedures w CC/MCC.
691..........................  Urinary stones w esw lithotripsy w CC/
                                MCC.
711..........................  Testes procedures w CC/MCC.
800..........................  Splenectomy w CC.
814..........................  Reticuloendothelial & immunity disorders
                                w MCC.
826..........................  Myeloprolif disord or poorly diff neopl w
                                maj O.R. proc w MCC**.
827..........................  Myeloprolif disord or poorly diff neopl w
                                maj O.R. proc w CC**.
829..........................  Myeloprolif disord or poorly diff neopl w
                                other O.R. proc w CC/MCC.
834..........................  Acute leukemia w/o major O.R. procedure w
                                MCC.
844..........................  Other myeloprolif dis or poorly diff
                                neopl diag w CC***.
855..........................  Infectious & parasitic diseases w O.R.
                                procedure w/o CC/MCC.
909..........................  Other O.R. procedures for injuries w/o CC/
                                MCC.
917..........................  Poisoning & toxic effects of drugs w MCC.
922..........................  Other injury, poisoning & toxic effect
                                diag w MCC**.
923..........................  Other injury, poisoning & toxic effect
                                diag w/o MCC**.
927..........................  Extensive burns or full thickness burns w
                                MV 96+ hrs w skin graft.
928..........................  Full thickness burn w skin graft or inhal
                                inj w CC/MCC.
933..........................  Extensive burns or full thickness burns w
                                MV 96+ hrs w/o skin graft.
958..........................  Other O.R. procedures for multiple
                                significant trauma w CC.
963..........................  Other multiple significant trauma w MCC.
983..........................  Extensive O.R. procedure unrelated to
                                principal diagnosis w/o CC/MCC.
------------------------------------------------------------------------
                           Proposed Quintile 5
------------------------------------------------------------------------
011..........................  Tracheostomy for face, mouth & neck
                                diagnoses w MCC.
025..........................  Craniotomy & endovascular intracranial
                                procedures w MCC.
031..........................  Ventricular shunt procedures w MCC.
037..........................  Extracranial procedures w MCC.
038..........................  Extracranial procedures w CC.
135..........................  Sinus & mastoid procedures w CC/MCC.
148..........................  Ear, nose, mouth & throat malignancy w/o
                                CC/MCC***.

[[Page 24218]]

 
164..........................  Major chest procedures w CC.
168..........................  Other resp system O.R. procedures w/o CC/
                                MCC.
222..........................  Cardiac defib implant w cardiac cath w
                                AMI/HF/shock w MCC.
226..........................  Cardiac defibrillator implant w/o cardiac
                                cath w MCC.
227..........................  Cardiac defibrillator implant w/o cardiac
                                cath w/o MCC.
242..........................  Permanent cardiac pacemaker implant w
                                MCC.
245..........................  AICD generator procedures.
250..........................  Perc cardiovasc proc w/o coronary artery
                                stent or AMI w MCC.
260..........................  Cardiac pacemaker revision except device
                                replacement w MCC.
330..........................  Major small & large bowel procedures w
                                CC.
335..........................  Peritoneal adhesiolysis w MCC.
336..........................  Peritoneal adhesiolysis w CC.
405..........................  Pancreas, liver & shunt procedures w MCC.
406..........................  Pancreas, liver & shunt procedures w CC.
414..........................  Cholecystectomy except by laparoscope w/o
                                c.d.e. w MCC.
417..........................  Laparoscopic cholecystectomy w/o c.d.e. w
                                MCC.
420..........................  Hepatobiliary diagnostic procedures w
                                MCC.
453..........................  Combined anterior/posterior spinal fusion
                                w MCC.
454..........................  Combined anterior/posterior spinal fusion
                                w CC.
456..........................  Spinal fusion exc cerv w spinal curv,
                                malig or 9+ fusions w MCC.
457..........................  Spinal fusion exc cerv w spinal curv,
                                malig or 9+ fusions w CC.
459..........................  Spinal fusion except cervical w MCC.
466..........................  Revision of hip or knee replacement w
                                MCC**.
467..........................  Revision of hip or knee replacement w CC.
469..........................  Major joint replacement or reattachment
                                of lower extremity w MCC**.
470..........................  Major joint replacement or reattachment
                                of lower extremity w/o MCC.
480..........................  Hip & femur procedures except major joint
                                w MCC**.
481..........................  Hip & femur procedures except major joint
                                w CC.
485..........................  Knee procedures w pdx of infection w MCC.
486..........................  Knee procedures w pdx of infection w CC.
492..........................  Lower extrem & humer proc except hip,
                                foot, femur w MCC.
498..........................  Local excision & removal int fix devices
                                of hip & femur w CC/MCC.
507..........................  Major shoulder or elbow joint procedures
                                w CC/MCC.
619..........................  O.R. procedures for obesity w MCC.
642..........................  Inborn errors of metabolism.
659..........................  Kidney & ureter procedures for non-
                                neoplasm w MCC.
662..........................  Minor bladder procedures w MCC.
709..........................  Penis procedures w CC/MCC.
717..........................  Other male reproductive system O.R. proc
                                exc malignancy w CC/MCC.
776..........................  Postpartum & post abortion diagnoses w/o
                                O.R. procedure.
823..........................  Lymphoma & non-acute leukemia w other
                                O.R. proc w MCC.
824..........................  Lymphoma & non-acute leukemia w other
                                O.R. proc w CC.
827..........................  Myeloprolif disord or poorly diff neopl w
                                maj O.R. proc w CC*.
848..........................  Chemotherapy w/o acute leukemia as
                                secondary diagnosis w/o CC/MCC***.
876..........................  O.R. procedure w principal diagnoses of
                                mental illness.
923..........................  Other injury, poisoning & toxic effect
                                diag w/o MCC*.
957..........................  Other O.R. procedures for multiple
                                significant trauma w MCC.
969..........................  HIV w extensive O.R. procedure w MCC.
970..........................  HIV w extensive O.R. procedure w/o MCC.
984..........................  Prostatic O.R. procedure unrelated to
                                principal diagnosis w MCC.
985..........................  Prostatic O.R. procedure unrelated to
                                principal diagnosis w CC.
989..........................  Non-extensive O.R. proc unrelated to
                                principal diagnosis w/o CC/MCC***.
------------------------------------------------------------------------
* One of the original 282 low-volume proposed MS-LTC-DRGs initially
  assigned to this low-volume quintile; removed from this low-volume
  quintile in addressing nonmonotonicity (refer to step 6 in section
  VIII.B.3.f.of the preamble of this proposed rule).
** One of the original 282 low-volume proposed MS-LTC-DRGs initially
  assigned to a different low-volume quintile but moved to this low-
  volume quintile in addressing nonmonotonicity (refer to step 6 in
  section VIII.B.3.f. of the preamble of this proposed rule).
*** One of the original 282 low-volume proposed MS-LTC-DRGs initially
  assigned to this low-volume quintile but moved to a different low-
  volume quintile in addressing nonmonotonicity (refer to step 6 in
  section VIII.B.3.f. of the preamble of this proposed rule).

    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 used in determining the proposed MS-LTC-DRG 
relative weights 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.
f. Steps for Determining the Proposed RY 2010 MS-LTC-DRG Relative 
Weights
    In general, we are proposing to determine the RY 2010 MS-LTC-DRG 
relative weights based on the methodology established in the August 30, 
2002 LTCH PPS final rule (67 FR 55989 through 55995) and consistent 
with the methodology we used to determine the FY 2009 MS-LTC-DRG 
relative weights in the FY 2009 IPPS final rule (73 FR 48540 through 
48551). (We note that, for FY 2009, we made a modification to our 
methodology for determining relative weights for MS-LTC-DRGs with no 
LTCH cases (73 FR

[[Page 24219]]

48542 through 48543), which is reflected in the proposed methodology 
for determining the proposed RY 2010 MS-LTC-DRG relative weights 
presented below.)
    In summary, for RY 2010, we are proposing to group LTCH cases to 
the appropriate proposed MS-LTC-DRG, while taking into account the low-
volume proposed MS-LTC-DRGs (as described above), in order to determine 
the proposed RY 2010 MS-LTC-DRG relative weights. After grouping the 
cases to the appropriate MS-LTC-DRG (or low-volume quintile), we 
calculate the proposed relative weights for RY 2010 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 adjust the number of 
cases in each proposed 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 are then used to 
calculate ``relative adjusted weights'' for each proposed MS-LTC-DRG 
(or low-volume quintile) using the HSRV method (described above).
    Below we discuss in detail the steps for calculating the proposed 
RY 2010 MS-LTC-DRG relative weights. We note that, as we stated above 
in section VIII.B.3.b. of the preamble of this proposed 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 
2008 MedPAR file.
    Step 1--Remove statistical outliers.
    The first step in the calculation of the proposed RY 2010 MS-LTC-
DRG relative weights is to remove statistical outlier cases. Consistent 
with our historical relative weight methodology, we are proposing to 
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 proposed 
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 proposed relative weights 
could result in an inaccurate proposed 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 proposed RY 2010 MS-LTC-DRG 
relative weights, the value of many proposed 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 proposed RY 2010 MS-LTC-DRG relative weights, we are 
proposing to remove 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 the next step in the calculation of the proposed RY 2010 
MS-LTC-DRG relative weights, consistent with our historical relative 
weight methodology, we are proposing to adjust 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).
    We make 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 proposed RY 2010 MS-LTC-DRG relative weights would 
lower the proposed RY 2010 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, we are proposing to adjust 
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 proposed RY 2010 MS-LTC-DRG relative weights 
on an iterative basis.
    Consistent with our historical relative weight methodology, we are 
proposing to calculate the proposed RY 2010 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 is then multiplied by the LTCH's case-mix index to 
produce an adjusted hospital-specific relative charge value for the 
case. An initial case-mix index value of 1.0 is used for each LTCH.
    For each proposed MS-LTC-DRG, the proposed RY 2010 relative weight 
was calculated by dividing the average of the adjusted hospital-
specific relative charge values (from above) for the proposed MS-LTC-
DRG by the overall average hospital-specific relative charge value 
across all cases for all LTCHs. Using these recalculated proposed MS-
LTC-DRG relative weights, each LTCH's average relative weight for all 
of its cases (that is, its case-mix) is calculated by dividing the sum 
of all the LTCH's proposed MS-LTC-DRG relative weights by its total 
number of cases. The LTCHs' hospital-specific relative charge values 
above is multiplied by these hospital-specific case-mix indexes. These 
hospital-specific case-mix adjusted relative charge values are then 
used to calculate a new set of proposed MS-LTC-DRG relative weights 
across all LTCHs. This iterative process is continued until there is 
convergence between the weights produced at adjacent steps, for 
example, when the maximum difference is less than 0.0001.
    Step 5--Determine a proposed RY 2010 relative weight for MS-LTC-
DRGs with no LTCH cases.
    As we stated above, we are proposing to determine the proposed RY 
2010 relative weight for each proposed MS-LTC-DRG using total Medicare 
allowable charges reported in the best available LTCH claims data (that 
is, the December 2008 update of the FY 2008 MedPAR file for this 
proposed rule). Of the proposed RY 2010 MS-LTC-DRGs, we identified a 
number of proposed MS-LTC-DRGs for which there were no

[[Page 24220]]

LTCH cases in the database. That is, based on data from the FY 2008 
MedPAR file used for this proposed rule, no patients who would have 
been classified to those proposed MS-LTC-DRGs were treated in LTCHs 
during FY 2008 and, therefore, no charge data were available for these 
proposed MS-LTC-DRGs. Thus, in the process of determining the proposed 
MS-LTC-DRG relative weights, we were unable to calculate proposed 
relative weights for the proposed 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 proposed MS-LTC-
DRGs may be treated at LTCHs, consistent with our historical 
methodology, we are proposing to assign a proposed relative weight to 
each of the no-volume proposed MS-LTC-DRGs based on clinical similarity 
and relative costliness (with the exception of ``transplant'' proposed 
MS-LTC-DRGs and ``error'' proposed MS-LTC-DRGs, as discussed below). In 
general, we determine proposed RY 2010 relative weights for the 
proposed MS-LTC-DRGs with no LTCH cases in the FY 2008 MedPAR file used 
in this proposed rule (that is, ``no-volume'' proposed MS-LTC-DRGs) by 
crosswalking each no-volume proposed MS-LTC-DRG to another proposed MS-
LTC-DRG with a calculated proposed relative weight (determined in 
accordance with the methodology described above). Then, the ``no-
volume'' MS-LTC-DRG is assigned the same proposed relative weight of 
the MS-LTC-DRG to which it was crosswalked (as described in greater 
detail below).
    Specifically, in this proposed rule, as stated above, we are 
proposing to determine the proposed relative weight for each proposed 
MS-LTC-DRG using total Medicare allowable charges reported in the 
December 2008 update of the FY 2008 MedPAR file. Of the 746 proposed 
MS-LTC-DRGs for RY 2010, we identified 216 proposed MS-LTC-DRGs for 
which there were no LTCH cases in the database (including the 8 
``transplant'' proposed MS-LTC-DRGs and 2 ``error'' proposed MS-LTC-
DRGs). As stated above, we are proposing to assign proposed relative 
weights for each of the 216 no-volume proposed MS-LTC-DRGs (with the 
exception of the 8 ``transplant'' proposed MS-LTC-DRGs and the 2 
``error'' proposed MS-LTC-DRGs, which are discussed below) based on 
clinical similarity and relative costliness to one of the remaining 530 
(746-216=530) proposed MS-LTC-DRGs for which we were able to determine 
proposed relative weights based on FY 2008 LTCH claims data using the 
steps described above. (For the remainder of this discussion, we refer 
to one of the 530 proposed MS-LTC-DRGs for which we were able to 
determine a proposed relative weight as the ``crosswalked'' proposed 
MS-LTC-DRG.) Then, we are proposing to assign the no-volume proposed 
MS-LTC-DRG the proposed relative weight of the crosswalked proposed MS-
LTC-DRG. (As explained below in Step 6, when necessary, we made 
adjustments to account for nonmonotonicity.)
    In this proposed rule, we are proposing to use the following 
methodology for determining the proposed RY 2010 relative weights for 
the no-volume proposed MS-LTC-DRGs: We crosswalk the no-volume proposed 
MS-LTC-DRG to an proposed MS-LTC-DRG for which there are LTCH cases in 
the FY 2008 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. As we explained in 
the FY 2009 IPPS final rule (73 FR 48543), we evaluate the relative 
costliness in determining the applicable proposed MS-LTC-DRG to which a 
no-volume proposed MS-LTC-DRG was crosswalked in order to assign an 
appropriate proposed relative weight for the no-volume proposed MS-LTC-
DRGs in RY 2010. In general, most of the no-volume proposed MS-LTC-DRGs 
historically have not had any cases in the LTCH claims 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 proposed 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 proposed MS-LTC-DRGs. 
Specifically, the relative costliness of each of the no-volume proposed 
MS-LTC-DRGs for RY 2010 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 proposed 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 proposed MS-LTC-DRGs in RY 2010, the proposed relative 
weights assigned based on the crosswalked proposed MS-LTC-DRGs would 
result in an appropriate LTCH PPS payment because the proposed 
crosswalks, which are based on similar clinical similarity and relative 
costliness, generally require equivalent relative resource use. We then 
assign the proposed relative weight of the crosswalked proposed MS-LTC-
DRG as the proposed relative weight for the no-volume proposed MS-LTC-
DRG such that both of these proposed MS-LTC-DRGs (that is, the no-
volume proposed MS-LTC-DRG and the crosswalked proposed MS-LTC-DRG) 
would have the same proposed relative weight for RY 2010. We note that 
if the crosswalked proposed MS-LTC-DRG has 25 cases or more, its 
proposed relative weight, which is calculated using the methodology 
described in steps 1 through 4 above, is assigned to the no-volume 
proposed MS-LTC-DRG as well. Similarly, if the MS-LTC-DRG to which the 
no-volume proposed 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 proposed relative weights, we assign the 
proposed relative weight of the applicable low-volume quintile to the 
no-volume proposed MS-LTC-DRG such that both of these proposed MS-LTC-
DRGs (that is, the no-volume proposed MS-LTC-DRG and the crosswalked 
proposed MS-LTC-DRG) have the same proposed relative weight for RY 
2010. (As we noted above, in the infrequent case where nonmonotonicity 
involving a no-volume proposed MS-LTC-DRG results, additional measures 
as described in Step 6 are required in order to maintain monotonically 
increasing proposed relative weights.)
    For this proposed rule, a list of the no-volume MS-LTC-DRGs and the 
proposed MS-LTC-DRG to which it is crosswalked (that is, the 
crosswalked MS-LTC-DRG) for RY 2010 is shown in the chart below.

[[Page 24221]]



           Proposed No-Volume MS-LTC-DRG Crosswalk for RY 2010
------------------------------------------------------------------------
                                                             Proposed
       MS-LTC-DRG (V27.0)         MS-LTC-DRG description  crosswalked MS-
                                       (version 27)           LTC-DRG
------------------------------------------------------------------------
9..............................  Bone marrow transplant.             823
12.............................  Tracheostomy for face,              146
                                  mouth & neck diagnoses
                                  w CC.
13.............................  Tracheostomy for face,              146
                                  mouth & neck diagnoses
                                  w/o CC/MCC.
20.............................  Intracranial vascular                31
                                  procedures w PDX
                                  hemorrhage w MCC.
21.............................  Intracranial vascular                32
                                  procedures w PDX
                                  hemorrhage w CC.
22.............................  Intracranial vascular                32
                                  procedures w PDX
                                  hemorrhage w/o CC/MCC.
24.............................  Craniotomy w major                   23
                                  device implant or
                                  acute complex CNS PDX
                                  w/o MCC.
27.............................  Craniotomy &                         26
                                  endovascular
                                  intracranial
                                  procedures w/o CC/MCC.
34.............................  Carotid artery stent                 37
                                  procedure w MCC.
35.............................  Carotid artery stent                 38
                                  procedure w CC.
36.............................  Carotid artery stent                 38
                                  procedure w/o CC/MCC.
39.............................  Extracranial procedures              38
                                  w/o CC/MCC.
61.............................  Acute ischemic stroke w              70
                                  use of thrombolytic
                                  agent w MCC.
62.............................  Acute ischemic stroke w              71
                                  use of thrombolytic
                                  agent w CC.
63.............................  Acute ischemic stroke w              72
                                  use of thrombolytic
                                  agent w/o CC/MCC.
76.............................  Viral meningitis w/o CC/             75
                                  MCC.
79.............................  Hypertensive                        305
                                  encephalopathy w/o CC/
                                  MCC.
113............................  Orbital procedures w CC/            146
                                  MCC.
114............................  Orbital procedures w/o              147
                                  CC/MCC.
116............................  Intraocular procedures              125
                                  w CC/MCC.
117............................  Intraocular procedures              125
                                  w/o CC/MCC.
122............................  Acute major eye                     125
                                  infections w/o CC/MCC.
123............................  Neurological eye                    125
                                  disorders.
129............................  Major head & neck                   146
                                  procedures w CC/MCC or
                                  major device.
130............................  Major head & neck                   148
                                  procedures w/o CC/MCC.
132............................  Cranial/facial                      133
                                  procedures w/o CC/MCC.
134............................  Other ear, nose, mouth              133
                                  & throat O.R.
                                  procedures w/o CC/MCC.
136............................  Sinus & mastoid                     133
                                  procedures w/o CC/MCC.
137............................  Mouth procedures w CC/              133
                                  MCC.
138............................  Mouth procedures w/o CC/            133
                                  MCC.
150............................  Epistaxis w MCC........             152
151............................  Epistaxis w/o MCC......             153
165............................  Major chest procedures              254
                                  w/o CC/MCC.
185............................  Major chest trauma w/o              184
                                  CC/MCC.
215............................  Other heart assist                  254
                                  system implant.
216............................  Cardiac valve & oth maj             237
                                  cardiothoracic proc w
                                  card cath w MCC.
217............................  Cardiac valve & oth maj             253
                                  cardiothoracic proc w
                                  card cath w CC.
218............................  Cardiac valve & oth maj             254
                                  cardiothoracic proc w
                                  card cath w/o CC/MCC.
219............................  Cardiac valve & oth maj             237
                                  cardiothoracic proc w/
                                  o card cath w MCC.
220............................  Cardiac valve & oth maj             254
                                  cardiothoracic proc w/
                                  o card cath w CC.
221............................  Cardiac valve & oth maj             254
                                  cardiothoracic proc w/
                                  o card cath w/o CC/MCC.
223............................  Cardiac defib implant w             243
                                  cardiac cath w AMI/HF/
                                  shock w/o MCC.
224............................  Cardiac defib implant w             242
                                  cardiac cath w/o AMI/
                                  HF/shock w MCC.
225............................  Cardiac defib implant w             243
                                  cardiac cath w/o AMI/
                                  HF/shock w/o MCC.
228............................  Other cardiothoracic                252
                                  procedures w MCC.
229............................  Other cardiothoracic                253
                                  procedures w CC.
230............................  Other cardiothoracic                254
                                  procedures w/o CC/MCC.
231............................  Coronary bypass w PTCA              237
                                  w MCC.
232............................  Coronary bypass w PTCA              254
                                  w/o MCC.
233............................  Coronary bypass w                   237
                                  cardiac cath w MCC.
234............................  Coronary bypass w                   254
                                  cardiac cath w/o MCC.
235............................  Coronary bypass w/o                 237
                                  cardiac cath w MCC.
236............................  Coronary bypass w/o                 254
                                  cardiac cath w/o MCC.
238............................  Major cardiovascular                254
                                  procedures w/o MCC.
246............................  Percutaneous                        252
                                  cardiovascular proc w
                                  drug-eluting stent w
                                  MCC.
247............................  Percutaneous                        253
                                  cardiovascular proc w
                                  drug-eluting stent w/o
                                  MCC.
248............................  Percutaneous cardiovasc             252
                                  proc w non-drug-
                                  eluting stent w MCC.
249............................  Percutaneous cardiovasc             253
                                  proc w non-drug-
                                  eluting stent w/o MCC.
251............................  Perc cardiovasc proc w/             250
                                  o coronary artery
                                  stent or AMI w/o MCC.
258............................  Cardiac pacemaker                   259
                                  device replacement w
                                  MCC.
261............................  Cardiac pacemaker                   259
                                  revision except device
                                  replacement w CC.
262............................  Cardiac pacemaker                   259
                                  revision except device
                                  replacement w/o CC/MCC.
263............................  Vein ligation &                     301
                                  stripping.
265............................  AICD lead procedures...             259
295............................  Deep vein                           294
                                  thrombophlebitis w/o
                                  CC/MCC.
296............................  Cardiac arrest,                     283
                                  unexplained w MCC.
297............................  Cardiac arrest,                     284
                                  unexplained w CC.
298............................  Cardiac arrest,                     284
                                  unexplained w/o CC/MCC.
328............................  Stomach, esophageal &               358
                                  duodenal proc w/o CC/
                                  MCC.
332............................  Rectal resection w MCC.             356

[[Page 24222]]

 
333............................  Rectal resection w CC..             357
334............................  Rectal resection w/o CC/            358
                                  MCC.
337............................  Peritoneal adhesiolysis             335
                                  w/o CC/MCC.
339............................  Appendectomy w                      372
                                  complicated principal
                                  diag w CC.
340............................  Appendectomy w                      373
                                  complicated principal
                                  diag w/o CC/MCC.
341............................  Appendectomy w/o                    371
                                  complicated principal
                                  diag w MCC.
342............................  Appendectomy w/o                    372
                                  complicated principal
                                  diag w CC.
343............................  Appendectomy w/o                    373
                                  complicated principal
                                  diag w/o CC/MCC.
345............................  Minor small & large                 344
                                  bowel procedures w CC.
346............................  Minor small & large                 344
                                  bowel procedures w/o
                                  CC/MCC.
349............................  Anal & stomal                       348
                                  procedures w/o CC/MCC.
351............................  Inguinal & femoral                  350
                                  hernia procedures w CC.
352............................  Inguinal & femoral                  350
                                  hernia procedures w/o
                                  CC/MCC.
355............................  Hernia procedures                   354
                                  except inguinal &
                                  femoral w/o CC/MCC.
407............................  Pancreas, liver & shunt             406
                                  procedures w/o CC/MCC.
408............................  Biliary tract proc                  424
                                  except only cholecyst
                                  w or w/o c.d.e. w MCC.
409............................  Biliary tract proc                  424
                                  except only cholecyst
                                  w or w/o c.d.e. w CC.
410............................  Biliary tract proc                  424
                                  except only cholecyst
                                  w or w/o c.d.e. w/o CC/
                                  MCC.
411............................  Cholecystectomy w                   418
                                  c.d.e. w MCC.
412............................  Cholecystectomy w                   418
                                  c.d.e. w CC.
413............................  Cholecystectomy w                   418
                                  c.d.e. w/o CC/MCC.
415............................  Cholecystectomy except              418
                                  by laparoscope w/o
                                  c.d.e. w CC.
416............................  Cholecystectomy except              418
                                  by laparoscope w/o
                                  c.d.e. w/o CC/MCC.
419............................  Laparoscopic                        418
                                  cholecystectomy w/o
                                  c.d.e. w/o CC/MCC.
421............................  Hepatobiliary                       424
                                  diagnostic procedures
                                  w CC.
422............................  Hepatobiliary                       424
                                  diagnostic procedures
                                  w/o CC/MCC.
425............................  Other hepatobiliary or              424
                                  pancreas O.R.
                                  procedures w/o CC/MCC.
434............................  Cirrhosis & alcoholic               433
                                  hepatitis w/o CC/MCC.
455............................  Combined anterior/                  457
                                  posterior spinal
                                  fusion w/o CC/MCC.
458............................  Spinal fusion exc cerv              457
                                  w spinal curv, malig
                                  or 9+ fusions w/o CC/
                                  MCC.
460............................  Spinal fusion except                459
                                  cervical w/o MCC.
461............................  Bilateral or multiple               480
                                  major joint procs of
                                  lower extremity w MCC.
462............................  Bilateral or multiple               480
                                  major joint procs of
                                  lower extremity w/o
                                  MCC.
468............................  Revision of hip or knee             480
                                  replacement w/o CC/MCC.
473............................  Cervical spinal fusion              472
                                  w/o CC/MCC.
482............................  Hip & femur procedures              480
                                  except major joint w/o
                                  CC/MCC.
483............................  Major joint & limb                  480
                                  reattachment proc of
                                  upper extremity w CC/
                                  MCC.
484............................  Major joint & limb                  480
                                  reattachment proc of
                                  upper extremity w/o CC/
                                  MCC.
489............................  Knee procedures w/o pdx             488
                                  of infection w/o CC/
                                  MCC.
491............................  Back & neck procedures              490
                                  except spinal fusion w/
                                  o CC/MCC.
494............................  Lower extrem & humer                493
                                  proc except hip, foot,
                                  femur w/o CC/MCC.
506............................  Major thumb or joint                514
                                  procedures.
508............................  Major shoulder or elbow             507
                                  joint procedures w/o
                                  CC/MCC.
509............................  Arthroscopy............             505
512............................  Shoulder, elbow or                  511
                                  forearm proc, exc
                                  major joint proc w/o
                                  CC/MCC.
533............................  Fractures of femur w                480
                                  MCC.
538............................  Sprains, strains, &                 537
                                  dislocations of hip,
                                  pelvis & thigh w/o CC/
                                  MCC.
583............................  Mastectomy for                      582
                                  malignancy w/o CC/MCC.
585............................  Breast biopsy, local                584
                                  excision & other
                                  breast procedures w/o
                                  CC/MCC.
599............................  Malignant breast                    598
                                  disorders w/o CC/MCC.
614............................  Adrenal & pituitary                 629
                                  procedures w CC/MCC.
615............................  Adrenal & pituitary                 629
                                  procedures w/o CC/MCC.
618............................  Amputat of lower limb               617
                                  for endocrine, nutrit,
                                  & metabol dis w/o CC/
                                  MCC.
621............................  O.R. procedures for                 620
                                  obesity w/o CC/MCC.
625............................  Thyroid, parathyroid &              628
                                  thyroglossal
                                  procedures w MCC.
626............................  Thyroid, parathyroid &              629
                                  thyroglossal
                                  procedures w CC.
627............................  Thyroid, parathyroid &              629
                                  thyroglossal
                                  procedures w/o CC/MCC.
630............................  Other endocrine, nutrit             629
                                  & metab O.R. proc w/o
                                  CC/MCC.
653............................  Major bladder                       660
                                  procedures w MCC.
654............................  Major bladder                       660
                                  procedures w CC.
655............................  Major bladder                       660
                                  procedures w/o CC/MCC.
657............................  Kidney & ureter                     656
                                  procedures for
                                  neoplasm w CC.
658............................  Kidney & ureter                     656
                                  procedures for
                                  neoplasm w/o CC/MCC.
661............................  Kidney & ureter                     660
                                  procedures for non-
                                  neoplasm w/o CC/MCC.
664............................  Minor bladder                       663
                                  procedures w/o CC/MCC.
665............................  Prostatectomy w MCC....             669
670............................  Transurethral                       669
                                  procedures w/o CC/MCC.
672............................  Urethral procedures w/o             671
                                  CC/MCC.
688............................  Kidney & urinary tract              687
                                  neoplasms w/o CC/MCC.
692............................  Urinary stones w esw                694
                                  lithotripsy w/o CC/MCC.

[[Page 24223]]

 
707............................  Major male pelvic                   660
                                  procedures w CC/MCC.
708............................  Major male pelvic                   660
                                  procedures w/o CC/MCC.
710............................  Penis procedures w/o CC/            709
                                  MCC.
712............................  Testes procedures w/o               711
                                  CC/MCC.
713............................  Transurethral                       669
                                  prostatectomy w CC/MCC.
714............................  Transurethral                       669
                                  prostatectomy w/o CC/
                                  MCC.
715............................  Other male reproductive             717
                                  system O.R. proc for
                                  malignancy w CC/MCC.
716............................  Other male reproductive             717
                                  system O.R. proc for
                                  malignancy w/o CC/MCC.
718............................  Other male reproductive             717
                                  system O.R. proc exc
                                  malignancy w/o CC/MCC.
724............................  Malignancy, male                    722
                                  reproductive system w/
                                  o CC/MCC.
734............................  Pelvic evisceration,                717
                                  rad hysterectomy & rad
                                  vulvectomy w CC/MCC.
735............................  Pelvic evisceration,                717
                                  rad hysterectomy & rad
                                  vulvectomy w/o CC/MCC.
736............................  Uterine & adnexa proc               754
                                  for ovarian or adnexal
                                  malignancy w MCC.
737............................  Uterine & adnexa proc               755
                                  for ovarian or adnexal
                                  malignancy w CC.
738............................  Uterine & adnexa proc               755
                                  for ovarian or adnexal
                                  malignancy w/o CC/MCC.
739............................  Uterine & adnexa proc               628
                                  for non-ovarian/
                                  adnexal malig w MCC.
740............................  Uterine & adnexa proc               755
                                  for non-ovarian/
                                  adnexal malig w CC.
741............................  Uterine & adnexa proc               755
                                  for non-ovarian/
                                  adnexal malig w/o CC/
                                  MCC.
742............................  Uterine & adnexa proc               755
                                  for non-malignancy w
                                  CC/MCC.
743............................  Uterine & adnexa proc               755
                                  for non-malignancy w/o
                                  CC/MCC.
744............................  D&C, conization,                    749
                                  laparascopy & tubal
                                  interruption w CC/MCC.
745............................  D&C, conization,                    749
                                  laparascopy & tubal
                                  interruption w/o CC/
                                  MCC.
748............................  Female reproductive                 749
                                  system reconstructive
                                  procedures.
750............................  Other female                        749
                                  reproductive system
                                  O.R. procedures w/o CC/
                                  MCC.
756............................  Malignancy, female                  755
                                  reproductive system w/
                                  o CC/MCC.
761............................  Menstrual & other                   760
                                  female reproductive
                                  system disorders w/o
                                  CC/MCC.
765............................  Cesarean section w CC/              629
                                  MCC.
766............................  Cesarean section w/o CC/            629
                                  MCC.
767............................  Vaginal delivery w                  629
                                  sterilization &/or D&C.
768............................  Vaginal delivery w O.R.             629
                                  proc except steril &/
                                  or D&C.
769............................  Postpartum & post                   629
                                  abortion diagnoses w
                                  O.R. procedure.
770............................  Abortion w D&C,                     629
                                  aspiration curettage
                                  or hysterotomy.
774............................  Vaginal delivery w                  629
                                  complicating diagnoses.
775............................  Vaginal delivery w/o                629
                                  complicating diagnoses.
777............................  Ectopic pregnancy......             629
778............................  Threatened abortion....             759
779............................  Abortion w/o D&C.......             759
780............................  False labor............             759
782............................  Other antepartum                    781
                                  diagnoses w/o medical
                                  complications.
789............................  Neonates, died or                   781
                                  transferred to another
                                  acute care facility.
790............................  Extreme immaturity or               781
                                  respiratory distress
                                  syndrome, neonate.
791............................  Prematurity w major                 781
                                  problems.
792............................  Prematurity w/o major               781
                                  problems.
793............................  Full term neonate w                 781
                                  major problems.
794............................  Neonate w other                     781
                                  significant problems.
795............................  Normal newborn.........             781
799............................  Splenectomy w MCC......             800
801............................  Splenectomy w/o CC/MCC.             800
804............................  Other O.R. proc of the              803
                                  blood & blood forming
                                  organs w/o CC/MCC.
810............................  Major hematol/immun                 812
                                  diag exc sickle cell
                                  crisis & coagul w/o CC/
                                  MCC.
820............................  Lymphoma & leukemia w               823
                                  major O.R. procedure w
                                  MCC.
822............................  Lymphoma & leukemia w               821
                                  major O.R. procedure w/
                                  o CC/MCC.
825............................  Lymphoma & non-acute                824
                                  leukemia w other O.R.
                                  proc w/o CC/MCC.
828............................  Myeloprolif disord or               827
                                  poorly diff neopl w
                                  maj O.R. proc w/o CC/
                                  MCC.
830............................  Myeloprolif disord or               829
                                  poorly diff neopl w
                                  other O.R. proc w/o CC/
                                  MCC.
836............................  Acute leukemia w/o                  835
                                  major O.R. procedure w/
                                  o CC/MCC.
838............................  Chemo w acute leukemia              837
                                  as sdx or w high dose
                                  chemo agent w CC.
839............................  Chemo w acute leukemia              837
                                  as sdx or w high dose
                                  chemo agent w/o CC/MCC.
845............................  Other myeloprolif dis               844
                                  or poorly diff neopl
                                  diag w/o CC/MCC.
887............................  Other mental disorder               881
                                  diagnoses.
915............................  Allergic reactions w                918
                                  MCC.
916............................  Allergic reactions w/o              918
                                  MCC.
929............................  Full thickness burn w               934
                                  skin graft or inhal
                                  inj w/o CC/MCC.
955............................  Craniotomy for multiple              26
                                  significant trauma.
956............................  Limb reattachment, hip              480
                                  & femur proc for
                                  multiple significant
                                  trauma.
959............................  Other O.R. procedures               958
                                  for multiple
                                  significant trauma w/o
                                  CC/MCC.
------------------------------------------------------------------------


[[Page 24224]]

    To illustrate this methodology for determining the proposed 
relative weights for the proposed RY 2010 MS-LTC-DRGs with no LTCH 
cases, we are providing the following example, which refers to the no-
volume proposed MS-LTC-DRGs crosswalk information for RY 2010 provided 
in the chart above.

    Example: There were no cases in the FY 2008 MedPAR file used for 
this proposed rule for proposed MS-LTC-DRG 61 (Acute Ischemic Stroke 
with Use of Thrombolytic Agent with MCC). We determined that 
proposed MS-LTC-DRG 70 (Nonspecific Cebrovascular Disorders with 
MCC) was similar clinically and based on resource use to MS-LTC-DRG 
61. Therefore, we assigned the same proposed relative weight of 
proposed MS-LTC-DRG 70 of 0.8612 for RY 2010 to proposed MS-LTC-DRG 
61 (we refer readers to Table 11 of the Addendum to this proposed 
rule).

    Furthermore, for RY 2010, consistent with our historical relative 
weight methodology, we are proposing to establish proposed MS-LTC-DRG 
relative weights of 0.0000 for the following transplant proposed MS-
LTC-DRGs: Heart Transplant or Implant of Heart Assist System with MCC 
(proposed MS-LTC-DRG 1); Heart Transplant or Implant of Heart Assist 
System without MCC (proposed MS-LTC-DRG 2); Liver Transplant with MCC 
or Intestinal Transplant (proposed MS-LTC-DRG 5); Liver Transplant 
without MCC (proposed MS-LTC-DRG 6); Lung Transplant (proposed MS-LTC-
DRG 7); Simultaneous Pancreas/Kidney Transplant (proposed MS-LTC-DRG 
8); Pancreas Transplant (proposed MS-LTC-DRG 10); and Kidney Transplant 
(proposed 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 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 proposed 
relative weights in this proposed rule.
    Step 6--Adjust the proposed RY 2010 MS-LTC-DRG relative weights to 
account for nonmonotonically increasing relative weights.
    As discussed above in this section, the MS-DRGs (used under the 
IPPS) and the MS-LTC-DRGs (used under the LTCH PPS) 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 (that is, major complication or 
comorbidity). The next lower severity level contains cases with at 
least one code that is a CC (that is, complication or comorbidity). 
Those cases 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 subdivided into either two levels or the base DRG is 
not subdivided. The two-level subdivisions could consist of the with 
CC/MCC and the without CC/MCC. Alternatively, the other type of two-
level subdivision may 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 
both the ``with CC'' and the ``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 decrease as severity decreased (that 
is, if within a base MS-LTC-DRG, an MS-LTC-DRG with CC has a higher 
relative weight than one with MCC, 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 because the payment for the cases in the higher 
severity level in a base MS-LTC-DRG (which are generally expected to 
have higher resource use and costs) would be lower than the payment for 
cases in a lower severity level within the same base MS-LTC-DRG (which 
are generally expected to have lower resource use and costs). 
Consequently, in general, consistent with our historical methodology, 
we are proposing to combine proposed 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. Specifically, in 
determining the proposed RY 2010 MS-LTC-DRG relative weights in this 
proposed rule, we are proposing to use the same methodology to adjust 
for nonmonotonicity that we used to determine the RY 2009 MS-LTC-DRG 
relative weights in the FY 2009 IPPS final rule (73 FR 48549 through 
48550). In determining the proposed RY 2010 MS-LTC-DRG relative weights 
in this proposed rule, under each of the example scenarios provided 
below, we combine severity levels within a proposed base MS-LTC-DRG as 
follows:
    The first example of nonmonotonically increasing relative weights 
for a proposed MS-LTC-DRG pertains to a proposed 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 proposed MS-LTC-DRGs is assigned to 
one of the five low-volume quintiles. In this proposed rule, if 
nonmonotonicity is detected in the proposed relative weights of the 
proposed MS-LTC-DRGs in adjacent severity levels (for example, the 
proposed relative weight of the ``with MCC'' (the highest severity 
level) is less than the ``with CC'' (the middle level), or the proposed 
relative weight ``with CC'' is less than the ``without CC/MCC'' (lowest 
severity level)), we combine the nonmonotonic adjacent proposed MS-LTC-
DRGs and redetermine a proposed relative weight based on the case-
weighted average of the combined LTCH cases of the nonmonotonic 
proposed MS-LTC-DRGs. The case-weighted average charge is calculated by 
dividing the total charges for all LTCH cases in both

[[Page 24225]]

severity levels by the total number of LTCH cases for both proposed MS-
LTC-DRGs. The same proposed relative weight is assigned to both 
affected levels of the proposed base MS-LTC-DRG. If nonmonotonicity 
remains an issue because the above process results in a proposed 
relative weight that is still nonmonotonic to the proposed relative 
weight of the remaining proposed MS-LTC-DRG within the proposed base 
MS-LTC-DRG, we combine all three of the severity levels to redetermine 
the proposed relative weights based on the case-weighted average charge 
of the combined severity levels. This same proposed relative weight is 
then assigned to each of the proposed MS-LTC-DRGs in that proposed base 
MS-LTC-DRG.
    A second example of nonmonotonically increasing relative weights 
for a proposed base MS-LTC-DRG pertains to the situation where there 
are three severity levels and one or more of the severity levels within 
a proposed base MS-LTC-DRG has less than 25 LTCH cases (that is, low 
volume). 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 proposed relative weight of the applicable low-volume quintile(s)), 
we combine the data for the cases in the two adjacent low-volume 
proposed MS-LTC-DRGs for the purpose of determining a proposed relative 
weight. If the combination results in at least 25 cases, we redetermine 
one proposed relative weight based on the case-weighted average charge 
of the combined severity levels and assign this same proposed relative 
weight to each of the severity levels. If the combination results in 
less than 25 cases, based on the case-weighted average charge of the 
combined low-volume proposed MS-LTC-DRGs, both proposed MS-LTC-DRGs are 
assigned to the appropriate low-volume quintile (discussed above in 
section VIII.B.3.e. of this preamble) based on the case-weighted 
average charge of the combined low-volume proposed MS-LTC-DRGs. Then 
the proposed relative weight of the affected low-volume quintile is 
redetermined and that proposed relative weight is assigned to each of 
the affected severity levels (and all of the proposed MS-LTC-DRGs in 
the affected low-volume quintile). If nonmonotonicity persists, we 
combine all three severity levels and redetermine one proposed relative 
weight based on the case-weighted average charge of the combined 
severity levels and this same proposed relative weight is assigned to 
each of the three levels within that proposed base MS-LTC-DRG.
    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 combine the 
nonmonotonic low-volume proposed MS-LTC-DRG with the middle severity-
level proposed MS-LTC-DRG (the ``with CC'') of the proposed base MS-
LTC-DRG. We redetermine one proposed relative weight based on the case-
weighted average charge of the combined severity levels, and assign 
this same proposed relative weight to each of the affected proposed MS-
LTC-DRGs. If nonmonotonicity persists, we combine all three levels for 
the purpose of redetermining a proposed relative weight based on the 
case-weighted average charge of the combined severity levels, and 
assign that proposed relative weight to each of the three severity 
levels within the proposed base MS-LTC-DRG.
    In the case where all three severity levels in the proposed base-
MS-LTC-DRGs are low-volume proposed MS-LTC-DRGs and two of the severity 
levels are nonmonotonic in relation to each other, we combine the two 
adjacent nonmonotonic severity levels. If that combination resulted in 
less than 25 cases, both low-volume proposed MS-LTC-DRGs are assigned 
to the appropriate low-volume quintile (discussed above in section 
VIII.B.3.e. of this preamble) based on the case-weighted average charge 
of the combined low-volume proposed MS-LTC-DRGs. Then the proposed 
relative weight of the affected low-volume quintile is redetermined, 
and that proposed relative weight is assigned to each of the affected 
severity levels (and all of the proposed MS-LTC-DRGs in the affected 
low-volume quintile). If the nonmonotonicity persists, we combine all 
three levels of that proposed base MS-LTC-DRG for the purpose of 
redetermining a proposed relative weight based on the case-weighted 
average charge of the combined severity levels, and assign that 
proposed relative weight to each of the three severity levels. If that 
combination of all three severity levels results in less than 25 cases, 
we assign that ``combined'' base MS-LTC-DRG to the appropriate low-
volume quintile based on the case-weighted average charge of the 
combined low-volume proposed MS-LTC-DRGs. Then the proposed relative 
weight of the affected low-volume quintile is redetermined, and that 
proposed relative weight is assigned to each of the affected severity 
levels (and all of the MS-LTC-DRGs in the affected low-volume 
quintile). If the combination of all three severity levels resulted in 
25 or more cases, we redetermine one proposed relative weight based on 
the case-weighted average charge of the combined severity levels, and 
assign this same proposed relative weight to all three of the severity 
levels within the proposed base MS-LTC-DRG.
    Similarly, in the case where all three severity levels in the 
proposed base MS-LTC-DRGs are low-volume proposed MS-LTC-DRGs and two 
of the severity levels were nonmonotonic in relation to each other, we 
combine the two adjacent nonmonotonic severity levels. If the 
combination resulted in at least 25 cases, we then redetermine one 
proposed relative weight based on the case-weighted average charge of 
the combined severity levels, and assign this same proposed relative 
weight to both of the affected adjacent severity levels within the 
proposed base MS-LTC-DRG. If the nonmonotonicity persists, we combine 
all three levels of that proposed base MS-LTC-DRG for the purpose of 
redetermining a proposed relative weight based on the case-weighted 
average charge of the combined severity levels, and assign that 
proposed relative weight to each of the three severity levels within 
the proposed base MS-LTC-DRG.
    Another example of nonmonotonicity involves a proposed base MS-LTC-
DRG with three severity levels where at least one of the severity 
levels has no LTCH cases. As discussed above in Step 5, we are 
proposing to crosswalk a proposed no-volume MS-LTC-DRG to a proposed 
MS-LTC-DRG that has at least one case based on resource use intensity 
and clinical similarity. The no-volume proposed MS-LTC-DRG is assigned 
the same proposed relative weight as the proposed MS-LTC-DRG to which 
it is crosswalked. For many no-volume proposed MS-LTC-DRGs, as shown in 
the chart above in Step 5, the application of our methodology results 
in a crosswalked proposed MS-LTC-DRG that is the adjacent severity 
level in the same proposed base MS-LTC-DRG. Consequently, in most 
instances, the no-volume proposed MS-LTC-DRG and the adjacent proposed 
MS-LTC-DRG to which it is crosswalked do not result in nonmonotonicity 
because both of these severity levels would have the same proposed 
relative weight. (In this proposed rule, under our methodology for the 
treatment of no-volume proposed

[[Page 24226]]

MS-LTC-DRGs, in the case where the no-volume proposed MS-LTC-DRG was 
either the highest or lowest severity level, the crosswalked proposed 
MS-LTC-DRG is typically the middle level (``with CC'') within the same 
proposed base MS-LTC-DRG, and, therefore, the no-volume proposed MS-
LTC-DRG (either the ``with MCC'' or the ``without CC/MCC'') and the 
crosswalked proposed MS-LTC-DRG (the ``with CC'') have the same 
proposed relative weight. Consequently, no adjustment for monotonicity 
is necessary.) However, if our methodology for determining proposed 
relative weights for no-volume proposed MS-LTC-DRGs results in 
nonmonotonicity with the third severity level in the base MS-LTC-DRG, 
all three severity levels are combined in order to redetermine one 
proposed relative weight based on the case-weighted average charge of 
the combined severity levels. This same proposed relative weight is 
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 proposed base MS-LTC-DRG that has three severity 
levels. Under our methodology for the treatment of nonmonotonicity, we 
are proposing to apply the same process where the proposed base MS-LTC-
DRG contains only two severity levels. For example, if nonmonotonicity 
occurs in a proposed 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 are low volume (that is, less 
than 25 cases), we combine the two proposed MS-LTC-DRGs of that 
proposed base MS-LTC-DRG for the purpose of redetermining a proposed 
relative weight based on the combined case-weighted average charge for 
both severity levels. This same proposed relative weight is assigned to 
each of the two severity levels in the proposed base MS-LTC-DRG. 
Specifically, if the combination of the two severity levels results in 
at least 25 cases, we redetermine one proposed relative weight based on 
the case-weighted average charge, and assign that proposed relative 
weight to each of the two proposed MS-LTC-DRGs. If the combination 
results in less than 25 cases, we assign both proposed MS-LTC-DRGs to 
the appropriate low-volume quintile (discussed above in section 
VIII.B.3.e. of this preamble) based on their combined case-weighted 
average charge. Then the proposed relative weight of the affected low-
volume quintile is redetermined, and that proposed relative weight is 
assigned to each of the two severity levels within the proposed base 
MS-LTC-DRG (and all of the proposed MS-LTC-DRGs in the affected low-
volume quintile).
    Step 7--Calculate the RY 2010 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 a requirement 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 budget neutrality requirement to update the 
MS-LTC-DRG classifications and relative weights, we refer readers to 
the RY 2008 LTCH PPS final rule (72 FR 26880 through 26884).) The MS-
LTC-DRG classifications and relative weights are updated annually based 
on the most recent available LTCH claims data to reflect changes in 
relative LTCH resource use. Under the budget neutrality requirement, 
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, we are proposing to update the proposed MS-LTC-DRG 
classifications and relative weights for RY 2010 based on the most 
recent available LTCH data, and to include a budget neutrality 
adjustment that is applied in determining the proposed RY 2010 MS-LTC-
DRG relative weights.
    To ensure budget neutrality in the proposed update to 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 through 
47296), in determining the budget neutrality adjustment for RY 2010 in 
this proposed rule, we are proposing to use a method that is similar to 
the methodology used under the IPPS. Specifically, for RY 2010, after 
recalibrating the proposed MS-LTC-DRG proposed relative weights as we 
do under the methodology as described in detail in Steps 1 through 6 
above, we are proposing to calculate and apply a normalization factor 
to those proposed relative weights to ensure that estimated payments 
are 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 proposed 
MS-LTC-DRG relative weights (that is, the process itself) neither 
increases nor decreases total estimated payments.
    To calculate the normalization factor for RY 2010, we are proposing 
to use the following steps: (1) We use the most recent available LTCH 
claims data (FY 2008) and group them using the proposed RY 2010 GROUPER 
(Version 27.0) and the proposed RY 2010 MS-LTC-DRG relative weights 
(determined above in Steps 1 through 6 above) to calculate the average 
case-mix index (CMI); (2) we group the same LTCH claims data (FY 2008) 
using the FY 2009 GROUPER (Version 26.0) and FY 2009 relative weights 
(established in the FY 2009 IPPS final rule (73 FR 48528 through 
48551)) and calculate the average CMI; and (3) we compute the ratio of 
these average CMIs by dividing the average CMI for FY 2009 (determined 
in Step 2) by the average CMI for RY 2010 (determined in Step 1). In 
determining the proposed MS-LTC-DRG relative weights for RY 2010, based 
on the latest available LTCH claims data, the normalization factor is 
estimated as 1.1147455, which is applied in determining each proposed 
RY 2010 MS-LTC-DRG relative weight. That is, each proposed MS-LTC-DRG 
relative weight is multiplied by 1.1147455 in the first step of the 
budget neutrality process. Accordingly, the proposed RY 2010 MS-LTC-DRG 
relative weights in Table 11 in the Addendum of this proposed rule 
reflect this normalization factor. We also ensure that estimated 
aggregate LTCH PPS payments (based on the most recent available LTCH 
claims data) after reclassification and recalibration (the proposed RY 
2010 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 RY 2009 MS-LTC-DRG classifications and relative weights).

[[Page 24227]]

Therefore, similar to the methodology used to determine the proposed 
IPPS DRG reclassification and recalibration budget neutrality factor 
discussed in section II.A.4.a. of the Addendum to this proposed rule, 
we used FY 2008 discharge data to simulate payments and compare 
estimated aggregate LTCH PPS payments using the FY 2009 MS-LTC-DRGs and 
relative weights to estimate aggregate LTCH PPS payments using the 
proposed RY 2010 MS-LTC-DRGs and relative weights. As noted above, the 
most recent available LTCH claims data for this proposed rule are from 
the December 2008 update of the FY 2008 MedPAR file. Consistent with 
our historical policy of using the best available data, we are 
proposing to use the most recently available claims data for 
determining the budget neutrality adjustment factor in the final rule.
    Specifically, we determined the proposed RY 2010 budget neutrality 
adjustment factor in this proposed rule using the following steps: (1) 
We simulate estimated total LTCH PPS payments using the normalized 
proposed relative weights for RY 2010 and proposed GROUPER Version 27.0 
(as described above in this section); (2) we simulate estimated total 
LTCH PPS payments using the FY 2009 GROUPER (Version 26.0) and FY 2009 
MS-LTC-DRG relative weights (as established in the FY 2009 IPPS final 
rule (73 FR 48528 through 48551)); and (3) we calculate the ratio of 
these estimated total LTCH PPS payments by dividing the estimated total 
LTCH PPS payments using the FY 2009 GROUPER (Version 26.0) and the FY 
2009 MS-LTC-DRG relative weights (determined in Step 2) by the 
estimated total LTCH PPS payments using the proposed RY 2010 GROUPER 
(Version 27.0) and the normalized proposed MS-LTC-DRG relative weights 
for RY 2010 (determined in Step 1). Then, each of the normalized 
proposed relative weights is multiplied by the budget neutrality 
adjustment factor to determine the proposed budget neutral RY 2010 
relative weight for each proposed MS-LTC-DRG.
    Accordingly, in determining the proposed RY 2010 MS-LTC-DRG 
relative weights in this proposed rule, based on the most recent 
available LTCH claims data, we are proposing to establish a budget 
neutrality adjustment factor of 0.993192, which is applied to the 
normalized proposed relative weights (described above). The proposed RY 
2010 MS-LTC-DRG relative weights in Table 11 in the Addendum to this 
proposed rule reflect this proposed budget neutrality factor.
    Table 11 in the Addendum to this proposed rule lists the proposed 
MS-LTC-DRGs and their respective proposed relative weights, geometric 
mean length of stay, and five-sixths of the geometric mean length of 
stay (used in determining SSO payments under Sec.  412.529) for RY 
2010.

C. Proposed Changes to the LTCH Payment Rates and Other Changes to the 
RY 2010 LTCH PPS

1. Overview of Development of the LTCH Payment Rates
    The LTCH PPS was effective beginning with a LTCH's first cost 
reporting period beginning on or after October 1, 2002. Effective with 
that cost reporting period, LTCHs are paid, during a 5-year transition 
period, a total LTCH prospective payment that is comprised of an 
increasing proportion of the LTCH PPS Federal rate and a decreasing 
proportion based on reasonable cost-based principles, unless the 
hospital makes a one-time election to receive payment based on 100 
percent of the Federal rate, as specified in Sec.  412.533. New LTCHs 
(as defined at Sec.  412.23(e)(4)) are paid based on 100 percent of the 
Federal rate, with no phase-in transition payments.
    The basic methodology for determining LTCH PPS Federal prospective 
payment rates is set forth at Sec.  412.515 through Sec.  412.536. In 
this section, we discuss the factors that would be used to update the 
LTCH PPS standard Federal rate for the 2010 LTCH PPS rate year that 
would be effective for LTCH discharges occurring on or after October 1, 
2009 through September 30, 2010. When we implemented the LTCH PPS in 
the August 30, 2002 LTCH PPS final rule (67 FR 56029 through 56031), we 
computed the LTCH PPS standard Federal payment rate for FY 2003 by 
updating the latest available (FY 1998 or FY 1999) Medicare inpatient 
operating and capital cost data, using the excluded hospital market 
basket.
    Section 123(a)(1) of the BBRA requires that the PPS developed for 
LTCHs be budget neutral for the initial year of implementation. 
Therefore, in calculating the standard Federal rate under Sec.  
412.523(d)(2), we set total estimated LTCH PPS payments equal to 
estimated payments that would have been made under the reasonable cost-
based payment methodology had the LTCH PPS not been implemented. 
Section 307(a)(2) of the BIPA specified that the increases to the 
target amounts and the cap on the target amounts for LTCHs for FY 2002 
provided for by section 307(a)(1) of the BIPA shall not be considered 
in the development and implementation of the LTCH PPS. Section 
307(a)(2) of the BIPA also specified that enhanced bonus payments for 
LTCHs provided for by section 122 of BBRA were not to be taken into 
account in the development and implementation of the LTCH PPS.
    Furthermore, as specified at Sec.  412.523(d)(1), the initial 
standard Federal rate was reduced by an adjustment factor to account 
for the estimated proportion of outlier payments under the LTCH PPS to 
total estimated LTCH PPS payments (8 percent). For further details on 
the development of the FY 2003 standard Federal rate, we refer readers 
to the August 30, 2002 LTCH PPS final rule (67 FR 56027 through 56037), 
and for subsequent updates to the LTCH PPS Federal rate we refer 
readers to the following final rules: RY 2004 LTCH PPS final rule (68 
FR 34134 through 34140), RY 2005 LTCH PPS final rule (69 FR 25682 
through 25684), RY 2006 LTCH PPS final rule (70 FR 24179 through 
24180), RY 2007 LTCH PPS final rule (71 FR 27819 through 27827), RY 
2008 LTCH PPS final rule (72 FR 26870 through 27029), and RY 2009 LTCH 
PPS final rule (73 FR 26800 through 26804). The proposed update to the 
LTCH PPS standard Federal rate for RY 2010 is presented in section V.A. 
of the Addendum to this proposed rule. Two of the components of the 
proposed update to the LTCH PPS standard Federal rate for RY 2010 are 
discussed below.
2. Market Basket for LTCHs Reimbursed Under the LTCH PPS
a. Overview
    Historically, the Medicare program has used a market basket to 
account for price increases in the services furnished by providers. The 
market basket used for the LTCH PPS includes both operating and 
capital-related costs of LTCHs because the LTCH PPS uses a single 
payment rate for both operating and capital-related costs. The 
development of the initial LTCH PPS standard Federal rate for FY 2003, 
using the excluded hospital with capital market basket, is discussed in 
further detail in the August 30, 2002 LTCH PPS final rule (67 FR 56027 
through 56033).
    In that final rule (67 FR 56016 through 56017 and 56030), which 
implemented the LTCH PPS, we established the use of the excluded 
hospital with capital market basket as the LTCH PPS market basket. The 
excluded hospital with capital market basket was also used to update 
the limits on LTCHs' operating costs for inflation under the TEFRA 
reasonable

[[Page 24228]]

cost-based payment system. We explained that we believe the use of the 
excluded hospital with capital market basket to update LTCHs' payments 
for inflation was appropriate because the excluded hospital market 
basket (with a capital component) measures price increases of the 
services furnished by excluded hospitals, including LTCHs. For further 
details on the development of the excluded hospital with capital market 
basket, we refer readers to the RY 2004 LTCH PPS final rule (68 FR 
34134 through 34137).
    As discussed in the RY 2007 LTCH PPS final rule (71 FR 27810), 
based on our research, we did not develop a market basket specific to 
LTCH services. We were unable to create a separate market basket 
specifically for LTCHs at that time due to the small number of 
facilities and the limited amount of data that was reported (for 
instance, only approximately 15 percent of LTCHs reported contract 
labor cost data for 2002). In that same final rule, under the broad 
authority conferred upon the Secretary by section 123 of the BBRA as 
amended by section 307(b) of the BIPA, we adopted the rehabilitation, 
psychiatric, long-term care (RPL) market basket as the appropriate 
market basket of goods and services under the LTCH PPS for discharges 
occurring on or after July 1, 2006. Specifically, beginning with the 
2007 LTCH PPS rate year, for the LTCH PPS, we adopted the use of the 
RPL market basket which is based on FY 2002 cost report data. We chose 
to use the FY 2002 Medicare cost report data because those data were 
the most recent, relatively complete cost data for IRFs, IPFs, and 
LTCHs available at the time of rebasing.
    The RPL market basket was determined based on the operating and 
capital costs of freestanding IRFs, freestanding IPFs, and LTCHs. As we 
explained in the RY 2007 LTCH PPS final rule, we believed a market 
basket based on the data of IRFs, IPFs, and LTCHs was appropriate to 
use under the LTCH PPS because those data were the best available data 
that reflect the cost structures of LTCHs. For further details on the 
development of the RPL market basket, including the methodology for 
determining the operating and capital portions of the RPL market 
basket, we refer readers to the RY 2007 LTCH PPS final rule (71 FR 
27810 through 27817).
b. Proposed Market Basket Under the LTCH PPS for RY 2010
    When we initially created the FY 2002-based RPL market basket, we 
were unable to create a separate market basket specifically for LTCHs 
due, in part, to the small number of facilities and the limited data 
that were provided in the Medicare cost reports. Over the last several 
years, however, the number of LTCH facilities submitting valid Medicare 
cost report data has increased. Based on this development, as well as 
our desire to move from one RPL market basket to three stand-alone and 
provider-specific market baskets (for IRFs, IPFs, and LTCHs, 
respectively), we plan to begin exploring the viability of creating 
these market baskets for future use. However, as we discussed in the FY 
2010 IRF PPS proposed rule, we are conducting further research to 
assist us in understanding the reasons for the variations in costs and 
cost structure between freestanding IRFs and hospital-based IRFs. We 
also are researching the reasons for similar variations in costs and 
cost structure between freestanding IPFs and hospital-based IPFs. 
Therefore, as we continue to explore the development of stand-alone 
market baskets for LTCHs, IRFs and IPFs, respectively, we believe that 
it is appropriate to continue to use the FY 2002-based RPL market 
basket for LTCHs, IRFs and IPFs under their respective PPSs. 
Accordingly, in this proposed rule, we are proposing to continue to use 
the FY 2002-based RPL market basket under the LTCH PPS for RY 2010, as 
we continue to believe it is the best available data that reflect the 
cost structure of LTCHs. We are hopeful that progress can be made in 
the near future with respect to creating stand-alone market baskets for 
LTCHs, IRFs, and IPFs and, as a result, may propose to rebase the 
appropriate market basket(s) for subsequent updates in the future.
c. Proposed Market Basket Update for LTCHs for RY 2010
    Consistent with our historical practice, we estimate the RPL market 
basket update based on IHS Global Insight, Inc.'s forecast using the 
most recent available data. IHS Global Insight, Inc. is a nationally 
recognized economic and financial forecasting firm that contracts with 
CMS to forecast the components of the hospital market baskets. Based on 
IHS Global Insight Inc.'s first quarter 2009 forecast, the proposed RY 
2010 market basket estimate for the LTCH PPS using the FY 2002-based 
RPL market basket is 2.4 percent. This includes increases in both the 
operating section and the capital section of the FY 2002-based RPL 
market basket. In addition, consistent with our historical practice of 
using market basket estimates based on the most recent available data, 
we are proposing that if more recent data are available when we develop 
the final rule, we would use such data, if appropriate. (As discussed 
in greater detail in section V. of the Addendum to this proposed rule, 
for RY 2010, we are proposing to update the LTCH PPS standard Federal 
rate by -0.2 percent. The proposed update reflects an adjustment based 
on the most recent market basket estimate (currently 2.4 percent as 
discussed above) and adjustments to account for the increase in case-
mix in the prior periods (FYs 2007 through 2009) that resulted from 
changes in documentation and coding practices rather than increases in 
patients' severity of illness.)
d. Proposed Labor-Related Share Under the LTCH PPS for RY 2010
    As discussed in section V.B. of the Addendum to this proposed rule, 
under the authority of section 123 of the BBRA as amended by section 
307(b) of the BIPA, we established an adjustment to the LTCH PPS 
Federal rate to account for differences in LTCH area wage levels at 
Sec.  412.525(c). The labor-related portion of the LTCH PPS Federal 
rate, hereafter referred to as the labor-related share, is adjusted to 
account for geographic differences in area wage levels by applying the 
applicable LTCH PPS wage index.
    The labor-related share is determined by identifying the national 
average proportion of operating and capital costs that are related to, 
influenced by, or vary with the local labor market. We continue to 
classify a cost category as labor-related if the costs are labor-
intensive and vary with the local labor market. In addition, as 
discussed above, we are proposing to continue to use the FY 2002-based 
RPL market basket under the LTCH PPS for RY 2010. Given this, we are 
proposing to continue to define the labor-related share as the national 
average proportion of operating costs that are attributable to wages 
and salaries, employee benefits, contract labor, professional fees, 
labor-intensive services, and a labor-related portion of capital based 
on the FY 2002-based RPL market basket. (Additional information on the 
development of the FY 2002-based RPL market basket used under the LTCH 
PPS can be found in the RY 2007 LTCH PPS final rule (71 FR 27809 
through 27818).)
    The proposed labor-related share for RY 2010 would be the sum of 
the proposed RY 2010 relative importance of each labor-related cost 
category, and would reflect the different rates of price change for 
these cost categories between the base year (FY 2002) and RY 2010. The 
sum of the proposed relative importance for RY 2010 for operating costs 
(wages and salaries, employee

[[Page 24229]]

benefits, professional fees, and all-other labor-intensive services) 
would be 71.961 as shown in the chart below. The portion of capital 
that is influenced by the local labor market is estimated to be 46 
percent. Because the relative importance for capital in RY 2010 would 
be 8.572 percent of the FY 2002-based RPL market basket, we are 
proposing to take 46 percent of 8.572 percent to determine the proposed 
labor-related share of capital for RY 2010. The result would be 3.943 
percent, which we are proposing to add to 71.961 percent for the 
operating cost amount to determine the total proposed labor-related 
share for RY 2010. Thus, the labor-related share that we are proposing 
to use for LTCH PPS in RY 2010 would be 75.904 percent.
    The chart below shows the proposed RY 2010 relative importance 
labor-related share using the FY 2002-based RPL market basket.

   Proposed RY 2010 Labor-Related Share Based on the FY 2002-Based RPL
                              Market Basket
------------------------------------------------------------------------
                                                       FY 2002-based RPL
                                                         market basket
                                                         labor-related
                    Cost category                        share relative
                                                           importance
                                                       (percent) RY 2010
------------------------------------------------------------------------
Wages and Salaries...................................             53.064
Employee Benefits....................................             13.880
Professional Fees....................................              2.894
All Other Labor-Intensive Services...................              2.123
                                                      ------------------
    Subtotal.........................................             71.961
Labor-Related Share of Capital Costs (46 percent)....              3.943
                                                      ------------------
    Total Labor-Related Share........................             75.904
------------------------------------------------------------------------

3. Proposed Adjustment for Changes in LTCHs' Case-Mix Due to Changes in 
Documentation and Coding Practices That Occurred in a Prior Period
a. Background
    Beginning in RY 2007, in updating the standard Federal rate for the 
LTCH PPS, we have accounted for increases in payments from a past 
period due to changes in documentation and coding practices. 
Specifically, in the RY 2007 LTCH PPS final rule (71 FR 27820), we 
explained that rather than solely using the most recent estimate of the 
LTCH PPS market basket increase as the basis of the update factor for 
the standard Federal rate for RY 2007, we believed that based on our 
ongoing monitoring of LTCHs' case mix, it was appropriate to also 
adjust the standard Federal rate to account for the changes in 
documentation and coding practices (rather than patients' severity of 
illness) in addition to the estimated increase in the LTCH PPS market 
basket. Accordingly, we established at Sec.  412.523(c)(3)(iii) of the 
regulations that the update to the standard Federal rate for the 2007 
LTCH PPS rate year was zero percent, based on the most recent estimate 
of the LTCH PPS market basket increase of 3.4 percent and an equivalent 
negative adjustment to account for changes in case-mix due to changes 
in documentation and coding practices in a prior period (FY 2004).
    In the RY 2008 LTCH PPS final rule (72 FR 26880 through 26890), we 
continued to monitor and analyze LTCHs' case-mix and applied an update 
to the standard Federal rate of 0.71 percent, based on the most recent 
estimate of the market basket increase (3.2 percent) and an adjustment 
to account for changes in documentation and coding practices (-2.49 
percent) in the prior period, FY 2005. Similarly, for RY 2009, as 
discussed in the RY 2009 final rule (73 FR 26805 through 26812), the 
standard Federal rate was updated using an update factor of 2.7 
percent, based on the most recent estimate of the market basket 
increase (3.6 percent) and an adjustment to account for changes in 
case-mix due to documentation and coding practices (-0.9 percent) in 
the prior period, FY 2006.
b. Evaluation of FY 2007 Claims Data
    For RY 2010, we continue to believe that changes in the LTCH PPS 
payment rates should accurately reflect changes in LTCHs' true cost of 
treating patients, and should not be influenced by changes in 
documentation and coding that do not reflect increases in patients' 
severity of illness. Accordingly, consistent with previous years, we 
are proposing to analyze LTCHs' case-mix index (CMI) changes in the 
prior period, FY 2007, and if applicable, determine an appropriate 
adjustment to account for changes in documentation and coding 
practices. As we explained in the RY 2007 final rule (71 FR 27819 
through 27823), a LTCH's CMI is defined as its case-weighted average 
LTC-DRG relative weight for all its discharges in a given period. 
Changes in CMI consist of two components: ``real'' CMI changes and 
``apparent'' CMI changes. Real CMI increase is defined as the increase 
in the average LTC-DRG relative weights resulting from the hospital's 
treatment of more resource intensive patients. Apparent CMI increase is 
defined as the increase in CMI due to changes in documentation and 
coding practices (including better documentation of the medical record 
by physicians and more complete coding of the medical record by 
coders). In previous years, analysis of the most recent available LTCH 
CMI data focused on quantifying the portion of CMI change in a prior 
period that is attributable to apparent CMI change. However, beginning 
in RY 2010, we are proposing to revise our methodology to determine the 
proposed documentation and coding adjustment, consistent with the IPPS 
proposed methodology for case-mix analysis under the IPPS, which is 
discussed in detail in section II.D.4 of the preamble of this proposed 
rule. We note that section II.D.4 of the preamble of this proposed rule 
discusses the proposed analysis in the context of the MS-DRG 
documentation and coding adjustments for FY 2008 and FY 2009 authorized 
by Public Law 110-90 for the IPPS, and we note that the requirements of 
Public Law 110-90 do not apply to the LTCH PPS. However, section 
123(a)(1) of Public Law 106-113 (BBRA), as amended by section 307(b) of 
Public Law 106-554 (BIPA), provides broad authority to the Secretary in 
developing the LTCH PPS, including the authority for establishing 
appropriate adjustments. The stated purpose of the proposed CMI 
analysis for the IPPS is to measure and corroborate the extent of the 
overall national average changes in case-mix since the adoption of the 
MS-DRGs, which we believe is also relevant in determining appropriate 
adjustments to account for changes in documentation and coding under 
the LTCH PPS because, as stated above, the same DRG-based patient 
classification system is used under both the LTCH PPS and the IPPS 
(referred to as the MS-LTC-DRGs and MS-DRGs, respectively). 
Accordingly, under the broad authority afforded by the statute to make 
appropriate adjustments for the LTCH PPS, we believe it is appropriate 
to propose to use the same methodology that we are proposing to use 
under the IPPS as described in section II.D.4. of the preamble of this 
proposed rule and which is discussed in further detail below in this 
section.
    Accordingly, consistent with the proposed IPPS CMI analysis 
methodology, we conducted a thorough evaluation of LTCH claims data in 
order to assess the case-mix changes that do not reflect real changes 
in patients' severity of illness. The results of this evaluation were 
used by our actuaries to determine if any payment adjustments are 
necessary to ensure appropriate payments under the LTCH PPS. 
Specifically, to evaluate the FY 2007 LTCH claims data, we performed 
the proposed analysis plan in the following

[[Page 24230]]

manner. We first divided the CMI obtained by grouping the FY 2007 LTCH 
claims data from the December 2007 update of the MedPAR files through 
the FY 2007 GROUPER (Version 24.0) by the CMI obtained by grouping 
these same FY 2007 LTCH claims through the FY 2006 GROUPER (Version 
23.0). This results in a value of 0.974. Because these are the same FY 
2007 LTCH cases grouped using the two GROUPERs, we attribute this 
change primarily to two factors: (1) The effect of changes in 
documentation and coding; and (2) the measurement effect from the 
calibration of the GROUPER. We estimated the measurement effect from 
the calibration of the GROUPER by dividing the CMI obtained by grouping 
the FY 2006 LTCH claims through the FY 2007 GROUPER by the CMI obtained 
by grouping these same LTCH claims through the FY 2006 GROUPER. This 
results in a value of 0.969. In order to isolate the documentation and 
coding effect, we then divided the combined effect of the changes in 
documentation and coding and measurement (0.974) by the measurement 
effect (0.969) to yield 1.005. Therefore, our estimate of the 
documentation and coding increase that occurred in FY 2007 is 0.5 
percent.
    As in prior years, the FY 2006 and FY 2007 MedPAR files are 
available to the public to allow independent analysis of the 
documentation and coding effect in FY 2007. We are seeking public 
comment on our proposed methodology and analysis.
c. Evaluation of FY 2008 Claims Data
    In prior years, we based documentation and coding adjustments on an 
analysis of the most recent available LTCH data and have established 
the adjustments in a timely manner, as the data became available, to 
account for each prior period where LTCHs were paid based on case-mix 
changes that do not reflect increased patients' severity of illness. 
Due to the change in the LTCH update cycle in RY 2010, we now have data 
available to analyze case-mix changes for FY 2008 as well as FY 2007. 
Accordingly, we believe it is also appropriate at this time to evaluate 
documentation and coding changes in FY 2008 based on the most recent 
available LTCH claims data. Accordingly, analogous to our evaluation of 
the FY 2007 LTCH claims data as discussed above, we analyzed the FY 
2008 LTCH claims data from the December 2008 update of the MedPAR files 
as well. That is, we first divided the CMI obtained by grouping the FY 
2008 LTCH claims through the FY 2008 GROUPER (Version 25.0) by the CMI 
obtained by grouping these same FY 2008 LTCH claims through the FY 2007 
GROUPER (Version 24.0). This results in a value of 1.011. We estimated 
the measurement effect from the calibration of the GROUPER by dividing 
the CMI obtained by grouping the FY 2007 LTCH claims through the FY 
2008 GROUPER by the CMI obtained by grouping these same LTCH claims 
through the FY 2007 GROUPER. This results in a value of 0.999. We then 
divided the combined effect of the changes in documentation and coding 
measurement (1.011) by the measurement effect (0.999) to yield 1.013. 
Therefore, based on the results of the analysis, the documentation and 
coding increase that occurred in FY 2008 is 1.3 percent.
    As noted above, the FY 2007 and FY 2008 MedPAR files are available 
to the public to allow independent analysis of the documentation and 
coding effect in FY 2008. We are seeking public comment on our proposed 
methodology and analysis.
d. Proposed RY 2010 Documentation and Coding Adjustment
    Based on analysis of the most recent available LTCH claims data as 
described above, we are proposing to apply a cumulative adjustment for 
changes in documentation and coding that do not reflect an increase in 
patients' severity of illness of -1.8 percent (that is, -0.5 percent 
for FY 2007 plus -1.3 percent for FY 2008 equals -1.8 percent). 
Accordingly, as discussed in section V.A.2. of the Addendum to this 
proposed rule, we are proposing to update the proposed RY 2010 LTCH PPS 
standard Federal rate by 0.6 percent, which is based on the most recent 
estimate of the market basket increase (2.4 percent) and a proposed 
adjustment to account for changes in documentation and coding practices 
(-1.8 percent). We also are proposing that if more recent data are 
available for the final rule, we would use those data to establish a 
final update to the RY 2010 LTCH PPS standard Federal rate, if 
applicable.

D. Monitoring

    In the August 30, 2002 final rule (67 FR 56014), we described an 
ongoing monitoring component to the new LTCH PPS. Specifically, we 
discussed analysis of the various policies that we believe would 
provide equitable payment for stays that reflect less than the full 
course of treatment and reduce the incentives for inappropriate 
admissions, transfers, or premature discharges of patients that are 
present in a discharge-based PPS. As a result of our ongoing data 
analysis, we revisited a number of our original policies and since the 
FY 2003 implementation of the LTCH PPS, we have identified behaviors by 
certain LTCHs that lead to inappropriate Medicare payments and have 
formulated policies that we believe have resulted in fair and 
reasonable payments for treatments delivered to Medicare beneficiaries 
by LTCHs.
    In the RY 2009 LTCH PPS proposed rule, we summarized policy 
initiatives that we have issued as a result of our ongoing monitoring 
program (73 FR 5373 through 5374). While we are not proposing to make 
any new payment adjustments for RY 2010 as a result of our monitoring 
activity, we note that we will continue to pursue our ongoing 
monitoring program that involves the CMS Office of Research and 
Development (ORDI), existing QIO monitoring, medical review activities 
conducted by Medicare contractors (that is, fiscal intermediaries or 
MACs), and studies described in the RY 2006 LTCH PPS final rule (70 FR 
24211).

E. Research Conducted by the Research Triangle Institute, International 
(RTI)

    At this time, we are not proposing any additional specific changes 
to payment policies under the LTCH PPS based on the findings made thus 
far under our ongoing research contract with the Research Triangle 
Institute, International (RTI). However, we believe that, in light of 
continuing concerns regarding RTI's evaluation of the feasibility of 
establishing patient-level and facility-level criteria for LTCHs, it is 
appropriate to provide an update on RTI's most recent analyses and 
findings.
    At the beginning of FY 2005, CMS contracted with RTI for a 
comprehensive evaluation of the feasibility of developing patient-level 
and facility-level characteristics for LTCHs that could distinguish 
LTCH patients from those patients treated in other hospitals. In prior 
Federal Register notices, we have summarized the results of the ongoing 
work and posted the reports on both Phase I and Phase II of RTI's 
research on the CMS Web site at http://www.cms.hhs.gov/LongTermCareHospitalPPS/02a_RTIReports.asp#TopOfPage.
    In the RY 2009 LTCH PPS proposed rule, in addition to a description 
of RTI's research, we described the results of two technical expert 
panels held during 2007 (73 FR 5374 through 5376). In these analyses, 
RTI used CY 2004 Medicare claims data to examine the range of patient 
types admitted to LTCHs, their characteristics to determine if they 
were all medically complex, as suggested by many, and their outcomes to 
examine whether the higher cost LTCH service was

[[Page 24231]]

distinguishable from outcomes for similar patients treated in areas 
without LTCHs. These analyses controlled for case-mix severity and 
examined the differences between beneficiaries discharged from acute 
care hospitals to LTCHs compared to those who did not use LTCHs. The 
results suggested LTCH cases were not uniquely distinguishable from 
those in other acute care settings, in terms of their severity of 
illness and reasons for admission. RTI's findings, which were 
consistent with the findings of MedPAC that were included in the 
MedPAC's June 2004 Report to the Congress (p. 127), indicated that, for 
a small subset of patients (those that had been in the IPPS for 
ventilator weaning), LTCHs achieved better outcomes at lower Medicare 
program costs. RTI's findings also agreed with MedPAC's findings that 
it found no differences in the other populations and that the severity 
of cases admitted to LTCHs varied.
    In the earlier reports, RTI also examined whether the average 
Medicare payment per episode (across the IPPS, LTCH, and any other 
associated services used during the episode of care) differed when 
LTCHs were used. The issue under examination was whether the payments 
per episode were similar and whether the outcomes were similar. To 
examine this, RTI examined the top 50 types of cases likely to be 
admitted to an LTCH and broke down the costs across an episode of care. 
Those patients discharged to the LTCH had average payments per episode 
that were $20,000 higher and no shorter episodes of care or IPPS 
lengths of stay. Hospital readmission rates were also higher among the 
LTCH users. However, it is unclear whether this reflects a more 
complicated case that was not identified as such--being discharged to 
the LTCH--or whether higher readmission was needed because the patient 
was transferred from the IPPS inappropriately and needed more general 
acute care rather than specialized LTCH services. LTCHs restrict their 
admissions to patients who are hemodynamically stable, unlike IPPS 
hospitals which provide intensive care, step-down care, and general 
medical care. However, the analysis also showed variation in the types 
of cases admitted to LTCHs. Additional analysis of the differences in 
post-intensive care IPPS use for these two types of cases is also being 
completed.
    In the third phase of this study, RTI presented these findings to a 
technical expert panel comprised of physicians treating complex cases 
in LTCHs, IPPS hospitals, IRFs, and SNFs. The technical expert panel 
members were asked to focus on the more complex cases and consider 
whether LTCHs treat a unique population or use a unique set of 
treatment practices. The panel discussed the distinguishing 
characteristics of their respective populations and found great 
overlap. The panel, including the LTCH physicians, reached a general 
consensus that LTCHs do not treat a unique population. The types of 
cases treated in LTCHs may also be treated in IPPS hospitals or IRFs, 
depending on the primary condition. The panel noted that these complex 
cases needed specialized treatments, including higher level nursing and 
physician oversight, interdisciplinary teams to monitor infections and 
other complications, as well as adequate numbers of cases to ensure 
appropriate experience for treating these cases. Many LTCHs have these 
facility-level characteristics although they were not mandated. Acute 
care hospitals that treat these types of cases frequently have these 
characteristics as well. All of the panel members agreed that 
interdisciplinary teams and higher nurse staffing levels were necessary 
to meet the needs of these patients. A recommendation was made that 
Medicare should establish Centers of Excellence for treating the 
medically complex or critically ill populations. These centers may be 
LTCHs or other hospitals with the staffing and resources to treat these 
cases, a critical volume of admissions to ensure experience with these 
complex cases, and a consistent payment approach for these cases across 
hospitals. (RTI's Phase III Report is posted on the CMS Web site at: 
http://www.cms.hhs.gov.)
    RTI also examined the adequacy of the payment rates for LTCHs. 
Medicare cost reports were used to analyze trends in overall 
profitability and Medicare profitability for some of the more common 
conditions in LTCHs. Service-specific CCRs were computed to estimate 
costs for individual MedPAR claims in CY 2006. Half of these claims 
were paid under the rules applicable to LTCH PPS RY 2007. Data on costs 
and payments of claims were then used to reassess patterns in 
profitability by LTC-DRG. RTI found that aggregate LTCH facility PPS 
margins declined from 11.7 percent in FY 2004 to 7.1 percent in FY 
2006. For the subset of RY 2007 claims, the aggregate margin was 5.4 
percent. The median PPS margin in FY 2006 was 8.7 percent among for-
profit LTCHs, 7.2 percent for private nonprofits, and -5.4 percent in 
publicly-owned LTCHs. However, RTI found that these differences in 
facility margins by type of ownership were explained by differences in 
case-mix. Systematic variation in profitability by type of DRG was even 
stronger in the FY 2006 data than in the FY 2004 data and publicly 
owned LTCHs continued to admit a larger proportion of patients with 
lower weighted (and, therefore, lower paid) DRGs.
    RTI found that excess LTCH profitability relative to other PPS 
settings in aggregate appears to have been reduced. However, margins 
varied substantially for different types of cases. The ratio of PPS 
payments to PPS costs were more than 30 percent higher than an industry 
baseline, while cases for aftercare and rehabilitation had payment 
ratios that were more than 10 percent below the baseline.
    Persistent concerns regarding appropriate Medicare payments for 
patients who are treated in LTCHs as well as in other provider settings 
resulted in the enactment of a statutory provision under section 114(b) 
of the MMSEA directing the Secretary to conduct a study for purposes of 
determining medical necessity, appropriateness of admission, and 
continued stay at, and discharge from, LTCHs and to submit a report to 
the Congress within 18 months after the date of enactment of the MMSEA 
(December 29, 2007) on the study, along with recommendations for 
legislation and administrative actions for implementing national LTCH 
facility and patient criteria, as the Secretary determines appropriate. 
The statute further states that ``[I]n conducting the study and 
preparing the report under this subsection, the Secretary shall 
consider--(A) recommendations contained in a report to Congress by the 
Medicare Payment Advisory Commission in June 2004 for long-term care 
hospital-specific facility and patient criteria to ensure that patients 
admitted to long-term care hospitals are medically complex and 
appropriate to receive long-term care hospital services; and (B) 
ongoing work by the Secretary to evaluate and determine the feasibility 
of such recommendations.''
    In fulfillment of this statutory mandate, CMS' Office of Research, 
Development, and Information awarded a contract to Kennell and 
Associates and RTI for additional analysis of data on Medicare payments 
and facility costs for the treatment of similar patients in LTCHs and 
alternative providers as well as patient outcomes and the range of 
hospital-level care delivered in each setting. We intend to post this 
report on the CMS Web site once it has been submitted to Congress.

[[Page 24232]]

F. Proposed Technical Corrections of LTCH PPS Regulations

    While we are not proposing any new payment policy changes at this 
time, we are taking this opportunity to propose two technical 
corrections to regulation text that we believe will clarify our 
existing policy at Sec.  412.525 relating to adjustments to the Federal 
prospective payment to LTCHs.
    First, at Sec.  412.525(a)(2), the regulations currently state that 
``The fixed-loss amount is determined for the long-term care hospital 
rate year using the LTC-DRG relative weights that are in effect on July 
1 of the rate year.'' As stated earlier, in the RY 2009 LTCH PPS final 
rule, we revised the LTCH PPS payment rate update cycle in order to 
consolidate the timing of the annual update of the payment rates with 
the update of the MS-LTC-DRG classifications to October 1, beginning 
October 1, 2009 (73 FR 26792 through 26798). At that time, at Sec.  
412.503, we specified a new definition for ``long-term care hospital 
prospective payment system rate year.'' Under Sec.  412.503, the term 
``long-term care hospital prospective payment system rate year'' means: 
(1) From July 1, 2003, and ending on or before June 30, 2008, the 12-
month period of July 1 through June 30; (2) from July 1, 2008, and 
ending on September 30, 2009, the 15-month period of July 1, 2008, 
through September 30, 2009; and (3) beginning on or after October 1, 
2009, the 12-month period of October 1 through September 30. At 
Sec. Sec.  412.535(b) and (c), we described the resulting new 
publication schedule of Federal prospective payment rates. However, we 
neglected to make a conforming change to the regulations at Sec.  
412.525(a)(2) to reflect this new schedule. Currently, the language of 
Sec.  412.525(a)(2) still links the determination of the fixed-loss 
amount to a July 1 effective date. The annual calculation of the fixed-
loss amount, which is the amount used to limit the loss that a hospital 
will incur under the outlier policy for a case with unusually high 
costs, is directly linked to the calculation of the annual update of 
the Federal prospective payment rate (73 FR 26821). When we changed the 
annual update of the LTCH PPS rate year to coincide with the update in 
the MS-LTC-DRG relative weights to October 1, we should have changed 
the language at Sec.  412.525(a)(2) regarding the calculation of the 
fixed-loss amount to conform with this new schedule. Therefore, in this 
proposed rule, we are proposing to revise Sec.  412.525(a)(2) to 
accurately reflect the basis (effective LTC-DRG relative weights) for 
calculating the annual fixed-loss amount for high-cost outlier 
payments, in order to cover the various update cycles that have been in 
effect under the LTCH PPS. Specifically, we are proposing to revise 
Sec.  412.525(a)(2) to specify that the fixed-loss amount is determined 
for the LTCH rate year using the MS-LTC-DRG relative weights that are 
in effect at the start of the applicable LTCH PPS rate year, as defined 
in Sec.  412.503. (We note that the regulation text at Sec.  
412.525(a)(2) uses the term ``LTC-DRG'' rather than ``MS-LTC-DRG'' 
because the term ``LTC-DRG'' includes ``MS-LTC-DRG'' generally 
applicable to any year. Specifically, in our regulations at Sec.  
412.503, we state that ``[a]ny reference to the term `LTC-DRG' shall be 
considered a reference to the term `MS-LTC-DRG' when applying the 
provisions of this subpart for policy descriptions and payment 
calculations for discharges from a long-term care hospital occurring on 
or after October 1, 2007.'')
    We also are proposing to clarify our existing policy at Sec.  
412.525(d) so that it more accurately reflects existing policy 
regarding payment adjustments under the LTCH PPS. In paragraph (d) of 
Sec.  412.525, we provide that CMS adjusts the Federal prospective 
payment to account for--(1) short-stay outliers at Sec.  412.529; (2) a 
3-day or less interruption of stay and a greater than 3-day 
interruption of stay, as provided for in Sec.  412.531; (3) patients 
who are transferred to onsite providers and readmitted to a LTCH as 
provided for in Sec.  412.532; and (4) long-term care HwHs and 
satellite facilities of LTCHs as provided in Sec.  412.534.
    We finalized the policy at Sec.  412.525(d)(4), which refers to the 
percentage threshold payment adjustment for co-located long-term care 
HwHs and satellite facilities in the FY 2005 IPPS final rule (69 FR 
49191 through 49214), and it was codified in the FY 2007 IPPS final 
rule (71 FR 48122). We adopted a similar policy in the RY 2008 LTC PPS 
final rule (72 FR 26910 through 26944) that provides for an adjustment 
to the LTCH PPS payment for LTCHs and satellite facilities of LTCHs 
that discharge Medicare patients admitted from hospitals not located in 
the same building or on the same campus as the LTCH or the satellite 
facility of the LTCH, as specified at Sec.  412.536. We inadvertently 
omitted the inclusion of this policy in the regulation text at Sec.  
412.525(d). Therefore, in order to ensure that the applicable 
regulatory text reflects existing policy, we are proposing to add a 
paragraph (d)(5) to Sec.  412.525 that specifically provides that CMS 
adjusts the Federal LTCH PPS payment amount for LTCHs and satellite 
facilities of LTCHs that discharged Medicare patients admitted from a 
hospital not located in the same building or on the same campus as the 
LTCH or the satellite facility of the LTCH, as provided in Sec.  
412.536.

IX. MedPAC Recommendations

    Under section 1886(e)(4)(B) of the Act, the Secretary must consider 
MedPAC's recommendations regarding hospital inpatient payments. Under 
section 1886(e)(5) of the Act, the Secretary must publish in the annual 
proposed and final IPPS rules the Secretary's recommendations regarding 
MedPAC's recommendations. We have reviewed MedPAC's March 2009 ``Report 
to the Congress: Medicare Payment Policy'' and have given the 
recommendations in the report careful consideration in conjunction with 
the proposed policies set forth in this proposed rule.
    MedPAC's Recommendation 2A-1 states that ``[t]he Congress should 
increase payment rates for the acute inpatient and outpatient 
prospective payment systems in 2010 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 proposed rule.
    MedPAC's Recommendation 2A-2 states that ``[t]he Congress should 
reduce the indirect medical education adjustment in 2010 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 value-based purchasing initiatives to improve 
the quality of care. 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, given the existing statutory requirement regarding the 
IME formula multiplier, CMS does not have the authority to implement 
MedPAC's recommendation to reduce the IME adjustment in FY 2010.
    For further information relating specifically to the MedPAC reports 
or to obtain a copy of the reports, contact

[[Page 24233]]

MedPAC at (202) 653-7226, or 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 now available on compact disc (CD) format. 
However, many of the files are available on the Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS. Data files and the cost for each 
file, if applicable, are listed below. Anyone wishing to purchase CDs 
should submit a written request along with a company check or money 
order (payable to CMS-PUF) to cover the cost to the following address: 
Centers for Medicare & Medicaid Services, Public Use Files, Accounting 
Division, P.O. Box 7520, Baltimore, MD 21207-0520, (410) 786-3691. 
Files on the Internet may be downloaded without charge.
1. CMS Wage Data Public Use File
    This file contains the hospital hours and salaries from Worksheet 
S-3, Parts II and III from FY 2006 Medicare cost reports used to create 
the proposed FY 2010 prospective payment system wage index. Multiple 
versions of this file are created each year. For a complete schedule on 
the release of different versions of this file, we refer readers to the 
wage index schedule in section III.K. of the preamble of this proposed 
rule.

------------------------------------------------------------------------
                                                 Wage data    PPS fiscal
                Processing year                     year         year
------------------------------------------------------------------------
2009..........................................         2006         2010
2008..........................................         2005         2009
2007..........................................         2004         2008
------------------------------------------------------------------------

    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage.
    Periods Available: FY 2007 through FY 2010 IPPS Update.
2. CMS Occupational Mix Data Public Use File
    This file contains the 2007-2008 occupational mix survey data to be 
used to compute the occupational mix adjustment wage indexes. Multiple 
versions of this file are created each year. For a complete schedule on 
the release of different versions of this file, we refer readers to the 
wage index schedule in section III.K. of the preamble of this proposed 
rule.
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage.
    Period Available: FY 2010 IPPS Update.
3. Provider Occupational Mix Adjustment Factors for Each Occupational 
Category Public Use File
    This file contains each hospital's occupational mix adjustment 
factors by occupational category. Two versions of these files are 
created each year. They support the following:
     Notice of proposed rulemaking published in the Federal 
Register.
     Final rule published in the Federal Register.
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage.
    Period Available: FY 2010 IPPS Update.
4. Other Wage Index Files
    CMS releases other wage index analysis files after each proposed 
and final rule.
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/WIFN/list.asp#TopOfPage.
    Periods Available: FY 2007 through FY 2010 IPPS Update.
5. FY 2010 IPPS SSA/FIPS CBSA State and County Crosswalk
    This file contains a crosswalk of State and county codes used by 
the Social Security Administration (SSA) and the Federal Information 
Processing Standards (FIPS), county name, and a historical list of 
Metropolitan Statistical Areas (MSAs).
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage.
    Period Available: FY 2010 IPPS Update.
6. HCRIS Cost Report Data
    The data included in this file contain cost reports with fiscal 
years ending on or after September 30, 1996. These data files contain 
the highest level of cost report status.
    Media: Internet at: http://www.cms.hhs.gov/CostReports/02_HospitalCostReport.asp and Compact Disc (CD).
    File Cost: $100.00 per year.
7. Provider-Specific File
    This file is a component of the PRICER program used in the fiscal 
intermediary's or the MAC's system to compute DRG/MS-DRG payments for 
individual bills. The file contains records for all prospective payment 
system eligible hospitals, including hospitals in waiver States, and 
data elements used in the prospective payment system recalibration 
processes and related activities. Beginning with December 1988, the 
individual records were enlarged to include pass-through per diems and 
other elements.
    Media: Internet at: http://www.cms.hhs.gov/ProspMedicareFeeSvcPmtGen/03_psf_text.asp.
    Period Available: FY 2010 IPPS Update.
8. CMS Medicare Case-Mix Index File
    This file contains the Medicare case-mix index by provider number 
as published in each year's update of the Medicare hospital inpatient 
prospective payment system. The case-mix index is a measure of the 
costliness of cases treated by a hospital relative to the cost of the 
national average of all Medicare hospital cases, using DRG/MS-DRG 
weights as a measure of relative costliness of cases. Two versions of 
this file are created each year. They support the following:
     Notice of proposed rulemaking published in the Federal 
Register.
     Final rule published in the Federal Register.
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage.
    Periods Available: FY 1985 through FY 2010.
9. MS-DRG Relative Weights (Also Table 5--MS-DRGs)
    This file contains a listing of MS-DRGs, MS-DRG narrative 
descriptions, relative weights, and geometric and arithmetic mean 
lengths of stay as published in the Federal Register. There are two 
versions of this file as published in the Federal Register.
     Notice of proposed rulemaking.
     Final rule.
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage.
    Periods Available: FY 2006 through FY 2010 IPPS Update
10. IPPS Payment Impact File
    This file contains data used to estimate payments under Medicare's 
hospital impatient prospective payment systems for operating and 
capital-related costs. The data are taken from various sources, 
including the Provider-Specific File, Minimum Data Sets, and prior 
impact files. The data set is abstracted from an internal file used for 
the impact analysis of the changes to the prospective payment systems 
published in the Federal Register.
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/

[[Page 24234]]

FFD/list.aspTopOfPage and http://www.cms.hhs.gov/AcuteInpatientPPS/HIF/list.asp#TopOfPage.
    Periods Available: FY 1994 through FY 2010 IPPS Update.
11. AOR/BOR Tables
    This file contains data used to develop the MS-DRG relative 
weights. It contains mean, maximum, minimum, standard deviation, and 
coefficient of variation statistics by MS-DRG for length of stay and 
standardized charges. The BOR tables are ``Before Outliers Removed'' 
and the AOR is ``After Outliers Removed.'' (Outliers refer to 
statistical outliers, not payment outliers.)
    Two versions of this file are created each year. They support the 
following:
     Notice of proposed rulemaking published in the Federal 
Register.
     Final rule published in the Federal Register.
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage.
    Periods Available: FY 2006 through FY 2010 IPPS Update.
12. Prospective Payment System (PPS) Standardizing File
    This file contains information that standardizes the charges used 
to calculate relative weights to determine payments under the hospital 
inpatient operating and capital prospective payment systems. Variables 
include wage index, cost-of-living adjustment (COLA), case-mix index, 
indirect medical education (IME) adjustment, disproportionate share, 
and the Core-Based Statistical Area (CBSA). The file supports the 
following:
     Notice of proposed rulemaking published in the Federal 
Register.
     Final rule published in the Federal Register.
    Media: Internet at: http://www.cms.hhs.gov/AcuteInpatientPPS/FFD/list.asp#TopOfPage.
    Periods Available: FY 2010 IPPS Update.
    For further information concerning these data files, contact the 
CMS Public Use Files Hotline at (410) 786-3691.
    Commenters interested in discussing any data used in constructing 
this proposed rule should contact Nisha Bhat at (410) 786-5320.

B. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995 (PRA), we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the PRA requires that we 
solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    We are soliciting public comment on each of these issues for the 
following sections of this document that contain information collection 
requirements (ICRs):

A. ICRs Regarding Payment Adjustment for Medicare DSHs (Sec.  412.106)

    Proposed Sec.  412.106(b)(4)(iv) would permit hospitals to count 
Medicaid-eligible inpatient days in the numerator of the Medicaid 
fraction of the DPP in the DSH payment adjustment calculation by one of 
the following methodologies, as long as no such days are counted more 
than once for any hospital in a cost reporting period: date of 
discharge; date of admission; or dates of service. To avoid ``double 
counting,'' a hospital would be required to report to CMS any changes 
to the methodology it uses to count days in the numerator of the 
Medicaid fraction of the DPP. The burden associated with this proposed 
requirement would be the time and effort necessary for a hospital to 
report to CMS changes to the methodology it uses to count days in the 
numerator of its Medicaid fraction of the DPP.
    This requirement is subject to the PRA. While we believe the burden 
is minimal, we are unable to accurately quantify the burden because we 
cannot estimate the number of expected submissions from hospitals 
reporting changes to their respective methodology for counting days in 
the numerator of the Medicaid fraction of the DPP for the Medicare DSH 
payment adjustment calculation. We are soliciting public comments on 
the possible annual number of submissions pertaining to changes to the 
methodologies used to count days in the numerator of a hospital's 
Medicaid fraction of the DPP, and will reevaluate this issue in the 
final rule stage of rulemaking.

B. ICRs Regarding Payments for GME (Sec.  413.75)

    Existing regulations at Sec.  413.75(b) permit hospitals that share 
residents to elect to form a Medicare GME affiliated group 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 purpose of a 
Medicare GME affiliated group is to provide flexibility to hospitals in 
structuring rotations under an aggregate FTE resident cap when they 
share residents. The existing regulations at Sec.  413.79(f)(1) specify 
that each hospital in a Medicare GME affiliated group must submit a 
Medicare GME affiliation agreement (as defined under Sec.  413.75(b)) 
to the Medicare fiscal intermediary or MAC servicing the hospital and 
send a copy to CMS' Central Office no later than July 1 of the 
residency program year during which the Medicare GME affiliation 
agreement will be in effect.
    In section V.G. of the preamble of this proposed rule, we discuss 
our proposed change to specify in regulations that a hospital that is 
new after July 1 and that begins training residents for the first time 
after the July 1 start date of that academic year would be permitted to 
submit a Medicare GME affiliation agreement prior to the end of its 
cost reporting period in order to participate in an existing Medicare 
GME affiliated group for the remainder of the academic year. The burden 
associated with this proposed requirement would be the time and effort 
it would take for the new hospital to develop and submit the Medicare 
GME affiliation agreement. It is difficult for us to estimate the 
annual burden associated with this proposal because we cannot estimate 
the additional number of hospitals that would be permitted to submit 
Medicare GME affiliation agreements in any given year as a result of 
the proposed change. However, we believe the number of affected 
hospitals would be very small because, under the proposed change, a 
hospital would not only have to start training residents after July 1, 
but would also need to be a new hospital after July 1. We note that 
this proposal would merely apply established procedures to provide 
increased flexibility to a new hospital to join an existing GME 
affiliated group such that, in its first year, it may train and receive 
IME and direct GME payments relating to FTE for residents that could 
otherwise be counted for purposes of IME and direct GME at another 
hospital. We believe the proposed expansion of the existing policy 
regarding the submission of

[[Page 24235]]

Medicare GME affiliation agreements for hospitals that are new after 
July 1 and that begin to train residents after July 1 would amount to a 
minimal paperwork burden. Nevertheless, we are soliciting public 
comments on the possible number of annual submissions of Medicare GME 
affiliation agreements under this proposed change.

C. Additional Information Collection Requirements

    This proposed rule imposes collection of information requirements 
as outlined in the regulation text and specified above. However, this 
proposed rule also makes reference to several associated information 
collections that are not discussed in the regulation text contained in 
this document. The following is a discussion of these information 
collections, some of which have already received OMB approval.
1. Present on Admission (POA) Indicator Reporting
    Section II.F.6. of the preamble discusses the POA indicator 
reporting program. As stated earlier, collection of 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 5499 dated 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. This 
requirement is subject to the PRA; however, the associated burden is 
currently approved under OMB control number 0938-0997 with an 
expiration date of August 31, 2009.
2. Proposed Add-On Payments for New Services and Technologies
    Section II.I.1. of the preamble of this proposed 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 2011 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, 
collection of the information for this requirement is conducted on an 
individual case-by-case basis. We believe the associated burden is 
thereby exempt from the PRA as stipulated under 5 CFR 1320.3(h)(6). 
Similarly, we also believe the burden associated with this requirement 
is exempt from the PRA under 5 CFR 1320.3(c), which defines the agency 
collection of information subject to the requirements of the PRA as 
information collection imposed on 10 or more persons within any 12-
month period. This information collection does not impact 10 or more 
entities in a 12-month period. In FYs 2008, 2009, and 2010, we received 
1, 4, and 5 applications, respectively.
3. Reporting of Hospital Quality Data for Annual Hospital Payment 
Update
    As discussed in section V.A. of the preamble of this proposed rule, 
the RHQDAPU program was originally established to implement section 
501(b) of Public Law 108-173, thereby expanding our voluntary Hospital 
Quality Initiative (HQI). The RHQDAPU program originally consisted of a 
``starter set'' of 10 quality measures. OMB approved the collection of 
data associated with the original starter set of quality measures under 
OMB control number 0938-0918, with a current expiration date of January 
31, 2010.
    As part of our implementation of section 5001(a) of the DRA, we 
expanded the number of quality measures reported in the RHQDAPU 
program. Specifically, 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.'' Under 
this provision, we established additional program measures to bring the 
total number of measures to 30. 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.
    In the FY 2009 IPPS proposed rule (73 FR 23527), we solicited 
public comments on several considerations for expanding and updating 
quality measures. We responded to the public comments received in the 
FY 2009 IPPS final rule (73 FR 48433). We also expanded and finalized 
the RHQDAPU program measure set for FY 2010. As part of the expansion 
effort, two measures were finalized in the CY 2009 OPPS/ASC final rule 
with comment period (73 FR 68781).
    In this FY 2010 IPPS proposed rule, we are proposing to add a total 
of four new measures, to harmonize two existing measures, and to retire 
one measure, which would increase the total number of measures in the 
RHQDAPU program from 42 in FY 2010 to 46 in FY 2011. Specifically, we 
are proposing to add four new measures, two new chart-abstracted 
measures, and two new structural measures. The new chart-abstracted 
measures include the addition of SCIP-Infection-9: Postoperative 
Urinary Catheter Removal on Postoperative Day 1 or 2, and SCIP-
Infection-10: Perioperative Temperature Management to the existing SCIP 
measure set. As stated in V.A.3. of the preamble of this proposed rule, 
the new structural measures include (1) Participation in a Systematic 
Clinical Database Registry for Stroke Care; and (2) Participation in a 
Systematic Clinical Database Registry for Nursing Sensitive Care. We 
are submitting a revised version of the information collection request 
approved under OMB control number 0938-1022, to obtain approval for the 
new measures.
    Section V.A.9. of the preamble of this proposed 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 to 
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.
4. Occupational Mix Adjustment to the FY 2010 Index (Hospital Wage 
Index Occupational Mix Survey)
    Section II.D. of the preamble of this proposed rule discusses the 
proposed occupational mix adjustment to the FY 2010 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

[[Page 24236]]

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. The aforementioned 
burden is subject to the PRA; however, it is currently approved under 
OMB control number 0938-0907, with an expiration date of February 28, 
2011.
5. Hospital Applications for Geographic Reclassifications by the MGCRB
    Section III.I.3. of the preamble of this proposed rule discusses 
revisions to the wage index based on hospital redesignations. As stated 
in that section, under section 1886(d)(10) of the Act, the MGCRB has 
the authority to accept short-term IPPS hospital applications 
requesting geographic reclassification for wage index or standardized 
payment amounts and to issue decisions on these requests by hospitals 
for geographic reclassification for purposes of payment under the IPPS. 
The burden associated with this application process is the time and 
effort necessary for an IPPS hospital to complete and submit an 
application for reclassification to the MGCRB. While this requirement 
is subject to the PRA, it is currently approved under OMB control 
number 0938-0573, with an expiration date of December 31, 2011.
    If you comment on these information collection and recordkeeping 
requirements, please do either of the following:
    1. Submit your comments electronically as specified in the 
ADDRESSES section of this proposed rule; or
    2. Submit your comments to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Attention: CMS Desk Officer, 
[CMS-1406-P], Fax: (202) 395-6974; or E-mail: [email protected].

C. Response to Comments

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

List of Subjects

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 415

    Health facilities, Health professions, Medicare, Reporting and 
recordkeeping requirements.

42 CFR Part 489

    Health facilities, Medicare, Reporting and recordkeeping 
requirements.

    For the reasons stated in the preamble of this proposed rule, the 
Centers for Medicare & Medicaid Services is proposing to amend 42 CFR 
Chapter IV as follows:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

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

    Authority: 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).

    2. Section 412.22 is amended by revising paragraph (h)(2)(iii)(A) 
to read as follows:


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

* * * * *
    (h) * * *
    (2) * * *
    (iii) * * *
    (A) Effective for cost reporting periods beginning on or after 
October 1, 2002, it is not under the control of the governing body or 
chief executive officer of the hospital in which it is located, and it 
furnishes inpatient care through the use of medical personnel who are 
not under the control of the medical staff or chief medical officer of 
the hospital in which it is located.
    (1) Except as provided in paragraph (h)(2)(iii)(A)(2) of this 
section, effective for cost reporting periods beginning on or after 
October 1, 2009, the governing body of the hospital of which the 
satellite facility is a part is not under the control of any third 
entity that controls both the governing body of the hospital of which 
the satellite facility is a part and the hospital with which the 
satellite facility is co-located.
    (2) If a hospital and its satellite facility were excluded from the 
inpatient prospective payment system under the provisions of this 
section for the most recent cost reporting period beginning prior to 
October 1, 2009, the hospital does not have to meet the requirements of 
paragraph (h)(2)(iii)(A)(1) of this section, with respect to that 
satellite facility, in order to retain its IPPS-excluded status.
    (3) A hospital described in paragraph (h)(2)(iii)(A)(2) of this 
section that establishes an additional satellite facility in a cost 
reporting period beginning on or after October 1, 2009, must meet the 
criteria in this section, including the provisions of paragraph 
(h)(2)(iii)(A)(1) of this section with respect to the additional 
satellite facility, in order to be excluded from the inpatient 
prospective payment system.
* * * * *
    3. Section 412.64 is amended by revising paragraph (c) to read as 
follows:


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

* * * * *
    (c) Computing the standardized amount. CMS computes an average 
standardized amount that is applicable to all hospitals located in all 
areas, updated by the applicable percentage increase specified in 
paragraph (d) of this section. CMS standardizes the average 
standardized amount by excluding an estimate of indirect medical 
education payments.
* * * * *


Sec.  412.87  [Amended]

    4. In Sec.  412.87, paragraph (b)(1), remove the word ``relating'' 
and insert in its place the word ``relative''.
    5. Section 412.105 is amended by revising paragraph (b)(4) to read 
as follows:


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

* * * * *
    (b) * * *
    (4) Beds otherwise countable under this section used for outpatient 
observation services or skilled nursing swing-bed services;
* * * * *
    6. Section 412.106 is amended by--
    a. Revising paragraph (a)(1)(ii)(B).
    b. Adding a new paragraph (b)(4)(iv).
    The revision and addition read as follows:


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

    (a) * * *
    (1) * * *

[[Page 24237]]

    (ii) * * *
    (B) Beds otherwise countable under this section used for outpatient 
observation services or skilled nursing swing-bed services;
* * * * *
    (b) * * *
    (4) * * *
    (iv) For cost reporting periods beginning on or after October 1, 
2009, the hospital must report the days in the numerator of the 
fraction in the second computation in a cost reporting period based on 
the date of discharge, the date of admission, or the dates of service. 
If a hospital seeks to change its methodology for reporting days in the 
numerator of the fraction in the second computation, the hospital must 
notify CMS, through its fiscal intermediary or MAC, in writing at least 
30 days before the beginning of the cost reporting period in which the 
change would apply. The written notification must specify the 
methodology the hospital will use and the cost reporting period to 
which the requested change would apply. Such a change will be effective 
only on the first day of a cost reporting period. If a hospital changes 
its methodology for reporting such days, CMS or the fiscal intermediary 
or MAC may adjust the number of days reported for a cost reporting 
period if it determines that any of those days have been counted in a 
prior cost reporting period.
* * * * *


Sec.  412.113  [Amended]

    7. In paragraph (c)(2)(i)(B) of Sec.  412.113, the cross-reference 
``Sec.  410.66'' is removed and the cross-reference ``Sec.  410.69'' is 
added in its place.
    8. Section 412.322 is amended by removing and reserving paragraph 
(c) to read as follows:


Sec.  412.322  Indirect medical education adjustment factor.

* * * * *
    (c) [Reserved].
* * * * *
    9. Section 412.523 is amended by adding a new paragraph (c)(3)(vi) 
to read as follows:


Sec.  412.523  Methodology for calculating the Federal prospective 
payment rates.

* * * * *
    (c) * * *
    (3) * * *
    (vi) For long-term care hospital prospective payment system rate 
year beginning October 1, 2009 and ending September 30, 2010. The 
standard Federal rate for long-term care hospital prospective payment 
system rate year beginning October 1, 2009 and ending September 30, 
2010 is the standard Federal rate for the previous long-term care 
hospital prospective payment system rate year updated by 0.6 percent. 
The standard Federal rate is adjusted, as appropriate, as described in 
paragraph (d) of this section.
* * * * *
    10. Section 412.525 is amended by--
    a. Revising paragraph (a)(2).
    b. Revising paragraph (d)(1).
    c. Adding a new paragraph (d)(5).
    The revisions and addition read as follows:


Sec.  412.525  Adjustments to the Federal prospective payment.

    (a) * * *
    (2) The fixed-loss amount is determined for the long-term care 
hospital rate year using the LTC-DRG relative weights that are in 
effect on the start of the applicable long-term care hospital 
prospective payment system rate year, as defined in Sec.  412.503.
* * * * *
    (d) * * *
    (1) Short-stay outliers, as provided for in Sec.  412.529.
* * * * *
    (5) Long-term care hospitals and satellites of long-term care 
hospitals that discharged Medicare patients admitted from a hospital 
not located in the same building or on the same campus as the long-term 
care hospital or satellite of the long-term care hospital, as provided 
in Sec.  412.536.

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

    11. 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).

    12. Section 413.65 is amended by--
    a. Revising paragraph (a)(1)(ii)(G).
    b. Revising paragraph (a)(1)(ii)(H).
    The revisions read as follows:


Sec.  413.65  Requirements for a determination that a facility or an 
organization has provider-based status.

    (a) * * *
    (1) * * *
    (ii) * * *
    (G) Independent diagnostic testing facilities furnishing only 
services paid under a fee schedule, such as facilities that furnish 
only screening mammography services (as defined in section 1861(jj) of 
the Act), facilities that furnish only clinical diagnostic laboratory 
tests, other than those clinical diagnostic laboratories operating as 
parts of CAHs, or facilities that furnish only some combination of 
these services. Clinical diagnostic laboratories operating as parts of 
CAHs must meet the applicable provider-based requirements.
    (H) Facilities, other than those operating as parts of CAHs, 
furnishing only physical, occupational, or speech therapy to ambulatory 
patients, throughout any period during which the annual financial cap 
amount on payment for coverage of physical, occupational, or speech 
therapy, as described in section 1833(g)(2) of the Act, is suspended by 
legislation.
* * * * *
    13. Section 413.70 is amended by--
    a. Revising paragraph (b)(1)(i).
    b. Removing paragraph (b)(2)(iii).
    c. Revising the heading of paragraph (b)(3).
    d. Revising paragraph (b)(3)(ii)(A).
    e. Adding a new paragraph (b)(7).
    The revisions and addition read as follows:


Sec.  413.70  Payment for services of a CAH.

* * * * *
    (b) * * *
    (1) * * *
    (i) Unless the CAH elects to be paid for services to its 
outpatients under the method specified in paragraph (b)(3) of this 
section, the amount of payment for outpatient services of a CAH is 
determined under paragraph (b)(2) of this section.
* * * * *
    (3) Election to be paid reasonable costs for facility services plus 
fee schedule for professional services. * * *
    (ii) * * *
    (A) For facility services not including any services for which 
payment may be made under paragraph (b)(3)(ii)(B) of this section, the 
reasonable costs of the services as determined in accordance with the 
provisions of section 1861(v)(1)(A) of the Act and the applicable 
principles of cost reimbursement specified in this part and in Part 415 
of this subchapter, except that the lesser of costs or charges 
principle and the RCE payment principle are excluded when determining 
payment for CAH outpatient services; and
* * * * *

[[Page 24238]]

    (7) Payment for clinical diagnostic laboratory tests included as 
outpatient CAH services.
    (i) Payment for clinical diagnostic laboratory tests is not subject 
to the Medicare Part B deductible and coinsurance amounts.
    (ii) Subject to the provisions of paragraphs (b)(7)(iii) through 
(b)(7)(vi) of this section, payment to a CAH for clinical diagnostic 
laboratory tests will be made at 101 percent of reasonable costs of the 
services as determined in accordance with paragraph (b)(2)(i) of this 
section.
    (iii) For services furnished before July 1, 2009, payment to a CAH 
for clinical diagnostic laboratory tests will be made under paragraph 
(b)(7)(ii) of this section only if the individual is an outpatient of 
the CAH, as defined in Sec.  410.2 of this chapter, and is physically 
present in the CAH at the time the specimen is collected.
    (iv) Except as provided in paragraphs (b)(7)(iii) and (b)(7)(v) of 
this section, payment to a CAH for clinical diagnostic laboratory tests 
will be made under paragraph (b)(7)(ii) of this section only if the 
individual is an outpatient of the CAH, as defined in Sec.  410.2 of 
this chapter, without regard to whether the individual is physically 
present in the CAH at the time the specimen is collected and at least 
one of the following conditions is met:
    (A) The individual is receiving outpatient services in the CAH on 
the same day the specimen is collected; or
    (B) The specimen is collected by an employee of the CAH.
    (v) Notwithstanding paragraph (b)(7)(iv) of this section, payment 
for outpatient clinical diagnostic laboratory tests will not be made 
under paragraph (b)(7)(ii) of this section if the billing rules under 
Sec.  411.15(p) of this chapter apply.
    (vi) Payment for clinical diagnostic laboratory tests for which 
payment may not be made under paragraph (b)(7)(iii) or paragraph 
(b)(7)(iv) of this section will be made in accordance with the 
provisions of sections 1833(a)(1)(D) and 1833(a)(2)(D) of the Act.
* * * * *
    14. Section 413.79 is amended by--
    a. Revising paragraph (f)(1).
    b. Redesignating paragraph (f)(6) and paragraph (f)(7).
    c. Adding a new paragraph (f)(6).
    d. Moving paragraph (l) so that it appears after paragraph (k)(7) 
and is the last paragraph in the section.
    The revisions and addition read as follows:


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

* * * * *
    (f) * * *
    (1) Except as provided in paragraph (f)(6) of this section, each 
hospital in the Medicare GME affiliated group must submit the Medicare 
GME affiliation agreement, as defined under Sec.  413.75(b) of this 
section, to the CMS fiscal intermediary or MAC servicing the hospital 
and send a copy to the CMS Central Office no later than July 1 of the 
residency program year during which the Medicare GME affiliation 
agreement will be in effect.
* * * * *
    (6) Effective October 1, 2009, a hospital that is new after July 1 
and begins training residents for the first time after the July 1 start 
date of an academic year may receive a temporary adjustment to its FTE 
resident cap to reflect its participation in an existing Medicare GME 
affiliated group by submitting the Medicare GME affiliation agreement, 
as defined under Sec.  413.75(b), to the CMS fiscal intermediary or MAC 
servicing the hospital and sending a copy to the CMS Central Office 
prior to the end of the first cost reporting period during which the 
hospital begins training residents. The Medicare GME affiliation 
agreement must specify the effective period for the agreement, which 
may begin no earlier than the date the affiliation agreement is 
submitted to CMS. Each of the other hospitals participating in the 
Medicare GME affiliated group must submit an amended Medicare GME 
affiliation agreement that reflects the participation of the new 
hospital to the CMS fiscal intermediary or MAC servicing the hospital 
and send a copy to the CMS Central Office no later than June 30 of the 
residency program year during which the Medicare GME affiliation 
agreement will be in effect. For purposes of this paragraph, a new 
hospital is one for which a new Medicare provider agreement takes 
effect in accordance with Sec.  489.13 of this chapter.
* * * * *

PART 415--SERVICES FURNISHED BY PHYSICIANS IN PROVIDERS, 
SUPERVISING PHYSICIANS IN TEACHING SETTINGS, AND RESIDENTS IN 
CERTAIN SETTINGS

    15. The authority citation for Part 415 continues to read as 
follows:

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


Sec.  415.152  [Amended]

    16. In Sec.  415.152, under paragraph (1) of the definition of 
``Approved graduate medical education (GME) program'', remove the 
phrase ``the Committee on Hospitals of the Bureau of Professional 
Education of''.

PART 489--PROVIDER AGREEMENTS AND SUPPLIER APPROVAL

    17. 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).

    18. Section 489.24 is amended by revising paragraph (a)(2) to read 
as follows:


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

    (a) * * *
    (2)(i) When a waiver has been issued in accordance with section 
1135 of the Act that includes a waiver under section 1135(b)(3) of the 
Act, sanctions under this section for an inappropriate transfer or for 
the direction or relocation of an individual to receive medical 
screening at an alternate location do not apply to a hospital with a 
dedicated emergency department if the following conditions are met:
    (A) If relating to an inappropriate transfer, the transfer arises 
out of the circumstances of the emergency.
    (B) If relating to the direction or relocation of an individual to 
receive medical screening at an alternate location, the direction or 
relocation is 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.
    (C) The hospital does not discriminate on the basis of an 
individual's source of payment or ability to pay.
    (D) The hospital is located in an emergency area during an 
emergency period, as those terms are defined in section 1135(g)(1) of 
the Act.
    (E) There has been a determination that a waiver of sanctions is 
necessary.
    (ii) 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 under section 1135(e)(1)(B) 
of the Act.
* * * * *

[[Page 24239]]

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

    Dated: April 17, 2009.
Charlene Frizzera,
Acting Administrator, Centers for Medicare & Medicaid Services.
    Dated: May 1, 2009.
Kathleen Sebelius,
Secretary.

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

Addendum--Proposed Schedule of Standardized Amounts, Update Factors, 
and Rate-of-Increase Percentages Effective With Cost Reporting Periods 
Beginning on or After October 1, 2009

I. Summary and Background

    In this Addendum, we are setting forth a description of the methods 
and data we used to determine the proposed prospective payment rates 
for Medicare hospital inpatient operating costs and Medicare hospital 
inpatient capital-related costs for FY 2010 for acute care hospitals. 
We also are setting forth the proposed rate-of-increase percentages for 
updating the target amounts for certain hospitals excluded from the 
IPPS for FY 2010. 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 proposed figures for the standardized amounts, offsets, 
and budget neutrality factors. Therefore, in this proposed rule, we are 
proposing the rate-of-increase percentages for updating the target 
amounts for certain hospitals excluded from the IPPS that are effective 
for cost reporting periods beginning on or after October 1, 2009.
    In addition, we are setting forth a description of the methods and 
data we used to determine the proposed standard Federal rate that would 
be applicable to Medicare LTCHs for RY 2010.
    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; the updated hospital-specific rate based on FY 1996 costs 
per discharge; or for cost reporting periods beginning on or after 
January 1, 2009, the updated hospital-specific rate based on the FY 
2006 costs per discharge.
    Under section 1886(d)(5)(G) of the Act, MDHs historically have been 
paid based on the Federal national rate or, if higher, the Federal 
national rate plus 50 percent of the difference between the Federal 
national rate and the updated hospital-specific rate based on FY 1982 
or FY 1987 costs per discharge, whichever 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 
proposing to make changes in the determination of the prospective 
payment rates for Medicare inpatient operating costs for acute care 
hospitals for FY 2010. In section III. of this Addendum, we discuss our 
proposed policy changes for determining the prospective payment rates 
for Medicare inpatient capital-related costs for FY 2010. In section 
IV. of this Addendum, we are setting forth our proposed changes for 
determining the rate-of-increase limits for certain hospitals excluded 
from the IPPS for FY 2010. In section V. of this Addendum, we are 
proposing to make changes in the determination of the standard Federal 
rate for LTCHs under the LTCH PPS for RY 2010. The tables to which we 
refer in the preamble of this proposed rule are presented in section 
VI. of this Addendum.

II. Proposed Changes to Prospective Payment Rates for Hospital 
Inpatient Operating Costs for Acute Care Hospitals for FY 2010

    The basic methodology for determining prospective payment rates for 
hospital inpatient operating costs for acute care hospitals 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 proposed 
prospective payment rates for FY 2010.
    In summary, the proposed 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)(II) 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 
standardized amounts and 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.
     Proposed updates of 2.1 percent for all areas (that is, 
the estimated full market basket percentage increase of 2.1 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 proposed update of 2.1 percent to the 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

[[Page 24240]]

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 recalibration and reclassification, as provided for 
under section 1886(d)(4)(C)(iii) of the Act.
     An adjustment to ensure the wage index and labor share 
update and changes are budget neutral, as provided for under section 
1886(d)(3)(E)(i) of the Act. We note that section 1886(d)(3)(E)(i) of 
the Act requires that we do not consider the labor-related share of 62 
percent to compute wage index budget neutrality.
     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 2009 budget neutrality 
factor and applying a revised factor.
     An adjustment to remove the FY 2009 outlier offset and 
apply an offset for FY 2010, 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.
     As discussed below and in section II.D. of the preamble to 
this proposed rule, an adjustment to eliminate the effect of 
documentation and coding changes that do not reflect real changes in 
case-mix provided for under section 1886(d)(3)(A)(vi) of the Act.
    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. As we did for FY 2009, for FY 
2010, we are proposing to continue 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 amount, for FY 2010, we 
are proposing to continue to apply the imputed floor budget neutrality 
adjustment to the wage indices. As we did for FY 2009, we also are 
proposing to continue to apply 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 of the FY 2009 IPPS final rule and this 
proposed rule.

A. Calculation of the 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 1886(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, 
IME 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 2010, we are proposing to rebase and revise the national and 
Puerto Rico-specific labor-related and nonlabor-related shares from the 
percentages established for FY 2009. Specifically, under section 
1886(d)(3)(E) of the Act, the Secretary estimates from time to time the 
proportion of payments that are labor-related: ``The Secretary shall 
adjust the proportion (as estimated by the Secretary from time to time) 
of hospitals' costs which are attributable to wages and wage-related 
costs of the DRG prospective payment rates. * * *'' We refer to the 
proportion of hospitals' costs that are attributable to wages and wage-
related costs as the ``labor-related share.'' For FY 2010, as discussed 
in section IV.B.4. of the preamble of this proposed rule, we are 
proposing a labor-related share of 67.1 percent for the national 
standardized amounts and 60.3 percent for the Puerto Rico-specific 
standardized amount. Consistent with section 1886(d)(3)(E) of the Act, 
we are proposing to apply 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 proposing to apply the wage 
index to a labor-related share of 67.1 percent of the national 
standardized amount. For hospitals located in Puerto Rico, we are 
proposing to apply a labor-related share of 60.3 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 proposing to apply a labor-related share of 
62 percent.
    The proposed standardized amounts for operating costs appear in 
Tables 1A, 1B, and 1C of the Addendum to this proposed rule.
2. Computing the 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 proposing to calculate 
FY 2010 national and Puerto Rico standardized amounts irrespective of 
whether a hospital is located in an urban or rural location.
3. Updating the Average Standardized Amount
    In accordance with section 1886(d)(3)(A)(iv)(II) of the Act, we are

[[Page 24241]]

proposing to update the equalized standardized amount for FY 2010 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 
increase in the market basket reflects the average change in the price 
of goods and services comprising routine, ancillary, and special care 
unit hospital inpatient services. The most recent forecast of the 
hospital market basket increase for FY 2010 is 2.1 percent. Thus, for 
FY 2010, the proposed update to the average standardized amount is 2.1 
percent for hospitals in all areas. The estimated market basket 
increase of 2.1 percent is based on Global Insight, Inc.'s 2009 first 
quarter forecast of the hospital market basket increase (as discussed 
in Appendix B of this proposed 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 V.A. of the preamble of this proposed 
rule. The proposed standardized amounts in Tables 1A through 1C of 
section VI. of this Addendum 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 proposing to apply 
the full rate-of-increase in the hospital market basket for IPPS 
hospitals to the Puerto Rico-specific standardized amount. Therefore, 
the proposed update to the Puerto Rico-specific standardized amount is 
2.1 percent.
    Although the update factors for FY 2010 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 
2010 for both IPPS hospitals and hospitals and hospital units excluded 
from the IPPS. Section 1886(e)(5)(A) of the Act requires that we 
publish our proposed recommendations in the Federal Register for public 
comment. Our recommendation on the update factors is set forth in 
Appendix B of this proposed rule.
4. Other Adjustments to the Average Standardized Amount
    As in the past, we are proposing to adjust the FY 2010 standardized 
amount to remove the effects of the FY 2009 geographic 
reclassifications and outlier payments before applying the FY 2010 
updates. We then apply budget neutrality offsets for outliers and 
geographic reclassifications to the standardized amount based on FY 
2010 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 satisfy 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 include outlier payments in the 
simulations because they may be affected by changes in these 
parameters.
    We also are proposing to adjust the standardized amount this year 
by an estimated amount to ensure that aggregate payments made by the 
Secretary 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 2010, we are not proposing to apply 
budget neutrality for the imputed floor to the standardized amount, but 
to apply it instead to the wage index, as discussed in section III.B.2. 
of the preamble to this proposed rule. For FY 2010, we also are 
proposing to apply an adjustment to eliminate the effect of 
documentation and coding 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.
a. Proposed 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 proposed rule, we normalized the recalibrated DRG 
weights by an adjustment factor so that the average case weight after 
recalibration is equal to the average case weight prior to 
recalibration. However, equating the average case weight after 
recalibration to the average case weight before recalibration does not 
necessarily achieve budget neutrality with respect to aggregate 
payments to hospitals because payments to hospitals are affected by 
factors other than average case weight. Therefore, as we have done in 
past years, we are proposing to make 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)(i) 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. In 
addition, under section 1886(d)(3)(E)(i) of the Act, as we established 
in the FY 2006 final rule (70 FR 47395), we are implementing the 
revised and rebased labor share in a budget neutral manner. 
Specifically, section 1886(d)(3)(E)(i) of the Act directs us to 
determine a labor-related share that reflects the ``proportion * * * of 
hospitals' costs which are attributable to wages and wage-related 
costs.'' In addition, section 1886(d)(3)(E)(i) of the Act requires that 
we implement the wage index adjustment in a budget neutral manner. 
However, section 1886(d)(3)(E)(ii) of the Act sets the labor-related 
share at 62 percent for hospitals with a wage index less than or equal 
to 1.0, and section 1886(d)(3)(E)(i) of the Act provides that the 
Secretary shall calculate the budget neutrality adjustment for the 
adjustments or updates made under that provision as if section 
1886(d)(3)(E)(ii) of the Act had not been enacted. In other words, 
these two sections of the statute require that we implement the 
proposed revision of the labor-related share to 67.1 percent (compared 
to the prior 69.7 percent) (as well as the wage index updates) in a 
budget neutral manner, but that our budget neutrality

[[Page 24242]]

adjustment should not take into account the requirement that we set the 
labor-related share for hospitals with indices less than or equal to 
1.0 at the more advantageous level of 62 percent. Therefore, for 
purposes of this budget neutrality adjustment, section 1886(d)(3)(E)(i) 
of the Act prohibits us from taking into account the fact that 
hospitals with a wage index less than or equal to 1.0 are paid using a 
labor-related share of 62 percent. Consistent with current policy, for 
FY 2010, we are proposing to adjust 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 proposed rule.
    For FY 2010, to comply with the requirement that DRG 
reclassification and recalibration of the relative weights be budget 
neutral for the Puerto Rico standardized amount and the hospital-
specific rates, we used FY 2008 discharge data to simulate payments and 
compared aggregate payments using the FY 2009 relative weights to 
aggregate payments using the proposed FY 2010 relative weights. Based 
on this comparison, we computed a proposed budget neutrality adjustment 
factor equal to 0.997663. As discussed in section IV. of this Addendum, 
we would also apply the DRG reclassification and recalibration budget 
neutrality factor of 0.997663 to the hospital-specific rates that are 
to be effective for cost reporting periods beginning on or after 
October 1, 2009.
    In order to meet the statutory requirements that we do not take 
into account the labor-related share of 62 percent when computing wage 
index budget neutrality and that we budget neutralize any changes in 
payments as a result of the proposed FY 2010 rebased and revised labor 
share, it was necessary to use a three-step process to comply with the 
requirements that DRG reclassification and recalibration of the 
relative weights and the updated wage index and labor-related share 
have no effect on aggregate payments for IPPS hospitals. We first 
determined a proposed DRG reclassification and recalibration budget 
neutrality factor of 0.997663 by using the same methodology described 
above to determine the proposed DRG reclassification and recalibration 
budget neutrality factor for the Puerto Rico standardized amount and 
hospital-specific rates. Secondly, to compute a budget neutrality 
factor for wage index and labor-related share changes, we used FY 2008 
discharge data to simulate payments and compared aggregate payments 
using the proposed FY 2010 relative weights, FY 2009 wage indices, and 
applied the FY 2009 labor share of 69.7 percent to all hospitals 
(regardless of whether the hospital's wage index was above or below 
1.0) to aggregate payments using the proposed FY 2010 relative weights, 
proposed FY 2010 wage indices, and applied the proposed rebased and 
revised labor share for FY 2010 of 67.1 percent to all hospitals 
(regardless of whether the hospital's proposed wage index was above or 
below 1.0). In addition, we applied the proposed DRG reclassification 
and recalibration budget neutrality factor (derived in the first step) 
to the rates that were used to simulate payments for this comparison of 
aggregate payments from FY 2009 to FY 2010. By applying this 
methodology, we determined a budget neutrality factor for the proposed 
wage index and labor-related share changes of 1.000404. Finally, we 
multiplied the proposed DRG reclassification and recalibration proposed 
budget neutrality factor of 0.997663 (derived in the first step) by the 
proposed budget neutrality factor for proposed wage index changes of 
1.000404 (derived in the second step) to determine the proposed DRG 
reclassification and recalibration and updated wage index and labor-
related share budget neutrality factor of 0.998066.
b. Reclassified Hospitals--Proposed 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 proposed budget 
neutrality factor for FY 2010, we used FY 2008 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 proposed adjustment factor of 
0.991690 to ensure that the effects of these provisions are budget 
neutral, consistent with the statute.
    The proposed FY 2010 budget neutrality adjustment factor is applied 
to the standardized amount after removing the effects of the FY 2009 
budget neutrality adjustment factor. We note that the proposed FY 2010 
budget neutrality adjustment reflects FY 2010 wage index 
reclassifications approved by the MGCRB or the Administrator.
c. Proposed Rural Floor and Imputed Floor Budget Neutrality Adjustment
    As discussed in section III.B.2.b. of the preamble of the FY 2009 
IPPS final rule (73 FR 48570 through 48574), we adopted as final State-
level budget neutrality for the rural and imputed floors, effective 
beginning with the FY 2009 wage index. 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 implemented 
this change with no transition, we 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 received 
a blended wage index that was 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. For FY 2010, the 
blended wage index will be determined by adding 50 percent of the wage 
index adjusted by applying the State-level rural and imputed floor 
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 neutrality adjustment. As stated 
earlier, 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 50 percent State-
level rural and imputed floor budget neutrality adjustment and

[[Page 24243]]

the 50 percent national rural and imputed floor budget neutrality 
adjustment are used in calculating the FY 2010 outlier threshold (as 
discussed below), we are explaining our calculation of the proposed 
rural floor budget neutrality adjustments (in this section) below.
    In order to compute a budget neutral wage index that is a blend of 
50 percent of the wage index adjusted by the State-level rural and 
imputed floor budget neutrality adjustment and 50 percent of the wage 
index adjusted by the national rural and imputed floor budget 
neutrality adjustment, similar to our calculation of the FY 2009 wage 
index (73 FR 48570 through 48574), we used FY 2008 discharge data and 
proposed FY 2010 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 0.997466. 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 proposed FY 2010 blended wage indices for the second 
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 
proposed FY 2010 blended wage indices for the second year of the 
transition (as described below).
    To determine the proposed FY 2010 wage indices for the second year 
of the transition, we then blended the national and State-level wage 
index values (computed above) by taking 50 percent of the national 
rural and imputed floor budget neutral wage index and 50 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 floors, an 
additional adjustment factor of 1.00016 must be applied to the blended 
wage indexes calculated as described above.
d. Proposed Case-Mix Budget Neutrality Adjustment
(1) Adjustment to the Proposed FY 2010 IPPS Standardized Amount
    As stated earlier, beginning in FY 2008, we adopted the MS-DRG 
patient classification system for the IPPS to better recognize 
patients' severity of illness in Medicare payment rates. In the FY 2008 
IPPS final rule with comment period (73 FR 47175 through 47186), 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 changes in 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 documentation and coding 
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 (for a total 
adjustment of -4.8 percent). 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(a) 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 being effective as of October 1, 2007. For FY 
2009, section 7(a) of Public Law 110-90 required 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 applied 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 was in 
addition to the -0.6 percent adjustment in FY 2008, yielding a combined 
effect of -1.5 percent.
    As discussed in section II.D. of the preamble to this proposed 
rule, we estimated a 2.5 percent change in FY 2008 case-mix due to 
changes in documentation and coding that do not reflect real changes in 
case-mix for discharges occurring during FY 2008, which exceeded the -
0.6 percent prospective documentation and coding adjustment applied 
under section 7(a) of Public Law 110-90 by 1.9 percentage points. Under 
section 7(b)(1)(A) of Public Law 119-90, the Secretary is required to 
make an appropriate adjustment under section 1886(d)(3)(A)(vi) of the 
Act to the average standardized amounts for subsequent fiscal years so 
as to eliminate the full effect of the coding and classification 
changes that do not reflect real changes in case-mix. In addition, we 
note that the Secretary has the authority to make this prospective 
adjustment in FY 2010 under section 1886(d)(3)(A)(vi) of the Act. As we 
have consistently stated since the initial implementation of the MS-DRG 
system, we do not believe it is appropriate for expenditures under the 
IPPS to increase due to MS-DRG-related changes in documentation and 
coding that do not reflect real changes in case-mix.
    Therefore, we are proposing to reduce the average standardized 
amounts under section 1886(d) of the Act in FY 2010 by -1.9 percent, 
the difference between changes in documentation and coding that do not 
reflect real changes in case-mix for discharges occurring during FY 
2008 and the prospective adjustment applied under Public Law 110-90. We 
are proposing to leave this adjustment in place for subsequent fiscal 
years in order to ensure that changes in documentation and coding 
resulting from the adoption of the MS-DRGs do not lead to an increase 
in aggregate payments not reflective of an increase in real case-mix. 
Thus, the proposed cumulative adjustment to the average standardized 
amounts for FY 2010 is -3.4 percent (that is, the existing -1.5 percent 
plus the proposed -1.9 percent). We note that because we are proposing 
to apply a cumulative offset of -3.4 percent to the FY 2010 
standardized amount, we are proposing to apply a factor of 0.967 (1 
divided by

[[Page 24244]]

1.034) in determining the FY 2010 standardized amount. We refer readers 
to section II.D. of the preamble of this proposed rule for a complete 
discussion of our proposed -1.9 percent adjustment to the average 
standardized amounts under section 1886(d) of the Act in FY 2010.
    As also discussed in section II.D. of the preamble of this proposed 
rule, we will address any differences between the increase in FY 2009 
case-mix due to documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FY 2009 and the -
0.9 percent prospective documentation and coding adjustment applied 
under section 7(a) of Public Law 110-90 in the FY 2011 rulemaking 
cycle. Furthermore, we are seeking public comment on the proposed -1.9 
percent prospective adjustment to the standardized amounts under 
section 1886(d) of the Act and addressing in the FY 2011 rulemaking 
cycle any differences between the increase in FY 2009 case-mix due to 
documentation and coding changes that did not reflect real changes in 
case-mix for discharges occurring during FY 2009 and the -0.9 percent 
prospective documentation and coding adjustment applied under section 
7(a) of Public Law 110-90. We note that we are also seeking public 
comment on our intent to address the requirements of section 7(b)(1)(B) 
of Public Law 110-90 through future rulemaking.
(2) Proposed Adjustment to the FY 2010 Hospital-Specific Rates for SCHs 
and MDHs
    As discussed in section II.D. of the preamble to this proposed 
rule, because hospitals (SCHs and MDHs) paid based in whole or in part 
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 documentation and coding changes that do not reflect real 
increases in patients' severity of illness. Under section 
1886(d)(3)(A)(vi) of the Act, 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 changes 
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.'' We 
indicated that, for the FY 2010 rulemaking, we planned to examine our 
FY 2008 claims data for hospitals paid based on the hospital-specific 
rate. We also indicated that if we found evidence of significant 
increases in case-mix for patients treated in these hospitals that does 
not reflect real changes in case-mix, 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.
    We performed a retrospective evaluation of the FY 2008 claims data 
for SCHs and MDHs using the same methodology described in section II.D 
of the preamble of this proposed rule for other IPPS hospitals. We 
found that, independently for both SCHs and MDHs, the change due to 
documentation and coding that did not reflect real changes in case-mix 
for discharges occurring during FY 2008 slightly exceeded the 2.5 
percent result discussed earlier, but did not significantly differ from 
that result.
    Therefore, consistent with our statements in prior IPPS rules, we 
are proposing to use our authority under section 1886(d)(5)(I)(i) of 
the Act to prospectively adjust the hospital-specific rates by -2.5 
percent in FY 2010 for our estimated documentation and coding effect in 
FY 2008 that does not reflect real changes in case-mix. We are 
proposing to leave this adjustment in place for subsequent fiscal years 
in order to ensure that changes in documentation and coding resulting 
from the adoption of the MS-DRGs do not lead to an increase in 
aggregate payments for SCHs and MDHs not reflective of an increase in 
real case-mix. This proposed -2.5 percent adjustment to the hospital-
specific rates exceeds the proposed -1.9 percent adjustment to the 
national standardized amount under section 7(b)(1)(A) of Public Law 
110-90 because, unlike the national standardized rates, the FY 2008 
hospital-specific rates were not previously reduced in order to account 
for anticipated changes in documentation and coding that do not reflect 
real changes in case-mix resulting from the adoption of the MS-DRGs. We 
note that because we are proposing to apply a offset of -2.5 percent to 
the FY 2010 hospital-specific rates, we are proposing to apply a factor 
of 0.976 (1 divided by 1.025) to adjust the FY 2010 hospital-specific 
rates. We refer readers to section II.D. of the preamble of this 
proposed rule for a complete discussion on our proposal to 
prospectively adjust the hospital-specific rates by -2.5 percent in FY 
2010.
    We will address in the FY 2011 rulemaking cycle any change in FY 
2009 case-mix due to documentation and coding that did not reflect real 
changes in case-mix for discharges occurring during FY 2009. We note 
that, unlike the national standardized rates, the FY 2009 hospital-
specific rates were not previously reduced in order to account for 
anticipated changes in documentation and coding that do not reflect 
real changes in case-mix resulting from the adoption of the MS-DRGs.
    We are seeking public comment on the proposed -2.5 percent 
prospective adjustment to the hospital-specific rates of SCHs and MDHs 
and addressing in the FY 2011 rulemaking cycle any changes in FY 2009 
case-mix due to changes in documentation and coding that do not reflect 
real changes in case-mix for discharges occurring during FY 2009. We 
intend to update our analysis with FY 2008 data on claims paid through 
March 2008 for the FY 2010 IPPS final rule.
(3) Proposed Adjustment to the FY 2010 Puerto Rico Standardized Amount
    As stated in section II.D. of the preamble to this proposed rule, 
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, 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 changes that do not reflect real increases 
in patients' severity of illness. Consistent with the approach 
described for SCHs and MDHs, in the FY 2009 final rule, we indicated 
that we planned to examine our FY 2008 claims data for hospitals in 
Puerto Rico. We indicated in the FY 2009 IPPS proposed rule (73 FR 
48449) that if we found evidence of significant

[[Page 24245]]

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.
    We performed a retrospective evaluation of the FY 2008 claims data 
for Puerto Rico hospitals using the same methodology described in 
section II.D. of the preamble of this proposed rule for IPPS hospitals 
paid under the national standardized amounts under section 1886(d) of 
the Act. We found that, for Puerto Rico hospitals, the increase in 
payments for discharges occurring during FY 2008 due to documentation 
and coding changes that did not reflect real changes in case-mix for 
discharges occurring during FY 2008 was approximately 1.1 percent.
    Given these documentation and coding increases, consistent with our 
statements in prior IPPS rules, we are proposing to use our authority 
under section 1886(d)(5)(I)(i) of the Act to adjust the Puerto Rico-
specific standardized amount by -1.1 percent in FY 2010 to account for 
the FY 2008 documentation and coding changes that are not due to 
changes in real case-mix and to leave that adjustment in place for 
subsequent fiscal years. As the proposed -1.1 percent adjustment will 
be applied to the Puerto Rico-specific rate that accounts for 25 
percent of payment to Puerto Rico hospitals and the other 75 percent is 
accounted for by the similar proposed adjustment that is applied to the 
national standardized amount, the overall proposed adjustment for 
documentation and coding changes will be slightly less for Puerto Rico 
hospitals as compared to other hospitals that are paid based on 100 
percent of the national standardized amount. We note that, as with the 
hospital-specific rates, the Puerto Rico-specific standardized amount 
had not previously been reduced based on estimated changes in 
documentation and coding associated with the adoption of the MS-DRGs. 
Furthermore, we note that because we are proposing to apply a offset of 
-1.1 percent to the FY 2010 Puerto Rico-specific standardized amount, 
we are proposing to apply a factor of 0.989 (1 divided by 1.011) to 
adjust the FY 2010 Puerto Rico-specific standardized amount. We refer 
readers to section II.D. of the preamble of this proposed rule for a 
complete discussion on our proposal to adjust the Puerto Rico-specific 
standardized amount by -1.1 percent in FY 2010.
    We will address in the FY 2011 rulemaking cycle any change in FY 
2009 case-mix due to documentation and coding changes that do not 
reflect real changes in case-mix for discharges occurring during FY 
2009. We note that, unlike the national standardized rates, the FY 2009 
Puerto Rico-specific standardized amount was not previously reduced in 
order to account for anticipated changes in documentation and coding 
that do not reflect real changes in case-mix resulting from the 
adoption of the MS-DRGs.
    We are seeking public comment on the proposed -1.1 percent 
prospective adjustment to the Puerto Rico-specific standardized amount 
under section 1886(d)(5)(I)(i) of the Act and addressing in the FY 2011 
rulemaking cycle any changes in FY 2009 case-mix due to documentation 
and coding changes that do not reflect real changes in case-mix for 
discharges occurring during FY 2009. We intend to update our analysis 
with FY 2008 data on claims paid through March 2008 for the FY 2010 
IPPS final rule.
e. Proposed Outlier Payments
    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 
2010 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 Web site at http://www.cms.hhs.gov/AcuteInpatientPPS/04_outlier.asp#TopOfPage.
(1) Proposed FY 2010 Outlier Fixed-Loss Cost Threshold
    For FY 2010, we are proposing to continue to use the same 
methodology used for FY 2009 (73 FR 48763 through 48766) to calculate 
the outlier threshold. Similar to the methodology used in the FY 2009 
IPPS final rule, for FY 2010, we are proposing 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 2010 outlier threshold we simulated payments by applying 
proposed FY 2010 rates and policies using cases from the FY 2008 MedPAR 
files. Therefore, in order to determine the proposed FY 2010 outlier 
threshold, we inflate the charges on the MedPAR claims by 2 years, from 
FY 2008 to FY 2010.
    We are proposing 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 2007 in combination with the first quarter of FY 2008 
(July 1, 2007 through December 31, 2007) to the last quarter of FY 2008 
in combination with the first quarter of FY 2009 (July 1, 2008 through 
December 31, 2008). This rate of change was 7.29 percent (1.0729) or 
15.11 percent (1.1511) over 2 years.
    As we have done in the past, we established the proposed FY 2010 
outlier threshold using hospital CCRs from the December 2008 update to 
the Provider-Specific File (PSF)--the most recent available data at the 
time of this proposed rule. This file includes CCRs that reflect 
implementation of the

[[Page 24246]]

changes to the policy for determining the applicable CCRs that became 
effective August 8, 2003 (68 FR 34494).
    As discussed in the FY 2007 IPPS 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 2010, we are 
proposing to continue to use the same methodology to calculate the CCR 
adjustment by using the FY 2008 operating cost per discharge increase 
in combination with the actual FY 2008 operating market basket 
percentage increase determined by IHS Global Insight, Inc., as well as 
the charge inflation factor described above to estimate the adjustment 
to the CCRs. (We note that the FY 2008 actual (otherwise referred to as 
``final'') operating market basket percentage increase reflects 
historical data, whereas the published FY 2008 operating market basket 
update factor was based on IHS Global Insight, Inc.'s 2007 third 
quarter forecast with historical data through the first quarter of 
2008.) By using the operating market basket percentage 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 2010, we 
determined the adjustment by taking the percentage increase in the 
operating costs per discharge from FY 2006 to FY 2007 (1.0460) from the 
cost report and dividing it by the final operating market basket 
percentage increase from FY 2007 (1.0360). 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 percentage increase and the 
increase in cost per case from the cost report (the FY 2004 to FY 2005 
percentage increase of operating costs per discharge of 1.0584 divided 
by the FY 2005 final operating market basket percentage increase of 
1.0390, the FY 2005 to FY 2006 percentage increase of operating costs 
per discharge of 1.0578 divided by FY 2006 final operating market 
basket percentage increase of 1.0400). For FY 2010, we averaged the 
differentials calculated for FY 2005, FY 2006, and FY 2007, which 
resulted in a mean ratio of 1.0151. We multiplied the 3-year average of 
1.0151 by the FY 2008 final operating market basket percentage increase 
of 1.0400, which resulted in an operating cost inflation factor of 5.56 
percent or 1.056. We then divided the operating cost inflation factor 
by the 1-year average change in charges (1.072893) and applied an 
adjustment factor of 0.9840 to the operating CCRs from the PSF.
    As stated in the FY 2009 IPPS final rule (73 FR 48763), 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 a fiscal 
intermediary or 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 2009 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 2006 to FY 2007 (1.0488) from the cost report and 
dividing it by the final capital market basket percentage increase from 
FY 2007 (1.0130). 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 percentage increase and the increase 
in cost per case from the cost report (the FY 2004 to FY 2005 
percentage increase of capital costs per discharge of 1.0329 divided by 
the FY 2005 final capital market basket percentage increase of 1.0090, 
the FY 2005 to FY 2006 percentage increase of capital costs per 
discharge of 1.0467 divided by the FY 2006 final capital market basket 
percentage increase of 1.0110). For FY 2010, we averaged the 
differentials calculated for FY 2005, FY 2006, and FY 2007, which 
resulted in a mean ratio of 1.0314. We multiplied the 3-year average of 
1.0314 by the FY 2008 final capital market basket percentage increase 
of 1.0140, which resulted in a capital cost inflation factor of 4.59 
percent or 1.0459. We then divided the capital cost inflation factor by 
the 1-year average change in charges (1.072893) and applied an 
adjustment factor of 0.9748 to the capital CCRs from the PSF. We are 
proposing to use 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.
    As stated above, for FY 2010, we are applying the proposed FY 2010 
rates and policies using cases from the FY 2008 MedPAR files in 
calculating the proposed outlier threshold. Therefore, for purposes of 
estimating the proposed outlier threshold for FY 2010, it is necessary 
to take into account the remaining projected case-mix growth when 
calculating the outlier threshold that results in outlier payments 
being 5.1 percent of total payments for FY 2010. As discussed above and 
in section II.D. of the preamble of this proposed rule, our actuaries 
estimated that maintaining budget neutrality for changes in case-mix 
due to the adoption of the MS-DRGs requires an adjustment of -4.8 
percent to the national standardized amount. For FY 2008, our estimate 
of the case-mix increase due to documentation and coding in FY 2008 is 
2.5 percent, which is already included within the claims data (FY 2008 
MedPAR files) used to calculate the proposed FY 2010 threshold. In 
addition, we stated that, even with our assumption that there will be 
no continued changes in documentation and coding in FY 2009, the use of 
the FY 2009 relative weights will result in an additional 0.7 percent 
case-mix increase due to the documentation and coding effect in FY 
2009. Therefore, we project that an additional 1.6 percent case-mix 
growth occurred since 2008 (4.8 percent - 2.5 percent (case-mix growth 
in FY 2008) - 0.7 percent (FY 2009 relative weights effect) = 1.6 
percent). As a result, we inflated the FY 2008 claims data by an 
additional 1.6 percent for the additional case-mix growth projected to 
have occurred since FY 2008. If we did not take into account the 
remaining 1.6 percent projected case-mix growth, our estimate of total 
FY 2010 payments would be too low, and as a result, our proposed 
outlier threshold would be too high, such that estimated outlier 
payments would be less than our projected 5.1 percent of total 
payments. While we assume 1.6 percent case-mix growth for IPPS 
hospitals in our outlier threshold calculations, the proposed FY 2010 
national standardized amounts used to calculate the proposed outlier 
threshold reflect the proposed cumulative adjustment of -3.4 percent 
(as described above in this section).
    Using this methodology, we are proposing an outlier fixed-loss cost 
threshold for FY 2010 equal to the prospective payment rate for the 
DRG, plus any IME and DSH payments, and any add-on payments for new 
technology, plus $24,240.
    As we did in establishing the FY 2009 outlier threshold (73 FR 
57891), in our projection of FY 2010 outlier payments, we are not 
proposing to make any

[[Page 24247]]

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 June 9, 2003 outlier 
final rule (68 FR 34494), 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 
higher proposed fixed-loss outlier threshold for FY 2010 compared to FY 
2009. First, as stated below in section II.A.4.e.(3) of this Addendum, 
we are currently projecting 5.4 percent of total IPPS payment will be 
paid as outliers in FY 2009 or 0.3 percentage points greater than the 
5.1 percent originally estimated. If we do not increase the FY 2009 
threshold in FY 2010, we would continue to make outlier payments in 
excess of the 5.1 percent target. In addition, because overall payments 
are projected to be lower in FY 2010 compared to FY 2009, even more 
cases would qualify for outlier payments. In order to maintain outlier 
payments at 5.1 percent, the outlier threshold must be further 
increased to decrease the amount of cases that would qualify as 
outliers. Together, we believe that the above factors cumulatively 
contributed to a higher proposed fixed-loss outlier threshold in FY 
2010 compared to FY 2009.
(2) Other Proposed 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 2010 will result in outlier payments 
that will equal 5.1 percent of operating DRG payments and 5.5 percent 
of capital payments based on the Federal rate.
    In accordance with section 1886(d)(3)(B) of the Act, we are 
proposing to reduce the FY 2010 standardized amount by the same 
percentage to account for the projected proportion of payments paid as 
outliers.
    The outlier adjustment factors that would be applied to the 
standardized amount for the proposed FY 2010 outlier threshold are as 
follows:

------------------------------------------------------------------------
                                                Operating
                                              standardized     Capital
                                                 amounts    federal rate
------------------------------------------------------------------------
National....................................      0.948996      0.945405
Puerto Rico.................................      0.952493      0.938327
------------------------------------------------------------------------

    We are proposing to apply the outlier adjustment factors to the 
proposed FY 2010 rates after removing the effects of the FY 2009 
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 June 9, 2003 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 1.183 or capital CCRs greater than 0.146, 
or hospitals for whom the fiscal intermediary or MAC is unable to 
calculate a CCR (as described at Sec.  412.84(i)(3) of our 
regulations), we still use statewide average CCRs to determine whether 
a hospital qualifies for outlier payments.\11\ Table 8A in this 
Addendum contains the proposed 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, 2009, these statewide average ratios would replace the ratios 
published in the IPPS final rule for FY 2009 (73 FR 48994 through 
48995). Table 8B in this Addendum contains the comparable proposed 
statewide average capital CCRs. Again, the proposed CCRs in Tables 8A 
and 8B would be used during FY 2010 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.
---------------------------------------------------------------------------

    \11\ 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 and/or capital CCRs to work with their 
fiscal intermediary or MAC 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 CCRs, we refer readers to CMS Web site: http://www.cms.hhs.gov/manuals/downloads/clm104c03.pdf.
(3) FY 2008 and FY 2009 Outlier Payments
    In the FY 2009 IPPS final rule (73 FR 48766), we stated that, based 
on available data, we estimated that actual FY 2008 outlier payments 
would be approximately 4.7 percent of actual total DRG payments. This 
estimate was computed based on simulations using the FY 2007 MedPAR 
file (discharge data for FY 2007 claims). That is, the estimate of 
actual outlier payments did not reflect actual FY 2008 claims, but 
instead reflected the application of FY 2008 rates and policies to 
available FY 2007 claims.
    Our current estimate, using available FY 2008 claims data, is that 
actual outlier payments for FY 2008 were approximately 4.8 percent of 
actual total DRG payments. Thus, the data indicate that, for FY 2008, 
the percentage of actual outlier payments relative to actual total 
payments is higher than we projected before FY 2008. 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

[[Page 24248]]

outlier payments to ensure that total outlier payments for FY 2008 are 
equal to 5.1 percent of total DRG payments.
    We currently estimate that actual outlier payments for FY 2009 will 
be approximately 5.4 percent of actual total DRG payments, 0.3 
percentage points higher than the 5.1 percent we projected in setting 
the outlier policies for FY 2009. This estimate is based on simulations 
using the FY 2008 MedPAR file (discharge data for FY 2008 claims). We 
used these data to calculate an estimate of the actual outlier 
percentage for FY 2009 by applying FY 2009 rates and policies, 
including an outlier threshold of $20,045 to available FY 2008 claims.
f. Proposed Rural Community Hospital Demonstration Program Adjustment 
(Section 410A of Public Law 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 ``[i]n 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 V.I. of the 
preamble to this proposed rule, we have satisfied this requirement by 
proposing an adjustment to the 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 $1,124,126. 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 projected total annual 
impact of the demonstration program for FY 2010 is $14,613,632. In 
addition, because the cost reports of all hospitals participating in 
the demonstration in its first year (that is, FY 2005) have been 
finalized, we are able to determine how much the cost of the 
demonstration program exceeded the amount that was offset by the budget 
neutrality adjustment for FY 2005. For all 13 hospitals that 
participated in the demonstration in FY 2005, the amount is $7,179,461. 
Therefore, the projected total annual impact of the demonstration 
program for FY 2010 is $21,793,093. The proposed budget neutrality 
adjustment factor applied to the Federal rate to calculate Medicare 
inpatient prospective payments as a result of the demonstration is 
0.999790. This budget neutrality adjustment factor may be different in 
the FY 2010 IPPS final rule to the extent that we have more recent 
data.
    In order to achieve budget neutrality, we are proposing to adjust 
the national IPPS rates by an amount sufficient to account for the 
added costs of this demonstration. In other words, we are proposing to 
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. Proposed FY 2010 Standardized Amount
    The proposed adjusted standardized amount is divided into labor-
related and nonlabor-related portions. Tables 1A and 1B of this 
Addendum contain the national standardized amounts that we are 
proposing to apply to all hospitals, except hospitals located in Puerto 
Rico, for FY 2010. The proposed Puerto Rico-specific amounts are shown 
in Table 1C of this Addendum. The proposed amounts shown in Tables 1A 
and 1B differ only in that the labor-related share applied to the 
standardized amounts in Table 1A is the proposed revised labor-related 
share of 67.1 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 are 
applying 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 
will 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 proposed standardized amounts 
reflecting the proposed full 2.1 percent update for FY 2010, and the 
proposed standardized amounts reflecting the 2.0 percentage point 
reduction to the update (a 0.1 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 proposed amount 
is set forth in Table 1A). The proposed labor-related and nonlabor-
related portions of the national average standardized amounts for 
Puerto Rico hospitals for FY 2010 are set forth in Table 1C of this 
Addendum. This table also includes the proposed Puerto Rico 
standardized amounts. The labor-related share applied to the proposed 
Puerto Rico specific standardized amount is the proposed labor-related 
share of 60.3 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 Pub. L. 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.)
    The following table illustrates the proposed changes from the FY 
2009 national standardized amount. The second column shows the proposed 
changes from the FY 2009 standardized amounts for hospitals that 
satisfy the quality data submission requirement for receiving the full 
update (2.1 percent). The third column shows the proposed changes for 
hospitals receiving the reduced update (0.1 percent). The first row of 
the table shows the proposed updated (through FY 2009) average 
standardized amount after restoring the FY 2008 offsets for outlier 
payments, demonstration budget neutrality, the geographic 
reclassification budget neutrality, and the documentation and coding 
adjustment for FY 2008 and FY 2009. The DRG reclassification and 
recalibration and wage index budget neutrality factors are cumulative. 
Therefore, the FY 2009 factor is not removed from this table. We also 
have added separate rows to this table to reflect the different labor-
related shares that apply to hospitals.

[[Page 24249]]



                   Comparison of FY 2009 Standardized Amounts to the Proposed FY 2010 Standardized Amount With Full and Reduced Update
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                 Full update (2.1 percent);     Full update (2.1 percent);   Reduced update (0.1 percent);       Reduced update (0.1
                                 wage index is greater than     wage index is less than or     wage index is greater than   percent); wage index is less
                                           1.0000                    equal to 1.0000                     1.0000                than or equal to 1.0000
--------------------------------------------------------------------------------------------------------------------------------------------------------
FY 2009 Base Rate, after       Labor: $3,711.57.............  Labor: $3,429.47.............  Labor: $3,711.57.............  Labor: $3,429.47.
 removing geographic           Nonlabor: $1,819.83..........  Nonlabor: $2,101.93..........  Nonlabor: $1,819.83..........  Nonlabor: $2,101.93.
 reclassification budget
 neutrality, demonstration
 budget neutrality, Actual FY
 08 and FY 09 documentation
 and coding adjustment, and
 outlier offset (based on the
 labor-related share
 percentage for FY 2010).
Proposed FY 2010 Update        1.021........................  1.021........................  1.001........................  1.001.
 Factor.
Proposed FY 2010 DRG           0.998066.....................  0.998066.....................  0.998066.....................  0.998066.
 Recalibration and Wage Index
 Budget Neutrality Factor.
Proposed FY 2010               0.991690.....................  0.991690.....................  0.991690.....................  0.991690.
 Reclassification Budget
 Neutrality Factor.
Proposed FY 2010 Outlier       0.948996.....................  0.948996.....................  0.948996.....................  0.948996.
 Factor.
Proposed Rural Demonstration   0.999790.....................  0.999790.....................  0.999790.....................  0.999790.
 Budget Neutrality Factor.
Proposed FY 2010               0.967........................  0.967........................  0.967........................  0.967.
 Documentation and Coding
 Adjustment and Actual FY
 2008 and FY 2009 Adjustment
 and Additional Adjustment
 for FY 2008.
Proposed Rate for FY 2010....  Labor: $3,441.26.............  Labor: $3,179.71.............  Labor: $3,373.85.............  Labor: $3,117.42.
                               Nonlabor: $1,687.30..........  Nonlabor: $1,948.85..........  Nonlabor: $1,654.25..........  Nonlabor: $1,910.68.
--------------------------------------------------------------------------------------------------------------------------------------------------------

    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 standardized amount (as set forth in Table 1A of this 
Addendum). The labor-related and nonlabor-related portions of the 
national average standardized amounts for Puerto Rico hospitals are set 
forth in Table 1C of this Addendum. This table also includes the Puerto 
Rico standardized amounts. The proposed labor-related share applied to 
the Puerto Rico standardized amount is 60.3 percent, or 62 percent, 
depending on which results in higher payments to the hospital. (Section 
1886(d)(9)(C)(iv) of the Act, as amended by section 403(b) of Pub. L. 
108-173, provides that the labor-related share for hospitals in Puerto 
Rico will be 62 percent, unless the application of that percentage 
would result in lower payments to the hospital.)

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

    Tables 1A through 1C, as set forth in this Addendum, contain the 
proposed labor-related and nonlabor-related shares that we are using to 
calculate the proposed prospective payment rates for hospitals located 
in the 50 States, the District of Columbia, and Puerto Rico for FY 
2010. This section addresses two types of adjustments to the 
standardized amounts that are made in determining the proposed 
prospective payment rates as described in this Addendum.
1. Proposed 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 proposed 
rule, we discuss the data and methodology for the proposed FY 2010 wage 
index.
2. Proposed 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 2010, we are proposing to adjust 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. These proposed factors were obtained from 
the U.S. Office of Personnel Management (OPM) and are currently also 
used under the IPPS. In addition, we are proposing that if OPM releases 
revised COLA factors after publication of this proposed rule, we would 
use the revised factors for the development of IPPS payments for FY 
2010 and publish those revised COLA factors in the final rule.

 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)                    1.23
     radius by road..................................
    City of Fairbanks and 80-kilometer (50-mile)                    1.23
     radius by road..................................
    City of Juneau and 80-kilometer (50-mile) radius                1.23
     by road.........................................
    Rest of Alaska...................................               1.25

[[Page 24250]]

 
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 Web site at: http://www.opm.gov/oca/cola/rates.asp.)

C. Proposed MS-DRG Relative Weights

    As discussed in section II.H. of the preamble of this proposed 
rule, we have developed proposed 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 
proposed relative weights that we would apply to discharges occurring 
in FY 2010. These factors have been recalibrated as explained in 
section II. of the preamble of this proposed rule.

D. Calculation of the Proposed Prospective Payment Rates

General Formula for Calculation of the Proposed Prospective Payment 
Rates for FY 2010
    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 2010 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; the updated hospital-specific rate based on FY 1996 costs 
per discharge; or for cost reporting periods beginning on or after 
January 1, 2009, the updated hospital-specific rate based on the FY 
2006 costs per discharge to determine the rate that yields the greatest 
aggregate payment.
    The prospective payment rate for SCHs for FY 2010 equals the higher 
of the applicable Federal rate, or the hospital-specific rate as 
described below. The prospective payment rate for MDHs for FY 2010 
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 2010 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 may then be further 
adjusted if the hospital qualifies for either the IME or DSH 
adjustment. In addition, for hospitals that qualify for a low-volume 
payment adjustment under section 1886(d)(12) of the Act and 42 CFR 
412.101(b), the payment in Step 5 would be increased by 25 percent.
2. Hospital-Specific Rate (Applicable Only to SCHs and MDHs)
a. Calculation of Hospital-Specific Rate
    Section 1886(b)(3)(C) of the Act provides that, 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; the updated hospital-specific rate based on 
FY 1996 costs per discharge; or for cost reporting periods beginning on 
or after January 1, 2009, the updated hospital-specific rate based on 
the FY 2006 costs per discharge to determine the rate that yields the 
greatest aggregate payment.
    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 or the FY 
2006 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 will be used in determining the payment rate an SCH or MDH will 
receive for its discharges beginning on or after October 1, 2009.
b. Updating the FY 1982, FY 1987, FY 1996, FY 2002, and FY 2006 
Hospital-Specific Rates for FY 2010
    We are proposing to increase the hospital-specific rates by 2.1 
percent (the proposed hospital market basket percentage increase) for 
FY 2010 for those SCHs and MDHs that submit qualifying quality data and 
by 0.1

[[Page 24251]]

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 2009, is the market basket percentage increase 
for hospitals that submit qualifying quality data and the market basket 
percentage 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 
percentage increase for hospitals that submit qualifying quality data 
and the market basket percentage increase minus 2 percent for hospitals 
that fail to submit qualifying quality data.
3. General Formula for Calculation of Proposed Prospective Payment 
Rates for Hospitals Located in Puerto Rico Beginning On or After 
October 1, 2009, and Before October 1, 2010
    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 would then be further 
adjusted if the hospital qualifies for either the IME or DSH 
adjustment.

III. Proposed Changes to Payment Rates for Acute Care Hospital 
Inpatient Capital-Related Costs for FY 2010

    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 are proposing to use to 
determine the capital Federal rate for FY 2010, which would be 
effective for discharges occurring on or after October 1, 2009.
    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 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

[[Page 24252]]

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 Pulic. 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 (refer 
to 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 Proposed Federal Hospital Inpatient Capital-Related 
Prospective Payment Rate Update

    In the Federal Register notice setting out the final wage indices 
for FY 2009 (73 FR 57892), we established the final capital Federal 
rate of $424.17 for FY 2009. In the discussion that follows, we explain 
the factors that we are proposing to use to determine the proposed 
capital Federal rate for FY 2010. In particular, we explain why the 
proposed FY 2010 capital Federal rate would decrease approximately 0.8 
percent, compared to the FY 2009 capital Federal rate. Furthermore, we 
estimate that aggregate capital payments would decrease during this 
same period (approximately $393 million), primarily due to the 
estimated decrease in capital IME payments in FY 2010 as compared to FY 
2009 provided under current law, in addition to the proposed decrease 
in the capital Federal rate. 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.
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 
proposed update factor for FY 2010 under that framework is 1.20 percent 
based on the best data available at this time. The proposed update 
factor under that framework is based on a projected 1.2 percent 
increase in the CIPI, a 0.0 percent adjustment for intensity, a 0.0 
percent adjustment for case-mix, a 0.0 percent adjustment for the FY 
2008 DRG reclassification and recalibration, and a forecast error 
correction of 0.0 percent. As discussed below in section III.C. of this 
Addendum, 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 2010 CIPI projection 
in that same section of this Addendum. In addition, as also noted 
below, the proposed capital rates would be further adjusted to account 
for changes in documentation and coding under the MS-DRGs that do not 
correspond to changes in real increases in patients' severity of 
illness, discussed in section II.D. of the preamble of this proposed 
rule. Below we describe the policy adjustments that we are proposing to 
apply in the update framework for FY 2010.
    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 documentation and 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 
documentation and coding behavior that result in assignment of cases to 
higher weighted DRGs but do not reflect higher resource requirements. 
The capital update framework includes the same case-mix index 
adjustment used in the former operating IPPS update framework (as

[[Page 24253]]

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 changes in 
documentation and coding due to the adoption of the MS-DRGs, for FY 
2010, 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 2010. 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, the proposed net 
adjustment for case-mix change in FY 2010 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 2008 DRG reclassification 
and recalibration as part of our proposed update for FY 2010. To adjust 
for reclassification and recalibration effects, we run the FY 2008 
cases through the FY 2007 GROUPER and through the FY 2008 GROUPER. The 
resulting ratio of the case-mix indices should equate to 1.0. If not, 
in the update framework for FY 2010, we would make an adjustment to 
adjust for the reclassification and recalibration effects in FY 2008. 
As discussed in detail in section II.B. of the preamble, however, when 
we adopted the MS-DRGs for FY 2008 to better recognize severity of 
illness in Medicare payment rates, we also recognized that changes in 
documentation and coding could potentially lead to increases in 
aggregate payments without a corresponding increase in patients' 
severity of illness (that is, increased case-mix index other than real 
case-mix index increase). To maintain budget neutrality for the 
adoption of the MS-DRGs as discussed in greater detail in section II.D. 
of the preamble of this proposed rule, we are proposing to make an 
adjustment to the proposed capital Federal rates based on actuarial 
estimates of the documentation and coding effects that occurred in FY 
2008 (based on FY 2008 claims data). Therefore, we are not adjusting 
for reclassification and recalibration effects from FY 2008 in the 
update framework for FY 2010 because we have already accounted for it 
in the proposed documentation and coding adjustment to the proposed 
capital Federal rates. Therefore, we are proposing a 0.0 percent 
adjustment for DRG reclassification in the proposed update for FY 2010, 
as discussed above.
    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 0.1 percentage point was 
calculated for the FY 2010 update. That is, current historical data 
indicate that the forecasted FY 2008 CIPI (1.3 percent) used in 
calculating the FY 2008 update factor slightly understated the actual 
realized price increases (1.4 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, we are 
proposing to make a 0.0 percent adjustment for forecast error in the 
update for FY 2010.
    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.
    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) as a result of hospitals attempting to maximize 
outlier payments, while lessening costs, and we

[[Page 24254]]

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.
    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 
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 percent change in hospitals' 
charges in FY 2004 is approximately 12 percent, which is similar in 
magnitude to the large increases in charges that we found in the 4 
years prior to FY 2004 and before our revisions to the outlier policy 
in FY 2003. For FY 2005, there is approximately an 8 percent change in 
charges, which is somewhat lower than the percent change in FY 2004. 
Nevertheless, the percent change in charges in both FYs 2004 and 2005 
are still relatively high as compared to the change in charges prior to 
FY 2001. Moreover, the percent change in hospitals' case-mix in those 
years is not in proportion to the higher charges. The remaining 3 years 
in the 5-year average indicate that the change in hospitals' charges 
appears to be slightly moderating, and is lower than FYs 2004 and 2005. 
(We refer readers to a discussion regarding the intensity factor 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), the FY 2008 IPPS final rule with comment 
period (72 FR 47426), and the FY 2009 IPPS final rule (73 FR 48771.)
    Our intensity measure is based on a 5-year average, and therefore, 
the proposed intensity adjustment for FY 2010 is based on data from the 
5-year period beginning with FY 2004 and extending through FY 2008. 
Based on the increases in charges for FYs 2004 through 2005 that remain 
in the 5-year average used for the intensity adjustment, 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, as 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 2004 and possibly 
the FY 2005 charge data may still be skewed.
    The change in hospitals' charges for FY 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. 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, and it did not.
    Although it appears that the change in hospitals' charges is more 
reasonable compared to data used in recent past rulemaking, using a 5-
year average of the data tends to smooth out what might otherwise be 
more obvious effects of particular years such as FYs 2004 and 2005. 
Therefore, notwithstanding the gradual effect of the outlier policy 
over time, we believe the effect from hospitals attempting to maximize 
outlier payments prior to the implementation of the outlier policy 
continues, albeit to a smaller degree, to skew the charge data used in 
determining the intensity adjustment.
    As we discussed most recently in the FY 2009 IPPS final rule (73 FR 
48771), because our intensity calculation relies heavily upon charge 
data and we believe that these charge data for at least 1 if not 2 
years of the 5-year average may be inappropriately skewed, we are 
proposing to establish a 0.0 percent adjustment for intensity for FY 
2010, just as we did for FYs 2004 through 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 2010 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 
proposed 1.2 percent capital update factor under the capital update 
framework for FY 2010 as shown in the table below.

     CMS FY 2010 Proposed Update Factor to the Capital Federal Rate
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Capital Input Price Index.......................................     1.2
Intensity.......................................................     0.0
Case-Mix Adjustment Factors:
  Real Across DRG Change........................................    -1.0
  Projected Case-Mix Change.....................................     1.0
                                                                 -------
    Subtotal....................................................     1.2
Effect of FY 2008 Reclassification and Recalibration............     0.0
Forecast Error Correction.......................................     0.0
                                                                 -------
    Total Update................................................     1.2
------------------------------------------------------------------------

b. Comparison of CMS and MedPAC Update Recommendation
    In its March 2009 Report to Congress, MedPAC did not make a 
specific update recommendation for capital IPPS payments for FY 2010. 
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 2010, concurrent with a quality incentive 
program. (MedPAC's Report to the Congress: Medicare Payment Policy, 
March 2009, Section 2A.)
2. Proposed 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 Federal Register notice setting out the final wage indices 
for FY 2009 (73 FR 57891), we estimated that outlier payments for 
capital will equal 5.35 percent of inpatient capital-related payments 
based on the capital Federal rate in FY 2009. Based on the proposed 
thresholds as set forth in section II.A. of this Addendum, we estimate 
that outlier payments for capital-related costs would equal 5.46 
percent for inpatient capital-related payments based on the proposed 
capital Federal rate in FY 2010. Therefore, we are proposing to apply 
an outlier adjustment factor of 0.9454 in

[[Page 24255]]

determining the proposed capital Federal rate. Thus, we estimate that 
the percentage of capital outlier payments to total capital standard 
payments for FY 2010 would be higher than the percentage for FY 2009. 
This increase in capital outlier payments is primarily due to the 
proposed decrease in estimated aggregate capital IPPS payments. That 
is, because overall payments are projected to be lower in FY 2010 
compared to FY 2009, as discussed in section VIII. of Appendix A to 
this proposed rule, even more cases would qualify for outlier payments.
    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 proposed FY 2010 outlier 
adjustment of 0.9454 is a -0.12 percent change from the FY 2009 outlier 
adjustment of 0.9465. Therefore, the net change in the outlier 
adjustment to the proposed capital Federal rate for FY 2010 is 0.9988 
(0.9454/0.9465). Thus, the proposed outlier adjustment decreases the 
proposed FY 2010 capital Federal rate by 0.12 percent compared with the 
FY 2009 outlier adjustment.
3. Proposed 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 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 proposed factors for FY 2010, we compared 
(separately for the national capital rate and the Puerto Rico capital 
rate) estimated aggregate capital Federal rate payments based on the FY 
2009 MS-DRG classifications and relative weights and the FY 2009 GAF to 
estimated aggregate capital Federal rate payments based on the proposed 
FY 2010 MS-DRG classifications and relative weights and the proposed FY 
2010 GAFs. In making the comparison, we set the exceptions reduction 
factor to 1.00. To achieve budget neutrality for the proposed changes 
in the national GAFs, based on calculations using updated data, we are 
proposing to apply an incremental budget neutrality adjustment of 
0.9999 for FY 2010 to the previous cumulative FY 2009 adjustment of 
0.9917, yielding a proposed adjustment of 0.9916, through FY 2010. For 
the Puerto Rico GAFs, we are proposing to apply an incremental budget 
neutrality adjustment of 1.0015 for FY 2010 to the previous cumulative 
FY 2009 adjustment of 0.9960 (calculated with unrounded numbers), 
yielding a proposed cumulative adjustment of 0.9975 through FY 2010.
    We then compared estimated aggregate capital Federal rate payments 
based on the FY 2009 DRG relative weights and the proposed FY 2010 GAFs 
to estimated aggregate capital Federal rate payments based on the 
cumulative effects of the proposed FY 2010 MS-DRG classifications and 
relative weights and the proposed FY 2010 GAFs. The proposed 
incremental adjustment for proposed DRG classifications and proposed 
changes in relative weights is 0.9995 both nationally and for Puerto 
Rico. The proposed cumulative adjustments for MS-DRG classifications 
and changes in relative weights and for proposed changes in the GAFs 
through FY 2010 are 0.9911 (calculated with unrounded numbers) 
nationally and 0.9969 for Puerto Rico. The following table summarizes 
the adjustment factors for each fiscal year:
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    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.
    For FY 2009, we calculated a final GAF/DRG budget neutrality factor 
of 1.0015 (73 FR 57892). For FY 2010, we are proposing to establish a 
GAF/DRG budget neutrality factor of 0.9994. The GAF/DRG budget 
neutrality factors are built permanently into the capital rates; that 
is, they are applied cumulatively in determining the capital Federal 
rate. This follows 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 proposed adjustment from FY 2009 to 
FY 2010 is 0.9994. The cumulative change in the proposed capital 
Federal rate due to this proposed adjustment is 0.9911 (the product of 
the incremental factors for FYs 1995 though 2009 and the proposed 
incremental factor of 0.9994 for FY 2010). (We note that averages of 
the incremental factors that were in effect during FYs 2005 and 2006, 
respectively, were used in the calculation of the proposed cumulative 
adjustment of 0.9911 for FY 2010.)
    The proposed factor accounts for the proposed MS-DRG 
reclassifications and recalibration and for proposed changes in the 
GAFs. It also incorporates the effects on the proposed GAFs of FY 2010 
geographic reclassification decisions made by the MGCRB compared to FY 
2009 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 proposed FY 2010 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 proposed 
exceptions adjustment used in calculating the FY 2010 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 and 
MACs, 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 
December 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. Based on these data, we are 
proposing to make an adjustment of 0.0001. Because special exceptions 
are budget neutral, we are proposing to offset the proposed capital 
Federal rate by 0.01 percent for special exceptions payments for FY 
2010. Therefore, the proposed exceptions adjustment factor is equal to 
0.0001 (1-0.9999) to account for special exceptions payments in FY 
2009.
    In the FY 2009 IPPS final rule (73 FR 48773), we estimated that 
total (special) exceptions payments for FY 2009 would equal 0.01 
percent of aggregate payments based on the proposed capital Federal 
rate. Therefore, we applied an exceptions adjustment factor of 0.9999 
(1-0.0001) to determine the FY 2009 capital Federal rate. As we stated 
above, we estimate that exceptions payments in FY 2010 would equal 0.01 
percent of aggregate payments based on the proposed FY 2010 capital 
Federal rate. Therefore, we are proposing to apply an exceptions 
payment adjustment factor of 0.9999 to the proposed capital Federal 
rate for FY 2010. The proposed exceptions adjustment factor for FY 2010 
is the same as the factor used in determining the FY 2009 capital 
Federal rate as established in the FY 2009 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 proposed 
exceptions adjustment factor used in determining the proposed FY 2010 
capital Federal rate is 1.0000 (0.9999/0.9999).
5. Proposed Capital Standard Federal Rate for FY 2010
    For FY 2009, we established a final capital Federal rate of $424.17 
(73 FR 57891). We are proposing an update of 1.2 percent in determining 
the proposed FY 2010 capital Federal rate for all hospitals. However, 
as discussed in greater detail in section III.E.1. of the preamble of 
this proposed rule, under the statutory authority at section 1886(g) of 
the Act, in conjunction with section 1886(d)(3)(A)(vi) of the Act and 
section 7(b) of Public Law 110-90, we are proposing an additional 1.9 
percent

[[Page 24258]]

reduction to the national capital Federal payment rate in FY 2010. The 
proposed 1.9 percent reduction is based on our Actuary's analysis of 
the effect of changes in case-mix resulting from documentation and 
coding changes that do not reflect real changes in the case-mix in 
light of the adoption of MS-DRGs. Accordingly, we are proposing to 
apply a cumulative documentation and coding adjustment of -3.4 percent 
(that is, the existing -1.5 percent adjustment plus the proposed 
additional -1.9 percent adjustment) by applying a factor of 0.967 (that 
is 1 divided by 1.034) in determining the national capital Federal rate 
for FY 2010. (As also discussed in greater detail in section III.E.2. 
of the preamble of this proposed rule, under the statutory authority at 
section 1886(g) of the Act, in conjunction with section 
1886(d)(3)(A)(vi) of the Act and section 7(b) of Pub. L. 110-90, based 
on an analysis of the change in case-mix after the implementation of 
the MS-DRGs for hospitals located in Puerto Rico, we are proposing to 
apply a 1.1 percent reduction in developing the proposed FY 2010 Puerto 
Rico-specific capital rate.) As a result of the proposed 1.2 percent 
update and other proposed budget neutrality factors discussed above, we 
are proposing to establish a national capital Federal rate of $420.67 
for FY 2010. The proposed national capital Federal rate for FY 2010 was 
calculated as follows:
     The proposed FY 2010 update factor is 1.0120, that is, the 
update is 1.2 percent.
     The proposed FY 2010 budget neutrality adjustment factor 
that is applied to the capital standard Federal payment rate for 
proposed changes in the MS-DRG classifications and relative weights and 
proposed changes in the GAFs is 0.9994.
     The proposed FY 2010 outlier adjustment factor is 0.9454.
     The proposed FY 2010 (special) exceptions payment 
adjustment factor is 0.9999.
     The proposed FY 2010 adjustment factor applied to the 
national capital Federal rate for changes in documentation and coding 
under the MS-DRGs is 0.967.
    Because the proposed 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 proposing to make additional 
adjustments in the capital standard Federal rate for these factors, 
other than the budget neutrality factor for proposed changes in the MS-
DRG classifications and relative weights and for proposed changes in 
the GAFs.
    We are providing the following chart that shows how each of the 
proposed factors and adjustments for FY 2010 affected the computation 
of the proposed FY 2010 national capital Federal rate in comparison to 
the FY 2009 national capital Federal rate. The proposed FY 2010 update 
factor has the effect of increasing the proposed capital Federal rate 
by 1.2 percent compared to the FY 2009 capital Federal rate. The 
proposed GAF/DRG budget neutrality factor has the effect of decreasing 
the proposed capital Federal rate by 0.06 percent. The proposed FY 2010 
outlier adjustment factor has the effect of decreasing the proposed 
capital Federal rate by 0.12 percent compared to the FY 2009 capital 
Federal rate. The proposed FY 2010 exceptions payment adjustment factor 
has no net effect on the proposed capital Federal rate. Furthermore, as 
shown in the chart below, the resulting cumulative adjustment for 
changes in documentation and coding that do not reflect real changes in 
patients' severity of illness (that is, the proposed cumulative 
adjustment factor of 0.967) has the net effect of decreasing the 
proposed FY 2010 national capital Federal rate by 1.83 percent as 
compared to the FY 2009 national capital Federal rate. (As discussed in 
section VI.E.1. of the preamble of this proposed rule, a cumulative 
adjustment of -1.5 percent (that is, a factor of 0.985) was applied to 
the FY 2009 capital Federal rate for changes in documentation and 
coding that do not reflect real changes in patients' severity of 
illness.) The combined effect of all the proposed changes would 
decrease the national capital Federal rate by approximately 0.83 
percent compared to the FY 2009 national capital Federal rate.

  Comparison of Factors and Adjustments: FY 2009 Capital Federal Rate and Proposed FY 2010 Capital Federal Rate
----------------------------------------------------------------------------------------------------------------
                                                      FY 2009         FY 2010         Change      Percent change
----------------------------------------------------------------------------------------------------------------
Update Factor \1\...............................          1.0090          1.0120          1.0120            1.20
GAF/DRG Adjustment Factor \1\...................          1.0015          0.9994          0.9994           -0.06
Outlier Adjustment Factor \2\...................          0.9465          0.9454          0.9988           -0.12
Exceptions Adjustment Factor \2\................          0.9999          0.9999          1.0000            0.00
MS-DRG Documentation and Coding Adjustment                 0.985           0.967          0.9817           -1.83
 Factor.........................................
Capital Federal Rate............................         $424.17         $420.67          0.9917           -0.83
----------------------------------------------------------------------------------------------------------------
\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 2009 to FY 2010 resulting from the application of the
  proposed 0.9994 GAF/DRG budget neutrality factor for FY 2010 is 0.9994.
\2\ The outlier reduction factor and the exceptions adjustment factor are not built permanently into the capital
  rates; that is, these factors are not applied cumulatively in determining the capital rates. Thus, for
  example, the net change resulting from the application of the proposed FY 2010 outlier adjustment factor is
  0.9454/0.9465, or 0.9988.

6. Proposed Special Capital Rate for Puerto Rico Hospitals
    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 
VI. of the preamble of this proposed 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

[[Page 24259]]

costs, we apply a GAF to both portions of the blended capital rate. The 
GAF is calculated using the operating IPPS wage index, and varies 
depending on the labor market area or rural area in which the hospital 
is located. We use the Puerto Rico wage index to determine the GAF for 
the Puerto Rico part of the capital-blended rate and the national wage 
index to determine the GAF for the national part of the blended capital 
rate.
    Because we implemented a separate GAF for Puerto Rico in FY 1998, 
we also apply separate budget neutrality adjustments for the national 
GAF and for the Puerto Rico GAF. However, we apply the same budget 
neutrality factor for DRG reclassifications and recalibration 
nationally and for Puerto Rico. As we stated in section III.A.4. of 
this Addendum, the proposed national GAF budget neutrality factor is 
0.9999, while the DRG adjustment is 0.9995, for a combined proposed 
cumulative adjustment of 0.9994.
    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.
    For FY 2009, before application of the GAF, the special capital 
rate for hospitals located in Puerto Rico is $198.77 for discharges 
occurring on or after October 1, 2008, through September 30, 2009 (73 
FR 57893). Consistent with our development of the FY 2009 Puerto Rico-
specific operating standardized amount, we did not apply the additional 
-0.9 percent documentation and coding adjustment (or the cumulative -
1.5 percent adjustment) to the FY 2009 Puerto Rico-specific capital 
rate. We also noted in the FY 2009 IPPS final rule (73 FR 48449 through 
48550) that we may propose to apply such an adjustment to the Puerto 
Rico operating and capital rates in the future.
    With the changes we are proposing to make to the other factors used 
to determine the proposed capital rate, the proposed FY 2010 special 
capital rate for hospitals in Puerto Rico is $201.91. As discussed in 
greater detail in section VI.E.1. of the preamble of this proposed 
rule, consistent with our development of the proposed Puerto Rico-
specific operating standardized amount, we are proposing to reduce the 
Puerto Rico-specific capital rate by 1.1 percent to account for changes 
in documentation and coding as a result of the adoption of the MS-DRGs 
by applying a factor of 0.989 (that is, 1 divided by 1.011) in 
determining the proposed FY 2010 Puerto Rico-specific capital rate.

B. Calculation of the Proposed Inpatient Capital-Related Prospective 
Payments for FY 2010

    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 2010.
    For purposes of calculating proposed payments for each discharge 
during FY 2010, 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, 
if applicable). The result is the adjusted capital Federal rate. (As 
discussed above, under current law, there will no longer be an 
adjustment for IME under the capital IPPS beginning in FY 2010 (Sec.  
412.322(d).)
    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 proposed outlier thresholds for FY 2010 are in section 
II.A. of this Addendum. For FY 2010, a case would qualify as a cost 
outlier if the cost for the case plus the (operating) IME and DSH 
payments is greater than the prospective payment rate for the MS-DRG 
plus the proposed fixed-loss amount of $24,240.
    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.
    Currently, as provided in Sec.  412.304(c)(2), 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. In this proposed rule, we are proposing 
to rebase and revise the CIPI to a FY 2006 base year to reflect the 
more current structure of capital costs in hospitals. A complete

[[Page 24260]]

discussion of this rebasing is provided in section IV.D. of the 
preamble of this proposed rule. 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 2010
    Based on the latest forecast by IHS Global Insight, Inc. (first 
quarter of 2009), we are forecasting the proposed FY 2006-based CIPI to 
increase 1.2 percent in FY 2010. This reflects a projected 1.7 percent 
increase in vintage-weighted depreciation prices (building and fixed 
equipment, and movable equipment), and a 2.2 percent increase in other 
capital expense prices in FY 2010, partially offset by a 1.7 percent 
decline in vintage-weighted interest expenses in FY 2010. The weighted 
average of these three factors produces the 1.2 percent increase for 
the proposed FY 2006-based CIPI as a whole in FY 2010.

IV. Proposed Changes to Payment Rates for Excluded Hospitals: 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).
    Payments for services furnished in children's hospitals and cancer 
hospitals that are excluded from the IPPS continue 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.)
    We are proposing that the FY 2010 rate-of-increase percentage for 
cancer and children's hospitals and RNHCIs be the estimated percentage 
increase in the FY 2010 IPPS operating market basket, estimated to be 
2.1 percent, in accordance with applicable regulations at Sec.  413.40. 
We are proposing to use the most recent data available to determine the 
estimated FY 2010 IPPS operating market basket based on IHS Global 
Insight, Inc.'s first quarter 2009 forecast of the IPPS operating 
market basket increase, which is estimated to be 2.1 percent. (We are 
proposing to use more recent data when determining the estimated 
percentage increase for the FY 2010 IPPS operating market basket for 
the final rule, to the extent these data are available.)
    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 
all of the various transitioning periods provided for under the IRF 
PPS, the IPF PPS, and the LTCH PPS have ended.
    The IRF PPS, the IPF PPS, and the LTCH PPS are updated annually. We 
refer readers to section VIII. of the preamble and section V. of the 
Addendum to this proposed rule for the proposed update changes to the 
Federal payment rates for LTCHs under the LTCH PPS for RY 2010. The 
annual updates for the IRF PPS and the IPF PPS are issued by the agency 
in separate Federal Register documents.

V. Proposed Changes to the Payment Rates for the LTCH PPS for RY 2010

A. Proposed LTCH PPS Standard Federal Rate for FY 2010

1. Background
    In section VIII. of the preamble of this proposed rule, we discuss 
our proposed changes to the payment rates, factors, and specific 
policies under the LTCH PPS for RY 2010. At Sec.  412.523(c)(3)(ii) of 
the regulations, for LTCH PPS rate years beginning RY 2004 through RY 
2006, we updated the standard Federal rate by a rate increase factor to 
adjust for the most recent estimate of the increases in prices of an 
appropriate market basket of goods and services for LTCHs. We 
established that policy of annually updating the standard Federal rate 
because, at that time, we believed that was the most appropriate method 
for updating the LTCH PPS standard Federal rate annually for years 
after the initial implementation of the LTCH PPS in FY 2003. When we 
moved the date of the annual update of the LTCH PPS from October 1 to 
July 1 in the RY 2004 LTCH PPS final rule (68 FR 34138), we revised 
Sec.  412.523(c)(3) to specify that, for LTCH PPS rate years beginning 
on or after July 1, 2003, the annual update to the standard Federal 
rate for the LTCH PPS would be equal to the previous rate year's 
Federal rate updated by the most recent estimate of increases in the 
appropriate market basket of goods and services included in covered 
inpatient LTCH services. At that time, we believed that was the most 
appropriate method for updating the LTCH PPS standard Federal rate 
annually for years after RY 2004.
    In the RY 2007 LTCH PPS final rule (71 FR 27818), we explained that 
rather than solely using the most recent estimate of the LTCH PPS 
market basket as the basis of the update factor for the standard 
Federal rate for RY 2007, we believed that, based on our ongoing 
monitoring activity, it was appropriate to adjust the standard Federal 
rate to account for the changes in documentation and coding practices 
(rather than patient severity of illness). We established regulations 
at Sec.  412.523(c)(3)(iii) to specify that the update to the standard 
Federal rate for the 2007 LTCH PPS rate year is zero percent. This was 
based on the most recent estimate of the LTCH PPS market basket at the 
time, which was offset by an adjustment to account for changes in case-
mix in prior periods due to changes in documentation and coding rather 
than increased patient severity of illness in FY 2004. For the 
following year, we also considered changes in documentation and coding 
practices rather than patient severity of illness in establishing the 
update to the standard Federal rate for the 2008 LTCH PPS rate year. In 
the RY 2008 LTCH PPS final rule (72 FR 26887 through 27890), we 
adjusted the standard Federal rate based on the most recent estimate of 
the increase in the market basket (3.2 percent) and an adjustment to 
account for changes in documentation and coding practices (2.49 
percent) in FY 2005. Accordingly, we established regulations at Sec.  
412.523(c)(3)(iv) to specify that the update to the standard Federal 
rate for RY 2008 was 0.71 percent.
    However, Public Law 110-173 (MMSEA), enacted on December 29, 2007, 
contained a provision that addressed the standard Federal rate for RY 
2008. Specifically, section 114(e)(1) of Public Law 110-173 provided 
that under the added section 1886(m)(2) of

[[Page 24261]]

the Act, the standard Federal rate for RY 2008 shall be the same as the 
standard Federal rate for RY 2007. In addition, section 114(e)(2) of 
Public Law 110-173 specifically stated that the revised standard 
Federal rate provided for under section 114(e)(1) ``shall not apply to 
discharges occurring on or after July 1, 2007, and before April 1, 
2008,'' effectively resulting in a delay of the application of the 
updated standard Federal rate for RY 2007 established in the LTCH PPS 
RY 2008 final rule (72 FR 26890). We implemented these statutory 
provisions in an interim final rule with comment period (73 FR 24875 
through 24877). Accordingly, we revised Sec.  412.523(c)(iv) to provide 
that: (1) The standard Federal rate for the LTCH PPS RY 2008 is the 
same as the standard Federal rate for the previous LTCH PPS RY, which 
is RY 2007; and (2) for discharges occurring on or after July 1, 2007, 
and before April 1, 2008, payments are based on the standard Federal 
rate for LTCH PPS RY 2007, updated by 0.71 percent. Thus, effectively, 
the standard Federal rate used to determine LTCH PPS payments for 
discharges occurring on or after July 1, 2007, through March 31, 2008 
is the standard Federal rate for RY 2007 updated by 0.71 percent, while 
LTCH PPS payments for discharges occurring from April 1, 2008, through 
June 30, 2008, are determined based on the standard Federal rate set 
forth in section 114(e)(1) of Public Law 110-173 (that is, the same 
standard Federal rate as the previous rate year (RY 2007)).
    Consistent with our historical practice, in the RY 2009 LTCH PPS 
final rule (73 FR 26806), we updated the standard Federal rate from the 
previous year (that is, the standard Federal rate for RY 2008 as 
established by section 1886(m)(2) of the Act) to determine the standard 
Federal rate for RY 2009. In that same final rule, under the broad 
authority conferred upon the Secretary by section 123 of the BBRA as 
amended by section 307(b) of the BIPA, we established an annual update 
to the standard Federal rate for RY 2009 based on the most recent 
estimate of the increase in the LTCH PPS market basket of 3.6 percent 
(for the 15-month rate year, which was based on the best available data 
at that time) and an adjustment of -0.9 percent to account for the 
increase in case-mix in a prior period (FY 2006) due to changes in 
documentation and coding practices rather than an increase in patient 
severity of illness. (As noted above, we established a 15-month period 
for RY 2009 (July 1, 2008 through September 30, 2009) in order to move 
the LTCH PPS annual rate update to an October 1 effective date 
beginning October 1, 2009. We refer readers to 73 FR 26797 through 
26798).) Accordingly, we established regulations at Sec.  
412.523(c)(3)(v) to specify that the update to the standard Federal 
rate for the 2009 LTCH PPS rate year is 2.7 percent.
2. Development of the Proposed RY 2010 LTCH PPS Standard Federal Rate
    As noted above and as discussed in greater detail in the RY 2007, 
RY 2008, and RY 2009 LTCH PPS final rules (71 FR 27819 through 27827, 
72 FR 26887 through 2689, and 73 FR 26805 through 26812, respectively), 
while we continue to believe that an update to the LTCH PPS standard 
Federal rate should be based on the most recent estimate of the 
increase in the LTCH PPS market basket, we also believe it is 
appropriate that the standard Federal rate be offset by an adjustment 
to account for any changes in documentation and coding practices that 
do not reflect increased patient severity of illness. Such an 
adjustment protects the integrity of the Medicare Trust Funds by 
ensuring that the LTCH PPS payment rates better reflect the true costs 
of treating LTCH patients. Furthermore, as we discussed most recently 
in the RY 2009 final rule (73 FR 26805), we did not establish a case-
mix budget neutrality factor (that is, a documentation and coding 
adjustment for changes in case-mix that are not due to changes in 
patient severity of illness) for the adoption of the severity adjusted 
MS-LTC-DRG patient classification system. Rather, we noted that, 
consistent with past LTCH payment policy, we would continue to monitor 
LTCH data and we could propose to make adjustments when updating the 
LTCH PPS standard Federal rate in the future to account for changes in 
documentation and coding that do not reflect any real changes in case-
mix during these years that we are implementing MS-LTC-DRGs.
    As we discussed in greater detail in section VIII.C.3. of the 
preamble of this proposed rule, we performed a case-mix index (CMI) 
analysis using the most recent available LTCH claims data under both 
the current MS-LTC-DRG and former CMS LTC-DRG patient classification 
systems. Based on this evaluation, we have determined that there was a 
total increase in LTCH CMI of 1.8 percent due to changes in 
documentation and coding that did not reflect real changes in patient 
severity of illness for LTCH discharges occurring in FY 2007 and FY 
2008. Specifically, our analysis showed an increase in CMI of 0.5 
percent in FY 2007 and 1.3 percent in FY 2008 due to changes in 
documentation and coding that did not reflect increased patient 
severity of illness (or costs).
    At this time, the most recent estimate of the proposed increase in 
the LTCH PPS market basket (that is, the FY 2002-based RPL market 
basket) for RY 2010 is 2.4 percent, as discussed in section VIII.B.2. 
of the preamble of this proposed rule. Consistent with our historical 
practice, in this proposed rule, we are proposing to update the LTCH 
PPS standard Federal rate for RY 2010 based on the full proposed LTCH 
PPS market basket increase estimate of 2.4 percent and a proposed 
adjustment to account for the increase in case-mix in prior periods 
(FYs 2007 and 2008) that resulted from changes in documentation and 
coding practices of 1.8 percent. Therefore, the proposed update factor 
to the standard Federal rate for RY 2010 is 0.6 percent (that is, we 
are proposing to apply a factor of 1.006 in determining the proposed 
LTCH PPS standard Federal rate for RY 2010, calculated as 1.024 x 1 
divided by 1.018 = 1.006 or 0.6 percent). That is, under the broad 
authority conferred upon the Secretary under the BBRA and the BIPA to 
determine appropriate updates under the LTCH PPS, we are proposing to 
specify under Sec.  412.523(c)(3)(vi) that, for LTCH discharges 
occurring on or after October 1, 2009, and on or before September 30, 
2010, the standard Federal rate from the previous year would be updated 
by 0.6 percent. In determining the proposed standard Federal rate for 
RY 2010, we are applying the proposed 1.006 update factor to the RY 
2009 Federal rate of $39,114.36 (as established in the RY 2009 LTCH PPS 
final rule (73 FR 26812)). Consequently, the proposed standard Federal 
rate for RY 2010 is $39,349.05. We also are proposing that if more 
recent data become available, we would use that data, if appropriate, 
to determine the update to the standard Federal rate for RY 2010 in the 
final rule, and, thus, the standard Federal rate update noted in the 
proposed regulation text at Sec.  412.523(c)(3)(vi) could change.

B. Proposed Adjustment for Area Wage Levels under the LTCH PPS for RY 
2010

1. Background
    Under the authority of section 123 of the BBRA as amended by 
section 307(b) of the BIPA, we established an adjustment to the LTCH 
PPS standard Federal rate to account for differences in LTCH area wage 
levels at Sec.  412.525(c). The labor-related share of the LTCH PPS 
standard Federal rate (discussed in greater detail in section VIII.C.2. 
of the

[[Page 24262]]

preamble of this proposed rule), is adjusted to account for geographic 
differences in area wage levels by applying the applicable LTCH PPS 
wage index. The applicable LTCH PPS wage index is computed using wage 
data from inpatient acute care hospitals without regard to 
reclassification under section 1886(d)(8) or section 1886(d)(10) of the 
Act.
    As we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 
56015), when we implemented the LTCH PPS, we established a 5-year 
transition to the full wage index adjustment. The wage index adjustment 
was completely phased-in for cost reporting periods beginning in FY 
2007. Therefore, for cost reporting periods beginning on or after 
October 1, 2006, the applicable LTCH wage index values are the full 
(five-fifths) LTCH PPS wage index values calculated based on acute care 
hospital inpatient wage index data without taking into account 
geographic reclassification under section 1886(d)(8) and section 
1886(d)(10) of the Act. For additional information on the phase-in of 
the wage index adjustment under the LTCH PPS, we refer readers to the 
August 30, 2002 LTCH PPS final rule (67 FR 56017 through 56019) and the 
RY 2008 LTCH PPS final rule (72 FR 26891).
2. Proposed Updates to the Geographic Classifications/Labor Market Area 
Definitions
a. Background
    As discussed in the August 30, 2002 LTCH PPS final rule, which 
implemented the LTCH PPS (67 FR 56015 through 56019), in establishing 
an adjustment for area wage levels under Sec.  412.525(c), the labor-
related portion of a LTCH's Federal prospective payment is adjusted by 
using an appropriate wage index based on the labor market area in which 
the LTCH is located. In the RY 2006 LTCH PPS final rule (70 FR 24184 
through 24185), in regulations at Sec.  412.525(c), we revised the 
labor market area definitions used under the LTCH PPS effective for 
discharges occurring on or after July 1, 2005, based on the Executive 
OMB's CBSA designations which are based on 2000 Census data. We made 
this revision because we believe that the CBSA-based labor market area 
definitions will ensure that the LTCH PPS wage index adjustment most 
appropriately accounts for and reflects the relative hospital wage 
levels in the geographic area of the hospital as compared to the 
national average hospital wage level. We note that these are the same 
CBSA-based designations implemented for acute care hospitals under the 
IPPS at Sec.  412.64(b), effective October 1, 2004 (69 FR 49026 through 
49034). (For further discussion of the CBSA-based labor market area 
(geographic classification) definitions currently used under the LTCH 
PPS, we refer readers to the RY 2006 LTCH PPS final rule (70 FR 24182 
through 24191).)
    In the RY 2009 LTCH PPS final rule (73 FR 26814), we codified the 
definitions of ``urban'' and ``rural'' in 42 CFR Part 412, Subpart O 
(the subpart of the regulations specific to the LTCH PPS). Prior to 
this codification, the application of the wage index adjustment under 
Sec.  412.525(c)(2) was made on the basis of the location of the 
facility in either an urban area or a rural area as defined in Sec.  
412.64(b)(1)(ii)(A) through (C) of the regulations, which apply 
specifically to the IPPS. Under that regulatory construction, existing 
Sec.  412.525(c) indicated that the terms ``rural area'' and ``urban 
area'' were defined according to the definitions of those terms under 
the IPPS in 42 CFR Part 412, Subpart D. In that same final rule, we 
revised Sec.  412.525(c) to specify that the application of the LTCH 
PPS wage index adjustment is made on the basis of the location of the 
LTCH in either an urban area or a rural area as defined in Sec.  
412.503 because we believe it is administratively simpler to have the 
LTCH PPS urban and rural labor market area definitions self-contained 
in the regulations of the subpart specific to the LTCH PPS (Sec.  
412.503) rather than specifying a cross-reference to the definitions of 
urban area and rural area in the IPPS regulations in 42 CFR Part 412, 
Subpart D. Thus, under Sec.  412.503, for discharges occurring on or 
after July 1, 2008, an ``urban area'' under the LTCH PPS is defined as 
a Metropolitan Statistical Area, as defined by OMB and a ``rural area'' 
is defined as any area outside of an urban area.
    In addition, in the RY 2009 final rule (73 FR 26813 through 26814), 
we clarified the change regarding the treatment of Litchfield County, 
Connecticut (CT), and Merrimack County, New Hampshire (NH) CBSA-based 
labor market area definitions. Specifically, we discussed that, 
effective for LTCH PPS discharges occurring on or after July 1, 2008, 
Litchfield County, CT, and Merrimack County, NH, are considered 
``rural'' and are no longer considered as being part of urban CBSA 
25540 (Hartford-West Hartford-East Hartford, CT) and urban CBSA 31700 
(Manchester-Nashua, NH), respectively, as these areas had been in the 
past as a result of a change to the regulations at Sec.  
412.64(b)(1)(ii)(B) established in the FY 2008 IPPS final rule with 
comment period (72 FR 47337 through 47338). In making this 
clarification, we noted that this policy is consistent with our policy 
of not taking into account IPPS geographic reclassifications in 
determining payments under the LTCH PPS.
b. Update to the CBSA-Based Labor Market Area Definitions
    The CBSA-based labor market area definitions used under the LTCH 
PPS were last updated in the RY 2009 LTCH PPS final rule (73 FR 26812 
through 26813) based on the most recent OMB bulletin available at that 
time (December 18, 2006; OMB Bulletin No. 07-01). Since that time, 
there have been two OMB bulletins announcing revisions to the CBSA 
designations. First, on November 20, 2007, OMB announced the revision 
of titles for eight urban areas (OMB Bulletin No. 08-01). This OMB 
bulletin is available on the OMB Web site at: http://www.whitehouse.gov/omb/assets/omb/bulletins/fy2008/b08-01.pdf. 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 (CBSA 12100).
     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 (CBSA 20764).
     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 (CBSA 
16700).
     Winter Haven, Florida qualifies as a new principal city of 
the Lakeland, Florida CBSA. The new title is Lakeland-Winter Haven, 
Florida (CBSA 29460).
     Bradenton, Florida replaces Sarasota, Florida as the most 
populous principal city of the Sarasota-Bradenton-Venice, Florida CBSA 
(currently CBSA 42260). 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 (CBSA 13644).
     North Myrtle Beach, South Carolina replaces Conway, South 
Carolina as the

[[Page 24263]]

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 (CBSA 34820).
     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 
(CBSA 28420).
    In this proposed rule, under the broad authority conferred upon the 
Secretary by section 123 of the BBRA, as amended by section 307(b) of 
BIPA to determine appropriate adjustments under the LTCH PPS, we are 
proposing to apply these changes to the current CBSA-based labor market 
area definitions and geographic classifications used under the LTCH PPS 
effective for discharges occurring on or after October 1, 2009 (to the 
extent that they are not changed by the later OMB Bulletin No. 90-1 
discussed below). We believe these revisions to the LTCH PPS CBSA-based 
labor market area definitions, which are based on the most recent 
available data, would ensure that the LTCH PPS wage index adjustment 
most appropriately accounts for and reflects the relative hospital wage 
levels in the geographic area of the hospital as compared to the 
national average hospital wage level. Accordingly, the proposed RY 2010 
LTCH PPS wage index values presented in Tables 12A and 12B in the 
Addendum of this proposed rule reflect the proposed revisions to the 
CBSA-based labor market area definitions described above. We note that 
the eight CBSA title revisions announced in OMB Bulletin No.08-01 do 
not change the composition (constituent counties) of the affected 
CBSAs; they only revise the CBSA titles (and do not change the CBSA 
codes with the exception of the change in CBSA code 42260 to 14600). We 
also note that these revisions were applicable under the IPPS beginning 
October 1, 2008 (73 FR 48575).
    Second, on November 20, 2008, OMB announced three Micropolitan 
Statistical Areas that now qualify as MSAs and changed the principal 
cities and titles of a number of CBSAs and a Metropolitan Division (OMB 
Bulletin No. 09-01). This OMB bulletin is available on the OMB Web site 
at: http://www.whitehouse.gov/omb/assets/omb/bulletins/fy2009/09-01.pdf. The new urban CBSAs are as follows:
     Cape Girardeau-Jackson, Missouri-Illinois (CBSA 16020). 
This CBSA is comprised of the principal cities of Cape Girardeau and 
Jackson, Missouri; Alexander County, Illinois; Bollinger County, 
Missouri, and Cape Girardeau County, Missouri.
     Manhattan, Kansas (CBSA 31740). This CBSA is comprised of 
the principal city of Manhattan, Kansas in Geary County, Pottawatomie 
County, and Riley County.
     Mankato-North Mankato, Minnesota (CBSA 31860). This CBSA 
is comprised of the principal cities of Mankato and North Mankato, 
Minnesota in Blue Earth County and Nicollet County.
    The changes in the principal cities and the revised titles are as 
follows:
     Broomfield, Colorado qualifies as a new principal city of 
the Denver-Aurora, Colorado CBSA. The new title is Denver-Aurora-
Broomfield, Colorado (CBSA 19740).
     Chapel Hill, North Carolina qualifies as a new principal 
city of the Durham, North Carolina CBSA. The new title is Durham-Chapel 
Hill, North Carolina (CBSA 20500).
     Chowchilla, California qualifies as a new principal city 
of the Madera, California CBSA. The new title is Madera-Chowchilla, 
California (CBSA 31460).
     Panama City Beach, Florida qualifies as a new principal 
city of the Panama City-Lynn Haven, Florida CBSA. The new title is 
Panama City-Lynn Haven-Panama City Beach, Florida (CBSA 37460).
     East Wenatchee, Washington qualifies as a new principal 
city of the Wenatchee, Washington CBSA. The new title is Wenatchee-East 
Wenatchee, Washington (CBSA 48300).
     Rockville, Maryland replaces Gaithersburg, Maryland as the 
third most populous city of the Bethesda-Frederick-Gaithersburg, 
Maryland Metropolitan Division. The new title is Bethesda-Frederick-
Rockville, Maryland Metropolitan Division (CBSA 13644).
    In this proposed rule, under the broad authority conferred upon the 
Secretary by section 123 of the BBRA, as amended by section 307(b) of 
BIPA, to determine appropriate adjustments under the LTCH PPS, we are 
proposing to apply these changes to the current CBSA-based labor market 
area definitions and geographic classifications used under the LTCH PPS 
effective for discharges occurring on or after October 1, 2009. We 
believe these proposed revisions to the LTCH PPS CBSA-based labor 
market area definitions, which are based on the most recent available 
data, would ensure that the LTCH PPS wage index adjustment most 
appropriately accounts for and reflects the relative hospital wage 
levels in the geographic area of the hospital as compared to the 
national average hospital wage level. Accordingly, the proposed RY 2010 
LTCH PPS wage index values presented in Tables 12A and 12B in the 
Addendum of this proposed rule reflect the revisions to the CBSA-based 
labor market area definitions described above. We note that the six 
CBSA title revisions noted above do not change the composition 
(constituent counties) of the affected CBSAs; they only revise the CBSA 
titles (and do not change the CBSA codes). We also note that we are 
currently aware of only one LTCH located in one of the three new CBSAs 
(CBSA 16020). As discussed in section III.C. of the preamble of this 
proposed rule, the revisions to the CBSA-based designations are also 
proposed for adoption under the IPPS effective beginning October 1, 
2009.
3. Proposed LTCH PPS Labor-Related Share
    As noted above in this section, under the adjustment for difference 
in area wage levels at Sec.  412.525(c), the labor-related share of a 
LTCH's PPS payment is adjusted by the applicable wage index for the 
labor market area in which the LTCH is located. Specifically, as 
discussed in section VIII.C.2.d. of the preamble of this proposed rule, 
the LTCH PPS labor-related share is determined by our actuaries and is 
based on data for the labor-related share of operating costs and 
capital costs of the FY 2002-based RPL market basket. (Additional 
background information on the historical development of the labor-
related share under the LTCH PPS can be found in the RY 2009 LTCH PPS 
final rule (73 FR 26815). In the RY 2007 final rule (71 FR 27829 
through 27830), we established a labor-related share based on the 
relative importance of the labor-related share of operating costs 
(wages and salaries, employee benefits, professional fees, postal 
services, and all other labor-intensive services) and capital costs of 
the RPL market basket based on FY 2002 data, as they are the best 
available data that reflect the cost structure of LTCHs. For the past 2 
years (RYs 2008 and 2009), we updated the LTCH PPS labor-related share 
annually based on the latest available data for the RPL market basket. 
For RY 2009, the labor-related share is 75.662 percent, as established 
in the RY 2009 LTCH PPS final rule (73 FR 26815 through 26816), based 
on the sum of the relative importance of the labor-related share of 
operating costs (wages and salaries, employee benefits, professional 
fees, and all other labor-intensive services) and capital costs of the 
FY 2002-based RPL market basket from the first quarter

[[Page 24264]]

of 2008 forecast (the most recent available data at that time).
    As discussed in section VIII.C. of the preamble of this proposed 
rule, we are proposing to continue to use the FY 2002-based RPL market 
basket used under the LTCH PPS for RY 2010. Furthermore, for RY 2010, 
we are proposing to continue to define the LTCH PPS labor-related share 
as the national average proportion of operating costs that are 
attributable to wages and salaries, employee benefits, the labor-
related portion of professional fees, all other labor-intensive 
services, and a labor-related portion of capital based on the FY 2002-
based RPL market basket. (As noted above, additional information on the 
development of the FY 2002-based RPL market basket used under the LTCH 
PPS can be found in the RY 2007 LTCH PPS final rule (71 FR 27808 
through 27818).) Accordingly, consistent with our historical practice 
of using the best available data, we are proposing to use IHS Global 
Insight Inc.'s first quarter 2009 forecast of the FY 2002-based RPL 
market basket for RY 2010 to determine the proposed labor-related share 
for the LTCH PPS for RY 2010 that would be effective for discharges 
occurring on or after October 1, 2009, and through September 30, 2010, 
as these are the most recent available data. As shown in the chart in 
section VIII.C.2.d. of the preamble of this proposed rule, based on the 
latest available data (and the authority set forth in section 123 of 
the BBRA as amended by section 307(b) of the BIPA) we are proposing to 
establish a labor-related share of 75.904 percent under the LTCH PPS 
for the RY 2010. Furthermore, consistent with our historical practice 
of using the best data available, we also are proposing that if more 
recent data are available to determine the labor-related share used 
under the LTCH PPS for RY 2010, we would use these data for determining 
the RY 2010 LTCH PPS labor-related share in the final rule.
4. Proposed LTCH PPS Wage Index for RY 2010
    Historically, under the LTCH PPS, we have established LTCH PPS wage 
index values calculated from acute care IPPS hospital wage data without 
taking into account geographic reclassification under sections 
1886(d)(8) and 1886(d)(10) of the Act. As we discussed in the August 
30, 2002 LTCH PPS final rule (67 FR 56019), hospitals that are excluded 
from the IPPS are not required to provide wage-related information on 
the Medicare cost report. Therefore, we would need to establish 
instructions for the collection of these LTCH data as well as develop 
some type of application and determination process before a geographic 
reclassification adjustment under the LTCH PPS could be implemented. 
The wage adjustment established under the LTCH PPS is based on a LTCH's 
actual location without regard to the urban or rural designation of any 
related or affiliated provider. Acute care hospital inpatient wage 
index data are also used to establish the wage index adjustment used in 
other Medicare PPSs, such as the IRF PPS, the IPF PPS, the HHA PPS, and 
the SNF PPS.
    In the RY 2009 LTCH PPS final rule (73 FR 26816 through 26817), we 
established LTCH PPS wage index values for RY 2009 calculated from the 
same data collected from cost reports submitted by IPPS hospitals for 
cost reporting periods beginning during FY 2004 that were used to 
compute the FY 2008 acute care hospital inpatient wage index data 
without taking into account geographic reclassification under sections 
1886(d)(8) and 1886(d)(10) of the Act because these were the best 
available data at that time. The LTCH PPS wage index values applicable 
for discharges occurring on or after July 1, 2008, through September 
30, 2009, were shown in Table 1 (for urban areas) and Table 2 (for 
rural areas) in the Addendum to the RY 2009 LTCH PPS final rule (73 FR 
26840 through 26863).
    In this proposed rule, under the broad authority conferred upon the 
Secretary by section 123 of the BBRA, as amended by section 307(b) of 
BIPA, to determine appropriate adjustments under the LTCH PPS for RY 
2010, we are proposing to use the same data collected from cost reports 
submitted by IPPS hospitals for cost reporting periods beginning during 
FY 2006 that are being used to compute the proposed FY 2010 acute care 
hospital inpatient wage index data without taking into account 
geographic reclassification under sections 1886(d)(8) and 1886(d)(10) 
of the Act to determine the proposed applicable wage index values under 
the LTCH PPS in RY 2010 because these data (FY 2006) are the most 
recent complete data available at this time. (We note that due to the 
change in the annual LTCH PPS rate year update cycle from July 1 to 
October 1, effective October 1, 2009, established in the RY 2009 LTCH 
PPS final rule, there is no longer a lag-time in the availability of 
the IPPS hospital wage data used to develop the respective wage indices 
used under the IPPS and LTCH PPS. Consequently, because the annual 
update to the LTCH PPS and the IPPS now occurs on October 1 of each 
year, we are able to propose wage index values using the same wage data 
to develop the proposed LTCH wage index as is used to develop the 
proposed IPPS wage index in a given year. Under the previous July 1 
annual LTCH PPS rate year update cycle, due to the lag-time in the 
availability of data, there was a 1-year lag-time in the best available 
IPPS wage data to develop the LTCH PPS wage index each year (for 
example, as noted above, we established RY 2009 LTCH PPS wage index 
values from the same data collected from FY 2004 IPPS hospital cost 
reports that were used to compute the FY 2008 IPPS wage index). We are 
proposing to continue to use IPPS wage data as a proxy to determine the 
proposed LTCH wage index values for RY 2010 because both LTCHs and 
acute care hospitals are required to meet the same certification 
criteria set forth in section 1861(e) of the Act to participate as a 
hospital in the Medicare program and they both compete in the same 
labor markets, and therefore, experience similar wage-related costs.
    We also note that using the IPPS wage data to determine the 
proposed RY 2010 LTCH wage index values reflects our policy under the 
IPPS beginning in FY 2008 that apportions the wage data for multicampus 
hospitals that are located in different labor market areas (CBSAs) to 
each CBSA where the campuses are located. (For additional information, 
we refer readers to the FY 2008 IPPS final rule with comment (72 FR 
47317 through 47320), the FY 2009 IPPS final rule (73 FR 48582), and 
section III.C. of the preamble of this proposed rule.) Specifically, 
for the proposed RY 2010 LTCH PPS wage index values, which are computed 
from IPPS wage data submitted by hospitals for cost reporting periods 
beginning in FY 2006 (which are used to determine the proposed FY 2010 
IPPS wage index discussed in section III.F. of the preamble of this 
proposed rule), we allocated salaries and hours to the campuses of 
three multicampus hospitals with campuses that are located in different 
labor areas that are located in the following States: Massachusetts, 
Illinois, and Michigan. Thus, consistent with the proposed FY 2010 IPPS 
wage index, the proposed RY 2010 LTCH PPS wage index values for the 
following CBSAs would be affected by this policy: Boston-Quincy, MA 
(CBSA 14484); Providence-New Bedford-Falls River, RI-MA (CBSA 39300); 
Chicago-Naperville-Joliet, IL (CBSA 16974); Lake County-Kenosha County, 
IL-WI (CBSA 29404); Detroit-Livonia-Dearborn, MI (CBSA 19804); and 
Warren-Troy-Farmington-Hills, MI (CBSA 47644) (reflected in Tables 12A

[[Page 24265]]

and 12B in the Addendum of this proposed rule).
    The proposed RY 2010 LTCH PPS wage index values are computed 
consistent with the urban and rural geographic classifications (labor 
market areas) discussed in section V.B.2. of the Addendum of this 
proposed rule and consistent with the pre-reclassified IPPS wage index 
policy (that is, our historical policy of not taking into account IPPS 
geographic reclassifications in determining payments under the LTCH 
PPS). The proposed RY 2010 wage index values also reflect our 
methodology for establishing wage index values in urban and rural areas 
in which there are no IPPS wage data from which to compute a wage index 
value (as described above in this section).
    As previously noted, in the RY 2009 LTCH PPS final rule (73 FR 
26817 through 26818), we established a methodology for determining a 
LTCH PPS wage index value for areas that have no IPPS wage data. Under 
this methodology, we stated that each year we would determine a wage 
index value for any area in which there is no IPPS wage data based on 
the methodologies described in that final rule. We believe it is 
appropriate to establish a methodology for determining LTCH PPS wage 
index values for areas with no IPPS wage data, if necessary, because 
IPPS hospitals may open or close at any time, and therefore the number 
of areas without any IPPS wage data may change from year to year. Even 
when an IPPS hospital opens in an area where there are currently no 
IPPS hospitals, there is a lag-time between the time a hospital opens 
or becomes an IPPS provider and when the hospital's cost report wage 
data are available to include in calculating the area wage index. The 
policies established for determining LTCH PPS wage index values for 
areas with no IPPS hospital wage data are consistent with the 
methodologies that have been established under other Medicare postacute 
care PPSs, such as SNF and HHA, as well as the IPPS. Below we discuss 
the application of our established methodology for determining a 
proposed LTCH PPS wage index value for RY 2010 for any areas in which 
there is no IPPS wage data for cost reporting periods beginning during 
FY 2006 (that is, for the areas in which there is no data in the IPPS 
wage data that we are proposing to use to compute the proposed RY 2010 
LTCH PPS wage index).
    In this proposed rule, we are proposing to determine RY 2010 LTCH 
PPS wage index values for labor market areas in which there is no IPPS 
hospital wage data from which to compute a wage index value consistent 
with the methodology we established in the RY 2009 LTCH PPS final rule 
(73 FR 26817). As was the case in RY 2009, there are no LTCHs located 
in labor areas where there is no IPPS hospital wage data (or IPPS 
hospitals) for RY 2010. However, we continue to believe it is 
appropriate to propose LTCH PPS wage index values for these areas using 
our established methodology in the event that in the future a LTCH 
should open in one of those areas.
    Therefore, we are proposing to continue to determine a LTCH PPS 
wage index value for urban CBSAs with no IPPS wage data by using an 
average of all of the urban areas within the State to serve as a 
reasonable proxy for determining the LTCH PPS wage index for an urban 
area without specific IPPS hospital wage index data. We believe that an 
average of all of the urban areas within the State is a reasonable 
proxy for determining the LTCH PPS wage index for an urban area in the 
State with no wage data because it is based on pre-reclassified IPPS 
wage data, it is easy to evaluate, and it uses the most geographically 
similar relative wage-related costs data available. Furthermore, as 
noted above, this methodology has been adopted by other Medicare PPSs, 
such as the SNF PPS and the HHA PPS.
    Based on the FY 2006 IPPS wage data that we are proposing to use to 
determine the proposed RY 2010 LTCH PPS wage index values, there are no 
IPPS wage data for the urban area of Hinesville-Fort Stewart, GA (CBSA 
25980). Consistent with our methodology for determining a LTCH PPS wage 
index value for urban areas with no IPPS wage data (discussed above), 
in this proposed rule, we calculated the proposed RY 2010 wage index 
value for CBSA 25980 as the average of the proposed wage index values 
for all of the other urban areas within the State of Georgia (that is, 
CBSAs 10500, 12020, 12060, 12260, 15260, 16860, 17980, 19140, 23580, 
31420, 40660, 42340, 46660 and 47580) (reflected in Table 12A of the 
Addendum of this proposed rule). (As noted above, there are currently 
no LTCHs located in CBSA 25980.) As discussed in the RY 2009 final rule 
(73 FR 26817), as IPPS wage data are dynamic, it is possible that urban 
areas without IPPS wage data will vary in the future.
    We also are proposing to continue to determine a LTCH PPS wage 
index value for rural areas with no IPPS wage data using the unweighted 
average of the wage indices from all of the CBSAs that are contiguous 
to the rural counties of the State to serve as a reasonable proxy in 
determining the LTCH PPS wage index for a rural area without specific 
IPPS hospital wage index data. For this purpose, we are defining 
``contiguous'' as sharing a border. We are not able to apply an 
averaging in rural areas with no wage data similar to what we are doing 
for urban areas with no wage data because there is no rural hospital 
data available for averaging on a statewide basis. We believe that 
using an unweighted average of the wage indices from all of the CBSAs 
that are contiguous to the rural counties of the State is a reasonable 
proxy for determining the wage index for rural areas in a State with no 
wage data because it is based on pre-reclassified IPPS wage data, it is 
easy to evaluate, and it uses the most geographically similar relative 
wage-related costs data available.
    Based on the FY 2006 IPPS wage data that we are proposing to use to 
determine the proposed RY 2010 LTCH PPS wage index values, there are no 
IPPS wage data for the rural area of Massachusetts (CBSA code 11). 
Consistent with our methodology for determining a LTCH PPS wage index 
value for rural areas with no IPPS wage data (discussed above), in this 
proposed rule, we calculated the proposed RY 2010 wage index value for 
rural Massachusetts by computing the unweighted average of the wage 
indices from all of the CBSAs that are contiguous to the rural counties 
in that State. Specifically, in the case of Massachusetts, the entire 
rural area consists of Dukes and Nantucket counties. We determined that 
the borders of Dukes and Nantucket counties are ``contiguous'' with 
Barnstable County, MA, and Bristol County, MA. Therefore, the proposed 
RY 2010 LTCH PPS wage index value for rural Massachusetts is computed 
as the unweighted average of the proposed RY 2010 wage indexes for 
Barnstable County and Bristol County (reflected in Tables 12A and 12B 
in the Addendum of this proposed rule). (There are currently no LTCHs 
located in rural Massachusetts.) As discussed in the RY 2009 final rule 
(73 FR 26817), as IPPS wage data are dynamic, it is possible that rural 
areas without IPPS wage data will vary in the future.
    The proposed RY 2010 LTCH wage index values that would be 
applicable for LTCH discharges occurring on or after October 1, 2009, 
through September 30, 2010, are presented in Table 12A (for urban 
areas) and Table 12B (for rural areas) in the Addendum of this proposed 
rule.

[[Page 24266]]

5. Proposed LTCH PPS Cost-of-Living Adjustment for LTCHs Located in 
Alaska and Hawaii
    In the August 30, 2002 final rule (67 FR 56022), we established, 
under Sec.  412.525(b), a cost-of-living adjustment (COLA) for LTCHs 
located in Alaska and Hawaii to account for the higher costs incurred 
in those States. In the RY 2009 LTCH PPS final rule (73 FR 26819) 
(under the broad authority conferred upon the Secretary by section 123 
of the BBRA as amended by section 307(b) of BIPA to determine 
appropriate adjustments under the LTCH PPS, for RY 2009, we applied a 
COLA to payments to LTCHs located in Alaska and Hawaii by multiplying 
the standard Federal payment rate by the factors listed in Table III of 
that same rule.
    For RY 2010, under the broad authority conferred upon the Secretary 
by section 123 of the BBRA as amended by section 307(b) of BIPA to 
determine appropriate adjustments under the LTCH PPS, we are proposing 
to apply a COLA to payments to LTCHs located in Alaska and Hawaii by 
multiplying the proposed standard Federal payment rate by the factors 
listed in the chart below because they are the most recent available 
data at this time. These proposed factors were obtained from the U.S. 
Office of Personnel Management (OPM) and are also proposed to be used 
under the IPPS effective October 1, 2009 (section II.B.2. of the 
Addendum of this proposed rule). In addition, we are proposing that if 
OPM releases revised COLA factors before publication of the final rule, 
we would use the revised factors for the development of LTCH PPS 
payments for RY 2010 and publish those revised COLA factors in the 
final rule.

    Proposed Cost-of-Living Adjustment Factors for Alaska and Hawaii
                Hospitals for the 2010 LTCH PPS Rate Year
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Alaska:
  City of Anchorage and 80-kilometer (50-mile) radius by road..     1.23
  City of Fairbanks and 80-kilometer (50-mile) radius by road..     1.23
  City of Juneau and 80-kilometer (50-mile) radius by road.....     1.23
  All other areas 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
------------------------------------------------------------------------

C. Proposed Adjustment for LTCH PPS High-Cost Outlier (HCO) Cases

1. Background
    Under the broad authority conferred upon the Secretary by section 
123 of the BBRA as amended by section 307(b) of BIPA, in the 
regulations at Sec.  412.525(a), we established an adjustment for 
additional payments for outlier cases that have extraordinarily high 
costs relative to the costs of most discharges. We refer to these cases 
as high cost outliers (HCOs). Providing additional payments for 
outliers strongly improves the accuracy of the LTCH PPS in determining 
resource costs at the patient and hospital level. These additional 
payments reduce the financial losses that would otherwise be incurred 
when treating patients who require more costly care and, therefore, 
reduce the incentives to underserve these patients. We set the outlier 
threshold before the beginning of the applicable rate year so that 
total estimated outlier payments are projected to equal 8 percent of 
total estimated payments under the LTCH PPS. Outlier payments under the 
LTCH PPS are determined consistent with the instructions issued for the 
IPPS outlier policy.
    Under Sec.  412.525(a) in the regulations (in conjunction with the 
revised definition of ``LTC-DRG'' at Sec.  412.503), we make outlier 
payments for any discharges if the estimated cost of a case exceeds the 
adjusted LTCH PPS payment for the MS-LTC-DRG plus a fixed-loss amount. 
Specifically, in accordance with Sec.  412.525(a)(3) (in conjunction 
with the revised definition of ``LTC-DRG'' at Sec.  412.503), we pay 
outlier cases 80 percent of the difference between the estimated cost 
of the patient case and the outlier threshold, which is the sum of the 
adjusted Federal prospective payment for the MS-LTC-DRG and the fixed-
loss amount. The fixed-loss amount is the amount used to limit the loss 
that a hospital will incur under the outlier policy for a case with 
unusually high costs. This results in Medicare and the LTCH sharing 
financial risk in the treatment of extraordinarily costly cases. Under 
the LTCH PPS HCO policy, the LTCH's loss is limited to the fixed-loss 
amount and a fixed percentage (currently 80 percent) of costs above the 
outlier threshold (MS-LTC-DRG payment plus the fixed-loss amount). The 
fixed percentage of costs is called the marginal cost factor. We 
calculate the estimated cost of a case by multiplying the Medicare 
allowable covered charge by the overall hospital CCR.
    Under the LTCH PPS, we determine a fixed-loss amount, that is, the 
maximum loss that a LTCH can incur under the LTCH PPS for a case with 
unusually high costs before the LTCH will receive any additional 
payments. We calculate the fixed-loss amount by estimating aggregate 
payments with and without an outlier policy. The fixed-loss amount will 
result in estimated total outlier payments being projected to be equal 
to 8 percent of projected total LTCH PPS payments. Currently, MedPAR 
claims data and CCRs based on data from the most recent provider 
specific file (PSF) (or from the applicable statewide average CCR if a 
LTCH's CCR data are faulty or unavailable) are used to establish a 
fixed-loss threshold amount under the LTCH PPS.
2. Determining LTCH CCRs Under the LTCH PPS
a. Background
    The following is a discussion of CCRs that are used in determining 
payments for HCO and SSO cases under the LTCH PPS, at Sec.  412.525(a) 
and Sec.  412.529, respectively. Although this section is specific to 
HCO cases, because CCRs and the policies and methodologies pertaining 
to them are used in determining payments for both HCO and SSO cases (to 
determine the estimated cost of the case at Sec.  412.529(d)(2), we are 
discussing the determination of CCRs under the LTCH PPS for both of 
these type of cases simultaneously.
    In determining both HCO payments (at Sec.  412.525(a)) and SSO 
payments (at Sec.  412.529), we calculate the estimated cost of the 
case by multiplying the LTCH's overall CCR by the Medicare allowable 
charges for the case. In general, we use the 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 HCOs and SSOs, 
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

[[Page 24267]]

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).
b. LTCH Total CCR Ceiling
    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, CCRs based on erroneous data should 
not be used to identify and make payments for outlier cases. 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 2009 IPPS final rule (73 FR 48682), in accordance with 
Sec.  412.525(a)(4)(iv)(C)(2) for HCOs and Sec.  
412.529(c)(4)(iv)(C)(2) for SSOs, using our established methodology for 
determining the LTCH total CCR ceiling, based on IPPS total CCR data 
from the December 2007 update of the Provider Specific File (PSF), we 
established a total CCR ceiling of 1.262 under the LTCH PPS, effective 
October 1, 2008, through September 30, 2009. (For further detail on our 
current methodology for annually determining the LTCH total CCR 
ceiling, we refer readers to the FY 2007 IPPS final rule (71 FR 48119 
through 48121).)
    In this proposed rule, in accordance with Sec.  
412.525(a)(4)(iv)(C)(2) for HCOs and Sec.  412.529(c)(4)(iv)(C)(2) for 
SSOs, using our established methodology for determining the LTCH total 
CCR ceiling (described above), based on IPPS total CCR data from the 
December 2008 update of the PSF, we are proposing to establish a total 
CCR ceiling of 1.227 under the LTCH PPS that would be effective for 
discharges occurring on or after October 1, 2009, and on or before 
September 30, 2010. We also are proposing that if more recent data 
become available, we would use them to establish the LTCH PPS CCR 
ceiling for RY 2010 in the final rule.
c. LTCH Statewide Average CCRs
    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 HCO policy at Sec.  412.525(a)(4)(iv)(C) and the SSO policy at 
Sec.  412.529(c)(4)(iv)(C), the fiscal intermediary 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) New LTCHs that have not yet submitted their first 
Medicare cost report (for this purpose, consistent with current policy, 
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) LTCHs whose CCR is in excess of the LTCH CCR ceiling (as 
discussed above); and (3) other LTCHs for whom data with which to 
calculate a CCR are not available (for example, missing or faulty 
data). (Other sources of data that the fiscal intermediary may consider 
in determining a LTCH's CCR 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 Table 8C of the Addendum to the FY 2009 IPPS final rule (73 FR 
48998), in accordance with the regulations at Sec.  
412.525(a)(4)(iv)(C) for HCOs and Sec.  412.529(c)(4)(iv)(C) for SSOs, 
using our established methodology for determining the LTCH statewide 
average CCRs, based on using the most recent complete IPPS total CCR 
data from the March 2008 update of the PSF, we established the LTCH PPS 
statewide average total CCRs for urban and rural hospitals effective 
for discharges occurring on or after October 1, 2008, and on or before 
September 30, 2009. (For further detail on our current methodology for 
annually determining the LTCH statewide average CCRs, we refer readers 
to the FY 2007 IPPS final rule (71 FR 48119 through 48121).)
    In this proposed rule, using our established methodology for 
determining the LTCH statewide average CCRs, based on the most recent 
complete IPPS total CCR data from the December 2008 update of the PSF, 
we are proposing LTCH PPS statewide average total CCRs for urban and 
rural hospitals that would be effective for discharges occurring on or 
after October 1, 2009, and through September 30, 2010, in Table 8C of 
the Addendum to this proposed rule. We also are proposing that if more 
recent data become available, we would use them to establish LTCH PPS 
statewide average total CCRs for urban and rural hospitals for RY 2010 
in the final rule.
    We also note that all areas in the District of Columbia, New 
Jersey, Puerto Rico, and Rhode Island are classified as urban; 
therefore, there are no rural statewide average total CCRs listed for 
those jurisdictions in Table 8C of the Addendum to this proposed rule. 
This policy is consistent with the policy that 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 same as the policy applied under the IPPS. In addition, 
although Massachusetts has areas that are designated as rural, there 
are no short-term acute care IPPS hospitals or LTCHs located in those 
areas as of March 2009. Therefore, for this proposed rule, there is no 
rural statewide average total CCR listed for rural Massachusetts in 
Table 8C of the Addendum of this proposed rule.
    In addition, 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, in this proposed rule, 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 entirely accurate (as discussed in greater detail in that 
same final rule (71 FR 48120)).
d. Reconciliation of LTCH HCO and SSO Payments
    We note, under the LTCH PPS HCO policy at Sec.  
412.525(a)(4)(iv)(D) and the LTCH PPS SSO policy at Sec.  
412.529(c)(4)(iv)(D), the payments for HCO and SSO cases, respectively, 
are subject to reconciliation. Specifically, any reconciliation of 
outlier payments is based on the CCR that is calculated based on a 
ratio of CCRs computed from the relevant cost report and charge data 
determined at the time the cost report coinciding with the discharge is 
settled. For additional information, we refer

[[Page 24268]]

readers to the RY 2009 LTCH PPS final rule (73 FR 26820 through 26821).
3. Establishment of the Proposed LTCH PPS Fixed-Loss Amount for RY 2010
    When we implemented the LTCH PPS, as discussed in the August 30, 
2002 LTCH PPS final rule (67 FR 56022 through 56026), under the broad 
authority of section 123 of the BBRA as amended by section 307(b) of 
BIPA, we established a fixed-loss amount so that total estimated 
outlier payments are projected to equal 8 percent of total estimated 
payments under the LTCH PPS. To determine the fixed-loss amount, we 
estimate outlier payments and total LTCH PPS payments for each case 
using claims data from the MedPAR files. Specifically, to determine the 
outlier payment for each case, we estimate the cost of the case by 
multiplying the Medicare covered charges from the claim by the LTCH's 
hospital specific CCR. Under Sec.  412.525(a)(3) (in conjunction with 
the revised definition of ``LTC-DRG'' at Sec.  412.503), if the 
estimated cost of the case exceeds the outlier threshold (the sum of 
the adjusted Federal prospective payment for the MS-LTC-DRG and the 
fixed-loss amount), we pay an outlier payment equal to 80 percent of 
the difference between the estimated cost of the case and the outlier 
threshold (the sum of the adjusted Federal prospective payment for the 
MS-LTC-DRG and the fixed-loss amount).
    In the RY 2009 LTCH PPS final rule (73 FR 26823), we used claims 
data from the December 2007 update of the FY 2007 MedPAR claims data 
and CCRs from the December 2007 update of the PSF to determine a fixed-
loss amount that would result in estimated outlier payments projected 
to be equal to 8 percent of total estimated payments for the 2009 LTCH 
PPS rate year. We determined the RY 2009 fixed-loss amount using the 
MS-LTC-DRG classifications and relative weights from the version of the 
GROUPER that was to be in effect as of the beginning of the 2009 LTCH 
PPS rate year (July 1, 2008), that is, Version 25.0 of the GROUPER (as 
established in the FY 2008 IPPS final rule (72 FR 47278). Furthermore, 
in using CCRs from the December 2007 update of the PSF to determine the 
RY 2009 fixed-loss amount, we used the FY 2008 applicable LTCH 
``total'' CCR ceiling of 1.284 and LTCH statewide average ``total'' 
CCRs established in the FY 2008 IPPS final rule (72 FR 47404 and 48126 
through 48127) such that the current applicable Statewide average CCR 
was assigned if, among other things, a LTCH's CCR exceeded the current 
ceiling (1.284).
    Therefore, based on the data and policies described and under the 
broad authority of section 123(a)(1) of the BBRA and section 307(b)(1) 
of BIPA, in the RY 2009 LTCH PPS final rule, we established a fixed-
loss amount of $22,960 for RY 2009. Thus, for RY 2009, we currently pay 
an outlier case 80 percent of the difference between the estimated cost 
of the case and the outlier threshold (the sum of the adjusted Federal 
LTCH payment for the MS-LTC-DRG and the fixed-loss amount of $22,960).
    In this proposed rule, we are proposing to use the same methodology 
that we used in the RY 2009 final rule to calculate the fixed-loss 
amount for RY 2010 (using updated data and the proposed rates and 
policies established in this proposed rule) in order to maintain 
estimated HCO payments at the projected 8 percent of total estimated 
LTCH PPS payments. Consistent with our historical practice of using the 
best data available, in this proposed rule, in determining the proposed 
fixed-loss amount for RY 2010, we used the most recent available LTCH 
claims data and CCR data. Specifically, for this proposed rule, we used 
LTCH claims data from the December 2008 update of the FY 2008 MedPAR 
files and CCRs from the December 2008 update of the PSF to determine a 
fixed-loss amount that would result in estimated outlier payments 
projected to be equal to 8 percent of total estimated payments in RY 
2010 because these data are the most recent complete LTCH data 
currently available. Consistent with our historical practice of using 
the best data available, we are proposing that if more recent LTCH 
claims data become available, we will use them for determining the 
fixed-loss amount for the 2010 LTCH PPS rate year in the final rule. We 
are proposing to determine the proposed RY 2010 fixed-loss amount based 
on the MS-LTC-DRG classifications and relative weights from the version 
of the GROUPER that will be in effect as of the beginning of the 2010 
LTCH PPS rate year (October 1, 2009), that is, proposed Version 27.0 of 
the GROUPER (discussed in section VIII.B. of the preamble of this 
proposed rule). Furthermore, in determining the proposed RY 2010 fixed-
loss amount using CCRs from the December 2008 update of the PSF, we 
used the proposed RY 2010 LTCH ``total'' CCR ceiling of 1.227 and the 
applicable proposed LTCH statewide average ``total'' CCRs presented in 
Table 8C in the Addendum of this proposed rule such that the proposed 
applicable statewide average CCR was assigned if, among other things, a 
LTCH's CCR exceeded the proposed ceiling (1.227). We note that, in 
determining the proposed RY 2010 fixed-loss amount in this proposed 
rule using the CCRs from the December 2008 update of the PSF, there was 
no need for us to independently assign the applicable proposed 
statewide average CCR to any LTCHs, as none of the LTCHs' CCRs in the 
PSF exceeds the proposed ceiling.
    In this proposed rule, based on the data and policies described 
earlier in this proposed rule under the broad authority of section 
123(a)(1) of the BBRA and section 307(b)(1) of BIPA, we are proposing 
to establish a fixed-loss amount of $16,059 for the RY 2010. Thus, we 
would pay an outlier case 80 percent of the difference between the 
estimated cost of the case and the outlier threshold (the sum of the 
adjusted Federal LTCH payment for the MS-LTC-DRG and the fixed-loss 
amount of $16,059). The proposed fixed-loss amount for RY 2010 of 
$16,059 is significantly lower than the RY 2009 fixed-loss amount of 
$22,960. The proposed decrease in the fixed-loss amount for RY 2010 is 
primarily due to the projected 2.8 percent increase in LTCH PPS 
payments from RY 2009 to RY 2010 (discussed in greater detail in 
section IX. of the Appendix A (the regulatory impact analysis) to this 
proposed rule), which includes our current estimate that we are paying 
less than the required 8 percent of total estimated LTCH PPS payments 
as HCO payments in RY 2009 (as discussed below). Specifically, an 
analysis of the most recent available LTCH PPS claims data (that is, FY 
2008 claims from the December 2008 update of the MedPAR files) 
indicates that the RY 2009 fixed-loss amount of $22,960 may result in 
LTCH PPS HCO payments that fall below the estimated 8 percent 
requirement. Specifically, we currently estimate that HCO payments are 
approximately 6.1 percent of estimated total LTCH PPS payments in RY 
2009.
    In addition to the estimated increase in LTCH PPS payments in RY 
2010 as compared to RY 2009 due to the projected increase in HCO 
payments, as we discuss in section IX. of Appendix A to this proposed 
rule, we estimate an increase LTCH PPS payments in RY 2010 due to the 
proposed update to the standard Federal rate and a projected increase 
in the payments for SSO cases that are paid based on the estimated cost 
of the case. For these reasons, we believe that proposing to lower the 
fixed-loss amount is appropriate and necessary to maintain that 
estimated outlier payments would equal 8 percent

[[Page 24269]]

of estimated total LTCH PPS payments as required under Sec.  
412.525(a). Maintaining the fixed-loss amount at the current level 
would result in HCO payments that are significantly less than the 
current regulatory requirement that estimated outlier payments be 
projected to equal 8 percent of estimated total LTCH PPS payments. As 
we explained in past LTCH PPS rules (such as the RY 2006 LTCH PPS final 
rule (70 FR 24195 through 24196)), proposing to lower the fixed-loss 
amount results in more cases qualifying as outlier cases as well as 
increases the amount of the additional payment for a HCO case because 
the maximum loss that a LTCH must incur before receiving an HCO payment 
(that is, the fixed-loss amount) would be smaller. Thus, in order to 
maintain that estimated HCO payments in RY 2010 will be equal to 8 
percent of estimated total RY 2010 LTCH PPS payments, we believe it is 
appropriate to lower the fixed-loss amount.
    In the August 30, 2002 final rule (67 FR 56022 through 56024), 
based on our regression analysis, we established the outlier ``target'' 
at 8 percent of estimated total LTCH PPS payments to allow us to 
achieve a balance between the ``conflicting considerations of the need 
to protect hospitals with costly cases, while maintaining incentives to 
improve overall efficiency.'' We continue to believe that a HCO target 
of 8 percent is appropriate, as discussed in greater detail below. 
However, we are soliciting public comments on whether we should revisit 
the regression analysis noted above in this section that was used to 
establish the existing 8 percent outlier target, using the most recent 
available data to evaluate whether the current outlier target of 8 
percent should be adjusted, and which therefore may mitigate the 
magnitude of the proposed change in the fixed-loss amount for RY 2010.
    As an alternative to proposing to lower the fixed-loss amount for 
RY 2010, we also examined adjusting the marginal cost factor (that is, 
the percentage that Medicare will pay of the estimated cost of a case 
that exceeds the sum of the adjusted Federal prospective payment for 
the MS-LTC-DRG and the fixed-loss amount for LTCH PPS HCO cases as 
specified in Sec.  412.525(a)(3)), as a means of ensuring that 
estimated outlier payments would be projected to equal 8 percent of 
estimated total LTCH PPS payments. As we established in the August 30, 
2002 final rule (67 FR 56022 through 56026), under the LTCH PPS HCO 
policy at Sec.  412.525(a)(3), the marginal cost factor is currently 
equal to 80 percent. As discussed in the RY 2007 LTCH PPS final rule 
(71 FR 4677 through 4678), a marginal cost factor equal to 80 percent 
means that, for an outlier case, we pay the LTCH 80 percent of the 
difference between the estimated cost of the case and the outlier 
threshold (the sum of the adjusted Federal rate for the MS-LTC-DRG PPS 
payment and the fixed-loss amount). In addition, as we discussed in the 
August 30, 2002 final rule (67 FR 56023) that implemented the LTCH PPS, 
the marginal cost factor is designed to ensure ``a balance between the 
need to protect LTCHs financially, while encouraging them to treat 
expensive patients and maintaining the incentives of a prospective 
payment system to improve the efficient delivery of care.'' Increasing 
the marginal cost factor from the established 80 percent, without 
reducing the current fixed-loss amount, would increase total estimated 
outlier payments because we would pay a larger percentage of the 
estimated costs that exceed the outlier threshold (the sum of the 
adjusted Federal rate for the MS-LTC-DRG and the fixed-loss amount). 
For example, if we were to increase the marginal cost factor to 90 
percent without lowering the fixed-loss amount, we would pay outlier 
cases 10 percent more of the estimated costs that exceed the HCO 
threshold. While this alternative could ensure that outlier payments 
are projected to equal 8 percent of estimated total LTCH PPS payments 
by increasing estimated aggregate HCO payments, it may not maintain the 
existing balance between providing an incentive for LTCHs to treat 
expensive patients and improving the efficient delivery of care because 
a policy such as this would reduce the incentive to provide cost 
efficient care that is in effect under the current HCO policy (with an 
80 percent marginal cost factor). Such a result would be inconsistent 
with the intent of the LTCH PPS HCO policy (noted above) as stated when 
we implemented the LTCH PPS in the August 30, 2002 final rule (67 
FR56025). As we discussed in that same final rule (67 FR 56023 through 
56024), our analysis of payment-to-cost ratios for HCO cases showed 
that a marginal cost factor of 80 percent appropriately addresses cases 
that are significantly more expensive than nonoutlier cases, while 
simultaneously maintaining the integrity of the LTCH PPS. Accordingly, 
we are not proposing to adjust the marginal cost factor under the LTCH 
PPS HCO policy at this time. However, we are soliciting public comments 
on whether we should revisit the regression analysis that was used to 
establish the existing 80 percent marginal cost factor, using the most 
recent available data to evaluate whether the current marginal cost 
factor of 8 percent in the current HCO policy should be adjusted, and 
therefore may mitigate the proposed change in the fixed-loss amount for 
RY 2010. We note that, as we discussed in the RY 2009 LTCH PPS final 
rule (73 FR 26824 through 26825), for the past several rate years, in 
proposing changes to the fixed-loss amount we solicited public comments 
on whether we should revisit the regression analysis referenced above 
that was used to establish the existing 8 percent outlier target and 80 
percent marginal cost factor, using the most recent available data to 
evaluate whether the current outlier target of 8 percent or the 80 
percent marginal cost factor should be adjusted and, therefore, could 
have mitigated the magnitude of the change in the fixed-loss amount for 
RYs 2007, 2008, and 2009, respectively. In response to these 
solicitations, we received no public comments in support of any option 
that would allow us to revisit the regression analysis that was used to 
establish the existing 80 percent marginal cost factor and existing 
outlier target of 8 percent, and the commenters agreed that keeping the 
marginal cost factor at 80 percent and the outlier pool at 8 percent 
better identifies LTCH patients that are unusually costly cases, and 
that this policy appropriately addresses HCO cases that are 
significantly more expensive than nonoutlier cases.
    In summary, we are proposing to establish a fixed-loss amount of 
$16,059 for RY 2010 based on the best available LTCH data and the 
policies presented in this proposed rule because we believe a proposed 
decrease in the fixed-loss amount for RY 2010 is appropriate and 
necessary to maintain estimated outlier payments equal to 8 percent of 
estimated total LTCH PPS payments, as required under Sec.  412.525(a). 
As explained above in this section, in section IX of Appendix A to this 
proposed rule, we are projecting an increase in total LTCH PPS payments 
systemwide. In accordance with Sec.  412.523(d)(1), we reduce the 
standard Federal rate by 8 percent for the estimated proportion of LTCH 
PPS HCO payments. Because we are estimating an increase in the average 
payment per discharge, thereby increasing total estimated LTCH PPS 
payments, and because we are currently estimating that HCO payments in 
RY 2009 may fall below the 8 percent target, we believe the fixed-loss 
amount must be lowered in order to maintain total outlier payments that 
are projected to equal 8 percent of total payments under the

[[Page 24270]]

LTCH PPS, in accordance with Sec.  412.525(a).
4. Application of Outlier Policy to SSO Cases
    As we discussed in the August 30, 2002 final rule (67 FR 56026), 
under some rare circumstances, a LTCH discharge could qualify as a SSO 
case (as defined in the regulations at Sec.  412.529 in conjunction 
with the regulations at Sec.  412.503) and also as a HCO case. In this 
scenario, a patient could be hospitalized for less than five-sixths of 
the geometric ALOS for the specific MS-LTC-DRG, and yet incur 
extraordinarily high treatment costs. If the costs exceeded the high 
cost outlier threshold (that is, the SSO payment plus the fixed-loss 
amount), the discharge is eligible for payment as a HCO. Thus, for a 
SSO case in the 2010 LTCH PPS rate year, the HCO payment would be 80 
percent of the difference between the estimated cost of the case and 
the outlier threshold (the sum of the proposed fixed-loss amount of 
$16,059 and the amount paid under the SSO policy as specified in Sec.  
412.529).

D. Computing the Proposed Adjusted LTCH PPS Federal Prospective 
Payments for RY 2010

    In accordance with Sec.  412.525, the proposed standard Federal 
rate is adjusted to account for differences in area wages by 
multiplying the proposed labor-related share of the proposed standard 
Federal rate by the appropriate proposed LTCH PPS wage index (as shown 
in Tables 12A and 12B of the Addendum of this proposed rule). The 
proposed standard Federal rate is also adjusted to account for the 
higher costs of hospitals in Alaska and Hawaii by multiplying the 
proposed nonlabor-related share of the proposed standard Federal rate 
by the appropriate proposed cost-of-living factor (shown in the chart 
in section V.C.5. of the Addendum of this proposed rule). In this 
proposed rule, we are proposing to establish a standard Federal rate 
for the 2010 LTCH PPS rate year of $39,349.05, as discussed in section 
V.A.2. of the Addendum of this proposed rule. We illustrate the 
methodology to adjust the proposed Federal rate for the 2010 LTCH PPS 
rate year in the following example:

    Example: During the 2010 LTCH PPS rate year, a Medicare patient 
is in a LTCH located in Chicago, Illinois (CBSA 16974). The proposed 
RY 2010 LTCH PPS wage index value for CBSA 16974 is 1.0478 (Table 
12A of the Addendum of this proposed rule). The Medicare patient is 
classified into MS-LTC-DRG 28 (Spinal Procedures with MCC), which 
has a proposed relative weight for RY 2010 of 1.1175 (Table 11 of 
the Addendum of this proposed rule).
    To calculate the LTCH's total adjusted Federal prospective 
payment for this Medicare patient, we compute the wage-adjusted 
proposed Federal prospective payment amount by multiplying the 
unadjusted proposed standard Federal rate ($39,349.05) by the 
proposed labor-related share (75.904 percent) and the proposed wage 
index value (1.0478). This wage-adjusted amount is then added to the 
proposed nonlabor-related portion of the unadjusted proposed 
standard Federal rate (24.096 percent; adjusted for cost of living, 
if applicable) to determine the adjusted proposed Federal rate, 
which is then multiplied by the proposed MS-LTC-DRG relative weight 
(1.1175) to calculate the total adjusted proposed Federal 
prospective payment for the 2010 LTCH PPS rate year ($45,567.98). 
The table below illustrates the components of the calculations in 
this example.

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Unadjusted Proposed Standard Federal Prospective           $39,349.05
 Payment Rate........................................
Proposed Labor-Related Share.........................          x 0.75904
Labor-Related Portion of the Proposed Federal Rate...     = 29,867.50
Proposed Wage Index (CBSA 16974).....................          x 1.0478
Proposed Wage-Adjusted Labor Share of Proposed            = 31,295.17
 Federal Rate........................................
Proposed Nonlabor-Related Portion of the Proposed          + 9,481.55
 Federal Rate ($39,349.05 x 0.24096).................
Adjusted Proposed Federal Rate Amount................     = 40,776.72
Proposed MS-LTC-DRG 9 Relative Weight................          x 1.1175
    Total Adjusted Proposed Federal Prospective           = 45,567.98
     Payment.........................................
------------------------------------------------------------------------

VI. Tables

    This section contains the tables referred to throughout the 
preamble to this proposed rule and in this Addendum. Tables 1A, 1B, 1C, 
1D, 1E, 2, 3A, 3B, 4A, 4B, 4C, 4D-1, 4D-2, 4F, 4J, 5, 7A, 7B, 8A, 8B, 
8C, 9A, 9C, 10, 11, 12A, and 12B are presented below. 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, and Table 6K.--Complications and Comorbidity 
(CC) List are available only through the Internet on the CMS Web site 
at: http://www.cms.hhs.gov/AcuteInpatientPPS/. The tables presented 
below are as follows:

Table 1A.--National Adjusted Operating Standardized Amounts, Labor/
Nonlabor (67.1 Percent Labor Share/32.9 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 1E.--LTCH Standard Federal Prospective Payment Rate
Table 2.--Acute Care Hospitals Case-Mix Indexes for Discharges 
Occurring in Federal Fiscal Year 2008; Hospital Wage Indexes for 
Federal Fiscal Year 2010; Hospital Average Hourly Wages for Federal 
Fiscal Years 2008 (2004 Wage Data), 2009 (2005 Wage Data), and 2010 
(2006 Wage Data); and 3-Year Average of Hospital Average Hourly 
Wages
Table 3A.--FY 2010 and 3-Year Average Hourly Wage for Acute Care 
Hospitals in Urban Areas by CBSA
Table 3B.--FY 2010 and 3-Year Average Hourly Wage for Acute Care 
Hospitals in Rural Areas by CBSA
Table 4A.--Wage Index and Capital Geographic Adjustment Factor (GAF) 
for Acute Care Hospitals in Urban Areas by CBSA and by State--FY 
2010
Table 4B.--Wage Index and Capital Geographic Adjustment Factor (GAF) 
for Acute Care Hospitals in Rural Areas by CBSA and by State--FY 
2010
Table 4C.--Wage Index and Capital Geographic Adjustment Factor (GAF) 
for Acute Care Hospitals That Are Reclassified by CBSA and by 
State--FY 2010
Table 4D-1.--Rural Floor Budget Neutrality Factors for Acute Care 
Hospitals--FY 2010
Table 4D-2.--Urban Areas with Acute Care Hospitals Receiving the 
Statewide Rural Floor or Imputed Floor Wage Index--FY 2010
Table 4E.--Urban CBSAs and Constituent Counties for Acute Care 
Hospitals--FY 2010
Table 4F.--Puerto Rico Wage Index and Capital Geographic Adjustment 
Factor (GAF) for Acute Care Hospitals by CBSA--FY 2010
Table 4J.--Out-Migration Adjustment for Acute Care Hospitals--FY 
2010
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

[[Page 24271]]

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 2008 MedPAR Update--December 2008 GROUPER V26.0 
MS-DRGs
Table 7B.--Medicare Prospective Payment System Selected Percentile 
Lengths of Stay: FY 2008 MedPAR Update--December 2008 GROUPER V27.0 
MS-DRGs
Table 8A.--Proposed Statewide Average Operating Cost-to-Charge 
Ratios (CCRs) for Acute Care Hospitals--March 2009
BILLING CODE 4210-01-P
Table 8B.--Proposed Statewide Average Capital Cost-to-Charge Ratios 
(CCRs) for Acute Care Hospitals--March 2009
Table 8C.--Proposed Statewide Average Total Cost-to-Charge Ratios 
(CCRs) for LTCHs--March 2009
Table 9A.--Hospital Reclassifications and Redesignations--FY 2010
Table 9C.--Hospitals Redesignated as Rural under Section 
1886(d)(8)(E) of the Act--FY 2010
Table 10.--Geometric Mean Plus the Lesser of .75 of the National 
Adjusted Operating Standardized Payment Amount (Increased to Reflect 
the Difference Between Costs and Charges) or .75 of One Standard 
Deviation of Mean Charges by Medicare Severity Diagnosis-Related 
Group (MS-DRG)--March 2009
Table 11.--Proposed MS-LTC-DRGs, Relative Weights, Geometric Average 
Length of Stay, and Short-Stay Outlier (SSO) Threshold for 
Discharges Occurring from October 1, 2009 through September 30, 2010 
under the LTCH PPS
Table 12A.--LTCH PPS Wage Index for Urban Areas for Discharges 
Occurring from October 1, 2009 through September 30, 2010
Table 12B.--LTCH PPS Wage Index for Rural Areas for Discharges 
Occurring from October 1, 2009 through September 20, 2010
BILLING CODE 4210-01-P

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[[Page 24651]]



Appendix A: Regulatory Impact Analysis

I. Overall Impact

    We have examined the impacts of this proposed 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 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 proposed rule is a major rule as 
defined in 5 U.S.C. 804(2). We estimate that the proposed changes for 
FY 2010 acute care hospital operating and capital payments would 
redistribute in excess of $100 million among different types of 
inpatient cases. The proposed changes to rebase and revise the market 
basket for purposes of the market basket update to the IPPS rates 
required by the statute, in conjunction with other proposed payment 
changes in this proposed rule, would result in an estimated $586 
million decrease in FY 2010 operating payments (or 0.5 percent 
decrease), and $393 million decrease in FY 2010 capital payments (or 
4.8 percent decrease), or a total $979 million decrease in FY 2010 
operating and capital payments to acute care hospitals. The impacts 
analysis of the capital payments can be found in section VIII. of this 
Appendix. In addition, as described in section IX. of this Appendix, 
LTCHs are expected to experience an increase in payments by $135 
million (or 2.8 percent).
    Our operating impact estimate includes the proposed -2.5 percent 
documentation and coding adjustment applied to the hospital-specific 
rates, the -1.1 percent documentation and coding adjustment applied to 
the Puerto Rico-specific rates and the -1.9 percent adjustment for 
documentation and coding changes to the IPPS standardized amounts and 
capital Federal rates for FY 2010. In addition, our operating impact 
estimate includes the 2.1 percent market basket update to the 
standardized amount. The estimates of IPPS operating payments to acute 
care hospitals 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 $34.5 million or 
less in any 1 year). (For details on the latest standards for health 
care providers, we refer readers to the Table of Small Business Size 
Standards for NAIC 622 found on the Small Business Administration 
Office of Size Standards Web site at: http://www.sba.gov/contractingopportunities/officials/size/GC-SMALL-BUS-SIZE-STANDARDS.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 the provisions of this proposed rule relating 
to acute care hospitals would have a significant impact on small 
entities as explained in this Appendix. Because we lack data on 
individual hospital receipts, we cannot determine the number of small 
proprietary LTCHs. Therefore, we are assuming that all LTCHs are 
considered small entities for the purpose of the analysis in section 
IX. of this Appendix. Medicare fiscal intermediaries and MACs are not 
considered to be small entities. Because we acknowledge that many of 
the affected entities are small entities, the analysis discussed 
throughout the preamble of this proposed rule constitutes our proposed 
regulatory flexibility analysis. Therefore, we are soliciting public 
comments on our estimates and analysis of the impact of this proposed 
rule on those small entities.
    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 on 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 proposed rule are available 
on the CMS IPPS Web page at http://www.cms.hhs.gov/AcuteInpatientPPS/01_overview.asp. We also note that the Hospital Center Web page at 
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 603 of the RFA. With the exception of hospitals located in 
certain New England counties, for purposes of section 1102(b) of the 
Act, we 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 and the LTCH PPS, we 
continue to classify these hospitals as urban hospitals. (We refer 
readers to Table 1 and section VI. of this Appendix for the 
quantitative effects of the proposed policy changes under the IPPS for 
operating costs.)
    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 $133 million. This 
proposed rule will not mandate any requirements for State, local, or 
tribal governments, nor would it affect private sector costs.
    Executive Order 13132 establishes certain requirements that an 
agency must meet when it promulgates a proposed rule (and subsequent 
final rule) that imposes substantial direct requirement costs on State 
and local governments, preempts State law, or otherwise has Federalism 
implications. As stated above, this proposed rule would not have a 
substantial effect on State and local governments.
    The following analysis, in conjunction with the remainder of this 
document, demonstrates that this proposed rule is consistent with the 
regulatory philosophy and principles identified in Executive Order 
12866, the RFA, and section 1102(b) of the Act. The proposed rule would 
affect payments to a substantial number of

[[Page 24652]]

small rural hospitals, as well as other classes of hospitals, and the 
effects on some hospitals may be significant.

II. Objectives of the IPPS

    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 proposed changes in this proposed rule would 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 proposed changes would 
ensure that the outcomes of the prospective payment systems 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 proposed policy changes, as well as statutory changes effective 
for FY 2010, 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 proposed 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. For FY 2010, we are proposing to reduce the 
national standardized amount by an additional 1.9 percent. Based on our 
analysis, described in II.D. of the preamble of this proposed rule, we 
believe that, in FY 2008, hospitals experienced a documentation and 
coding effect of 2.5 percent, which exceeds the FY 2008 documentation 
and coding adjustment of 0.6 percent by 1.9 percent. Therefore, we are 
proposing to reduce the national standardized amounts in FY 2010 by -
1.9 percent. We will address in the FY 2011 rulemaking cycle any change 
in FY 2009 case-mix due to documentation and coding changes that do not 
reflect real changes in case-mix for discharges occurring during FY 
2009.
    Furthermore, we believe that hospitals that are paid under the 
hospital-specific payment rate, specifically SCHs and MDHs, experience 
similar increases in case-mix due to documentation and coding changes 
that do not reflect real changes in case-mix. Our actuarial office 
estimates that hospitals paid under the hospital-specific rate 
experienced a 4.8 percent increase in payments due to documentation and 
coding changes in FY 2008 and FY 2009. We did not apply a documentation 
and coding adjustment to the hospital-specific rates when we first 
implemented the MS-DRG system. For FY 2010, we are proposing to reduce 
the hospital-specific rate by 2.5 percent in FY 2010 to account for the 
case-mix increase that occurred in FY 2008 due to changes in 
documentation and coding under the adoption of MS-DRGs that do not 
reflect real changes in case-mix. We will address any increase in case-
mix in FY 2009 due to changes in documentation and coding that do not 
reflect real changes in case-mix in the FY 2011 rulemaking cycle.
    Our analysis, as described in II.D. of the preamble, shows that 
Puerto Rico hospitals experienced an increase in case-mix by 1.1 
percent in FY 2008 due to changes in documentation and coding. We did 
not apply a documentation and coding adjustment to the Puerto Rico-
specific rate when we first implemented the MS-DRG system. For FY 2010, 
we are proposing to reduce the Puerto Rico-specific standardized amount 
by 1.1 percent to account for the case-mix increase due to 
documentation and coding that occurred in FY 2008. We will address any 
increase in case-mix in FY 2009 for Puerto Rico hospitals in the FY 
2011 rulemaking cycle.
    The impacts shown below illustrate the impact of the proposed FY 
2010 IPPS changes on acute care hospital operating payments, including 
the proposed -1.9 percent FY 2010 documentation and coding adjustment 
to the IPPS national standardized amounts, the -2.5 percent FY 2010 
documentation and coding adjustment to the hospital-specific rates, and 
the -1.1 percent FY 2010 documentation and coding adjustment to the 
Puerto Rico-specific standardized amount. The proposed documentation 
and coding adjustment that would be applicable to the Federal rate 
under the LTCH PPS for RY 2010 is discussed in section IX. of this 
Appendix. As we have done in the previous rules, we are soliciting 
public comments and information about the anticipated effects of the 
proposed changes on acute care hospitals and our methodology for 
estimating them.

IV. Hospitals Included In and Excluded From the IPPS

    The prospective payment systems for hospital inpatient operating 
and capital-related costs of acute care hospitals encompass most 
general short-term, acute care hospitals that participate in the 
Medicare program. There were 33 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 pursuant to 
the waiver under section 1814(b)(3) of the Act.
    As of March 2009, there are 3,513 IPPS acute care 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 1,306 
CAHs. These small, limited service hospitals are paid on the basis of 
reasonable costs rather than under the IPPS. (We refer readers to 
section VII. of this Appendix for a further description of the impact 
of CAH-related proposed policy changes.) There are also 1,228 IPPS-
excluded hospitals and 2,209 IPPS-excluded hospital units. These IPPS-
excluded hospitals and units 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 IPPS-excluded hospitals and units are not included in this 
proposed rule. The impact of the proposed update and policy changes to 
the LTCH PPS for RY 2010 are discussed in section IX. of this Appendix.

V. Effects on Hospitals and Hospital Units Excluded From the IPPS

    As of March 2009, there were 1,228 hospitals excluded from the 
IPPS. Of these 1,228 hospitals, 78 children's

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hospitals, 11 cancer hospitals, and 16 RNHCIs are being paid on a 
reasonable cost basis subject to the rate-of-increase ceiling under 
Sec.  413.40. The remaining providers, 223 IRFs and 406 LTCHs, are paid 
the Federal prospective per discharge rate under the IRF PPS and the 
LTCH PPS, respectively, and 1,312 IPFs are paid the Federal per diem 
amount under the IPF PPS. As stated above, IRFs and IPFs are not 
affected by rate updates in this proposed rule. The impacts of the 
proposed changes to LTCHs are discussed in section IX. of this 
Appendix. In addition, there are 1,312 IPF units located in hospitals 
otherwise subject to the IPPS. There are 972 IRFs (paid under the IRF 
PPS) 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). Cancer and children's hospitals continue to be paid on a 
reasonable cost basis subject to TEFRA limits for FY 2010. For these 
hospitals (cancer and children's hospitals), consistent with the 
authority provided in section 1886(b)(3)(B)(ii) of the Act, the 
proposed update is the percentage increase in the FY 2010 IPPS 
operating market basket. In compliance with section 404 of the MMA, in 
this proposed rule, we are proposing to replace the FY 2002-based IPPS 
operating and capital market baskets with the revised and rebased FY 
2006-based IPPS operating and capital market baskets for FY 2010. 
Therefore, consistent with current law, based on IHS Global Insight, 
Inc.'s 2009 first quarter forecast, with historical data through the 
2008 fourth quarter, we are estimating that the FY 2010 update to the 
IPPS operating market basket will be 2.1 percent (that is, the current 
estimate of the market basket rate-of-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 proposed update is the percentage increase in the FY 2010 
IPPS operating market basket increase, which is estimated to be 2.1 
percent, based on IHS Global Insight, Inc.'s 2009 first quarter 
forecast of the IPPS operating market basket increase.
    The impact of the proposed update in the rate-of-increase limit on 
those excluded hospitals depends on the cumulative cost increases 
experienced by each excluded hospital since its applicable base period. 
For excluded hospitals 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 excluded 
hospitals receive. Conversely, for excluded hospitals 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 that 
continues 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, 
cancer and children's hospitals 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 proposed rule, we are announcing proposed policy changes 
and payment rate updates for the IPPS for operating costs of acute care 
hospitals. Updates to the capital payments to acute care hospitals are 
discussed in section VIII. of this Appendix.
    Based on the overall percentage change in payments per case 
estimated using our payment simulation model, we estimate that total FY 
2010 operating payments would decrease by 0.5 percent compared to FY 
2009, largely due to the statutorily mandated update to the IPPS rates. 
This amount also reflects the proposed FY 2010 documentation and coding 
adjustments described above and in section II.D. of the preamble: -1.9 
percent for the IPPS national standardized amounts, -2.5 percent for 
the IPPS hospital specific rates, and -1.1 percent for the IPPS Puerto 
Rico-specific standardized amount. The impacts do not illustrate 
changes in hospital admissions or real case-mix intensity, which would 
also affect overall payment changes.
    We have prepared separate impact analyses of the proposed changes 
to each system. This section deals with changes to the operating 
prospective payment system for acute care hospitals. Our payment 
simulation model relies on the most recent available data to enable us 
to estimate the impacts on payments per case of certain proposed 
changes in this proposed rule. However, there are other proposed 
changes for which we do not have data available that would allow us to 
estimate the payment impacts using this model. For those proposed 
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 2008 MedPAR 
file and the most current Provider-Specific File that is used for 
payment purposes. Although the analyses of the proposed 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 
proposed 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 2008 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 the capital IPPS for FY 2010 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 MS-DRG relative weights.
     The effects of the proposed changes in hospitals' wage 
index values reflecting wage data from hospitals' cost reporting 
periods beginning during FY 2006, compared to the FY 2005 wage data.
     The effects of the proposed changes to the hospital labor-
related share,

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where the proposed hospital labor-related share for hospitals with a 
wage index greater than 1 has been rebased from 69.7 percent to 67.1 
percent. Hospitals with a wage index less than or equal to 1 will 
continue to have a hospital labor-related share of 62 percent.
     The effects of the recalibration of the DRG relative 
weights as required by section 1886(d)(4)(C) of the Act, including the 
wage and recalibration budget neutrality factors.
     The effects of geographic reclassifications by the MGCRB 
that would be effective in FY 2010.
     The effects of the second year of the 3-year transition to 
apply rural floor budget neutrality adjustment at the State level. In 
FY 2010, hospitals would receive a blended wage index that is 50 
percent of a wage index with the State level rural and imputed floor 
budget neutrality adjustment and 50 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 documentation and coding of discharges that do not reflect real 
changes in case-mix. These documentation and coding adjustments include 
a -1.9 percent documentation and coding adjustment for the national 
standardized amount, a -2.5 percent documentation and coding adjustment 
for the hospital-specific rate, and a -1.1 percent documentation and 
coding adjustment for the Puerto Rico-specific rate.
     The total estimated change in payments based on the 
proposed FY 2010 policies relative to payments based on FY 2009 
policies that include the proposed market basket update of 2.1 percent.
    To illustrate the impacts of the proposed FY 2010 changes, our 
analysis begins with a FY 2009 baseline simulation model using: the 
proposed FY 2010 market basket update of 2.1 percent; the FY 2009 MS-
DRG GROUPER (Version 26.0); the most current CBSA designations for 
hospitals based on OMB's MSA definitions; the FY 2009 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, 94 hospitals did not receive the full market basket rate-of-
increase for FY 2009 because they failed the quality data submission 
process. For purposes of the simulations shown below, we modeled the 
proposed payment changes for FY 2010 using a reduced update for these 
94 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 2010.
    Each policy change, statutorily or otherwise, is then added 
incrementally to this baseline, finally arriving at an FY 2010 model 
incorporating all of the proposed changes. This simulation allows us to 
isolate the effects of each proposed change.
    Our final comparison illustrates the proposed percent change in 
payments per case from FY 2009 to FY 2010. 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 proposing to update the standardized amounts for FY 
2010 using the most recently forecasted hospital market basket increase 
for FY 2010 of 2.1 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 from 2.1 percent to 
0.1 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 percentage increase, or 2.1 percent.
    A second significant factor that affects the proposed changes in 
hospitals' payments per case from FY 2010 to FY 2010 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 
2009 that are no longer reclassified in FY 2010. Conversely, payments 
may increase for hospitals not reclassified in FY 2009 that are 
reclassified in FY 2010. In addition, section 508 of Public Law 108-
173, the special reclassification provision, is set to expire in FY 
2010. The section 508 reclassification is a nonbudget neutral 
provision, so overall payments will be reduced as a result of the 
expiration of this provision. In the impact analysis for this proposed 
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 2009 will be 5.4 percent of total DRG 
payments. When the FY 2008 final rule was published, we projected FY 
2009 outlier payments would be 5.1 percent of total DRG plus outlier 
payments; the average standardized amounts were offset correspondingly. 
The effects of the higher than expected outlier payments during FY 2010 
(as discussed in the Addendum to this proposed rule) are reflected in 
the analyses below comparing our current estimates of FY 2009 payments 
per case to estimated FY 2010 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 proposed 
changes for FY 2010. 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 3,513 acute care 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 2,535 
hospitals located in urban areas included in our analysis. Among these, 
there are 1,386 hospitals located in large urban areas (populations 
over 1 million), and 1,149 hospitals in other urban areas (populations 
of 1 million or fewer). In addition, there are 978 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 2010 payment classifications, including any 
reclassifications under section 1886(d)(10) of the Act. For example, 
the

[[Page 24655]]

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 2,585, 
1,417, 1,168 and 928, respectively.
    The next three groupings examine the impacts of the proposed 
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 
2,479 nonteaching hospitals in our analysis, 800 teaching hospitals 
with fewer than 100 residents, and 234 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 
or rural, in terms of whether they receive the IME adjustment, the DSH 
adjustment, both, or neither.
    The next five rows examine the impacts of the proposed changes on 
rural hospitals by special payment groups (SCHs, RRCs, and MDHs). There 
were 187 RRCs, 338 SCHs, 181 MDHs, 105 hospitals that are both SCHs and 
RRCs, and 14 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 2006 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 2010. The second grouping 
shows the MGCRB rural reclassifications.
    The final category shows the impact of the proposed policy changes 
on the 20 cardiac hospitals in our analysis.
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C. Effects of the Proposed Changes to the MS-DRG Reclassifications and 
Relative Cost-Based Weights (Column 1)

    In Column 1 of Table I, we present the effects of the proposed DRG 
reclassifications, as discussed in section II. of the preamble to this 
proposed 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 proposed rule, the proposed FY 
2010 DRG relative weights would be 100 percent cost-based and 100 
percent MS-DRGs. For FY 2010, the MS-DRGs are calculated using the FY 
2008 MedPAR data grouped to the Version 27.0 (FY 2010) DRGs. The 
methods of calculating the proposed relative weights and the 
reclassification changes to the GROUPER are described in more detail in 
section II.H. of the preamble to this proposed rule. The proposed 
changes to the relative weights and MS-DRGs shown in Column 2 are prior 
to any offset for budget neutrality. Overall, hospitals would 
experience a 0.2 percent increase in payments due to the changes in the 
MS-DRGs and relative weights prior to budget neutrality. Urban 
hospitals would experience a 0.3 percent increase in payments under the 
updates to the relative weights and DRGs, while rural hospitals would 
experience a 0.1 percent decrease in payments. Under the MS-DRG system, 
rural hospitals would generally experience a decrease in payments from 
recalibration due to the lower acuity of services provided.

D. Effects of the Application of Recalibration Budget Neutrality 
(Column 2)

    Column 2 shows the effects of the changes to the MS-DRGs and 
relative weights with the application of the recalibration budget 
neutrality factor to the standardized amounts. Consistent with section 
1886(d)(4)(C)(iii) of the Act, we are calculating a recalibration 
budget neutrality factor to account for the changes in MS-DRGs and 
relative weights to ensure that the overall payment impact is budget 
neutral. Beginning in FY 2010, we are calculating a budget neutrality 
factor to account for changes in MS-DRGs and relative weights 
separately from the budget neutrality factor to account for changes in 
wage data.
    The ``All Hospitals'' line in Column 1 indicates that proposed 
changes due to MS-DRGs and relative weights would increase payments by 
0.2 percent before application of the budget neutrality factor. The 
proposed recalibration budget neutrality factor is 0.997663, which is 
applied to the standardized amount. Thus, the impact after accounting 
only for budget neutrality for proposed changes to the MS-DRG relative 
weights and classification is somewhat lower than the figures shown in 
this column (approximately 0.2 percent). Consequentially, urban 
hospitals would not experience a change in payments when recalibration 
budget neutrality is applied, while rural hospitals would experience a 
0.3 percent decrease in payments due to the lower acuity of services 
provided.

E. Effects of Proposed 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 proposed wage index for 
acute care hospitals for FY 2010 is based on data submitted for 
hospital cost reporting periods beginning on or after October 1, 2005 
and before October 1, 2006. The estimated impact of the updated wage 
data and labor share 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 change in payments when going from a 
model using the FY 2009 wage index, based on FY 2005 wage data, the 
current labor-related share and having a 100-percent occupational mix 
adjustment applied, to a model using the proposed FY 2010 pre-
reclassification wage index with the proposed labor-related share, also 
having a 100-percent occupational mix adjustment applied, based on FY 
2006 wage data (while holding other payment parameters such as use of 
the Version 26.0 DRG GROUPER constant). The occupational mix adjustment 
is based on the FY 2007/2008 occupational mix survey. The wage data 
collected on the FY 2006 cost report include overhead costs for 
contract labor that were not collected on FY 2005 and earlier cost 
reports. The impacts below incorporate the effects of the FY 2006 wage 
data collected on hospital cost reports, including additional overhead 
costs for contract labor compared to the wage data from FY 2005 cost 
reports that were used to calculate the FY 2009 wage index.
    As discussed in section III. of this proposed rule, under section 
1886(d)(3)(E) of the Act, the Secretary estimates from time to time the 
proportion of payments that are labor-related. ``The Secretary shall 
adjust the proportion (as estimated by the Secretary from time to time) 
of hospitals' costs which are attributable to wages and wage-related 
costs of the DRG prospective payment rates * * * '' We refer to the 
proportion of hospitals' costs that are attributable to wages and wage-
related costs as the ``labor-related share.''
    The labor-related share is used to determine the proportion of the 
national IPPS base payment rate to which the area wage index is 
applied. In this proposed rule, we describe our updated methodology and 
data sources to calculate the national labor-related share. Using the 
proposed cost category weights from the FY 2006-based IPPS market 
basket, we calculated a labor-related share of 67.1 percent, 
approximately 3 percentage points lower than the current labor-related 
share of 69.7 percent. Accordingly, in this proposed rule, we are 
implementing a national labor-related share of 67.1 percent for 
discharges occurring on or after October 1, 2009. This proposal only 
affects hospitals with a wage index greater than 1. According to 
section

[[Page 24662]]

1886(d)(3)(E)(ii) of the Act, hospitals with a wage index less than or 
equal to 1 have their wage index adjusted to 62 percent of the national 
standardized amount; therefore, these hospitals remain unaffected by 
the labor-related share proposal. In addition, we are proposing to 
update the labor-related share for Puerto Rico. Using FY 2006-based 
Puerto Rico cost category weights, we calculated a labor-related share 
of 60.347 percent, approximately 2 percentage points higher than the 
current Puerto-Rico specific labor-related share of 58.721. 
Accordingly, we are adopting an updated Puerto Rico labor-related share 
of 60.3 percent.
    Column 3 shows the impacts of updating the wage data using FY 2006 
cost reports and the updated labor-related share. The payment changes 
simulated in this column are used to calculate the wage budget 
neutrality. Beginning in FY 2010, we are calculating separate wage 
budget neutrality and recalibration budget neutrality factors, in 
accordance with section 1886(d)(3)(E) of the Act, which specifies that 
budget neutrality to account for wage changes or updates made under 
that subparagraph must be made without regard to the 62 percent labor-
related share guaranteed under section 1886(d)(3)(E)(ii) of the Act. 
Therefore, for FY 2010, we are calculating the wage budget neutrality 
factor to ensure that payments under updated wage data and the proposed 
labor-related share are budget neutral without regard to the lower 
labor-related share of 62 percent applied to hospitals with a wage 
index less than or equal to 1. In other words, the wage budget 
neutrality is calculated under the assumption that all hospitals 
receive the higher labor-related share of the standardized amount. 
Column 3 shows the effects of the new wage data and new labor share 
before budget neutrality under the assumption that all providers have 
their wage index adjusted by the same labor-related share. Overall, the 
new wage data would lead to a 0.0 percent change for all hospitals 
before being combined with the proposed wage budget neutrality 
adjustment shown in Column 5. 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 
Puerto Rico region, which experiences a 1.8 percent increase before 
applying an adjustment for budget neutrality. The largest decline from 
updating the wage data is seen in rural New England (0.5 percent 
decrease).
    In looking at the wage data itself, the national average hourly 
wage increased 3.9 percent compared to FY 2009. Therefore, the only 
manner in which to maintain or exceed the previous year's wage index 
was to match or exceed the national 3.9 percent increase in average 
hourly wage. Of the 3,469 hospitals with wage data for both FYs 2009 
and 2010, 1,682, or 48.5 percent, experienced an average hourly wage 
increase of 3.9 percent or more.
    The following chart compares the shifts in proposed wage index 
values for hospitals for FY 2010 relative to FY 2009. Among urban 
hospitals, 29 will experience an increase of more than 5 percent and 
less than 10 percent and 8 will experience an increase of more than 10 
percent. Among rural hospitals, 8 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, 955 rural hospitals will 
experience increases or decreases of less than 5 percent, while 2,427 
urban hospitals will experience increases or decreases of less than 5 
percent. Thirty-four urban hospitals will experience decreases in their 
wage index values of more than 5 percent and less than 10 percent. 
Eight 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 proposed 
changes in the wage index which is an adjustment to either 67.1 percent 
or 62 percent of a hospital's proposed 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.

------------------------------------------------------------------------
                                                            Number of
                                                            hospitals
      Percentage change in area wage index values      -----------------
                                                         Urban    Rural
------------------------------------------------------------------------
Increase more than 10 percent.........................        8        0
Increase more than 5 percent and less than 10 percent.       29        8
Increase or decrease less than 5 percent..............    2,427      955
Decrease more than 5 percent and less than 10 percent.       34        0
Decrease more than 10 percent.........................        8        0
------------------------------------------------------------------------

F. Application of the Wage Budget Neutrality Factor (Column 4)

    Column 4 shows the impact of the new wage data, new labor share 
with the application of the wage budget neutrality factor. For FY 2010, 
we will calculate the wage budget neutrality factor without regard to 
the lower labor share of 62 percent for hospitals with a wage index 
less than or equal to 1, in accordance with section 1886(d)(3)(E)(i) of 
the Act. In other words, the wage budget neutrality is calculated under 
the assumption that all hospitals receive the proposed labor-related 
share of 67.1 percent of the standardized amount compared to the 
current labor-related share of 69.7 percent of the standardized amount. 
Because the wage data changes did not change overall payments 
(displayed in Column 3), the wage budget neutrality factor is minimal 
at 1.000404, and the overall payment change is 0.0 percent.

G. Combined Effects of Proposed MS-DRG and Wage Index Changes (Column 
5)

    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. We computed a proposed wage budget neutrality factor 
of 1.000404, and a proposed recalibration budget neutrality factor of 
0.997663 (which is applied to the Puerto Rico specific standardized 
amount and the hospital-specific rates). The product of the two budget 
neutrality factors is the cumulative wage and recalibration budget 
neutrality factor. The proposed cumulative wage and recalibration 
budget neutrality adjustment is 0.998066 or approximately -0.2 percent 
which is applied to the national standardized amounts. Because the wage 
budget neutrality and the recalibration budget neutrality are 
calculated under different methodologies according to the statute, when 
the two budget neutralities are combined and applied to the 
standardized amount, the cumulative wage and recalibration budget 
neutrality results in a 0.1 percent decrease in payments relative to no 
budget neutrality adjustment at all. In Table I, the combined overall 
impacts of the effects of both the proposed MS-DRG reclassifications 
and the updated wage index are shown in Column 5. The estimated changes 
shown in this column reflect the combined effects of the proposed 
changes in Columns 2, 3,

[[Page 24663]]

and 4 and the proposed budget neutrality factors discussed previously.
    We estimate that the combined impact of the proposed changes to the 
relative weights and DRGs, the proposed updated wage data and proposed 
changes to the labor share with budget neutrality applied will decrease 
payments to hospitals located in all urban areas by approximately 0.1 
percent. Rural hospitals would generally experience a decrease in 
payments (-0.5 percent) primarily due to payment decreases under the 
MS-DRGs. Among the rural hospital categories, rural hospitals with less 
than 50 beds and rural New England hospitals will experience the 
greatest decline in payment (-0.8 percent) primarily due to the 
proposed changes to MS-DRGs and the relative cost weights.

H. Effects of MGCRB Reclassifications (Column 6)

    Our impact analysis to this point has assumed acute care 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 proposed changes in Column 7 reflect the per case payment 
impact of moving from this baseline to a simulation incorporating the 
MGCRB decisions for FY 2010 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 2010 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 proposing to apply an 
adjustment of 0.991690 to ensure that the effects of the section 
1886(d)(10) reclassifications are budget neutral. (See section II.A. of 
the Addendum to this proposed rule.) Geographic reclassification 
generally benefits hospitals in rural areas. We estimate that 
geographic reclassification will increase payments to rural hospitals 
by an average of 1.7 percent.
    Table 9A of the Addendum to this proposed rule reflects the 
approved reclassifications for FY 2010.

I. Effects of the Rural Floor and Imputed Floor, Including the 
Transition To Apply Budget Neutrality at the State Level (Column 7)

    As discussed in section III.B. of the preamble of the FY 2009 IPPS 
final rule and this proposed 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 final rule, we finalized the policy to apply the rural floor 
budget neutrality at the State level with a 3-year transition. In FY 
2009, hospitals received 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. As described in FY 2009 IPPS final rule 
(73 FR 48570), in FY 2010, hospitals will receive a blended wage index 
that is 50 percent of a wage index with the State level rural and 
imputed floor budget neutrality and 50 percent of a wage index with the 
national budget neutrality adjustment. The national rural floor budget 
neutrality applied to the wage index is 0.997466. The within-State 
rural floor budget neutrality factors applied to the proposed wage 
index are shown in Table 4D in the Addendum to this proposed rule. 
After the wage index is blended, an additional adjustment of 1.000017 
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 proposal to extend the imputed 
floor for 1 additional year. In the FY 2009 IPPS final rule (73 FR 
48573), we extended the imputed floor for an additional 3 years through 
FY 2011. Furthermore, in that final rule, we provided for a 3-year 
transition to the rural floor budget neutrality adjustment at the State 
level. Therefore, we 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 50 percent 
of the wage index will have the national rural and imputed floor budget 
neutrality factor applied and 50 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 7 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 proposed post-reclassification FY 2010 wage index of providers 
before the rural floor adjustment and the post-reclassification FY 2010 
wage index of providers with the rural floor and 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, because, for FY 2010, the rural floor adjusted wage index is 
based on a blend where 50 percent of the wage index would have a 
within-State budget neutrality factor applied and 50 percent of the 
wage index would have 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 because these hospitals do 
not benefit from the rural floor, but have their wage indexes 
downwardly adjusted to ensure that the application of the rural floor 
is budget neutral overall. We project hospitals located in other urban 
areas (populations of 1 million or fewer) will experience a 0.1 percent 
increase in

[[Page 24664]]

payments because those providers benefit from the rural floor. Rural 
hospitals located in the South Atlantic, East South Central and West 
South Central and Pacific regions can expect the decreases in payments 
by 0.1 percent. Urban Middle Atlantic hospitals can expect a payment 
increase of 0.1 percent primarily due to payment increases among urban 
hospitals in New Jersey, which is the only State that benefits from the 
imputed floor.

J. Effects of the Proposed Wage Index Adjustment for Out-Migration 
(Column 8)

    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, small rural providers with 
less than 49 beds and MDHs will experience a 0.2 percent increase in 
payments in FY 2010 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 $17 million.

K. Effects of All Proposed Changes Prior to Documentation and Coding 
(or CMI) Adjustment (Column 9)

    Column 9 shows our estimate of the change in operating payments 
from FY 2009 and FY 2010 resulting from all proposed changes in this 
rule other than the proposed documentation and coding adjustment. This 
column includes a 2.1 percent market basket update to the standardized 
amount. In addition, it reflects the -0.3 percentage point difference 
between the projected outlier payments in FY 2009 (5.1 percent of total 
MS-DRG payments) and the current estimate of the percentage of actual 
outlier payments in FY 2009 (5.4 percent), as described in the 
introduction to this Appendix and the Addendum to this proposed rule. 
As a result, payments are projected to be 0.3 percentage points higher 
in FY 2009 than originally estimated, resulting in a 0.3 percentage 
point decrease for FY 2010 than would otherwise occur. This analysis 
also 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 0.2 
percent. In addition, the separate calculation of wage budget 
neutrality (which does not account for the 62 percent labor-related 
share) from the recalibration budget neutrality (which does account for 
the 62 percent labor-related share) results in a 0.2 percent decrease 
in payments relative to last year. We estimate that overall payments to 
hospitals paid under the IPPS would increase 1.4 percent prior to the 
application of the proposed documentation and coding adjustment. For 
the proposed rule, we are proposing to apply a -1.9 percent 
documentation and coding adjustment to the IPPS national standardized 
amount, a -2.5 documentation and coding adjustment applied to the 
hospitals-specific rate, and a -1.1 documentation and coding adjustment 
applied to the Puerto Rico-specific rate. Because SCHs and MDHs are 
paid in whole or in part based on the hospital-specific rate if higher 
than the rate based on the national standardized amount, these 
hospitals may switch between these payment rates in Column 9 and Column 
10.
    Without the documentation and coding adjustments, hospitals located 
in urban areas would experience higher payment increases (1.4 percent) 
than hospitals in rural areas (0.8 percent) because urban hospitals 
generally treat patients with higher acuity of illness and have a 
higher case-mix under the MS-DRGs.

L. Effects of All Proposed Changes With CMI Adjustment (Column 10)

    Column 10 shows our estimate of the changes in payments per 
discharge from FY 2009 and FY 2010, resulting from all proposed changes 
reflected in this proposed rule for FY 2010 (including statutory 
changes). This column includes the proposed FY 2010 documentation and 
coding adjustment of -1.9 percent on the national standardized amount, 
-2.5 percent on the hospital-specific amount and -1.1 percent on the 
Puerto Rico-specific rate, which overall accounts for a 1.9 percent 
decrease in payments. Because the hospital payment projections are 
based on FY 2008 Medicare claims data and we believe that case-mix was 
expected to increase an additional 1.6 percent in FY 2009, the payment 
models reflect a case-mix growth of 1.6 percent in FY 2009.
    Column 10 reflects the impact of all proposed FY 2010 changes 
relative to FY 2009, including those shown in Columns 1 through 9. The 
average decrease in payments under the IPPS for all hospitals is 
approximately 0.5 percent. As described in Column 9, this average 
decrease includes the effects of the 2.1 percent market basket update, 
the -0.3 percentage point difference between the projected outlier 
payments in FY 2009 (5.1 percent of total DRG payments), the current 
estimate of the percentage of actual outlier payments in FY 2009 (5.4 
percent), the 0.2 percent decrease in payments due to the expiration of 
section 508 reclassification, and the 0.2 percent decrease in payments 
due to the calculation of wage and recalibration budget neutrality.
    There might also be interactive effects among the various factors 
comprising the payment system that we are not able to isolate. For 
these reasons, the values in Column 10 may not equal the sum of the 
percentage changes described above.
    The overall proposed change in payments per discharge for hospitals 
paid under the IPPS in FY 2010 is estimated to decrease by 0.5 percent. 
The payment decreases among the hospital categories are largely 
attributed to the proposed documentation and coding adjustments. 
Hospitals in urban areas would experience an estimated 0.4 percent 
decrease in payments per discharge in FY 2010 compared to FY 2009. 
Hospitals in large urban areas would experience an estimated 0.4 
percent decrease and hospitals in other urban areas would experience an 
estimated 0.5 percent decrease in payments per discharge in FY 2010 as 
compared to FY 2009. Hospital payments per discharge in rural areas are 
estimated to decrease by 1.3 percent in FY 2010 as compared to FY 2009. 
The decreases that are smaller than the national average for larger 
urban areas and larger than the national average for rural areas are 
largely attributed to the differential impact of adopting MS-DRGs and 
due to the -1.9 percent documentation and coding adjustment applied to 
the national standardized amount and the -2.5 percent documentation and 
coding adjustment to the hospital-specific rate, applied to SCHs and 
MDHs which are generally classified as rural hospitals.
    Among urban census divisions, the largest estimated payment 
decreases would be -0.9 percent in the Pacific region and -0.7 percent 
in the Middle Atlantic region. Among the rural regions, the providers 
in the New England region would experience the largest decrease in 
payments (-2.5

[[Page 24665]]

percent) primarily due to a combination of the MS-DRG changes, the 
transition to the State rural floor budget neutrality and the 
documentation and coding adjustment. The rural providers in the East 
South Central regions would have the smallest decreases among rural 
regions at -0.3 percent because the benefits from the MGCRB 
reclassification partially offset the documentation and coding 
adjustments.
    Among special categories of rural hospitals, MDHs would receive an 
estimated payment decrease of -0.1 percent. MDHs are paid the higher of 
the IPPS rate based on the national standardized amount, that is, the 
Federal rate, or, if the hospital-specific rate exceeds the Federal 
rate, the Federal rate plus 75 percent of the difference between the 
Federal rate and the hospital-specific rate. MDHs experience a decrease 
in payments due to the 1.9 percent documentation and coding adjustment 
applied to the federal rate and the 2.5 percent documentation and 
coding adjustment applied to the hospital-specific rate. In addition, 
this payment impact accounts for the corrected wage and recalibration 
budget neutrality factor, described in section V.B.2. of the preamble 
of this proposed rule, applied to the hospital-specific rates for MDHs 
that are paid based on their FY 2002 hospital-specific rate. Overall, 
SCHs would experience an estimated decrease in payments by -2.3 percent 
largely due to the proposed -2.5 percent documentation and coding 
adjustment applied to the hospital-specific rate. In addition, section 
112 of Public Law 110-275 (MIPPA) allowed for SCHs to 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 FY 2006), if this results in the greatest payment to the 
SCH, effective for cost reporting periods beginning on or after January 
1, 2009. We estimated the FY 2006 hospital-specific rate for SCHs that 
we believed would benefit from the rebased rate and included those 
rates in our analysis. SCHs are estimated to experience a greater 
decrease in payments compared to the MDHs because the documentation and 
coding adjustment applied to the hospital-specific rates impacts SCHs 
and MDHs differently. SCHs that are paid under the hospital-specific 
rate have not had their payment rates adjusted for documentation and 
coding previously and would experience a -2.5 percent documentation and 
coding adjustment to their rates. However, MDHs, which are paid the 
Federal rate plus 75 percent of the amount by which the hospital-
specific rate exceeds the Federal rate, have had the portion of their 
payment rate based on the Federal rate adjusted in the past (-0.6 
percent adjustment in FY 2008 and -0.9 percent adjustment in FY 2009), 
whereas the -2.5 percent documentation and coding adjustment applied to 
the hospital-specific rate affects a relatively smaller portion of 
their rate based on the hospital-specific rate (compared to SCHs), 
thereby resulting in a smaller payment impact. Thus, the change in 
payment for SCHs relative to last year is more significant than the 
payment change for MDHs.
    Urban hospitals reclassified for FY 2010 are anticipated to receive 
a decrease in payments under the IPPS of 0.6 percent, while urban 
hospitals that are not reclassified for FY 2010 are expected to receive 
a decrease of 0.4 percent. Rural hospitals reclassified for FY 2010 are 
anticipated to receive a -1.1 percent payment decrease, and rural 
hospitals that are not reclassifying are estimated to receive a payment 
decrease of -1.6 percent.
    Cardiac hospitals are the only category of hospitals under the IPPS 
expected to experience payment increases in FY 2010 as compared to FY 
2009 (an increase of 0.3 percent).

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

    For FY 2010, we are proposing to continue 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 2010. We estimate that low-volume hospitals will 
experience a 3.1 percent decrease in payments in FY 2010 relative to FY 
2009.

N. Impact Analysis of Table II

    Table II presents the projected impact of the proposed changes for 
FY 2010 for urban and rural hospitals and for the different categories 
of hospitals shown in Table I. It compares the estimated average 
payments per discharge for FY 2009 with the payments per discharge for 
FY 2010, as calculated under our models. Thus, this table presents, in 
terms of the average dollar amounts paid per discharge, the combined 
effects of the proposed changes presented in Table I. The estimated 
percentage changes shown in the last column of Table II equal the 
estimated percentage changes in average payments per discharge from 
Column 9 of Table I.

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VII. Effects of Other Proposed Policy Changes

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

A. Effects of Proposed Policy on HACs, Including Infections

    In section II.F. of the preamble of this proposed 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 results 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 went into effect on October 1, 2008. Our 
savings estimates for the next 5 fiscal years are shown below:

------------------------------------------------------------------------
                                                            Savings (in
                          Year                               millions)
------------------------------------------------------------------------
FY 2010.................................................             $21
FY 2011.................................................              21
FY 2012.................................................              22
FY 2013.................................................              22
FY 2014.................................................              22
------------------------------------------------------------------------

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

    In section II.I. of the preamble to this proposed rule, we discuss 
the five applications for add-on payments for new medical services and 
technologies for FY 2010, as well as the status of the new technology 
that was approved to receive new technology add-on payments in FY 2009. 
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.I.4. of the preamble of this proposed rule, 
we have yet to determine whether any of the five applications we 
received for consideration for new technology add-on payments for FY 
2010 will meet the specified criteria. Consequently, it is premature to 
estimate the potential payment impact of any potential new technology 
add-on payments for FY 2010. We note that if any of the five 
applications are found to be eligible for new technology add-on 
payments for FY 2010 in the final rule, we would discuss the estimated 
payment impact for FY 2010 in that final rule.
    However, we are providing an estimate of additional payments for 
new technology add-on payments because such payments would have an 
impact on total operating IPPS payments in FY 2010. Because we are 
proposing to continue to make new technology add-on payments in FY 2010 
for the Cardiowest TM Temporary Total Artificial Heart 
System (TAH-t), we are providing an estimate of total payments for the 
TAH-t in FY 2010. We note that new technology add-on payments per case 
are limited to the lesser of (1) 50 percent of the costs of the new 
technology or (2) 50 percent of the amount by which the costs of the 
case exceed the standard MS-DRG payment for the case. Because it is 
difficult to predict the actual new technology add-on payment for each 
case, our estimate below is based on the increase in add-on payments 
for FY 2010 as if every claim that would qualify for a new technology 
add-on payments would receive the maximum add-on payment. Therefore, we 
currently estimate that payments for the TAH-t will increase overall FY 
2010 payments by $9.54 million.

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

    In section V.A. of the preamble of this proposed rule, we discuss 
our proposed requirements for hospitals to report quality data under 
the RHQDAPU program in order to receive the full payment update for FY 
2010 and FY 2011. We estimate that 96 hospitals may not receive the 
full payment update for FY 2010 and that 96 hospitals may not receive 
the full payment update for FY 2011. Most of these hospitals are either 
small rural or small urban hospitals. However, at this time, 
information is not available to determine the hospitals that do not 
meet the requirements for the full hospital market basket increase for 
FY 2010 and FY 2011.
    For the FY 2010 payment update, hospitals must pass our validation 
requirement of a minimum of 80 percent reliability based upon our 
chart-audit validation process. For all but two measures (SCIP-
Infection-4 and SCIP-Infection-6), this process uses four quarters of 
data from FY 2008. These data were due to the QIO Clinical Warehouse by 
May 15, 2008 (fourth quarter CY 2007 discharges), August 15, 2008 
(first quarter CY 2008 discharges), November 15, 2008 (second quarter 
CY 2008 discharges), and February 15, 2009 (third quarter CY 2008 
discharges). For the SCIP-Infection-4 and SCIP-Infection-6 measures, 
the validation process is based on two quarters of data from FY 2008. 
These data were due to the QIO Clinical Warehouse by November 15, 2008 
(second quarter CY 2008 discharges) and February 15, 2009 (third 
quarter CY 2008 discharges).
    In section V.A.9. of the preamble of this proposed rule, we are 
proposing that if we determine that a hospital is not entitled to 
receive the full FY 2010 payment update because it failed to satisfy 
the validation requirement, and the hospital asks for a reconsideration 
of that decision, the hospital must submit complete copies of the 
medical records that it submitted to the CDAC contractor for purposes 
of the validation. We estimate that no more than 20 hospitals would 
fail the validation requirement for the FY 2010 payment update. We 
estimate that this proposal would cost

[[Page 24670]]

hospitals approximately 12 cents per page for copying and approximately 
$4.00 per chart for postage. We have found, based on experience, that 
an average sized medical chart is approximately 150 pages. Hospitals 
would be required to return all 20 sampled medical records for the four 
quarters of data from FY 2008. We estimate that the total cost to the 
20 impacted hospitals would be approximately $8,800, or $440 per 
hospital. We believe that this cost is minimal, compared with the 2.0 
percentage point RHQDAPU program component of the annual payment update 
at risk. This proposed requirement is necessary so that CMS has all the 
information it needs to fairly and timely make a decision on the 
hospital's reconsideration request. We also anticipate that this 
requirement will benefit hospitals seeking reconsiderations because it 
will enable us to resolve potential issues earlier in the appeals 
process, obviating the need for a hearing before the Provider 
Reimbursement Review Board (PRRB). We believe that this benefit will 
greatly outweigh the burden of copying and mailing the requested 
records.
    For the FY 2011 payment update, hospitals must pass our validation 
requirement of a minimum of 80 percent reliability based upon our 
chart-audit validation process. For all but one measure (SCIP-
Cardiovascular-2), this process will use four quarters of data from FY 
2009. These data are due to the QIO Clinical Warehouse by May 15, 2009 
(fourth quarter CY 2008 discharges), August 15, 2009 (first quarter CY 
2009 discharges), November 15, 2009 (second quarter CY 2009 
discharges), and February 15, 2010 (third quarter CY 2009 discharges). 
For the SCIP-Cardiovascular-2 measure, the validation process is based 
on two quarters of data from FY 2009. SCIP-Cardiovascular-2 data are 
due to the QIO Clinical Warehouse by November 15, 2009 (second quarter 
CY 2009 discharges) and February 15, 2010 (third quarter CY 2009 
discharges).
    We have continued our efforts to ensure that QIOs provide 
assistance to all hospitals that wish to participate in the RHQDAPU 
program. The requirement of 5 charts per hospital would result in 
approximately 21,500 charts per quarter being submitted to CMS for the 
FY 2010 payment update and for the FY 2011 payment update. We reimburse 
hospitals for the cost of sending charts to the Clinical Data 
Abstraction Center (CDAC) contractor 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 by the CDAC contractor 
is approximately 150 pages. Thus, CMS would have expenditures of 
approximately $597,600 per quarter to collect the charts. Because we 
reimburse hospitals 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.
    We are proposing to modify our validation process for the FY 2012 
payment update. We believe that our proposal to validate data submitted 
by 800 hospitals for the FY 2012 RHQDAPU payment determination would 
not change the number of hospitals that fail the validation requirement 
for the FY 2012 payment update from previous years. We have proposed to 
change the way we calculate the validation matches (that is, all 
relevant data elements submitted by the hospital must match the 
independently re-abstracted data elements to count as a match), which 
will make it more difficult for hospitals to satisfy the validation 
requirement. However, we have also proposed to validate data for a much 
smaller number of hospitals each year and proposed to reduce the 
validation score needed to satisfy the validation requirement. In 
combination, we believe that these proposed revisions will 
counterbalance each other and result in no additional impact on the 
number of hospitals failing our validation requirement for the FY 2012 
payment update.

D. Effects of Correcting the FY 2002-Based Hospital-Specific Rates for 
MDHs

    In section V.B. of the preamble of this proposed rule, we discuss 
the need to correct the calculation of the FY 2002 hospital-specific 
rates for MDHs and apply a cumulative budget neutrality adjustment 
factor for DRG changes for FYs 1993 through 2002, in addition to the 
cumulative budget neutrality adjustment factors for FYs 2003 forward 
(which have already been applied). The cumulative budget neutrality 
adjustment factor of 0.982557 is calculated as the product of the 
following budget neutrality adjustment factors for FYs 1993 through 
2002: 0.999851 for FY 1993; 0.999003 for FY 1994; 0.998050 for FY 1995; 
0.999306 for FY 1996; 0.998703 for FY 1997; 0.997731 for FY 1998; 
0.998978 for FY 1999; 0.997808 for FY 2000; 0.997174 for FY 2001; and 
0.995821 for FY 2002. We estimate that there are currently about 195 
MDHs. We estimate that approximately 60 percent of MDHs qualified for 
the rebasing to a FY 2002 hospital-specific rate (that is, their FY 
2002 hospital-specific rate was higher than the other hospital-specific 
rates (FY 1982 or FY 1987)), of which about 46 percent of those MDHs 
were paid based on their FY 2002 hospital-specific rate because it was 
higher than the Federal rate. The remaining 54 percent of those MDHs 
are estimated to have been paid based solely on the Federal rate 
because the Federal rate was higher than their FY 2002 hospital-
specific rate. We estimate that correcting the FY 2002 hospital-
specific rate to ensure cumulative budget neutrality for FY 1993 though 
FY 2002 would result in an estimated decrease in operating IPPS 
payments in FY 2010 of approximately $6 million. However, this figure 
may be lower because application of the cumulative budget neutrality 
adjustment factor will, in some cases, lower the FY 2002 hospital-
specific rate to below the Federal rate, thus creating a floor to the 
potential reduction.

E. Effect of Proposed Policy Changes Relating to the Payment 
Adjustments to Disproportionate Share Hospitals

1. Proposed Change Relating to Inclusion of Labor and Delivery Days in 
DSH Calculation
    In section V.E.2. of the preamble of this proposed rule, we discuss 
our proposal to amend the regulations so that patient days associated 
with labor and delivery services are included in both the Medicaid and 
Medicare fractions of the DPP used for calculating the DSH payment 
adjustment, regardless of whether the patient occupied a routine bed 
prior to occupying an ancillary labor and delivery bed. We believe that 
the impact of the proposed inclusion of these days in the Medicare 
fraction of the DPP would be negligible because, generally, there are 
not many labor and delivery patient days among the Medicare population. 
In addition, with regard to the Medicaid fraction, we are not able to 
provide a detailed analysis of the potential of this proposed policy 
change because the impact would depend on the proportion of days 
associated with Medicaid-eligible patients who occupied an ancillary 
labor and delivery bed at some point after being admitted as an 
inpatient, but prior to occupying a routine bed, to days associated 
with similarly situated non-Medicaid-eligible patients relative to a 
hospital's current Medicaid-to-total-days ratio (which would not have 
included the types of days we are proposing to include in this policy). 
We expect that the Medicaid fraction for some hospitals would increase 
while it would decrease for other hospitals. Therefore, we estimate

[[Page 24671]]

that the impact of this proposed policy change would be negligible.
2. Proposed Change Relating to Calculation of Inpatient Days in 
Medicaid Fraction
    In section V.E.3. of the preamble of this proposed rule, we discuss 
our proposal to allow a hospital to change its methodology of reporting 
days in the numerator of the Medicaid fraction of the DPP used in the 
DSH payment adjustment calculation. Under the proposed change, we would 
allow a hospital to report the Medicaid days in the numerator of the 
Medicaid fraction of the DPP based on one of the following: date of 
discharge; date of admission; or dates of service. Hospitals would be 
permitted to use only one basis for all of the Medicaid days for the 
entire cost reporting period. In addition, under the proposal, CMS, or 
its fiscal intermediaries or MACs, has the authority to make 
adjustments to the number of Medicaid days reported to avoid counting 
Medicaid days in one cost reporting period of a hospital that may have 
been reported in a hospital's previous cost reporting period. We do not 
believe that the proposed change in the methodology of counting days in 
the numerator of the Medicaid fraction of the DPP would result in any 
increase in aggregate DSH payments.
3. Proposed Change Relating to Exclusion of Observation Beds and 
Patient Days from DSH Calculation
    In section V.E.4. of the preamble of this proposed rule, we discuss 
our proposal to amend the regulations so that patient days associated 
with beds used for observation services for patients who are 
subsequently admitted as an inpatient are no longer included in the DPP 
for calculating the DSH payment adjustment or in the available bed day 
count for calculating the DSH payment adjustment and IME payments. Some 
hospitals may receive increased DSH payment adjustments and others may 
expect to receive lower DSH payment adjustments, depending on how the 
exclusion of observation patient days affects the hospital's overall 
DPP. For IME payment purposes, a decrease in a hospital's number of 
available beds results in an increase in the resident-to-bed ratio. The 
exclusion of observation bed days from the available bed count for IME 
would reduce the available beds, increase the resident-to-bed ratio, 
and, consequently, increase IME payments to teaching hospitals. Based 
on an analysis from our Office of the Actuary, we believe that any 
savings associated with proposed changes in DSH payment adjustments 
would be offset by proposed additional spending for IME payments. 
Therefore, we anticipate the impact of these proposed policy changes to 
be negligible.

F. Effects of Proposed Policy Revisions Related to Payment to Hospitals 
for Direct GME

    In section V.G. of the preamble of this proposed rule, we discuss 
our proposal to clarify the definition of a new medical residency 
training program in the regulations by specifying that a new medical 
residency program is one that receives initial accreditation for the 
first time, as opposed to a reaccreditation of a program that existed 
previously at the same or another hospital. In addition, we discuss our 
proposed change to add a provision to the regulations relating to 
Medicare GME affiliation agreements to specify that a hospital that is 
new after July 1 and that begins training residents for the first time 
after the July 1 start date of that academic year would be permitted to 
submit a Medicare GME affiliation agreement prior to the end of its 
cost reporting period in order to participate in an existing Medicare 
GME affiliated group for the remainder of the academic year.
    With respect to the first proposed provision regarding a new 
medical residency training program, there is no financial impact on the 
Medicare program because this is a proposed clarification of existing 
policy and is not a proposed policy revision or addition of a new 
policy. Further, there is no financial impact related to the second 
proposal concerning Medicare GME affiliated groups because it does not 
provide for an increase in the aggregate number of resident FTEs. 
Rather, it merely provides increased flexibility for a hospital that is 
new after July 1 and that begins training residents for the first time 
after the start date of that academic year to enter into an existing 
Medicare GME affiliation agreement after July 1, so that, in that 
academic year, it may train and receive IME and direct GME payments 
relating to FTE for residents that would otherwise be counted for IME 
and direct GME at another hospital.

G. Effects of Proposed Policy Changes Relating to Hospital Emergency 
Services under EMTALA

    In section V.H. of the preamble of this proposed rule, we discuss 
our proposal to amend the regulations pertaining to the waiver of 
EMTALA sanctions in an emergency area during an emergency period to 
make the regulations consistent with the statutory language of section 
1135 of the Act. Specifically, we are proposing to revise the existing 
regulations to reflect the Secretary's authority under section 1135 of 
the Act to waive or modify requirements for a single health care 
provider, a class of health care providers, or a geographic subset of 
health care providers located within an emergency area during an 
emergency period or portion of an emergency period. We are proposing to 
amend the regulations to clarify that, in cases where the Secretary has 
delegated implementation of a waiver of EMTALA sanctions to CMS, CMS is 
also authorized to apply a section 1135 waiver to a subset of the 
emergency area and some or all of the emergency period, as necessary. 
We also are proposing to make the regulations consistent with the 
language at section 1135 of the Act to state that a waiver of EMTALA 
sanctions pursuant to an inappropriate transfer only applies if the 
transfer arises out of the circumstances of the emergency. We are 
further proposing to make the regulation text consistent with the 
language at section 1135 of the Act to provide that the sanctions 
waived for an inappropriate transfer or for the relocation or 
redirection of an individual to receive a medical screening examination 
at an alternate location are only in effect if the hospital to which 
the waiver applies does not discriminate on the source of an 
individual's payment or ability to pay. We estimate that these proposed 
changes would have no impact on Medicare expenditures and no 
significant impact on hospitals with emergency departments.

H. Effects of Implementation of Rural Community Hospital Demonstration 
Program

    In section V.I. of the preamble to this proposed 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 ``[i]n 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 V.I. of the preamble to this proposed rule, 
we are

[[Page 24672]]

proposing to satisfy this budget neutrality requirement by proposing to 
adjust the national IPPS rates by a factor that is sufficient to 
account for the added costs of this demonstration. First, we are 
estimating the cost of the demonstration program for FY 2010 for the 13 
currently participating hospitals. The estimated cost of the 
demonstration for FY 2010 for 9 of the 13 currently participating 
hospitals (specifically the 9 hospitals that have participated in the 
demonstration since its inception and that still are participating in 
the demonstration) is based on data from their first and second year 
cost reports--that is, cost reporting periods beginning in CY 2005 and 
CY 2006. In addition, the estimated cost of the demonstration for FY 
2010 for the 4 hospitals selected in 2008 to participate in the 
demonstration is based on data from their cost reports for cost 
reporting periods beginning October 1, 2005, through July 1, 2006 (that 
is, cost reporting periods that include CY 2006). When we add together 
the estimated costs of the demonstration for FY 2010 for the 9 
hospitals that have participated in the demonstration since its 
inception and the 4 new hospitals selected in 2008, the total estimated 
cost is $14,613,632. This estimated amount reflects the difference 
between the participating hospitals' estimated costs under the 
methodology set forth in Public Law 108-173 and the amount the 
hospitals would have been paid if they were paid under the IPPS.
    Second, because the cost reports of all hospitals participating in 
the demonstration in its first year (that is, FY 2005) have been 
finalized, we are able to determine how much the cost of the 
demonstration program exceeded the amount that was offset by the budget 
neutrality adjustment for FY 2005. For all 13 hospitals that 
participated in the demonstration in FY 2005, the amount is $7,179,461.
    The proposed budget neutrality adjustment factor applied to the 
IPPS Federal rate to account for the added $21,793,093 in costs for the 
demonstration is 0.999790.

J. Effects of Proposed Policy Changes Relating to Payments to Satellite 
Facilities

    In section VII.B. of the preamble of this proposed rule, we discuss 
our proposed policy change that, effective for cost reporting periods 
beginning on or after October 1, 2009, in addition to meeting the other 
criteria in the regulations, to be excluded from the IPPS, the 
governing body of the hospital of which the satellite facility is a 
part cannot be under the control of any third entity that controls both 
the hospital of which the satellite facility is a part and the hospital 
with which the satellite facility is co-located. We also are proposing 
that if a hospital and its satellite facility were excluded from the 
IPPS under Sec.  412.22(h) for the most recent cost reporting period 
beginning prior to October 1, 2009, the hospital does not have to meet 
the requirements of proposed Sec.  412.22(h)(2)(iii)(A)(1) with respect 
to that satellite facility in order to retain its IPPS-excluded status. 
The creation of any satellite facility that would trigger the hospital 
of which it is a part to comply with the proposed additional criteria 
would occur at some point in the future. Therefore, we are unable to 
quantify the impact of the proposed changes.

K. Effects of Proposed Policy Changes Relating to Payments to CAHs

    In section VII.C.2. of the preamble of this proposed rule, we 
discuss our proposal to implement section 148 of Public Law 110-275 
(MIPPA). We are proposing that a CAH may receive reasonable cost-based 
payment for outpatient clinical diagnostic laboratory tests furnished 
to an individual who is an outpatient of the CAH (that is, receiving 
outpatient services directly from the CAH) even if the individual with 
respect to whom the laboratory services are furnished is not physically 
present in the CAH at the time the specimen is collected. In order for 
an individual who is not physically present in the CAH at the time the 
specimen is collected to be determined to be receiving services 
directly from the CAH, we are proposing that the individual must either 
receive outpatient services in the CAH on the same day the specimen is 
collected or that the specimen must be collected by an employee of the 
CAH. We anticipate that, for FY 2009 through FY 2016, the cost of 
implementing the provisions of section 148 of Public Law 110-275, would 
be less than $50 million per year.
    In section VII.C.3. of this preamble of this proposed rule, we 
discuss our proposal to amend the regulations to make them consistent 
with the plain reading of section 1834(g)(2)(A) of the Act. Section 
1834(g)(2)(A) of the Act requires that CAHs that select the optional 
method of reimbursement receive reasonable cost payment for outpatient 
facility services. We are proposing to revise the regulations to state 
that CAHs that select the optional method would receive reasonable 
cost-based payment for outpatient facility services instead of 101 
percent of reasonable cost for outpatient facility services. Therefore, 
those CAHs that elect the optional method of payment would receive 
reasonable cost payment for the facility portion of outpatient 
services.

L. Effects of Proposed Policy Changes Relating to Provider-Based Status 
of Entities and Organizations

    In section VII.D. of the preamble of this proposed rule, we discuss 
our proposal to amend the regulations to require facilities that 
furnish only clinical diagnostic laboratory tests and operate as part 
of a CAH to meet the provider-based status rules currently in the 
regulations at Sec.  413.65. If a facility that is part of a CAH and 
furnishes only clinical diagnostic laboratory tests meets the provider-
based status rules, the CAH would be paid for services furnished by the 
laboratory facility under the CAH payment methodology of reasonable 
cost. If a facility that furnishes only clinical diagnostic laboratory 
tests does not meet the provider-based status rules, the services 
furnished in the facility would be paid under the CLFS, unless the 
laboratory specimen is collected from an outpatient of the CAH as 
described in VII.C.2. of the preamble of this proposed rule. We believe 
it would be difficult to quantify the payment impact of these proposed 
changes because we cannot estimate the number of CAHs that would be 
affected by this proposal. We are soliciting public comments on these 
issues.

VIII. Effects of Proposed 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 VI. of the preamble of this proposed rule, with the 
10-year transition period ending with hospital cost reporting periods 
beginning on or after October 1, 2001 (FY 2002), payments for most 
hospitals under the capital IPPS are based solely on the

[[Page 24673]]

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 2010 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, 
if applicable).
    In accordance with Sec.  412.322(d), there is no longer an 
additional payment for indirect teaching medical education (IME 
adjustment factor) under the capital IPPS costs for FY 2010 and 
subsequent years, as discussed in section VI.B.2. of the preamble of 
this proposed rule. However, we note that the 50-percent reduction to 
capital IME adjustments for FY 2009 in the current regulations at Sec.  
412.322(c) was repealed in section 4301(b)(1) of Public Law 111-5 
(ARRA). We discuss below the ramifications of restoring the full IME 
adjustment in FY 2009 when comparing proposed changes in capital IPPS 
payments to FY 2010. 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 December 2008 update of the FY 2008 MedPAR file and the 
December 2008 update of the Provider-Specific File (PSF) 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 December 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 VI.B.1. of the preamble to 
this proposed rule, as we established in FYs 2008 and 2009, we are 
proposing to adjust the national capital rate to account for changes in 
documentation and coding under the MS-DRGs in FY 2010. As discussed in 
section VI.B.1.c. of the preamble to this proposed rule, we also are 
proposing to adjust the Puerto Rico-specific capital rate in FY 2010 to 
account for changes in documentation and coding resulting from the 
adoption of the MS-DRGs. Due to the interdependent nature of the IPPS, 
it is very difficult to precisely quantify the impact associated with 
each change. 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 December 2008 update of the FY 2008 MedPAR 
file, we simulated payments under the capital PPS for FY 2009 and FY 
2010 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. 
The final capital rates and factors for FY 2009 were published in a 
subsequent notice in the Federal Register (73 FR 57891).
    As we discuss in section III.A.4. of the Addendum to this proposed 
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 only included estimated payments for 
the IME adjustment in our modeling of FY 2009 capital IPPS payments 
because, under current law, capital IME payments are eliminated 
beginning in FY 2010 in accordance with Sec.  412.322(d) (as discussed 
in section VI.B.2. of the preamble of this proposed rule). We then 
added estimated payments for 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 2009 and 2010. (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 2009 and FY 2010.
     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.a. of the 
Addendum to this proposed rule, the proposed FY 2010 update is 1.2 
percent.
     In addition to the FY 2010 update factor, the proposed FY 
2010 capital Federal rate was calculated based on a proposed GAF/DRG 
budget neutrality factor of 0.9994, a proposed outlier adjustment 
factor of 0.9454, and a proposed exceptions adjustment factor of 
0.9999.
     For FY 2010, as discussed in section VI.B.1. of the 
preamble of this proposed rule, the proposed FY 2010 national capital 
rate was further adjusted by a factor to account for estimated changes 
in documentation and coding that result in an increase in case-mix 
under the MS-DRGs. Specifically, as discussed in greater detail in 
section VI.B.1. of the preamble of this proposed rule, we are proposing 
a 1.9 percent reduction in the proposed FY 2010 national capital 
Federal rate for changes in documentation and coding resulting from the 
adoption of the MS-DRGs. As also discussed in section VI.A.6. of the 
preamble to this proposed rule, we also are proposing to adjust the 
Puerto Rico-specific capital rate to account for changes in 
documentation and coding under the MS-DRGs in FY 2010. Specifically, we 
are proposing a 1.1 percent reduction in the proposed FY 2010 Puerto 
Rico-specific capital rate for changes in documentation and coding 
resulting from the adoption of the MS-DRGs.

B. Results

    We used the actuarial model described above to estimate the 
potential impact of our proposed changes for FY 2010 on total capital 
payments per case, using a universe of 3,513 hospitals. As described 
above, the individual hospital payment parameters are taken from the 
best available data, including the December 2008 update of the FY 2008 
MedPAR file, the December 2008 update to the PSF, and the most recent 
cost report data from the December 2008 update of HCRIS. In Table III, 
we present a comparison of estimated total payments per case for FY 
2009 compared to proposed estimated total payments per case for FY 2010 
based on the proposed FY 2010 payment rates and policies. Column 2 
shows estimates of payments per case under our model for FY 2009. 
Column 3 shows estimates of payments per case under our model for FY 
2010. Column 4 shows the total percentage change in payments from FY 
2009 to FY 2010. The change represented in Column 4 includes the 
proposed 1.2 percent update to the capital Federal rate, other changes 
in the adjustments to the capital Federal rate (for example, the

[[Page 24674]]

phase out of the IME adjustment for FY 2010), and the proposed 
additional 1.9 percent reduction in the national capital rate (and the 
proposed 1.1 percent reduction in the Puerto Rico-specific capital 
rate) to account for changes in documentation and coding (or other 
changes in documentation and coding that do not reflect real changes in 
case-mix) for implementation of the MS-DRGs. For purposes of this 
impact analysis, we also account for estimated case-mix growth for FYs 
2009 and 2010, as determined by the Office of the Actuary, because, as 
discussed previously, 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 patients' severity of illness. The 
comparisons are provided by: (1) Geographic location; (2) region; and 
(3) payment classification.
    The simulation results show that capital payments per case in FY 
2010 are expected to decrease as compared to capital payments per case 
in FY 2009. The proposed capital rate for FY 2010 would decrease 
approximately 0.8 percent as compared to the FY 2009 capital rate, 
which contributes to the estimated decrease in capital payments. 
However, the phase-out of the IME adjustment for FY 2010 is the major 
factor affecting capital payments in FY 2010 as compared to FY 2009; 
that is, full capital IME payments in FY 2009 as specified by section 
4302(b)(1) of Public Law 111-5 as compared to no capital IME payments 
in FY 2010, as specified under current law (Sec.  412.322(d) of the 
regulations). Countering these factors is the projected case-mix growth 
as a result of changes in documentation and coding (discussed above). 
The net result of these changes is an estimated 4.8 percent decrease in 
capital payments per discharge from FY 2009 to FY 2010 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 phase-out of the 
IME adjustment for FY 2010 (Sec.  412.322(d)). The majority of the 
estimated decreases in capital payments from FY 2009 to FY 2010 are not 
a result of any of the proposed changes to policies presented in this 
proposed rule. Our policy to phase-out capital IME adjustments, such 
that there would be no adjustment for capital IME beginning in FY 2010, 
was established in FY 2008, and was based on analyses of capital 
margins from the past 10 years for which data were available; that is, 
FY 1996 through FY 2006. These margins clearly demonstrated that 
capital IME payment adjustments were contributing to the significantly 
large positive margins experienced by teaching hospitals. We initially 
implemented a phase-out of the IME adjustment over a 3-year period 
which included a 50-percent reduction to the capital IME adjustment in 
FY 2009 and the elimination of the remaining 50 percent in FY 2010. 
Under that 3-year phase-out, including the elimination of the capital 
IME adjustment in FY 2010, we expected that capital margins would 
decrease and be more in line with other hospitals in the system. As 
discussed in section VI.B.2 of the preamble of this proposed rule, 
however, section 4301(b)(1) of Public Law 111-5 restored the capital 
IME adjustment for FY 2009 (that is, it eliminated the 50-percent 
reduction to the capital IME adjustment), while section 4301(b)(2) of 
Public Law 111-5 specified that the law has no effect on the 
established elimination of the capital IME adjustment in FY 2010. The 
combination of restoring the full capital IME adjustment in FY 2009 and 
eliminating it in FY 2010 has resulted in larger estimated decreases in 
capital payments from FY 2009 to FY 2010 in this impact analysis. While 
the end results in FY 2010 would have been the same had the 50-percent 
reduction to capital IME adjustments in FY 2009 not have been restored, 
and had the remaining 50 percent of the capital IME adjustment been 
eliminated in FY 2010 as planned, the estimated decrease in capital 
payments from FY 2009 to FY 2010 would have been moderated, such that 
the somewhat dramatic decreases reflected in Table III in this impact 
analysis would not have resulted.
    To a lesser degree, but nevertheless, a mitigating factor to the 
estimated decrease in capital payments from FY 2009 to FY 2010 are 
changes in documentation and coding under the MS-DRGs and the 
associated adjustments to the capital rates. When we implemented the 
MS-DRGs in FY 2008, in order to maintain budget neutrality, it was 
necessary to adjust the capital Federal rate to account for potential 
increases in aggregate capital payments when there was not a 
corresponding increase in patients' severity of illness. As discussed 
in greater detail in section VI.B.1. of the preamble of this proposed 
rule, the FY 2009 capital Federal rate includes a cumulative -1.5 
percent documentation and coding adjustment as determined by our Office 
of the Actuary. As also discussed in that same section, in this 
proposed rule, we are proposing to apply an additional documentation 
and coding adjustment of -1.9 percent to the FY 2010 capital Federal 
rate, yielding a proposed cumulative adjustment of 3.4 perecent. The 
proposed additional -1.9 percent adjustment contributes to the larger 
decrease in capital payments in FY 2010 when compared to FY 2009.
    The geographic comparison shows that, on average, all urban 
hospitals are expected to experience a 5.1 percent decrease in capital 
IPPS payments per case in FY 2010 as compared to FY 2009, while 
hospitals in large urban areas are expected to experience a 6.0 percent 
decrease in capital IPPS payments per case in FY 2010 as compared to FY 
2009. Capital IPPS payments per case for rural hospitals are also 
expected to decrease, but to a lesser degree, that is, 1.9 percent. 
This variation in the estimated decreases in payments per case by 
geographic location is mostly due to the elimination of the IME 
adjustment. Because teaching hospitals generally tend to be located in 
urban or large urban areas, we expect that the phase-out of the IME 
adjustment for FY 2010 would have a more significant impact on 
hospitals in those areas than hospitals located in rural areas. As 
discussed above, the magnitude of the estimated decreases, however, is 
attributable to the phase-out of the IME adjustment occurring in 2 
years rather than over 3 years.
    All regions are estimated to experience a decrease in total capital 
payments per case from FY 2009 to FY 2010. These decreases vary by 
region and range from a 0.3 percent decrease in the Mountain rural 
region to a 9.4 percent decrease in the New England rural region. Three 
urban regions are projected to experience a relatively larger decrease 
in capital payments, with the difference, again, primarily due to the 
phase-out of the IME adjustment for FY 2010: -8.8 percent in the New 
England urban region, -8.2 percent in the Middle Atlantic urban region, 
and -7.0 percent in the East North Central urban region.
    By type of ownership, voluntary and government hospitals are 
estimated to experience a decrease of 5.0 percent and 6.9 percent, 
respectively. The projected smaller decrease in capital payments per 
case for proprietary hospitals, 2.0 percent, is mostly because these 
hospitals are expected to experience a smaller than average decrease in 
their payments due to the phase-out of the IME adjustment for FY 2010.
    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

[[Page 24675]]

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 
2010. 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 
2010, we show estimated average capital payments per case for 
reclassified hospitals for FY 2009. All classifications of reclassified 
hospitals are expected to experience a decrease in payments in FY 2010 
as compared to FY 2009. Urban reclassified and urban nonreclassified 
hospitals are expected to have the largest decreases in capital 
payments: -5.3 percent and -5.0 percent, respectively. Rural 
reclassified and rural nonreclassified are expected to have decreases 
in capital payments of 1.7 percent and 2.2 percent, respectively. Other 
reclassified hospitals (that is, hospitals reclassified under section 
1886(d)(8)(B) of the Act) are expected to experience the smallest 
decrease in capital payment from FY 2009 to FY 2010 (-1.3 percent). As 
discussed above, the variation in the estimated decreases in payments 
per case is mostly due to the phase-out of the IME adjustment. Because 
teaching hospitals generally tend to be located in urban areas, we 
expect that the phase-out of the IME adjustment for FY 2010 would have 
a more significant impact on both reclassified and nonreclassified 
hospitals in those areas than reclassified and nonreclassified 
hospitals located in rural areas.
    It is important to note that had our original policy of phasing out 
the capital IME adjustment over 3 years not been changed by section 
4301(b)(1) of Public Law 111-5 subsequent to the implementation of the 
transition period, the decrease in capital payments from FY 2009 to FY 
2010 would not have been as large. Although the end result of the 
changes to the IME adjustment implemented in FY 2008 would have been 
the same, the decreases would have occurred over 2 years instead of 
essentially just 1 year--FY 2010.

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IX. Effects of Proposed Payment Rate Changes and Policy Changes under 
the LTCH PPS

A. Introduction and General Considerations

    In section VIII. of the preamble of this proposed rule, we are 
setting forth the proposed annual update to the payment rates for the 
LTCH PPS for RY 2010. In the preamble, we specify the statutory 
authority for the proposed provisions that are presented, identify 
those proposed policies where discretion has been exercised, and 
present rationale for our decisions as well as alternatives that were 
considered. In this section of Appendix A to this proposed rule, we 
discuss the impact of the proposed changes to the payment rates, 
factors, and other payment rate policies related to the LTCH PPS that 
are presented in the preamble of this proposed rule in terms of their 
estimated fiscal impact on the Medicare budget and on LTCHs.
    Currently, our database of 399 LTCHs includes the data for 81 
nonprofit (voluntary ownership control) LTCHs and 267 proprietary 
LTCHs. Of the remaining 51 LTCHs, 12 LTCHs are government-owned and 
operated and the ownership type of the other 39 LTCHs is unknown. In 
the impact analysis, we are using the proposed rates, factors and 
policies presented in this proposed rule, including proposed updated 
wage index values and the labor-related share, and the best available 
claims and CCR data to estimate the change in payments for the 2010 
LTCH PPS rate year. The standard Federal rate for RY 2009 is 
$39,114.36. As discussed in section V.A.2. of the Addendum to this 
proposed rule, consistent with our historical practice, we are 
proposing to update the standard Federal rate for RY 2009 by 0.6 
percent in order to establish the proposed RY 2010 standard Federal 
rate at $39,349.05. Based on the best available data for the 399 LTCHs 
in our database, we estimate that the proposed update to the standard 
Federal rate for RY 2010 (discussed in section VIII. of the preamble of 
this proposed rule) and the proposed changes to the area wage 
adjustment (discussed in section V.A. of the Addendum to this proposed 
rule) for the 2010 LTCH PPS rate year, in addition to an estimated 
increase in HCO payments and an estimated increase in SSO payments, 
would result in an increase in estimated payments from the 2009 LTCH 
PPS rate year of approximately $135 million (or about 2.8 percent). 
Based on the 399 LTCHs in our database, we estimate RY 2009 LTCH PPS 
payments to be approximately $4.76 billion and RY 2010 LTCH PPS 
payments to be approximately $4.90 billion. Because the combined 
distributional effects and estimated changes to the Medicare program 
payments would be greater than $100 million, this proposed rule is 
considered a major economic rule, as defined in this section. We note 
the approximately $135 million for the projected increase in estimated 
aggregate LTCH PPS payments from RY 2009 to RY 2010 do not reflect 
changes in LTCH admissions or case-mix intensity in estimated LTCH PPS 
payments, which would also affect overall payment changes.
    The projected 2.8 percent increase in estimated payments per 
discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate 
year is attributable to several factors, including the proposed 0.6 
percent increase to the standard Federal rate and projected increases 
in estimated HCO and SSO payments. As Table IV shows, the proposed 
change attributable solely to the standard Federal rate is projected to 
result in an increase of 0.5 percent in estimated payments per 
discharge from RY 2009 to RY 2010, on average, for all LTCHs, while the 
proposed changes to the area wage adjustment are projected to result in 
neither an increase nor decrease in estimated payments, on average, for 
all LTCHs (Columns 6 and 7 of Table IV, respectively). We note that 
because payments for cost-based SSO cases and a portion of payments for 
SSO cases that are paid based on the ``blend'' option (that is, SSO 
cases paid under Sec.  412.529(c)(2)(iv)) are not affected by the 
proposed update to the standard Federal rate, we estimate that the 
effect of the proposed 0.6 percent update to the standard Federal rate 
would result in a 0.5 percent increase (as shown in Column 6 of Table 
IV) on estimated aggregate LTCH PPS payments for all LTCH PPS cases, 
including SSO cases.
    While the effects of the estimated increase in SSO and HCO payments 
and the proposed change to the standard Federal rate are projected to 
increase estimated payments from RY 2009 to RY 2010, the proposed 
changes to the area wage adjustment from RY 2009 to RY 2010 are 
expected to result in neither an increase nor a decrease in estimated 
aggregate LTCH PPS payments from the 2009 LTCH PPS rate year to the 
2010 LTCH PPS rate year (Column 7 of Table IV). As discussed in section 
V.B. of the Addendum to this proposed rule, we are proposing to update 
the wage index values for FY 2010 based on the most recent available 
data. In addition, we are proposing to increase the labor-related share 
from 75.662 percent to 75.904 percent under the LTCH PPS for RY 2010 
based on the most recent available data on the relative importance of 
the labor-related share of operating and capital costs of the RPL 
market basket (also discussed in section VIII.C.2. of this proposed 
rule).
    We note that the overall percent change in estimated LTCH payments 
from RY 2009 to RY 2010 for all proposed changes (shown in Column 8) 
cannot be determined by adding the incremental effect of the proposed 
standard Federal rate (Column 6) and the proposed area wage adjustment 
changes (Column 7) on estimated aggregate LTCH PPS payments because 
each of those two columns are intended to show the isolated impact of 
the respective change (that is, the proposed change to the standard 
Federal rate or the proposed change to the area wage adjustment) on 
estimated payments for RY 2010 as compared to RY 2009, but the 
interactive effects resulting from both the proposed change to the 
standard Federal rate and the proposed change to the area wage 
adjustment, as well as estimated changes to HCO and SSO payments, are 
not reflected in each of these columns. However, the interactive 
effects of all proposed changes, including the change in estimated HCO 
and SSO payments, are reflected in the estimated change in payments for 
all proposed changes for RY 2010 as compared to RY 2009 (shown in 
Column 8 of Table IV).
    Notwithstanding this limitation in comparing the various columns in 
Table IV, the projected increase in payments per discharge from RY 2009 
to RY 2010 is 2.8 percent (shown in Column 8). This projected increase 
in payments is attributable to the proposed impacts of the proposed 
change to the standard Federal rate (0.5 percent in Column 6) and the 
proposed change due to the area wage adjustment (0 percent in Column 
7), and is also due to the effect of the estimated increase in payments 
for HCO cases and SSO cases in RY 2010 as compared to RY 2009. That is, 
estimated total HCO payments are projected to increase from RY 2009 to 
RY 2010 in order to ensure that estimated HCO payments will be 8 
percent of total estimated LTCH PPS payments in RY 2010. As discussed 
in detail in section V. of the Addendum to of this proposed rule, an 
analysis of the most recent available LTCH PPS claims data (that is, FY 
2008 claims from the December 2008 update of the MedPAR files) 
indicates that the RY 2009 HCO threshold of $22,960 may result in HCO 
payments in RY 2009 that fall below the estimated 8 percent. 
Specifically, we currently estimate that HCO payments will be 
approximately 6.1 percent of estimated

[[Page 24679]]

total LTCH PPS payments in RY 2009. Consequently, it is necessary to 
propose to decrease the HCO threshold for RY 2010 in order to ensure 
that estimated HCO payments will be 8 percent of total estimated LTCH 
PPS payments in RY 2010. We estimate that the impact of the increase 
HCO payments would result in approximately a 2 percent increase in 
estimated payments from RY 2009 to RY 2010. Furthermore, in calculating 
the estimated increase in payments from RY 2009 to RY 2010 for HCO and 
SSO cases, we increased estimated costs by the applicable market basket 
percentage increase as projected by our actuaries. We note that 
estimated payments for SSO cases comprise approximately 15 percent of 
estimated total LTCH PPS payments, and estimated payments for HCO cases 
comprise approximately 8 percent of estimated total LTCH PPS payments. 
Payments for HCO cases are based on 80 percent of the estimated cost 
above the HCO threshold, while the majority of the payments for SSO 
cases (over 70 percent) are based on the estimated cost of the SSO 
case. A thorough discussion of the regulatory impact analysis for the 
proposed changes presented in this proposed rule can be found below in 
section V. of the Addendum to this proposed rule.
    As we discuss in detail throughout this proposed rule, based on the 
most recent available data, we believe that the proposed provisions of 
this proposed rule relating to the LTCH PPS would result in an increase 
in estimated aggregate LTCH PPS payments and that the resulting LTCH 
PPS payment amounts result in appropriate Medicare payments.

B. Impact on Rural Hospitals

    For purposes of section 1102(b) of the Act, we define a small rural 
hospital as a hospital that is located outside of a Metropolitan 
Statistical Area and has fewer than 100 beds. As shown in Table IV, we 
are projecting a 4.2 percent increase in estimated payments per 
discharge for the 2010 LTCH PPS rate year as compared to the 2009 LTCH 
PPS rate year for rural LTCHs that would result from the proposed 
changes presented in this proposed rule (that is, the update to the 
standard Federal rate discussed in section V.A. of the Addendum to this 
proposed rule and the proposed changes to the area wage adjustment as 
discussed in section V.B. of the Addendum to this proposed rule) as 
well as the effect of estimated changes to HCO and SSO payments. This 
estimated impact is based on the data of the 26 rural LTCHs in our 
database of 399 LTCHs for which complete data were available.
    The estimated increase in LTCH PPS payments from the 2009 LTCH PPS 
rate year to the 2010 LTCH PPS rate year for rural LTCHs is primarily 
due to the estimated change in HCO payments; that is, our current 
estimate that HCO payments in RY 2009 will be less than 8 percent of 
total estimated LTCH PPS payments (as discussed in greater detail in 
section V.C. of the Addendum to this proposed rule), the proposed 
change to the standard Federal rate (as discussed in greater detail in 
section V.A. of the Addendum to this proposed rule), and the proposed 
change in the area wage adjustment (as discussed in greater detail in 
section V.B. of the Addendum to this proposed rule). We believe that 
the proposed changes to the area wage adjustment presented in this 
proposed rule (that is, the proposed use of updated wage data and the 
proposed change in the labor-related share) would result in accurate 
and appropriate LTCH PPS payments in RY 2010 because they are based on 
the most recent available data. Such updated data appropriately reflect 
national differences in area wage levels and appropriately identifies 
the portion of the standard Federal rate that should be adjusted to 
account for such differences in area wages, thereby resulting in 
accurate and appropriate LTCH PPS payments.

C. Anticipated Effects of Proposed LTCH PPS Payment Rate Change and 
Policy Changes

    We discuss the impact of the proposed changes to the payment rates, 
factors, and other payment rate policies under the LTCH PPS for RY 2010 
(in terms of their estimated fiscal impact on the Medicare budget and 
on LTCHs) in section VIII. of the preamble of this proposed rule.
1. Budgetary Impact
    Section 123(a)(1) of the BBRA requires that the PPS developed for 
LTCHs ``maintain budget neutrality.'' We believe that the statute's 
mandate for budget neutrality applies only to the first year of the 
implementation of the LTCH PPS (that is, FY 2003). Therefore, in 
calculating the FY 2003 standard Federal rate under Sec.  
412.523(d)(2), we set total estimated payments for FY 2003 under the 
LTCH PPS so that estimated aggregate payments under the LTCH PPS were 
estimated to equal the amount that would have been paid if the LTCH PPS 
had not been implemented.
    As discussed in section IX.A. of this Appendix A, we project an 
increase in aggregate LTCH PPS payments in RY 2010 of approximately 
$135 million (or 2.8 percent) based on the 399 LTCHs in our database.
2. Impact on Providers
    The basic methodology for determining a per discharge LTCH PPS 
payment is set forth in Sec.  412.515 through Sec.  412.536. In 
addition to the basic MS-LTC-DRG payment (standard Federal rate 
multiplied by the MS-LTC-DRG relative weight), we make adjustments for 
differences in area wage levels, COLA for Alaska and Hawaii, and SSOs. 
Furthermore, LTCHs may also receive HCO payments for those cases that 
qualify based on the threshold established each rate year.
    To understand the impact of the proposed changes to the LTCH PPS 
payments presented in this proposed rule on different categories of 
LTCHs for the 2010 LTCH PPS rate year, it is necessary to estimate 
payments per discharge for the 2009 LTCH PPS rate year using the rates, 
factors and policies established in the RY 2009 LTCH PPS final rule (73 
FR 26788 through 26874) and the FY 2009 GROUPER (Version 26.0) and 
relative weights established in the FY 2009 IPPS final rule (73 FR 
23537 through 23617). It is also necessary to estimate the payments per 
discharge that would be made under the proposed LTCH PPS rates, 
factors, policies, and GROUPER for the 2010 LTCH PPS rate year (as 
discussed in VIII. of the preamble and section V. of the Addendum to 
this proposed rule). These estimates of RY 2009 and RY 2010 LTCH PPS 
payments are based on the best available LTCH claims data and other 
factors such as the application of inflation factors to estimate costs 
for SSO and HCO cases in each year. We also evaluated the change in 
estimated 2009 LTCH PPS rate year payments to estimated 2010 LTCH PPS 
rate year payments (on a per discharge basis) for each category of 
LTCHs.
    Hospital groups were based on characteristics provided in the OSCAR 
data, FY 2004 through FY 2006 cost report data in HCRIS, and PSF data. 
Hospitals with incomplete characteristics were grouped into the 
``unknown'' category. Hospital groups include the following:
     Location: large urban/other urban/rural.
     Participation date.
     Ownership control.
     Census region.
     Bed size.
    To estimate the impacts of the proposed payment rates and policy 
changes among the various categories of existing providers, we used 
LTCH cases from the FY 2008 MedPAR file to estimate payments for RY 
2009 and to estimate payments for RY 2010 for 399 LTCHs. While 
currently there are just

[[Page 24680]]

over 400 LTCHs, the most recent growth is predominantly in for-profit 
LTCHs that provide respiratory and ventilator-dependent patient care. 
We believe that the discharges based on the FY 2008 MedPAR data for the 
399 LTCHs in our database, which includes 267 proprietary LTCHs, 
provide sufficient representation in the MS-LTC-DRGs containing 
discharges for patients who received LTCH care for the most commonly 
treated LTCH patients' diagnoses.
3. Calculation of Prospective Payments
    For purposes of this impact analysis, to estimate per discharge 
payments under the LTCH PPS, we simulated payments on a case-by-case 
basis using LTCH claims from the FY 2008 MedPAR files. For modeling 
estimated LTCH PPS payments for RY 2009, we applied the RY 2009 
standard Federal rate (that is, $39,114.36, which is effective for LTCH 
discharges occurring on or after July 1, 2008, and through September 
30, 2009). For modeling estimated LTCH PPS payments for RY 2010, we 
applied the proposed RY 2010 standard Federal rate of $39,349.05, which 
would be effective for LTCH discharges occurring on or after October 1, 
2009, and through September 30, 2010).
    Furthermore, in modeling estimated LTCH PPS payments for both RY 
2009 and RY 2010 in this impact analysis, we applied the RY 2009 and 
proposed RY 2010 adjustments for area wage differences and the COLA for 
Alaska and Hawaii. Specifically, we adjusted for area wage differences 
for estimated 2009 LTCH PPS rate year payments using the current LTCH 
PPS labor-related share of 75.662 percent (73 FR 26815), the wage index 
values established in the Tables 1 and 2 of the Addendum of the RY 2009 
final rule (73 FR 26840 through 26863) and the COLA factors established 
in Table III of the preamble of the RY 2009 final rule (73 FR 26819). 
Similarly, we adjusted for area wage differences for estimated proposed 
2010 LTCH PPS rate year payments using the LTCH PPS proposed RY 2010 
labor-related share of 75.904 percent (section VIII.C.2. of the 
preamble of this proposed rule), the proposed RY 2010 wage index values 
presented in the Tables 12A and 12B of the Addendum to this proposed 
rule, and the proposed RY 2010 COLA factors shown in the table in 
section V. of the Addendum to this proposed rule.
    As discussed above, our impact analysis reflects an estimated 
change in payments for SSO cases as well as an estimated increase in 
payments for HCO cases (as described in section V.C. of the Addendum to 
this proposed rule). In modeling payments for SSO and HCO cases in RY 
2009, we applied an inflation factor of 1.024 percent (determined by 
OACT) to the estimated costs of each case determined from the charges 
reported on the claims in the FY 2008 MedPAR files and the best 
available CCRs from the December 2008 update of the PSF. In modeling 
proposed payments for SSO and HCO cases in RY 2010, we applied an 
inflation factor of 1.049 (determined by OACT) to the estimated costs 
of each case determined from the charges reported on the claims in the 
FY 2008 MedPAR files and the best available CCRs from the December 2008 
update of the PSF.
    These impacts reflect the estimated ``losses'' or ``gains'' among 
the various classifications of LTCHs from the 2009 LTCH PPS rate year 
to the 2010 LTCH PPS rate year based on the proposed payment rates and 
policy changes presented in this proposed rule. Table IV illustrates 
the estimated aggregate impact of the LTCH PPS among various 
classifications of LTCHs.
     The first column, LTCH Classification, identifies the type 
of LTCH.
     The second column lists the number of LTCHs of each 
classification type.
     The third column identifies the number of LTCH cases.
     The fourth column shows the estimated payment per 
discharge for the 2009 LTCH PPS rate year (as described above).
     The fifth column shows the estimated payment per discharge 
for the 2010 LTCH PPS rate year (as described above).
     The sixth column shows the percentage change in estimated 
payments per discharge from the 2009 LTCH PPS rate year to the 2010 
LTCH PPS rate year for proposed changes to the standard Federal rate 
(as discussed in section V. of the Addendum to this proposed rule).
     The seventh column shows the percentage change in 
estimated payments per discharge from the 2009 LTCH PPS rate year to 
the 2010 LTCH PPS rate year for proposed changes to the area wage 
adjustment at Sec.  412.525(c) (as discussed in section V.B.4. of the 
Addendum to this proposed rule).
     The eighth column shows the percentage change in estimated 
payments per discharge from the 2009 LTCH PPS rate year (Column 4) to 
the 2010 LTCH PPS rate year (Column 5) for all proposed changes (and 
includes the effect of estimated changes to HCO and SSO payments).

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4. Results
    Based on the most recent available data (as described previously 
for 399 LTCHs), we have prepared the following summary of the impact 
(as shown in Table IV) of the proposed LTCH PPS payment rate and policy 
changes presented in this proposed rule. The impact analysis in Table 
IV shows that estimated payments per discharge are expected to increase 
approximately 2.8 percent, on average, for all LTCHs from the 2009 LTCH 
PPS rate year to the 2010 LTCH PPS rate year as a result of the 
proposed payment rate and policy changes presented in this proposed 
rule as well as estimated increases in HCO and SSO payments. We note 
that we are proposing a 0.6 percent increase to the standard Federal 
rate for RY 2010, based on the latest market basket estimate (2.4 
percent) and the proposed documentation and coding adjustment (-1.8 
percent). We noted earlier in this section that or most categories of 
LTCHs, as shown in Table IV (Column 6), the impact of the proposed 
increase of 0.6 percent to the standard Federal rate is projected to 
result in a 0.5 percent increase in estimated payments per discharge 
for all LTCHs from the 2009 LTCH PPS rate year to the 2010 LTCH PPS 
rate year. In addition to the proposed 0.6 percent increase to the 
standard Federal rate for RY 2010, the projected percent increase in 
estimated payments per discharge from the 2009 LTCH PPS rate year to 
the 2010 LTCH PPS rate year of 2.8 percent shown in Table IV (Column 8) 
reflects the effect of estimated increases in HCO and SSO payments, as 
discussed previously. Furthermore, as discussed previously in this 
regulatory impact analysis, the average increase in estimated payments 
per discharge from the 2009 LTCH PPS rate year to the 2010 LTCH PPS 
rate year for all LTCHs of approximately 2.8 (as shown in Table IV) was 
determined by comparing estimated RY 2010 LTCH PPS payments (using the 
proposed rates and policies discussed in this proposed rule) to 
estimated RY 2009 LTCH PPS payments (as described above in section 
IX.C. of this regulatory impact analysis).
a. Location
    Based on the most recent available data, the majority of LTCHs are 
in urban areas. Approximately 7 percent of the LTCHs are identified as 
being located in a rural area, and approximately 5 percent of all LTCH 
cases are treated in these rural hospitals. The impact analysis 
presented in Table IV shows that the average percent increase in 
estimated payments per discharge from the 2009 LTCH PPS rate year to 
the 2010 LTCH PPS rate year for all hospitals is 2.8 percent for all 
proposed changes. For rural LTCHs, the percent change for all proposed 
changes is estimated to be 4.2 percent, while for urban LTCHs, we 
estimate this increase to be the average of 2.8 percent. Large urban 
LTCHs are projected to experience a slightly higher than average 
increase (2.9 percent) in estimated payments per discharge from the 
2009 LTCH PPS rate year to the 2010 LTCH PPS rate year, while other 
urban LTCHs are projected to experience a slightly lower than average 
increase (2.6 percent) in estimated payments per discharge from the 
2009 LTCH PPS rate year to the 2010 LTCH PPS rate year, as shown in 
Table IV.
b. Participation Date
    LTCHs are grouped by participation date into four categories: (1) 
Before October 1983; (2) between October 1983 and September 1993; (3) 
between October 1993 and September 2002; and (4) after October 2002. 
Based on the most recent available data, the majority (approximately 51 
percent) of the LTCH cases are in hospitals that began participating 
between October 1993 and September 2002, and are projected to 
experience about the average increase (3.8 percent) in estimated 
payments per discharge from the 2009 LTCH PPS rate year to the 2010 
LTCH PPS rate year, as shown in Table IV.
    In the two participation categories where LTCHs began participating 
in Medicare before October 1983 (that is, the ``Before October 1983'' 
category and the ``October 1983 through September 1993'' category), 
LTCHs are projected to experience higher than average percent increases 
(3.7 and 3.4 percent, respectively) in estimated payments per discharge 
from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year, as 
shown in Table IV, due to proposed changes in the wage index and an 
estimated increase in HCO payments. Approximately 4 percent of LTCHs 
began participating in Medicare before October 1983. The LTCHs in this 
category are projected to experience a higher than average increase in 
estimated payments because 65 percent of these LTCHs are located in 
areas where the proposed RY 2010 wage index value is greater than the 
RY 2009 wage index value, and also because the majority of these LTCHs 
have a proposed wage index value of greater than 1.0. Approximately 11 
percent of LTCHs began participating in Medicare between October 1983 
and September 1993. These LTCHs are projected to experience a higher 
than average increase in estimated payments because the majority (57 
percent) are located in areas where the proposed RY 2010 wage index 
value would be greater than the RY 2009 wage index value. The majority 
of LTCHs, that is, those that began participating in Medicare since 
October 1993, are projected to experience near average increases in 
estimated payments per discharge from the 2009 LTCH PPS rate year to 
the 2010 LTCH PPS rate year, as shown in Table IV.
c. Ownership Control
    Other than LTCHs whose ownership control type is unknown, LTCHs are 
grouped into three categories based on ownership control type: 
voluntary, proprietary, and government. Based on the most recent 
available data, approximately 20 percent of LTCHs are identified as 
voluntary (Table IV). We expect that, for these LTCHs in the voluntary 
category, estimated 2010 LTCH PPS rate year payments per discharge 
would increase higher than the average (3.3 percent) in comparison to 
estimated payments in the 2009 LTCH PPS rate year, as shown in Table 
IV, primarily because the change in estimated HCO payments is projected 
to be higher than the average for these LTCHs. The majority (67 
percent) of LTCHs are identified as proprietary and these LTCHs are 
projected to experience a near average (2.6 percent) increase in 
estimated payments per discharge from the 2009 LTCH PPS rate year to 
the 2010 LTCH PPS rate year. Finally, government-owned and operated 
LTCHs (3 percent) are expected to experience a higher than the average 
increase (3.8 percent) in estimated payments primarily due to larger 
than the average increase in estimated HCO payments.
d. Census Region
    Estimated payments per discharge for the 2010 LTCH PPS rate year 
are projected to increase for LTCHs located in all regions in 
comparison to the 2009 LTCH PPS rate year. Of the 9 census regions, we 
project that the increase in estimated payments per discharge would 
have the largest impact on LTCHs in the New England, East South 
Central, Mountain, and Pacific regions (4.0 percent, 3.2 percent, 4.1 
percent, and 3.8 percent, respectively, as shown in Table IV). As 
explained in greater detail above in section XV.B.4. of this Appendix, 
the estimated percent increase in payments per discharge from the 2009 
LTCH PPS rate year to the 2010 LTCH PPS rate year for most regions is 
largely attributable to the projected increase in estimated HCO and SSO 
payments in addition to the proposed increase in the standard Federal 
rate and the proposed changes to the area wage adjustment. 
Specifically, for the

[[Page 24684]]

New England region, all the LTCHs located in this region have a 
proposed wage index value of greater than 1.0; and the majority (87 
percent) of these LTCHs are located in areas where the proposed RY 2010 
wage index value is greater than the RY 2009 wage index value. The 
projected increase in estimated payments per discharge from the 2009 
LTCH PPS rate year to the 2010 LTCH PPS rate year for LTCHs in the East 
South Central region, as shown in Table IV, is due to the estimated 
increase in HCO payments, while for LTCHs in the Mountain and Pacific 
regions, the projected increase in payments is due to both the 
estimated increase in HCO payments and the significantly higher than 
average estimated impact from the proposed changes to the area wage 
adjustment. That is, the majority (60 percent) of the LTCHs located in 
the Mountain region have a proposed wage index value of greater than 
1.0, and in addition, most of these LTCHs are located in areas where 
the proposed RY 2010 wage index value is greater than the RY 2009 wage 
index value. Furthermore, all the LTCHs located in the Pacific region 
have a proposed wage index value of greater than 1.0 and are located in 
areas where the proposed RY 2010 wage index value would be greater than 
the RY 2009 wage index value.
    In contrast, LTCHs located in the Middle Atlantic and East North 
Central regions are projected to experience a lower than average 
increase in estimated payments per discharge from the 2009 LTCH PPS 
rate year to the 2010 LTCH PPS rate year. The projected increase in 
payments of 1.7 percent for LTCHs in the Middle Atlantic region is 
primarily due to the 59 percent of LTCHs located in areas where the 
proposed RY 2010 wage index value would be less than the RY 2009 wage 
index value. In addition, 62 percent of the LTCHs in this category are 
projected to have a proposed RY 2010 wage index value of greater than 
1.0. Similarly, the lower than average increase in payments per 
discharge for LTCHs in the East North Central region is largely due to 
the majority of LTCHs in this region that are expected to experience a 
decrease in estimated payments per discharge due to the proposed 
changes in the area wage adjustment. For LTCHs in the Middle Atlantic 
and East North Central regions, the increase in estimated payments is 
less than the estimated average increase in payments for all providers 
due to the proposed changes in the area wage adjustment as discussed 
above. However, we note that the projected increase in estimated HCO 
payments for LTCHs in this region in addition to the increase in the 
standard Federal rate results in an overall estimated increase, albeit 
less than the average increase, in estimated payments per discharge 
from the 2009 LTCH PPS rate year to the 2010 LTCH PPS rate year. The 
remaining regions, South Atlantic, West North Central, and West South 
Central, are expected to experience near the average increases in 
estimated payments per discharge from the 2009 LTCH PPS rate year to 
the 2010 LTCH PPS rate year.
e. Bed Size
    LTCHs were grouped into six categories based on bed size: 0-24 
beds; 25-49 beds; 50-74 beds; 75-124 beds; 125-199 beds; and greater 
than 200 beds.
    We are projecting an increase in estimated 2010 LTCH PPS rate year 
payments per discharge in comparison to the 2009 LTCH PPS rate year for 
all bed size categories. Approximately 38 percent of LTCHs are in bed 
size categories where estimated 2010 LTCH PPS rate year payments per 
discharge are projected to increase at or near the average increase for 
all LTCHS in comparison to estimated 2009 LTCH PPS rate year payments 
per discharge. That is, LTCHs in bed size categories of 50-74 beds, 75-
124 beds, and 125-199 beds are projected to experience an overall 
increase of 2.9 percent. LTCHs in the bed size category of 0-24 beds 
are projected to experience a higher than the average increase (3.8 
percent) in estimated payments per discharge from the 2009 LTCH PPS 
rate year to the 2010 LTCH PPS rate year due primarily to the estimated 
increase in HCO payments, while for LTCHs with 200+ beds, the projected 
increase in estimated payments is largely due to the significantly 
higher than average impact from the proposed changes to the area wage 
adjustment. Specifically, 69 percent of LTCHs in this category are 
expected to have a proposed RY 2010 wage index value of greater than 
1.0, and 62 percent of the LTCHs in this category are located in areas 
where the proposed RY 2010 wage index value is greater than the RY 2009 
wage index value. We are projecting a slightly lower than the average 
increase in estimated 2010 LTCH PPS rate year payments per discharge in 
comparison to the 2009 LTCH PPS rate year for LTCHs in bed size 
category 25-49 beds, which is largely due to the 87 percent of LTCHs in 
this category expected to have a proposed RY 2010 wage index value of 
less than 1.0. In addition, 54 percent of the LTCHs in this category 
are located in areas where the proposed RY 2010 wage index value is 
less than the RY 2009 wage index value.

D. Effect on the Medicare Program

    As noted previously, we project that the provisions of this 
proposed rule would result in an increase in estimated aggregate LTCH 
PPS payments in RY 2010 of approximately $135 million (or about 2.8 
percent) for the 399 LTCHs in our database.

E. Effect on Medicare Beneficiaries

    Under the LTCH PPS, hospitals receive payment based on the average 
resources consumed by patients for each diagnosis. We do not expect any 
changes in the quality of care or access to services for Medicare 
beneficiaries under the LTCH PPS, but we expect that paying 
prospectively for LTCH services would enhance the efficiency of the 
Medicare program.

X. Alternatives Considered

    This proposed rule contains a range of policies. The preamble of 
this proposed rule provides descriptions of the statutory provisions 
that are addressed, identifies implementing policies where discretion 
has been exercised, and presents rationales for our decisions and, 
where relevant, alternatives that were considered.

XI. Overall Conclusion

A. Acute Care Hospitals

    Table I of section VI. of this Appendix demonstrates the estimated 
distributional impact of the IPPS budget neutrality requirements for 
the proposed MS-DRG and wage index changes, and for the wage index 
reclassifications under the MGCRB. Table I also shows an overall 
decrease of 0.5 percent in operating payments. We estimate that 
operating payments will decrease by $586 million in FY 2010. 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 
of $2.39 million, and all proposed operating payment policies as 
described in section VII. of this Appendix. We estimate that capital 
payments will decrease by 4.8 percent per case, as shown in Table III 
of section VIII. of this Appendix. Therefore, we project that the 
decrease in capital payments in FY 2010 compared to FY 2009 will be 
approximately $393 million. The proposed cumulative operating and 
capital payments should result in a net decrease of $979 million to 
IPPS providers. The discussions presented in the previous pages, in 
combination with the rest of this

[[Page 24685]]

proposed rule, constitute a regulatory impact analysis.

B. LTCHs

    Overall, LTCHs are projected to experience an increase in estimated 
payments per discharge in RY 2010. In the impact analysis, we are using 
the proposed rates, factors, and policies presented in this proposed 
rule, including proposed updated wage index values, and the best 
available claims and CCR data to estimate the change in payments for 
the 2010 LTCH PPS rate year. Accordingly, based on the best available 
data for the 399 LTCHs in our database, we estimate that RY 2010 LTCH 
PPS payments will increase approximately $135 million (or about 2.8 
percent).

XII. Accounting Statements

A. Acute Care Hospitals

    As required by OMB Circular A-4 (available at http://www.whitehousegov/omb/circulars/a004/a-4.pdf), in Table V below, we 
have prepared an accounting statement showing the classification of the 
expenditures associated with the provisions of this proposed rule as 
they relate to acute care hospitals. This table provides our best 
estimate of the increase in Medicare payments to providers as a result 
of the proposed changes to the IPPS presented in this proposed rule. 
All expenditures are classified as transfers to Medicare providers.

 Table V--Accounting Statement: Classification of Estimated Expenditures
                 Under the IPPS From FY 2009 to FY 2010
------------------------------------------------------------------------
                 Category                             Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers............  $-979 million.
From Whom to Whom.........................  Federal Government to IPPS
                                             Medicare Providers.
                                           -----------------------------
    Total.................................  $-979 million.
------------------------------------------------------------------------

B. LTCHs

    As discussed in section IX. of this Appendix , the impact analysis 
for the proposed changes under the LTCH PPS for this proposed rule 
projects an increase in estimated aggregate payments of approximately 
$135 million (or about 2.8 percent) for the 399 LTCHs in our database 
that are subject to payment under the LTCH PPS. Therefore, as required 
by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table VI we have prepared an accounting 
statement showing the classification of the expenditures associated 
with the provisions of this proposed rule as they relate to proposed 
changes to the LTCH PPS. Table VI provides our best estimate of the 
proposed increase in Medicare payments under the LTCH PPS as a result 
of the proposed provisions presented in this proposed rule based on the 
data for the 399 LTCHs in our database. All expenditures are classified 
as transfers to Medicare providers (that is, LTCHs).

       Table VI--Accounting Statement: Classification of Estimated
Expenditures, From the 2009 LTCH PPS Rate Year to the 2010 LTCH PPS Rate
                                  Year
------------------------------------------------------------------------
                 Category                             Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers............  Positive transfer--Estimated
                                             increase in expenditures:
                                             $135 million.
From Whom To Whom.........................  Federal Government to LTCH
                                             Medicare Providers.
------------------------------------------------------------------------

XIII. Executive Order 12866

    In accordance with the provisions of Executive Order 12866, the 
Executive Office of Management and Budget reviewed this proposed 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 care of high quality. Under section 1886(e)(5) 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 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 certain hospitals 
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 2010

    Section 1886(b)(3)(B)(i)(XX) of the Act, as amended by section 
5001(a) of Public Law 109-171, sets the FY 2010 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 section 
1886(b)(3)(B)(viii) of the Act. For hospitals that do not provide 
these data, the update is equal to the market basket percentage 
increase less 2.0 percentage points.
    In compliance with section 404 of the MMA, in this proposed 
rule, we are proposing to replace the FY 2002-based IPPS operating 
and capital market baskets with the revised and rebased FY 2006-
based IPPS operating and capital market baskets for FY 2010. In 
addition to updating the base year to reflect more recent data, we 
also are proposing to make several changes to the structure of the 
market basket, including three new expense categories and revising 
several price proxies.
    We also are proposing to rebase the labor-related share to 
reflect the more recent base year. The current labor-related share, 
which is based on the FY 2002-based IPPS market basket, is 69.7. We 
are proposing a labor-related share of 67.1, which is based on the 
proposed rebased and revised FY 2006-based IPPS market basket. For a 
complete discussion on the rebasing of the market basket and labor 
share, we refer readers to section IV. of the preamble to this 
proposed rule.
    Consistent with current law, based on IHS Global Insight, Inc. 
2009 first quarter forecast, with historical data through the 2008 
fourth quarter, of the proposed rebased and revised FY 2006-based 
IPPS market basket, we are estimating that the FY 2010 update to the 
standardized amount will be 2.1 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, we are 
estimating that the update to the standardized amount will be 0.1 
percent (that is, the current estimate of the market basket rate-of-
increase minus 2.0 percentage points).
    Section 1886(d)(9)(C)(i) of the Act is the basis for determining 
the percentage increase to the Puerto Rico-specific standardized 
amount. For FY 2010, we are proposing to apply 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 estimated to be 2.1 
percent.
    Section 1886(b)(3)(B)(iv) of the Act sets the FY 2010 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 estimated to be 2.1 or 0.1 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

[[Page 24686]]

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 Pub. L. 106-554, 
provides the statutory authority for updating payment rates under 
the LTCH PPS. In addition, section 124 of Public Law 106-113 
provides the statutory authority for updating all aspects of the 
payment rates for IPFs.
    Currently, children's hospitals, cancer hospitals, and RNHCIs 
are the remaining three types of hospitals still reimbursed under 
the reasonable cost methodology. We are proposing to provide our 
current estimate of the FY 2010 IPPS operating market basket 
percentage increase (2.1 percent) to update the target limits for 
children's hospitals, cancer hospitals, and RNHCIs.
    For RY 2010, as discussed in section VIII. of the preamble to 
this proposed rule, we are proposing an update of 0.6 percent to the 
LTCH PPS Federal rate, which is based on a proposed market basket 
increase of 2.4 percent (based on IHS Global Insight, Inc.'s first 
quarter 2009 forecast of the FY 2002-based RPL market basket 
increase for RY 2010) and a proposed adjustment of -1.8 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.
    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.
    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).

III. Secretary's Recommendation

    MedPAC is recommending an inpatient hospital update equal to the 
market basket rate of increase for FY 2010. MedPAC's rationale for 
this update recommendation is described in more detail below. Based 
on IHS Global Insight, Inc.'s 2009 first quarter forecast, with 
historical data through the 2008 fourth quarter, of the proposed 
rebased and revised FY 2006-based IPPS market basket, we are 
recommending an update to the standardized amount of 2.1 percent. We 
are recommending that this same update factor apply to SCHs and 
MDHs.
    Section 1886(d)(9)(C)(i) of the Act is the basis for determining 
the percentage increase to the Puerto Rico-specific standardized 
amount. For FY 2010, we are proposing to apply 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 estimated to be 2.1 
percent.
    In addition to making a recommendation for IPPS hospitals, in 
accordance with section 1886(e)(4)(A) of the Act, we are 
recommending update factors for all other types of hospitals. Using 
IHS Global Insight, Inc.'s 2009 first quarter forecast, with 
historical data through the 2008 fourth quarter, of the proposed 
rebased and revised FY 2006-based IPPS market basket, we are 
recommending an update based on the IPPS market basket increase for 
children's hospitals, cancer hospitals, and RNHCIs of 2.1 percent.
    Based on IHS Global Insight, Inc.'s first quarter 2009 forecast 
of the RPL market basket increase, we are recommending an update to 
the IPF PPS Federal rate for RY 2010 of 2.1 percent for the Federal 
per diem payment amount.
    For RY 2010, similar to our proposal in section VIII. of the 
preamble of this proposed rule, we are recommending an update of 2.4 
percent to the LTCH PPS Federal rate, which is based on a proposed 
market basket increase of 2.4 percent (based on IHS Global Insight, 
Inc.'s first quarter 2009 forecast of the FY 2002-based RPL market 
basket increase for RY 2010) and a proposed adjustment of -1.8 
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.
    Finally, based on IHS Global Insight, Inc.'s first quarter 2009 
forecast of the RPL market basket increase, we are recommending a 
2.4 percent update to the IRF PPS Federal rate for FY 2010.

IV. MedPAC Recommendation for Assessing Payment Adequacy and Updating 
Payments in Traditional Medicare

    In its March 2009 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 2010, 
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 
2010. 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 proposed 
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 proposing to continue to use 
separate updates for operating and capital payments. The proposed 
update to the capital rate is discussed in section III. of the 
Addendum to this proposed rule.

 [FR Doc. E9-10458 Filed 5-1-09; 4:15 pm]
BILLING CODE 4120-01-P