[Federal Register Volume 76, Number 83 (Friday, April 29, 2011)]
[Proposed Rules]
[Pages 24214-24289]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-10159]



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Vol. 76

Friday,

No. 83

April 29, 2011

Part IV





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 Rehabilitation Facility Prospective Payment 
System for Federal Fiscal Year 2012; Changes in Size and Square Footage 
of Inpatient Rehabilitation Units and Inpatient Psychiatric Units; 
Proposed Rule

  Federal Register / Vol. 76 , No. 83 / Friday, April 29, 2011 / 
Proposed Rules  

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DEPARTMENT OF HEALTH AND HUMAN SERVICES

Centers for Medicare & Medicaid Services

42 CFR Part 412

[CMS-1349-P]
RIN 0938-AQ28


Medicare Program; Inpatient Rehabilitation Facility Prospective 
Payment System for Federal Fiscal Year 2012; Changes in Size and Square 
Footage of Inpatient Rehabilitation Units and Inpatient Psychiatric 
Units

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

ACTION: Proposed rule.

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SUMMARY: This proposed rule would implement section 3004 of the 
Affordable Care Act, which establishes a new quality reporting program 
that provides for a 2 percent reduction in the annual increase factor 
beginning in 2014 for failure to report quality data to the Secretary 
of Health and Human Services. This proposed rule would also update the 
prospective payment rates for inpatient rehabilitation facilities 
(IRFs) for Federal fiscal year 2012 (for discharges occurring on or 
after October 1, 2011 and on or before September 30, 2012) as required 
by the Social Security Act (the Act). The Act requires the Secretary to 
publish in the Federal Register on or before the August 1 that precedes 
the start of each FY the classification and weighting factors for the 
IRF prospective payment system (PPS) case-mix groups and a description 
of the methodology and data used in computing the prospective payment 
rates for that fiscal year. We are also proposing to consolidate, 
clarify, and revise existing policies regarding IRF hospitals and IRF 
units of hospitals to eliminate unnecessary confusion and enhance 
consistency. Furthermore, in accordance with the general principles of 
the President's January 18, 2011 Executive Order entitled ``Improving 
Regulation and Regulatory Review,'' we are proposing to amend existing 
regulatory provisions regarding ``new'' facilities and changes in the 
bed size and square footage of IRFs and inpatient psychiatric 
facilities (IPFs) to improve clarity and remove obsolete material.

DATES: To be assured consideration, comments must be received at one of 
the addresses provided below, no later than 5 p.m. on June 21, 2011.

ADDRESSES: In commenting, please refer to file code CMS-1349-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 ``Submit a 
comment'' instructions.
    2. By regular mail. You may mail written comments to the following 
address only: Centers for Medicare & Medicaid Services, Department of 
Health and Human Services, Attention: CMS-1349-P, P.O. Box 8016, 
Baltimore, MD 21244-8016.
    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-1349-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) 786-7195 in advance to schedule your 
arrival with one of our staff members.
    Comments mailed to the addresses indicated as appropriate for hand 
or courier delivery may be delayed and received after the comment 
period.
    Submission of comments on paperwork requirements. You may submit 
comments on this document's paperwork requirements by following the 
instructions at the end of the ``Collection of Information 
Requirements'' section in this document.
    For information on viewing public comments, see the beginning of 
the SUPPLEMENTARY INFORMATION section.

FOR FURTHER INFORMATION CONTACT:
Gwendolyn Johnson, (410) 786-6954, for general information about the 
proposed rule.
Hillary Loeffler, (410) 786-0456, for information about the proposed 
payment rates.
Stella R. Mandl, (410) 786-2547, for information about the proposed 
quality reporting program.
Susanne Seagrave, (410) 786-0044, for information about the proposed 
payment policies.

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. Historical Overview of the Inpatient Rehabilitation Facility 
Prospective Payment System (IRF PPS)
    B. Provisions of the Affordable Care Act Affecting the IRF PPS 
in FY 2012 and Beyond
    C. Operational Overview of the Current IRF PPS
II. Summary of Provisions of the Proposed Rule
    A. Proposed Updates to the IRF Federal Prospective Payment Rates 
for Federal Fiscal Year (FY) 2012
    B. Proposed Revisions to Existing Regulation Text
III. Proposed Update to the Case-Mix Group (CMG) Relative Weights 
and Average Length of Stay Values for FY 2012

[[Page 24215]]

IV. Proposed Updates to the Facility-Level Adjustment Factors for FY 
2012
    A. Proposed Updates to the IRF Facility-Level Adjustment Factors
    B. Budget Neutrality Methodology for the Proposed Updates to the 
IRF Facility-Level Adjustment Factors
    C. Proposed Policy for Temporary Cap Adjustments to Reflect 
Interns and Residents Displaced Due to Closure of IRFs or IRF 
Residency Training Programs
    1. Background
    2. Proposed FTE Intern and Resident Temporary Cap Adjustment
    3. Proposed Temporary Adjustment to the FTE Cap to Reflect 
Interns and Residents Displaced Due to IRF Closure
    4. Proposed Temporary Adjustment to the FTE Cap to Reflect 
Interns and Residents Displaced Due to a Residency Program Closure
V. Proposed FY 2012 IRF PPS Federal Prospective Payment Rates
    A. Proposed Market Basket Increase Factor, Productivity 
Adjustment, and Labor-Related Share for FY 2012
    1. Proposed Rebasing of the RPL Market Basket for FY 2012
    2. Proposed Productivity Adjustment
    3. Proposed Calculation of the IRF PPS Market Basket Increase 
Factor for FY 2012
    4. Proposed Calculation of the Labor-Related Share for FY 2012
    B. Proposed Area Wage Adjustment
    C. Description of the Proposed IRF Standard Conversion Factor 
and Payment Rates for FY 2012
    D. Example of the Methodology for Adjusting the Proposed Federal 
Prospective Payment Rates
VI. Proposed Update to Payments for High-Cost Outliers Under the IRF 
PPS
    A. Proposed Update to the Outlier Threshold Amount for FY 2012
    B. Proposed Update to the IRF Cost-to-Charge Ratio Ceilings
VII. Impact of the IPPS Data Matching Process Changes on the IRF PPS 
Calculation of the Low-Income Percentage Adjustment Factor
VIII. Proposed Updates to the Policies in 42 CFR 412
    A. Proposed Consolidation of the Requirements for Rehabilitation 
Hospitals and Rehabilitation Units
    B. Proposed Revisions to the Regulations at Proposed Sec.  
412.29
    C. Proposed Revisions to the Requirements for Changes in Bed 
Size and Square Footage
    D. Proposed Revisions to Enhance Consistency Between the IRF 
Coverage and Payment Requirements
IX. Proposed Quality Reporting Program for IRFs
    A. Background and Statutory Authority
    B. Quality Measures for IRF Quality Reporting Program for FY 
2014
    1. General
    2. Considerations in the Selection of the Proposed Quality 
Measures
    3. FY 2014 Measure 1: Healthcare Associated Infection 
Measure (HAI): Urinary Catheter-Associated Urinary Tract Infections 
(CAUTI)
    4. FY 2014 Measure 2: Percent of Patients with Pressure 
Ulcers that are New or Worsened
    5. Potential FY 2014 Measure 3: 30-Day Comprehensive 
All Cause Risk Standardized Readmission Measure
    C. Data Submission Requirements
    1. Proposed Method of Data Submission for HAI Measure (CAUTI)
    2. Proposed Method of Data Submission for the Percent of 
Patients with New or Worsened Pressure Ulcer Measure
    3. Potential Method of Data Submission for the 30-Day 
Comprehensive All-Cause Risk-Standardized Readmission Measure
    D. Public Reporting
    E. Quality Measures for Future Consideration for Determination 
of Increase Factors for Future Fiscal Year Payments
F. Proposed New Regulation Text for the IRF Quality Reporting 
Program
X. Collection of Information Requirements
XI. Response to Public Comments
XII. Economic Analyses
    A. Regulatory Impact Analysis
    1. Introduction
    2. Statement of Need
    3. Overall Impacts
    4. Detailed Economic Analysis
    5. Alternatives Considered
    6. Accounting Statement
    7. Conclusion
    B. Regulatory Flexibility Act Analysis
    C. Unfunded Mandates Reform Act Analysis
XIII. Federalism Analysis
    Regulation Text
    Addendum

Acronyms

    To assist the reader, we are listing the acronyms used and their 
corresponding meaning in alphabetical order.

ADC Average Daily Census
AHA American Hospital Association
ASCA Administrative Simplification Compliance Act of 2002, Public 
Law 107-105
BBA Balanced Budget Act of 1997, Public Law 105-33
BBRA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Balanced Budget Refinement Act of 1999, Public 
Law 106-113
BEA Bureau of Economic Analysis
BIPA Medicare, Medicaid, and SCHIP [State Children's Health 
Insurance Program] Benefits Improvement and Protection Act of 2000, 
Public Law 106-554
BLS Bureau of Labor Statistics
CAH Critical Access Hospital
CAUTI Catheter-Associated Urinary Tract Infection
CDC Centers for Disease Control and Prevention
CBSA Core-Based Statistical Area
CCR Cost-to-Charge Ratio
CFR Code of Federal Regulations
CIPI Capital Input Price Index
CMG Case-Mix Group
CMS Centers for Medicare & Medicaid Services
CPI Consumer Price Index
DSH Disproportionate Share Hospital
ECI Employment Cost Index
EHR Electronic Health Record
FI Fiscal Intermediary
FR Federal Register
FTE Full-time Equivalent
FY Federal Fiscal Year
GDP Gross Domestic Product
GME Graduate Medical Education
HAI Healthcare Associated Infection
HHH Hubert H. Humphrey Building
HHS Department of Health Human Services
HIPAA Health Insurance Portability and Accountability Act of 1996, 
Public Law 104-191
HOMER Home Office Medicare Records
IGI IHS Global Insight
IME Indirect Medical Education
I-O Input-Output
IPF Inpatient Psychiatric Facility
IPPS Inpatient Prospective Payment System
IRF Inpatient Rehabilitation Facility
IRF-PAI Inpatient Rehabilitation Facility-Patient Assessment 
Instrument
IRF PPS Inpatient Rehabilitation Facility Prospective Payment System
IRVEN Inpatient Rehabilitation Validation and Entry
LTCH Long Term Care Hospital
LIP Low-Income Percentage
LOS Length of Stay
MA Medicare Advantage
MAC Medicare Administrative Contractor
MedPAR Medicare Provider Analysis and Review
MFP Multifactor Productivity
MMSEA Medicare, Medicaid, and SCHIP Extension Act of 2007, Public 
Law 110-173
MSA Metropolitan Statistical Area
NAICS North American Industry Classification System
NHSN National Healthcare Safety Network
NQF National Quality Forum
OMB Office of Management and Budget
PLI Professional Liability Insurance
PPI Producer Price Indexes
PPS Prospective Payment System
QM Quality Measure
RFA Regulatory Flexibility Act of 1980, Public Law 96-354
RIA Regulatory Impact Analysis
RIC Rehabilitation Impairment Category
RO Regional Office
RP Rehabilitation and Psychiatric
RPL Rehabilitation, Psychiatric, and Long-Term Care Hospital
SCHIP State Children's Health Insurance Program
SSI Supplemental Security Income
TEFRA Tax Equity and Fiscal Responsibility Act of 1982, Public Law 
97-248

I. Background

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

    Section 4421 of the Balanced Budget Act of 1997 (Pub. L. 105-33, 
enacted on August 5, 1997) (BBA), as amended by section 125 of the 
Medicare, Medicaid, State Children's Health Insurance Program (SCHIP) 
Balanced Budget Refinement Act of 1999 (Pub. L. 106-113, enacted on 
November 29, 1999) (BBRA) and by section 305 of the

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Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act 
of 2000 (Pub. L. 106-554, enacted on December 21, 2000) (BIPA) provides 
for the implementation of a per discharge prospective payment system 
(PPS) under section 1886(j) of the Social Security Act (the Act) for 
inpatient rehabilitation hospitals and inpatient rehabilitation units 
of a hospital (hereinafter referred to as IRFs).
    Payments under the IRF PPS encompass inpatient operating and 
capital costs of furnishing covered rehabilitation services (that is, 
routine, ancillary, and capital costs) but not direct graduate medical 
education costs, costs of approved nursing and allied health education 
activities, bad debts, and other services or items outside the scope of 
the IRF PPS. Although a complete discussion of the IRF PPS provisions 
appears in the original FY 2002 IRF PPS final rule (66 FR 41316) and 
the FY 2006 IRF PPS final rule (70 FR 47880), we are providing below a 
general description of the IRF PPS for fiscal years (FYs) 2002 through 
2010.
    Under the IRF PPS from FY 2002 through FY 2005, as described in the 
FY 2002 IRF PPS final rule (66 FR 41316), the Federal prospective 
payment rates were computed across 100 distinct case-mix groups (CMGs). 
We constructed 95 CMGs using rehabilitation impairment categories 
(RICs), functional status (both motor and cognitive), and age (in some 
cases, cognitive status and age may not be a factor in defining a CMG). 
In addition, we constructed five special CMGs to account for very short 
stays and for patients who expire in the IRF.
    For each of the CMGs, we developed relative weighting factors to 
account for a patient's clinical characteristics and expected resource 
needs. Thus, the weighting factors accounted for the relative 
difference in resource use across all CMGs. Within each CMG, we created 
tiers based on the estimated effects that certain comorbidities would 
have on resource use.
    We established the Federal PPS rates using a standardized payment 
conversion factor (formerly referred to as the budget neutral 
conversion factor). For a detailed discussion of the budget neutral 
conversion factor, please refer to our FY 2004 IRF PPS final rule (68 
FR 45684 through 45685). In the FY 2006 IRF PPS final rule (70 FR 
47880), we discussed in detail the methodology for determining the 
standard payment conversion factor.
    We applied the relative weighting factors to the standard payment 
conversion factor to compute the unadjusted Federal prospective payment 
rates under the IRF PPS from FYs 2002 through 2005. Within the 
structure of the payment system, we then made adjustments to account 
for interrupted stays, transfers, short stays, and deaths. Finally, we 
applied the applicable adjustments to account for geographic variations 
in wages (wage index), the percentage of low-income patients, location 
in a rural area (if applicable), and outlier payments (if applicable) 
to the IRF's unadjusted Federal prospective payment rates.
    For cost reporting periods that began on or after January 1, 2002 
and before October 1, 2002, we determined the final prospective payment 
amounts using the transition methodology prescribed in section 
1886(j)(1) of the Act. Under this provision, IRFs transitioning into 
the PPS were paid a blend of the Federal IRF PPS rate and the payment 
that the IRF would have received had the IRF PPS not been implemented. 
This provision also allowed IRFs to elect to bypass this blended 
payment and immediately be paid 100 percent of the Federal IRF PPS 
rate. The transition methodology expired as of cost reporting periods 
beginning on or after October 1, 2002 (FY 2003), and payments for all 
IRFs now consist of 100 percent of the Federal IRF PPS rate.
    We established a CMS Website as a primary information resource for 
the IRF PPS. The Web site URL is http://www.cms.gov/InpatientRehabFacPPS/ and may be accessed to download or view 
publications, software, data specifications, educational materials, and 
other information pertinent to the IRF PPS.
    Section 1886(j) of the Act confers broad statutory authority upon 
the Secretary to propose refinements to the IRF PPS. In the FY 2006 IRF 
PPS final rule (70 FR 47880) and in correcting amendments to the FY 
2006 IRF PPS final rule (70 FR 57166) that we published on September 
30, 2005, we finalized a number of refinements to the IRF PPS case-mix 
classification system (the CMGs and the corresponding relative weights) 
and the case-level and facility-level adjustments. These refinements 
included the adoption of the Office of Management and Budget's (OMB) 
Core-Based Statistical Area (CBSA) market definitions, modifications to 
the CMGs, tier comorbidities, and CMG relative weights, implementation 
of a new teaching status adjustment for IRFs, revision and rebasing of 
the market basket index used to update IRF payments, and updates to the 
rural, low-income percentage (LIP), and high-cost outlier adjustments. 
Beginning with the FY 2006 IRF PPS final rule (70 FR 47908 through 
47917), the market basket index used to update IRF payments is a market 
basket reflecting the operating and capital cost structures for 
freestanding IRFs, freestanding inpatient psychiatric facilities 
(IPFs), and long-term care hospitals (LTCHs) (hereafter referred to as 
the rehabilitation, psychiatric, and long-term care (RPL) market 
basket). Any reference to the FY 2006 IRF PPS final rule in this 
proposed rule also includes the provisions effective in the correcting 
amendments. For a detailed discussion of the final key policy changes 
for FY 2006, please refer to the FY 2006 IRF PPS final rule (70 FR 
47880 and 70 FR 57166).
    In the FY 2007 IRF PPS final rule (71 FR 48354), we further refined 
the IRF PPS case-mix classification system (the CMG relative weights) 
and the case-level adjustments, to ensure that IRF PPS payments would 
continue to reflect as accurately as possible the costs of care. For a 
detailed discussion of the FY 2007 policy revisions, please refer to 
the FY 2007 IRF PPS final rule (71 FR 48354).
    In the FY 2008 IRF PPS final rule (72 FR 44284), we updated the 
Federal prospective payment rates and the outlier threshold, revised 
the IRF wage index policy, and clarified how we determine high-cost 
outlier payments for transfer cases. For more information on the policy 
changes implemented for FY 2008, please refer to the FY 2008 IRF PPS 
final rule (72 FR 44284), in which we published the final FY 2008 IRF 
Federal prospective payment rates.
    After publication of the FY 2008 IRF PPS final rule (72 FR 44284), 
section 115 of the Medicare, Medicaid, and SCHIP Extension Act of 2007 
(Pub. L. 110-173, enacted on December 29, 2007) (MMSEA), amended 
section 1886(j)(3)(C) of the Act to apply a zero percent increase 
factor for FYs 2008 and 2009, effective for IRF discharges occurring on 
or after April 1, 2008. Section 1886(j)(3)(C) of the Act required the 
Secretary to develop an increase factor to update the IRF Federal 
prospective payment rates for each FY. Based on the legislative change 
to the increase factor, we revised the FY 2008 Federal prospective 
payment rates for IRF discharges occurring on or after April 1, 2008. 
Thus, the final FY 2008 IRF Federal prospective payment rates that were 
published in the FY 2008 IRF PPS final rule (72 FR 44284) were 
effective for discharges occurring on or after October 1, 2007 and on 
or before March 31, 2008; and the revised FY 2008 IRF Federal 
prospective payment rates were effective for discharges occurring on or 
after April 1, 2008 and on or before September 30, 2008. The

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revised FY 2008 Federal prospective payment rates are available on the 
CMS Web site at http://www.cms.gov/InpatientRehabFacPPS/07_DataFiles.asp#TopOfPage.
    In the FY 2009 IRF PPS final rule (73 FR 46370), we updated the CMG 
relative weights, the average length of stay values, and the outlier 
threshold; clarified IRF wage index policies regarding the treatment of 
``New England deemed'' counties and multi-campus hospitals; and revised 
the regulation text in response to section 115 of the MMSEA to set the 
IRF compliance percentage at 60 percent (``the 60 percent rule'') and 
continue the practice of including comorbidities in the calculation of 
compliance percentages. We also applied a zero percent market basket 
increase factor for FY 2009 in accordance with section 115 of the 
MMSEA. For more information on the policy changes implemented for FY 
2009, please refer to the FY 2009 IRF PPS final rule (73 FR 46370), in 
which we published the final FY 2009 IRF Federal prospective payment 
rates.
    In the FY 2010 IRF PPS final rule (74 FR 39762) and in correcting 
amendments to the FY 2010 IRF PPS final rule (74 FR 50712) that we 
published on October 1, 2009, we updated the Federal prospective 
payment rates, the CMG relative weights, the average length of stay 
values, the rural, LIP, and teaching status adjustment factors, and the 
outlier threshold; implemented new IRF coverage requirements for 
determining whether an IRF claim is reasonable and necessary; and 
revised the regulation text to require IRFs to submit patient 
assessments on Medicare Advantage (MA) (Medicare Part C) patients for 
use in the 60 percent rule calculations. Any reference to the FY 2010 
IRF PPS final rule in this proposed rule also includes the provisions 
effective in the correcting amendments. For more information on the 
policy changes implemented for FY 2010, please refer to the FY 2010 IRF 
PPS final rule (74 FR 39762 and 74 FR 50712), in which we published the 
final FY 2010 IRF Federal prospective payment rates.
    After publication of the FY 2010 IRF PPS final rule (74 FR 39762), 
section 3401(d) of the Patient Protection and Affordable Care Act (Pub. 
L. 111-148, enacted on March 23, 2010) as amended by section 10319 of 
the same Act and by section 1105 of the Health Care and Education 
Reconciliation Act of 2010 (Pub. L. 111-152, enacted on March 30, 2010) 
(collectively, hereafter referred to as ``The Affordable Care Act''), 
amended section 1886(j)(3)(C) of the Act and added section 
1886(j)(3)(D) of the Act. Section 1886(j)(3)(C) of the Act requires the 
Secretary to estimate a multi-factor productivity adjustment to the 
market basket increase factor, and to apply other adjustments as 
defined by the Act. The productivity adjustment applies to FYs from 
2012 forward. The other adjustments apply to FYs 2010-2019.
    Sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(i) of the Act 
defined the adjustments that were to be applied to the market basket 
increase factors in FYs 2010 and 2011. Under these provisions, the 
Secretary was required to reduce the market basket increase factor in 
FY 2010 by a 0.25 percentage point adjustment. Notwithstanding this 
provision, in accordance with section 3401(p) of the Affordable Care 
Act, the adjusted FY 2010 rate was only to be applied to discharges 
occurring on or after April 1, 2010. Based on the self-implementing 
legislative changes to section 1886(j)(3) of the Act, we adjusted the 
FY 2010 Federal prospective payment rates as required, and applied 
these rates to IRF discharges occurring on or after April 1, 2010 and 
on or before September 30, 2010. Thus, the final FY 2010 IRF Federal 
prospective payment rates that were published in the FY 2010 IRF PPS 
final rule (74 FR 39762) were used for discharges occurring on or after 
October 1, 2009 and on or before March 31, 2010; and the adjusted FY 
2010 IRF Federal prospective payment rates applied to discharges 
occurring on or after April 1, 2010 and on or before September 30, 
2010. The adjusted FY 2010 Federal prospective payment rates are 
available on the CMS Web site at http://www.cms.gov/InpatientRehabFacPPS/07_DataFiles.asp#TopOfPage.
    In addition, sections 1886(j)(3)(C) and (D) of the Act also 
affected the FY 2010 IRF outlier threshold amount because they required 
an adjustment to the FY 2010 RPL market basket increase factor, which 
changed the standard payment conversion factor for FY 2010. 
Specifically, the original FY 2010 IRF outlier threshold amount was 
determined based on the original estimated FY 2010 RPL market basket 
increase factor of 2.5 percent and the standard payment conversion 
factor of $13,661. However, as adjusted, the IRF prospective payments 
are based on the adjusted RPL market basket increase factor of 2.25 
percent and the revised standard payment conversion factor of $13,627. 
To maintain estimated outlier payments for FY 2010 equal to the 
established standard of 3 percent of total estimated IRF PPS payments 
for FY 2010, we revised the IRF outlier threshold amount for FY 2010 
for discharges occurring on or after April 1, 2010 and on or before 
September 30, 2010. The revised IRF outlier threshold amount for FY 
2010 was $10,721.
    Sections 1886(j)(3)(ii)(II) and 1886(j)(3)(D)(i) also required the 
Secretary to reduce the market basket increase factor in FY 2011 by a 
0.25 percentage point adjustment. The FY 2011 IRF PPS notice (75 FR 
42836) and the correcting amendments to the FY 2011 IRF PPS notice (75 
FR 70013, November 16, 2010) described the required adjustments to the 
FY 2011 and FY 2010 IRF PPS Federal prospective payment rates and 
outlier threshold amount for IRF discharges occurring on or after April 
1, 2010 and on or before September 30, 2011. It also updated the FY 
2011 Federal prospective payment rates, the CMG relative weights, and 
the average length of stay values. Any reference to the FY 2011 IRF PPS 
notice in this proposed rule also includes the provisions effective in 
the correcting amendments. For more information on the FY 2010 and FY 
2011 adjustments or the updates for FY 2011, please refer to the FY 
2011 IRF PPS notice (75 FR 42836 and 75 FR 70013).

B. Provisions of the Affordable Care Act Affecting the IRF PPS in FY 
2012 and Beyond

    The Affordable Care Act included several provisions that affect IRF 
PPS in FYs 2012 and beyond. In addition to what was discussed above, 
section 3401(d) of the Affordable Care Act also added section 
1886(j)(3)(C)(ii)(I) (providing for a ``productivity'' adjustment'' for 
fiscal year 2012 and each subsequent fiscal year). The proposed 
productivity adjustment for FY 2012 is discussed in section V.A.6. of 
this proposed rule, and the 0.1 percentage point adjustment is 
discussed in section V.A of this proposed rule. Section 
1886(j)(3)(C)(ii)(II) of the Act notes that the application of these 
adjustments to the market basket update may result in an update that is 
less than 0.0 for a fiscal year and in payment rates for a fiscal year 
being less than such payment rates for the preceding fiscal year.
    Section 3004(b) of the Affordable Care Act also addressed the IRF 
PPS program. It reassigned the previously-designated section 1886(j)(7) 
of the Act to section 1886(j)(8) and inserted a new section 1886(j)(7), 
which contains new requirements for the Secretary to establish a 
quality reporting program for IRFs. Under that program, data must be 
submitted in a form and manner, and at a time specified by the 
Secretary. Beginning in FY 2014, section 1886(j)(7)(A)(i) will require 
application

[[Page 24218]]

of a 2 percentage point reduction of the applicable market basket 
increase factor for IRFs that fail to comply with the quality data 
submission requirements. Application of the 2 percentage point 
reduction may result in an update that is less than 0.0 for a fiscal 
year and in payment rates for a fiscal year being less than such 
payment rates for the preceding fiscal year. Reporting-based reductions 
to the market basket increase factor will not be cumulative; they will 
only apply for the FY involved.
    Under section 1886(j)(7)(D)(i) and (ii) of the Act, the Secretary 
is generally required to select quality measures for the IRF quality 
reporting program from those that have been endorsed by the consensus-
based entity which holds a performance measurement contract under 
section 1890(a) of the Act. This contract is currently held by the 
National Quality Forum (NQF). So long as due consideration is given to 
measures that have been endorsed or adopted by a consensus-based 
organization, section 1886(j)(7)(D)(ii) of the Act authorizes the 
Secretary to select non-endorsed measures for specified areas or 
medical topics when there are no feasible or practical endorsed 
measure(s). Under section 1886(j)(7)(D)(iii) of the Act, the Secretary 
is required to publish the measures that will be used in FY 2014 no 
later than October 1, 2012.
    Section 1886(j)(7)(E) of the Act requires the Secretary to 
establish procedures for making the IRF PPS quality reporting data 
available to the public. In so doing, the Secretary must ensure that 
IRFs have the opportunity to review any such data prior to its release 
to the public. Future rulemaking will address these public reporting 
obligations.
    The proposed quality reporting program for IRFs, in accordance with 
section 1886(j)(7) of the Act, is discussed in detail in section IX. of 
this proposed rule.

C. Operational Overview of the Current IRF PPS

    As described in the FY 2002 IRF PPS final rule, upon the admission 
and discharge of a Medicare Part A fee-for-service patient, the IRF is 
required to complete the appropriate sections of a patient assessment 
instrument, designated as the Inpatient Rehabilitation Facility-Patient 
Assessment Instrument (IRF-PAI). In addition, beginning with IRF 
discharges occurring on or after October 1, 2009, the IRF is also 
required to complete the appropriate sections of the IRF-PAI upon the 
admission and discharge of each Medicare Part C (Medicare Advantage) 
patient, as described in the FY 2010 IRF PPS final rule. All required 
data must be electronically encoded into the IRF-PAI software product. 
Generally, the software product includes patient classification 
programming called the GROUPER software. The GROUPER software uses 
specific IRF-PAI data elements to classify (or group) patients into 
distinct CMGs and account for the existence of any relevant 
comorbidities.
    The GROUPER software produces a 5-digit CMG number. The first digit 
is an alpha-character that indicates the comorbidity tier. The last 4 
digits represent the distinct CMG number. Free downloads of the 
Inpatient Rehabilitation Validation and Entry (IRVEN) software product, 
including the GROUPER software, are available on the CMS Web site at 
http://www.cms.gov/InpatientRehabFacPPS/06_Software.asp.
    Once a patient is discharged, the IRF submits a Medicare claim as a 
Health Insurance Portability and Accountability Act of 1996 (Pub. L. 
104-191, enacted on August 21, 1996) (HIPAA), compliant electronic 
claim or, if the Administrative Simplification Compliance Act of 2002 
(Pub. L. 107-105, enacted on December 27, 2002) (ASCA) permits, a paper 
claim (a UB-04 or a CMS-1450 as appropriate) using the five-digit CMG 
number and sends it to the appropriate Medicare fiscal intermediary 
(FI) or Medicare Administrative Contractor (MAC). Claims submitted to 
Medicare must comply with both ASCA and HIPAA.
    Section 3 of the ASCA amends section 1862(a) of the Act by adding 
paragraph (22) which requires the Medicare program, subject to section 
1862(h) of the Act, to deny payment under Part A or Part B for any 
expenses for items or services ``for which a claim is submitted other 
than in an electronic form specified by the Secretary.'' Section 
1862(h) of the Act, in turn, provides that the Secretary shall waive 
such denial in situations in which there is no method available for the 
submission of claims in an electronic form or the entity submitting the 
claim is a small provider. In addition, the Secretary also has the 
authority to waive such denial ``in such unusual cases as the Secretary 
finds appropriate.'' For more information, see the ``Medicare Program; 
Electronic Submission of Medicare Claims'' final rule (70 FR 71008, 
November 25, 2005). CMS instructions for the limited number of Medicare 
claims submitted on paper are available at http://www.cms.gov/manuals/downloads/clm104c25.pdf.
    Section 3 of the ASCA operates in the context of the administrative 
simplification provisions of HIPAA, which include, among others, the 
requirements for transaction standards and code sets codified in 45 
CFR, parts 160 and 162, subparts A and I through R (generally known as 
the Transactions Rule). The Transactions Rule requires covered 
entities, including covered healthcare providers, to conduct covered 
electronic transactions according to the applicable transaction 
standards. (See the CMS program claim memoranda at http://www.cms.gov/ElectronicBillingEDITrans/ and listed in the addenda to the Medicare 
Intermediary Manual, Part 3, section 3600).
    The Medicare FI or MAC processes the claim through its software 
system. This software system includes pricing programming called the 
``PRICER'' software. The PRICER software uses the CMG number, along 
with other specific claim data elements and provider-specific data, to 
adjust the IRF's prospective payment for interrupted stays, transfers, 
short stays, and deaths, and then applies the applicable adjustments to 
account for the IRF's wage index, percentage of low-income patients, 
rural location, and outlier payments. For discharges occurring on or 
after October 1, 2005, the IRF PPS payment also reflects the new 
teaching status adjustment that became effective as of FY 2006, as 
discussed in the FY 2006 IRF PPS final rule (70 FR 47880).

II. Summary of Provisions of the Proposed Rule

    In this proposed rule, we are proposing to update the IRF Federal 
prospective payment rates, to rebase and revise the RPL market basket, 
to implement refinements to the methodologies for calculating the LIP 
adjustment, and to establish a new quality reporting program for IRFs 
in accordance with section 1886(j)(7) of the Act. We are also proposing 
to revise existing regulations text for the purpose of updating and 
providing greater clarity. These proposals are as follows:

A. Proposed Updates to the IRF Federal Prospective Payment Rates for 
Federal Fiscal Year (FY) 2012

    The proposed updates to the IRF Federal prospective payment rates 
for FY 2012 are as follows:
     Update the FY 2012 IRF PPS relative weights and average 
length of stay values using the most current and complete Medicare 
claims and cost report data in a budget neutral manner, as discussed in 
section III. of this proposed rule.

[[Page 24219]]

     Update the FY 2012 IRF facility-level adjustments (rural, 
LIP, and teaching status adjustments) in a budget neutral manner using 
the most current and complete Medicare claims and cost report data and 
by removing the weighting methodology previously used to analyze such 
data, and propose a temporary cap adjustment policy for the teaching 
status adjustment to reflect interns and residents displaced due to 
closure of IRFs or IRF residency training programs, as discussed in 
section IV. of this proposed rule.
     Update the FY 2012 IRF PPS payment rates by the proposed 
market basket increase factor, based upon the most current data 
available, with a 0.1 percentage point reduction as required by 
sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act and a 
productivity adjustment required by section 1886(j)(3)(C)(ii)(I) of the 
Act, as described in section V. of this proposed rule.
     Update the wage index and the labor-related share of the 
FY 2012 IRF PPS payment rates in a budget neutral manner, as discussed 
in section V. of this proposed rule.
     Calculate the IRF Standard Payment Conversion Factor for 
FY 2012, as discussed in section V. of this proposed rule.
     Update the outlier threshold amount for FY 2012, as 
discussed in section VI. of this proposed rule.
     Update the cost-to-charge ratio (CCR) ceiling and urban/
rural average CCRs for FY 2012, as discussed in section VI. of this 
proposed rule.
     Discuss the impact of the IPPS data matching process 
changes on the IRF PPS calculation of the Supplemental Security Income 
(SSI) ratios used to compute the IRF LIP adjustment factor, as 
discussed in section VII. of this proposed rule.
     Implement the IRF quality reporting program provisions of 
section 1886(j)(7) of the Act, as discussed in section IX. of this 
proposed rule.

B. Proposed Revisions to Existing Regulation Text

    In this proposed rule, we are proposing to revise the existing 
requirements at Sec.  412.25(b), Sec.  412.25(b)(1), Sec.  
412.25(b)(2), Sec.  412.25(b)(3), and Sec.  412.25(e)(2)(ii)(A) that 
apply to all units that are excluded from the inpatient prospective 
payment system (IPPS), as described in section VIII. of this proposed 
rule. These proposed revisions would affect IRFs and inpatient 
psychiatric facilities (IPFs).
    We are also proposing to relocate and revise the existing 
requirements at Sec.  412.23(b), Sec.  412.29, and Sec.  412.30 that 
describe the requirements for facilities to qualify to receive payment 
under the IRF PPS, as described in section VIII. of this proposed rule.
    Finally, we are proposing to re-designate the existing paragraph 
Sec.  412.624(c)(4) as Sec.  412.624(c)(5) and add a new paragraph 
Sec.  412.624(c)(4) to implement the IRF quality reporting program.

III. Proposed Update to the Case-Mix Group (CMG) Relative Weights and 
Average Length of Stay Values for FY 2012

    As specified in Sec.  412.620(b)(1), we calculate a relative weight 
for each CMG that is proportional to the resources needed by an average 
inpatient rehabilitation case in that CMG. For example, cases in a CMG 
with a relative weight of 2, on average, will cost twice as much as 
cases in a CMG with a relative weight of 1. Relative weights account 
for the variance in cost per discharge due to the variance in resource 
utilization among the payment groups, and their use helps to ensure 
that IRF PPS payments support beneficiary access to care, as well as 
provider efficiency.
    In this proposed rule, we propose to update the CMG relative 
weights and average length of stay values for FY 2012. As required by 
statute, we always use the most recent available data to update the CMG 
relative weights and average lengths of stay. This ensures that the CMG 
relative weights and average length of stay values reflect as 
accurately as possible the current costs of care in IRFs. For FY 2012, 
we are proposing to use the FY 2010 IRF claims and FY 2009 IRF cost 
report data. These data are the most current and complete data 
available at this time. Currently, only a small portion of the FY 2010 
IRF cost report data are available for analysis, but the majority of 
the FY 2010 IRF claims data are available for analysis.
    In this proposed rule, we propose to use the same methodology that 
we used to update the CMG relative weights and average length of stay 
values in the FY 2009 IRF PPS final rule (73 FR 46370), which we also 
used to update the CMG relative weights and average length of stay 
values in the FY 2010 IRF PPS final rule (74 FR 39762) and the FY 2011 
notice (75 FR 42836).
    In calculating the CMG relative weights, we use a hospital-specific 
relative value method to estimate operating (routine and ancillary 
services) and capital costs of IRFs. The process used to calculate the 
CMG relative weights for this proposed rule is as follows:
    Step 1. We estimate the effects that comorbidities have on costs.
    Step 2. We adjust the cost of each Medicare discharge (case) to 
reflect the effects found in the first step.
    Step 3. We use the adjusted costs from the second step to calculate 
CMG relative weights, using the hospital-specific relative value 
method.
    Step 4. We normalize the FY 2012 CMG relative weights to the same 
average CMG relative weight from the CMG relative weights implemented 
in the FY 2011 IRF PPS notice (75 FR 42836).
    Consistent with the methodology that we have used to update the IRF 
classification system in each instance in the past, we are proposing to 
update the CMG relative weights for FY 2012 in such a way that total 
estimated aggregate payments to IRFs for FY 2012 are the same with or 
without the changes (that is, in a budget neutral manner) by applying a 
budget neutrality factor to the standard payment amount. To calculate 
the appropriate proposed budget neutrality factor for use in updating 
the FY 2012 CMG relative weights, we propose to use the following 
steps:
    Step 1. Calculate the estimated total amount of IRF PPS payments 
for FY 2012 (with no proposed changes to the CMG relative weights).
    Step 2. Calculate the estimated total amount of IRF PPS payments 
for FY 2012 by applying the proposed changes to the CMG relative 
weights (as discussed above).
    Step 3. Divide the amount calculated in step 1 by the amount 
calculated in step 2 to determine the proposed budget neutrality factor 
(0.9989) that would maintain the same total estimated aggregate 
payments in FY 2012 with and without the proposed changes to the CMG 
relative weights.
    Step 4. Apply the proposed budget neutrality factor (0.9989) to the 
FY 2011 IRF PPS standard payment amount after the application of the 
budget-neutral wage adjustment factor.
    In section V.C. of this proposed rule, we discuss the proposed use 
of the existing methodology to calculate the standard payment 
conversion factor for FY 2012.
    Table 1, ``Proposed Relative Weights and Average Length of Stay 
Values for Case-Mix Groups,'' presents the CMGs, the comorbidity tiers, 
the proposed corresponding relative weights, and the proposed average 
length of stay values for each CMG and tier for FY 2012. The average 
length of stay for each CMG is used to determine when an IRF

[[Page 24220]]

discharge meets the definition of a short-stay transfer, which results 
in a per diem case level adjustment. The proposed relative weights and 
average length of stay values shown in Table 1 are subject to change 
for the final rule if more recent data become available for use in 
these analyses.

[[Page 24221]]

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[GRAPHIC] [TIFF OMITTED] TP29AP11.006

    Generally, updates to the CMG relative weights result in some 
increases and some decreases to the CMG relative weight values. Table 2 
shows how the application of the proposed revisions for FY 2012 would 
affect particular CMG relative weight values, which affect the overall 
distribution of payments within CMGs and tiers. Note that, because we 
propose to implement the CMG relative weight revisions in a budget 
neutral manner (as described above), total estimated aggregate payments 
to IRFs for FY 2012 would not be affected as a result of the CMG 
relative weight revisions. However, the proposed revisions would affect 
the distribution of payments within CMGs and tiers.
[GRAPHIC] [TIFF OMITTED] TP29AP11.007

    As Table 2 shows, 97 percent of all IRF cases are in CMGs and tiers 
that would experience less than a 5 percent change (either increase or 
decrease) in the CMG relative weight value as a result of the proposed 
revisions for FY 2012. The largest increase in the proposed CMG 
relative weight values that affects a particularly large number of IRF 
discharges is a 1.7 percent increase in the CMG relative weight value 
for CMG A0704--Fracture of Lower Extremity with a motor score of less 
than 28.15--in the ``no comorbidity'' tier. In the FY 2010 data, 24,162 
IRF discharges were classified into this CMG and tier. The largest 
decrease in a CMG relative weight value that affects a particularly 
large number of IRF discharges is a 0.7 percent decrease in the CMG 
relative weight for CMG A0110--Stroke, with a motor score of less than 
22.35 and a patient age of less than 84.5 years in the ``no 
comorbidity'' tier. In the FY 2010 IRF claims data, this change affects 
16,975 cases.

[[Page 24225]]

    Given the changes in IRFs' case mix over time, we believe that it 
is important to update the CMG relative weights and average length of 
stay (LOS) values periodically to continue to reflect the trends in IRF 
patient populations. As we have more recent data that better reflect 
IRFs' case mix at this time, we propose the updates described in this 
section.

IV. Proposed Updates to the Facility-Level Adjustment Factors for FY 
2012

A. Proposed Updates to the IRF Facility-Level Adjustment Factors

    Section 1886(j)(3)(A)(v) of the Act confers broad authority upon 
the Secretary to adjust the per unit payment rate ``by such * * * 
factors as the Secretary determines are necessary to properly reflect 
variations in necessary costs of treatment among rehabilitation 
facilities.'' For example, we adjust the Federal prospective payment 
amount associated with a CMG to account for facility-level 
characteristics such as an IRF's LIP, teaching status, and location in 
a rural area, if applicable, as described in Sec.  412.624(e).
    In the FY 2010 IRF PPS final rule (74 FR 39762), we updated the 
adjustment factors for calculating the rural, LIP, and teaching status 
adjustments based on the most recent three consecutive years worth of 
IRF claims data (at that time, FY 2006, FY 2007, and FY 2008) and the 
most recent available corresponding IRF cost report data. As discussed 
in the FY 2010 IRF PPS proposed rule (74 FR 21060 through 21061), we 
observed relatively large year-to-year fluctuations in the underlying 
data used to compute the adjustment factors, especially the teaching 
status adjustment factor. Therefore, we implemented a three-year moving 
average approach to updating the facility-level adjustment factors in 
the FY 2010 IRF PPS final rule (74 FR 39762) to provide greater 
stability and predictability of Medicare payments for IRFs.
    Though the 3-year moving average approach that we implemented in FY 
2010 improves the year-to-year stability and predictability of the 
facility-level adjustment factors, we have continued to estimate 
unusually large year-to-year fluctuations in the teaching status 
adjustment factor. To determine the underlying reasons for these large 
year-to-year fluctuations in the teaching status adjustment factor, we 
analyzed the data and reviewed the methodology that we were using to 
estimate all three of the facility-level adjustment factors (that is, 
the rural, the LIP, and the teaching status adjustment factors). We 
found that the unusually large year-to-year fluctuations in the 
teaching status adjustment factors were the result of a weighting 
methodology that we have been applying to the regression analysis used 
to estimate the facility-level adjustment factors since the 
implementation of the IRF PPS. This weighted regression methodology 
assigns greater weight to some facilities than to others and, in 
effect, exaggerates the differences among different types of IRF 
facilities. While this weighted regression methodology was appropriate 
when the IRF PPS was first being developed because we had limited data 
on which to base the initial facility-level adjustment factors, we 
believe that a more appropriate and conservative approach for the 
current IRF PPS is to assign equal weight to all facilities in the 
regression analysis that is used to estimate all of the IRF facility-
level adjustment factors (that is, the rural, LIP, and teaching status 
adjustment factors). Thus, we propose to remove the weighting 
methodology from our analysis of the facility-level adjustment factors 
and update the IRF facility-level adjustment factors for FY 2012 using 
an unweighted regression analysis. The primary effect of the proposed 
change in methodology is to stabilize all three of the facility-level 
adjustment factors (that is, the rural, the LIP, and the teaching 
status adjustment factor) over time. However, the proposed change in 
the methodology also has a relatively large effect on our estimate of 
the LIP adjustment factor that we discuss in this section.
    To update the facility-level adjustment factors for FY 2012, we 
propose using updated data (FY 2008, FY 2009, and 2010 IRF claims data 
and the corresponding year's cost report data or, if unavailable, the 
most recent available cost report data). To analyze the updated data, 
we propose to use a revised methodology from the methodology that we 
used to update the facility-level adjustment factors in the FY 2010 IRF 
PPS final rule (74 FR 39762). The revised methodology would remove a 
weighting factor from the regression analysis and, instead, assign 
equal weight to all facilities in the regression analysis. Based on 
analysis of the updated data using the proposed unweighted regression 
analysis and the 3-year moving average approach, we estimate that IRF 
PPS payments to IRFs in rural areas would be increased by 18.7 percent 
for FY 2012. In addition, to account for the percentage of low-income 
patients that an IRF treats, we estimate that IRF PPS payments for FY 
2012 would be adjusted using an updated LIP adjustment formula of (1 + 
disproportionate share hospital (DSH) patient percentage) raised to the 
power of (0.1897), where the--
[GRAPHIC] [TIFF OMITTED] TP29AP11.008

    Note that the proposed LIP adjustment factor of 0.1897 is 
substantially lower than the current LIP adjustment factor of 0.4613 
due to the use of updated data and the proposed use of the unweighted 
regression methodology, which would give equal weight to all facilities 
in the regression. Finally, we estimate that IRF PPS payments to 
eligible IRFs that qualify for the teaching status adjustment will be 
adjusted by the following updated formula for FY 2012: (1 + full-time 
equivalent (FTE) interns and residents/average daily census) raised to 
the power of (0.4888). To calculate the proposed updates to the rural, 
LIP, and teaching status adjustment factors for FY 2012, we used the 
following steps:

[Steps 1 and 2 are performed independently for each of 3 years of IRF 
claims data: FY 2008, FY 2009, and FY 2010]

    Step 1. Calculate the average cost per case for each IRF in the IRF 
claims data.
    Step 2. Use logarithmic regression analysis on average cost per 
case to compute the coefficients for the rural, LIP, and teaching 
status adjustments. For FY 2012, we are proposing to update the 
logarithmic regression analysis so that we no longer apply weights to 
the analysis. The proposed unweighted regression analysis gives equal 
weight to all facilities in the regression analysis.
    Step 3. Calculate a simple mean for each of the coefficients across 
the 3 years of data using logarithms for the LIP and teaching status 
adjustment coefficients (because they are continuous variables), but 
not for the rural adjustment coefficient (because the rural variable is 
either zero (if not rural) or 1 (if rural)). To compute the proposed

[[Page 24226]]

LIP and teaching status adjustment factors, we convert these factors 
back out of the logarithmic form.
    The proposed adjustment factors are subject to change for the final 
rule if more recent data become available for use in these analyses.

B. Budget Neutrality Methodology for the Proposed Updates to the IRF 
Facility-Level Adjustment Factors

    Consistent with the way that we implemented changes to the IRF 
facility-level adjustment factors (the rural, LIP, and teaching status 
adjustment factors) in the FY 2006 and FY 2010 IRF PPS final rules (70 
FR 47880, 70 FR 57166, and 74 FR 39762), we propose to make changes to 
the rural, LIP, and teaching status adjustment factors for FY 2012 in 
such a way that total estimated aggregate payments to IRFs for FY 2012 
would be the same with or without the proposed changes (that is, in a 
budget neutral manner) by applying budget neutrality factors for each 
of these three changes to the standard payment amount. To calculate the 
proposed budget neutrality factors used to update the rural, LIP, and 
teaching status adjustment factors, we propose to use the following 
steps:
    Step 1. Using the most recent available data (currently FY 2010), 
calculate the estimated total amount of IRF PPS payments that would be 
made in FY 2012 (without applying the proposed changes to the rural, 
LIP, or teaching status adjustment factors).
    Step 2. Calculate the estimated total amount of IRF PPS payments 
that would be made in FY 2012 if the proposed update to the rural 
adjustment factor were applied.
    Step 3. Divide the amount calculated in step 1 by the amount 
calculated in step 2 to determine the proposed budget neutrality factor 
(0.9998) that would maintain the same total estimated aggregate 
payments in FY 2012 with and without the proposed change to the rural 
adjustment factor.
    Step 4. Calculate the estimated total amount of IRF PPS payments 
that would be made in FY 2012 if the proposed update to the LIP 
adjustment factor were applied.
    Step 5. Divide the amount calculated in step 1 by the amount 
calculated in step 4 to determine the proposed budget neutrality factor 
(1.0327) that would maintain the same total estimated aggregate 
payments in FY 2012 with and without the proposed change to the LIP 
adjustment factor.
    Step 6. Calculate the estimated total amount of IRF PPS payments 
that would be made in FY 2012 if the proposed update to the teaching 
status adjustment factor were applied.
    Step 7. Divide the amount calculated in step 1 by the amount 
calculated in step 6 to determine the proposed budget neutrality factor 
(1.0024) that would maintain the same total estimated aggregate 
payments in FY 2012 with and without the proposed change to the 
teaching status adjustment factor.
    Step 8. Apply the proposed budget neutrality factors for the 
updates to the rural, LIP, and teaching status adjustment factors to 
the FY 2011 IRF PPS standard payment amount after the application of 
the proposed budget neutrality factors for the wage adjustment and the 
CMG relative weights.
    The proposed budget neutrality factors for the proposed changes to 
the rural, LIP, and teaching status adjustment factors are subject to 
change for the final rule if more recent data become available for use 
in these analyses or if the proposed payment policies associated with 
the proposed budget neutrality factors change.
    In section V.C. of this proposed rule, we discuss the proposed 
methodology for calculating the standard payment conversion factor for 
FY 2012.

C. Proposed Policy for Temporary Cap Adjustments To Reflect Interns and 
Residents Displaced Due to Closure of IRFs or IRF Residency Training 
Programs

1. Background
    In the FY 2006 IRF PPS final rule (70 FR 47880 at 47928 through 
47932), we implemented regulations at Sec.  412.624(e)(4) to establish 
a facility-level adjustment for IRFs that are, or are part of, teaching 
hospitals. The teaching status 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 FTE interns and residents training in the 
IRF and the IRF's average daily census.
    We established the IRF teaching status adjustment in a manner that 
limited the incentives for IRFs to add FTE interns and residents for 
the purpose of increasing their teaching status adjustment. We imposed 
a cap on the number of FTE interns and residents that may be counted 
for purposes of calculating the teaching status adjustment. The cap 
limits the number of FTE interns and residents that teaching IRFs may 
count for the purpose of calculating the IRF PPS teaching status 
adjustment, not the number of interns and residents teaching 
institutions can hire or train. We calculated the number of FTE interns 
and residents that trained in the IRF during a ``base year'' and used 
that FTE intern and resident number as the cap. An IRF's FTE intern and 
resident cap is ultimately determined based on the final settlement of 
the IRF's most recent cost reporting period ending on or before 
November 15, 2004. A complete discussion of how the IRF teaching status 
adjustment was calculated appears in the FY 2006 IRF PPS final rule (70 
FR 47880, 47928 through 47932).
2. Proposed Temporary FTE Intern and Resident Cap Adjustment
    Sometimes, interns and residents that are training in an IRF find 
themselves unable to complete their training in the IRF, either because 
the IRF closes or closes a residency training program (we refer to 
these interns and residents as ``displaced''). Although we have not 
heard of any instances where IRFs did not accept displaced interns and 
residents because the additional interns and residents would put the 
facility over the facility's FTE intern and resident cap, we believe 
that it is important to maintain consistent policies with other 
Medicare PPS systems, to the extent feasible. The IPPS indirect medical 
education (IME) adjustment and the direct GME policies contain 
provisions that allow for temporary adjustments to the IME/GME caps for 
IPPS hospitals that train interns and residents that are displaced 
because a hospital closes or closes a medical residency training 
program. CMS has recently proposed to include a similar temporary cap 
adjustment policy for the inpatient psychiatric facility (IPF) PPS 
teaching status adjustment outlined in the rate year 2012 IPF PPS 
proposed rule (76 FR 4998 at 5018 through 5020). Consistent with the 
IPPS and the IPF PPS, in this proposed rule, we propose to permit a 
temporary increase in the FTE intern and resident cap when an IRF 
increases the number of FTE interns and residents it trains in order to 
accept displaced interns and residents because another IRF closes or 
closes a medical residency training program.
    When an IRF temporarily takes on interns and residents that are 
displaced because another IRF closes or closes a residency training 
program, we believe that a temporary adjustment to the cap would be 
appropriate. In these situations, interns and residents may have 
partially completed a residency training program at the IRF that has 
closed or closed a training program and may be unable to complete their 
training

[[Page 24227]]

at another IRF that is already training interns and residents up to or 
in excess of its FTE intern and resident cap. We believe that it is 
appropriate to allow temporary adjustments to the FTE caps for an IRF 
that provides residency training to medical interns and residents who 
have partially completed a residency training program at an IRF that 
closes or at an IRF that discontinues training interns and residents in 
a residency training program(s). For this reason, we are proposing to 
adopt the following temporary intern and resident cap adjustment 
policies, similar to the temporary adjustments to the FTE cap used for 
acute care hospitals and the proposed temporary adjustments to the FTE 
caps for IPFs.
    We are proposing that the cap adjustment would be temporary because 
it is intern and resident specific and would only apply to the 
displaced intern(s) or resident(s) until those intern(s) or resident(s) 
have completed their training in the program in which they were 
training at the time of the IRF closure or the closure of the program. 
We propose that, as under the IPPS policy for displaced interns and 
residents, the IRF PPS temporary cap adjustment would apply only to 
interns and residents that were still training at the IRF at the time 
the IRF closed or at the time the IRF ceased training interns and 
residents in the residency training program(s). Interns and residents 
who leave the IRF, for whatever reason, before the closure of the IRF 
or the closure of the residency training program would not be 
considered displaced interns and residents for purposes of the IRF 
temporary cap adjustment policy. We are proposing to adopt the same 
definition of ``closure of a hospital residency training program'' as 
it is currently defined at Sec.  413.79(h)(1)(ii); that is, the 
hospital ceases to offer training for residents in a particular 
approved medical residency training program. Similarly, as under the 
IPPS policy, we are proposing that medical students who are accepted 
into a program at an IRF but the IRF or residency training program 
closes before the individual begins training at that IRF are also not 
considered displaced interns and residents for purposes of the IRF 
temporary cap adjustments. We note that although we are proposing to 
adopt a policy under the IRF PPS that is consistent with the policy 
applicable under the IPPS, the actual caps under the two payment 
systems are separate and distinct. This means, for example, if a 
program closes at an IPPS hospital that has an IRF unit, but the 
interns and residents from that closed program were not rotating into 
the IRF unit when the program closed, then there would be no temporary 
FTE cap adjustment under the IRF PPS, since the interns and residents 
were not displaced from the IRF. However, if an IPPS hospital that has 
an IRF unit closes a training program and interns and residents from 
that program were rotating into the IRF unit when the program closed, 
an IRF hospital or IRF unit may temporarily adjust their FTE intern and 
resident cap if they train the displaced interns and residents, but 
only for the portion of the training that has to be completed in the 
IRF setting and only if all of the requirements specified in section 
IV.C. of this proposed rule are met.
3. Proposed Temporary Adjustment to the FTE Cap To Reflect Interns and 
Residents Displaced Due to an IRF Closure
    We are proposing to allow an IRF to receive a temporary adjustment 
to the FTE cap to reflect interns and residents added because of 
another IRF's closure. The temporary cap adjustment is intended to 
account for medical interns and residents who have partially completed 
a medical residency training program at the IRF that has closed and may 
be unable to complete their training at another IRF because that IRF is 
already training interns and residents up to or in excess of its cap. 
We are proposing this change because IRFs may be reluctant to accept 
additional interns and residents from a closed IRF without a temporary 
adjustment to their caps. For purposes of this policy, we are proposing 
to adopt the IPPS definition of ``closure of a hospital'' in Sec.  
413.79(h)(1)(i) to mean the IRF terminates its Medicare provider 
agreement as specified in Sec.  489.52. Therefore, we are proposing to 
allow a temporary adjustment to an IRF's FTE cap to reflect interns and 
residents added because of an IRF's closure. The proposed policy would 
be effective for cost reporting periods beginning on or after October 
1, 2011, when an IRF trains an intern or resident from an IRF that 
closed on or after October 1, 2011. We would allow an adjustment to an 
IRF's FTE cap if the IRF meets the following criteria:
    (a) The IRF is training displaced interns and residents from an IRF 
that closed on or after October 1, 2011.
    (b) The IRF that is training the displaced interns and residents 
from the closed IRF 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 interns and residents, and 
documents that the IRF is eligible for this temporary adjustment to its 
FTE cap by identifying the interns and residents who have come from the 
closed IRF and have caused the IRF to exceed its cap, (or the IRF may 
already be over its cap), and specifies the length of time that the 
adjustment is needed.
    After the displaced interns and residents leave the IRF's training 
program or complete their residency program, the IRF's cap would revert 
to its original level. This means that the temporary adjustment to the 
FTE cap would be available to the IRF only for the period of time 
necessary for the displaced interns and 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 allotted to 
all receiving IRFs cannot exceed the cap amount of the IRF 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 IRFs that closed. Section 5506 of the Affordable Care Act 
only amends sections 1886(d) and (h) of the Act for direct GME and IPPS 
IME payments. Therefore, the IME FTE cap redistributions under section 
5506 of the Affordable Care Act only apply to ``subsection (d)'' IPPS 
hospitals. Section 5506 of the Affordable Care Act has no applicability 
to the teaching status adjustments under the IRF PPS (or the IPF PPS, 
for that matter).
4. Proposed Temporary Adjustment to FTE Cap To Reflect Interns and 
Residents Displaced Due to a Residency Program Closure
    We are proposing that if an IRF ceases training interns and 
residents in a residency training program(s) and agrees to temporarily 
reduce its FTE cap, another IRF may receive a temporary adjustment to 
its FTE cap to reflect the addition of the displaced interns and 
residents. 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'' as specified in Sec.  413.79(h)(1)(ii) 
which means that the hospital ceases to offer training for interns and 
residents in a particular approved medical residency training program. 
The methodology for adjusting the caps for the ``receiving IRF'' and 
the ``IRF that closed its program'' is described below.
a. Receiving IRF
    We are proposing that an IRF may receive a temporary adjustment to 
its FTE cap to reflect interns and residents added because of the 
closure of another

[[Page 24228]]

IRF's residency training program for cost reporting periods beginning 
on or after October 1, 2011 if--
     The IRF is training additional interns and residents from 
the residency training program of an IRF that closed its program on or 
after October 1, 2011; and
     No later than 60 days after the IRF begins to train the 
interns and residents, the IRF submits to its Medicare contractor a 
request for a temporary adjustment to its FTE cap, documents that the 
IRF is eligible for this temporary adjustment by identifying the 
interns and residents who have come from another IRF's closed program 
and have caused the IRF to exceed its cap (or the IRF 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 IRF closing 
the residency training program.
    In general, the proposed temporary adjustment criteria established 
for closed medical residency training programs at IRFs is similar to 
the criteria established for closed IRFs. We are proposing that more 
than 1 IRF may be eligible to apply for the temporary adjustment 
because interns and residents from one closed program may rotate to 
different IRFs, or they may complete their training at more than one 
IRF. Also, only to the extent to which an IRF would exceed its FTE cap 
by training displaced interns and residents would it be eligible for 
the temporary adjustment. Thus, for example, if the IRF has room below 
its cap to take 1 additional displaced FTE intern or resident but 
taking a second displaced FTE intern or resident would cause the IRF to 
exceed its FTE intern and resident cap, then the IRF would potentially 
qualify for a temporary cap adjustment for 1 FTE intern or resident, 
not 2.
b. IRF That Closed Its Program(s)
    We are proposing that an IRF that agrees to train interns and 
residents who have been displaced by the closure of another IRF's 
residency training program may receive a temporary FTE cap adjustment 
only if the IRF that closed its program meets the following criteria--
     Temporarily reduces its FTE cap by the number of FTE 
interns and residents in each program year training and in the program 
at the time of the program's closure. The yearly reduction would be 
determined by deducting the number of those interns and residents who 
would have been training in the program up to the IRF's cap during the 
year of the closure, had the program not closed; and
     No later than 60 days after the interns and residents who 
were in the closed program begin training at another IRF, 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 IRF training the displaced interns and 
residents to obtain a temporary adjustment to its cap; identifies the 
interns and residents who were training at the time of the program's 
closure; identifies the IRFs to which the interns and residents are 
transferring once the program closes; and specifies the reduction for 
the applicable program years.
    In addition, we propose under this closed program policy that in 
order for the receiving IRF(s) to qualify for a temporary adjustment to 
their FTE cap, the IRFs that are closing their programs would need to 
reduce their FTE cap for the expected duration of time the displaced 
interns and residents would need to finish their training. We are 
proposing this because the IRF that closes the program still retains 
the FTE slots in its cap, even if the IRF chooses not to fill the slots 
with interns and residents. We believe that it is inappropriate to 
allow an increase to the receiving IRF's cap without an attendant 
decrease to the cap of the IRF with the closed program, because the IRF 
that ceased training the interns and residents could fill these slots 
with interns and residents from other programs even if the increase and 
related decrease is only temporary.
    We are proposing that the cap reduction for the IRF with the closed 
program would be based on the number of FTE interns and residents in 
each program year that were in the program at the IRF at the time of 
the program's closure, and who begin training at another IRF.
    In summary, we are proposing new IRF policies related to temporary 
adjustments to FTE caps to reflect interns and residents added due to 
closure of an IRF or closure of a residency training program. Finally, 
we are proposing that the IRFs that meet the proposed criteria would be 
eligible to receive temporary adjustments to their FTE caps for cost 
reporting periods beginning on or after October 1, 2011.

V. Proposed FY 2012 IRF PPS Federal Prospective Payment Rates

A. Proposed Market Basket Increase Factor, Productivity Adjustment, and 
Labor-Related Share for FY 2012

    Section 1886(j)(3)(C) of the Act requires the Secretary to 
establish an increase factor that reflects changes over time in the 
prices of an appropriate mix of goods and services included in the 
covered IRF services, which is referred to as a market basket index. 
According to section 1886(j)(3)(A)(i) of the Act, the increase factor 
shall be used to update the IRF Federal prospective payment rates for 
each FY. Sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the 
Act require the application of a 0.1 percentage point reduction to the 
market basket increase factor for FYs 2012 and 2013. In addition, 
section 1886(j)(3)(C)(ii)(I) of the Act requires the application of a 
productivity adjustment, as described below. Thus, in this proposed 
rule, we are proposing to update the IRF PPS payments for FY 2012 by a 
market basket increase factor based upon the most current data 
available, with a productivity adjustment as required by section 
1886(j)(3)(C)(ii)(I) of the Act as described below and a 0.1 percentage 
point reduction as required by sections 1886(j)(3)(C)(ii)(II) and 
1886(j)(3)(D)(ii) of the Act. Further, we are proposing to rebase the 
RPL market basket from a 2002-based market basket to a 2008-based 
market basket. We typically rebase the RPL market basket every 5 to 7 
years to ensure that it continues to reflect the most accurate account 
of the cost of relevant goods and services.
    Thus, in this proposed rule, we propose to start with a rebased RPL 
market basket (updated from a 2002 base year to a 2008 base year) and 
then apply a productivity adjustment as required by section 
1886(j)(3)(C)(ii)(I) of the Act and a 0.1 percentage point reduction as 
required by sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the 
Act. In section V.A.1 of this proposed rule, we describe the proposed 
methodology for rebasing the RPL market basket from a 2002 base year to 
a 2008 base year, and then in section V.A.2 of this proposed rule, we 
describe the proposed methodology for calculating the productivity 
adjustment as required by section 1886(j)(3)(C)(ii)(I) of the Act. 
Finally, in section V.A.3 of this proposed rule, we describe the 
proposed calculation of the market basket increase factor to be used to 
adjust IRF PPS payments for FY 2012.

[[Page 24229]]

1. Proposed Rebasing of the RPL Market Basket for FY 2012
a. Background
    The input price index (that is, the market basket) that was used to 
develop the IRF 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 IRFs, IPFs, 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 an input price index.
    Beginning with the FY 2006 IRF PPS final rule (70 FR 47908), IRF 
PPS payments were updated using a FY 2002-based RPL market basket 
reflecting the operating and capital cost structures for freestanding 
IRFs, freestanding IPFs, and LTCHs.
    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 is implemented at Sec.  413.40. 
Cancer and children's hospitals 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 freestanding IRFs, 
freestanding IPFs, and LTCHs. See the FY 2006 IRF PPS final rule (70 FR 
47908) for a complete discussion of the FY 2002-based RPL market 
basket.
    In the FY 2010 IRF proposed rule (74 FR 21062), we expressed our 
interest in exploring the possibility of creating a stand-alone IRF 
market basket that reflects the cost structures of only IRF providers. 
We noted that, of the available options, one is to combine the Medicare 
cost report data from freestanding IRF providers (presently 
incorporated into the FY 2002-based RPL market basket) with data from 
hospital-based IRF providers. We indicated that an examination of the 
Medicare cost report data comparing freestanding and hospital-based 
IRFs 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 IRF providers. As 
a result, we believed 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 IRFs (74 FR 21062).
    We summarized the public comments we received and our responses in 
the FY 2010 IRF PPS final rule (74 FR 39762, 39776 through 39777). 
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 IRFs, and 
therefore we do not believe it is appropriate at this time to 
incorporate data from hospital-based IRFs with those of freestanding 
IRFs to create a stand-alone IRF market basket.
    Although we do not believe it would be appropriate to propose a 
stand-alone IRF market basket, we are currently exploring the viability 
of creating two separate market baskets from the current RPL, one of 
which would include freestanding IRFs and freestanding IPFs 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 IRF 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. 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 relative to a base 
period 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 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

[[Page 24230]]

changing data sources, price proxies, or methods, used to derive the 
input price index. For FY 2012, we are proposing to rebase and revise 
the market basket used to update the IRF 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 (PLI), 
capital, and a residual. This residual reflects all remaining costs 
that are not captured in the four cost categories listed above. The 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 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 and a residual as 
represented by all other costs directly from the FY 2008 Medicare cost 
reports for freestanding IRFs, freestanding IPFs, and LTCHs (see Table 
3 for these four cost categories and their associated weights). 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.
[GRAPHIC] [TIFF OMITTED] TP29AP11.009

(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 between 
October 1, 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.

[[Page 24231]]

    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 3 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 inflated the 2002 Benchmark I-O data 
forward to 2008. The methodology we used to inflate 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'' 
based on the inflated 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 
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 V.A.1.c.(3) of this proposed rule. Also, the proposed FY 2008-
based RPL market basket excludes 1 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 PLI, 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:
    (a) 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.
    (b) 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.
    (c) 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, these indexes 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 proposed CPIs, PPIs, and ECIs selected meet these 
criteria.
    Table 4 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 4 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 V.A.1.c.(4) of this proposed rule).

[[Page 24232]]

    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 August 27, 2009 
Federal Register (74 FR 43843).

[[Page 24233]]

[GRAPHIC] [TIFF OMITTED] TP29AP11.010


[[Page 24234]]


[GRAPHIC] [TIFF OMITTED] TP29AP11.011

(i) 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.
(ii) 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.
(iii) 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.
(iv) 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.
(v) 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.
(vi) Professional Liability Insurance
    We are proposing to proxy price changes in hospital PLI premiums 
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 non-
price 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.
(vii) 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

[[Page 24235]]

series; however, this is the same proxy that was used in the FY 2002-
based RPL market basket.
(viii) 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.
(ix) 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.
(x) 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 
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 5 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.
[GRAPHIC] [TIFF OMITTED] TP29AP11.012

(xi) 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.
(xii) 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.
(xiii) 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.
(xiv) 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.
(xv) 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.
(xvi) 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.
(xvii) 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.
(xviii) 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.
(xix) 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

[[Page 24236]]

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.
(xx) 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.
(xxi) 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.
(xxii) 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 financial services and its incorporation represents a 
technical improvement to the market basket.
(xxiii) 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.
(xxiv) 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.
(xxv) 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 
freestanding IRF, freestanding 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 inflated 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 
when calculating the operating cost weights as described above in 
section V.A.1.c.(1)(a) of this proposed rule. 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 and Fixed 
Equipment; and (2) Movable Equipment. The apportionment between 
building and fixed equipment and movable equipment was determined using 
the FY 2008 Medicare cost reports for freestanding IRFs, freestanding 
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 
(CIPI) (70 FR 23406) due to insufficient Medicare cost report data for 
freestanding IRFs, freestanding IPFs, and LTCHs. For the proposed FY 
2008-based RPL market basket, we are proposing to derive the split 
using the FY 2008 Medicare cost report data on interest expenses for 
government/nonprofit and for-profit freestanding IRFs, freestanding 
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 V.A.1.c.(1)(a) of 
this proposed rule) 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 freestanding 
IRFs, freestanding 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 and 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.

[[Page 24237]]

    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 and 
fixed equipment and movable equipment. We found no single source that 
provides an appropriate time series of capital purchases by hospitals 
for all of the above components of capital purchases. The early 
Medicare cost reports did not have sufficient capital data to meet this 
need. Data we obtained from the American Hospital Association (AHA) do 
not include annual capital purchases. However, AHA does provide a 
consistent database back to 1963. We used data from the AHA Panel 
Survey and the AHA Annual Survey to obtain a time series of total 
expenses for hospitals. We then used data from the AHA Panel Survey 
supplemented with the ratio of depreciation to total hospital expenses 
obtained from the Medicare cost reports to derive a trend of annual 
depreciation expenses for 1963 through 2008.
    To estimate capital purchases using data on depreciation expenses, 
the expected life for each cost category (building and fixed equipment, 
movable equipment, and interest) is needed to calculate vintage 
weights. For the FY 2002-based RPL market basket, due to insufficient 
Medicare cost report data for freestanding IRFs, freestanding IPFs, and 
LTCHs, we used 2001 Medicare Cost Reports for IPPS hospitals to 
determine the expected life of building and fixed equipment and movable 
equipment (70 FR 47913). The FY 2002-based RPL market basket was based 
on an expected life of building and fixed equipment of 23 years. It 
used 11 years as the expected life for movable equipment. We believed 
that this data source reflected the latest relative cost structure of 
depreciation expenses for hospitals at the time and was analogous to 
freestanding IRFs, freestanding 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 and 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 and 
fixed equipment and movable equipment using the Medicare cost reports 
from freestanding IRFs, freestanding IPFs, and LTCHs.
    We also propose to use the building and fixed equipment and movable 
equipment weights derived from FY 2008 Medicare cost reports for 
freestanding IRFs, freestanding IPFs, and LTCHs to separate the 
depreciation expenses into annual amounts of building and fixed 
equipment depreciation and movable equipment depreciation. Year-end 
asset costs for building and fixed equipment and movable equipment were 
determined by multiplying the annual depreciation amounts by the 
expected life calculations. We then calculated a time series, back to 
1963, of annual capital purchases by subtracting the previous year 
asset costs from the current year asset costs. From this capital 
purchase time series, we were able to calculate the vintage weights for 
building and fixed equipment and for movable equipment. Each of these 
sets of vintage weights is explained in more detail below.
    For the proposed building and fixed equipment vintage weights, we 
used the real annual capital purchase amounts for building and 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 and fixed equipment was produced by deflating the nominal 
annual purchase amount by the building and fixed equipment price proxy, 
BEA's chained price index for nonresidential construction for hospitals 
and special care facilities. Because building and fixed equipment have 
an expected life of 26 years, the vintage weights for building and 
fixed equipment are deemed to represent the average purchase pattern of 
building and fixed equipment over 26-year periods. With real building 
and fixed equipment purchase estimates available from 2008 back to 
1963, we averaged twenty 26-year periods to determine the average 
vintage weights for building and fixed equipment that are 
representative of average building and fixed equipment purchase 
patterns over time. Vintage weights for each 26-year period are 
calculated by dividing the real building and fixed capital purchase 
amount in any given year by the total amount of purchases in the 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 and 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

[[Page 24238]]

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 and fixed, and 
movable) were used to capture the value of the debt instrument. Because 
we have determined that hospital debt instruments have an expected life 
of 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 
6.
[GRAPHIC] [TIFF OMITTED] TP29AP11.013


[[Page 24239]]


    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 FY 2012 Market Basket Increase Factor
    For FY 2012 (that is, beginning October 1, 2011 and ending 
September 30, 2012), we are proposing to use an estimate of the 
proposed FY 2008-based RPL market basket increase factor based on the 
best available data. Consistent with historical practice, we estimate 
the RPL market basket update for the IRF PPS based on IHS Global 
Insight's forecast using the most recent available data. IHS Global 
Insight (IGI), Inc. is a nationally recognized economic and financial 
forecasting firm that contracts with CMS to forecast the components of 
the market baskets.
    Based on IGI's 1st quarter 2011 forecast with historical data 
through the 4th quarter of 2010, the projected market basket increase 
factor for FY 2012 is 2.8 percent. Therefore, consistent with our 
historical practice of estimating market basket increases based on the 
best available data, we are proposing a market basket increase factor 
of 2.8 percent for FY 2012. Furthermore, because the proposed FY 2012 
update is based on the most recent market basket estimate for the 12-
month period (currently 2.8 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 FY 2012 update in the final rule.
    Using the current FY 2002-based RPL market basket and IGI's 1st 
quarter 2011 forecast for the market basket components, the FY 2012 
update would be 2.8 percent. Table 7 compares the proposed FY 2008-
based RPL market basket and the FY 2002-based RPL market basket percent 
changes.
[GRAPHIC] [TIFF OMITTED] TP29AP11.014

    For FY 2012, the proposed FY 2008-based RPL market basket update is 
the same as the FY 2002-based RPL market basket (2.8 percent). 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 partially 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. The net effect 
is that the updates are the same for FY 2012 based on the current 2002-
based RPL market basket and the proposed FY 2008-based RPL market 
basket.
2. Proposed Productivity Adjustment
    According to Section 1886(j)(3)(C)(i) of the Act, the Secretary 
shall establish an increase factor ``based on an appropriate percentage 
increase in a market basket of goods and services.'' As described in 
section V.A.1 of this proposed rule, we are proposing to estimate the 
IRF PPS increase factor for FY 2012 based on the proposed FY

[[Page 24240]]

2008-based RPL market basket. Section 1886(j)(3)(C)(ii) of the Act then 
requires that, after establishing the increase factor for a FY, ``the 
Secretary shall reduce such increase factor for FY 2012 and each 
subsequent FY, by the productivity adjustment described in section 
1886(b)(3)(B)(xi)(II)'' of the Act. Section 1886(b)(3)(B)(xi)(II) of 
the Act sets forth the definition of this productivity adjustment. The 
statute defines the productivity adjustment to be equal to the 10-year 
moving average of changes in annual economy-wide private nonfarm 
business multifactor productivity (MFP) (as projected by the Secretary 
for the 10-year period ending with the applicable FY, year, cost 
reporting period, or other annual period) (the ``MFP adjustment''). The 
BLS is the agency that publishes the official measure of private 
nonfarm business MFP. Please see http://www.bls.gov/mfp to obtain the 
historical BLS-published MFP data.
    The projection of MFP is currently produced by IGI, an economic 
forecasting firm. In order to generate a forecast of MFP, IGI 
replicated the MFP measure calculated by the BLS using a series of 
proxy variables derived from IGI's U.S. macroeconomic models. These 
models take into account a very broad range of factors that influence 
the total U.S. economy. IGI forecasts the underlying proxy components 
such as Gross Domestic Product (GDP), capital, and labor inputs 
required to estimate MFP and then combines those projections according 
to the BLS methodology. In Table 8, we identify each of the major MFP 
component series employed by the BLS to measure MFP. We also provide 
the corresponding concepts forecasted by IGI and determined to be the 
best available proxies for the BLS series.
[GRAPHIC] [TIFF OMITTED] TP29AP11.015

    IGI found that the historical growth rates of the BLS components 
used to calculate MFP and the IGI components identified are consistent 
across all series and therefore suitable proxies for calculating MFP. 
We have included below a more detailed description of the methodology 
used by IGI to construct a forecast of MFP, which is aligned closely 
with the methodology employed by the BLS. For more information 
regarding the BLS method for estimating productivity, see the BLS Web 
site at http://www.bls.gov/mfp/mprtech.pdf.
    At the time of this proposed rule, the BLS has published a 
historical time series of private nonfarm business MFP for 1987 through 
2009, with 2009 being a preliminary value. Using this historical MFP 
series and the IGI forecasted series, IGI has developed a forecast of 
MFP for 2010 through 2021, as described below.
    To create a forecast of BLS' MFP index, the forecasted annual 
growth rates of the ``non-housing, non-government, non-farm, real 
GDP'', ``hours of all persons in private nonfarm establishments 
adjusted for labor composition,'' and ``real effective capital stock'' 
series (ranging from 2010 to 2021) are used to ``grow'' the levels of 
the ``real value-added output,'' ``private non-farm business sector 
labor input,'' and ``aggregate capital input'' series published by the 
BLS. Projections of the ``hours of all persons'' measure are calculated 
using the difference between projections of the BLS index of output per 
hour and real GDP. This difference is then adjusted to account for 
changes in labor composition in the forecast interval.
    Using these three key concepts, MFP is derived by subtracting the 
contribution of labor and capital inputs from output growth. However, 
in order to estimate MFP, we need to understand the relative 
contributions of labor and capital to total output growth. Therefore, 
two additional measures are needed to operationalize the estimation of 
the IGI MFP projection: Labor compensation and capital income. The sum 
of labor compensation and capital income represents total income. The 
BLS calculates labor compensation and capital income (in current dollar 
terms) to derive the nominal values of labor and capital inputs. IGI 
uses the ``non-government total compensation'' and ``flow of capital 
services from the total private non-residential capital stock'' series 
as proxies for the BLS' income measures. These two proxy measures for 
income are divided by total income to obtain the shares of labor 
compensation and capital income to total income. To estimate labor's 
contribution and capital's contribution to the growth in total output, 
the growth rates of the proxy variables for labor and capital inputs 
are multiplied by their respective shares of total income. These 
contributions of labor and capital to output growth are subtracted from 
total output growth to calculate the ``change in the growth rates of 
multifactor productivity'':

MFP = Total output growth--((labor input growth * labor compensation 
share) + (capital input growth * capital income share))

    The change in the growth rates (also referred to as the compound 
growth rates) of the IGI MFP are multiplied by 100 in order to 
calculate the percent

[[Page 24241]]

change in growth rates (the percent change in growth rates are 
published by the BLS for its historical MFP measure). Finally, the 
growth rates of the IGI MFP are converted to index levels based to 2005 
to be consistent with the BLS' methodology. For benchmarking purposes, 
the historical growth rates of IGI's proxy variables were used to 
estimate a historical measure of MFP, which was compared to the 
historical MFP estimate published by the BLS. The comparison revealed 
that the growth rates of the components were consistent across all 
series, and therefore validated the use of the proxy variables in 
generating the IGI MFP projections. The resulting MFP index was then 
interpolated to a quarterly frequency using the Bassie method for 
temporal disaggregation. The Bassie technique utilizes an indicator 
(pattern) series for its calculations. IGI uses the index of output per 
hour (published by the BLS) as an indicator when interpolating the MFP 
index.
3. Proposed Calculation of the IRF PPS Market Basket Increase Factor 
for FY 2012
    To calculate the MFP-adjusted IRF PPS increase factor for FY 2012, 
in accordance with section 1886(j)(3)(C) of the Act, we propose to 
start with the FY 2008-based RPL market basket increase factor 
described above in section V.A.1. of this proposed rule and subtract 
from that the MFP percentage adjustment described in section V.A.2.of 
this proposed rule. Additionally, in accordance with sections 
1886(j)(3)(C)(ii)(II) and (D)(ii) of the Act, we propose to further 
reduce the MFP-adjusted IRF PPS increase factor by 0.1 percentage point 
for FY 2012.
    Specifically, in calculating the MFP percentage adjustment, we 
propose that the end of the 10-year moving average of changes in the 
MFP should coincide with the end of the appropriate FY update period. 
Since the market basket update is reduced by the MFP adjustment to 
determine the annual update for the IRF PPS, we believe it is 
appropriate for the numbers associated with both components of the 
calculation (the market basket and the productivity adjustment) to line 
up so that changes in market conditions are aligned. Therefore, for the 
FY 2012 update, the MFP adjustment is calculated as the 10-year moving 
average of changes in MFP for the period ending September 30, 2012. We 
propose to round the final annual adjustment to the one-tenth of 1 
percentage point level up or down as applicable according to 
conventional rounding rules (that is, if the number we are rounding is 
followed by 5, 6, 7, 8, or 9, we will round the number up; if the 
number we are rounding is followed by 0, 1, 2, 3, or 4, we will round 
the number down).
    Thus, in accordance with section 1886(j)(3)(C) of the Act, the 
proposed IRF PPS increase factor for FY 2012 is based on the 1st 
quarter 2011 forecast of the proposed FY 2008-based RPL market basket 
update, which is estimated to be 2.8 percent. This proposed increase 
factor is then reduced by the MFP adjustment (the 10-year moving 
average of MFP for the period ending FY 2012) of 1.2 percentage points, 
based on the proposed methodology described above and IHS Global 
Insight's 1st quarter 2011 forecast. The proposed increase factor for 
FY 2012 is then further reduced by 0.1 percentage point in accordance 
with sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act. 
The resulting proposed IRF PPS increase factor reduced by the 
productivity adjustment and the ``other adjustment'' for FY 2012 is 
equal to 1.5 percent, or 2.8 percent less 1.2 percentage points for the 
MFP less 0.1 percentage point in accordance with sections 
1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of the Act. Consistent with 
historical practice, we propose to update the market basket increase 
factor estimate and the MFP adjustment in the final rule to reflect the 
most recent available data.
4. Proposed Calculation of the Labor-Related Share for FY 2012
    Section 1886(j)(6) of the Act specifies that ``[t]he Secretary 
shall adjust the proportion (as estimated by the Secretary from time to 
time) of rehabilitation facilities' costs which are attributable to 
wages and wage-related costs, of the prospective payment rates computed 
under paragraph (3) for area differences in wage levels by a factor 
(established by the Secretary) reflecting the relative hospital wage 
level in the geographic area of the rehabilitation facility compared to 
the national average wage level for such facilities. Not later than 
October 1, 2001 (and at least every 36 months thereafter), the 
Secretary shall update the factor under the preceding sentence on the 
basis of information available to the Secretary (and updated as 
appropriate) of the wages and wage-related costs incurred in furnishing 
rehabilitation services. Any adjustments or updates made under this 
paragraph for a fiscal year shall be made in a manner that assures that 
the aggregated payments under this subsection in the fiscal year are 
not greater or less than those that would have been made in the year 
without such adjustment.''
    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 FY 2006 IRF PPS final rule (70 FR 47880, 47915), 
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 IRF PPS for FY 2011, we used the FY 2002-based RPL market 
basket cost weights relative importance to determine the labor-related 
share for the IRF 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.
    For the FY 2002-based RPL market basket, we assumed that all 
nonmedical professional services (including accounting and auditing 
services,

[[Page 24242]]

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.
    With approval from the OMB (Control Number 0938-1036), 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 IRFs 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 post-stratification 
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 to 
determine the Professional Fees: Nonlabor-related costs. The 
Professional Fees: Labor-related costs were determined to be the 
difference between the total costs for each Benchmark I-O category and 
the Professional Fees: Nonlabor-related costs. 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.
    Using this proposed method and the IHS Global Insight, Inc. 
forecast for the 1st quarter 2011 of the proposed FY 2008-based RPL 
market basket, the IRF labor-related share for FY 2012 is the sum of 
the FY 2012 relative importance of each labor-related cost category. 
Consistent with our proposal to update the labor-related share with the 
most recent available data, the labor-related share for this proposed 
rule reflects IHS Global Insight's 1st quarter 2011 forecast of the 
proposed FY 2008-based RPL market basket. Table 9 shows the proposed FY 
2012 relative importance labor-related share using the proposed FY 
2008-based RPL market basket and the FY 2002-based RPL market basket.

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[GRAPHIC] [TIFF OMITTED] TP29AP11.016

    The proposed labor-related share for FY 2012 is the sum of the 
proposed FY 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 FY 2012. The 
sum of the proposed relative importance for FY 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 66.689 percent, as shown in Table 9.
    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 7.923 percent of 
the proposed FY 2008-based RPL market basket in FY 2012, we are 
proposing to take 46 percent of 7.923 percent to determine the proposed 
labor-related share of Capital for FY 2012. The result would be 3.645 
percent, which we propose to add to 66.689 percent for the operating 
cost amount to determine the total proposed labor-related share for FY 
2012. Thus, the labor-related share that we propose to use for IRF PPS 
in FY 2012 would be 70.334 percent. This proposed labor-related share 
is determined using the same methodology as employed in calculating all 
previous IRF labor-related shares. The wage index and the labor-related 
share are adjusted for budget neutrality.

B. Proposed Area Wage Adjustment

    Section 1886(j)(6) of the Act requires the Secretary to adjust the 
proportion of rehabilitation facilities' costs attributable to wages 
and wage related costs (as estimated by the Secretary from time to 
time) by a factor (established by the Secretary) reflecting the 
relative hospital wage level in the geographic area of the 
rehabilitation facility compared to the national average wage level for 
those facilities. The Secretary is required to update the IRF PPS wage 
index on the basis of information available to the Secretary on the 
wages and wage-related costs to furnish rehabilitation services. Any 
adjustment or updates made under section 1886(j)(6) of the Act for a FY 
are made in a budget neutral manner.
    In the FY 2009 IRF PPS final rule (73 FR 46378), we maintained the 
methodology described in the FY 2006 IRF PPS final rule to determine 
the wage index, labor market area definitions and hold harmless policy 
consistent with the rationale outlined in the FY 2006 IRF PPS final 
rule (70 FR 47880, 47917 through 47926).
    For FY 2012, we are maintaining the policies and methodologies 
described in the FY 2009 IRF PPS final rule (73 FR 46378) relating to 
the labor market area definitions and the wage index methodology for 
areas with wage data. Thus, we are using the CBSA labor market area 
definitions and the FY 2011 pre-reclassification and pre-floor hospital 
wage index data. In accordance with section 1886(d)(3)(E) of the Act, 
the FY 2011 pre-reclassification and pre-floor hospital wage index is 
based on data submitted for hospital cost reporting periods beginning 
on or after October 1, 2006, and ending September 30, 2007 (that is, FY 
2007 cost report data).
    The labor market designations made by the OMB include some 
geographic areas where there are no hospitals and, thus, no hospital 
wage index data on which to base the calculation of the IRF PPS wage 
index. We propose to continue to use the same methodology discussed in 
the FY 2008 IRF PPS final rule (72 FR 44299) to address those 
geographic areas where there are no hospitals and, thus, no hospital 
wage index data in which to base the calculation for the FY 2012 IRF 
PPS wage index.

[[Page 24244]]

    Additionally, we propose to incorporate the CBSA changes published 
in the most recent OMB bulletin that applies to the hospital wage data 
used to determine the current IRF PPS wage index. The changes were 
nominal and did not represent substantive changes to the CBSA-based 
designations. Specifically, OMB added or deleted certain CBSA numbers 
and revised certain titles. The OMB bulletins are available at http://www.whitehouse.gov/omb/bulletins/index.html.
    To calculate the wage-adjusted facility payment for the payment 
rates set forth in this proposed rule, we multiply the unadjusted 
Federal payment rate for IRFs by the proposed FY 2012 labor-related 
share based on the FY 2008-based RPL market basket (70.334 percent) to 
determine the labor-related portion of the standard payment amount. We 
then multiply the labor-related portion by the applicable IRF wage 
index from the tables in the addendum to this proposed rule. Table A is 
for urban areas and Table B is for rural areas.
    Adjustments or updates to the IRF wage index made under section 
1886(j)(6) of the Act must be made in a budget neutral manner. We 
calculate a proposed budget neutral wage adjustment factor as 
established in the FY 2004 IRF PPS final rule (68 FR 45689), codified 
at Sec.  412.624(e)(1), as described in the steps below. We use the 
listed steps to ensure that the proposed FY 2012 IRF standard payment 
conversion factor reflects the update to the wage indexes (based on the 
FY 2007 hospital cost report data) and the proposed labor-related share 
in a budget neutral manner:
    Step 1. Determine the total amount of the estimated FY 2011 IRF PPS 
rates, using the FY 2011 standard payment conversion factor and the 
labor-related share and the wage indexes from FY 2011 (as published in 
the FY 2011 IRF PPS final rule (75 FR 42836)).
    Step 2. Calculate the total amount of estimated IRF PPS payments 
using the FY 2011 standard payment conversion factor and the proposed 
FY 2012 labor-related share and CBSA urban and rural wage indexes.
    Step 3. Divide the amount calculated in step 1 by the amount 
calculated in step 2. The resulting quotient is the proposed FY 2012 
budget neutral wage adjustment factor of 0.9989.
    Step 4. Apply the proposed FY 2012 budget neutral wage adjustment 
factor from step 3 to the FY 2011 IRF PPS standard payment conversion 
factor after the application of the adjusted market basket update to 
determine the proposed FY 2012 standard payment conversion factor.
    We discuss the calculation of the proposed standard payment 
conversion factor for FY 2012 in section V.C. of this proposed rule.

C. Description of the Proposed IRF Standard Conversion Factor and 
Payment Rates for FY 2012

    To calculate the proposed standard payment conversion factor for FY 
2012, as illustrated in Table 10, we begin by applying the proposed 
adjusted market basket increase factor for FY 2012 that was adjusted in 
accordance with sections 1886(j)(3)(C) and (D) of the Act (1.5 percent, 
or 2.8 percent less a cumulative total adjustment of 1.3 percentage 
points, as described in section V.A.3. of this proposed rule), to the 
standard payment conversion factor for FY 2011 ($13,860). Applying the 
proposed 1.5 percent adjusted market basket increase factor for FY 2012 
to the standard payment conversion factor for FY 2011 of $13,860 yields 
a standard payment amount of $14,068. Then, we apply the proposed 
budget neutrality factor for the FY 2012 wage index and labor-related 
share of 0.9989, which results in a standard payment amount of $14,052. 
Then we apply the proposed budget neutrality factor for the revised CMG 
relative weights of 0.9989, which results in a proposed standard 
payment amount of $14,037. Finally, we apply the proposed budget 
neutrality factors for the updates to the rural, LIP and IRF teaching 
status adjustments of 0.9998, 1.0327, and 1.0024, respectively, which 
results in a proposed standard payment amount of $14,528 for FY 2012.

[[Page 24245]]

[GRAPHIC] [TIFF OMITTED] TP29AP11.017

BILLING CODE 4120-01-P
After the application of the CMG relative weights described in Section 
III of this proposed rule, to the proposed FY 2012 standard payment 
conversion factor ($14,528), the resulting proposed unadjusted IRF 
prospective payment rates for FY 2012 are shown in Table 11, ``Proposed 
FY 2012 Payment Rates.''

[[Page 24246]]

[GRAPHIC] [TIFF OMITTED] TP29AP11.018


[[Page 24247]]


BILLING CODE 4120-01-C

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

    Table 12 illustrates the methodology for adjusting the proposed 
Federal prospective payments (as described in sections V.A. through 
V.C. of this proposed rule). The following examples are based on two 
hypothetical Medicare beneficiaries, both classified into CMG 0110 
(without comorbidities). The proposed unadjusted Federal prospective 
payment rate for CMG 0110 (without comorbidities) appears in Table 11.

    Example: One beneficiary is in Facility A, an IRF located in 
rural Spencer County, Indiana, and another beneficiary is in 
Facility B, an IRF located in urban Harrison County, Indiana. 
Facility A, a rural non-teaching hospital has a DSH percentage of 5 
percent (which would result in a LIP adjustment of 1.0093), a wage 
index of 0.8391, and a rural adjustment of 18.7 percent. Facility B, 
an urban teaching hospital, has a DSH percentage of 15 percent 
(which would result in a LIP adjustment of 1.0269 percent), a wage 
index of 0.8896, and a teaching status adjustment of 0.0610.

    To calculate each IRF's labor and non-labor portion of the proposed 
Federal prospective payment, we begin by taking the proposed unadjusted 
Federal prospective payment rate for CMG 0110 (without comorbidities) 
from Table 11. Then, we multiply the proposed labor-related share for 
FY 2012 (70.334 percent) described in section V.A.4 of this proposed 
rule by the proposed unadjusted Federal prospective payment rate. To 
determine the non-labor portion of the proposed Federal prospective 
payment rate, we subtract the labor portion of the proposed Federal 
payment from the proposed unadjusted Federal prospective payment.
    To compute the proposed wage-adjusted Federal prospective payment, 
we multiply the labor portion of the proposed Federal payment by the 
appropriate wage index found in the addendum in Tables A and B. The 
resulting figure is the wage-adjusted labor amount. Next, we compute 
the proposed wage-adjusted Federal payment by adding the wage-adjusted 
labor amount to the non-labor portion.
    Adjusting the proposed wage-adjusted Federal payment by the 
facility-level adjustments involves several steps. First, we take the 
wage-adjusted Federal prospective payment and multiply it by the 
appropriate rural and LIP adjustments (if applicable). Second, to 
determine the appropriate amount of additional payment for the teaching 
status adjustment (if applicable), we multiply the teaching status 
adjustment (0.0610, in this example) by the wage-adjusted and rural-
adjusted amount (if applicable). Finally, we add the additional 
teaching status payments (if applicable) to the wage, rural, and LIP-
adjusted Federal prospective payment rates. Table 12 illustrates the 
components of the adjusted payment calculation.

[[Page 24248]]

[GRAPHIC] [TIFF OMITTED] TP29AP11.019

Thus, the proposed adjusted payment for Facility A would be $32,392.77 
and the proposed adjusted payment for Facility B would be $30,592.91.

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

A. Proposed Update to the Outlier Threshold Amount for FY 2012

    Section 1886(j)(4) of the Act provides the Secretary with the 
authority to make payments in addition to the basic IRF prospective 
payments for cases incurring extraordinarily high costs. A case 
qualifies for an outlier payment if the estimated cost of the case 
exceeds the adjusted outlier threshold. We calculate the adjusted 
outlier threshold by adding the IRF PPS payment for the case (that is, 
the CMG payment adjusted by all of the relevant facility-level 
adjustments) and the adjusted threshold amount (also adjusted by all of 
the relevant facility-level adjustments). Then, we calculate the 
estimated cost of a case by multiplying the IRF's overall CCR by the 
Medicare allowable covered charge. If the estimated cost of the case is 
higher than the adjusted outlier threshold, we make an outlier payment 
for the case equal to 80 percent of the difference between the 
estimated cost of the case and the outlier threshold.
    In the FY 2002 IRF PPS final rule (66 FR 41362 through 41363), we 
discussed our rationale for setting the outlier threshold amount for 
the IRF PPS so that estimated outlier payments would equal 3 percent of 
total estimated payments. For the 2002 IRF PPS final rule, we analyzed 
various outlier policies using 3, 4, and 5 percent of the total 
estimated payments, and we concluded that an outlier policy set at 3 
percent of total estimated payments would optimize the extent to which 
we could reduce the financial risk to IRFs of caring for high-cost 
patients, while

[[Page 24249]]

still providing for adequate payments for all other (non-high cost 
outlier) cases.
    Subsequently, we updated the IRF outlier threshold amount in the 
FYs 2006 through 2010 IRF PPS final rules and the FY 2011 notice (70 FR 
47880, 71 FR 48354, 72 FR 44284, 73 FR 46370, 74 FR 39762, and 75 FR 
42836, respectively) to maintain estimated outlier payments at 3 
percent of total estimated payments. We also stated in the FY 2009 
final rule (73 FR 46370 at 46385) that we would continue to analyze the 
estimated outlier payments for subsequent years and adjust the outlier 
threshold amount as appropriate to maintain the 3 percent target.
    To update the IRF outlier threshold amount for FY 2012, we propose 
to use FY 2010 claims data and the same methodology that we used to set 
the initial outlier threshold amount in the FY 2002 IRF PPS final rule 
(66 FR 41316 and 41362 through 41363), which is also the same 
methodology that we used to update the outlier threshold amounts for 
FYs 2006 through 2011. Based on an analysis of this updated data, we 
estimate that IRF outlier payments as a percentage of total estimated 
payments are approximately 2.7 percent in FY 2011. Based on the updated 
analysis, we propose to update the outlier threshold amount to $11,822 
to maintain estimated outlier payments at approximately 3 percent of 
total estimated aggregate IRF payments for FY 2012.
    The proposed outlier threshold amount of $11,822 for FY 2012 is 
subject to change in the final rule if more recent data become 
available for analysis or if any changes are made to any of the other 
proposed payment policies set forth in this proposed rule.

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

    In accordance with the methodology stated in the FY 2004 IRF PPS 
final rule (68 FR 45674, 45692 through 45694), we apply a ceiling to 
IRFs' CCRs. Using the methodology described in that final rule, we 
propose to update the national urban and rural CCRs for IRFs, as well 
as the national CCR ceiling for FY 2012, based on analysis of the most 
recent data that is available. We apply the national urban and rural 
CCRs in the following situations:
     New IRFs that have not yet submitted their first Medicare 
cost report.
     IRFs whose overall CCR is in excess of the national CCR 
ceiling for FY 2012, as discussed below.
     Other IRFs for which accurate data to calculate an overall 
CCR are not available.
    Specifically, for FY 2012, we estimate a proposed national average 
CCR of 0.669 for rural IRFs, which we calculate by taking an average of 
the CCRs for all rural IRFs using their most recently submitted cost 
report data. Similarly, we estimate a national average CCR of 0.520 for 
urban IRFs, which we calculate by taking an average of the CCRs for all 
urban IRFs using their most recently submitted cost report data. We 
apply weights to both of these averages using the IRFs' estimated 
costs, meaning that the CCRs of IRFs with higher costs factor more 
heavily into the averages than the CCRs of IRFs with lower costs. For 
this proposed rule, we have used the most recent available cost report 
data (FY 2009). This includes all IRFs whose cost reporting periods 
begin on or after October 1, 2008, and before October 1, 2009. If, for 
any IRF, the FY 2009 cost report was missing or had an ``as submitted'' 
status, we used data from a previous fiscal year's (that is, FY 2004 
through FY 2008) settled cost report for that IRF. We do not use cost 
report data from before FY 2004 for any IRF because changes in IRF 
utilization since FY 2004 resulting from the 60 percent rule and IRF 
medical review activities suggest that these older data do not 
adequately reflect the current cost of care.
    In addition, in accordance with past practice, we propose to set 
the national CCR ceiling at 3 standard deviations above the mean CCR. 
Using this method, the national CCR ceiling is set at 1.55 for FY 2012. 
This means that, if an individual IRF's CCR exceeds this ceiling of 
1.55 for FY 2012, we would replace the IRF's CCR with the appropriate 
national average CCR (either rural or urban, depending on the 
geographic location of the IRF). We estimate the national CCR ceiling 
by:
    Step 1. Taking the national average CCR (weighted by each IRF's 
total costs, as discussed above) of all IRFs for which we have 
sufficient cost report data (both rural and urban IRFs combined).
    Step 2. Estimating the standard deviation of the national average 
CCR computed in step 1.
    Step 3. Multiplying the standard deviation of the national average 
CCR computed in step 2 by a factor of 3 to compute a statistically 
significant reliable ceiling.
    Step 4. Adding the result from step 3 to the national average CCR 
of all IRFs for which we have sufficient cost report data, from step 1.
    We note that the proposed national average rural and urban CCRs and 
our estimate of the national CCR ceiling in this section are subject to 
change in the final rule if more recent data become available for use 
in these analyses.

VII. Impact of the IPPS Data Matching Process Changes on the IRF PPS 
Calculation of the Low-Income Percentage Adjustment Factor

    Section 1886(j)(3)(A)(v) of the Act confers broad authority upon 
the Secretary to adjust the per unit payment rate ``by such * * * 
factors as the Secretary determines are necessary to properly reflect 
variations in necessary costs of treatment among rehabilitation 
facilities.'' For example, we adjust the Federal prospective payment 
amount associated with a CMG to account for facility-level 
characteristics such as an IRF's LIP, teaching status, and location in 
a rural area, if applicable, as described in Sec.  412.624(e).
    In the FY 2002 IRF PPS final rule (66 FR 41359 through 41361) that 
implemented the IRF PPS, we established the IRF LIP adjustment. In that 
final rule, we said that we would calculate the LIP adjustment by using 
the same disproportionate share hospital (DSH) patient percentage used 
in the acute IPPS DSH adjustment.
    The DSH patient percentage is equal to the sum of the 
``Supplemental Security Income (SSI) fraction'' and the ``Medicaid 
Fraction.'' We compute the SSI fraction (also known as the ``SSI 
ratio'' or the ``Medicare fraction'') by dividing the number of the 
facility's inpatient days that are furnished to patients who were 
entitled to both Medicare Part A (including patients who are enrolled 
in a Medicare Advantage (Part C) plan) and SSI benefits by the 
facility's total number of patient days furnished to patients entitled 
to benefits under Medicare Part A (including patients who are enrolled 
in a Medicare Advantage (Part C) plan). To determine the number of 
inpatient days for individuals entitled to both Medicare Part A and 
SSI, as required for calculation of the numerator of the SSI fraction, 
CMS matches the Medicare records and SSI eligibility records for each 
IRF's patients during the FY. The data underlying the match process are 
drawn from: (a) The Medicare Provider Analysis and Review (MedPAR) data 
file; and (b) SSI eligibility data provided by the Social Security 
Administration (SSA). CMS recently revised this data match. See the FY 
2011 IPPS final rule (75 FR 50041, 50276).
    As previously stated, it is our policy to calculate the LIP 
adjustment using the same DSH patient percentage used in the acute IPPS 
DSH adjustment. In keeping with this long-standing policy, we will use 
the same matching process

[[Page 24250]]

as IPPS for calculating the SSI fractions for FYs 2011 and beyond. This 
process is described in the FY 2011 IPPS final rule, and will be used 
to calculate IRFs' SSI fractions for FY 2011. The FY 2011 IPPS final 
rule (75 FR 50277 through 50286) gives information on this revised data 
matching process.

VIII. Proposed Updates to the Policies in 42 CFR Part 412

    Prior to the implementation of the IRF PPS on January 1, 2002, IRFs 
were paid based on the costs that they reported on their Medicare cost 
reports, subject to some limits. To simplify the cost reporting 
process, both for providers and for CMS and the Medicare contractors 
that monitored the cost reports, regulations were put into place that 
carefully defined, for example, when and how providers could be 
considered ``new'' and when and how they could expand their bed size 
and square footage. Under the IRF PPS, however, Medicare pays IRFs 
according to Federal prospective payment rates that are no longer tied 
to an individual IRF's Medicare cost reports. This new payment 
methodology has made some of the requirements regarding new IRFs and 
IRF expansions obsolete.
    In addition, prior to 2002, the regulations distinguished between 
freestanding rehabilitation hospitals and rehabilitation units of acute 
care hospitals, with separate regulatory sections for the two types of 
facilities even though many of the same requirements applied to both. 
Under the IRF PPS, the distinctions between freestanding IRFs and IRF 
units are no longer relevant because both types of facilities are paid 
the same and are subject to the same rules and requirements. The 
current separation of the regulatory sections results in unnecessary 
repetition and confusion about which regulations apply to which types 
of facilities.
    In addition, we added new IRF coverage requirements to Sec.  
412.622(a)(3), (4), and (5) in the FY 2010 IRF PPS final rule (74 FR 
39762 at 39811 through 39812) for IRF discharges occurring on or after 
January 1, 2010. Several of the IRF conditions of payment in the 
existing Sec.  412.23(b) and Sec.  412.29, including the requirements 
for preadmission screenings to be conducted on all prospective 
patients, the requirements for IRF patients to receive close medical 
supervision, the requirements for plans of care to be developed for all 
IRF patients, and the requirements for patients to receive an 
interdisciplinary approach to care in the IRF, mirror some of the IRF 
coverage requirements in Sec.  412.622(a)(3), (4), and (5).
    Finally, in recent years, we have observed an increase in the 
number and complexity of acquisitions and mergers occurring in this 
industry. In some cases, the current Medicare rules and requirements 
for IRFs do not adequately address the number and complexity of 
acquisitions and mergers because they simply did not occur when the 
regulations were written. In other cases, regulations were written to 
address issues that do not exist today.
    For all of these reasons, in this proposed rule we propose to 
consolidate, clarify, and revise the regulations for inpatient 
rehabilitation facilities at Sec.  412.23(b), Sec.  412.25(b), Sec.  
412.29, and Sec.  412.30 to update and simplify the policies, to 
eliminate unnecessary repetition and confusion, and to enhance the 
consistency with the IRF coverage requirements in Sec.  412.622(a)(3), 
(4), and (5). Since the proposed modifications would eliminate 
regulations that may no longer be strictly necessary under the IRF PPS, 
they would enable IRFs to more easily adjust to beneficiary changes in 
demand for IRF services, which would improve beneficiary access to 
these services. The proposed modifications would also reduce costs for 
providers and for the government by reducing the amount of time and 
expenditures devoted to adhering to (for providers) and enforcing (for 
the government) regulations that may no longer be strictly necessary. 
Since we have no way of determining how many IRFs might take advantage 
of the added flexibility these regulations afford to expand or change 
their operations, we are not able to quantify the savings. However, for 
example, each time an IRF unit submits a request to add beds to its 
facility under the current regulations, the Medicare contractor must 
determine whether or not the added IRF beds will be considered ``new.'' 
To be considered ``new,'' the beds must be added at the start of a cost 
reporting period, and the hospital must have ``obtained approval, under 
State licensure and Medicare certification, for an increase in its 
hospital bed capacity that is greater than 50 percent of the number of 
beds it seeks to add to the unit.'' We believe that the first 
requirement (that beds can only be added at the start of a cost 
reporting period) is difficult, and potentially costly, for IRFs that 
are expanding through new construction because the exact timing of the 
end of a construction project is often difficult to predict. 
Construction delays can hamper an IRF's ability to have the 
construction completed exactly at the start of a cost reporting period, 
which can lead to significant revenue loss for the facility if the IRF 
is unable to add beds until the next cost reporting period. We believe 
that it is no longer necessary to require IRF beds to be added at the 
start of a cost reporting period. Further, the current regulations 
require Medicare contractors to expend unnecessary resources 
determining whether the IRF has met the second criteria, which requires 
the hospital to have ``obtained approval, under State licensure and 
Medicare certification, for an increase in its hospital bed capacity 
that is greater than 50 percent of the number of beds it seeks to add 
to the unit.'' The proposed modifications to the regulations are 
designed to simplify the regulations in order to minimize the amount of 
effort that Medicare contractors would need to spend enforcing them. 
Finally, the proposed modifications would enhance the consistency 
between the IRF coverage and payment requirements.
    We note that Sec.  412.25(b) applies to both IRFs and inpatient 
psychiatric facilities (IPFs), so the proposed revisions to Sec.  
412.25(b) would also affect IPFs in similar ways.

A. Proposed Consolidation of the Requirements for Rehabilitation 
Hospitals and Rehabilitation Units

    Under the IRF PPS, rehabilitation hospitals and rehabilitation 
units of acute care hospitals (and critical access hospitals (CAHs)) 
are paid the same and, with very few exceptions, are subject to the 
same Medicare rules and requirements. For this reason, we believe that 
it is no longer necessary to have separate sections in 42 CFR part 412 
that define the requirements for rehabilitation hospitals and 
rehabilitation units of acute care hospitals (and CAHs). This leads to 
excessive repetition and potential confusion about which rules apply to 
which types of facilities.
    Thus, we propose to revise and consolidate the regulations for 
rehabilitation facilities that are currently in Sec.  412.23(b) (for 
rehabilitation hospitals), Sec.  412.29 (for rehabilitation units), and 
Sec.  412.30 (for rehabilitation units) into a revised Sec.  412.29 
that would contain the requirements for all IRFs, whether they be 
freestanding rehabilitation hospitals or rehabilitation units of acute 
care hospitals (or CAHs). We believe that this would simplify the 
regulations by consolidating the majority of the requirements for IRFs 
into just one sub-section of part 412.
    Although we are proposing slight modifications to the regulations 
in Sec.  412.25(b), as discussed in section

[[Page 24251]]

VII.C. of this proposed rule, we are not proposing to move the IRF 
regulations in Sec.  412.25 to Sec.  412.29 in this proposed rule. The 
regulations in Sec.  412.25, such as the requirement to have beds that 
are physically separate from the rest of the hospital, the requirement 
that the unit be serviced by the same Medicare contractor as the rest 
of the hospital, and the requirement that the unit be treated as a 
separate cost center for cost finding and apportionment purposes, by 
their nature apply uniquely to units that are part of another hospital. 
Since these requirements are not applicable to freestanding IRFs, we do 
not believe that it would be appropriate to include them with the rest 
of the IRF regulations in Sec.  412.29 that are intended to apply to 
both freestanding IRF hospitals and to IRF units of hospitals. Further, 
we are not proposing modifications to Sec.  412.25, other than the 
proposed changes to Sec.  412.25(b) as discussed in section VII.C. of 
this proposed rule, because the regulations in Sec.  412.25(a) through 
(g) (excluding (b)) remain relevant and important for defining IRF 
units of hospitals for payment purposes.
    However, we propose to replace the text that is currently located 
at Sec.  412.23(b) with text that simply refers the reader to the 
requirements in Sec.  412.29, and move the rest of Sec.  412.23(b) and 
all of Sec.  412.30 to Sec.  412.29. We propose to leave text in Sec.  
412.23(b) that refers IRFs to the requirements they must meet in Sec.  
412.29 only so that we do not disturb the ordering of the rest of Sec.  
412.23 that contain the Medicare regulations for inpatient psychiatric 
facilities, children's hospitals, and long-term care hospitals. 
Specifically, we propose to move all of the text in Sec.  412.23(b) to 
Sec.  412.29 except for a new paragraph that refers to the requirements 
in Sec.  412.29, which would read as follows: ``(b) Rehabilitation 
hospitals. A rehabilitation hospital must meet the requirements 
specified in Sec.  412.29 to be excluded from the prospective payment 
systems specified in Sec.  412.1(a)(1) and to be paid under the 
prospective payment system specified in Sec.  412.1(a)(3) and in 
subpart P of this part.''

B. Proposed Revisions to the Regulations at Proposed Sec.  412.29

    As described in section VIII.A. of this proposed rule, we propose 
to replace the text that is currently located at Sec.  412.23(b) with 
text that simply refers the reader to the requirements in Sec.  412.29, 
and move the rest of Sec.  412.23(b) and all of Sec.  412.30 to Sec.  
412.29. To eliminate any unnecessary repetition, and to update and 
clarify the regulations, we are also proposing revisions to the 
language from all three of the current sections, Sec.  412.23(b), Sec.  
412.29, and Sec.  412.30. As stated in current Sec.  412.30, a 
rehabilitation unit can only be considered ``new'' if the hospital has 
never had a rehabilitation unit before. We have encountered 
circumstances in which a hospital closed a rehabilitation unit over 20 
years ago and is now seeking to re-open the rehabilitation unit, and we 
believe that it would be reasonable to consider the rehabilitation unit 
to be ``new.'' Thus, we are proposing to revise the requirements for an 
IRF to be considered ``new'' to indicate that an IRF can be considered 
``new'' if it has not been paid under the IRF PPS in 42 CFR part 412, 
subpart P for at least 5 calendar years. These proposed requirements 
would now apply equally to both rehabilitation hospitals and 
rehabilitation units of acute care hospitals (or CAHs), and would be 
located in proposed Sec.  412.29(c)(1). We believe that 5 calendar 
years would allow a sufficient amount of time between an IRF closing 
and an IRF reopening to prevent IRFs from closing and reopening 
annually to avoid meeting certain requirements, while allowing IRFs 
more flexibility to meet changing demand for IRF services.
    In addition, we propose to clarify and simplify the rules regarding 
change of ownership (including mergers) or leasing, as defined in Sec.  
489.18. Changes of ownership or leasing, as defined in Sec.  489.18, 
and mergers in which the new owner(s) accept assignment of the previous 
owner's provider agreements are transfers of the provider agreement. 
Therefore, we propose that IRFs in these situations would retain their 
excluded status and would continue to be paid under the IRF PPS before 
and after the change, as long as the IRF continues to meet all of the 
requirements specified in Sec.  412.29. However, we propose to clarify 
that a change of ownership (including merger) or leasing in which the 
new owner(s) do not accept assignment of the previous owner's provider 
agreement would be considered a voluntary termination of the provider 
agreement, and the new owner(s) would need to reapply to the Medicare 
program as an initial applicant to operate a new IRF. In the case of 
changes of ownership (including mergers) or leasing, we propose that 
the new owner(s) would not be required to wait for 5 calendar years to 
reapply to operate a new IRF, but would be required to complete the 
initial hospital or critical access hospital certification process to 
participate in Medicare as a new IRF.
    Further, we also propose to revise the regulations regarding new 
IRF beds. The regulations currently in Sec.  412.30(d), which require 
an IRF to obtain ``approval, under State licensure and Medicare 
certification, for an increase in its hospital bed capacity that is 
greater than 50 percent of the number of beds it seeks to add to the 
unit,'' have become less and less relevant under a prospective payment 
system in which payments are no longer based on IRFs' reported costs. 
Thus, we propose to eliminate these requirements and, instead, propose 
in Sec.  412.29(c)(2) that IRF beds would be considered ``new'' if they 
meet all applicable State Certificate of Need and State licensure laws 
and if they get written approval from the appropriate CMS regional 
office (RO), as described below. We propose that new IRF beds can be 
added one time at any point during a cost reporting period (instead of 
at the start of a cost reporting period), but we propose to require 
that a full 12-month cost reporting period elapse before an IRF that 
has had beds delicensed or decertified can add new beds. The reason for 
this proposed requirement is to prevent IRFs from decreasing and 
increasing bed size every year to avoid having to meet certain 
requirements. We propose to require the IRF to obtain written approval 
from the appropriate CMS RO for the addition of the new beds in order 
to allow the CMS RO to verify that a full 12-month cost reporting 
period has elapsed before an IRF that has had beds delicensed or 
decertified can add new beds.

C. Proposed Revisions to the Requirements for Changes in Bed Size and 
Square Footage

    Prior to the IRF PPS and the IPF PPS, excluded units (IRFs and 
IPFs) were paid based on their costs, as reported on their Medicare 
cost reports, subject to certain facility-specific cost limits. These 
cost-based payments were determined separately for operating and 
capital costs. Thus, under cost-based payments, the facilities' capital 
costs were determined, in part, by their bed size and square footage. 
Changes in the bed size and square footage would complicate the 
facilities' capital cost allocation. Thus, the Medicare regulations at 
Sec.  412.25 limited the situations under which an IRF or IPF could 
change its bed size and square footage.
    Under the IRF PPS and IPF PPS, however, a facility's bed size and 
square footage is not relevant for determining the individual 
facility's Medicare payment. Thus, we believe it is appropriate to 
modify some of the restrictions on a facility's ability to

[[Page 24252]]

change its bed size and square footage. We are therefore proposing in 
this proposed rule to relax the restrictions on a facility's ability to 
increase its bed size and square footage. Under the proposed 
requirements in Sec.  412.25, an IRF or IPF could change (either 
increase or decrease) its bed size or square footage one time at any 
point in a given cost reporting period as long as it notifies the CMS 
RO within 30 days of the proposed change and maintains the required 
documentation. We note that any IRF beds that are added to an existing 
IRF during the IRF's cost reporting period would only be considered new 
through the end of that cost reporting period. Further, the new IRF 
beds would be included in the IRF's compliance review calculations 
under the 60 percent rule specified in Sec.  412.29(b) beginning on the 
date that they are first added to the IRF.

D. Proposed Revisions To Enhance Consistency Between the IRF Coverage 
and Payment Requirements

    In the FY 2010 IRF PPS final rule (74 FR 39762 at 39788 through 
39798), CMS implemented new IRF coverage requirements in Sec.  
412.622(a)(3),(4), and (5). These new IRF coverage requirements 
replaced coverage requirements that were 25 years old and no longer 
reflected current medical practice. In updating these coverage 
requirements, we added further specificity to some of the terms that 
had been discussed in the old coverage requirements. For example, we 
more clearly defined in the new IRF coverage requirements what we mean 
by an IRF preadmission screening, care planning, and close medical 
supervision. In the proposed revisions to Sec.  412.23(b) and Sec.  
412.29, we propose to enhance the consistency between the IRF coverage 
and payment requirements by incorporating some of the added specificity 
from the coverage requirements into the same requirements for payment. 
Specifically, we propose to clarify that, as in the IRF coverage 
requirements, IRF preadmission screenings must be reviewed and approved 
by a rehabilitation physician prior to each prospective patient's 
admission to an IRF. As we said in the FY 2010 IRF PPS final rule (74 
FR 39791), we believe that it is important to require that a 
rehabilitation physician document the reasoning behind the decision to 
admit a patient to an IRF, to enable medical reviewers to understand 
the rationale for the decision.
    Further, we propose to clarify, as we did in the coverage 
requirements at Sec.  412.622(a)(3)(iv), that close medical supervision 
in an IRF means that the patient receives at least 3 face-to-face 
visits per week by a licensed physician with specialized training and 
experience in inpatient rehabilitation to assess the patient both 
medically and functionally, as well as to modify the course of 
treatment as needed to maximize the patient's capacity to benefit from 
the rehabilitation process. As we stated in the FY 2010 IRF PPS final 
rule (74 FR 39796), we believe that at least 3 face-to-face 
rehabilitation physician visits per week are necessary to coordinate 
the patient's medical needs with his or her functional rehabilitation 
needs while in the facility.
    Finally, we propose to clarify that we believe that discharge 
planning, in addition to assessment of the patient's goals and progress 
toward those goals, is an integral part of the interdisciplinary team 
approach to care that is provided in IRFs.
    The specific proposed changes to the regulations at part 412 are 
shown in the ``Regulation Text'' of this proposed rule of this proposed 
rule. We encourage stakeholder comment on these proposed changes.

IX. Quality Reporting for Inpatient Rehabilitation Hospitals

A. Background and Statutory Authority

    CMS seeks to promote higher quality and more efficient health care 
for Medicare beneficiaries. Our efforts are, in part, effectuated by 
quality reporting programs coupled with the public reporting of data 
collected under those programs. The quality reporting programs exist 
for various settings such as hospital inpatient services (the Hospital 
Inpatient Quality Reporting (Hospital IQR) Program), hospital 
outpatient services (the Hospital Outpatient Quality Data Reporting 
Program (HOP QDRP)), and for physicians and other eligible 
professionals the Physician Quality Reporting System (formerly called 
the Physician Quality Reporting Initiative, or PQRI). We have also 
implemented quality reporting programs for home health agencies and 
skilled nursing facilities that are based on conditions of 
participation, and an end-stage renal disease quality incentive program 
(ESRD QIP) that links payment to performance.
    Section 3004(b) of the Affordable Care Act added section 1886(j)(7) 
to the Act, which requires the Secretary to implement a quality 
reporting program for Inpatient Rehabilitation Facilities (IRFs), 
including freestanding IRF hospitals and IRF units within hospitals. 
Beginning in FY 2014, section 1886(j)(7)(A)(i) of the Act requires the 
Secretary to reduce the increase factor with respect to a fiscal year 
by 2 percentage points for any IRFs that do not submit data to the 
Secretary in accordance with requirements established by the Secretary 
for that fiscal year. Section 1886(j)(7)(A)(ii) of the Act notes that 
this reduction may result in the increase factor being less than 0.0 
for a fiscal year, and in payment rates under this subsection for a 
fiscal year being less than the payment rates for the preceding fiscal 
year. Any reduction based on failure to comply with the reporting 
requirements is, in accordance with section 1886(j)(7)(B) of the Act, 
limited to the particular fiscal year involved. The reductions are not 
to be cumulative and will not be taken into account in computing the 
payment amount under subsection (j) for a subsequent fiscal year.
    Section 1886(j)(7)(C) of the Act requires that each IRF submit data 
to the Secretary on quality measures specified by the Secretary. The 
data must be submitted in a form and manner, and at a time, specified 
by the Secretary. The Secretary is generally required to specify 
measures that have been endorsed by the entity with a contract under 
section 1890(a) of the Act. This contract is currently held by the 
National Quality Forum (NQF). The NQF is a voluntary consensus 
standard-setting organization with a diverse representation of 
consumer, purchaser, provider, academic, clinical, and other health 
care stakeholder organizations. The NQF was established to standardize 
health care quality measurement and reporting through its consensus 
development process. We have generally adopted NQF-endorsed measures in 
our reporting programs. However, section 1886(j)(7)(D)(ii)of the Act 
provides that ``in the case of a specified area or medical topic 
determined appropriate by the Secretary for which a feasible and 
practical measure has not been endorsed by the entity with a contract 
under section 1890(a) of the Act, the Secretary may specify a measure 
that is not so endorsed as long as due consideration is given to 
measures that have been endorsed or adopted by a consensus-based 
organization identified by the Secretary.'' Under section 
1886(j)(7)(D)(iii) of the Act, the Secretary must publish the selected 
measures that will be applicable with respect to FY 2014 no later than 
October 1, 2012.
    Section 1886(j)(7)(E) of the Act requires the Secretary to 
establish procedures for making data submitted

[[Page 24253]]

under the IRF quality reporting program available to the public. The 
Secretary must ensure that an IRF is given the opportunity to review 
the data that is to be made public prior to the data being made public. 
The Secretary must report quality measures that relate to services 
furnished in inpatient settings in rehabilitation facilities on the CMS 
Web site.

B. Quality Measures for IRF Quality Reporting Program for FY 2014

1. General
    We propose to adopt 2 quality measures for FY 2014. These quality 
measures are: (1) Urinary Catheter-Associated Urinary Tract Infections 
(CAUTI), and (2) Pressure Ulcers that are New or Have Worsened. We also 
discuss below a third measure that we are currently developing and 
intend to propose to adopt for FY 2014 in future rulemaking. That 
measure will be the 30-day Comprehensive All-Cause Risk-Standardized 
Readmission Measure.
2. Considerations in the Selection of the Proposed Quality Measures
    In implementing the IRF Quality Reporting Program, we seek to 
collect data on measures that will provide information on the full 
spectrum of the quality of care being furnished by IRFs while imposing 
as little burden as possible on IRFs. We seek to collect data on valid, 
reliable, and relevant quality measures and to make that data available 
to the public in accordance with applicable law.
    We also seek to align new Affordable Care Act reporting 
requirements for IRFs with HHS high priority conditions and topics, as 
reflected in the National Quality Strategy released by the Secretary 
(http://www.healthcare.gov/center/reports/quality03212011a.html#es) and 
to ultimately provide a comprehensive assessment of the quality of 
healthcare delivered. We note that adopting a comprehensive set of 
measures may take multiple years because of the time, effort and 
resources required by IRFs and CMS to develop and implement the data 
collection and reporting infrastructure needed to support an expanded 
quality reporting program. Current areas of high priority for HHS 
include patient safety, healthcare associated infections, and reduction 
of avoidable readmissions. These priorities are consistent with the aim 
of providing safe, sound care for all patients receiving services in 
any healthcare setting including IRFs.
    In our consideration and selection of a comprehensive set of 
quality measures, we have several objectives. First, the measures 
should align with CMS' three-part aim for better care for individuals, 
better health for populations, and lower cost through improvement. 
Second, the measures should relate to specific priorities in the care 
setting for which they are adopted. For IRFs, these include improving 
patient safety (such as avoiding healthcare associated infections 
(HAI)), reducing adverse events, and encouraging better coordination of 
care and person-and-family-centered care. Third, the measures should 
address improved quality for the primary role of IRFs, which is to 
address the rehabilitation needs of the individual including improved 
functional status and achievement of successful return to the community 
post-discharge.
    Other considerations in proposing quality measures include 
alignment with other Medicare quality reporting programs and other 
private sector initiatives; suggestions and input received from 
multiple stakeholders and national subject matter experts; seeking 
measures that have a low probability of causing unintended adverse 
consequences; and considering measures that are feasible, that is, 
measures that can be technically implemented within the capacity of the 
CMS infrastructure for data collection, analyses, and calculation of 
reporting and performance rates as applicable.
3. FY 2014 Measure 1: Healthcare Associated Infection Measure 
(HAI): Urinary Catheter-Associated Urinary Tract Infections (CAUTI)
    The first measure we propose for IRFs for purposes of calculating 
the FY 2014 Increase Factor is an application of the NQF-endorsed 
measure developed by the Centers for Disease Control (CDC) for 
hospitals entitled (NQF 0138) ``Urinary Catheter-Associated 
Urinary Tract Infection [CAUTI] for Intensive Care Unit Patients'' to 
the IRF setting. This measure was developed by the CDC to measure the 
percentage of patients with urinary catheter associated urinary tract 
infections in the ICU context. At the time of this proposed rule, the 
measure we are applying (NQF 0138) is undergoing measure 
maintenance review by NQF which may result in a change in how the CDC 
calculates the aggregated data from using a standard rate for CAUTI, to 
the use of a standardized infection ratio (SIR) of healthcare 
associated urinary catheter-associated urinary tract infections. We 
propose to adopt the current measure in this rulemaking cycle. However, 
we intend to propose the adoption of any modifications to this measure 
that may result from the NQF review process in future rulemaking. We 
recognize that the NQF has endorsed this measure for the hospital 
setting, but believe that this measure is highly relevant to IRFs in 
that urinary catheters are commonly used in the IRF setting. Section 
1886(j)(7)(D)(ii) provides that ``in the case of a specified area or 
medical topic determined appropriate by the Secretary for which a 
feasible and practical measure has not been endorsed by the entity with 
a contract under section 1890(a), the Secretary may specify a measure 
that is not so endorsed as long as due consideration is given to 
measures that have been endorsed or adopted by a consensus-based 
organization identified by the Secretary.'' We reviewed the NQF's 
consensus endorsed measures, and were unable to identify any NQF-
endorsed measures for urinary catheter-associated urinary tract 
infections for the IRF setting. We are unaware of any other measures of 
urinary tract infections that have been approved by voluntary consensus 
standards bodies.
    Having given due consideration to other measures that have been 
endorsed or adopted by a consensus entity, we propose to adopt an 
application of the NQF-endorsed CAUTI measure under the Secretary's 
authority to select non-NQF endorsed measures where NQF-endorsed 
measures do not exist for a specified area or medical topic. While we 
are proposing to adopt the measure under the exception authority 
provided in section 1886(j)(7)(D)(ii), we note that we intend to ask 
NQF to formally extend its endorsement of the existing CAUTI measure to 
the IRF setting.
    Urinary tract infections (UTIs) are a common cause of morbidity and 
mortality. The urinary tract is the most common site of healthcare-
associated infection, accounting for more than 30 percent of infections 
reported by acute care hospitals.\1\ Healthcare-associated UTIs are 
commonly attributed to catheterization of the urinary tract.
---------------------------------------------------------------------------

    \1\ Klevens RM, Edward JR, et al. Estimating health care-
associated infections and deaths in U.S. hospitals, 2002. Public 
Health Reports 2007;122:160-166.
---------------------------------------------------------------------------

    CAUTI can lead to complications as cystitis, pyelonephritis, gram-
negative bacteremia, prostatitis, epididymitis, and orchitis in males 
and, less commonly, endocarditis, vertebral osteomyelitis, septic 
arthritis, endophthalmitis, and meningitis in all patients. 
Complications associated with CAUTI include discomfort to the patient, 
prolonged hospital stay, and increased cost and mortality. Each year, 
more than 13,000 deaths are associated

[[Page 24254]]

with UTIs.1 Prevention of CAUTIs is discussed in the CDC/
HICPAC document, Guideline for Prevention of Catheter-associated 
Urinary Tract Infections.\2\ The NQF endorsed CAUTI measure we are 
proposing is currently collected by the CDC's National Healthcare 
Safety Network (NHSN), a secure Internet-based health surveillance 
system, and we note that the CDC is also collecting data on this 
measure from IRFs. NHSN is currently used, in part, as one means by 
which certain State-mandated reporting and surveillance data are 
collected.
---------------------------------------------------------------------------

    \2\ Wong ES. Guideline for prevention of catheter-associated 
urinary tract infections. Infect Control 1981; 2:126-30.
---------------------------------------------------------------------------

    The HHS National Action Plan to Prevent HAI (http://www.hhs.gov/ash/initiatives/hai/actionplan/index.html) identified catheter-
associated urinary tract infections as the leading type of HAI that is 
largely preventable. The technical expert panel (TEP) convened by the 
CMS measure-developer-contractor on February 4, 2011 (https://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/) also identified CAUTI 
as a high priority quality issue for IRFs.
4. FY 2014 Measure 2: Percent of Patients With Pressure Ulcers 
That are New or Worsened
    The second measure we propose for IRFs for purposes of calculating 
the FY 2014 increase factor is an application of a CMS developed NQF-
endorsed measure for short-stay nursing home patients; (NQF 
NH-012-10) ``Percent of Residents with Pressure Ulcers that Are New or 
Worsened.'' This is the percentage of patients who have one or more 
stage 2-4 pressure ulcers that are new or worsened, when assessed at 
the time of discharge as compared with the patient's condition when it 
was assessed at admission. We recognize NQF endorsement of this measure 
is limited to short-stay nursing home patients, but believe that this 
measure is highly relevant and a high priority quality issue in the 
care of IRF patients. Currently, there are no other NQF-endorsed 
pressure ulcer measures that are applicable to IRFs and we were unable 
to identify other measures for pressure ulcers that have been endorsed 
or adopted for the IRF context by a consensus organization. We are also 
unaware of any other measures of pressure ulcers that have been 
approved by voluntary consensus standards bodies. For these reasons, we 
propose to adopt an application of this NQF-endorsed measure under the 
Secretary's authority to select non-NQF endorsed measures where 
measures do not exist for a specified area or medical topic. We also 
intend to ask NQF to extend its endorsement of the existing short-stay 
nursing home pressure ulcer measure to the IRF setting.
    Pressure ulcers are high-volume and high-cost adverse events across 
the spectrum of health care settings from acute hospitals to home 
health. Patients in the IRF setting may have medically complex 
conditions and severe functional limitations, and are therefore at high 
risk for the development, or worsening, of pressure ulcers. Pressure 
ulcers are serious medical conditions and an important measure of 
quality. Pressure ulcers can lead to serious, life-threatening 
infections, which substantially increase the total cost of care. As 
reported in the August 22, 2007, Inpatient Hospital PPS Final Rule for 
FY 2008 (72 FR 47205) in 2006 there were 322,946 reported cases of 
Medicare patients with a pressure ulcer as a secondary diagnosis in 
acute care hospitals.
5. Potential FY 2014 measure 3: 30-day Comprehensive All-Cause 
Risk-Standardized Readmission Measure
    Avoidable hospital readmissions are a high priority for HHS and 
CMS. We are currently developing setting-specific risk adjusted 30-day 
all-condition all-cause risk-standardized readmission measures for 
hospitals, IRFs, long term care hospitals and nursing homes. The main 
features of the measure methodology will be consistent with that of the 
NQF-endorsed CMS hospital risk-adjusted 30-day readmission measures for 
the Acute Myocardial Infarction (AMI), Heart Failure (HF), Pneumonia 
and Percutaneous Coronary Intervention (PCI). We plan to cover the 
maximum number of patient conditions possible in the all-condition 
measures. We will consult literature and national experts and conduct 
analyses on the types and comorbidities of the patients of each setting 
in order to establish appropriate risk-adjustment of the measures as 
well as the meaning/definition of readmission and the appropriate time-
window for readmission for each care setting. To expand beyond the 
condition-specific measures to an all-condition readmission measure for 
each setting, we will conduct analyses to determine whether it is 
statistically and clinically sound to derive the all-condition measures 
from one single risk adjustment model, or if it would be better to form 
a composite of multiple models for multiple conditions. We plan to use 
hierarchical logistic regression modeling to take into account the 
effects of the clustering of patients and the sample size in the IRF 
setting. This measure is expected to be completed in late 2011, at 
which time it will be submitted to the entity with a contract under 
section 1890(a) of the Act for endorsement.
    We invite public comments on the proposed quality measures for FY 
2014: (1) Urinary Catheter-Associated Urinary Tract Infections (CAUTI); 
(2) Pressure Ulcers that are New or Have Worsened. We also invite 
public comment on our intent to propose a 30-day Comprehensive All-
Cause Risk-Standardized Readmission Measure.

C. Data Submission Requirements

1. Proposed Method of Data Submission for HAI Measure (CAUTI)
    We propose to require that IRFs submit data on the Urinary 
Catheter-Associated Urinary Tract Infection (CAUTI) measure through the 
Centers for Disease Control (CDC)/National Healthcare Safety Network 
(NHSN). As we noted above, the NHSN is a secure, Internet-based 
surveillance system maintained by the CDC that can be utilized by all 
types of healthcare facilities in the United States, including acute 
care hospitals, long term acute care hospitals, psychiatric hospitals, 
rehabilitation hospitals, outpatient dialysis centers, ambulatory 
surgery centers, and long term care facilities. The NHSN enables 
healthcare facilities to collect and use data about HAIs, including 
information on clinical practices known to prevent HAIs, information on 
the incidence or prevalence of multidrug-resistant organisms within 
their organizations, and information on other adverse events. Some 
States use the NHSN as a means of collecting state law mandated HAI 
reporting. NHSN collects data via a Web-based tool hosted by the CDC 
(http://www.cdc.gov/). This reporting service is provided free of 
charge to healthcare facilities. Additionally, the ability of the CDC 
to receive NHSN measures data from electronic health records (EHR) may 
be possible in the near future. Currently, more than 20 States require 
hospitals to report HAIs using NHSN, and the CDC supports more 4,000 
hospitals that are using the NHSN.
    We propose for IRFs to submit the data elements needed to calculate 
the Urinary Catheter-Associated Urinary Tract Infection measure using 
the NHSN's standard data submission requirements which requires 
submission of data on HAI events on all patients. Collecting data on 
all patients will provide CMS with the most robust,

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accurate reflection of the quality of care delivered to Medicare 
beneficiaries as compared with non-Medicare patients. Therefore, to 
measure the quality of care that is delivered to Medicare beneficiaries 
in the IRF setting, we are proposing to collect quality data related to 
HAI events on all patients regardless of payor.
    CDC/NHSN requirements may include adherence to training 
requirements, use of CDC measure specifications, data element 
definitions, data submission requirements and instructions, data 
reporting timeframes, as well as NHSN participation forms and 
indications to CDC allowing CMS to access data for this measure for the 
IRF quality reporting program purposes. Detailed requirements for NHSN 
participation, measure specifications, and data collection can be found 
at http://www.cdc.gov/nhsn/. We propose to require IRFs to use the 
specifications and data collection tools for the proposed Urinary 
Catheter-Associated Urinary Tract Infections as required by CDC as of 
the time that the data is submitted.
    For purposes of calculating the FY 2014 increase factor we propose 
to collect data on CAUTI events that occur from October 1, 2012 through 
December 31, 2012, the final fiscal quarter of FY 2013. We propose that 
all subsequent IRF quality reporting cycles would be based on a full 
calendar year (CY) cycle (that is January 1 through December 31 of the 
applicable year). For example, the FY 2015 payment determinations will 
be made based on CY 2013 data submitted to CDC. We welcome comments on 
the proposed reporting cycle for IRFs.
    Should this proposed measure be finalized, further details 
regarding data submission and reporting requirements for this measure 
will be posted on the CMS Web site http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/ by no later than January 31, 2012.
    IRFs are also encouraged to visit the CDC Web site http://www.cdc.gov/nhsn/ in order to review the NHSN enrollment and reporting 
requirements.
2. Proposed Method of Data Submission for the Percent of Patients With 
New or Worsened Pressure Ulcer Measure
    We seek to implement the IRF Quality Reporting Program in a manner 
that imposes as little burden as possible. IRFs already are required to 
submit certain data for purposes of determining payment via the current 
Inpatient Rehabilitation Facility-Patient Assessment Instrument (IRF-
PAI). The IRF-PAI also includes currently optional ``quality 
indicators'' (QI). To support the standardized collection and 
calculation of quality measures specifically focused on IRF services, 
we propose to modify the current IRF-PAI by replacing the current 
optional pressure ulcer items in the QI section of the IRF-PAI with 
mandatory pressure ulcer data elements for the proposed measure.
    We propose for IRFs to submit the data needed to calculate the 
measure ``Percent of Patients with New or Worsened Pressure Ulcers'' on 
all Medicare patients. Therefore, to measure the quality of care that 
is delivered to Medicare beneficiaries in the IRF setting, we are 
proposing to collect quality data related to new or worsening pressure 
ulcers on all Medicare patients.
    We propose to use the IRF-PAI to collect pressure ulcer data 
elements that would be similar to those collected through the Minimum 
Data Set 3.0 (MDS 3.0), which is a reporting instrument that is used in 
nursing homes. A draft of the proposed IRF-PAI revisions with the new 
pressure ulcer elements is available on the CMS Web site at http://www.cms.gov/InpatientRehabFacPPS/04_IRFPAI.asp#TopOfPage. The current 
MDS 3.0 pressure ulcer items evolved as an outgrowth of CMS' work to 
develop a standardized patient assessment instrument, now referred to 
as CARE (Continuity Assessment Record & Evaluation).
    The CARE assessment instrument was developed and tested in the 
post-acute care payment reform demonstration (PAC-PRD) which included 
IRFs as required by section 5008 of the 2005 Deficit Reduction Act 
(DRA) (Pub. L. 109-171, enacted February 8, 2006) (more information may 
be found at http://www.pacdemo.rti.org). We note that the MDS data 
elements were supported by the National Pressure Ulcer Advisory Panel 
(NPUAP). We believe that modifying the current IRF-PAI pressure ulcer 
items to be consistent with the standardized data elements now used in 
the MDS 3.0, will drive uniformity across settings that will lead to 
better quality of care in IRFs and ultimately, across the continuum of 
care settings. If this proposal is finalized, additional details 
regarding the use of modified IRF-PAI data elements to calculate this 
measure will be published on the CMS Web site at http://www.cms.gov/LTCH-IRF-Hospice-Quality-Reporting/ by no later than January 31, 2012. 
We invite comments on these proposals for the submission of data on the 
proposed quality measure for pressure ulcers.
3. Potential Method of Data Submission for the 30-day Comprehensive 
All-Cause Risk-Standardized Readmission Measure
    In the FY 2013 rule cycle we anticipate being able to propose using 
claims data otherwise submitted by the IRF as the data to calculate 
this measure. As such, we anticipate not needing additional reporting 
to fulfill the data needs if this measure is proposed and adopted. We 
generally anticipate calculating the measure based on 3 years of claims 
data in order to provide a sufficient number of discharges to calculate 
this measure.

D. Public Reporting

    Under section 1886(j)(7)(E) of the Act, the Secretary is required 
to establish procedures for making data submitted by IRFs under the IRF 
quality reporting program available to the public. In accordance with 
this provision, we propose to establish procedures to make the data 
available to the public. We do not intend to make individual patient 
data public. We believe that existing laws governing access to agency 
records will adequately address requests for such data. We will adopt 
procedures that will ensure that an IRF has the opportunity to review 
the data to be made public prior to the data being made public. 
Additionally, as required under section 1886(j)(7)(E) of the Act, we 
will report quality measures that relate to services furnished in IRFs 
on CMS Web site.

E. Quality Measures for Future Consideration for Determination of 
Increase Factors for Future Fiscal Year Payments

    As indicated previously in this section, we ultimately seek to 
adopt a comprehensive set of quality measures to be available for 
widespread use for informed decision making and quality improvement. 
While we are beginning with a limited set of measures in the IRF 
context, we expect to expand the measure set through rulemaking which 
will allow us, for example, to assess an IRF patient's functional 
status and whether he/she has achieved his or her rehabilitation goals 
and potential. As noted above, IRFs are currently required to submit 
certain data for purposes of determining payment via the IRF-PAI. The 
IRF-PAI currently includes optional QIs, and, if finalized, it would 
include mandatory data elements for use in the calculation of the 
pressure ulcer measure. Only a small number of IRFs are currently 
submitting data on the optional QI data elements.

[[Page 24256]]

    We intend to propose a more robust set of measures for the IRF 
quality reporting program in the FY 2013 rulemaking cycle for the 
determination of the FY 2015 payment increase factor. We are 
considering the measures listed in Table 13 which include, but are not 
limited to, measure topics reported by providers of skilled nursing 
facility (SNF) services for short stay nursing home patients. We invite 
public comment on which quality measures would be considered most 
feasible and useful for IRFs to report for purposes of the FY 2015 
payment update.
    The quality data on short stay nursing home patients, which 
generates the short stay nursing home measures, are generated from the 
MDS 3.0 data collection vehicle. We are currently analyzing the quality 
data collected by nursing homes through the 3.0 version of the MDS 
which was implemented nationally in nursing homes in October 2010. 
Nursing homes are reporting data for long stay residents as well as 
short stay residents. We will be analyzing the performance of these 
nursing home measures through the end of 2011 and expect to have 
findings on their performance in the nursing home setting by early 
2012. Next steps would include analyzing whether any of these measures 
would be appropriate for application in the IRF setting. We would 
invite public comment on the application of some or all of the short 
stay nursing home measures listed below. We are seeking NQF endorsement 
of these measures by August 2011. These measures may also be found at 
the NQF Web site http://www.qualityforum.org/. CMS' short stay nursing 
home measures undergoing NQF endorsement include NH-010-10 percent of 
residents who self-report moderate to severe pain; NH-014-10 percent of 
residents assessed and appropriately given the seasonal influenza 
vaccine; NH-016-10 percent of residents assessed and appropriately 
given the seasonal pneumococcal vaccine and NH-009-10 percentage of 
residents on a scheduled pain medication regimen on admission who self-
report a decrease in pain intensity or frequency.
    If any of the short stay nursing home measures are appropriate for 
application to the IRF setting we would intend to propose some or all 
of those measures in the FY 2013 rulemaking cycle. Any added measures 
proposed through the FY 2013 rulemaking cycle would apply to the 
payment determination for FY 2015. We expect that any measures proposed 
through the FY 2013 rulemaking cycle would require changes to the IRF-
PAI as a data collection vehicle and changes to the supporting 
information technology (IT) infrastructure. We expect that it would 
take providers, vendors, and CMS approximately one year to make the 
necessary changes to their IT systems to support the collection and 
reporting of new or modified IRF-PAI data elements. We would expect 
providers, vendors, and CMS to complete any needed changes to their IT 
systems by August 2013. We would intend to propose IRFs submit any 
additional or revised IRF-PAI data elements starting October 1, 2013 
through December 31, 2013 for the FY 2015 payment update. 
Alternatively, we are considering and invite public comment on the 
possibility of basing future quality measures on data sources or 
assessment instruments other than the IRF-PAI. As stated earlier, we 
developed and tested the CARE assessment instrument for the post-acute 
demonstration under section 5008 of the DRA. We intend to submit a 
report to Congress by the end of 2011 with findings from the three year 
Post Acute Care-Payment Reform Demonstration (PAC-PRD) and its use of 
the CARE patient assessment instrument as a data collection vehicle. 
More details on the PAC-PRD which concluded in late 2010 are available 
at http://www.pacdemo.rti.org. We believe that the data elements that 
were collected using this CARE standardized assessment instrument could 
be used across all post-acute care sites to measure functional status 
and other factors during treatment and at discharge which are key 
indicators of quality in IRFs and in nursing homes treating short stay 
patients requiring rehabilitative services. We believe the instrument 
could be beneficial in supporting the submission of data on quality 
measures by IRFs and other care settings by ensuring standardized data 
collection. We invite comments on the use of a standardized assessment 
instrument such as the CARE assessment instrument in IRFs to collect 
data that would generate additional quality measures for the IRF 
quality reporting program in the future.
    We also invite public comment on the measures and measures topics 
in Table 13, as well as potential methods for collecting quality data 
on the percent of patients whose individually stated goals were met and 
the percent of patients for whom care delivered was consistent with 
patient stated care preferences. During the NQF endorsement process for 
nursing home quality measures mentioned above, the NQF steering 
committee pointed to the need for CMS to consider pairing pain measures 
with a measure or measures that reflect patients' preferences for how 
their care, treatment and symptoms are managed by healthcare providers. 
These items, and other items in Table 13, are under consideration for 
future years. We also invite other suggestions regarding our 
implementation of the IRF quality measures program.
BILLING CODE 4120-01-P

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[GRAPHIC] [TIFF OMITTED] TP29AP11.020

BILLING CODE 4120-01-C

F. Proposed New Regulation Text for the IRF Quality Reporting Program

    To implement the new IRF quality reporting program, we propose to 
re-designate the existing paragraph Sec.  412.624(c)(4) as Sec.  
412.624(c)(5) and add a new paragraph Sec.  412.624(c)(4). The specific 
proposed changes to the regulations at part 412 are shown in the 
``Regulation Text'' of this proposed rule of this proposed rule. We 
encourage stakeholder comment on these proposed changes.

[[Page 24258]]

X. Collection of Information Requirements

    Under the Paperwork Reduction Act of 1995, we are required to 
provide 60-day notice in the Federal Register and solicit public 
comment before a collection of information requirement is submitted to 
the Office of Management and Budget (OMB) for review and approval. In 
order to fairly evaluate whether an information collection should be 
approved by OMB, section 3506(c)(2)(A) of the Paperwork Reduction Act 
of 1995 requires that we solicit comment on the following issues:
     The need for the information collection and its usefulness 
in carrying out the proper functions of our agency.
     The accuracy of our estimate of the information collection 
burden.
     The quality, utility, and clarity of the information to be 
collected.
     Recommendations to minimize the information collection 
burden on the affected public, including automated collection 
techniques.
    This proposed rule does not impose any new information collection 
requirements as outlined in the regulation text. However, this proposed 
rule does make reference to associated information collections that are 
not discussed in the regulation text contained in this document. The 
following is a discussion of these information collections, some of 
which have already received OMB approval.
    As stated in Section IX.B. of the preamble of this proposed rule, 
for purposes of calculating the FY 2014 IRF PPS increase factor, we 
propose that IRFs submit data on 2 quality measures. These quality 
measures are: (1) Catheter Associated Urinary Tract Infections; and (2) 
Pressure Ulcers that are New or Have Worsened. The aforementioned 
measures will be collected via the following respective means.

Catheter Associated Urinary Tract Infections (CAUTI)

    Regarding the collection of data on the first quality measure, 
Catheter Associated Urinary Tract Infections, we propose to require as 
the form and manner of submission for the measure, CAUTI rate per 1000 
urinary catheter days, to be through the Centers for Disease Control 
(CDC)/National Health Safety Network (NHSN). Data collection by the 
NHSN occurs via a Web-based tool hosted by the CDC. This reporting 
service is provided free of charge to healthcare facilities. In fact, 
some IRFs are already using the NHSN to collect and submit this data. 
With this proposed rule, CMS seeks to impose an information collection 
requirement for the CAUTI measure. It should be noted that information 
collection activities associated with the CDC/NHSN are currently 
approved under OMB control number 0920-0666. Detailed requirements for 
NHSN participation, measure specifications, and data collection can be 
found at http://www.cdc.gov/nhsn/. IRFs must use the current 
specifications and data collection tools for Catheter Associated 
Urinary Tract Infections.
    CMS does not currently require IRFs to report data to NHSN; 
however, according to the CDC, there are 26 IRFs that already submit 
data to NHSN either voluntarily or per state mandate. In order to 
report data to NHSN, the CDC requires the facility to enroll into the 
NHSN and take specified training. As per the NHSN Web site, we estimate 
that it will take 240 minutes (4 hours) to register and complete the 
necessary training provided by the CDC. The estimated annual burden 
associated with this requirement is 268,800 minutes/4,480 hours (240 
minutes x 1,120 IRFs) at an estimated cost of $186,323. This cost is 
estimated using the average hourly wage of a Registered Nurse which is 
reported by the U.S. Bureau of Statistics to be $41.59. Once each 
facility has been properly registered into NHSN and trained, they will 
need to submit two types of forms in order for CDC to calculate the 
CAUTI rate per 1,000 urinary catheter days. The first form, the Urinary 
Tract Infection (UTI) form, is submitted by facilities for each patient 
with a CAUTI. We estimate that it will take 15 minutes per form per 
IRF. This time estimate consists of 5 minutes of nursing time needed to 
collect the clinical data and 10 minutes of clerical time necessary to 
enter the data into NHSN. We further anticipate that there will be 
approximately 2.25 forms submitted per IRF per month. Based on this 
estimate, we expect for each IRF to expend 33.75 minutes (0.5625 hours) 
per month and 405 minutes (6.75 hours) per year reporting to NHSN. The 
estimated annual burden to all IRFs in the U.S. for reporting to NHSN 
is 7,735.5 hours. The estimated cost per IRF is $186.14 per year. 
Similarly, the estimated total yearly cost across all IRFs is $213,322. 
These costs are estimated using an hourly wage for a Registered Nurse 
of $41.59 and a Medical Billing Clerk/Data Entry person of $20.57 as 
stated by the U.S. Bureau of Labor Statistics. The second form, the 
denominator form, is used to count daily the number of patients with an 
indwelling catheter device. These daily counts are summed and only the 
total for each month is submitted to NHSN. While CDC estimates that the 
denominator form takes 5 hours per month to complete, we estimate that 
it will take 2.5 hours per form per IRF per month, as the number of 
patients with an indwelling catheter is the only part of this form that 
IRFs will be required to complete. We anticipate that there will be one 
form submitted per IRF per month. Based on this estimate, we expect for 
each IRF to expend 150 minutes (2.5 hours) per month and 1,800 minutes 
(30 hours) per year reporting to NHSN. The estimated annual burden to 
all IRFs in the U.S. for reporting to NHSN is 34,380 hours. The 
estimated cost per IRF is $1,247.70 per year. Similarly, the estimated 
total yearly cost across all IRFs is $1,429,864. These costs are 
estimated using an hourly wage for a Registered Nurse of $41.59.

Pressure Ulcers That Are New or Have Worsened

    As stated in Section IX.C.2 of this preamble, to support the 
standardized collection and calculation of quality measures 
specifically focused on IRF services, we propose to modify the current 
Inpatient Rehabilitation Facility-Patient Assessment Instrument (IRF-
PAI) by replacing and harmonizing the pressure ulcer items with data 
elements similar to those collected through the Minimum Data Set 3.0 
(MDS 3.0) used in nursing homes. Additionally, the MDS 3.0 pressure 
ulcer items have been harmonized with the Continuity Assessment Record 
and Evaluation (CARE) data set, which was developed for and broadly 
tested in the post-acute demonstration as required by section 5008 of 
the Deficit Reduction Act of 2005 (DRA) (Pub. L. 109-171, enacted on 
February 8, 2006). We believe modifying the IRF-PAI pressure ulcer 
items to be consistent with the standardized data elements now used in 
the MDS 3.0, and supported by the National Pressure Ulcer Advisory 
Panel (NPUAP), would provide better informed decision making and 
quality improvement in IRFs and ultimately, across the continuum of 
care settings.
    Since all IRFs are already required to complete and transmit IRF-
PAIs on all Medicare Part A fee-for-service and Medicare Part C 
(Medicare Advantage) patients in order to receive payment from 
Medicare, and the number of IRFs submitting claims to Medicare has 
remained stable over the past several years, we do not estimate that 
there are any IRFs that would need to conduct additional training or 
set-up for completing and transmitting the IRF-PAI. Thus, we do not 
estimate any additional burden on IRFs for these

[[Page 24259]]

activities. In addition, we do not estimate any additional burden for 
IRFs to complete the IRF-PAI with the mandatory quality measures as the 
IRF-PAI currently contains a voluntary ``Quality Indicators'' section. 
If finalized, the voluntary data items will be replaced with the 
proposed pressure ulcer question set. When the original burden 
estimates were completed for the IRF-PAI, we estimated that the 
``Quality Indicators'' section of the IRF-PAI would take about 10 
minutes to complete, and we assumed that all IRFs would complete the 
Quality Indicators items, even though completion of this section was 
voluntary. Thus, removing the Quality Indicators items from the IRF-PAI 
would decrease the total estimated burden of completing each IRF-PAI by 
about 10 minutes. However, we estimate that it will take about 10 
minutes to complete the new pressure ulcer item that we are proposing 
to require IRFs to complete as part of the new IRF quality reporting 
program. Since the time to complete the items that we are proposing to 
remove from the IRF-PAI is the same as the time to complete the new 
items we are proposing to add, we estimate no net change in the amount 
of time associated with completing each IRF-PAI and no net change in 
burden.
    We will be submitting a revision to the IRF-PAI information 
collection request currently approved under OMB control number 0938-
0842 for OMB review and approval.
    If you comment on these information collection and recordkeeping 
requirements, please do either of the following:
    1. Submit your comments electronically as specified in the 
ADDRESSES section of this proposed rule; or
    2. Submit your comments to the Office of Information and Regulatory 
Affairs, Office of Management and Budget; Attention: CMS Desk Officer, 
CMS-1349-P; Fax: (202) 395-6974; or E-mail: [email protected].

XI. Response to Public Comments

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

XII. Economic Analyses

A. Regulatory Impact Analysis

1. Introduction
    We have examined the impacts of this proposed rule as required by 
Executive Order 12866 (September 30, 1993, Regulatory Planning and 
Review), Executive Order 13563 on Improving Regulation and Regulatory 
Review (January 18, 2011), the Regulatory Flexibility Act (September 
19, 1980, Pub. L. 96-354) (RFA), section 1102(b) of the Social Security 
Act, section 202 of the Unfunded Mandates Reform Act of 1995 (Pub. L. 
104-4), Executive Order 13132 on Federalism (August 4, 1999), and the 
Congressional Review Act (5 U.S.C. 804(2)).
    Executive Orders 12866 and 13563 direct 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). Executive 
Order 13563 emphasizes the importance of quantifying both costs and 
benefits, of reducing costs, of harmonizing rules, and of promoting 
flexibility. This rule has been designated an ``economically'' 
significant rule, under section 3(f)(1) of Executive Order 12866. 
Accordingly, the rule has been reviewed by the Office of Management and 
Budget.
2. Statement of Need
    This proposed rule updates the IRF prospective payment rates for FY 
2012 as required under section 1886(j)(3)(C) of the Act. It responds to 
Section 1886(j)(5) of the Act, which requires the Secretary to publish 
in the Federal Register on or before the August 1 that precedes the 
start of each fiscal year, the classification and weighting factors for 
the IRF PPS's case-mix groups and a description of the methodology and 
data used in computing the prospective payment rates for that fiscal 
year.
    This rule also proposes some policy changes within the statutory 
discretion afforded to the Secretary under section 1886(j) of the Act. 
We believe that the proposed policy changes would better align IRF PPS 
policies with those of other Medicare payment systems and would clarify 
the current IRF payment regulations. Further, many of the proposed 
policy changes are designed to promote greater flexibility in the IRF 
PPS policies.
    This proposed rule also implements section 3401(d) of the 
Affordable Care Act, which amended section 1886(j)(3)(C) of the Act and 
added section 1886(j)(3)(D) of the Act. Section 1886(j)(3)(C) of the 
Act requires the Secretary to estimate a multi-factor productivity 
adjustment to the market basket increase factor, and to apply other 
adjustments as defined by the Act. The productivity adjustment applies 
to FYs from 2012 forward. The other adjustments apply to FYs 2010-2019.
    Finally, this proposed rule discusses the IRF quality measures that 
we are proposing to adopt for the first year of implementation of a new 
IRF quality reporting program, as required by section 3004(b) of the 
Affordable Care Act.
3. Overall Impacts
    We estimate that the total impact of these proposed changes for 
estimated FY 2012 payments compared to estimated FY 2011 payments would 
be an increase of approximately $120 million (this reflects a $100 
million increase from the update to the payment rates and a $20 million 
increase due to the proposed update to the outlier threshold amount to 
increase estimated outlier payments from approximately 2.7 percent in 
FY 2011 to 3 percent in FY 2012).
4. Detailed Economic Analysis
i. Basis and Methodology of Estimates
    This proposed rule sets forth updates of the IRF PPS rates 
contained in the FY 2011 notice and proposes updates to the CMG 
relative weights and average length of stay values, the facility-level 
adjustments, the wage index, and the outlier threshold for high-cost 
cases. This proposed rule also implements a 0.1 percentage point 
reduction to the proposed FY 2012 rebased RPL market basket increase 
factor (updated from a 2002 base year to a 2008 base year) in 
accordance with sections 1886(j)(3)(C)(ii)(II) and 1886(j)(3)(D)(ii) of 
the Act and a 1.2 percent productivity adjustment to the proposed FY 
2012 rebased RPL market basket increase factor as required by section 
1886(j)(3)(C)(ii)(I) of the Act.
    We estimate that the FY 2012 impact would be a net increase of $120 
million in payments to IRF providers (this reflects a $100 million 
estimated increase from the proposed update to the payment rates and a 
$20 million estimated increase due to the proposed update to the 
outlier threshold amount to increase the estimated outlier payments 
from approximately 2.7 percent in FY 2011 to 3.0 percent in FY 2012). 
The impact analysis in Table 14 of this proposed rule represents the 
projected effects of the proposed policy

[[Page 24260]]

changes in the IRF PPS for FY 2012 compared with estimated IRF PPS 
payments in FY 2011 without the proposed policy changes. We estimate 
the effects by estimating payments while holding all other payment 
variables constant. We use the best data available, but we do not 
attempt to predict behavioral responses to these proposed changes, and 
we do not make adjustments for future changes in such variables as 
number of discharges or case-mix.
    We note that certain events may combine to limit the scope or 
accuracy of our impact analysis, because such an analysis is future-
oriented and, thus, susceptible to forecasting errors because of other 
changes in the forecasted impact time period. Some examples could be 
legislative changes made by the Congress to the Medicare program that 
would impact program funding, or changes specifically related to IRFs. 
Although some of these changes may not necessarily be specific to the 
IRF PPS, the nature of the Medicare program is such that the changes 
may interact, and the complexity of the interaction of these changes 
could make it difficult to predict accurately the full scope of the 
impact upon IRFs.
    In updating the rates for FY 2012, we are proposing a number of 
standard annual revisions and clarifications mentioned elsewhere in 
this proposed rule (for example, the proposed update to the wage index 
and market basket increase factor used to adjust the Federal rates). We 
estimate that these proposed revisions would increase payments to IRFs 
by approximately $100 million (all due to the update to the market 
basket increase factor, since the update to the wage index is done in a 
budget neutral manner--as required by statute--and therefore neither 
increases nor decreases aggregate payments to IRFs).
    The aggregate change in estimated payments associated with this 
proposed rule is estimated to be an increase in payments to IRFs of 
$120 million for FY 2012. The market basket increase of $100 million 
and the $20 million increase due to the proposed update to the outlier 
threshold amount to increase estimated outlier payments from 
approximately 2.7 percent in FY 2011 to 3.0 percent in FY 2012 would 
result in a net change in estimated payments from FY 2011 to FY 2012 of 
$120 million.
    The effects of the proposed changes that impact IRF PPS payment 
rates are shown in Table 14. The following proposed changes that affect 
the IRF PPS payment rates are discussed separately below:
     The effects of the proposed update to the outlier 
threshold amount, from approximately 2.7 to 3.0 percent of total 
estimated payments for FY 2012, consistent with section 1886(j)(4) of 
the Act.
     The effects of the 2.8 percent annual market basket update 
for FY 2012 (using the proposed rebased RPL market basket) to IRF PPS 
payment rates, as required by section 1886(j)(3)(A)(i) and section 
1886(j)(3)(C) of the Act, including a 0.1 percentage point reduction 
for FY 2012 in accordance with sections 1886(j)(3)(C)(ii)(II) and 
1886(j)(3)(D)(ii) of the Act and a 1.2 percent productivity adjustment 
as required by section 1886(j)(3)(C)(ii)(I) of the Act.
     The effects of applying the budget-neutral labor-related 
share and wage index adjustment, as required under section 1886(j)(6) 
of the Act.
     The effects of the proposed budget-neutral changes to the 
CMG relative weights and average length of stay values, under the 
authority of section 1886(j)(2)(C)(i) of the Act.
     The effects of the proposed budget-neutral changes to the 
facility-level adjustment factors, as permitted under section 
1886(j)(3)(A)(v) of the Act.
     The effect of the data matching process to compute the DSH 
patient percentage used in the IPPS DSH adjustment that is also used by 
IRF PPS to compute the low-income percentage adjustment factor.
     The effect of the proposed IRF quality reporting program, 
Beginning in FY 2013.
     The total proposed change in estimated payments based on 
the FY 2012 proposed policies relative to estimated FY 2011 payments 
without the proposed policies.
ii. Description of Table 14
    The table below categorizes IRFs by geographic location, including 
urban or rural location, and location with respect to CMS's nine census 
divisions (as defined on the cost report) of the country. In addition, 
the table divides IRFs into those that are separate rehabilitation 
hospitals (otherwise called freestanding hospitals in this section), 
those that are rehabilitation units of a hospital (otherwise called 
hospital units in this section), rural or urban facilities, ownership 
(otherwise called for-profit, non-profit, and government), and by 
teaching status. The top row of the table shows the overall impact on 
the 1,146 IRFs included in the analysis.
    The next 12 rows of Table 14 contain IRFs categorized according to 
their geographic location, designation as either a freestanding 
hospital or a unit of a hospital, and by type of ownership; all urban, 
which is further divided into urban units of a hospital, urban 
freestanding hospitals, and by type of ownership; and all rural, which 
is further divided into rural units of a hospital, rural freestanding 
hospitals, and by type of ownership. There are 952 IRFs located in 
urban areas included in our analysis. Among these, there are 749 IRF 
units of hospitals located in urban areas and 203 freestanding IRF 
hospitals located in urban areas. There are 194 IRFs located in rural 
areas included in our analysis. Among these, there are 174 IRF units of 
hospitals located in rural areas and 20 freestanding IRF hospitals 
located in rural areas. There are 376 for-profit IRFs. Among these, 
there are 314 IRFs in urban areas and 62 IRFs in rural areas. There are 
710 non-profit IRFs. Among these, there are 589 urban IRFs and 121 
rural IRFs. There are 60 government-owned IRFs. Among these, there are 
49 urban IRFs and 11 rural IRFs.
    The remaining three parts of Table 14 show IRFs grouped by their 
geographic location within a region and by teaching status. First, IRFs 
located in urban areas are categorized with respect to their location 
within a particular one of the nine CMS geographic regions. Second, 
IRFs located in rural areas are categorized with respect to their 
location within a particular one of the nine CMS geographic regions. In 
some cases, especially for rural IRFs located in the New England, 
Mountain, and Pacific regions, the number of IRFs represented is small. 
Finally, IRFs are grouped by teaching status, including non-teaching 
IRFs, IRFs with an intern and resident to ADC ratio less than 10 
percent, IRFs with an intern and resident to ADC ratio greater than or 
equal to 10 percent and less than or equal to 19 percent, and IRFs with 
an intern and resident to ADC ratio greater than 19 percent.
    The estimated impacts of each proposed change to the facility 
categories listed above are shown in the columns of Table 14. The 
description of each column is as follows:
    Column (1) shows the facility classification categories described 
above.
    Column (2) shows the number of IRFs in each category in our FY 2010 
analysis file.
    Column (3) shows the number of cases in each category in our FY 
2010 analysis file.
    Column (4) shows the estimated effect of the proposed adjustment to 
the outlier threshold amount so that estimated outlier payments 
increase

[[Page 24261]]

from approximately 2.7 percent in FY 2011 to 3.0 percent of total 
estimated payments for FY 2012.
    Column (5) shows the estimated effect of the rebased market basket 
update to the IRF PPS payment rates.
    Column (6) shows the estimated effect of the update to the IRF 
labor-related share and wage index, in a budget neutral manner.
    Column (7) shows the estimated effect of the update to the CMG 
relative weights and average length of stay values, in a budget neutral 
manner.
    Column (8) shows the estimated effects of the updates to the 
facility-level adjustment factors (rural, LIP, and teaching status), in 
a budget neutral manner.
    Column (9) compares our estimates of the payments per discharge, 
incorporating all of the proposed changes reflected in this proposed 
rule for FY 2012, to our estimates of payments per discharge in FY 2011 
(without these proposed changes).
    The average estimated increase for all IRFs is approximately 1.8 
percent. This estimated increase includes the effects of the 1.5 
percent market basket update, which is derived from a 2.8 percent 
rebased market basket update that is reduced by 0.1 percentage point 
for FY 2012 in accordance with sections 1886(j)(3)(C)(ii)(II) and 
1886(j)(3)(D)(ii) of the Act and by a 1.2 percentage point productivity 
adjustment as required by section 1886 (j)(3)(C)(ii)(I) of the Act. It 
also includes the 0.3 percent overall estimated increase (the 
difference between 2.7 percent in FY 2011 and 3.0 percent in FY 2012) 
in estimated IRF outlier payments from the proposed update to the 
outlier threshold amount. Because we are making the remainder of the 
proposed changes outlined in this proposed rule in a budget-neutral 
manner, they would not affect total estimated IRF payments in the 
aggregate. However, as described in more detail in each section, they 
would affect the estimated distribution of payments among providers.

[[Page 24262]]

[GRAPHIC] [TIFF OMITTED] TP29AP11.021


[[Page 24263]]


iii. Impact of the Proposed Update to the Outlier Threshold Amount
    In the FY 2011 IRF PPS notice (75 FR 42836), we used FY 2009 
patient-level claims data (the best, most complete data available at 
that time) to set the outlier threshold amount for FY 2011 so that 
estimated outlier payments would equal 3 percent of total estimated 
payments for FY 2011. For this proposed rule, we are proposing to 
update our analysis using more current FY 2010 data. Using the updated 
FY 2010 data, we now estimate that IRF outlier payments, as a 
percentage of total estimated payments for FY 2011, decreased from 3 
percent using the FY 2009 data to approximately 2.7 percent using the 
updated FY 2010 data. As a result, we are proposing to adjust the 
outlier threshold amount for FY 2012 to $11,822, reflecting total 
estimated outlier payments equal to 3 percent of total estimated 
payments in FY 2012.
    The impact of the proposed update to the outlier threshold amount 
(as shown in column 4 of Table 14) is to increase estimated overall 
payments to IRFs by 0.3 percent. We do not estimate that any group of 
IRFs would experience a decrease in payments from this proposed update. 
We estimate the largest increase in payments to be a 1.1 percent 
increase in estimated payments to rural IRFs in the Pacific region.
iv. Impact of the Proposed Market Basket Update to the IRF PPS Payment 
Rates
    The proposed adjusted market basket update to the IRF PPS payment 
rates is presented in column 5 of Table 14. The proposed FY 2008-based 
RPL market basket update is the same as the FY 2002-based RPL market 
basket (2.8 percent). In the aggregate the proposed update would result 
in a net 1.5 percent increase in overall estimated payments to IRFs. 
This net increase reflects the estimated rebased RPL market basket 
increase factor for FY 2012 of 2.8 percent, reduced by 0.1 percentage 
point in accordance with sections 1886(j)(3)(C)(ii)(II) and 
1886(j)(3)(D)(ii) of the Act and a 1.2 percent productivity adjustment 
as required by section 1886(j)(3)(C)(ii)(I) of the Act.
v. Impact of the Proposed CBSA Wage Index and Labor-Related Share
    In column 6 of Table 14, we present the effects of the proposed 
budget neutral update of the wage index and labor-related share. The 
changes to the wage index and the labor-related share are discussed 
together because the wage index is applied to the labor-related share 
portion of payments, so the changes in the two have a combined effect 
on payments to providers. As discussed in section V.A.4 of this 
proposed rule, the labor-related share decreased from 75.271 percent in 
FY 2011 to 70.334 percent in FY 2012.
    In the aggregate, since these updates to the wage index and the 
labor-related share are applied in a budget-neutral manner as required 
under section 1886(j)(6) of the Act, we do not estimate that these 
updates will affect overall estimated payments to IRFs. However, we 
estimate that these proposed changes would have small distributional 
effects. For example, we estimate a 0.9 percent increase in payments to 
rural IRFs, with the largest increase in payments of 1.8 percent for 
rural IRFs in the Mid-Atlantic region. We estimate the largest decrease 
in payments from the proposed update to the CBSA wage index and labor-
related share to be a 1.1 percent decrease for urban IRFs in the New 
England region.
vi. Impact of the Proposed Update to the CMG Relative Weights and 
Average Length of Stay Values
    In column 7 of Table 14, we present the effects of the proposed 
budget neutral update of the CMG relative weights and average length of 
stay values. In the aggregate we do not estimate that these proposed 
updates will affect overall estimated payments to IRFs. However, we 
estimate that these proposed updates will have small distributional 
effects, with the largest increase in payments as a result of these 
updates being a 0.2 percent increase to rural government IRFs. The 
largest estimated decrease in payments as a result of these proposed 
updates is a 0.1 percent decrease to urban for-profit IRFs and urban 
IRFs in the Mountain region and East South Central region.
vii. Impact of the Proposed Update to the Rural, LIP, and Teaching 
Status Adjustment Factors
    In column 8 of Table 14, we present the effects of the proposed 
budget neutral update to the rural, LIP, and teaching status adjustment 
factors. In the aggregate, we do not estimate that these proposed 
changes would affect overall estimated payments to IRFs. However, we 
estimate that these proposed changes would have small distributional 
effects. We estimate the largest increase in payments to be a 1.9 
percent increase for IRFs in the rural Mid-Atlantic region. We estimate 
the largest decrease in payments to be a 5.3 percent decrease for 
teaching IRFs with resident to ADC ratios of greater than 19 percent.
viii. Impact of the IPPS Data Matching Process Changes on the IRF PPS 
Calculation of the Low-Income Percentage Adjustment Factor
    In section VII of this proposed rule, we note the recent revision 
of the data matching process that is used to calculate the 
disproportionate share hospital (DSH) patient percentage used in the 
acute IPPS DSH adjustment. As we have stated previously, it is our 
policy in calculating the LIP adjustment factor to use the same 
disproportionate share hospital (DSH) patient percentage used in the 
acute IPPS DSH adjustment. This would include the data matching 
process. We are not able to provide a detailed analysis of the impact 
of the revised data matching process. That is, it is not possible to 
determine whether IRF LIP adjustment payments will generally increase 
or decrease, because IRFs' SSI fractions will vary depending on various 
factors, including the use of a more updated MedPAR claims data file, 
use of a more updated SSI eligibility data file, and the other features 
of the revised data matching process. See the FY 2011 IPPS final rule 
(75 FR 50663 through 50664) for more information on the revised data 
matching process.
ix. Impact of the Proposed IRF Quality Reporting Program Beginning in 
FY 2013
    As discussed in section IX.B. of this proposed rule, we propose to 
begin collecting data on 2 quality measures from October 1, 2012 
through December 31, 2012 (FY 2013). These quality measures are: (1) 
Catheter Associated Urinary Tract Infections; and (2) Pressure Ulcers 
that are New or Have Worsened. As discussed in section X. of this 
proposed rule, we estimate that IRFs would incur costs associated with 
the collection of these data, which we detail below.

Catheter Associated Urinary Tract Infections

    As stated in section IX.C.1. of this proposed rule, we propose to 
collect data on the first quality measure, Catheter Associated Urinary 
Tract Infections, through the Centers for Disease Control (CDC)/
National Health Safety Network (NHSN). CMS does not currently require 
IRFs to report data to NHSN. However, some IRFs submit data to NHSN 
either voluntarily or per state mandate. According to the CDC, 26 IRFs 
already report data to NHSN. We estimate that 1,120 IRFs (1146 minus 
the 26 IRFs that are already reporting data to NHSN) would incur costs 
for registering and completing the

[[Page 24264]]

necessary training provided by the CDC in FY 2012 in preparation for 
submitting the data beginning on October 1, 2012 (FY 2013). We estimate 
that registering and completing the necessary training of the required 
personnel at each IRF would take 4 hours at a cost of $41.59 per hour, 
at an estimated cost per IRF of $166.36 per IRF and a total estimated 
cost across all IRFs of $186,323.
    Once IRFs begin submitting data to the NHSN on Catheter Associated 
Urinary Tract Infections by October 1, 2012 (FY 2013), they will need 
to submit two types of forms in order for CDC to calculate the CAUTI 
rate per 1000 urinary catheter days. We estimate that the first form, 
the Urinary Tract Infection (UTI) form, will take 15 minutes per 
reporting episode per IRF and that there will be approximately 2.25 
NHSN submissions per IRF per month. Based on this estimate, we expect 
for each IRF to expend 33.75 minutes (0.5625) hours per month and 405 
minutes (6.75) hours per year reporting to NHSN. The estimated annual 
burden to all IRFs in the U.S. for reporting to NHSN is 7,735.5 hours. 
The estimated yearly cost per IRF is $186.14 and the estimated total 
yearly cost across all IRFs is $213,322. While CDC estimates that the 
second form, the denominator form used to count daily the number of 
patients with an indwelling catheter device, will take 5 hours per 
month to complete, we estimate that it will take 2.5 hours per form per 
IRF per month as the number of patients with an indwelling catheter is 
the only part of this form that IRFs will be required to complete. We 
anticipate that there will be one form submitted per IRF per month and 
each IRF will expend 150 minutes (2.5 hours) per month and 1,800 
minutes (30 hours) per year reporting to NHSN. The estimated annual 
burden to all IRFs in the U.S. for reporting to NHSN is 34,380 hours. 
The estimated cost per IRF is $1,247.70 per year and the estimated 
total yearly cost across all IRFs is $1,429,864. These costs are 
estimated using an hourly wage for a Registered Nurse of $41.59 and a 
Medical Billing Clerk/Data Entry person of $20.57.

Pressure Ulcers That Are New or Have Worsened

    As stated in Section IX.C.2 of this proposed rule, we propose to 
modify the current IRF-PAI by removing the items currently in the 
``Quality Indicators'' section and replacing them with pressure ulcer 
items similar to elements from the Minimum Data Set 3.0 (MDS 3.0) 
nursing home instrument. Since all IRFs are already required to 
complete and transmit IRF-PAIs on all Medicare Part A fee-for-service 
and Medicare Part C (Medicare Advantage) patients in order to receive 
payment from Medicare, and since the number of IRFs submitting claims 
to Medicare has remained stable over the past several years, we do not 
estimate that there are any IRFs that would need to conduct additional 
training or set-up for completing and transmitting the IRF-PAI. Thus, 
we do not estimate any additional cost to IRFs in FY 2012 for these 
activities. In addition, since IRFs are already transmitting the IRF-
PAI form to CMS, we do not estimate any additional transmission costs 
associated with the proposed IRF quality reporting program. Further, we 
do not estimate any additional burden for IRFs to complete an IRF-PAI 
with mandatory quality measures as the IRF-PAI currently contains a 
voluntary ``Quality Indicators'' section, which will be replaced with 
the proposed pressure ulcer question set. When the original burden 
estimates were completed for the IRF-PAI, we estimated that the 
``Quality Indicators'' section of the IRF-PAI would take about 10 
minutes to complete, and we assumed that all IRFs would complete the 
Quality Indicators items, even though completion of this section was 
voluntary. Thus, removing the Quality Indicators items from the IRF-PAI 
would decrease the total estimated burden of completing each IRF-PAI by 
about 10 minutes. However, we estimate that it will take about 10 
minutes to complete the new pressure ulcer item that we are proposing 
to require IRFs to complete as part of the new IRF quality reporting 
program. Since the time to complete the items that we are proposing to 
remove from the IRF-PAI is the same as the time to complete the new 
items we are proposing to add, we estimate no net change in the amount 
of time or the costs associated with completing each IRF-PAI.
5. Alternatives Considered
    Although we have determined that this proposed rule will not have a 
significant economic impact on a substantial number of small entities, 
we have voluntarily prepared a discussion on the alternatives 
considered to the IRF PPS.
    Section 1886(j)(3)(C) of the Act requires the Secretary to update 
the IRF PPS payment rates by an increase factor that reflects changes 
over time in the prices of an appropriate mix of goods and services 
included in the covered IRF services. Thus, we did not consider 
alternatives to updating payments using the estimated RPL market basket 
increase factor for FY 2012. In this proposed rule, we are proposing to 
rebase the RPL market basket for FY 2012, as we typically do every 5 to 
7 years, from a 2002 base year to a 2008 base year. We considered not 
proposing this rebasing of the RPL market basket for FY 2012; however, 
periodically rebasing the RPL market basket ensures that it continues 
to reflect the most accurate account of the cost of relevant goods and 
services. For FY 2012, the proposed update on the FY 2008-based RPL 
market basket is the same as the FY 2002-based RPL market basket (2.8 
percent). In accordance with the recently amended section 1886(j)(3)(C) 
of the Act, we are proposing to update IRF Federal prospective payments 
in this proposed rule by 1.5 percent (which equals the 2.8 percent 
estimated rebased RPL market basket increase factor for FY 2012 reduced 
by 0.1 percentage point, as required by sections 1886(j)(3)(C)(ii)(II) 
and 1886(j)(3)(D)(ii) of the Act and reduced by a 1.2 percent 
productivity adjustment as required by section 1886(j)(3)(C)(ii)(I) of 
the Act).
    We considered maintaining the existing CMG relative weights and 
average length of stay values for FY 2012. However, in light of 
recently available data and our desire to ensure that the CMG relative 
weights and average length of stay values are as reflective as possible 
of recent changes in IRF utilization and case mix, we believe that it 
is appropriate to update the CMG relative weights and average length of 
stay values at this time to ensure that IRF PPS payments continue to 
reflect as accurately as possible the current costs of care in IRFs.
    We also considered maintaining the existing rural, LIP, and 
teaching status adjustment factors for FY 2012. However, as a result of 
recent changes in IRF utilization that have occurred because of changes 
in the IRF compliance percentage and the consequences of recent IRF 
medical necessity reviews, we believe that it is important to update 
these adjustment factors at this time to ensure that payments to IRFs 
reflect as accurately as possible the current costs of care in IRFs. In 
estimating the proposed updates to the rural, LIP, and teaching status 
adjustment factors, we implemented a 3-year moving average approach to 
updating the facility-level adjustment factors in the FY 2010 IRF PPS 
final rule (74 FR 39762) to provide greater stability and 
predictability of Medicare payments for IRFs.
    We considered maintaining the existing outlier threshold amount for 
FY 2012. However, the proposed update to the outlier threshold amount 
would have a positive impact on IRF providers

[[Page 24265]]

and, therefore, on small entities (as shown in Table 14, column 4). If 
we were to maintain the FY 2011 outlier threshold amount, less outlier 
cases would qualify for the additional outlier payments in FY 2012. 
Analysis of updated FY 2010 data indicates that estimated outlier 
payments would not equal 3 percent of estimated total payments for FY 
2012 unless we proposed to update the outlier threshold amount. Thus, 
we believe that this update is appropriate for FY 2012.
6. Accounting Statement
    As required by OMB Circular A-4 (available at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf), in Table 15 below, we 
have prepared an accounting statement showing the classification of the 
transfers associated with the provisions of this proposed rule. This 
table provides our best estimate of the increase in Medicare payments 
under the IRF PPS as a result of the proposed changes presented in this 
proposed rule based on the data for 1,146 IRFs in our database.
[GRAPHIC] [TIFF OMITTED] TP29AP11.022

7. Conclusion
    Overall, the estimated payments per discharge for IRFs in FY 2012 
are projected to increase by 1.8 percent, compared with those in FY 
2011, as reflected in column 9 of Table 14. IRF payments are estimated 
to increase 1.6 percent in urban areas and 3.4 percent in rural areas, 
per discharge, compared with FY 2011. Payments to rehabilitation units 
in urban areas are estimated to increase 1.4 percent per discharge. 
Payments to rehabilitation freestanding hospitals in urban areas are 
estimated to increase 1.8 percent per discharge. Payments to 
rehabilitation units in rural areas are estimated to increase 3.3 
percent per discharge, while payments to freestanding rehabilitation 
hospitals in rural areas are estimated to increase 3.9 percent per 
discharge.
    Overall, the largest payment increase is estimated at 5.4 percent 
for rural IRFs in the Mid-Atlantic region. The only payment decreases 
we estimate are a 0.5 percent decrease, a 1.9 percent decrease, and a 
3.9 percent decrease for teaching IRFs with resident to ADC ratios less 
than 10 percent, 10 to 19 percent, and greater than 19 percent, 
respectively.

B. Regulatory Flexibility Act Analysis

    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 IRFs and most other providers and 
suppliers are small entities, either by nonprofit status or by having 
revenues of $34.5 million in any one year. (For details, see the Small 
Business Administration's Web site 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) (refer to subsector 622). Because we 
lack data on individual hospital receipts, we cannot determine the 
number of small proprietary IRFs or the proportion of IRFs' revenue 
that is derived from Medicare payments. Therefore, we assume that all 
IRFs (an estimated 1,146 IRFs that are in our analysis file by virtue 
of having submitted at least one IRF claim to Medicare in FY 2010 that 
we are able to match to an IRF-PAI, of which approximately 60 percent 
are nonprofit facilities) are considered small entities and that 
Medicare payment constitutes the majority of their revenues. The 
Department of Health and Human Services generally uses a revenue or 
cost impact of 3 to 5 percent as a significance threshold under the 
RFA. There is no negative estimated impact as a result of this proposed 
rule that is within the significance threshold of 3 to 5 percent. As 
shown in Table 14, we estimate that the net revenue impact, of this 
proposed rule, on all IRFs is to increase estimated payments by about 
1.8 percent, with an estimated increase in payments of 3 percent or 
higher for some categories of IRFs (such as rural IRFs in the New 
England, Mid-Atlantic, South Atlantic, East North Central, West North 
Central, West South Central, and Mountain) and an estimated decrease in 
payments of 3 percent or more for 15 teaching IRFs with resident to ADC 
ratios greater than 19 percent. Therefore, the majority of IRFs will 
experience a net positive increase in payments. As a result, the 
Secretary has determined that this proposed rule would not have a 
significant impact on a substantial number of small entities. We 
present, in the Alternatives Considered section (XII.A.5) above, an 
analysis of the alternatives we considered for this proposed IRF PPS 
rule. Medicare fiscal intermediaries and carriers are not considered to 
be small entities. Individuals and States are not included in the 
definition of a small entity. We solicit comment on the RFA analysis.
    In addition, section 1102(b) of the Act requires us to prepare a 
RIA 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 MSA and has fewer than 100 beds. Based on the 
data of the 174 rural units and 20 rural hospitals in our database of 
1,146 IRFs, we estimate that small rural IRF hospitals would receive 
between 2.6 percent and 5.4 percent higher net payments in FY 2012 due 
to the provisions in this proposed rule, with no rural IRF hospitals 
estimated to receive negative net payments. Thus, the Secretary has 
determined that the rates and policies set forth in this proposed rule 
would not have a significant impact on the operations of a substantial 
number of small rural hospitals.

[[Page 24266]]

C. Unfunded Mandates Reform Act Analysis

    Section 202 of the Unfunded Mandates Reform Act of 1995 also 
requires that agencies assess anticipated costs and benefits before 
issuing any rule whose mandates require spending in any one year of 
$100 million in 1995 dollars, updated annually for inflation. In 2011, 
that threshold level is approximately $136 million. This proposed rule 
will not impose spending costs on State, local, or tribal governments, 
in the aggregate, or by the private sector, of $136 million.

XIII. Federalism Analysis

    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. This proposed rule would have no substantial direct 
effect on State and local governments, preempt State law, or otherwise 
have Federalism implications.

List of Subjects in 42 CFR 412

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

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

PART 412--PROSPECTIVE PAYMENT SYSTEMS FOR INPATIENT HOSPITAL 
SERVICES

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

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

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

    2. Section 412.23 is amended by revising paragraph (b) to read as 
follows:


Sec.  412.23  Excluded hospitals: Classifications.

* * * * *
    (b) Rehabilitation hospitals. A rehabilitation hospital or unit 
must meet the requirements specified in Sec.  412.29 of this subpart to 
be excluded from the prospective payment systems specified in Sec.  
412.1(a)(1) of this subpart and to be paid under the prospective 
payment system specified in Sec.  412.1(a)(3) of this subpart and in 
subpart P of this part.
* * * * *
    3. Section 412.25 is amended by revising paragraphs (b) and 
(e)(2)(ii)(A) to read as follows:


Sec.  412.25  Excluded hospital units: Common requirements.

* * * * *
    (b) Changes in the size of excluded units. Except in the special 
cases noted at the end of this paragraph, changes in the number of beds 
or square footage considered to be part of an excluded unit under this 
section are allowed one time during a cost reporting period if the 
hospital notifies its Medicare contractor and the CMS RO in writing of 
the planned change at least 30 days before the date of the change. The 
hospital must maintain the information needed to accurately determine 
costs that are attributable to the excluded unit. A change in bed size 
or a change in square footage may occur at any time during a cost 
reporting period and must remain in effect for the rest of that cost 
reporting period. Changes in bed size or square footage may be made at 
any time if these changes are made necessary by relocation of a unit to 
permit construction or renovation necessary for compliance with changes 
in Federal, State, or local law affecting the physical facility or 
because of catastrophic events such as fires, floods, earthquakes, or 
tornadoes.
* * * * *
    (e) * * *
    (2) * * *
    (ii) * * *
    (A) For a rehabilitation unit, the requirements under Sec.  412.29 
of this subpart; or
* * * * *
    4. Section 412.29 is revised to read as follows:


Sec.  412.29  Classification criteria for payment Under the Inpatient 
Rehabilitation Facility Prospective Payment System.

    To be excluded from the prospective payment systems described in 
Sec.  412.1(a)(1) of this subpart and to be paid under the prospective 
payment system specified in Sec.  412.1(a)(3) of this subpart, an 
inpatient rehabilitation hospital or an inpatient rehabilitation unit 
of a hospital (otherwise referred to as an IRF) must meet the following 
requirements:
    (a) Have (or be part of a hospital that has) a provider agreement 
under part 489 of this chapter to participate as a hospital.
    (b) Except in the case of a ``new'' IRF or ``new'' IRF beds, as 
defined in paragraph (c) of this section, an IRF must show that, during 
its most recent, consecutive, and appropriate 12-month time period (as 
defined by CMS or the Medicare contractor), it served an inpatient 
population that meets the following criteria:
    (1) For cost reporting periods beginning on or after July 1, 2004, 
and before July 1, 2005, the IRF served an inpatient population of whom 
at least 50 percent, and for cost reporting periods beginning on or 
after July 1, 2005, the IRF served an inpatient population of whom at 
least 60 percent required intensive rehabilitation services for 
treatment of one or more of the conditions specified at paragraph 
(b)(2) of this section. A patient with a comorbidity, as defined at 
Sec.  412.602 of this part, may be included in the inpatient population 
that counts toward the required applicable percentage if--
    (i) The patient is admitted for inpatient rehabilitation for a 
condition that is not one of the conditions specified in paragraph 
(b)(2) of this section;
    (ii) The patient has a comorbidity that falls in one of the 
conditions specified in paragraph (b)(2) of this section; and
    (iii) The comorbidity has caused significant decline in functional 
ability in the individual that, even in the absence of the admitting 
condition, the individual would require the intensive rehabilitation 
treatment that is unique to inpatient rehabilitation facilities paid 
under subpart P of this part and that cannot be appropriately performed 
in another care setting covered under this title.
    (2) List of conditions.
    (i) Stroke.
    (ii) Spinal cord injury.
    (iii) Congenital deformity.
    (iv) Amputation.
    (v) Major multiple trauma.
    (vi) Fracture of femur (hip fracture).
    (vii) Brain injury.
    (viii) Neurological disorders, including multiple sclerosis, motor 
neuron diseases, polyneuropathy, muscular dystrophy, and Parkinson's 
disease.
    (ix) Burns.
    (x) Active, polyarticular rheumatoid arthritis, psoriatic 
arthritis, and seronegative arthropathies resulting in significant 
functional impairment of ambulation and other activities of daily 
living that have not improved after an appropriate, aggressive, and 
sustained course of outpatient therapy services or services in other 
less intensive rehabilitation settings immediately preceding the 
inpatient rehabilitation admission or that result from a systemic 
disease activation immediately before admission, but have the potential 
to

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improve with more intensive rehabilitation.
    (xi) Systemic vasculidities with joint inflammation, resulting in 
significant functional impairment of ambulation and other activities of 
daily living that have not improved after an appropriate, aggressive, 
and sustained course of outpatient therapy services or services in 
other less intensive rehabilitation settings immediately preceding the 
inpatient rehabilitation admission or that result from a systemic 
disease activation immediately before admission, but have the potential 
to improve with more intensive rehabilitation.
    (xii) Severe or advanced osteoarthritis (osteoarthrosis or 
degenerative joint disease) involving two or more major weight bearing 
joints (elbow, shoulders, hips, or knees, but not counting a joint with 
a prosthesis) with joint deformity and substantial loss of range of 
motion, atrophy of muscles surrounding the joint, significant 
functional impairment of ambulation and other activities of daily 
living that have not improved after the patient has participated in an 
appropriate, aggressive, and sustained course of outpatient therapy 
services or services in other less intensive rehabilitation settings 
immediately preceding the inpatient rehabilitation admission but have 
the potential to improve with more intensive rehabilitation. (A joint 
replaced by a prosthesis no longer is considered to have 
osteoarthritis, or other arthritis, even though this condition was the 
reason for the joint replacement.)
    (xiii) Knee or hip joint replacement, or both, during an acute 
hospitalization immediately preceding the inpatient rehabilitation stay 
and also meet one or more of the following specific criteria:
    (A) The patient underwent bilateral knee or bilateral hip joint 
replacement surgery during the acute hospital admission immediately 
preceding the IRF admission.
    (B) The patient is extremely obese with a Body Mass Index of at 
least 50 at the time of admission to the IRF.
    (C) The patient is age 85 or older at the time of admission to the 
IRF.
    (c) In the case of new IRFs (as defined in paragraph (c)(1) of this 
section) or new IRF beds (as defined in paragraph (c)(2)of this 
section), the IRF must provide a written certification that the 
inpatient population it intends to serve meets the requirements of 
paragraph (b) of this section. This written certification will apply 
until the end of the IRF's first full 12-month cost reporting period 
or, in the case of new IRF beds, until the end of the cost reporting 
period during which the new beds are added to the IRF.
    (1) New IRFs. An IRF hospital or IRF unit is considered new if it 
has not been paid under the IRF PPS in subpart P of this part for at 
least 5 calendar years. A new IRF will be considered new from the point 
that it first participates in Medicare as an IRF until the end of its 
first full 12-month cost reporting period.
    (2) New IRF beds. Any IRF beds that are added to an existing IRF 
must meet all applicable State Certificate of Need and State licensure 
laws. New IRF beds may be added one time at any point during a cost 
reporting period and will be considered new for the rest of that cost 
reporting period. A full 12-month cost reporting period must elapse 
between the delicensing or decertification of IRF beds in an IRF 
hospital or IRF unit and the addition of new IRF beds to that IRF 
hospital or IRF unit. Before an IRF can add new beds, it must receive 
written approval from the appropriate CMS RO, so that the CMS RO can 
verify that a full 12-month cost reporting period has elapsed since the 
IRF has had beds delicensed or decertified. New IRF beds are included 
in the compliance review calculations under paragraph (b) of this 
section from the time that they are added to the IRF.
    (3) Change of Ownership or Leasing. An IRF hospital or IRF unit 
that undergoes a change of ownership or leasing, as defined in Sec.  
489.18 of this chapter, retains its excluded status and will continue 
to be paid under the prospective payment system specified in Sec.  
412.1(a)(3) of this subpart before and after the change of ownership or 
leasing if the new owner(s) of the IRF accept assignment of the 
previous owners' Medicare provider agreement and the IRF continues to 
meet all of the requirements for payment under the IRF prospective 
payment system. If the new owner(s) do not accept assignment of the 
previous owners' Medicare provider agreement, the IRF is considered to 
be voluntarily terminated and the new owner(s) may re-apply to 
participate in the Medicare program. If the IRF does not continue to 
meet all of the requirements for payment under the IRF prospective 
payment system, then the IRF loses its excluded status and is paid 
according to the prospective payment systems described in Sec.  
412.1(a)(1).
    (4) Mergers. If an IRF hospital (or a hospital with an IRF unit) 
merges with another hospital and the owner(s) of the merged hospital 
accept assignment of the IRF hospital's provider agreement (or the 
provider agreement of the hospital with the IRF unit), then the IRF 
hospital or IRF unit retains its excluded status and will continue to 
be paid under the prospective payment system specified in Sec.  
412.1(a)(3) of this subpart before and after the merger, as long as the 
IRF hospital or IRF unit continues to meet all of the requirements for 
payment under the IRF prospective payment system. If the owner(s) of 
the merged hospital do not accept assignment of the IRF hospital's 
provider agreement (or the provider agreement of the hospital with the 
IRF unit), then the IRF hospital or IRF unit is considered voluntarily 
terminated and the owner(s) of the merged hospital may reapply to the 
Medicare program to operate a new IRF.
    (d) Have in effect a preadmission screening procedure under which 
each prospective patient's condition and medical history are reviewed 
to determine whether the patient is likely to benefit significantly 
from an intensive inpatient hospital program. Each prospective 
patient's preadmission screening must be reviewed and approved by a 
rehabilitation physician prior to the patient's admission to the IRF.
    (e) Ensure that the patients receive close medical supervision, as 
evidenced by at least 3 face-to-face visits per week by a licensed 
physician with specialized training and experience in inpatient 
rehabilitation to assess the patient both medically and functionally, 
as well as to modify the course of treatment as needed to maximize the 
patient's capacity to benefit from the rehabilitation process.
    (f) Furnish, through the use of qualified personnel, rehabilitation 
nursing, physical therapy, and occupational therapy, plus, as needed, 
speech-language pathology, social services, psychological services 
(including neuropsychological services), and orthotic and prosthetic 
services.
    (g) Have a director of rehabilitation who--
    (1) Provides services to the IRF hospital and its inpatients on a 
full-time basis or, in the case of a rehabilitation unit, at least 20 
hours per week;
    (2) Is a doctor of medicine or osteopathy;
    (3) Is licensed under State law to practice medicine or surgery; 
and
    (4) Has had, after completing a one-year hospital internship, at 
least 2 years of training or experience in the medical-management of 
inpatients requiring rehabilitation services.
    (h) Have a plan of treatment for each inpatient that is 
established, reviewed, and revised as needed by a physician in 
consultation with other professional personnel who provide services to 
the patient.

[[Page 24268]]

    (i) Use a coordinated interdisciplinary team approach in the 
rehabilitation of each inpatient, as documented by the periodic 
clinical entries made in the patient's medical record to note the 
patient's status in relationship to goal attainment and discharge 
plans, and that team conferences are held at least once per week to 
determine the appropriateness of treatment.
    (j) Retroactive adjustments. If a new IRF (or new beds that are 
added to an existing IRF) are excluded from the prospective payment 
systems specified in Sec.  412.1(a)(1) of this subpart and paid under 
the prospective payment system specified in Sec.  412.1(a)(3) of this 
subpart for a cost reporting period under paragraph (c) of this 
section, but the inpatient population actually treated during that 
period does not meet the requirements of paragraph (b) of this section, 
we adjust payments to the IRF retroactively in accordance with the 
provisions in Sec.  412.130 of this subpart.


Sec.  412.30  [Removed and Reserved]

    5. Section 412.30 is removed and reserved.

Subpart P--Prospective payment for inpatient rehabilitation 
hospitals and rehabilitation units

    6. Section 412.624 is amended by:
    A. Re-designating paragraph (c)(4) as (c)(5).
    B. Adding a new paragraph (c)(4).
    The addition reads as follows:


Sec.  412.624  Methodology for calculating the Federal prospective 
payment rates.

* * * * *
    (c) * * *
    (4) Applicable increase factor for fiscal year 2014 and for 
subsequent fiscal years. Subject to the provisions of paragraphs 
(c)(4)(i) and (c)(4)(ii) of this section, the applicable increase 
factor for fiscal year 2014 and for subsequent years for updating the 
standard payment conversion factor is the increase factor described in 
paragraph (a)(3) of this section, including adjustments described in 
paragraph (d) of this section as appropriate.
    (i) In the case of an IRF that is paid under the prospective 
payment system specified in Sec.  412.1(a)(3) of this part that does 
not submit quality data to CMS, in the form and manner specified by 
CMS, the applicable increase factor specified in paragraph (a)(3) of 
this section is reduced by 2 percentage points.
    (ii) Any reduction of the increase factor will apply only to the 
fiscal year involved and will not be taken into account in computing 
the applicable increase factor for a subsequent fiscal year.
* * * * *

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

    Dated: March 18, 2011.
Donald M. Berwick,
Administrator, Centers for Medicare & Medicaid Services.
    Approved: April 18, 2011.
Kathleen Sebelius,
Secretary.
    The following addendum will not appear in the Code of Federal 
Regulations.

Addendum

    In this addendum, we provide the wage index tables referred to 
throughout the preamble to this proposed rule. The tables presented 
below are as follows:
    Table A.--Proposed Inpatient Rehabilitation Facility Wage Index 
for Urban Areas for Discharges Occurring from October 1, 2011 
through September 30, 2012.
    Table B--Proposed Inpatient Rehabilitation Facility Wage Index 
for Rural Areas for Discharges Occurring from October 1, 2011 
through September 30, 2012.
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[FR Doc. 2011-10159 Filed 4-22-11; 4:15 pm]
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