Federal Register, Volume 74 Issue 98 (Friday, May 22, 2009)

[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

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 AutoLITT^TM System
b. CLOLAR[supreg] (clofarabine) Injection
c. LipiScan^TM 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

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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.
BILLING CODE 4120-01-P

[[Page 24099]]

[GRAPHIC] [TIFF OMITTED] TP22MY09.001

[GRAPHIC] [TIFF OMITTED] TP22MY09.002

BILLING CODE 4120-01-C

[[Page 24100]]

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]]

[GRAPHIC] [TIFF OMITTED] TP22MY09.003

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*
------------------------------------------------------------------------
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] TP22MY09.010

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: CardioWest^TM Temporary Total Artificial Heart
System (CardioWest^TM 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. LipiScan^TM Coronary Imaging System
InfraReDx, Inc. submitted an application for new technology add-on
payments for FY 2010 for the LipiScan^TM Coronary Imaging
System (LipiScan^TM). The LipiScan^TM 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 LipiScan^TM 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 LipiScan^TM
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
Lipiscan^TM device cleared by the FDA in 2008 is for a
modified indication. The modified indication specified that
Lipiscan^TM 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 Lipiscan^TM 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 Lipican^TM
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
LipiScan^TM 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 LipiScan^TM 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 Lipiscan^TM 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
Lipiscan^TM. The applicant believes that every case within
DRGs 246, 247, 248, 249, 250, and 251 are eligible for
Lipiscan^TM. In addition, the applicant believes that
Lipiscan^TM 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 Lipiscan^TM; 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 Lipiscan^TM 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 Lipiscan^TM. 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 Lipiscan^TM would meet the cost criterion. We
invite public comment on whether or not Lipiscan^TM 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 Lipiscan^TM 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 LipiScan^TM 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 LipiScan^TM
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 LipiScan^TM 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 LipiScan^TM findings in
20 to 50 percent of patients. The most common use of
LipiScan^TM 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 LipiScan^TM 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]]

LipiScan^TM 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 LipiScan^TM technology.
The applicant also submitted commentary from Interventional
Cardiologists (a group of clinicians who currently utilize the
LipiScan^TM 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 LipiScan^TM 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
LipiScan^TM 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
LipiScan^TM 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 LipiScan^TM stated that,
prior to the availability of LipiScan^TM, 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 LipiScan^TM 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,
LipiScan^TM 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 LipiScan^TM 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
LipiScan^TM 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
LipiScan^TM is equivalent to the predicate intravascular
ultrasound (IVUS) device, the features of the LipiScan^TM
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
LipiScan^TM is a novel diagnostic method that meets the three
criteria for a new technology add-on payment and that more frequent
utilization of LipiScan^TM would occur with additional
reimbursement resulting in possible improved outcomes for patients
undergoing stenting. The manufacturer stated that LipiScan^TM
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

[[Page 24139]]

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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[GRAPHIC] [TIFF OMITTED] TP22MY09.011

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[GRAPHIC] [TIFF OMITTED] TP22MY09.012

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Because the occupational mix adjustment is required by statute, all
hospitals that are subject to payments under the IPPS, or any hospital
that would be subject to the IPPS if not granted a waiver, must
complete the occupational mix survey, unless the hospital has no
associated cost report wage data that are included in the 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