Federal Register, Volume 76 Issue 18 (Thursday, January 27, 2011)

[Federal Register Volume 76, Number 18 (Thursday, January 27, 2011)]
[Proposed Rules]
[Pages 4998-5051]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-1507]

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Vol. 76

Thursday,

No. 18

January 27, 2011

Part II

Department of Health and Human Services

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Centers for Medicare & Medicaid Services

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42 CFR Part 412

Medicare Program; Inpatient Psychiatric Facilities Prospective Payment
System--Update for Rate Year Beginning July 1, 2011 (RY 2012); Proposed
Rule

Federal Register / Vol. 76 , No. 18 / Thursday, January 27, 2011 /
Proposed Rules

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1346-P]
RIN 0938-AQ23

Medicare Program; Inpatient Psychiatric Facilities Prospective
Payment System--Update for Rate Year Beginning July 1, 2011 (RY 2012)

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would update the prospective payment rates
for Medicare inpatient hospital services provided by inpatient
psychiatric facilities (IPFs) for discharges occurring during the rate
year beginning July 1, 2011 through September 30, 2012. The proposed
rule would also change the IPF prospective payment system (PPS) payment
rate update period to a rate year (RY) that coincides with a fiscal
year (FY). In addition, the rule proposes policy changes affecting the
IPF PPS teaching adjustment. It would also rebase and revise the
Rehabilitation, Psychiatric, and Long-Term Care (RPL) market basket,
and make some clarifications and corrections to terminology and
regulations text.

DATES: To be assured consideration, comments must be received at one of
the addresses provided in the ADDRESSES section no later than 5 p.m.
EST on March 22, 2011.

ADDRESSES: In commenting, please refer to file code CMS-1346-P. Because
of staff and resource limitations, we cannot accept comments by
facsimile (FAX) transmission.
You may submit comments in one of four ways (please choose only one
of the ways listed):
1. Electronically. You may submit electronic comments on this
regulation to http://www.regulations.gov. Follow the instructions under
the ``More Search Options'' tab.
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-1346-P, P.O. Box 8010, 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 to
the following address ONLY: Centers for Medicare & Medicaid Services,
Department of Health and Human Services, Attention: CMS-1346-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 before the close of the comment period
to either of the following addresses:
a. For delivery in Washington, DC--Centers for Medicare & Medicaid
Services, Department of Health and Human Services, Room 445-G, Hubert
H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC
20201.
(Because access to the interior of the Hubert H. Humphrey 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. For delivery in Baltimore, MD--Centers for Medicare & Medicaid
Services, Department of Health and Human Services, 7500 Security
Boulevard, Baltimore, MD 21244-1850.
If you intend to deliver your comments to the Baltimore address,
please call telephone number (410) 786-9994 in advance to schedule your
arrival with one of our staff members.
Comments mailed to the addresses indicated as appropriate for hand
or courier delivery may be delayed and received after the comment
period.
For information on viewing public comments, see the beginning of
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT: Dorothy Myrick or Jana Lindquist,
(410) 786-4533 (for general information). Mary Carol Barron, (410) 786-
7943, or Bridget Dickensheets, (410) 786-8670, (for information
regarding the market basket and labor-related share). Theresa Bean,
(410) 786-2287 (for information regarding the regulatory impact
analysis).

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

Table of Contents

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

I. Background
A. Annual Requirements for Updating the IPF PPS
B. Overview of the Legislative Requirements of the IPF PPS
C. IPF PPS-General Overview
D. Transition Period for Implementation of the IPF PPS
II. Proposal to Revise the IPF PPS Payment Rate Update Period from a
Rate Year to a Fiscal Year
III. Proposed Rebasing and Revising of the Rehabilitation,
Psychiatric, and Long-Term Care (RPL) Market Basket for Inpatient
Psychiatric Facilities
A. Background
B. Overview of the Proposed FY 2008-Based RPL Market Basket
C. Proposed Rebasing and Revising of the RPL 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. Employee Benefits
c. Electricity
d. Fuel, Oil, and Gasoline
e. Water and Sewage
f. Professional Liability Insurance
g. Pharmaceuticals
h. Food: Direct Purchases
i. Food: Contract Services
j. Chemicals
k. Medical Instruments
l. Photographic Supplies
m. Rubber and Plastics
n. Paper and Printing Products
o. Apparel
p. Machinery and Equipment
q. Miscellaneous Products
r. Professional Fees: Labor-Related
s. Administrative and Business Support Services
t. All Other: Labor-Related Services
u. Professional Fees: Nonlabor-Related
v. Financial Services
w. Telephone Services
x. Postage
y. All Other: Nonlabor-Related Services

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4. Proposed Methodology for Capital Portion of the RPL Market
Basket
5. Proposed RY 2012 Market Basket Update
6. Proposed Labor-Related Share
IV. Updates to the IPF PPS for RY Beginning July 1, 2011
A. Determining the Standardized Budget-Neutral Federal Per Diem
Base Rate
1. Standardization of the Federal Per Diem Base Rate and
Electroconvulsive Therapy (ECT) Rate
2. Calculation of the Budget Neutrality Adjustment
a. Outlier Adjustment
b. Stop-Loss Provision Adjustment
c. Behavioral Offset
B. Proposed Update of the Federal Per Diem Base Rate and
Electroconvulsive Therapy Rate
V. Proposed Update of the IPF PPS Adjustment Factors
A. Overview of the IPF PPS Adjustment Factors
B. Proposed Patient-Level Adjustments
1. Proposed Adjustment for MS-IPF-DRG Assignment
2. Proposed Payment for Comorbid Conditions
3. Proposed Patient Age Adjustments
4. Proposed Variable Per Diem Adjustments
C. Facility-Level Adjustments
1. Proposed Wage Index Adjustment
a. Background
b. Proposed Wage Index for RY 2012
c. OMB Bulletins
2. Proposed Adjustment for Rural Location
3. Proposed Teaching Adjustment
a. Proposed Temporary Adjustment to FTE Cap to Reflect Residents
Affected by Hospital Closure
b. Proposed Temporary Adjustment to FTE Cap to Reflect Residents
Affected By Residency Program Closure
4. Proposed Cost of Living Adjustment for IPFs Located in Alaska
and Hawaii
5. Proposed Adjustment for IPFs with a Qualifying Emergency
Department (ED)
D. Other Payment Adjustments and Policies
1. Proposed Outlier Payments
a. Proposed Update to the Outlier Fixed Dollar Loss Threshold
Amount
b. Proposed Statistical Accuracy of Cost-to-Charge Ratios
2. Expiration of the Stop-Loss Provision
3. Future Refinements
VI. Proposed Regulations Text Corrections
VII. Provisions of the Proposed Regulations
VIII. Collection of Information Requirements
IX. Regulatory Impact Analysis
Regulations Text
Addenda

Acronyms

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

BBRA Medicare, Medicaid and SCHIP [State Children's Health Insurance
Program] Balanced Budget Refinement Act of 1999, (Pub. L. 106-113)
CBSA Core-Based Statistical Area
CCR Cost-to-charge ratio
CAH Critical access hospital
DSM-IV-TR Diagnostic and Statistical Manual of Mental Disorders
Fourth Edition--Text Revision
DRGs Diagnosis-related groups
FY Federal fiscal year (October 1 through September 30)
ICD-9-CM International Classification of Diseases, 9th Revision,
Clinical Modification
IPFs Inpatient psychiatric facilities
IRFs Inpatient rehabilitation facilities
LTCHs Long-term care hospitals
MedPAR Medicare provider analysis and review file
RPL Rehabilitation, Psychiatric, and Long-Term Care
RY Rate Year (July 1 through June 30)
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, (Pub. L. 97-
248)

I. Background

A. Annual Requirements for Updating the IPF PPS

In November 2004, we implemented the inpatient psychiatric
facilities (IPF) prospective payment system (PPS) in a final rule that
appeared in the November 15, 2004 Federal Register (69 FR 66922). In
developing the IPF PPS, in order to ensure that the IPF PPS is able to
account adequately for each IPF's case-mix, we performed an extensive
regression analysis of the relationship between the per diem costs and
certain patient and facility characteristics to determine those
characteristics associated with statistically significant cost
differences on a per diem basis. For characteristics with statistically
significant cost differences, we used the regression coefficients of
those variables to determine the size of the corresponding payment
adjustments.
In that final rule, we explained that we believe it is important to
delay updating the adjustment factors derived from the regression
analysis until we have IPF PPS data that includes as much information
as possible regarding the patient-level characteristics of the
population that each IPF serves. Therefore, we indicated that we did
not intend to update the regression analysis and recalculate the
Federal per diem base rate and the patient- and facility-level
adjustments until we complete that analysis. Until that analysis is
complete, we stated our intention to publish a notice in the Federal
Register each spring to update the IPF PPS (71 FR 27041). We are
proposing to change the payment rate update period to a RY that
coincides with a FY. If we finalize this proposal, future update
notices would be published in the Federal Register in the summer. See
section II. of this proposed rule.
Updates to the IPF PPS as specified in 42 CFR 412.428 include the
following:
A description of the methodology and data used to
calculate the updated Federal per diem base payment amount.
The rate of increase factor as described in Sec.
412.424(a)(2)(iii), which is based on the Excluded Hospital With
Capital market basket under the update methodology of section
1886(b)(3)(B)(ii) of the Social Security Act (the Act) for each year
(effective from the implementation period until June 30, 2006).
For discharges occurring on or after July 1, 2006, the
rate of increase factor for the Federal portion of the IPF's payment,
which is based on the Rehabilitation, Psychiatric, and Long-Term Care
(RPL) market basket.
The best available hospital wage index and information
regarding whether an adjustment to the Federal per diem base rate is
needed to maintain budget neutrality.
Updates to the fixed dollar loss threshold amount in order
to maintain the appropriate outlier percentage.
Description of the International Classification of
Diseases, 9th Revision, Clinical Modification (ICD-9-CM) coding and
diagnosis-related groups (DRGs) classification changes discussed in the
annual update to the hospital inpatient prospective payment system
(IPPS) regulations.
Update to the electroconvulsive therapy (ECT) payment by a
factor specified by CMS.
Update to the national urban and rural cost-to-charge
ratio medians and ceilings.
Update to the cost of living adjustment factors for IPFs
located in Alaska and Hawaii, if appropriate.
Our most recent IPF PPS annual update occurred in the April 30,
2010 Federal Register notice (75 FR 23106) (hereinafter referred to as
the April 2010 IPF PPS notice) that set forth updates to the IPF PPS
payment rates for RY 2011. This notice updated the IPF PPS per diem
payment rates that were published in the May 2009 IPF PPS notice in
accordance with our established policies.
Since implementation of the IPF PPS, we have explained that we
believe it is important to delay updating the adjustment factors
derived from the regression analysis until we have IPF PPS data that
include as much information as possible regarding the patient-level
characteristics of the population that each IPF serves. Now that we are
approximately 5 years into the system, we believe that we have enough
data to begin that process. Therefore, we have begun the necessary

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analysis in order to make future refinements. While we are not
proposing to make refinements in this rulemaking, as explained in
section V.D.3 below, we believe that in the next rulemaking, for RY
2013, we will be ready to propose potential refinements.

B. Overview of the Legislative Requirements of the IPF PPS

Section 124 of the Medicare, Medicaid, and SCHIP (State Children's
Health Insurance Program) Balanced Budget Refinement Act of 1999, (Pub.
L. 106-113) (BBRA) required implementation of the IPF PPS.
Specifically, section 124 of the BBRA mandated that the Secretary
develop a per diem PPS for inpatient hospital services furnished in
psychiatric hospitals and psychiatric units that includes an adequate
patient classification system that reflects the differences in patient
resource use and costs among psychiatric hospitals and psychiatric
units.
Section 405(g)(2) of the Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 (MMA) (Pub. L. 108-173) extended the IPF
PPS to distinct part psychiatric units of critical access hospitals
(CAHs).
To implement these provisions, we published various proposed and
final rules in the Federal Register. For more information regarding
these rules, see the CMS Web sites http://www.cms.hhs.gov/InpatientPsychFacilPPS/ and http://www.cms.hhs.gov/InpatientpsychfacilPPS/02_regulations.asp.
Section 3401(f) of the Patient Protection and Affordable Care Act
(Pub. L. 111-148) as amended by section 10319(e) of that Act and by
section 1105(d) of the Health Care and Education Reconciliation Act of
2010 (Pub. L. 111-152) (hereafter referred to as ``The Affordable Care
Act'') added subsection (s) to section 1886 of the Act.
Section 1886(s)(1) is titled ``Reference to Establishment and
Implementation of System'' and it refers to section 124 of the
Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999,
which relates to the establishment of the IPF PPS.
Section 1886(s)(2)(A)(i) of the Act requires the application of the
productivity adjustment described in Sec. 1886(b)(3)(B)(xi)(II) of the
Act to the IPF PPS for the rate year beginning in 2012 and each
subsequent rate year. Section 1886(s)(2)(A)(ii) of the Act requires the
application of an ``other adjustment'' that reduces any update to an
IPF PPS base rate by percentages specified in section 1886(s)(3) of the
Act for rate years beginning in 2010 through the rate year beginning in
2019. For the rate year beginning in 2011, the reduction is 0.25
percentage point. We are proposing to implement that provision for RY
2012 in this proposed rule.
Section 1886(s)(4) of the Act requires the establishment of a
quality data reporting program for the IPF PPS beginning in RY 2014.

C. IPF PPS-General Overview

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

D. Transition Period for Implementation of the IPF PPS

In the November 2004 IPF PPS final rule, we provided for a 3-year
transition period. During this 3-year transition period, an IPF's total
payment under the PPS was based on an increasing percentage of the
Federal rate with a corresponding decreasing percentage of the IPF PPS
payment that is based on reasonable cost concepts. However, effective
for cost reporting periods beginning on or after January 1, 2008, IPF
PPS payments are based on 100 percent of the Federal rate.

II. Proposal To Revise the IPF PPS Payment Rate Update Period From a
Rate Year to a Fiscal Year

In this proposed rule, we are proposing a change to the current
period for the annual updates of the IPF PPS Federal payment rates. We
propose to revise the IPF PPS payment rate update period by switching
from a RY that begins on July 1 and goes through June 30 to a period
that coincides with a fiscal year (FY), that is, October 1 through
September 30. We would also refer to the update period as a FY
beginning with the update period that begins in 2012, that is, FY 2013.
This change in the annual update period would allow us to consolidate
Medicare publications by aligning the IPF PPS update with the annual
update of the ICD-9-CM codes, which are effective on October 1 of each
year. Currently, in addition to our annual proposed and final
rulemaking documents, we publish a change request transmittal every
August updating the ICD-9-CM codes related to the DRG and comorbidity
adjustments. By aligning the IPF PPS

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with the same update period as the ICD-9-CM codes, we will eliminate
the need to publish a transmittal off-cycle.
We maintain the same diagnostic coding and DRG classification for
IPFs that are used under the IPPS for providing the psychiatric care.
When the IPF PPS was implemented, we adopted the same diagnostic code
set and DRG patient classification systems (that is, the CMS DRGs) that
were utilized at the time under the hospital IPPS. Every year, changes
to the ICD-9-CM coding system are addressed in the IPPS proposed and
final rules. These changes are effective October 1 of each year and
must be used by acute care hospitals as well as other providers to
report diagnostic and procedure information. The IPF PPS has always
incorporated ICD-9-CM coding changes made in the annual IPPS update.
This proposed change to the annual payment rate update period would
allow the annual update to the rates and the ICD-9-CM coding update to
occur on the same schedule and appear in the same Federal Register
document.
Our intent in making the change in the payment rate update schedule
is to place the IPF PPS on the same update cycle as other PPSs, making
it administratively efficient. In order to smoothly transition to a
payment update period that runs from October 1 through September 30, we
propose that the RY 2012 period run from July 1, 2011 to September 30,
2012 such that RY 2012 would be 15 months. Under this proposal, after
RY 2012, the rate update period for the IPF PPS payment rates and other
policy changes would begin on October 1 and go through September 30.
The next update to the IPF PPS rates after RY 2012 would be the FY 2013
update cycle, which would begin on October 1, 2012 and go through
September 30, 2013. In addition, we are proposing to make a change to
the regulations at Sec. 412.402 to add the term ``IPF Prospective
Payment System Rate Year'' which would mean October 1 through September
30. We are proposing that the RY would be referred to as a FY. The
discussion of the proposed 15-month market basket update for the
proposed 2012 rate year can be found in section III.C.5. of this
proposed rule.

III. Proposed Rebasing and Revising of the Rehabilitation, Psychiatric,
and Long-Term Care (RPL) Market Basket for Inpatient Psychiatric
Facilities

A. Background

The input price index (that is, the market basket) that was used to
develop the IPF PPS was the Excluded Hospital with Capital market
basket. This market basket was based on 1997 Medicare cost report data
and included data for Medicare participating IPFs, inpatient
rehabilitation facilities (IRFs), long-term care hospitals (LTCHs),
cancer hospitals, and children's hospitals. 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 a hospital input price
index.
Beginning with the May 2006 IPF PPS final rule (71 FR 27046 through
27054), IPF PPS payments were updated using a FY 2002-based market
basket reflecting the operating and capital cost structures for IRFs,
IPFs, and LTCHs (hereafter referred to as the Rehabilitation,
Psychiatric, and Long-Term Care (RPL) market basket).
We excluded cancer and children's hospitals from the RPL market
basket because their payments are based entirely on reasonable costs
subject to rate-of-increase limits established under the authority of
section 1886(b) of the Act, which are implemented in regulations at
Sec. 413.40. They are not reimbursed through a PPS. Also, the FY 2002
cost structures for cancer and children's hospitals are noticeably
different than the cost structures of the IRFs, IPFs, and LTCHs. A
complete discussion of the FY 2002-based RPL market basket appears in
the May 2006 IPF PPS final rule (71 FR 27046 through 27054).
In the May 1, 2009 IPF PPS notice (74 FR 20362), we expressed our
interest in exploring the possibility of creating a stand-alone IPF
market basket that reflects the cost structures of only IPF providers.
We note that, of the available options, one would be to join the
Medicare cost report data from freestanding IPF providers (presently
incorporated into the FY 2002-based RPL market basket) with data from
hospital-based IPF providers. We indicated that an examination of the
Medicare cost report data comparing freestanding and hospital-based
IPFs revealed considerable differences between the two with respect to
cost levels and cost structures. At that time, we were unable to fully
understand the differences between these two types of IPF providers. As
a result, we felt that further research was required and we solicited
public comment for additional information that might help us to better
understand the reasons for the variations in costs and cost structures,
as indicated by the cost report data, between freestanding and
hospital-based IPFs (74 FR 20376).
We summarized the public comments we received and our responses in
the April 2010 IPF PPS notice (75 FR 23111 through 23113). Despite
receiving comments from the public on this issue, we remain unable to
sufficiently understand the observed differences in costs and cost
structures between hospital-based and freestanding IPFs, and therefore
we do not feel it is appropriate at this time to incorporate data from
hospital-based IPFs with those of freestanding IPFs to create a stand-
alone IPF market basket.
Although we do not feel it would be appropriate to propose a stand-
alone IPF market basket, we are currently exploring the viability of
creating two separate market baskets from the current RPL, one of which
would include freestanding IPFs and freestanding IRFs and would be used
to update payments under both the IPF and IRF payment systems. The
other would be a stand-alone LTCH market basket. Depending on the
outcome of our research, we anticipate the possibility of proposing a
rehabilitation and psychiatric (RP) market basket in the next update
cycle. We welcome public comment on the possibility of using this type
of market basket to update IPF payments in the future.
For this update cycle, we are proposing to rebase and revise the FY
2002-based RPL market basket by creating a proposed FY 2008-based RPL
market basket as described below. In the following discussion, we
provide an overview of the market basket and describe the methodologies
we propose to use for purposes of determining the operating and capital
portions of the proposed FY 2008-based RPL market basket.

B. Overview of the Proposed FY 2008-Based RPL Market Basket

The proposed FY 2008-based RPL market basket is a fixed weight,
Laspeyres-type price index. 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 2008)
and total base period expenditures are estimated for a set of mutually
exclusive and exhaustive spending categories with the proportion of
total costs that each category

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represents being calculated. 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 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.
As noted above, the market basket is described as a fixed-weight
index because it represents the change in price over time of a constant
mix (quantity and intensity) of goods and services needed to furnish
hospital services. 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, a hospital hiring more
nurses to accommodate the needs of patients would increase the volume
of goods and services purchased by the hospital, but would not be
factored into the price change measured by a fixed-weight hospital
market basket. Only when the index is rebased would changes in the
quantity and intensity be captured, with those changes being reflected
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.

C. Proposed Rebasing and Revising of the RPL Market Basket

We are inviting public comments on our proposed methodological
changes to the RPL 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 proposing to shift the base year cost structure
for the RPL market basket from FY 2002 to FY 2008). ``Revising'' means
changing data sources, price proxies, or methods, used to derive the
input price index. We propose to rebase and revise the market basket
used to update the IPF PPS.
1. Development of Cost Categories and Weights
a. Medicare Cost Reports
The proposed FY 2008-based RPL market basket consists of several
major cost categories derived from the FY 2008 Medicare cost reports
for freestanding IRFs, freestanding IPFs, and LTCHs including wages and
salaries, pharmaceuticals, professional liability insurance, capital,
and a residual. These FY 2008 cost reports include providers whose cost
report begin date is on or between October 1, 2007 and September 30,
2008. We choose to use FY 2008 as the base year because we believe that
the Medicare cost reports for this year represent the most recent,
complete set of Medicare cost report data available for IRFs, IPFs, and
LTCHs. However, there is an issue with obtaining data specifically for
benefits and contract labor from this set of FY 2008 Medicare cost
reports since IRFs, IPFs, and LTCHs were not required to complete the
Medicare cost report worksheet from which these data were collected
(Worksheet S-3, part II). As a result, only a small number of providers
(less than 30 percent) reported data for these categories, and we do
not expect these FY 2008 data to improve over time. Furthermore, since
IRFs, IPFs, and LTCHs were not required to submit data for Worksheet S-
3, part II in previous cost reporting years, we have always had this
issue of incomplete Medicare cost report data for benefits and contract
labor (including when we finalized the FY 2002-based RPL market
basket). Due to the incomplete benefits and contract labor data for
IRFs, IPFs, and LTCHs, we propose to develop these cost weights using
FY 2008 Medicare cost report data for IPPS hospitals (similar to the
method that was used for the FY 2002-based RPL market basket).
Additional detail is provided later in this section.
Since our goal is to measure cost shares that are reflective of
case mix and practice patterns associated with providing services to
Medicare beneficiaries, we are proposing to limit our selection of
Medicare cost reports to those from hospitals that have a Medicare
average length of stay (LOS) that is within a comparable range of their
total facility average LOS. We believe this provides a more accurate
reflection of the structure of costs for Medicare covered days. We
propose to use the cost reports of IRFs and LTCHs with Medicare average
LOS within 15 percent (that is, 15 percent higher or lower) of the
total facility average LOS for the hospital. This is the same edit
applied to derive the FY 2002-based RPL market basket and generally
includes those LTCHs and IRFs with Medicare LOS within approximately 5
days of the facility average LOS of the hospital.
We are proposing to use a less stringent measure of Medicare LOS
for IPFs. For this provider-type, and in order to produce a robust
sample size, we propose to use those facilities' Medicare cost reports
whose average LOS is within 30 or 50 percent (depending on the total
facility average LOS) of the total facility average LOS. This is the
same edit applied to derive the FY 2002-based RPL market basket.
We applied these LOS edits to first obtain a set of cost reports
for facilities that have a Medicare LOS within a comparable range of
their total facility LOS. Using this set of Medicare cost reports, we
then calculated cost weights for four cost categories directly from the
FY 2008 Medicare cost reports for freestanding IRFs, freestanding IPFs,
and LTCHs (found in Table 1 below). These Medicare cost report cost
weights were then supplemented with information obtained from other
data sources (explained in more detail below) to derive the proposed FY
2008-based RPL market basket cost weights.

Table 1--Major Cost Categories and Their Respective Cost Weights as
Calculated Directly From FY 2008 Medicare Cost Reports
------------------------------------------------------------------------
Proposed FY
2008-based RPL
Major cost categories market basket
(percent)
------------------------------------------------------------------------
Wages and salaries...................................... 47.371
Professional liability insurance (Malpractice).......... 0.764
Pharmaceuticals......................................... 6.514
Capital................................................. 8.392
All other............................................... 36.959
------------------------------------------------------------------------

b. Other Data Sources
In addition to the IRF, IPF and LTCH Medicare cost reports for
freestanding IRFs and freestanding IPFs, and LTCHs, the other data
sources we used to develop the proposed FY 2008-based RPL market basket
cost weights were the FY 2008 IPPS Medicare cost reports and the
Benchmark Input-Output (I-O) Tables created by the Bureau of Economic
Analysis (BEA), U.S. Department of Commerce. The FY 2008 Medicare cost
reports include providers whose cost report begin date is on or

[[Page 5003]]

between October 1st, 2007 and September 30, 2008.
As noted above, the proposed FY 2008-based RPL cost weights for
benefits and contract labor were derived using FY 2008-based IPPS
Medicare cost reports. We used these Medicare cost reports to calculate
cost weights for Wages and Salaries, Benefits, and Contract Labor for
IPPS hospitals for FY 2008. For the proposed Benefits cost weight for
the FY 2008-based RPL market basket, the ratio of the FY 2008 IPPS
Benefits cost weight to the FY 2008 IPPS Wages and Salaries cost weight
was applied to the RPL Wages and Salaries cost weight. Similarly, the
ratio of the FY 2008 IPPS Contract Labor cost weight to the FY 2008
IPPS Wages and Salaries cost weight was applied to the RPL Wages and
Salaries cost weight to derive a Contract Labor cost weight for the
proposed FY 2008-based RPL market basket.
The All Other cost category is divided into other hospital
expenditure category shares using the 2002 BEA Benchmark I-O data
following the removal of the portions of the All Other cost category
provided in Table 1 that are attributable to Benefits and Contract
Labor. 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 2002-based RPL market basket, we used
the 1997 Benchmark I-O data. We are proposing to use the 2002 Benchmark
I-O data in the FY 2008-based RPL market basket. Instead of using the
less detailed Annual I-O data, we aged the 2002 Benchmark I-O data
forward to 2008. 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 expenditure shares are determined as
being equal to each category's proportion to total ``all other'' in the
aged 2002 Benchmark I-O data. For instance, if the cost for telephone
services represented 10 percent of the sum of the ``all other''
Benchmark I-O hospital expenditures, then telephone services would
represent 10 percent of the RPL market basket's All Other cost
category.
2. Final Cost Category Computation
As stated previously, for this rebasing we are proposing to use the
FY 2008 Medicare cost reports for IRFs, IPFs, and LTCHs to derive four
major cost categories. The proposed FY 2008-based RPL market basket
includes two additional cost categories that were not broken out
separately in the FY 2002-based RPL market basket: ``Administrative and
Business Support Services'' and ``Financial Services''. The inclusion
of these two additional cost categories, which are derived using the
Benchmark I-O data, is consistent with the addition of these two cost
categories to the FY 2006-based IPPS market basket (74 FR 43845). We
are proposing to break out both categories so we can better match their
respective expenses with more appropriate price proxies. A thorough
discussion of our rationale for each of these cost categories is
provided in the section III.C.3.s. of this proposed rule. Also, the
proposed FY 2008-based RPL 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 RPL
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 ``nonlabor-intensive'' services
to ``labor-related'' and ``nonlabor-related'' services. This is
consistent with the FY 2006-based IPPS market basket (74 FR 43845). As
discussed in more detail below and similar to the FY 2002-based RPL
market basket, 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 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 2008 cost weights for the proposed rebased
RPL 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
Insurance, all of the proxies for the operating portion of the proposed
FY 2008-based RPL market basket 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

[[Page 5004]]

proposed CPIs, PPIs, and ECIs selected meet these criteria.
Table 2 sets forth the proposed FY 2008-based RPL market basket
including cost categories, and their respective weights and price
proxies. For comparison purposes, the corresponding FY 2002-based RPL
market basket cost weights are listed, as well. For example, Wages and
Salaries are 49.447 percent of total costs in the proposed FY 2008-
based RPL market basket compared to 52.895 percent for the FY 2002-
based RPL market basket. Employee Benefits are 12.831 percent in the
proposed FY 2008-based RPL market basket compared to 12.982 percent for
the FY 2002-based RPL market basket. As a result, compensation costs
(Wages and Salaries plus Employee Benefits) for the proposed FY 2008-
based RPL market basket are 62.278 percent of total costs compared to
65.877 percent for the FY 2002-based RPL market basket.
Following Table 2 is a summary outlining the choice of the proxies
we propose to use for the operating portion of the FY 2008-based RPL
market basket. The price proxies proposed for the capital portion are
described in more detail in the capital methodology section (see
section III.C.4. of this proposed rule).
We note that the proxies for the operating portion of the FY 2008-
based RPL market basket are the same as those used for the FY 2006-
based IPPS operating market basket. Because these proxies meet our
criteria of reliability, timeliness, availability, and relevance, we
believe they are the best measures of price changes for the cost
categories. For further discussion on the FY 2006-based IPPS market
basket, see the IPPS final rule published in the Federal Register on
August 27, 2009 (74 FR 43843).

Table 2--Proposed FY 2008-Based RPL Market Basket Cost Categories, Weights, and Price Proxies With FY 2002-Based
RPL Market Basket Cost Weights Included for Comparison
----------------------------------------------------------------------------------------------------------------
FY Proposed FY
2002[dash]based 2008[dash]based
Cost categories RPL market RPL market Proposed FY 2008-based RPL
basket cost basket cost market basket price proxies
weights weights
----------------------------------------------------------------------------------------------------------------
1. Compensation.............................. 65.877 62.278
A. Wages and Salaries \1\................ 52.895 49.447 ECI for Wages and Salaries,
Civilian Hospital Workers.
B. Employee Benefits \1\................. 12.982 12.831 ECI for Benefits, Civilian
Hospital Workers.
2. Utilities................................. 0.656 1.578
A. Electricity........................... 0.351 1.125 PPI for Commercial Electric
Power.
B. Fuel, Oil, and Gasoline............... 0.108 0.371 PPI for Petroleum Refineries.
C. Water and Sewage...................... 0.197 0.082 CPI-U for Water & Sewerage
Maintenance.
3. Professional Liability Insurance.......... 1.161 0.764 CMS Hospital Professional
Liability Insurance
Premium Index.
4. All Other Products and Services........... 22.158 26.988
A. All Other Products.................... 13.325 15.574
(1.) Pharmaceuticals..................... 5.103 6.514 PPI for Pharmaceutical
Preparations for Human Use
(Prescriptions).
(2.) Food: Direct Purchases.............. 0.873 2.959 PPI for Processed Foods &
Feeds.
(3.) Food: Contract Services............. 0.620 0.392 CPI-U for Food Away From Home.
(4.) Chemicals \2\....................... 1.100 1.100 Blend of Chemical PPIs.
(5.) Medical Instruments................. 1.014 1.795 PPI for Medical, Surgical, and
Personal Aid Devices.
(6.) Photographic Supplies............... 0.096
(7.) Rubber and Plastics................. 1.052 1.131 PPI for Rubber & Plastic
Products.
(8.) Paper and Printing Products......... 1.000 1.021 PPI for Converted Paper &
Paperboard Products.
(9.) Apparel............................. 0.207 0.210 PPI for Apparel.
(10.) Machinery and Equipment............ 0.297 0.106 PPI for Machinery & Equipment.
(11.) Miscellaneous Products............. 1.963 0.346 PPI for Finished Goods less
Food and Energy.
B. All Other Services.................... 8.833 11.414
(1.) Labor-related Services.............. 5.111 4.681
(a.) Professional Fees: Labor-related \3\ 2.892 2.114 ECI for Compensation for
Professional and Related
Occupations.
(b.) Administrative and Business Support n/a 0.422 ECI for Compensation for Office
Services \4\. and Administrative Services.
(c.) All Other: Labor-Related Services 2.219 2.145 ECI for Compensation for
\5\. Private Service Occupations.
(2.) Nonlabor-Related Services........... 3.722 6.733
(a.) Professional Fees: Nonlabor-Related n/a 4.211 ECI for Compensation for
\3\. Professional and Related
Occupations.
(b.) Financial Services \5\.............. n/a 0.853 ECI for Compensation for
Financial Activities.
(c.) Telephone Services.................. 0.240 0.416 CPI-U for Telephone Services.
(d.) Postage............................. 0.682 0.630 CPI-U for Postage.
(e.) All Other: Nonlabor-Related Services 2.800 0.623 CPI-U for All Items less Food
\6\. and Energy.
5. Capital-Related Costs..................... 10.149 8.392
A. Depreciation.......................... 6.187 5.519
(1.) Fixed Assets........................ 4.250 3.286 BEA chained price index for
nonresidential construction
for hospitals and special care
facilities--vintage weighted
(26 years).
(2.) Movable Equipment................... 1.937 2.233 PPI for Machinery and
Equipment--vintage weighted
(11 years).
B. Interest Costs........................ 2.775 1.954
(1.) Government/Nonprofit................ 2.081 0.653 Average yield on domestic
municipal bonds (Bond Buyer 20
bonds)--vintage-weighted (26
years).

[[Page 5005]]

(2.) For Profit.......................... 0.694 1.301 Average yield on Moody's Aaa
bonds--vintage-weighted (26
years).
C. Other Capital-Related Costs........... 1.187 0.919 CPI-U for Residential Rent.
----------------------------------
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 used 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
III.C.3.j. of the preamble of this proposed rule.
\3\ 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 RPL market basket. For more detail about
how these new categories were derived, we refer readers to sections III.C.6. of the preamble of this proposed
rule, on the labor-related share.
\4\ The Administrative and Business Support Services cost category was contained within All Other: Labor-
intensive Services cost category in the FY 2002-based RPL market basket. The All Other: Labor-intensive
Services cost category is renamed the All Other: Labor-related Services cost category for the FY 2008-based
RPL market basket.
\5\ The Financial Services cost category was contained within the All Other: Non-labor Intensive Services cost
category in the FY 2002-based RPL market basket. The All Other: Non-labor Intensive Services cost category is
renamed the All Other: Nonlabor-related Services cost category for the FY 2008-based RPL market basket.

a. Wages and Salaries
We are proposing to use the ECI for Wages and Salaries for Hospital
Workers (All Civilian) (BLS series code CIU1026220000000I) to measure
the price growth of this cost category. This same proxy was used in the
FY 2002-based RPL 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 RPL market
basket.
c. Electricity
We are proposing to use the PPI for Commercial Electric Power (BLS
series code WPU0542). This same proxy was used in the FY 2002-based RPL
market basket.
d. Fuel, Oil, and Gasoline
For the FY 2002-based RPL market basket, this category only
included expenses classified under North American Industry
Classification System (NAICS) 21 (Mining). We proxied this category
using the PPI for Commercial Natural Gas (BLS series code WPU0552). For
the proposed FY 2008-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 (BLS series code PCU324110324110) as the proxy for this cost
category.
e. Water and Sewage
We are proposing to use the CPI for Water and Sewerage Maintenance
(All Urban Consumers) (BLS series code CUUR0000SEHG01) to measure the
price growth of this cost category. This same proxy was used in the FY
2002-based RPL 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 (75 FR 73268). This same
proxy was used in the FY 2002-based RPL market basket.
g. Pharmaceuticals
We are proposing to use the PPI for Pharmaceuticals for Human Use,
Prescription (BLS series code WPUSI07003) to measure the price growth
of this cost category. We note that we are not making a change to the
PPI that is used to proxy this cost category. There was a recent change
to the BLS naming convention for this series; however this is the same
proxy that was used in the FY 2002-based RPL market basket.
h. Food: Direct Purchases
We are proposing to use the PPI for Processed Foods and Feeds (BLS
series code WPU02) to measure the price growth of this cost category.
This same proxy was used in the FY 2002-based RPL market basket.
i. Food: Contract Services
We are proposing to use the CPI for Food Away From Home (All Urban
Consumers) (BLS series code CUUR0000SEFV) to measure the price growth
of this cost category. This same proxy was used in the FY 2002-based
RPL market basket.
j. Chemicals
We are proposing to use a blended PPI composed of the PPI for
Industrial Gas Manufacturing (NAICS 325120) (BLS series code
PCU325120325120P), the PPI for Other Basic Inorganic Chemical
Manufacturing (NAICS 325180) (BLS series code PCU32518-32518-), the PPI
for Other Basic Organic Chemical Manufacturing (NAICS 325190) (BLS

[[Page 5006]]

series code PCU32519-32519-), and the PPI for Soap and Cleaning
Compound Manufacturing (NAICS 325610) (BLS series code PCU32561-32561-
). 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 (BLS series code WPU061), the proxy used in the FY 2002-based
RPL market basket. Table 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.

Table 3--Blended Chemical PPI Weights
------------------------------------------------------------------------
Weights (in
Name percent) NAICS
------------------------------------------------------------------------
PPI for Industrial Gas Manufacturing.... 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. Medical Instruments
We are proposing to use the PPI for Medical, Surgical, and Personal
Aid Devices (BLS 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. Therefore, we used the PPI for Surgical and
Medical Instruments and Equipment (BLS series code WPU1562) to proxy
this category in the FY 2002-based RPL market basket. The 2002
Benchmark I-O data show that surgical and medical instruments now
represent only 33 percent of these expenses and that the largest
expense category is surgical appliance and supplies manufacturing
(corresponding to BLS 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.
l. Photographic Supplies
We are proposing to eliminate the cost category specific to
photographic supplies for the proposed FY 2008-based RPL market basket.
These costs would now be included in the Chemicals cost category
because the costs are presently reported as all other chemical
products. Notably, although we would be eliminating the specific cost
category, these costs would still be accounted for within the RPL
market basket.
m. Rubber and Plastics
We are proposing to use the PPI for Rubber and Plastic Products
(BLS series code WPU07) to measure price growth of this cost category.
This same proxy was used in the FY 2002-based RPL market basket.
n. Paper and Printing Products
We are proposing to use the PPI for Converted Paper and Paperboard
Products (BLS series code WPU0915) to measure the price growth of this
cost category. This same proxy was used in the FY 2002-based RPL market
basket.
o. Apparel
We are proposing to use the PPI for Apparel (BLS series code
WPU0381) to measure the price growth of this cost category. This same
proxy was used in the FY 2002-based RPL market basket.
p. Machinery and Equipment
We are proposing to use the PPI for Machinery and Equipment (BLS
series code WPU11) to measure the price growth of this cost category.
This same proxy was used in the FY 2002-based RPL market basket.
q. Miscellaneous Products
We are proposing to use the PPI for Finished Goods Less Food and
Energy (BLS series code WPUSOP3500) to measure the price growth of this
cost category. Using this index would remove the double-counting of
food and energy prices, which would already be captured elsewhere in
the market basket. This same proxy was used in the FY 2002-based RPL
market basket.
r. Professional Fees: Labor-Related
We are proposing to use the ECI for Compensation for Professional
and Related Occupations (Private Industry) (BLS 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 RPL market
basket.
s. Administrative and Business Support Services
We are proposing to use the ECI for Compensation for Office and
Administrative Support Services (Private Industry) (BLS series code
CIU2010000220000I) to measure the price growth of this category.
Previously these costs were included in the All Other: Labor-intensive
category (now renamed the All Other: Labor-related Services 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.
t. All Other: Labor-Related Services
We are proposing to use the ECI for Compensation for Service
Occupations (Private Industry) (BLS series code CIU2010000300000I) to
measure the price growth of this cost category. This same proxy was
used in the FY 2002-based RPL market basket.
u. Professional Fees: Nonlabor-Related
We are proposing to use the ECI for Compensation for Professional
and Related Occupations (Private Industry) (BLS 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.
v. Financial Services
We are proposing to use the ECI for Compensation for Financial
Activities (Private Industry) (BLS series code CIU201520A000000I) to
measure the price growth of this cost category. Previously these costs
were included in the All Other: Nonlabor-intensive category (now
renamed the All Other: Nonlabor-related Services 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

[[Page 5007]]

financial services and its incorporation represents a technical
improvement to the market basket.
w. Telephone Services
We are proposing to use the CPI for Telephone Services (BLS series
code CUUR0000SEED) to measure the price growth of this cost category.
This same proxy was used in the FY 2002-based RPL market basket.
x. Postage
We are proposing to use the CPI for Postage (BLS series code
CUUR0000SEEC01) to measure the price growth of this cost category. This
same proxy was used in the FY 2002-based RPL market basket.
y. All Other: Nonlabor-Related Services
We are proposing to use the CPI for All Items Less Food and Energy
(BLS 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 RPL market basket. We believe that using the
CPI for All Items Less Food and Energy would remove the double counting
of changes in food and energy prices, as they are already captured
elsewhere in the market basket. Consequently, we believe that the
incorporation of this proxy would represent a technical improvement to
the market basket.
4. Proposed Methodology for Capital Portion of the RPL Market Basket
In the FY 2002-based RPL market basket, we did not have IRF, IPF,
and LTCH 2002 Medicare cost report data for the capital cost weights,
due to a change in the 2002 reporting requirements. Therefore, we used
these hospitals' 2001 expenditure data for the capital cost categories
of depreciation, interest, and other capital expenses, and aged the
data to a 2002 base year using relevant price proxies.
For the proposed FY 2008-based RPL market basket, we are proposing
to calculate weights for the proposed RPL market basket capital costs
using the same set of FY 2008 Medicare cost reports used to develop the
operating share for IRFs, IPFs, and LTCHs. To calculate the proposed
total capital cost weight, we first apply the same LOS edits as applied
prior to calculating the operating cost weights as described above in
section III.C.3. The resulting proposed capital weight for the FY 2008
base year is 8.392 percent.
Lease expenses are unique in that they are not broken out as a
separate cost category in the RPL market basket, but rather are
proportionally distributed amongst 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 the FY 2002-based RPL market basket, we first assumed 10
percent of lease expenses represents overhead and assigned those costs
to the Other Capital-Related Costs 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 & Fixed
Equipment; and (2) Movable Equipment. The apportionment between
building & fixed equipment and movable equipment was determined using
the FY 2008 Medicare cost reports for freestanding IRFs, IPFs, and
LTCHs. This methodology was also used to compute the apportionment used
in the FY 2002-based RPL market basket (70 FR 47912).
The total Interest expense cost category is split between
government/nonprofit interest and for-profit interest. The FY 2002-
based RPL market basket 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 47912).
This was based on the FY 2002-based IPPS capital input price index (70
FR 23406) due to insufficient Medicare cost report data for IPFs, IRFs,
and LTCHs. For the proposed FY 2008-based RPL market basket, we are
proposing to derive the split using the relative FY 2008 Medicare cost
report data on interest expenses for government/nonprofit and for-
profit IRFs, IPFs, and LTCHs. Based on these data, we calculated a
proposed 33/67 split between government/nonprofit and for-profit
interest. We believe it is important that this split reflects the
latest relative cost structure of interest expenses for RPL providers.
As stated above, we first apply the LOS edits (as described in section
III.C.3.) prior to calculating this split. Therefore, we are using cost
reports that are reflective of case mix and practice patterns
associated with providing services to Medicare beneficiaries. Using
data specific to government/nonprofit and for-profit IRFs, IPFs, and
LTCHs as well as the application of these LOS edits are the primary
reasons for the difference in this split relative to the FY 2002-based
RPL market basket.
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
capital portion of the FY 2008-based RPL market basket 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 & fixed
equipment, movable equipment, and interest. We are proposing to use the
vintage weights to compute vintage-weighted price changes associated
with depreciation and interest expense.
Vintage weights are an integral part of the proposed FY 2008-based
RPL market basket. 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 capital portion of the proposed FY 2008-based RPL
market basket would reflect the annual price changes associated with
capital costs, and would be a useful simplification of the actual
capital investment process. By accounting for the vintage nature of
capital, we are able to provide an accurate and 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 capital component of the proposed FY 2008-based RPL
market basket would reflect 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 &
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

[[Page 5008]]

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 2008.
In order to estimate capital purchases using data on depreciation
expenses, the expected life for each cost category (building & fixed
equipment, movable equipment, and interest) is needed to calculate
vintage weights. For the FY 2002-based RPL market basket, due to
insufficient Medicare cost report data for IRFs, IPFs, and LTCHs, we
used 2001 Medicare Cost Reports for IPPS hospitals to determine the
expected life of building & fixed equipment and movable equipment (70
FR 47913). The FY 2002-based RPL market basket was based on an expected
life of building & fixed equipment of 23 years. It used 11 years as the
expected life for movable equipment. We believed that this data source
reflected the latest relative cost structure of depreciation expenses
for hospitals at the time and was analogous to IRFs, IPFs, and LTCHs.
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. Following a
similar method to what was applied for the FY 2002-based RPL market
basket, we are proposing to use the expected life of building & fixed
equipment to be equal to 26 years, and the expected life of movable
equipment to be 11 years. These expected lives are calculated using FY
2008 Medicare cost reports for IPPS hospitals since we are currently
unable to obtain robust measures of the expected lives for building &
fixed equipment and movable equipment using the Medicare cost reports
from IRFs, IPFs, and LTCHs.
We also propose to use the building & fixed equipment and movable
equipment weights derived from FY 2008 Medicare cost reports for IRFs,
IPFs, and LTCHs to separate the depreciation expenses into annual
amounts of building & fixed equipment depreciation and movable
equipment depreciation. Year-end asset costs for building & fixed
equipment and movable equipment were determined by multiplying the
annual depreciation amounts by the expected life calculations. 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 & fixed equipment and for
movable equipment. Each of these sets of vintage weights is explained
in more detail below.
For the proposed building & fixed equipment vintage weights, we
used the real annual capital purchase amounts for building & fixed
equipment to capture the actual amount of the physical acquisition, net
of the effect of price inflation. This real annual purchase amount for
building & fixed equipment was produced by deflating the nominal annual
purchase amount by the building & fixed equipment price proxy, BEA's
chained price index for nonresidential construction for hospitals and
special care facilities. Because building & fixed equipment have an
expected life of 26 years, the vintage weights for building & fixed
equipment are deemed to represent the average purchase pattern of
building & fixed equipment over 26-year periods. With real building &
fixed equipment purchase estimates available from 2008 back to 1963, we
averaged twenty 26-year periods to determine the average vintage
weights for building & fixed equipment that are representative of
average building & fixed equipment purchase patterns over time. Vintage
weights for each 26-year period are calculated by dividing the real
building & fixed capital purchase amount in any given year by the total
amount of purchases in the 26-year period. This calculation is done for
each year in the 26-year period, and for each of the twenty 26-year
periods. We used the average of each year across the twenty 26-year
periods to determine the average building & fixed equipment vintage
weights for the FY 2008-based RPL market basket.
For the proposed 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. This is the same
proxy used for the FY 2002-based RPL market basket. Based on our
determination that movable equipment has an expected life of 11 years,
the vintage weights for movable equipment represent the average
expenditure for movable equipment over an 11-year period. With real
movable equipment purchase estimates available from 2008 back to 1963,
thirty-five 11-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 11-year period are calculated by dividing the real movable
capital purchase amount for any given year by the total amount of
purchases in the 11-year period. This calculation was done for each
year in the 11-year period and for each of the thirty-five 11-year
periods. We used the average of each year across the thirty-five 11-
year periods to determine the average movable equipment vintage weights
for the FY 2008-based RPL market basket.
For the proposed interest vintage weights, the nominal annual
capital purchase amounts for total equipment (building & 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 26 years, the vintage weights for interest are deemed to represent
the average purchase pattern of total equipment over 26-year periods.
With nominal total equipment purchase estimates available from 2008
back to 1963, twenty 26-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 26-year
period are calculated by dividing the nominal total capital purchase
amount for any given year by the total amount of purchases in the 26-
year period. This calculation is done for each year in the 26-year
period and for each of the twenty 26-year periods. We used the average
of each year across the twenty 26-year periods to determine the average
interest vintage weights for the FY 2008-based RPL market basket. The
vintage weights for the capital portion of the FY 2002-based RPL market
basket and the FY 2008-based RPL market basket are presented in Table
4.

[[Page 5009]]

Table 4--FY 2002 and FY 2008 Vintage Weights for Capital-Related Price Proxies
--------------------------------------------------------------------------------------------------------------------------------------------------------
Building and fixed equipment Movable equipment Interest
-----------------------------------------------------------------------------------------------
Year FY 2002 23 FY 2008 26 FY 2002 11 FY 2008 11 FY 2002 23 FY 2008 26
years years years years years years
--------------------------------------------------------------------------------------------------------------------------------------------------------
1....................................................... 0.021 0.021 0.065 0.071 0.010 0.010
2....................................................... 0.022 0.023 0.071 0.075 0.012 0.012
3....................................................... 0.025 0.025 0.077 0.080 0.014 0.014
4....................................................... 0.027 0.027 0.082 0.083 0.016 0.016
5....................................................... 0.029 0.028 0.086 0.085 0.019 0.018
6....................................................... 0.031 0.030 0.091 0.089 0.023 0.020
7....................................................... 0.033 0.031 0.095 0.092 0.026 0.021
8....................................................... 0.035 0.033 0.100 0.098 0.029 0.024
9....................................................... 0.038 0.035 0.106 0.103 0.033 0.026
10...................................................... 0.040 0.037 0.112 0.109 0.036 0.029
11...................................................... 0.042 0.039 0.117 0.116 0.039 0.033
12...................................................... 0.045 0.041 .............. .............. 0.043 0.035
13...................................................... 0.047 0.042 .............. .............. 0.048 0.038
14...................................................... 0.049 0.043 .............. .............. 0.053 0.041
15...................................................... 0.051 0.044 .............. .............. 0.056 0.043
16...................................................... 0.053 0.045 .............. .............. 0.059 0.046
17...................................................... 0.056 0.046 .............. .............. 0.062 0.049
18...................................................... 0.057 0.047 .............. .............. 0.064 0.052
19...................................................... 0.058 0.047 .............. .............. 0.066 0.053
20...................................................... 0.060 0.045 .............. .............. 0.070 0.053
21...................................................... 0.060 0.045 .............. .............. 0.071 0.055
22...................................................... 0.061 0.045 .............. .............. 0.074 0.056
23...................................................... 0.061 0.046 .............. .............. 0.076 0.060
24...................................................... .............. 0.046 .............. .............. .............. 0.063
25...................................................... .............. 0.045 .............. .............. .............. 0.064
26...................................................... .............. 0.046 .............. .............. .............. 0.068
-----------------------------------------------------------------------------------------------
Total............................................... 1.000 1.000 1.000 1.000 1.000 1.000
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note: Numbers 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 capital portion of the proposed FY 2008-
based RPL market basket that were used in the FY 2002-based RPL market
basket with the exception of the Boeckh Construction Index. We replaced
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 price proxies (prior to any vintage weighting) for each of the
capital cost categories are the same as those used for the FY 2006-
based CIPI as described in the IPPS FY 2010 final rule (74 FR at
43857).
5. Proposed RY 2012 Market Basket Update
For the proposed RY 2012 (that is, beginning July 1, 2011 and
ending September 30, 2012), we are proposing to use a 15-month (that is
July 1, 2011 through September 30, 2012) estimate of the proposed FY
2008-based RPL market basket based on the best available data.
Consistent with historical practice, we estimate the RPL market basket
update for the IPF PPS based on IHS Global Insight'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 market baskets.
To determine a 15-month market basket update for RY 2012, we
calculate the 5-quarter moving average index level for July 1, 2011
through September 30, 2012 and the 4-quarter moving average index level
for July 1, 2010 through June 30, 2011. The percent change in these two
values represents the proposed 15-month market basket update.
Based on IHS Global Insight's 4th quarter 2010 forecast with
history through the 3rd quarter of 2010, the projected 15-month market
basket update for the proposed 15-month RY 2012 (July 1, 2011 through
September 30, 2012) is 3.0 percent. Therefore, consistent with our
historical practice of estimating market basket increases based on the
best available data, we are proposing a market basket update of 3.0
percent for the proposed 15-month RY 2012. Furthermore, because the
proposed RY 2012 update is based on the most recent market basket
estimate for the 15-month period (currently 3.0 percent), we are also
proposing that if more recent data are subsequently available (for
example, a more recent estimate of the market basket), we would use
such data, if appropriate, to determine the RY 2012 update in the final
rule.
We note that the most recent estimate of the FY 2008-based RPL
market basket update for July 1, 2011 through June 30, 2012, based on
IHS Global Insight's 4th quarter 2010 forecast with history through the
3rd quarter of 2010, is 2.6 percent. We determine this 12-month market
basket update by calculating the 4-quarter moving average index level
for July 1, 2011 through June 30, 2012 and the 4-quarter moving average
index level for July 1, 2010 through June 30, 2011. The percent change
in these two values represents the proposed 12-month market basket
update. Consistent with our historical practice of using

[[Page 5010]]

market basket estimates based on the most recent available data, if we
were not proposing to extend the 2012 IPF PPS rate year by 3 months, we
would have proposed a market basket update for a 12-month RY 2012 of
2.6 percent, based on the most recent estimate of the 12-month RPL
market basket update for July 1, 2011 through June 30, 2012.
Using the current FY 2002-based RPL market basket and IHS Global
Insight's 4th quarter 2010 forecast for the market basket components,
the 15-month RY 2012 update would also be 3.0 percent. The 12-month RY
2012 update would be 2.6 percent. Table 5 below compares the proposed
FY 2008-based RPL market basket and the FY 2002-based RPL market basket
percent changes.

Table 5--FY 2002-Based and Proposed FY 2008-Based RPL Market Basket
Percent Change, RY 2006 Through FY 2014
------------------------------------------------------------------------
FY 2008-Based
FY 2002-Based RPL Proposed RPL
Rate Year (RY) or Fiscal Year (FY) Market Basket Market Basket
Index Percent Index Percent
Change Change
------------------------------------------------------------------------
Historical data:
RY 2006 \1\................... 3.8 3.7
RY 2007 \1\................... 3.5 3.5
RY 2008 \1\................... 3.5 3.6
RY 2009 \1\................... 3.2 3.3
RY 2010 \1\................... 2.2 2.1
Average 2006-2010............. 3.2 3.2
Forecast:
RY 2011 \1\................... 2.2 2.3
RY 2012 \2\................... 3.0 3.0
FY 2013 \3\................... 3.0 2.9
FY 2014 \3\................... 3.0 3.0
Average 2011-2014............. 2.8 2.8
------------------------------------------------------------------------
\1\ RY 2006 through RY 2011 represent 12-month updates, which include
July 1 through June 30.
\2\ RY 2012 represents a 15-month update, which includes July 1, 2011
through September 30, 2012.
\3\ FY 2013 through FY 2014 represent 12-month updates, which include
October 1 through September 30.
Note that these market basket percent changes do not include any further
adjustments as may be statutorily required.
Source: IHS Global Insight, Inc. 4th quarter 2010 forecast.

For the RY 2012 proposed market basket update, there is no
difference between the 15-month top-line FY 2002-based and the proposed
FY 2008-based RPL market basket increases due to offsetting factors.
The lower total compensation weight in the proposed FY 2008-based RPL
market basket (62.278 percent) relative to the FY 2002-based RPL market
basket (65.877 percent), absent other factors, would have resulted in a
slightly lower market basket update using the FY 2008-based RPL market
basket. This impact, however, is offset by 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 RPL market basket is 2.892 percent compared to 6.325 percent in
the proposed FY 2008-based RPL market basket.
6. Proposed Labor-Related Share
As described in section V.C.1. of this proposed rule, due to the
variations in costs and geographic wage levels, we are proposing that
payment rates under the IPF PPS continue to be adjusted by a geographic
wage index. This wage index would apply to the labor-related portion of
the proposed Federal per diem base rate, hereafter referred to as the
labor-related share.
The labor-related share is determined by identifying the national
average proportion of total 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. Given this, based on our definition of the
labor-related share, we are proposing to include in the labor-related
share the sum of the relative importance of Wages and Salaries,
Employee Benefits, Professional Fees: Labor-related, Administrative and
Business Support Services, All Other: Labor-related Services
(previously referred to in the FY 2002-based RPL market basket as
labor-intensive), and a portion of the Capital-Related cost weight.
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.
As stated in the April 2010 IPF PPS notice (75 FR 23110), the
labor-related share was defined as the sum of the relative importance
of Wages and Salaries, Fringe Benefits, Professional Fees, Labor-
intensive Services, and a portion of the capital share from an
appropriate market basket. Therefore, to determine the labor-related
share for the IPF PPS for RY 2011, we used the FY 2002-based RPL market
basket cost weights relative importance to determine the labor-related
share for the IPF PPS.
For the proposed FY 2008-based RPL 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.

[[Page 5011]]

For the FY 2002-based RPL 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 Office of Management and Budget (OMB), we
contacted a sample of IPPS hospitals and received responses to our
survey from 108 hospitals. We believe that these data serve as an
appropriate proxy for the purchasing patterns of professional services
for IPFs as they are also institutional providers of health care
services. 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.
42 percent of management consulting services.
We applied each of these percentages to its respective Benchmark I-
O cost category underlying the professional fees cost category. This is
the methodology that we used to separate the FY 2008-based RPL 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 19 percent of the total number of
freestanding IRFs, IPFs, and LTCHs that had home offices had those home
offices located in their respective local labor markets--defined as
being in the same Metropolitan Statistical Area (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 provider with the location of the hospital's home
office. We then placed providers into one of the following three
groups:
Group 1--Provider and home office are located in different
States.
Group 2--Provider and home office are located in the same
State and same city.
Group 3--Provider and home office are located in the same
State and different city.
We found that 63 percent of the providers with home offices were
classified into Group 1 (that is, different State) and, thus, these
providers 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, providers located in different States but the
same MSA as their home office), the 63 percent estimate was unchanged.
We found that 9 percent of all providers with home offices were
classified into Group 2 (that is, same State and same city and,
therefore, the same MSA). Consequently, these providers were determined
to be located in the same local labor market as their home offices.
We found that 27 percent of all providers 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
provider and its home office, we found that 10 percent of all providers
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
19 percent of providers with home offices had home offices located
within their local labor market (that is, 9 percent of providers with
home offices had their home offices in the same State and city (and,
thus, the same MSA), and 10 percent of providers 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 19 percent of these
costs into the Professional Fees: Labor-related cost category and the
remaining 81 percent into the Professional Fees: Nonlabor-related
Services cost category.
Table 6 below shows the proposed RY 2012 relative importance labor-
related share using the proposed FY 2008-based RPL market basket and
the FY 2002-based RPL market basket.

[[Page 5012]]

Table 6--Comparison of the RY 2011 (12-Month) Relative Importance Labor-
Related Share Based on the FY 2002-Based RPL Market Basket and the
Proposed RY 2012 (15-Month) Relative Importance Labor-Related Share
based on the Proposed FY 2008-Based RPL Market Basket
------------------------------------------------------------------------
Proposed RY 2012
RY 2011 Relative relative
importance labor- importance labor-
related share related share
------------------------------------------------------------------------
Wages and Salaries................ 52.600 49.248
Employee Benefits................. 13.935 12.988
Professional Fees: Labor-Related.. 2.853 2.085
Administrative and Business ................. 0.417
Support Services.................
All Other: Labor-Related Services. 2.118 2.104
Subtotal.......................... 71.506 66.842
Labor-Related Portion of Capital 3.894 3.657
Costs (46%)......................
-------------------------------------
Total Labor-Related Share..... 75.400 70.499
------------------------------------------------------------------------

The proposed labor-related share for RY 2012 is the sum of the
proposed RY 2012 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 2008) and RY 2012. The
sum of the proposed relative importance for RY 2012 for operating costs
(Wages and Salaries, Employee Benefits, Professional Fees: Labor-
Related, Administrative and Business Support Services, and All Other:
Labor-related Services) would be 66.842 percent, as shown in Table 6
above. We are proposing that the portion of Capital that is influenced
by the local labor market is estimated to be 46 percent, which is the
same percentage applied to the FY 2002-based RPL market basket. Since
the relative importance for Capital-Related Costs would be 7.950
percent of the proposed FY 2008-based RPL market basket in RY 2012, we
are proposing to take 46 percent of 7.950 percent to determine the
proposed labor-related share of Capital for RY 2012. The result would
be 3.657 percent, which we propose to add to 66.842 percent for the
operating cost amount to determine the total proposed labor-related
share for RY 2012. Therefore, the labor-related share that we propose
to use for IPF PPS in RY 2012 would be 70.499 percent. This proposed
labor-related share is determined using the same methodology as
employed in calculating all previous IPF labor-related shares (69 FR
66952). The wage index and the labor-related share are adjusted for
budget neutrality.

IV. Updates to the IPF PPS for RY Beginning July 1, 2011

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

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

Section 124(a)(1) of the BBRA requires that we implement the IPF
PPS in a budget neutral manner. In other words, the amount of total
payments under the IPF PPS, including any payment adjustments, must be
projected to be equal to the amount of total payments that would have
been made if the IPF PPS were not implemented. Therefore, we calculated
the budget-neutrality factor by setting the total estimated IPF PPS
payments to be equal to the total estimated payments that would have
been made under the Tax Equity and Fiscal Responsibility Act of 1982
(TEFRA) (Pub. L. 97-248) methodology had the IPF PPS not been
implemented.
Under the IPF PPS methodology, we calculated the final Federal per
diem base rate to be budget neutral during the IPF PPS implementation
period (that is, the 18-month period from January 1, 2005 through June
30, 2006) using a July 1 update cycle. We updated the average cost per
day to the midpoint of the IPF PPS implementation period (that is,
October 1, 2005), and this amount was used in the payment model to
establish the budget-neutrality adjustment.
A step-by-step description of the methodology used to estimate
payments under the TEFRA payment system appears in the November 2004
IPF PPS final rule (69 FR 66926).
1. Standardization of the Federal Per Diem Base Rate and
Electroconvulsive Therapy (ECT) Rate
In the November 2004 IPF PPS final rule, we describe how we
standardized the IPF PPS Federal per diem base rate in order to account
for the overall positive effects of the IPF PPS payment adjustment
factors. To standardize the IPF PPS payments, we compared the IPF PPS
payment amounts calculated from the FY 2002 Medicare Provider Analysis
and Review (MedPAR) file to the projected TEFRA payments from the FY
2002 cost report file updated to the midpoint of the IPF PPS
implementation period (that is, October 2005). The standardization
factor was calculated by dividing total estimated payments under the
TEFRA payment system by estimated payments under the IPF PPS. The
standardization factor was calculated to be 0.8367.
As described in detail in the May 2006 IPF PPS final rule (71 FR
27045), in reviewing the methodology used to simulate the IPF PPS
payments used for the November 2004 IPF PPS final rule, we discovered
that due to a computer code error, total IPF PPS payments were
underestimated by about 1.36 percent. Since the IPF PPS payment total
should have been larger than the estimated figure, the standardization
factor should have been smaller (0.8254 vs. 0.8367). In turn, the
Federal per diem base rate and the ECT rate should have been reduced by
0.8254 instead of 0.8367.
To resolve this issue, in RY 2007, we amended the Federal per diem
base rate and the ECT payment rate prospectively. Using the
standardization factor of 0.8254, the average cost per day was
effectively reduced by 17.46 percent (100 percent minus 82.54 percent =
17.46 percent).

[[Page 5013]]

2. Calculation of the Budget Neutrality Adjustment
To compute the budget neutrality adjustment for the IPF PPS, we
separately identified each component of the adjustment, that is, the
outlier adjustment, stop-loss adjustment, and behavioral offset.
A complete discussion of how we calculate each component of the
budget neutrality adjustment appears in the November 2004 IPF PPS final
rule (69 FR 66932 through 66933) and in the May 2006 IPF PPS final rule
(71 FR 27044 through 27046).
a. Outlier Adjustment
Since the IPF PPS payment amount for each IPF includes applicable
outlier amounts, we reduced the standardized Federal per diem base rate
to account for aggregate IPF PPS payments estimated to be made as
outlier payments. The outlier adjustment was calculated to be 2
percent. As a result, the standardized Federal per diem base rate was
reduced by 2 percent to account for projected outlier payments.
b. Stop-Loss Provision Adjustment
As explained in the November 2004 IPF PPS final rule, we provided a
stop-loss payment during the transition from cost-based reimbursement
to the per diem payment system to ensure that an IPF's total PPS
payments were no less than a minimum percentage of their TEFRA payment,
had the IPF PPS not been implemented. We reduced the standardized
Federal per diem base rate by the percentage of aggregate IPF PPS
payments estimated to be made for stop-loss payments. As a result, the
standardized Federal per diem base rate was reduced by 0.39 percent to
account for stop-loss payments. Since the transition was completed in
RY 2009, the stop-loss provision is no longer applicable, and for cost
reporting periods beginning on or after January 1, 2008, IPFs were paid
100 percent PPS.
c. Behavioral Offset
As explained in the November 2004 IPF PPS final rule,
implementation of the IPF PPS may result in certain changes in IPF
practices, especially with respect to coding for comorbid medical
conditions. As a result, Medicare may make higher payments than assumed
in our calculations. Accounting for these effects through an adjustment
is commonly known as a behavioral offset.
Based on accepted actuarial practices and consistent with the
assumptions made in other PPSs, we assumed in determining the
behavioral offset that IPFs would regain 15 percent of potential
``losses'' and augment payment increases by 5 percent. We applied this
actuarial assumption, which is based on our historical experience with
new payment systems, to the estimated ``losses'' and ``gains'' among
the IPFs. The behavioral offset for the IPF PPS was calculated to be
2.66 percent. As a result, we reduced the standardized Federal per diem
base rate by 2.66 percent to account for behavioral changes. As
indicated in the November 2004 IPF PPS final rule, we do not plan to
change adjustment factors or projections until we analyze IPF PPS data.
If we find that an adjustment is warranted, the percent difference
may be applied prospectively to the established PPS rates to ensure the
rates accurately reflect the payment level intended by the statute. In
conducting this analysis, we will be interested in the extent to which
improved coding of patients' principal and other diagnoses, which may
not reflect real increases in underlying resource demands, has occurred
under the PPS.

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

As described in the November 2004 IPF PPS final rule (69 FR 66931),
the average per diem cost was updated to the midpoint of the
implementation year. This updated average per diem cost of $724.43 was
reduced by 17.46 percent to account for standardization to projected
TEFRA payments for the implementation period, by 2 percent to account
for outlier payments, by 0.39 percent to account for stop-loss
payments, and by 2.66 percent to account for the behavioral offset. The
Federal per diem base rate in the implementation year was $575.95. The
increase in the per diem base rate for RY 2009 included the 0.39
percent increase due to the removal of the stop-loss provision. We
indicated in the November 2004 IPF PPS final rule (69 FR 66932) that we
would remove this 0.39 percent reduction to the Federal per diem base
rate after the transition. As discussed in section IV.D.2. of the May
2008 IPF PPS notice, we increased the Federal per diem base rate and
the ECT base rate by 0.39 percent in RY 2009. Therefore for RY 2009 and
beyond, the stop-loss provision has ended and is no longer a part of
budget neutrality.
In accordance with section 1886(s)(2)(A)(ii) of the Act, which
requires the application of an ``other adjustment,'' described in
section 1886(s)(3) of the Act (specifically, section 1886(s)(3)(A) for
RYs 2011 and 2012) that reduces the update to the IPF PPS base rate for
the rate year beginning in Calendar Year (CY) 2011, we are proposing to
adjust the IPF PPS update by 0.25 percentage point for rate year 2012.
We are proposing to apply the 15-month 2008-based RPL market basket
increase of 3.0 percent, as adjusted by the ``other adjustment'' of -
0.25 percentage point, and the wage index budget neutrality factor of
0.9995 to the RY 2011 Federal per diem base rate of $665.71 yielding a
proposed Federal per diem base rate of $683.68 for RY 2012. Similarly,
we propose applying the market basket increase, as adjusted by the
``other adjustment'', and the wage index budget neutrality factor to
the RY 2011 ECT base rate, yielding a proposed ECT base rate of $294.33
for RY 2012.

V. Proposed Update of the IPF PPS Adjustment Factors

A. Overview of the IPF PPS Adjustment Factors

The IPF PPS payment adjustments were derived from a regression
analysis of 100 percent of the FY 2002 MedPAR data file, which
contained 483,038 cases. For this proposed rule, we used the same
results of the regression analysis used to implement the November 2004
IPF PPS final rule. For a more detailed description of the data file
used for the regression analysis, see the November 2004 IPF PPS final
rule (69 FR 66935 through 66936). While we have since used more recent
claims data to set the fixed dollar loss threshold amount, we used the
same results of this regression analysis to update the IPF PPS for RY
2011 and we are proposing to use these same results for RY 2012. Now
that we are approximately 5 years into the IPF PPS, we believe that we
have enough data to begin looking at the process of refining the IPF
PPS as appropriate. We believe that in the next rulemaking, for FY
2013, we will be ready to propose potential refinements to the system.
As we stated previously, we do not plan to update the regression
analysis until we are able to analyze IPF PPS claims and cost report
data. However, we continue to monitor claims and payment data
independently from cost report data to assess issues, to determine
whether changes in case-mix or payment shifts have occurred among
freestanding governmental, non-profit and private psychiatric
hospitals, and psychiatric units of general hospitals, and CAHs and
other issues of importance to IPFs.

B. Proposed Patient-Level Adjustments

In the April 2010 IPF PPS notice (75 FR 23113 through 23117), we

[[Page 5014]]

announced payment adjustments for the following patient-level
characteristics: Medicare Severity diagnosis related groups (MS-DRGs)
assignment of the patient's principal diagnosis, selected
comorbidities, patient age, and the variable per diem adjustments.
1. Proposed Adjustment for MS-IPF-DRG Assignment
The IPF PPS includes payment adjustments for the psychiatric DRG
assigned to the claim based on each patient's principal diagnosis. The
IPF PPS recognizes the MS-DRGs. The DRG adjustment factors were
expressed relative to the most frequently reported psychiatric DRG in
FY 2002, that is, DRG 430 (psychoses). The coefficient values and
adjustment factors were derived from the regression analysis.
In accordance with Sec. 412.27(a), payment under the IPF PPS is
conditioned on IPFs admitting ``only patients whose admission to the
unit is required for active treatment, of an intensity that can be
provided appropriately only in an inpatient hospital setting, of a
psychiatric principal diagnosis that is listed in Chapter Five
(``Mental Disorders'') of the International Classification of Diseases,
Ninth Revision, Clinical Modification (ICD-9-CM)'' or in the Fourth
Edition, Text Revision of the American Psychiatric Association's
Diagnostic and Statistical Manual, (DSM-IV-TR). IPF claims with a
principal diagnosis included in Chapter Five of the ICD-9-CM or the
DSM-IV-TR are paid the Federal per diem base rate under the IPF PPS and
all other applicable adjustments, including any applicable DRG
adjustment. Psychiatric principal diagnoses that do not group to one of
the designated DRGs still receive the Federal per diem base rate and
all other applicable adjustments, but the payment would not include a
DRG adjustment.
The Standards for Electronic Transaction final rule published in
the Federal Register on August 17, 2000 (65 FR 50312), adopted the ICD-
9-CM as the designated code set for reporting diseases, injuries,
impairments, other health related problems, their manifestations, and
causes of injury, disease, impairment, or other health related
problems. Therefore, we use the ICD-9-CM as the designated code set for
the IPF PPS.
We believe that it is important to maintain the same diagnostic
coding and DRG classification for IPFs that are used under the IPPS for
providing psychiatric care. Therefore, when the IPF PPS was implemented
for cost reporting periods beginning on or after January 1, 2005, we
adopted the same diagnostic code set and DRG patient classification
system (that is, the CMS DRGs) that were utilized at the time under the
hospital inpatient prospective payment system (IPPS). Since the
inception of the IPF PPS, the DRGs used as the patient classification
system under the IPF PPS have corresponded exactly with the CMS DRGs
applicable under the IPPS for acute care hospitals.
Every year, changes to the ICD-9-CM coding system are addressed in
the IPPS proposed and final rules. The changes to the codes are
effective October 1 of each year and must be used by acute care
hospitals as well as other providers to report diagnostic and procedure
information. The IPF PPS has always incorporated ICD-9-CM coding
changes made in the annual IPPS update. We publish coding changes in a
Transmittal/Change Request, similar to how coding changes are announced
by the IPPS and LTCH PPS. Those ICD-9-CM coding changes are also
published in the following IPF PPS RY update, in either the IPF PPS
proposed and final rules, or in an IPF PPS update notice.
In the May 2008 IPF PPS notice (73 FR 25709), we discussed CMS'
effort to better recognize resource use and the severity of illness
among patients. CMS adopted the new MS-DRGs for the IPPS in the FY 2008
IPPS final rule with comment period (72 FR 47130). We believe by better
accounting for patients' severity of illness in Medicare payment rates,
the MS-DRGs encourage hospitals to improve their coding and
documentation of patient diagnoses. The MS-DRGs, which are based on the
CMS DRGs, represent a significant increase in the number of DRGs (from
538 to 745, an increase of 207). For a full description of the
development and implementation of the MS-DRGs, see the FY 2008 IPPS
final rule with comment period (72 FR 47141 through 47175).
In the May 2008 IPF PPS notice, the IPF PPS recognized the MS-DRGs.
A crosswalk, to reflect changes that were made to the DRGs under the
IPF PPS to the new MS-DRGs was provided (73 FR 25716). Since then, we
have referred to the IPF PPS DRGs as MS-DRGs. In this proposed rule, we
are proposing that all references to the MS-DRGs used for the IPF PPS,
would be to MS-IPF-DRGs. This would only be a change in terminology. We
are proposing to revise Sec. 412.402 to add the definition of MS-IPF-
DRG.
All of the ICD-9-CM coding changes are reflected in the FY 2011
GROUPER, Version 28.0, effective for IPPS discharges occurring on or
after October 1, 2010 through September 30, 2011. The GROUPER Version
28.0 software package assigns each case to an MS-DRG on the basis of
the diagnosis and procedure codes and demographic information (that is,
age, sex, and discharge status). The Medicare Code Editor (MCE) 27.0
uses the new ICD-9-CM codes to validate coding for IPPS discharges on
or after October 1, 2010. For additional information on the GROUPER
Version 28.0 and MCE 27.0, see Transmittal 2060 (Change Request 7134),
dated October 1, 2010. The IPF PPS has always used the same GROUPER and
Code Editor as the IPPS. Therefore, the ICD-9-CM changes, which were
reflected in the GROUPER Version 28.0 and MCE 27.0 on October 1, 2010,
also became effective for the IPF PPS for discharges occurring on or
after October 1, 2010.
The impact of the new MS-DRGs on the IPF PPS was negligible.
Mapping to the MS-DRGs resulted in the current 17 MS-DRGs, instead of
the original 15, for which the IPF PPS provides an adjustment. Although
the code set is updated, the same associated adjustment factors apply
now that have been in place since implementation of the IPF PPS, with
one exception that is unrelated to the update to the codes. When DRGs
521 and 522 were consolidated into MS-DRG 895, we carried over the
adjustment factor of 1.02 from DRG 521 to the newly consolidated MS-
DRG. This was done to reflect the higher claims volume under DRG 521,
with more than eight times the number of claims than billed under DRG
522. The updates are reflected in Tables 7 and 8. For a detailed
description of the mapping changes from the original DRG adjustment
categories to the current MS-DRG adjustment categories we refer readers
to the May 2008 IPF PPS notice (73 FR 25714).
The official version of the ICD-9-CM is available on CD-ROM from
the U.S. Government Printing Office. The FY 2009 version can be ordered
by contacting the Superintendent of Documents, U.S. Government Printing
Office, Department 50, Washington, DC 20402-9329, telephone number
(202) 512-1800. Questions concerning the ICD-9-CM should be directed to
Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination and
Maintenance Committee, CMS, Center for Medicare Management, Hospital
and Ambulatory Policy Group, Division of Acute Care, Mailstop C4-08-06,
7500 Security Boulevard, Baltimore, Maryland 21244-1850.
Further information concerning the official version of the ICD-9-CM
can be found in the IPPS final rule with

[[Page 5015]]

comment period, ``Changes to Hospital Inpatient Prospective Payment
System and Fiscal Year 2011 Rates'' in the August 16, 2010 Federal
Register (75 FR 50042) and at Tables 7 and 8 below list the FY 2011 new
and revised ICD-9-CM diagnosis codes that group to one of the 17 MS-
DRGs for which the IPF PPS provides an adjustment. These tables are
only a listing of FY 2011 changes and do not reflect all of the
currently valid and applicable ICD-9-CM codes classified in the MS-
DRGs. When coded as a principal code or diagnosis, these codes receive
the correlating MS-DRG adjustment.

Table 7--FY 2011 New Diagnosis Codes
------------------------------------------------------------------------
Diagnosis code MS-DRG descriptions MS-DRG
------------------------------------------------------------------------
799.51............................. Attention or 886
concentration deficit.
799.52............................. Cognitive 884
communication deficit.
799.54............................. Psychomotor deficit... 884
799.55............................. Frontal lobe and 884
executive function
deficit.
799.59............................. Other signs and 884
symptoms involving
cognition.
------------------------------------------------------------------------

Table 8--FY 2011 Revised Diagnosis Code
------------------------------------------------------------------------
Diagnosis code Description MS-DRG
------------------------------------------------------------------------
307.0.............................. Adult onset fluency 887
disorder.
------------------------------------------------------------------------

Because we do not plan to update the regression analysis until we are
able to analyze IPF PPS data, we propose that the MS-IPF-DRG adjustment
factors (as shown in Table 9) would continue to be paid for discharges
occurring in RY 2012.

Table 9--Proposed RY 2012 Current MS-IPF-DRGS Applicable for the
Principal Diagnosis Adjustment
------------------------------------------------------------------------
MS-IPF-DRG Adjustment
MS-DRG Descriptions Factor
------------------------------------------------------------------------
056................................ Degenerative nervous 1.05
system disorders w
MCC.
057................................ Degenerative nervous 1.05
system disorders w/o
MCC.
080................................ Nontraumatic stupor & 1.07
coma w MCC.
081................................ Nontraumatic stupor & 1.07
coma w/o MCC.
876................................ O.R. procedure w 1.22
principal diagnoses
of mental illness.
880................................ Acute adjustment 1.05
reaction &
psychosocial
dysfunction.
881................................ Depressive neuroses... 0.99
882................................ Neuroses except 1.02
depressive.
883................................ Disorders of 1.02
personality & impulse
control.
884................................ Organic disturbances & 1.03
mental retardation.
885................................ Psychoses............. 1.00
886................................ Behavioral & 0.99
developmental
disorders.
887................................ Other mental disorder 0.92
diagnoses.
894................................ Alcohol/drug abuse or 0.97
dependence, left AMA.
895................................ Alcohol/drug abuse or 1.02
dependence w
rehabilitation
therapy.
896................................ Alcohol/drug abuse or 0.88
dependence w/o
rehabilitation
therapy w MCC.
897................................ Alcohol/drug abuse or 0.88
dependence w/o
rehabilitation
therapy w/o MCC.
------------------------------------------------------------------------

2. Proposed Payment for Comorbid Conditions
The intent of the comorbidity adjustments is to recognize the
increased costs associated with comorbid conditions by providing
additional payments for certain concurrent medical or psychiatric
conditions that are expensive to treat. In the April 2010 IPF PPS
notice (75 FR 23114), we explained that the IPF PPS includes 17
comorbidity categories and identified the new, revised, and deleted
ICD-9-CM diagnosis codes that generate a comorbid condition payment
adjustment under the IPF PPS for RY 2011 (75 FR 23115).
Comorbidities are specific patient conditions that are secondary to
the patient's principal diagnosis and that require treatment during the
stay. Diagnoses that relate to an earlier episode of care and have no
bearing on the current hospital stay are excluded and must not be
reported on IPF claims. Comorbid conditions must exist at the time of
admission or develop subsequently, and affect the treatment received,
length of stay (LOS), or both treatment and LOS.
For each claim, an IPF may receive only one comorbidity adjustment
per comorbidity category, but it may receive an adjustment for more
than one comorbidity category. Billing instructions require that IPFs
must enter the full ICD-9-CM codes for up to 8 additional diagnoses if
they co-exist at the time of admission or develop subsequently and
impact the treatment provided.
The comorbidity adjustments were determined based on the regression
analysis using the diagnoses reported by IPFs in FY 2002. The principal
diagnoses were used to establish the DRG adjustments and were not
accounted for in establishing the comorbidity category adjustments,
except where ICD-9-CM ``code first'' instructions apply. As we
explained in the April 2010 IPF PPS notice (75 FR 23115), the code
first rule applies when

[[Page 5016]]

a condition has both an underlying etiology and a manifestation due to
the underlying etiology. For these conditions, the ICD-9-CM has a
coding convention that requires the underlying conditions to be
sequenced first followed by the manifestation. Whenever a combination
exists, there is a ``use additional code'' note at the etiology code
and a code first note at the manifestation code.
As discussed in the MS-IPF-DRG section (where we are proposing that
all references to MS-DRGs used for the IPF PPS be to MS-IPF-DRGs, as
detailed above), it is our policy to maintain the same diagnostic
coding set for IPFs that is used under the IPPS for providing the same
psychiatric care. Although the ICD-9-CM code set has been updated, the
same adjustment factors have been in place since the implementation of
the IPF PPS.
Table 10 below lists the FY 2011 new ICD diagnosis codes that
impact the comorbidity adjustments under the IPF PPS. Table 10 is not a
list of all currently valid ICD codes applicable for the IPF PPS
comorbidity adjustments.

Table 10--FY 2011 New ICD Codes Applicable for the Comorbidity
Adjustment
------------------------------------------------------------------------
Diagnosis code Description Comorbidity category
------------------------------------------------------------------------
237.73........................ Schwannomatosis. Oncology.
237.79........................ Other Oncology.
neurofibromatos
is.
------------------------------------------------------------------------

For RY 2012, we are applying the seventeen comorbidity categories
for which we are providing an adjustment, their respective codes,
including the new FY 2011 ICD-9-CM codes, and their respective
adjustment factors in Table 11 below.

Table 11--RY 2012 Diagnosis Codes and Adjustment Factors for Comorbidity
Categories
------------------------------------------------------------------------
Adjustment
Description of comorbidity Diagnoses codes factor
------------------------------------------------------------------------
Developmental disabilities.... 317, 3180, 3181, 3182, 1.04
and 319.
Coagulation Factor Deficits... 2860 through 2864..... 1.13
Tracheostomy.................. 51900 through 51909 1.06
and V440.
Renal Failure, Acute.......... 5845 through 5849, 1.11
63630, 63631, 63632,
63730, 63731, 63732,
6383, 6393, 66932,
66934, 9585.
Renal Failure, Chronic........ 40301, 40311, 40391, 1.11
40402, 40412, 40413,
40492, 40493, 5853,
5854, 5855, 5856,
5859, 586, V451,
V560, V561, and V562.
Oncology Treatment............ 1400 through 2399 with 1.07
a radiation therapy
code 92.21-92.29 or
chemotherapy code
99.25.
Uncontrolled Diabetes-Mellitus 25002, 25003, 25012, 1.05
with or without complications. 25013, 25022, 25023,
25032, 25033, 25042,
25043, 25052, 25053,
25062, 25063, 25072,
25073, 25082, 25083,
25092, and 25093.
Severe Protein Calorie 260 through 262....... 1.13
Malnutrition.
Eating and Conduct Disorders.. 3071, 30750, 31203, 1.12
31233, and 31234.
Infectious Disease............ 01000 through 04110, 1.07
042, 04500 through
05319, 05440 through
05449, 0550 through
0770, 0782 through
07889, and 07950
through 07959.
Drug and/or Alcohol Induced 2910, 2920, 29212, 1.03
Mental Disorders. 2922, 30300, and
30400.
Cardiac Conditions............ 3910, 3911, 3912, 1.11
40201, 40403, 4160,
4210, 4211, and 4219.
Gangrene...................... 44024 and 7854........ 1.10
Chronic Obstructive Pulmonary 49121, 4941, 5100, 1.12
Disease. 51883, 51884, V4611
and V4612, V4613 and
V4614.
Artificial Openings--Digestive 56960 through 56969, 1.08
and Urinary. 9975, and V441
through V446.
Severe Musculoskeletal and 6960, 7100, 73000 1.09
Connective Tissue Diseases. through 73009, 73010
through 73019, and
73020 through 73029.
Poisoning..................... 96500 through 96509, 1.11
9654, 9670 through
9699, 9770, 9800
through 9809, 9830
through 9839, 986,
9890 through 9897.
------------------------------------------------------------------------

3. Proposed Patient Age Adjustments
As explained in the November 2004 IPF PPS final rule (69 FR 66922),
we analyzed the impact of age on per diem cost by examining the age
variable (that is, the range of ages) for payment adjustments.
In general, we found that the cost per day increases with age. The
older age groups are more costly than the under 45 age group, the
differences in per diem cost increase for each successive age group,
and the differences are statistically significant.
We do not plan to update the regression analysis until we are able
to analyze IPF PPS data. Therefore, for RY 2012, we are proposing to
continue to use the patient age adjustments currently in effect as
shown in Table 12 below.

Table 12--Age Groupings and Adjustment Factors
------------------------------------------------------------------------
Adjustment
Age factor
------------------------------------------------------------------------
Under 45.............................................. 1.00
45 and under 50....................................... 1.01
50 and under 55....................................... 1.02
55 and under 60....................................... 1.04
60 and under 65....................................... 1.07
65 and under 70....................................... 1.10
70 and under 75....................................... 1.13
75 and under 80....................................... 1.15
80 and over........................................... 1.17
------------------------------------------------------------------------

[[Page 5017]]

4. Proposed Variable Per Diem Adjustments
We explained in the November 2004 IPF PPS final rule (69 FR 66946)
that the regression analysis indicated that per diem cost declines as
the LOS increases. The variable per diem adjustments to the Federal per
diem base rate account for ancillary and administrative costs that
occur disproportionately in the first days after admission to an IPF.
We used a regression analysis to estimate the average differences
in per diem cost among stays of different lengths. As a result of this
analysis, we established variable per diem adjustments that begin on
day 1 and decline gradually until day 21 of a patient's stay. For day
22 and thereafter, the variable per diem adjustment remains the same
each day for the remainder of the stay. However, the adjustment applied
to day 1 depends upon whether the IPF has a qualifying ED. If an IPF
has a qualifying ED, it receives a 1.31 adjustment factor for day 1 of
each stay. If an IPF does not have a qualifying ED, it receives a 1.19
adjustment factor for day 1 of the stay. The ED adjustment is explained
in more detail in section IV.C.5 of this proposed rule.
For RY 2012, we are proposing to continue to use the variable per
diem adjustment factors currently in effect as shown in Table 13 below.
A complete discussion of the variable per diem adjustments appears in
the November 2004 IPF PPS final rule (69 FR 66946).

Table 13--Variable Per Diem Adjustments
------------------------------------------------------------------------
Adjustment
Day-of-Stay factor
------------------------------------------------------------------------
Day 1--IPF Without a Qualifying ED.................... 1.19
Day 1--IPF With a Qualifying ED....................... 1.31
Day 2................................................. 1.12
Day 3................................................. 1.08
Day 4................................................. 1.05
Day 5................................................. 1.04
Day 6................................................. 1.02
Day 7................................................. 1.01
Day 8................................................. 1.01
Day 9................................................. 1.00
Day 10................................................ 1.00
Day 11................................................ 0.99
Day 12................................................ 0.99
Day 13................................................ 0.99
Day 14................................................ 0.99
Day 15................................................ 0.98
Day 16................................................ 0.97
Day 17................................................ 0.97
Day 18................................................ 0.96
Day 19................................................ 0.95
Day 20................................................ 0.95
Day 21................................................ 0.95
After Day 21.......................................... 0.92
------------------------------------------------------------------------

C. Facility-Level Adjustments

The IPF PPS includes facility-level adjustments for the wage index,
IPFs located in rural areas, teaching IPFs, cost of living adjustments
for IPFs located in Alaska and Hawaii, and IPFs with a qualifying ED.
1. Proposed Wage Index Adjustment
a. Background
As discussed in the May 2006 IPF PPS final rule and in the May 2008
and May 2009 IPF PPS notices, in providing an adjustment for geographic
wage levels, the labor-related portion of an IPF's payment is adjusted
using an appropriate wage index. Currently, an IPF's geographic wage
index value is determined based on the actual location of the IPF in an
urban or rural area as defined in Sec. 412.64(b)(1)(ii)(A) through
Sec. 412.64(C).
b. Proposed Wage Index for RY 2012
Since the inception of the IPF PPS, we have used hospital wage data
in developing a wage index to be applied to IPFs. We are continuing
that practice for RY 2012. We apply the wage index adjustment to the
labor-related portion of the Federal rate, which is 70.499 percent.
This percentage reflects the labor-related relative importance of the
proposed FY 2008-based RPL market basket for RY 2012 (see section
III.C.6 of this proposed rule). The IPF PPS uses the pre-floor, pre-
reclassified hospital wage index. Changes to the wage index are made in
a budget neutral manner so that updates do not increase expenditures.
For RY 2012, we are proposing to apply the most recent hospital
wage index (that is, the FY 2011 pre-floor, pre-reclassified hospital
wage index because this is the most appropriate index as it best
reflects the variation in local labor costs of IPFs in the various
geographic areas) using the most recent hospital wage data (that is,
data from hospital cost reports for the cost reporting period beginning
during FY 2007), and applying an adjustment in accordance with our
budget neutrality policy. This policy requires us to estimate the total
amount of IPF PPS payments in RY 2011 using the applicable wage index
value divided by the total estimated IPF PPS payments in RY 2012 using
the most recent wage index. The estimated payments are based on FY 2009
IPF claims, inflated to the appropriate RY. This quotient is the wage
index budget neutrality factor, and it is applied in the update of the
Federal per diem base rate for RY 2012 in addition to the market basket
described in section III.C.5 of this proposed rule. The wage index
budget neutrality factor for RY 2012 is 0.9995.
The wage index applicable for RY 2012 appears in Table 1 and Table
2 in Addendum B of this proposed rule. As explained in the May 2006 IPF
PPS final rule for RY 2007 (71 FR 27061), the IPF PPS applies the
hospital wage index without a hold-harmless policy, and without an out-
commuting adjustment or out-migration adjustment because the statutory
authority for these policies applies only to the IPPS.
Also in the May 2006 IPF PPS final rule for RY 2007 (71 FR 27061),
we adopted the changes discussed in the Office of Management and Budget
(OMB) Bulletin No. 03-04 (June 6, 2003), which announced revised
definitions for Metropolitan Statistical Areas (MSAs), and the creation
of Micropolitan Statistical Areas and Combined Statistical Areas. In
adopting the OMB Core-Based Statistical Area (CBSA) geographic
designations, since the IPF PPS was already in a transition period from
TEFRA payments to PPS payments, we did not provide a separate
transition for the CBSA-based wage index.
As was the case in RY 2011, for RY 2012 we are proposing to
continue to use the CBSA-based wage index values as presented in Tables
1 and 2 in Addendum B of this proposed rule. A complete discussion of
the CBSA labor market definitions appears in the May 2006 IPF PPS final
rule (71 FR 27061 through 27067).
In summary, for RY 2012 we are proposing to use the FY 2011 wage
index data (collected from cost reports submitted by hospitals for cost
reporting periods beginning during FY 2007) to adjust IPF PPS payments
beginning July 1, 2011.
c. OMB Bulletins
The Office of Management and Budget (OMB) publishes bulletins
regarding CBSA changes, including changes to CBSA numbers and titles.
In the May 2008 IPF PPS notice, we incorporated the CBSA nomenclature
changes published in the most recent OMB bulletin that applies to the
hospital wage data used to determine the current IPF PPS wage index (73
FR 25721). We will continue to do the same for all such OMB CBSA
nomenclature changes in future IPF PPS rules and notices, as necessary.
The OMB bulletins may be accessed online at http://www.whitehouse.gov/omb/bulletins/index.html.

[[Page 5018]]

2. Proposed Adjustment for Rural Location
In the November 2004 IPF PPS final rule, we provided a 17 percent
payment adjustment for IPFs located in a rural area. This adjustment
was based on the regression analysis, which indicated that the per diem
cost of rural facilities was 17 percent higher than that of urban
facilities after accounting for the influence of the other variables
included in the regression. For RY 2012, we are proposing to apply a 17
percent payment adjustment for IPFs located in a rural area as defined
at Sec. 412.64(b)(1)(ii)(C). As stated in the November 2004 IPF PPS
final rule, we do not intend to update the adjustment factors derived
from the regression analysis until we are able to analyze IPF PPS data.
A complete discussion of the adjustment for rural locations appears in
the November 2004 IPF PPS final rule (69 FR 66954).
3. Proposed Teaching Adjustment
In the November 2004 IPF PPS final rule, we implemented regulations
at Sec. 412.424(d)(1)(iii) to establish a facility-level adjustment
for IPFs that are, or are part of, teaching hospitals. The teaching
adjustment accounts for the higher indirect operating costs experienced
by hospitals that participate in graduate medical education (GME)
programs. The payment adjustments are made based on the number of full-
time equivalent (FTE) interns and residents training in the IPF and the
IPF's average daily census.
Medicare makes direct GME payments (for direct costs such as
resident and teaching physician salaries, and other direct teaching
costs) to all teaching hospitals including those paid under a PPS, and
those paid under the TEFRA rate-of-increase limits. These direct GME
payments are made separately from payments for hospital operating costs
and are not part of the PPSs. The direct GME payments do not address
the estimated higher indirect operating costs teaching hospitals may
face.
For teaching hospitals paid under the TEFRA rate-of-increase
limits, Medicare does not make separate payments for indirect medical
education costs because payments to these hospitals are based on the
hospitals' reasonable costs which already include these higher indirect
costs that may be associated with teaching programs.
The results of the regression analysis of FY 2002 IPF data
established the basis for the payment adjustments included in the
November 2004 IPF PPS final rule. The results showed that the indirect
teaching cost variable is significant in explaining the higher costs of
IPFs that have teaching programs. We calculated the teaching adjustment
based on the IPF's ``teaching variable,'' which is one plus the ratio
of the number of FTE residents training in the IPF (subject to
limitations described below) to the IPF's average daily census (ADC).
We established the teaching adjustment in a manner that limited the
incentives for IPFs to add FTE residents for the purpose of increasing
their teaching adjustment. We imposed a cap on the number of FTE
residents that may be counted for purposes of calculating the teaching
adjustment. The cap limits the number of FTE residents that teaching
IPFs may count for the purpose of calculating the IPF PPS teaching
adjustment, not the number of residents teaching institutions can hire
or train. We calculated the number of FTE residents that trained in the
IPF during a ``base year'' and used that FTE resident number as the
cap. An IPF's FTE resident cap is ultimately determined based on the
final settlement of the IPF's most recent cost report filed before
November 15, 2004 (that is, the publication date of the IPF PPS final
rule).
In the regression analysis, the logarithm of the teaching variable
had a coefficient value of 0.5150. We converted this cost effect to a
teaching payment adjustment by treating the regression coefficient as
an exponent and raising the teaching variable to a power equal to the
coefficient value. We note that the coefficient value of 0.5150 was
based on the regression analysis holding all other components of the
payment system constant.
As with other adjustment factors derived through the regression
analysis, we do not plan to rerun the regression analysis until we
analyze IPF PPS data. Therefore, for RY 2012, we are proposing to
retain the coefficient value of 0.5150 for the teaching adjustment to
the Federal per diem base rate.
A complete discussion of how the teaching adjustment was calculated
appears in the November 2004 IPF PPS final rule (69 FR 66954 through
66957) and the May 2008 IPF PPS notice (73 FR 25721).
Proposed FTE Intern and Resident Cap Adjustment
CMS has been asked to reconsider the current IPF teaching policy
and permit a temporary increase in the FTE resident cap when the IPF
increases the number of FTE residents it trains due to the acceptance
of displaced residents (residents that are training in an IPF or a
program before the IPF or program closed) when another IPF closes or
closes its medical residency training program.
To help us assess how many IPFs have been, or expect to be
adversely affected by their inability to adjust their caps under Sec.
412.424(d)(1) and under these situations, we specifically requested
public comment from IPFs in the May 1, 2009 IPF PPS notice (74 FR 20376
through 20377). A summary of the comments and our response can be
reviewed in the April 30, 2010 IPF PPS notice (75 FR 23106, 23117). All
of the commenters recommended that CMS modify the IPF PPS teaching
adjustment policy, supporting a policy change that would permit the IPF
PPS residency cap to be temporarily adjusted when that IPF trains
displaced residents due to closure of an IPF or closure of an IPF's
medical residency training program(s). The commenters recommended a
temporary resident cap adjustment policy similar to such policies
applied in similar contexts for acute care hospitals.
We agree with the commenters that, when a hospital temporarily
takes on residents because another hospital closes or discontinues its
program, a temporary adjustment to the cap would be appropriate for
rotation that occurs in an IPF setting (freestanding or units). In
these situations, residents may have partially completed a medical
residency training program at the hospital that has closed its training
program and may be unable to complete their training at another
hospital that is already training residents up to or in excess of its
cap. We believe that it is appropriate to allow temporary adjustments
to the FTE caps for an IPF that provides residency training to medical
residents who have partially completed a residency training program at
an IPF that closes or at an IPF that discontinues training residents in
a residency training program(s) (also referred to as a ``closed''
program throughout this preamble). For this reason, we are proposing to
adopt the following temporary resident cap adjustment policies, similar
to the temporary adjustments to the FTE cap used for acute care
hospitals. We are proposing that the cap adjustment would be temporary
because it is resident specific and would only apply to the displaced
resident(s) until the resident(s) completes training in that specialty.
We propose that, as under the IPPS policy for displaced residents, the
IPF PPS temporary cap adjustment would apply only to residents that
were still training at the IPF at the time the IPF closed or at the
time the IPF ceased training residents in the residency training
program(s). Residents who leave the IPF, for whatever reason,

[[Page 5019]]

before the closure of the IPF hospital or medical residency training
program would not be considered displaced residents for purposes of the
IPF temporary cap adjustment policy. Similarly, as under the IPPS
policy, we are proposing that medical students who match to a program
at an IPF but the IPF or medical residency training program closes
before the individual begins training at that IPF are also not
considered displaced residents for purposes of the IPF temporary cap
adjustments. For detailed information on these acute care hospital GME/
IME payment policies, see 66 FR 39899 (August 1, 2001), 64 FR 41522
(July 30 1999), and 64 FR 24736 (May 7 1999). We note that although we
are proposing to adopt a policy under the IPF PPS that is consistent
with the policy applicable under the IPPS, the actual caps under the
two payment systems may not be commingled.
a. Proposed Temporary Adjustment to the FTE Cap To Reflect Residents
Added Due to Hospital Closure
We are proposing to allow an IPF to receive a temporary adjustment
to the FTE cap to reflect residents added because of another IPF's
closure. This adjustment is intended to account for medical residents
who would have partially completed a medical residency training program
at the hospital that has closed and may be unable to complete their
training at another hospital because that hospital is already training
residents up to or in excess of its cap. We are proposing this change
because IPFs have indicated a reluctance to accept additional residents
from a closed IPF without a temporary adjustment to their caps. For
purposes of this policy on IPF closure, we are proposing to adopt the
IPPS definition of ``closure of a hospital'' in 42 CFR Sec. 413.79(h)
to mean the IPF terminates its Medicare provider agreement as specified
in 42 CFR Sec. 489.52. Therefore, we are proposing to add a new Sec.
412.424(d)(1)(iii)(F)(1) to allow a temporary adjustment to an IPF's
FTE cap to reflect residents added because of an IPF's closure on or
after July 1, 2011 to be effective for cost reporting periods beginning
on or after July 1, 2011. We would allow an adjustment to an IPF's FTE
cap if the IPF meets the following criteria: (a) The IPF is training
displaced residents from an IPF that closed on or after July 1, 2011;
(and (b) the IPF that is training the displaced residents from the
closed IPF submits a request for a temporary adjustment to its FTE cap
to its Medicare contractor no later than 60 days after the hospital
first begins training the displaced residents, and documents that the
IPF is eligible for this temporary adjustment to its FTE cap by
identifying the residents who have come from the closed IPF and have
caused the IPF to exceed its cap, (or the IPF may already be over its
cap), and specifies the length of time that the adjustment is needed.
After the displaced residents leave the IPF's training program or
complete their residency program, the IPF's cap would revert to its
original level. This means that the temporary adjustment to the FTE cap
would be available to the IPF only for the period of time necessary for
the displaced residents to complete their training. Further, as under
the IPPS policy, we are also proposing that the total amount of
temporary cap adjustment that can be distributed to all receiving
hospitals cannot exceed the cap amount of the IPF that closed.
We also note that section 5506 of the Affordable Care Act,
``Preservation of Resident Cap Positions from Closed Hospitals,'' does
not apply to IPFs that closed. Section 5506 only amends sections
1886(d) and (h) of the Act with respect to direct GME and IPPS IME
payments. Therefore, the IME FTE cap redistributions under section 5506
only apply to ``subsection (d)'' IPPS hospitals. Section 5506 has no
applicability to the IME teaching adjustments under the IPF PPS (or the
IRF PPS, for that matter).
b. Proposed Temporary Adjustment to FTE Cap To Reflect Residents
Affected by Residency Program Closure
We are proposing that if an IPF that ceases training residents in a
residency training program(s) agrees to temporarily reduce its FTE cap,
another IPF may receive a temporary adjustment to its FTE cap to
reflect residents added because of the closure of another IPF's
residency training program. For purposes of this policy on closed
residency programs, we are proposing to adopt the IPPS definition of
``closure of a hospital residency training program'' to mean that the
hospital ceases to offer training for residents in a particular
approved medical residency training program as specified in Sec.
413.79(h). The methodology for adjusting the caps for the ``receiving
IPF'' and the ``IPF that closed its program'' is described below.
i. Receiving IPF
We are proposing that an IPF(s) may receive a temporary adjustment
to its FTE cap to reflect residents added because of the closure of
another IPF's residency training program for cost reporting periods
beginning on or after July 1, 2011 if--
The IPF is training additional residents from the
residency training program of an IPF that closed its program on or
after July 1, 2011; and
No later than 60 days after the IPF begins to train the
residents, the IPF submits to its Medicare Contractor a request for a
temporary adjustment to its FTE cap, documents that the IPF is eligible
for this temporary adjustment by identifying the residents who have
come from another IPF's closed program and have caused the IPF to
exceed its cap, (or the IPF may already be in excess of its cap),
specifies the length of time the adjustment is needed, and, as
explained in more detail below, submits to its Medicare contractor a
copy of the FTE cap reduction statement by the IPF closing the
residency training program.
In general, the proposed temporary adjustment criteria established
for closed medical residency training programs at IPFs is similar to
the criteria established for closed IPFs. We are proposing that more
than one IPF may be eligible to apply for the temporary adjustment
because residents from one closed program may migrate to different
IPFs, or they may complete their training at more than one IPF. Also,
only to the extent to which an IPF would exceed its FTE cap by training
displaced residents would it be eligible for the temporary adjustment.
Finally, we are proposing that IPFs that meet the proposed criteria
would be eligible to receive temporary adjustments to their FTE caps
for cost reporting periods beginning on or after July 1, 2011.
ii. IPF That Closed Its Program(s)
We are proposing that an IPF that agrees to train residents who
have been displaced by the closure of another IPF's resident teaching
program may receive a temporary FTE cap adjustment only if the IPF with
the closed program meets the following criteria--
Temporarily reduces its FTE cap by the number of FTE
residents in each program year training in the program at the time of
the program's closure. The yearly reduction would be determined by
deducting the number of those residents who would have been training in
the program during the year of the closure, had the program not closed;
and
No later than 60 days after the residents who were in the
closed program begin training at another IPF, submits to its Medicare
contractor a statement signed and dated by its representative that
specifies that it agrees to the temporary reduction in its FTE cap to
allow the IPF training the displaced residents to obtain a

[[Page 5020]]

temporary adjustment to its cap; identifies the residents who were
training at the time of the program's closure; identifies the IPFs to
which the residents are transferring once the program closes; and
specifies the reduction for the applicable program years.
Unlike the proposed closed IPF policy at Sec.
412.424(d)(1)(iii)(F)(1), we propose under this closed program policy
that in order for the receiving IPF(s) to qualify for a temporary
adjustment to their FTE cap, the IPFs that are closing their programs
would need to reduce their FTE cap for the duration of time the
displaced residents would need to finish their training. We are
proposing this because the IPF that closes the program still retains
the FTE slots in its cap, even if the IPF chooses not to fill the slots
with residents. We believe it is inappropriate to allow an increase to
the receiving IPF's cap without an attendant decrease to the cap of the
IPF with the closed program, because the IPF that closed a program(s)
could fill these slots with residents from other programs even if the
increase and related decrease is only temporary.
We are proposing that the cap reduction for the IPF with the closed
program would be based on the number of FTE residents in each program
year who were in the program at the IPF at the time of the program's
closure, and who begin training at another IPF.
In summary we are proposing to revise Sec. 412.424(d)(1)(iii) and
to establish Sec. 412.424(d)(1)(iii)(F)(2) to implement policies
related to temporary adjustments to FTE caps to reflect residents added
due to closure of an IPF or an IPFs medical residency training program.
4. Proposed Cost of Living Adjustment for IPFs Located in Alaska and
Hawaii
The IPF PPS includes a payment adjustment for IPFs located in
Alaska and Hawaii based upon the county in which the IPF is located. As
we explained in the November 2004 IPF PPS final rule, the FY 2002 data
demonstrated that IPFs in Alaska and Hawaii had per diem costs that
were disproportionately higher than other IPFs. Other Medicare PPSs
(for example, the IPPS and LTCH PPS) have adopted a cost of living
adjustment (COLA) to account for the cost differential of care
furnished in Alaska and Hawaii.
We analyzed the effect of applying a COLA to payments for IPFs
located in Alaska and Hawaii. The results of our analysis demonstrated
that a COLA for IPFs located in Alaska and Hawaii would improve payment
equity for these facilities. As a result of this analysis, we provided
a COLA in the November 2004 IPF PPS final rule.
A COLA adjustment for IPFs located in Alaska and Hawaii is made by
multiplying the nonlabor-related portion of the Federal per diem base
rate by the applicable COLA factor based on the COLA area in which the
IPF is located.
As previously stated in the November 2004 IPF PPS final rule, we
will update the COLA factors according to updates established by the
U.S. Office of Personnel Management (OPM), which issued a final rule,
May 28, 2008 to change COLA rates.
The COLA factors are published on the OPM Web site at (http://www.opm.gov/oca/cola/rates.asp).
We note that the COLA areas for Alaska are not defined by county as
are the COLA areas for Hawaii. In 5 CFR 591.207, the OPM established
the following COLA areas:
(a) City of Anchorage, and 80-kilometer (50-mile) radius by road,
as measured from the Federal courthouse;
(b) City of Fairbanks, and 80-kilometer (50-mile) radius by road,
as measured from the Federal courthouse;
(c) City of Juneau, and 80-kilometer (50-mile) radius by road, as
measured from the Federal courthouse;
(d) Rest of the State of Alaska.
For RY 2012, we are proposing that IPFs located in Alaska and
Hawaii will continue to receive the updated COLA factors based on the
COLA area in which the IPF is located as shown in Table 14 below.

Table 14--Proposed COLA Factors for Alaska and Hawaii IPFs
------------------------------------------------------------------------
Location COLA
------------------------------------------------------------------------
Alaska............................... Anchorage............... 1.19
Fairbanks............... 1.19
Juneau.................. 1.19
Rest of Alaska.......... 1.21
Hawaii............................... Honolulu County......... 1.21
Hawaii County........... 1.14
Kauai County............ 1.21
Maui County............. 1.21
Kalawao County.......... 1.21
------------------------------------------------------------------------

5. Proposed Adjustment for IPFs With a Qualifying Emergency Department
(ED)
Currently, the IPF PPS includes a facility-level adjustment for
IPFs with qualifying EDs. We provide an adjustment to the Federal per
diem base rate to account for the costs associated with maintaining a
full-service ED. The adjustment is intended to account for ED costs
incurred by a freestanding psychiatric hospital with a qualifying ED or
a distinct part psychiatric unit of an acute hospital or a CAH for
preadmission services otherwise payable under the Medicare Outpatient
Prospective Payment System (OPPS) furnished to a beneficiary during the
day immediately preceding the date of admission to the IPF (see Sec.
413.40(c)(2)) and the overhead cost of maintaining the ED. This payment
is a facility-level adjustment that applies to all IPF admissions (with
one exception described below), regardless of whether a particular
patient receives preadmission services in the hospital's ED.
The ED adjustment is incorporated into the variable per diem
adjustment for the first day of each stay for IPFs with a qualifying
ED. That is, IPFs with a qualifying ED receive an adjustment factor of
1.31 as the variable per diem adjustment for day 1 of each stay. If an
IPF does not have a qualifying ED, it receives an adjustment factor of
1.19 as the variable per diem adjustment for day 1 of each patient
stay.
The ED adjustment is made on every qualifying claim except as
described below. As specified in Sec. 412.424(d)(1)(v)(B), the ED
adjustment is not made where a patient is discharged from an acute care
hospital or critical access hospital (CAH) and admitted to the same
hospital's or CAH's psychiatric unit. An ED adjustment is not made in
this case because the costs associated with ED services are reflected
in the DRG payment to the acute care hospital or through the reasonable
cost payment made to the CAH. If we provided the ED adjustment in these
cases, the hospital would be paid twice for the overhead costs of the
ED, as stated in the November 2004 IPF PPS final rule (69 FR 66960).
Therefore, when patients are discharged from an acute care hospital
or CAH and admitted to the same hospital's or CAH's psychiatric unit,
the IPF receives the 1.19 adjustment factor as the variable per diem
adjustment for the first day of the patient's stay in the IPF.
For RY 2012, we are proposing to retain the 1.31 adjustment factor
for IPFs with qualifying EDs. A complete discussion of the steps
involved in the calculation of the ED adjustment factor appears in the
November 2004 IPF PPS final rule (69 FR 66959 through 66960) and the
May 2006 IPF PPS final rule (71 FR 27070 through 27072).

D. Other Payment Adjustments and Policies

For RY 2012, the IPF PPS includes an outlier adjustment to promote
access to IPF care for those patients who require expensive care and to
limit the financial

[[Page 5021]]

risk of IPFs treating unusually costly patients. In this section, we
also explain the reason for ending the stop-loss provision that was
applicable during the transition period.
1. Proposed Outlier Payments
In the November 2004 IPF PPS final rule, we implemented regulations
at Sec. 412.424(d)(3)(i) to provide a per-case payment for IPF stays
that are extraordinarily costly. Providing additional payments to IPFs
for extremely costly cases strongly improves the accuracy of the IPF
PPS in determining resource costs at the patient and facility level.
These additional payments reduce the financial losses that would
otherwise be incurred in treating patients who require more costly care
and, therefore, reduce the incentives for IPFs to under-serve these
patients.
We make outlier payments for discharges in which an IPF's estimated
total cost for a case exceeds a fixed dollar loss threshold amount
(multiplied by the IPF's facility-level adjustments) plus the Federal
per diem payment amount for the case.
In instances when the case qualifies for an outlier payment, we pay
80 percent of the difference between the estimated cost for the case
and the adjusted threshold amount for days 1 through 9 of the stay
(consistent with the median LOS for IPFs in FY 2002), and 60 percent of
the difference for day 10 and thereafter. We established the 80 percent
and 60 percent loss sharing ratios because we were concerned that a
single ratio established at 80 percent (like other Medicare PPSs) might
provide an incentive under the IPF per diem payment system to increase
LOS in order to receive additional payments. After establishing the
loss sharing ratios, we determined the current fixed dollar loss
threshold amount of $6,372 through payment simulations designed to
compute a dollar loss beyond which payments are estimated to meet the 2
percent outlier spending target.
a. Proposed Update to the Outlier Fixed Dollar Loss Threshold Amount
In accordance with the update methodology described in Sec.
412.428(d), we are proposing to update the fixed dollar loss threshold
amount used under the IPF PPS outlier policy. Based on the regression
analysis and payment simulations used to develop the IPF PPS, we
established a 2 percent outlier policy which strikes an appropriate
balance between protecting IPFs from extraordinarily costly cases while
ensuring the adequacy of the Federal per diem base rate for all other
cases that are not outlier cases.
We believe it is necessary to update the fixed dollar loss
threshold amount because an analysis of the latest available data (that
is, FY 2009 IPF claims) and rate increases indicates that adjusting the
fixed dollar loss amount is necessary in order to maintain an outlier
percentage that equals 2 percent of total estimated IPF PPS payments.
In the May 2006 IPF PPS final rule (71 FR 27072), we describe the
process by which we calculate the outlier fixed dollar loss threshold
amount. We are proposing to continue to use this process for RY 2012.
We begin by simulating aggregate payments with and without an outlier
policy, and applying an iterative process to determine an outlier fixed
dollar loss threshold amount that will result in outlier payments being
equal to 2 percent of total estimated payments under the simulation.
Based on this process, using the FY 2009 claims data, we estimate that
IPF outlier payments as a percentage of total estimated payments are
approximately 2.2 percent in RY 2010. Thus, we are proposing to update
the RY 2012 IPF outlier threshold amount to ensure that estimated RY
2012 outlier payments are approximately 2 percent of total estimated
IPF payments. We are proposing to change the outlier fixed dollar loss
threshold amount of $6,372 for RY 2011 to $7,316 for RY 2012 to reduce
estimated outlier payments and thereby maintain estimated outlier
payments at 2 percent of total estimated aggregate IPF payments for RY
2012.
b. Proposed Statistical Accuracy of Cost-to-Charge Ratios
As previously stated, under the IPF PPS, an outlier payment is made
if an IPF's cost for a stay exceeds a fixed dollar loss threshold
amount. In order to establish an IPF's cost for a particular case, we
multiply the IPF's reported charges on the discharge bill by its
overall cost-to-charge ratio (CCR). This approach to determining an
IPF's cost is consistent with the approach used under the IPPS and
other PPSs. In FY 2004, we implemented changes to the IPPS outlier
policy used to determine CCRs for acute care hospitals because we
became aware that payment vulnerabilities resulted in inappropriate
outlier payments. Under the IPPS, we established a statistical measure
of accuracy for CCRs in order to ensure that aberrant CCR data did not
result in inappropriate outlier payments.
As we indicated in the November 2004 IPF PPS final rule, because we
believe that the IPF outlier policy is susceptible to the same payment
vulnerabilities as the IPPS, we adopted an approach to ensure the
statistical accuracy of CCRs under the IPF PPS (69 FR 66961).
Therefore, we adopted the following procedure in the November 2004 IPF
PPS final rule:
We calculated two national ceilings, one for IPFs located
in rural areas and one for IPFs located in urban areas. We computed the
ceilings by first calculating the national average and the standard
deviation of the CCR for both urban and rural IPFs.
To determine the rural and urban ceilings, we multiplied each of
the standard deviations by 3 and added the result to the appropriate
national CCR average (either rural or urban). We estimated a proposed
upper threshold CCR for IPFs in RY 2012 of 1.8522 for rural IPFs, and
1.7619 for urban IPFs, based on CBSA-based geographic designations. If
an IPF's CCR is above the applicable ceiling, the ratio is considered
statistically inaccurate and we assign the appropriate national (either
rural or urban) median CCR to the IPF.
We apply the national CCRs to the following situations:
++ New IPFs that have not yet submitted their first Medicare cost
report.
++ IPFs whose overall CCR is in excess of 3 standard deviations
above the corresponding national geometric mean (that is, above the
ceiling).
++ Other IPFs for which the Medicare contractor obtains inaccurate
or incomplete data with which to calculate a CCR.
For new IPFs, we are using these national CCRs until the facility's
actual CCR can be computed using the first tentatively or final settled
cost report.
We are not making any changes to the procedures for ensuring the
statistical accuracy of CCRs in RY 2012. However, we are proposing to
update the national urban and rural CCRs (ceilings and medians) for
IPFs for RY 2012 based on the CCRs entered in the latest available IPF
PPS Provider Specific File.
Specifically, for RY 2012, and to be used in each of the three
situations listed above, we estimate a proposed national average CCR of
0.6480 for rural IPFs and a proposed national average CCR of 0.5140 for
urban IPFs. These calculations are based on the IPF's location (either
urban or rural) using the CBSA-based geographic designations.
A complete discussion regarding the national median CCRs appears in
the November 2004 IPF PPS final rule (69 FR 66961 through 66964).

[[Page 5022]]

2. Expiration of the Stop-Loss Provision
In the November 2004 IPF PPS final rule, we implemented a stop-loss
policy that reduced financial risk to IPFs projected to experience
substantial reductions in Medicare payments during the period of
transition to the IPF PPS. This stop-loss policy guaranteed that each
facility received total IPF PPS payments that were no less than 70
percent of its TEFRA payments had the IPF PPS not been implemented.
This policy was applied to the IPF PPS portion of Medicare payments
during the 3-year transition.
In the implementation year, the 70 percent of TEFRA payment stop-
loss policy required a reduction in the standardized Federal per diem
and ECT base rates of 0.39 percent in order to make the stop-loss
payments budget neutral. As described in the May 2008 IPF PPS notice
for RY 2009, we increased the Federal per diem base rate and ECT rate
by 0.39 percent because these rates were reduced by 0.39 percent in the
implementation year to ensure stop-loss payments were budget neutral.
The stop-loss provision ended during RY 2009 (that is for
discharges occurring on or after July 1, 2008 through June 30, 2009).
The stop-loss policy is no longer applicable under the IPF PPS.
3. Future Refinements
As we have noted throughout this proposed rule, we have delayed
making refinements to the IPF PPS until we have adequate IPF PPS data
on which to base those decisions. Now that we are approximately 5 years
into the system, we believe that we have enough data to begin that
process. We have begun the necessary analysis to better understand IPF
industry practices so that we may refine the IPF PPS as appropriate.
While we are not proposing to make the following refinements in this
rulemaking, we believe that in the rulemaking for FY 2013 we will be
ready to present the results of our analysis.
Specifically, with the change from ICD-9-CM to ICD-10-CM coming in
2013, we are analyzing the comorbidity categories and related codes for
utilization and continued suitability. While we would continue to
provide for comorbidity adjustments, we are analyzing whether the
current groupings and codes continue to be warranted and whether other
appropriate codes should be added. Also, we are analyzing our current
policies for interrupted stays, readmissions, same-day transfers, and
length of stays in order to assess whether these policies continue to
be appropriate. Additionally, in accordance with section 1886(s)(4) of
the Act, which was added by section 10322 of the Affordable Care Act,
IPFs must submit data on quality measures, as specified by the
Secretary, for each RY beginning in RY 2014. If data is not submitted,
any annual update to a Federal base rate for discharges for the
payments shall be reduced by 2 percentage points. Quality measures are
currently being developed to effectuate this requirement. Lastly, for
the first time MedPAC will become involved in evaluating facility
margins and will likely make recommendations regarding the appropriate
payment update to IPFs based on their findings. CMS is interested in
gaining feedback on these areas for future refinements and therefore we
invite comments on these issues described in this section at this time.

VI. Proposed Regulations Text Corrections

We are proposing several minor corrections to the regulations text
to address typographical errors. We note that these proposed changes do
not impact policy. We are proposing to correct typographical errors at
Sec. 412.404, ``Conditions for payment under the prospective payment
system for inpatient hospital services of psychiatric facilities; Sec.
412.422, ``Basis of payment;'' and Sec. 412.426, ``Transition
period.'' In addition to these corrections, we are proposing to add
clarifying language at Sec. 412.426 and Sec. 412.432(d), ``Method of
payment under the inpatient psychiatric facility prospective payment
system.'' The proposed revisions are described below.

Section 412.404(a)(1)

Under Sec. 412.404, in paragraph (a)(1), ``General requirements,''
we are proposing to delete the word ``in'' between the words
``furnished'' and ``to Medicare''.

Section 412.422(b)(2)

Under Sec. 412.422, in paragraph (b)(2), we are proposing to
correct the reference to Sec. 413.80 to Sec. 413.89. The regulations
covered at Sec. 413.89 include bad debts, charity, and courtesy
allowances.

Section 412.426(a)

Under Sec. 412.426, in paragraph (a), ``Duration of transition
period and composition of the blended transition payment,'' we are
proposing to replace ``Except as provided in paragraph (d) of this
section'' with ``Except as provided in paragraph (c) of this section.''
There is no paragraph (d); this exception should refer to paragraph
(c), ``Treatment of new inpatient psychiatric facilities.''
Also in paragraph (a), we are proposing to add the words ``of this
part'' after ``as specified in Sec. 412.424(d)'' and ``of this
section'' after ``as specified under paragraph (b).'' This regulatory
language is required by the Federal Register.
In each of paragraphs Sec. 412.426(a)(1) through (a)(3), we are
proposing to delete the words ``on or'' directly before the words
``before January''. For example, paragraph (a)(1) currently states,
``For cost reporting periods beginning on or after January 1, 2005 and
on or before January 1, 2006* * *'' We are proposing that this
statement read: ``For cost reporting periods beginning on or after
January 1, 2005 and before January 1, 2006 * * * '' This correction
does not represent a change in policy. Rather, it is a correction to
conform the regulation text to our policy, which was established in our
final rule that appeared in the Federal Register on November 15, 2004
(69 FR 66980) (which was subsequently corrected on April 1, 2005 (70 FR
16729)). It is clear that the current regulation text is incorrect. The
same January date (for example, January 1, 2007) cannot be both the
date on which a new transition period begins and the date on which the
previous transition period ends. Our policy, since we established the
transition, has been to begin a transition period on or after a January
1 date and to end that transition period before the next transition
period begins. Because our regulation text does not accurately reflect
our actual policy, we are proposing this correction.
At Sec. 412.426(a)(4), we are proposing to replace the statement,
``For cost reporting periods beginning on or after July 1, 2008,
payment is based entirely on the Federal per diem payment amount'' with
the following statement: ``For cost reporting periods beginning on or
after January 1, 2008, payment is based entirely on the Federal per
diem payment amount.'' The transition period during which payment was
based on a combination of the Federal per diem payment amount and TEFRA
payments, ended on January 1, 2008, not July 1, 2008.

Section 412.432(d)

Under Sec. 412.432, in paragraph (d), ``Outlier payments,'' we are
proposing to add the words ``of this part'' after ``subject to the cost
report settlement specified in Sec. 412.84(i) and Sec. 412.84(m).''
This regulatory language is required by the Federal Register and
clarifies that Sec. 412.84(i) and Sec. 412.84(m) refer to 42 CFR part
412, ``Prospective

[[Page 5023]]

Payment Systems for Inpatient Hospital Services.''

VII. Provisions of the Proposed Regulations

In this proposed rule, we are proposing to update the IPF PPS
payment rates for RY 2012. We are also proposing to revise the IPF PPS
payment update period and make other policy changes and clarifications.
The following is a summary of the areas that we are addressing in this
proposed rule:
We are proposing to switch the annual update period for
the IPF PPS from a rate year that begins on July 1 and goes through
June 30 to one that coincides with a FY, that is, that begins on
October 1 and goes through September 30. For the update period that
begins in 2012, and thereafter, we would refer to the update period as
a FY. In order to make this switch, we are proposing that rate year
2012 be a 15-month period, from July 1, 2011 through September 30,
2012. This change in the payment update period would allow us to have
one consolidated annual update to both the rates and the ICD-9-CM
coding changes (MS-DRG and comorbidities). The coding changes will
continue to be effective October 1 of each year.
We are proposing to rebase and revise the FY 2002-based
RPL market basket to a FY 2008-based RPL market basket. We are
proposing a 3.0 percent market basket update to the IPF PPS for RY 2012
based on the most recent estimate of the market basket update for the
proposed 15-month 2012 IPF PPS rate year, with a 0.25 percentage point
reduction as required by section 1886 (s)(3)(A) of the Act.
We are proposing to adopt IPF policies similar to such
IPPS GME policies providing for temporary adjustments to an IPF's FTE
cap to reflect residents added due to the closure of an IPF or an IPF's
residency training program.
We are proposing to update the fixed dollar loss threshold
amount in order to maintain the appropriate outlier percentage.
We are proposing to update the ECT adjustment by a factor
specified by CMS.
We are proposing to update the national urban and rural
cost-to-charge ratio medians and ceilings.
We are proposing to update the cost of living adjustment
factors for IPFs located in Alaska and Hawaii, if appropriate.
We are proposing to describe the ICD-9-CM and MS-DRG
classification changes discussed in the annual update to the hospital
inpatient prospective payment system regulations.
We are proposing the best available hospital wage index
and information regarding whether an adjustment to the Federal per diem
base rate is needed to maintain budget neutrality.
We are proposing to retain the 17 percent adjustment for
IPFs located in rural areas, the 1.31 adjustment for IPFs with a
qualifying ED, the 0.5150 teaching adjustment to the Federal per diem
rate, and the MS-DRG adjustment factor currently being paid to IPFs for
RY 2011.
We are proposing to update the MS-DRG listing and
comorbidity categories to reflect the ICD-9-CM revisions effective
October 1, 2010.

VIII. Collection of Information Requirements

This document does not impose any information collection and
recordkeeping requirements. Consequently, it need not be reviewed by
the Office of Management and Budget under the authority of the
Paperwork Reduction Act of 1995 (44 U.S.C. 35).

IX. Regulatory Impact Analysis

A. Statement of Need

This proposed rule would update the prospective payment rates for
Medicare inpatient hospital services provided by inpatient psychiatric
facilities for discharges occurring during the rate year beginning July
1, 2011 through September 30, 2012. We propose to apply the 15-month
FY2008-based RPL market basket increase of 3.0 percent, adjusted by the
0.25 percentage point reduction, as required by section 1886(s)(3)(A)
of the Act. In addition, the rule proposes policy changes affecting the
IPF PPS teaching adjustment, as well as makes some clarifications and
corrections to terminology and regulations text.

B. Overall Impact

We have examined the impacts of this proposed rule as required by
Executive Order 12866 (September 1993, Regulatory Planning and Review),
the September 19, 1980 Regulatory Flexibility Act (RFA) (Pub. L. 96-
354), section 1102(b) of the 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). This proposed
rule is a major rule as defined in Title 5, United States Code, section
804(2), because we estimate that the impact to the Medicare program,
and the annual effects to the economy, will be more than $100 million.
We estimate that the total impact of these proposed changes for
estimated RY 2012 payments compared to estimated RY 2011 payments would
be an increase of approximately $110 million (this reflects a $120
million increase from the update to the payment rates and a $10 million
decrease due to the proposed update to the outlier threshold amount to
decrease estimated outlier payments from approximately 2.2 percent in
RY 2011 to 2.0 percent in RY 2012).
The RFA requires agencies to analyze options for regulatory relief
of small entities, if a rule has a significant impact on a substantial
number of small entities. For purposes of the RFA, small entities
include small businesses, nonprofit organizations, and small
governmental jurisdictions. Most IPFs and most other providers and
suppliers are small entities, either by nonprofit status or by having
revenues of $7 million to $34.5 million in any one year (for details,
refer to the SBA Small Business Size Standards found at http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=2465b064ba6965cc1fbd2eae60854b11&rgn=div8&view=text&node=13:1.0.1.1.16.1.266.9&idno=13). Because we lack data on individual
hospital receipts, we cannot determine the number of small proprietary
IPFs or the proportion of IPFs' revenue that is derived from Medicare
payments. Therefore, we assume that all IPFs are considered small
entities. The Department of Health and Human Services generally uses a
revenue impact of 3 to 5 percent as a significance threshold under the
RFA. As shown in Table 15, we estimate that the revenue impact of this
proposed rule on all IPFs is to increase estimated Medicare payments by
about 2.54 percent, with rural IPFs estimated to receive an increase in
estimated Medicare payments greater than 3 percent (an aggregate 3.56
percent). Since Medicare payments do not necessarily constitute total
revenue for all IPFs, the overall total revenue impact to IPFs would be
less than the significant threshold of 3

[[Page 5024]]

to 5 percent under the RFA. As a result, the Secretary has determined
that this proposed rule will not have a significant impact on a
substantial number of small entities. Medicare fiscal intermediaries,
Medicare Administrative Contractors, and carriers are not considered to
be small entities. Individuals and States are not included in the
definition of a small entity. We solicit comment on the above analysis.
In addition, section 1102(b) of the Act requires us to prepare a
regulatory impact analysis if a rule may have a significant impact on
the operations of a substantial number of small rural hospitals. This
analysis must conform to the provisions of section 603 of the RFA. For
purposes of section 1102(b) of the Act, we define a small rural
hospital as a hospital that is located outside of a metropolitan
statistical area and has fewer than 100 beds. As discussed in detail
below, the rates and policies set forth in this proposed rule will not
have an adverse impact on the rural hospitals based on the data of the
387 rural units and 67 rural hospitals in our database of 1,653 IPFs
for which data were available. Therefore, we are not preparing an
analysis for section 1102(b) of the Act because the Secretary has
determined that this proposed rule will not have a significant impact
on the operations of a substantial number of small rural hospitals.
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA) also
requires that agencies assess anticipated costs and benefits before
issuing any rule whose mandates require spending in any 1 year of $100
million in 1995 dollars, updated annually for inflation. In 2010, that
threshold is approximately $135 million. This proposed rule will not
impose spending costs on State, local, or tribal governments in the
aggregate, or by the private sector, of $135 million.
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.

C. Anticipated Effects of the Proposed Rule

We discuss below the historical background of the IPF PPS and the
impact of this proposed rule on the Federal Medicare budget and on
IPFs.
1. Budgetary Impact
As discussed in the November 2004 and May 2006 IPF PPS final rules,
we applied a budget neutrality factor to the Federal per diem and ECT
base rates to ensure that total estimated payments under the IPF PPS in
the implementation period would equal the amount that would have been
paid if the IPF PPS had not been implemented. The budget neutrality
factor includes the following components: outlier adjustment, stop-loss
adjustment, and the behavioral offset. As discussed in the May 2008 IPF
PPS notice (73 FR 25711), the stop-loss adjustment is no longer
applicable under the IPF PPS.
In accordance with Sec. 412.424(c)(3)(ii), we indicated that we
would evaluate the accuracy of the budget neutrality adjustment within
the first 5 years after implementation of the payment system. We may
make a one-time prospective adjustment to the Federal per diem and ECT
base rates to account for differences between the historical data on
cost-based TEFRA payments (the basis of the budget neutrality
adjustment) and estimates of TEFRA payments based on actual data from
the first year of the IPF PPS. As part of that process, we will
reassess the accuracy of all of the factors impacting budget
neutrality. In addition, as discussed in section III.C.6 of this
proposed rule, we are using the wage index and labor-related share in a
budget neutral manner by applying a wage index budget neutrality factor
to the Federal per diem and ECT base rates. Therefore, the budgetary
impact to the Medicare program of this proposed rule will be due to the
15-month market basket update for RY 2012 of 3.0 percent (see section
III.C.5 of this proposed rule) as adjusted by the ``other adjustment''
of -0.25 percentage point according to section 1886(s)(3)(A) of the
Act, and the proposed update to the outlier fixed dollar loss threshold
amount.
We estimate that the RY 2012 impact would be a net increase of $110
million in payments to IPF providers. This reflects a $120 million
increase from the update to the payment rates and a $10 million
decrease due to the proposed update to the outlier threshold amount to
decrease estimated outlier payments from approximately 2.2 percent in
RY 2011 to 2.0 percent in RY 2012.
2. Impacts on Providers
To understand the impact of the changes to the IPF PPS on
providers, discussed in this proposed rule, it is necessary to compare
estimated payments under the IPF PPS rates and factors for RY 2012
versus those under RY 2011. The estimated payments for RY 2011 and RY
2012 will be 100 percent of the IPF PPS payment, since the transition
period has ended and stop-loss payments are no longer paid. We
determined the percent change of estimated RY 2012 IPF PPS payments to
estimated RY 2011 IPF PPS payments for each category of IPFs. In
addition, for each category of IPFs, we have included the estimated
percent change in payments resulting from the proposed update to the
outlier fixed dollar loss threshold amount, the labor-related share and
wage index changes for the RY 2012 IPF PPS, and the 15-month market
basket update for RY 2012, as adjusted by the ``other adjustment''
according to section 1886(s)(3)(A) of the Act.
To illustrate the impacts of the RY 2012 changes in this proposed
rule, our analysis begins with a RY 2011 baseline simulation model
based on FY 2009 IPF payments inflated to the midpoint of RY 2011 using
IHS Global Insight's most recent forecast of the market basket update
(see section III.C.5 of this proposed rule); the estimated outlier
payments in RY 2011; the CBSA designations for IPFs based on OMB's MSA
definitions after June 2003; the FY 2010 pre-floor, pre-reclassified
hospital wage index; the RY 2011 labor-market share; and the RY 2011
percentage amount of the rural adjustment. During the simulation, the
total estimated outlier payments are maintained at 2 percent of total
estimated IPF PPS payments.
Each of the following proposed changes is added incrementally to
this baseline model in order for us to isolate the effects of each
change:
The update to the outlier fixed dollar loss threshold
amount.
The FY 2011 pre-floor, pre-reclassified hospital wage
index and RY 2012 labor-related share.
The 15-month market basket update for RY 2012 of 3.0
percent adjusted by 0.25 percentage point reduction in accordance with
section 1886(s)(3)(A) of the Act.
Our final comparison illustrates the percent change in payments
from RY 2011 (that is, July 1, 2010 to June 30, 2011) to RY 2012 (that
is, July 1, 2011 to September 30, 2012) including all the changes in
this proposed rule.
BILLING CODE 4210-01-P

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BILLING CODE 4120-01-C
3. Results
Table 15 above displays the results of our analysis. The table
groups IPFs into the categories listed below based on characteristics
provided in the Provider of Services (POS) file, the IPF provider
specific file, and cost report data from HCRIS:
Facility Type.
Location.

[[Page 5027]]

Teaching Status Adjustment.
Census Region.
Size.
The top row of the table shows the overall impact on the 1,653 IPFs
included in this analysis.
In column 3, we present the effects of the proposed update to the
outlier fixed dollar loss threshold amount. We estimate that IPF
outlier payments as a percentage of total estimated IPF payments are
2.2 percent in RY 2011. Thus, we are proposing to adjust the outlier
threshold amount from $6,372 in RY 2011 to $7,316 in RY 2012 in order
to set total estimated outlier payments equal to 2 percent of total
estimated payments in RY 2012. The estimated change in total IPF
payments for RY 2012, therefore, includes an approximate 0.2 percent
decrease in payments because the estimated outlier portion of total
payments is estimated to decrease from approximately 2.2 percent to 2
percent.
The overall aggregate effect of this proposed outlier adjustment
updates (as shown in column 3 of table 15), across all hospital groups,
is to decrease total estimated payments to IPFs by about 0.21 percent.
We do not estimate that any group of IPFs will experience an increase
in payments from this proposed update. We estimate the largest decrease
in payments to be a 1.57 percent decrease in estimated payments to
urban, government IPF units located in CAHs which is due to the small
number of IPFs of that type and the high volume of outlier payments
made to those IPFs.
In column 4, we present the effects of the proposed budget-neutral
update to the labor-related share and the wage index adjustment under
the CBSA geographic area definitions announced by OMB in June 2003.
This is a comparison of the simulated RY 2012 payments under the FY
2011 hospital wage index under CBSA classification and associated
labor-related share to the simulated RY 2011 payments under the FY 2010
hospital wage index under CBSA classifications and associated labor-
related share. We note that there is no projected change in aggregate
payments to IPFs, as indicated in the first row of column 4. However,
there would be distributional effects among different categories of
IPFs. For example, we estimate a 0.98 percent increase in overall
payments to rural IPFs, with the largest increase in estimated payments
of 2.2 percent for rural, for-profit freestanding psychiatric
hospitals. In addition, we estimate the largest decrease in estimated
payments to be a 0.89 percent decrease for IPFs in the New England
region.
Column 5 shows the estimated effect of the proposed update to the
IPF PPS payment rates, which includes a 3.0 percent 15-month market
basket update with the 0.25 percentage point reduction in accordance
with section 1886(s)(3)(A).
Column 6 compares our estimates of the changes reflected in this
proposed rule for RY 2012, to our estimates of payments for RY 2011
(without these changes). This column reflects all RY 2012 changes
relative to RY 2011. The average estimated increase for all IPFs is
approximately 2.54 percent. This estimated net increase includes the
effects of the 3.0 percent 15-month market basket update adjusted by
the ``other adjustment'' of -0.25 percentage point, as required by
section 1886(s)(3)(A) of the Act. It also includes the approximate 0.2
percent overall estimated decrease in estimated IPF outlier payments
from the proposed update to the outlier fixed dollar loss threshold
amount. Since we are making the updates to the IPF labor-related share
and wage index in a budget-neutral manner, they will not affect total
estimated IPF payments in the aggregate. However, they will affect the
estimated distribution of payments among providers.
Overall, no IPFs are estimated to experience a net decrease in
payments as a result of the proposed updates in this rule. IPFs in
urban areas will experience a 2.37 percent increase and IPFs in rural
areas will experience a 3.56 percent increase. The largest payment
increase is estimated at 4.98 percent for rural, for-profit
freestanding psychiatric hospitals. This is due to the larger than
average positive effect of the FY 2011 CBSA wage index and labor-
related share updates for rural IPFs in this category.
4. Effect on the Medicare Program
Based on actuarial projections resulting from our experience with
other PPSs, we estimate that Medicare spending (total Medicare program
payments) for IPF services over the next 5 years would be as shown in
Table 16 below.

Table 16--Estimated Payments
------------------------------------------------------------------------
Dollars in
Rate year millions
------------------------------------------------------------------------
July 1, 2011 to June 30, 2012.............................. $4,615
July 1, 2012 to June 30, 2013.............................. 4,938
July 1, 2013 to June 30, 2014.............................. 5,320
July 1, 2014 to June 30, 2015.............................. 5,750
July 1, 2015 to June 30, 2016.............................. 6,235
------------------------------------------------------------------------

These estimates are based on the current forecast of the increases
in the RPL market basket, including an adjustment for productivity, for
the rate year beginning in 2012 and each subsequent rate year, as
required by section 1886(s)(3)(A) of the Act, as follows:
2.6 percent for rate years beginning in 2011 (RY 2012).
1.7 percent for rate years beginning in 2012 (RY 2013).
1.9 percent for rate years beginning in 2013 (RY 2014).
2.1 percent for rate years beginning in 2014 (RY 2015).
2.3 percent for rate years beginning in 2015 (RY 2016).
The estimates in Table 14 also include the application of the
``other adjustment,'' as required by section 1886(s)(3)(A) of the Act,
as follows:
-0.25 percent for rate years beginning in 2011.
-0.1 percent for rate years beginning in 2012.
-0.1 percent for rate years beginning in 2013.
-0.3 percent for rate years beginning in 2014.
-0.2 percent for rate years beginning in 2015.
We estimate that there would be a change in fee-for-service
Medicare beneficiary enrollment as follows:
3.3 percent in RY 2012.
3.7 percent in RY 2013.
4.3 percent in RY 2014.
4.9 percent in RY 2015.
5.6 percent in RY 2016.
5. Effect on Beneficiaries
Under the IPF PPS, IPFs would receive payment based on the average
resources consumed by patients for each day. We do not expect changes
in the quality of care or access to services for Medicare beneficiaries
under the RY 2012 IPF PPS. In fact, we believe that access to IPF
services will be enhanced due to the patient- and facility-level
adjustment factors, all of which are intended to adequately reimburse
IPFs for expensive cases. Finally, the outlier policy is intended to
assist IPFs that experience high-cost cases.

D. Alternatives Considered

The statute does not specify an update strategy for the IPF PPS and
is broadly written to give the Secretary discretion in establishing an
update methodology. Therefore, we are updating the IPF PPS using the
methodology published in the November 2004 IPF PPS final rule.
We note that this proposed rule initiates policy changes with
regard to the IPF PPS, and it also provides an update to the rates for
RY 2012. We considered making refinements to the IPF PPS in this
proposed rule. However,

[[Page 5028]]

we decided that we needed more time to assess the data and would
therefore once again delay running the regression analysis until we
have adequate IPF PPS data. We have initiated the necessary analysis to
better understand IPF industry practices. We did not consider rebasing
the IPF PPS for concerns that rebasing would be too costly (re-
calculate the cost-per-day) and time consuming.

E. Accounting Statement

As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table 17 below, we
have prepared an accounting statement showing the classification of the
expenditures associated with the provisions of this proposed rule. This
table provides our best estimate of the increase in Medicare payments
under the IPF PPS as a result of the proposed changes presented in this
proposed rule and based on the data for 1,653 IPFs in our database. All
expenditures are classified as transfers to Medicare providers (that
is, IPFs).

Table 17--Accounting Statement: Classification of Estimated
Expenditures, From the 2011 IPF PPS RY to the 2012 IPF PPS RY
[In millions]
------------------------------------------------------------------------
Category Transfers
------------------------------------------------------------------------
Annualized Monetized Transfers............ $110
From Whom To Whom? Federal Government To IPF
Medicare Providers.
------------------------------------------------------------------------

In accordance with the provisions of Executive Order 12866, this
regulation was reviewed by the Office of Management and Budget.

List of Subjects in 42 CFR Part 412

Administrative practice and procedure, Health facilities, Medicare,
Puerto Rico, Reporting and recordkeeping requirements.
For the reasons set forth in the preamble, the Centers for Medicare
& Medicaid Services proposes to amend 42 CFR chapter IV as set forth
below:

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL
SERVICES

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

Authority: Secs. 1102, 1862, and 1871 of the Social Security
Act (42 U.S.C. 1302, 1395y, and 1395hh).

Subpart N--Prospective payment system for inpatient hospital
services of inpatient psychiatric facilities

2. In Sec. 412.402, new definitions of ``IPF prospective payment
system rate year'' and ``MS-IFP-DRG'' are added in alphabetical order
to read as follows:

Sec. 412.402 Definitions.

* * * * *
IPF prospective payment system rate year means --
(1) Through June 30, 2011, the 12-month period of July 1 through
June 30.
(2) Beginning July 1, 2011, the 15-month period of July 1, 2011
through September 30, 2012.
(3) Beginning October 1, 2012, the 12-month period of October 1
through September 30, referred to as Fiscal Year (FY).
* * * * *
MS-IFP-DRG means the severity adjusted diagnosis groups used to
classify IPF patients. For IPF discharges occurring on or after July 1,
2008, all reference to MS-DRGs used for the IPF PPS are to MS-IPF-DRGs.
* * * * *
3. Section 412.404 is amended by revising paragraph (a)(1) to read
as follows:

Sec. 412.404 Conditions for payment under the prospective payment
system for inpatient hospital services of psychiatric facilities.

(a) General requirements. (1) Effective for cost reporting periods
beginning on or after January 1, 2005, an inpatient psychiatric
facility must meet the conditions of this section to receive payment
under the prospective payment system described in this subpart for
inpatient hospital services furnished to Medicare Part A fee-for-
service beneficiaries.
* * * * *
4. Section 412.422 is amended by revising paragraph (b)(2) to read
as follows:

Sec. 412.422 Basis of payment.

* * * * *
(b) * * *
(2) In addition to the Federal per diem payment amounts, inpatient
psychiatric facilities receive payment for bad debts of Medicare
beneficiaries, as specified in Sec. 413.89 of this chapter.
5. Section 412.424 is amended by adding a new paragraph
(d)(1)(iii)(F) to read as follows:

Sec. 412.424 Methodology for calculating the Federal per diem payment
amount.

* * * * *
(d) * * *
(1) * * *
(iii) * * *
(F) Closure of an IPF. (1) For cost reporting periods beginning on
or after July 1, 2011, an IPF may receive a temporary adjustment to its
FTE cap to reflect residents added because of another IPF's closure if
the IPF meets the following criteria:
(i) The IPF is training additional residents from an IPF that
closed on or after July 1, 2011.
(ii) No later than 60 days after the IPF begins to train the
residents, the IPF submits a request to its Medicare contractor for a
temporary adjustment to its cap, documents that the IPF is eligible for
this temporary adjustment by identifying the residents who have come
from the closed IPF and have caused the IPF to exceed its cap, and
specifies the length of time the adjustment is needed.
(2) Closure of an IPF's residency training program. If an IPF that
closes its residency training program agrees to temporarily reduce its
FTE cap according to the criteria specified in paragraph
(d)(1)(iii)(F)(2)(ii) of this section, another IPF(s) may receive a
temporary adjustment to its FTE cap to reflect residents added because
of the closure of the residency training program if the criteria
specified in paragraph (d)(1)(iii)(F)(2)(i) of this section are met.
(i) Receiving IPF(s). For cost reporting periods beginning on or
after July 1, 2001, an IPF may receive a temporary adjustment to its
FTE cap to reflect residents added because of the closure of another
IPF's residency training program if the IPF is training additional
residents from the residency training program of an IPF that closed a
program; and if no later than 60 days after the IPF begins to train the
residents, the IPF submits to its Medicare Contractor a request for a
temporary adjustment to its FTE cap, documents that it is eligible for
this temporary adjustment by identifying the residents who have come
from another IPF's closed program and have caused the IPF to exceed its
cap, specifies the length of time the adjustment is needed, and submits
to its Medicare contractor a copy of the FTE reduction statement by the
hospital that closed its program, as specified in paragraph
(d)(1)(iii)(F)(2)(ii) of this section.
(ii) IPF that closed its program. An IPF that agrees to train
residents who have been displaced by the closure of another IPF's
program may receive a temporary FTE cap adjustment only if the hospital
with the closed program temporarily reduces its FTE cap based on the
FTE residents in each program year training in the program at the time

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of the program's closure. This yearly reduction in the FTE cap will be
determined based on the number of those residents who would have been
training in the program during that year had the program not closed. No
later than 60 days after the residents who were in the closed program
begin training at another hospital, the hospital with the closed
program must submit to its Medicare contractor a statement signed and
dated by its representative that specifies that it agrees to the
temporary reduction in its FTE cap to allow the IPF training the
displaced residents to obtain a temporary adjustment to its cap;
identifies the residents who were in training at the time of the
program's closure; identifies the IPFs to which the residents are
transferring once the program closes; and specifies the reduction for
the applicable program years.
* * * * *
6. Section 412.426 is amended by revising paragraph (a) to read as
follows:

Sec. 412.426 Transition period.

(a) Duration of transition period and composition of the blended
transition payment. Except as provided in paragraph (c) of this
section, for cost reporting periods beginning on or after January 1,
2005 through January 1, 2008, an inpatient psychiatric facility
receives a payment comprised of a blend of the estimated Federal per
diem payment amount, as specified in Sec. 412.424(d) of this subpart
and a facility-specific payment as specified under paragraph (b) of
this section.
(1) For cost reporting periods beginning on or after January 1,
2005 and before January 1, 2006, payment is based on 75 percent of the
facility-specific payment and 25 percent is based on the Federal per
diem payment amount.
(2) For cost reporting periods beginning on or after January 1,
2006 and before January 1, 2007, payment is based on 50 percent of the
facility-specific payment and 50 percent is based on the Federal per
diem payment amount.
(3) For cost reporting periods beginning on or after January 1,
2007 and before January 1, 2008, payment is based on 25 percent of the
facility-specific payment and 75 percent is based on the Federal per
diem payment amount.
(4) For cost reporting periods beginning on or after January 1,
2008, payment is based entirely on the Federal per diem payment amount.
* * * * *
7. Section 412.432 is amended by revising paragraph (d) to read as
follows:

Sec. 412.432 Method of payment under the inpatient psychiatric
facility prospective payment system.

* * * * *
(d) Outlier payments. Additional payments for outliers are not made
on an interim basis. Outlier payments are made based on the submission
of a discharge bill and represents final payment subject to the cost
report settlement specified in Sec. 412.84(i) and Sec. 412.84(m) of
this part.
* * * * *

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

Dated: January 13, 2011.
Donald Berwick,
Administrator, Centers for Medicare & Medicaid Services.
Approved: January 20, 2011.
Kathleen Sebelius,
Secretary.

[Note: The following Addendums will not appear in the Code of
Federal Regulations].

Addendum A--Rate and Adjustment Factors

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[FR Doc. 2011-1507 Filed 1-21-11; 4:15 pm]
BILLING CODE 4120-01-P