Skip to Content
Proposed Rule

Medicare Program; Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2006 Rates

Action

Proposed Rule.

Summary

We are proposing to revise the Medicare hospital inpatient prospective payment systems (IPPS) for operating and capital-related costs to implement changes arising from our continuing experience with these systems. In addition, in the Addendum to this proposed rule, we describe the proposed changes to the amounts and factors used to determine the rates for Medicare hospital inpatient services for operating costs and capital-related costs. We also are setting forth proposed rate-of-increase limits as well as proposed policy changes for hospitals and hospital units excluded from the IPPS that are paid in full or in part on a reasonable cost basis subject to these limits. These proposed changes would be applicable to discharges occurring on or after October 1, 2005, with one exception: The proposed changes relating to submittal of hospital wage data by a campus or campuses of a multicampus hospital system (that is, the proposed changes to § 412.230(d)(2) of the regulations) would be effective upon publication of the final rule.

Among the policy changes that we are proposing to make are changes relating to: the classification of cases to the diagnosis-related groups (DRGs); the long-term care (LTC)-DRGs and relative weights; the wage data, including the occupational mix data, used to compute the wage index; rebasing and revision of the hospital market basket; applications for new technologies and medical services add-on payments; policies governing postacute care transfers, payments to hospitals for the direct and indirect costs of graduate medical education, submission of hospital quality data, payment adjustment for low-volume hospitals, changes in the requirements for provider-based facilities; and changes in the requirements for critical access hospitals (CAHs).

Unified Agenda

 

Table of Contents Back to Top

Tables Back to Top

DATES: Back to Top

Comments will be considered if received at the appropriate address, as provided in the ADDRESSES section, no later than 5 p.m. on June 24, 2005.

ADDRESSES: Back to Top

In commenting, please refer to file code CMS-1500-P. Because of staff and resource limitations, we cannot accept comments by facsimile (FAX) transmission.

You may submit comments in one of three ways (no duplicates, please):

1. Electronically Back to Top

You may submit electronic comments to http://www.cms.hhs.gov/regulations/ecomments (attachments should be in Microsoft Word, WordPerfect, or Excel; however, we prefer Microsoft Word).

2. By Mail Back to Top

You may mail written comments (one original and two copies) to the following address only: Centers for Medicare Medicaid Services, Department of Health and Human Services, Attention: CMS-1500-P, P.O. Box 8011, Baltimore, MD 21244-1850.

Please allow sufficient time for mailed comments to be received before the close of the comment period.

3. By Hand or Courier Back to Top

If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to one of the following addresses. 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.

Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201, or 7500 Security Boulevard, Baltimore, MD 21244-1850.

(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 proof of filing by stamping in and retaining an extra copy of the comments being filed.)

Comments mailed to the addresses indicated as appropriate for hand or courier delivery may be delayed and received after the comment period.

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. After the close of the comment period, CMS posts all electronic comments received before the close of the comment period on its public Web site. Written comments received timely will be available for public inspection as they are received, generally beginning approximately 4 weeks after publication of a document, at the headquarters of the Centers for Medicare Medicaid Services, 7500 Security Boulevard, Baltimore, MD 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.

For comments that relate to information collection requirements, mail a copy of comments to the following addresses:

Centers for Medicare Medicaid Services, Office of Strategic Operations and Regulatory Affairs, Security and Standards Group, Office of Regulations Development and Issuances, Room C4-24-02 7500 Security Boulevard, Baltimore, Maryland 21244-1850, Attn: James Wickliffe, CMS-1500-P; and

Office of Information and Regulatory Affairs, Office of Management and Budget, Room 3001, New Executive Office Building, Washington, DC 20503, Attn: Christopher Martin, CMS Desk Officer, CMS-1500-P, Christopher_Martin@omb.eop.gov. Fax (202) 395-6974.

FOR FURTHER INFORMATION CONTACT: Back to Top

Marc Harstein, (410) 786-4539, Operating Prospective Payment, Diagnosis-Related Groups (DRGs), Wage Index, New Medical Services and Technology Add-On Payments, Hospital Geographic Reclassifications, Postacute Care Transfers, and Disproportionate Share Hospital Issues.

Tzvi Hefter, (410) 786-4487, Capital Prospective Payment, Excluded Hospitals, Graduate Medical Education, Critical Access Hospitals, and Long-Term Care (LTC)-DRGs, and Provider-Based Facilities Issues.

Steve Heffler, (410) 786-1211, Hospital Market Basket Revision and Rebasing.

Siddhartha Mazumdar, (410) 786-6673, Rural Hospital Community Demonstration Project Issues.

Mary Collins, (410) 786-3189, Critical Access Hospitals (CAHs) Issues.

Dr. Mark Krushat, (410) 786-6809, Quality Data for Annual Payment Update Issues.

Martha Kuespert, (410) 786-4605 Specialty Hospitals Definition Issues.

SUPPLEMENTARY INFORMATION: Back to Top

Electronic Access Back to Top

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

Acronyms Back to Top

AAOSAmerican Association of Orthopedic Surgeons

ACGMEAccreditation Council on Graduate Medical Education

AHIMAAmerican Health Information Management Association

AHAAmerican Hospital Association

AICDAutomatic cardioverter defibrillator

AMIAcute myocardial infarction

AOAAmerican Osteopathic Association

ASCAmbulatory Surgical Center

ASPAverage sales price

AWPAverage wholesale price

BBABalanced Budget Act of 1997, Pub. L. 105-33

BESBusiness Expenses Survey

BIPAMedicare, Medicaid, and SCHIP [State Children's Health Insurance Program] Benefits Improvement and Protection Act of 2000, Pub. L. 106-554

BLSBureau of Labor Statistics

CAHCritical access hospital

CBSAsCore-Based Statistical Areas

CCComplication or comorbidity

CIPICapital Input Price Index

CMSCenters for Medicare Medicaid Services

CMSAConsolidated Metropolitan Statistical Area

COBRAConsolidated Omnibus Reconciliation Act of 1985, 99

CoPCondition of Participation

CPIConsumer Price Index

CRNACertified registered nurse anesthetist

CRTCardiac Resynchronization Therapy

DRGDiagnosis-related group

DSHDisproportionate share hospital

ECIEmployment Cost Index

FDAFood and Drug Administration

FIPSFederal Information Processing Standards

FQHCFederally qualified health center

FTEFull-time equivalent

FYFederal fiscal year

GAAPGenerally accepted accounting principles

GAFGeographic adjustment factor

HICHealth Insurance Card

HISHealth Information System

GMEGraduate medical education

HCRISHospital Cost Report Information System

HIPCHealth Information Policy Council

HIPAAHealth Insurance Portability and Accountability Act of 1996, Pub. L. 104-191

HHAHome health agency

HHSDepartment of Health and Human Services

HPSAHealth Professions Shortage Area

HQAHospital Quality Alliance

ICD-9-CMInternational Classification of Diseases, Ninth Revision, Clinical Modification

ICD-10-PCSInternational Classification of Diseases, Tenth Edition, Procedure Coding System

ICF/MRsIntermediate care facilities for the mentally retarded

ICUIntensive Care Unit

IHSIndian Health Service

IMEIndirect medical education

IPPSAcute care hospital inpatient prospective payment system

IPFInpatient psychiatric facility

IRFInpatient rehabilitation facility

IRPInitial residency period

JCAHOJoint Commission on Accreditation of Healthcare Organizations

LAMCsLarge area metropolitan counties

LTC-DRGLong-term care diagnosis-related group

LTCHLong-term care hospital

MCEMedicare Code Editor

MCOManaged care organization

MDCMajor diagnostic category

MDHMedicare-dependent small rural hospital

MedPACMedicare Payment Advisory Commission

MedPARMedicare Provider Analysis and Review File

MEIMedicare Economic Index

MGCRBMedicare Geographic Classification Review Board

MMAMedicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. 108-173

MRHFPMedicare Rural Hospital Flexibility Program

MSAMetropolitan Statistical Area

NAICSNorth American Industrial Classification System

NCDNational coverage determination

NCHSNational Center for Health Statistics

NCVHSNational Committee on Vital and Health Statistics

NECMANew England County Metropolitan Areas

NICUNeonatal intensive care unit

NQFNational Quality Forum

NTISNational Technical Information Service

NVHRINational Voluntary Hospital Reporting Initiative

OESOccupational Employment Statistics

OIGOffice of the Inspector General

OMBExecutive Office of Management and Budget

O.R.Operating room

OSCAROnline Survey Certification and Reporting (System)

OSHAOccupational Safety and Health Act

PRMProvider Reimbursement Manual

PPIProducer Price Index

PMSPerformance Measurement System

PMSAsPrimary Metropolitan Statistical Areas

PPSProspective payment system

PRAPer resident amount

ProPACProspective Payment Assessment Commission

PRRBProvider Reimbursement Review Board

PSRProvider Statistical and Reimbursement System

QIAQuality Improvement Organizations

RHCRural health clinic

RHQDAPUReporting Hospital Quality Data for Annual Payment Update

RNHCIReligious nonmedical health care institution

RRCRural referral center

RUCAsRural-Urban Commuting Area Codes

SCHSole community hospital

SDPSingle Drug Pricer

SICStandard Industrial Codes

SNFSkilled nursing facility

SOCsStandard occupational classifications

SOMState Operations Manual

SSASocial Security Administration

SSISupplemental Security Income

TEFRATax Equity and Fiscal Responsibility Act of 1982, 97

UHDDSUniform Hospital Discharge Data Set

Table of Contents Back to Top

I. Background

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)

2. Hospitals and Hospital Units Excluded from the IPPS

a. IRFs

b. LTCH

c. IPFs

3. Critical Access Hospitals (CAHs)

4. Payments for Graduate Medical Education (GME)

B. Major Contents of this Proposed Rule

1. Proposed Changes to the DRG Reclassifications and Recalibrations of Relative Weights

2. Proposed Changes to the Hospital Wage Index

3. Proposed Revision and Rebasing of the Hospital Market Basket

4. Other Decisions and Proposed Changes to the PPS for Inpatient Operating and GME Costs

5. PPS for Capital-Related Costs

6. Proposed Changes for Hospitals and Hospital Units Excluded from the IPPS

7. Proposed Payment for Blood Clotting Factors for Inpatients with Hemophilia

8. Determining Proposed Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits

9. Impact Analysis

10. Recommendation of Update Factor for Hospital Inpatient Operating Costs

11. Discussion of Medicare Payment Advisory Commission Recommendations

II. Proposed Changes to DRG Classifications and Relative Weights

A. Background

B. DRG Reclassifications

1. General

2. Pre-MDC: Intestinal Transplantation

3. MDC 1 (Diseases and Disorders of the Nervous System)

a. Strokes

b. Unruptured Cerebral Aneurysms

4. MDC 5 (Diseases and Disorders of the Circulatory System)

a. Automatic Implantable Cardioverter/Defibrillator

b. Coronary Artery Stents

c. Insertion of Left Atrial Appendage Device

d. External Heart Assist System Implant

e. Carotid Artery Stent

f. Extracorporeal Membrane Oxygenation (ECMO)

5. MDC 6 (Diseases and Disorders of the Digestive System): Artificial Anal Sphincter

6. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue)

a. Hip and Knee Replacements

b. Kyphoplasty

c. Multiple Level Spinal Fusion

7. MDC 18 (Infectious and Parasitic Diseases (Systemic or Unspecified Sites)): Severe Sepsis

8. MDC 20 (Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders): Drug-Induced Dementia

9. Medicare Code Editor (MCE) Changes

a. Newborn Age Edit

b. Newborn Diagnoses Edit

c. Diagnoses Allowed for “Males Only” Edit

d. Tobacco Use Disorder Edit

e. Noncovered Procedure Edit

10. Surgical Hierarchies

11. Refinement of Complications and Comorbidities (CC) List

a. Background

b. Comprehensive Review of the CC List

c. CC Exclusion List for FY 2006

12. Review of Procedure Codes in DRGs 468, 476, and 477

a. Moving Procedure Codes from DRG 468 or DRG 477 to MDCs

b. Reassignment of Procedures among DRGs 468, 476, and 477

c. Adding Diagnosis or Procedure Codes to MDCs

13. Changes to the ICD-9-CM Coding System

14. Other Issues: Acute Intermittent Porphyria

C. Proposed Recalibration of DRG Weights

D. Proposed LTC-DRG Reclassifications and Relative Weights for LTCHs for FY 2006

1. Background

2. Proposed Changes in the LTC-DRG Classifications

a. Background

b. Patient Classifications into DRGs

3. Development of the Proposed FY 2006 LTC-DRG Relative Weights

a. General Overview of Development of the LTC-DRG Relative Weights

b. Data

c. Hospital-Specific Relative Value Methodology

d. Proposed Low-Volume LTC-DRGs

4. Steps for Determining the Proposed FY 2006 LTC-DRG Relative Weights

E. Proposed Add-On Payments for New Services and Technologies

1. Background

2. FY 2006 Status of Technology Approved for FY 2005 Add-On Payments

3. Reevaluation of FY 2005 Applications That Were Not Approved

4. FY 2006 Applicants for New Technology Add-On Payments

III. Proposed Changes to the Hospital Wage Index

A. Background

B. Core-Based Statistical Areas for the Proposed Hospital Wage Index

C. Proposed Occupational Mix Adjustment to FY 2006 Index

1. Development of Data for the Proposed Occupational Mix Adjustment

2. Calculation of the Proposed Occupational Mix Adjustment Factor and the Proposed Occupational Mix Adjusted Wage Index

D. Worksheet S-3 Wage Data for the Proposed FY 2006 Wage Index Update

E. Verification of Worksheet S-3 Wage Data

F. Computation of the Proposed FY 2006 Unadjusted Wage Index

G. Computation of the Proposed FY 2006 Blended Wage Index

H. Proposed Revisions to the Wage Index Based on Hospital Redesignation

1. General

2. Effects of Reclassification

3. Proposed Application of Hold Harmless Protection for Certain Urban Hospitals Redesignated as Rural

4. FY 2006 MGCRB Reclassifications

5. Proposed FY 2006 Redesignations under Section 1886(d)(8)(B) of the Act

6. Reclassifications under Section 508 of Pub. L. 108-173

I. Proposed FY 2006 Wage Index Adjustment Based on Commuting Patterns of Hospital Employees

J. Process for Requests for Wage Index Data Corrections

IV. Proposed Rebasing and Revision of the Hospital Market Baskets

A. Background

B. Rebasing and Revising the Hospital Market Basket

1. Development of Cost Categories and Weights

2. PPS—Selection of Price Proxies

3. Labor-Related Share

C. Separate Market Basket for Hospitals and Hospital Units Excluded from the IPPS

1. Hospitals Paid Based on Their Reasonable Costs

2. Excluded Hospitals Paid Under Blend Methodology

3. Development of Cost Categories and Weights for the Proposed 2002-Based Excluded Hospital Market Basket

D. Frequency of Updates of Weights in IPPS Hospital Market Basket

E. Capital Input Price Index Section

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

A. Postacute Care Transfer Payment Policy

1. Background

2. Changes to DRGs Subject to the Postacute Care Transfer Policy

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

1. Background

2. Requirements for Hospital Reporting of Quality Data

C. Sole Community Hospitals and Medicare Dependent Hospitals

1. Background

2. Budget Neutrality Adjustment to Hospital Payments Based on Hospital-Specific Rate

3. Technical Change

D. Rural Referral Centers

1. Case-Mix Index

2. Discharges

3. Technical Change

E. Payment Adjustment for Low-Volume Hospitals

F. Indirect Medical Education (IME) Adjustment

1. Background

2. IME Adjustment for TEFRA Hospitals Converting to IPPS Hospitals

3. Section 1886(d)(3)(E) Teaching Hospitals That Withdraw Rural Reclassification

G. Payment to Disproportionate Share Hospitals (DSHs)

1. Background

2. Implementation of Section 951 of Pub. L. 108-173

H. Geographic Reclassifications

1. Background

2. Multicampus Hospitals

3. Urban Group Hospital Reclassifications

4. Clarification of Goldsmith Modification Criterion for Urban Hospitals Seeking Reclassification as Rural

I. Payment for Direct Graduate Medical Education

1. Background

2. Direct GME Initial Residency Period

a. Background

b. Direct GME Initial Residency Period Limitation: Simultaneous Match

3. New Teaching Hospitals' Participation in Medicare GME Affiliated Groups

4. GME FTE Cap Adjustments for Rural Hospitals

5. Technical Changes: Cross-References

J. Provider-Based Status of Facilities under Medicare

1. Background

2. Limits on Scope of Provider-Based Regulations—Facilities for Which Provider-Based Determinations Will Not Be Made

3. Location Requirement for Off-Campus Facilities: Application to Certain Neonatal Intensive Care Units

4. Technical and Clarifying Changes

K. Rural Community Hospital Demonstration Program

L. Definition of a Hospital in Connection with Specialty Hospitals

VI. PPS for Capital-Related Costs

VII. Proposed Changes for Hospitals and Hospital Units Excluded from the IPPS

A. Payments to Excluded Hospitals and Hospital Units

1. Payments to Existing Excluded Hospitals and Hospital Units

2. Updated Caps for New Excluded Hospitals and Units

3. Implementation of a PPS for IRFs

4. Implementation of a PPS for LTCHs

5. Implementation of a PPS for IPFs

B. Critical Access Hospitals (CAHs)

1. Background

2. Proposed Policy Change Relating to Continued Participation by CAHs in Lugar Counties

3. Proposed Policy Change Relating to Designation of CAHs as Necessary Providers

a. Determination of the Relocation Status of a CAH

b. Relocation of a CAH Using a Waiver to Meet the CoP for Distance

VIII. Payment for Blood Clotting Factor Administered to Hemophilia Inpatients

IX. MedPAC Recommendations

A. Medicare Payment Policy

B. Physician-Owned Specialty Hospitals

C. Other MedPAC Recommendations

X. Other Required Information

A. Requests for Data from the Public

B. Collection of Information Requirements

C. Public Comments

Regulation Text Back to Top

Addendum—Proposed Schedule of Standardized Amounts Effective with Discharges Occurring On or After October 1, 2004 and Update Factors and Rate-of-Increase Percentages Effective With Cost Reporting Periods Beginning On or After October 1, 2004

I. Summary and Background

II. Proposed Changes to Prospective Payment Rates for Hospital Inpatient Operating Costs for FY 2006

A. Calculation of the Adjusted Standardized Amount

1. Standardization of Base-Year Costs or Target Amounts

2. Computing the Average Standardized Amount

3. Updating the Average Standardized Amount

4. Other Adjustments to the Average Standardized Amount

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

b. Reclassified Hospitals—Budget Neutrality Adjustment

c. Outliers

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

5. Proposed FY 2006 Standardized Amount

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

1. Adjustment for Area Wage Levels

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

C. DRG Relative Weights

D. Calculation of Proposed Prospective Payment Rates for FY 2006

1. Federal Rate

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

a. Calculation of Hospital-Specific Rate

b. Updating the FY 1982, FY 1987, and FY 1996 Hospital-Specific Rates for FY 2006

3. General Formula for Calculation of Proposed Prospective Payment Rates for Hospitals Located in Puerto Rico Beginning On or After October 1, 2005 and Before October 1, 2006

a. Puerto Rico Rate

b. National Rate

III. Proposed Changes to Payment Rates for Acute Care Hospital Inpatient Capital-Related Costs for FY 2006

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

1. Proposed Capital Standard Federal Rate Update

a. Description of the Update Framework

b. Comparison of CMS and MedPAC Update Recommendation

2. Proposed Outlier Payment Adjustment Factor

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

4. Proposed Exceptions Payment Adjustment Factor

5. Proposed Capital Standard Federal Rate for FY 2006

6. Proposed Special Capital Rate for Puerto Rico Hospitals

B. Calculation of Proposed Inpatient Capital-Related Prospective Payments for FY 2006

C. Capital Input Price Index

1. Background

2. Forecast of the CIPI for FY 2006

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

A. Payments to Existing Excluded Hospitals and Units

B. Updated Caps for New Excluded Hospitals and Units

V. Payment for Blood Clotting Factor Administered to Hemophilia Inpatients

Tables Back to Top

Table 1A—National Adjusted Operating Standardized Amounts, Labor/Nonlabor (69.7 Percent Labor Share/30.3 Percent Nonlabor Share If Wage Index Is Greater Than 1)

Table 1B—National Adjusted Operating Standardized Amounts, Labor/Nonlabor (62 Percent Labor Share/38 Percent Nonlabor Share If Wage Index Is Less Than or Equal to 1)

Table 1C—Adjusted Operating Standardized Amounts for Puerto Rico, Labor/Nonlabor

Table 1D—Capital Standard Federal Payment Rate

Table 2—Hospital Case-Mix Indexes for Discharges Occurring in Federal Fiscal Year 2004; Hospital Average Hourly Wage for Federal Fiscal Years 2004 (2000 Wage Data), 2005 (2001 Wage Data), and 2006 (2002 Wage Data) Wage Indexes and 3-Year Average of Hospital Average Hourly Wages

Table 3A—FY 2006 and 3-Year Average Hourly Wage for Urban Areas

Table 3B—FY 2006 and 3-Year Average Hourly Wage for Rural Areas

Table 4A—Wage Index and Capital Geographic Adjustment Factor (GAF) for Urban Areas

Table 4B—Wage Index and Capital Geographic Adjustment Factor (GAF) for Rural Areas

Table 4C—Wage Index and Capital Geographic Adjustment Factor (GAF) for Hospitals That Are Reclassified

Table 4F—Puerto Rico Wage Index and Capital Geographic Adjustment Factor (GAF)

Table 4J—Out-Migration Adjustment—FY 2006

Table 5—List of Diagnosis-Related Groups (DRGs), Relative Weighting Factors, and Geometric and Arithmetic Mean Length of Stay (LOS)

Table 6A—New Diagnosis Codes

Table 6B—New Procedure Codes

Table 6C—Invalid Diagnosis Codes

Table 6D—Invalid Procedure Codes

Table 6E—Revised Diagnosis Code Titles

Table 6F—Revised Procedure Code Titles

Table 6G—Additions to the CC Exclusions List

Table 6H—Deletions from the CC Exclusions List

Table 7A—Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2004 MedPAR Update December 2004 GROUPER V22.0

Table 7B—Medicare Prospective Payment System Selected Percentile Lengths of Stay: FY 2004 MedPAR Update December 2004 GROUPER V23.0

Table 8A—Statewide Average Operating Cost-to-Charge Ratios—March 2005

Table 8B—Statewide Average Capital Cost-to-Charge Ratios—March 2005

Table 9A—Hospital Reclassifications and Redesignations by Individual Hospital—FY 2006

Table 9B—Hospital Reclassifications and Redesignation by Individual Hospital Under Section 508 of Pub. L. 108-173—FY 2005

Table 9C—Hospitals Redesignated as Rural under Section 1886(d)(8)(E) of the Act—FY 2006

Table 10—Geometric Mean Plus the Lesser of .75 of the National Adjusted Operating Standardized Payment Amount (Increased to Reflect the Difference Between Costs and Charges) or .75 of One Standard Deviation of Mean Charges by Diagnosis-Related Groups (DRGs)—March 2005

Table 11—Proposed FY 2006 LTC-DRGs, Relative Weights, Geometric Average Length of Stay, and 5/6ths of the Geometric Average Length of Stay

Appendix A—Regulatory Impact Analysis

Appendix B—Recommendation of Update Factors for Operating Cost Rates of Payment for Inpatient Hospital Services

I. Background Back to Top

A. Summary

1. Acute Care Hospital Inpatient Prospective Payment System (IPPS)

Section 1886(d) of the Social Security Act (the Act) sets forth a system of payment for the operating costs of acute care hospital inpatient stays under Medicare Part A (Hospital Insurance) based on prospectively set rates. Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of hospital inpatient stays under a prospective payment system (PPS). Under these PPSs, Medicare payment for hospital inpatient operating and capital-related costs is made at predetermined, specific rates for each hospital discharge. Discharges are classified according to a list of diagnosis-related groups (DRGs).

The base payment rate is comprised of a standardized amount that is divided into a labor-related share and a nonlabor-related share. The labor-related share is adjusted by the wage index applicable to the area where the hospital is located; and if the hospital is located in Alaska or Hawaii, the nonlabor-related share is adjusted by a cost-of-living adjustment factor. This base payment rate is multiplied by the DRG relative weight.

If the hospital treats a high percentage of low-income patients, it receives a percentage add-on payment applied to the DRG-adjusted base payment rate. This add-on payment, known as the disproportionate share hospital (DSH) adjustment, provides for a percentage increase in Medicare payments to hospitals that qualify under either of two statutory formulas designed to identify hospitals that serve a disproportionate share of low-income patients. For qualifying hospitals, the amount of this adjustment may vary based on the outcome of the statutory calculations.

If the hospital is an approved teaching hospital, it receives a percentage add-on payment for each case paid under the IPPS (known as the indirect medical education (IME) adjustment). This percentage varies, depending on the ratio of residents to beds.

Additional payments may be made for cases that involve new technologies or medical services that have been approved for special add-on payments. To qualify, a new technology or medical service must demonstrate that it is a substantial clinical improvement over technologies or services otherwise available, and that, absent an add-on payment, it would be inadequately paid under the regular DRG payment.

The costs incurred by the hospital for a case are evaluated to determine whether the hospital is eligible for an additional payment as an outlier case. This additional payment is designed to protect the hospital from large financial losses due to unusually expensive cases. Any outlier payment due is added to the DRG-adjusted base payment rate, plus any DSH, IME, and new technology or medical service add-on adjustments.

Although payments to most hospitals under the IPPS are made on the basis of the standardized amounts, some categories of hospitals are paid the higher of a hospital-specific rate based on their costs in a base year (the higher of FY 1982, FY 1987, or FY 1996) or the IPPS rate based on the standardized amount. For example, sole community hospitals (SCHs) are the sole source of care in their areas, and Medicare-dependent, small rural hospitals (MDHs) are a major source of care for Medicare beneficiaries in their areas. Both of these categories of hospitals are afforded this special payment protection in order to maintain access to services for beneficiaries. (An MDH receives only 50 percent of the difference between the IPPS rate and its hospital-specific rates if the hospital-specific rate is higher than the IPPS rate. In addition, an MDH does not have the option of using FY 1996 as the base year for its hospital-specific rate.)

Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of inpatient hospital services “in accordance with a prospective payment system established by the Secretary.” The basic methodology for determining capital prospective payments is set forth in our regulations at 42 CFR 412.308 and 412.312. Under the capital PPS, payments are adjusted by the same DRG for the case as they are under the operating IPPS. Similar adjustments are also made for IME and DSH as under the operating IPPS. In addition, hospitals may receive an outlier payment for those cases that have unusually high costs.

The existing regulations governing payments to hospitals under the IPPS are located in 42 CFR part 412, Subparts A through M.

2. Hospitals and Hospital Units Excluded From the IPPS

Under section 1886(d)(1)(B) of the Act, as amended, certain specialty hospitals and hospital units are excluded from the IPPS. These hospitals and units are: Psychiatric hospitals and units; rehabilitation hospitals and units; long-term care hospitals (LTCHs); children's hospitals; and cancer hospitals. Various sections of the Balanced Budget Act of 1997 (Pub. L. 105-33), the Medicare, Medicaid and SCHIP [State Children's Health Insurance Program] Balanced Budget Refinement Act of 1999 (Pub. L. 106-113), and the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (Pub. L. 106-554) provide for the implementation of PPSs for rehabilitation hospitals and units (referred to as inpatient rehabilitation facilities (IRFs)), psychiatric hospitals and units (referred to as inpatient psychiatric facilities (IPFs)), and LTCHs, as discussed below. Children's hospitals and cancer hospitals continue to be paid under reasonable cost-based reimbursement.

The existing regulations governing payments to excluded hospitals and hospital units are located in 42 CFR Parts 412 and 413.

a. IRFs

Under section 1886(j) of the Act, as amended, rehabilitation hospitals and units (IRFs) have been transitioned from payment based on a blend of reasonable cost reimbursement subject to a hospital-specific annual limit under section 1886(b) of the Act and the adjusted facility Federal prospective payment rate for cost reporting periods beginning January 1, 2002 through September 30, 2002, to payment at 100 percent of the Federal rate effective for cost reporting periods beginning on or after October 1, 2002 (66 FR 41316, August 7, 2001; 67 FR 49982, August 1, 2002; and 68 FR 45674, August 1, 2003). The existing regulations governing payments under the IRF PPS are located in 42 CFR Part 412, Subpart P.

b. LTCHs

Under the authority of sections 123(a) and (c) of Pub. L. 106-113 and section 307(b)(1) of Pub. L. 106-554, LTCHs are being transitioned from being paid for inpatient hospital services based on a blend of reasonable cost-based reimbursement under section 1886(b) of the Act to 100 percent of the Federal rate during a 5-year period, beginning with cost reporting periods that start on or after October 1, 2002. For cost reporting periods beginning on or after October 1, 2006, LTCHs will be paid 100 percent of the Federal rate (May 7, 2004 LTCH PPS final rule (69 FR 25674)). LTCHs may elect to be paid based on 100 percent of the Federal rate instead of a blended payment in any year during the 5-year transition period. The existing regulations governing payment under the LTCH PPS are located in 42 CFR Part 412, Subpart O.

c. IPFs

Under the authority of sections 124(a) and (c) of Pub. L. 106-113, inpatient psychiatric facilities (IPFs) (formerly psychiatric hospitals and psychiatric units of acute care hospitals) are paid under the new IPF PPS. Under the IPF PPS, some IPFs are transitioning from being paid for inpatient hospital services based on a blend of reasonable cost-based payment and a Federal per diem payment rate, effective for cost reporting periods beginning on or after January 1, 2005 (November 15, 2004 IPF PPS final rule (69 FR 66921)). For cost reporting periods beginning on or after July 1, 2008, IPFs will be paid 100 percent of the Federal per diem payment amount. The existing regulations governing payment under the IPF PPS are located in 42 CFR part 412, subpart N.

3. Critical Access Hospitals (CAHs)

Under sections 1814, 1820, and 1834(g) of the Act, payments are made to critical access hospitals (CAHs) (that is, rural hospitals or facilities that meet certain statutory requirements) for inpatient and outpatient services based on 101 percent of reasonable cost. Reasonable cost is determined under the provisions of section 1861(v)(1)(A) of the Act and existing regulations under 42 CFR Parts 413 and 415.

4. Payments for Graduate Medical Education (GME)

Under section 1886(a)(4) of the Act, costs of approved educational activities are excluded from the operating costs of inpatient hospital services. Hospitals with approved graduate medical education (GME) programs are paid for the direct costs of GME in accordance with section 1886(h) of the Act; the amount of payment for direct GME costs for a cost reporting period is based on the hospital's number of residents in that period and the hospital's costs per resident in a base year. The existing regulations governing payments to the various types of hospitals are located in 42 CFR Part 413.

On August 11, 2004, we published a final rule in the Federal Register (69 FR 48916) that implemented changes to the Medicare hospital inpatient prospective payment systems for both operating cost and capital-related costs, as well as changes addressing payments for excluded hospitals and payments for GME costs. Generally these changes were effective for discharges occurring on or after October 1, 2004. OnOctober 7, 2004, we published a document in the Federal Register (69 FR 60242) that corrected technical errors made in the August 11, 2004 final rule. On December 30, 2004, we published another document in the Federal Register (69 FR 78525) that further corrected the August 11, 2004 final rule and the October 7, 2004 correction to that rule, effective January 1, 2005.

B. Major Contents of This Proposed Rule

In this proposed rule, we are setting forth proposed changes to the Medicare IPPS for operating costs and for capital-related costs in FY 2006. We also are setting forth proposed changes relating to payments for GME costs, payments to certain hospitals and units that continue to be excluded from the IPPS and paid on a reasonable cost basis, payments for DSHs, and requirements and payments for CAHs. The changes being proposed would be effective for discharges occurring on or after October 1, 2005, unless otherwise noted.

The following is a summary of the major changes that we are proposing to make:

1. Proposed Changes to the DRG Reclassifications and Recalibrations of Relative Weights

As required by section 1886(d)(4)(C) of the Act, in section II. of this proposed rule, we are proposing annual adjustments to the DRG classifications and relative weights. Based on analyses of Medicare claims data, we are proposing to establish a number of new DRGs and make changes to the designation of diagnosis and procedure codes under other existing DRGs.

The major DRG classification changes we are proposing include:

  • Reassigning procedure code 35.52 (Repair of atrial septal defect with prosthesis, closed technique) from DRG 108 to DRG 518 (Percutaneous Cardiovascular Procedure Without Coronary Artery Stent or AMI);
  • Reassigning procedure code 37.26 (Cardiac electrophysiologic stimulation and recording studies) from DRGs 535 and 536 to DRGs 515 (Cardiac Defibrillator Implant Without Cardiac Catheterization);
  • Splitting DRG 209 into two new DRGs based on the presence or absence of the procedure codes for major joint replacement or reattachment of lower extremity and revision of hip or knee replacement, DRG 545 (Revision of Hip or Knee Replacement) and DRG 544 (Major Joint Replacement or Reattachment of Lower Extremity);
  • Reassigning procedure code 26.12 (Open biopsy of salivary gland or duct) from DRG 468 to DRG 477 (Nonextensive O.R. Procedure Unrelated To Principal Diagnosis);
  • Reassigning the principal diagnosis codes for curvature of the spine or malignancy from DRGs 497 and 498 to proposed new DRG 546 (Spinal Fusion Except Cervical with PDX of Curvature of the Spine or Malignancy);
  • Splitting DRGs 516 and 526 into four new DRGs based on the presence or absence of a CC;
  • Reassigning procedure code 39.65 (Extracorporeal membrane oxygenation [ECMO]) from DRGs 104 and 105 to DRG 541 (ECMO or Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth and Neck Diagnoses With Major Operating Room Procedure).

We also are presenting our reevaluation of certain FY 2005 applicants for add-on payments for high-cost new medical services and technologies, and our analysis of FY 2006 applicants (including public input, as directed by Pub. L. 108-173, obtained in a town hall meeting).

We are proposing the annual update of the long-term care diagnosis-related group (LTC-DRG) classifications and relative weights for use under the LTCH PPS for FY 2006.

2. Proposed Changes to the Hospital Wage Index

In section III. of this preamble, we are proposing revisions to the wage index and the annual update of the wage data. Specific issues addressed include the following:

  • The FY 2006 wage index update, using wage data from cost reporting periods that began during FY 2002.
  • The proposed occupational mix adjustment to the wage index that we began to apply effective October 1, 2004.
  • The proposed revisions to the wage index based on hospital redesignations and reclassifications.
  • The proposed adjustment to the wage index for FY 2006 based on commuting patterns of hospital employees who reside in a county and work in a different area with a higher wage index.
  • The timetable for reviewing and verifying the wage data that will be in effect for the proposed FY 2006 wage index.

3. Proposed Revision and Rebasing of the Hospital Market Baskets

In section IV. of this proposed rule, we are proposing rebasing and revising the hospital operating and capital market baskets to be used in developing the FY 2006 update factor for the operating prospective payment rates and the excluded hospital market basket to be used in developing the FY 2006 update factor for the excluded hospital rate-of-increase limits. We are also setting forth the data sources used to determine the revised market basket relative weights and choice of price proxies.

4. Other Decisions and Proposed Changes to the PPS for Inpatient Operating and GME Costs

In section V. of this proposed rule, we discuss a number of provisions of the regulations in 42 CFR Parts 412 and 413 and set forth proposed changes concerning the following:

  • Solicitation of public comments on two options for possible expansion of the current postacute care transfer policy.
  • The reporting of hospital quality data as a condition for receiving the full annual payment update increase.
  • Proposed changes in the payment adjustment for low-volume hospitals.
  • Proposed IME adjustment for TEFRA hospitals that are converting to IPPS hospitals, and IME FTE resident caps for urban hospitals that are granted rural reclassification and then withdraw that rural classification.
  • Proposed changes to implement section 951 of Pub. L. 108-173 relating to the provision of patient stay/SSI days data maintained by CMS to hospitals for the purpose of determining their DSH percentage.
  • Proposed changes relating to hospitals' geographic classifications, including multicampus hospitals and urban group hospital reclassifications.
  • Proposed changes and clarifications relating to GME, including GME initial residency period limitation, new teaching hospitals' participation in Medicare GME affiliated groups, and the GME FTE cap adjustment for rural hospitals;
  • Solicitation of public comments on possible changes in requirements for provider-based entities relating to entities the location requirements for certain neonatal intensive care units as off-campus facilities;
  • Discussion of the second year of implementation of the Rural Community Hospital Demonstration Program; and
  • Clarification of the definition of a hospital as it relates to “specialty hospitals” participating in the Medicare program.

5. PPS for Capital-Related Costs

In section VI. of this proposed rule, we are not proposing any policy changes to the capital-related prospective payment system. For the readers' benefit, we discuss the payment policy requirements for capital-related costs and capital payments to hospitals.

6. Proposed Changes for Hospitals and Hospital Units Excluded From the IPPS

In section VII. of this proposed rule, we discuss the proposed revisions and clarifications concerning excluded hospitals and hospital units, proposed policy changes relating to continued participation by CAHs located in counties redesignated under section 1886(d)(8)(B) of the Act (Lugar counties), and proposed policy changes relating to designation of CAHs as necessary providers.

7. Proposed Changes in Payment for Blood Clotting Factor

In section VIII of this proposed rule, we discuss the proposed change in payment for blood clotting factor administered to inpatients with hemophilia for FY 2006.

8. Determining Prospective Payment Operating and Capital Rates and Rate-of-Increase Limits

In the Addendum to this proposed rule, we set forth proposed changes to the amounts and factors for determining the FY 2006 prospective payment rates for operating costs and capital-related costs. We also establish the proposed threshold amounts for outlier cases. In addition, we address the proposed update factors for determining the rate-of-increase limits for cost reporting periods beginning in FY 2006 for hospitals and hospital units excluded from the PPS.

9. Impact Analysis

In Appendix A of this proposed rule, we set forth an analysis of the impact that the proposed changes would have on affected hospitals.

10. Recommendation of Update Factor for Hospital Inpatient Operating Costs

In Appendix B of this proposed rule, as required by sections 1886(e)(4) and (e)(5) of the Act, we provided our recommendations of the appropriate percentage changes for FY 2006 for the following:

  • A single average standardized amount for all areas for hospital inpatient services paid under the IPPS for operating costs (and hospital-specific rates applicable to SCHs and MDHs).
  • Target rate-of-increase limits to the allowable operating costs of hospital inpatient services furnished by hospitals and hospital units excluded from the IPPS.

11. Discussion of Medicare Payment Advisory Commission Recommendations

Under section 1805(b) of the Act, the Medicare Payment Advisory Commission (MedPAC) is required to submit a report to Congress, no later than March 1 of each year, in which MedPAC reviews and makes recommendations on Medicare payment policies. MedPAC's March 2005 recommendation concerning hospital inpatient payment policies addressed only the update factor for inpatient hospital operating costs and capital-related costs under the IPPS and for hospitals and distinct part hospital units excluded from the IPPS. This recommendation is addressed in Appendix B of this proposed rule. MedPAC issued a second Report to Congress: Physician-Owned Specialty Hospitals, March 2005, which addressed other issues relating to Medicare payments to hospitals for inpatient services. The recommendations on these issues from this second report are addressed in section IX. of this preamble. For further information relating specifically to the MedPAC March 2005 reports or to obtain a copy of the reports, contact MedPAC at (202) 220-3700 or visit MedPAC's Web site at: http://www.medpac.gov.

II. Proposed Changes to DRG Classifications and Relative Weights Back to Top

A. Background

Section 1886(d) of the Act specifies that the Secretary shall establish a classification system (referred to as DRGs) for inpatient discharges and adjust payments under the IPPS based on appropriate weighting factors assigned to each DRG. Therefore, under the IPPS, we pay for inpatient hospital services on a rate per discharge basis that varies according to the DRG to which a beneficiary's stay is assigned. The formula used to calculate payment for a specific case multiplies an individual hospital's payment rate per case by the weight of the DRG to which the case is assigned. Each DRG weight represents the average resources required to care for cases in that particular DRG, relative to the average resources used to treat cases in all DRGs.

Congress recognized that it would be necessary to recalculate the DRG relative weights periodically to account for changes in resource consumption. Accordingly, section 1886(d)(4)(C) of the Act requires that the Secretary adjust the DRG classifications and relative weights at least annually. These adjustments are made to reflect changes in treatment patterns, technology, and any other factors that may change the relative use of hospital resources. The proposed changes to the DRG classification system and the recalibration of the DRG weights for discharges occurring on or after October 1, 2005, are discussed below.

B. DRG Reclassifications

(If you choose to comment on issues in this section, please include the caption “DRG Reclassifications” at the beginning of your comment.)

1. General

Cases are classified into DRGs for payment under the IPPS based on the principal diagnosis, up to eight additional diagnoses, and up to six procedures performed during the stay. In a small number of DRGs, classification is also based on the age, sex, and discharge status of the patient. The diagnosis and procedure information is reported by the hospital using codes from the International Classification of Diseases, Ninth Revision, Clinical Modification (ICD-9-CM).

The process of forming the DRGs was begun by dividing all possible principal diagnoses into mutually exclusive principal diagnosis areas referred to as Major Diagnostic Categories (MDCs). The MDCs were formed by physician panels as the first step toward ensuring that the DRGs would be clinically coherent. The diagnoses in each MDC correspond to a single organ system or etiology and, in general, are associated with a particular medical specialty. Thus, in order to maintain the requirement of clinical coherence, no final DRG could contain patients in different MDCs. Most MDCs are based on a particular organ system of the body. For example, MDC 6 is Diseases and Disorders of the Digestive System. This approach is used because clinical care is generally organized in accordance with the organ system affected. However, some MDCs are not constructed on this basis because they involve multiple organ systems (for example, MDC 22 (Burns)). For FY 2005, cases are assigned to one of 519 DRGs in 25 MDCs. The table below lists the 25 MDCs.

In general, cases are assigned to an MDC based on the patient's principal diagnosis before assignment to a DRG. However, for FY 2005, there are nine DRGs to which cases are directly assigned on the basis of ICD-9-CM procedure codes. These DRGs are for heart transplant or implant of heart assist systems, liver and/or intestinal transplants, bone marrow, lung, simultaneous pancreas/kidney, and pancreas transplants and for tracheostomies. Cases are assigned to these DRGs before they are classified to an MDC. The table below lists the current nine pre-MDCs.

Once the MDCs were defined, each MDC was evaluated to identify those additional patient characteristics that would have a consistent effect on the consumption of hospital resources. Since the presence of a surgical procedure that required the use of the operating room would have a significant effect on the type of hospital resources used by a patient, most MDCs were initially divided into surgical DRGs and medical DRGs. Surgical DRGs are based on a hierarchy that orders operating room (O.R.) procedures or groups of O.R. procedures by resource intensity. Medical DRGs generally are differentiated on the basis of diagnosis and age (less than or greater than 17 years of age). Some surgical and medical DRGs are further differentiated based on the presence or absence of a complication or a comorbidity (CC).

Generally, nonsurgical procedures and minor surgical procedures that are not usually performed in an operating room are not treated as O.R. procedures. However, there are a few non-O.R. procedures that do affect DRG assignment for certain principal diagnoses, for example, extracorporeal shock wave lithotripsy for patients with a principal diagnosis of urinary stones.

Once the medical and surgical classes for an MDC were formed, each class of patients was evaluated to determine if complications, comorbidities, or the patient's age would consistently affect the consumption of hospital resources. Physician panels classified each diagnosis code based on whether the diagnosis, when present as a secondary condition, would be considered a substantial complication or comorbidity.

A substantial complication or comorbidity was defined as a condition, which because of its presence with a specific principal diagnosis, would cause an increase in the length of stay by at least one day in at least 75 percent of the patients. Each medical and surgical class within an MDC was tested to determine if the presence of any substantial comorbidities or complications would consistently affect the consumption of hospital resources.

The actual process of forming the DRGs was, and continues to be, highly iterative, involving a combination of statistical results from test data combined with clinical judgment. In deciding whether to create a separate DRG, we consider whether the resource consumption and clinical characteristics of the patients with a given set of conditions are significantly different than the remaining patients in the DRG. We evaluate patient care costs using average charges and length of stay as proxies for costs and rely on the judgment of our medical officers to decide whether patients are distinct or clinically similar to other patients in the DRG. In evaluating resource costs, we consider both the absolute and percentage differences in average charges between the cases we are selecting for review and the remainder of cases in the DRG. We also consider variation in charges within these groups; that is, whether observed average differences are consistent across patients or attributable to cases that are extreme in terms of charges or length of stay, or both. Further, we also consider the number of patients who will have a given set of characteristics and generally prefer not to create a new DRG unless it will include a substantial number of cases. As we explain in more detail in section IX. of this preamble, MedPAC has made a number of recommendations regarding the DRG system. As part of our review and analysis of MedPAC's recommendations, we will consider whether to establish guidelines for making DRG reclassification decisions.

A patient's diagnosis, procedure, discharge status, and demographic information is fed into the Medicare claims processing systems and subjected to a series of automated screens called the Medicare Code Editor (MCE). The MCE screens are designed to identify cases that require further review before classification into a DRG.

After patient information is screened through the MCE and any further development of the claim is conducted, the cases are classified into the appropriate DRG by the Medicare GROUPER software program. The GROUPER program was developed as a means of classifying each case into a DRG on the basis of the diagnosis and procedure codes and, for a limited number of DRGs, demographic information (that is, sex, age, and discharge status).

After cases are screened through the MCE and assigned to a DRG by the GROUPER, the PRICER software calculates a base DRG payment. The PRICER calculates the payments for each case covered by the IPPS based on the DRG relative weight and additional factors associated with each hospital, such as IME and DSH adjustments. These additional factors increase the payment amount to hospitals above the base DRG payment.

The records for all Medicare hospital inpatient discharges are maintained in the Medicare Provider Analysis and Review (MedPAR) file. The data in this file are used to evaluate possible DRG classification changes and to recalibrate the DRG weights. However, in the July 30, 1999 IPPS final rule (64 FR 41500), we discussed a process for considering non-MedPAR data in the recalibration process. In order for us to consider using particular non-MedPAR data, we must have sufficient time to evaluate and test the data. The time necessary to do so depends upon the nature and quality of the non-MedPAR data submitted. Generally, however, a significant sample of the non-MedPAR data should be submitted by mid-October for consideration in conjunction with the next year's proposed rule. This allows us time to test the data and make a preliminary assessment as to the feasibility of using the data. Subsequently, a complete database should be submitted by early December for consideration in conjunction with the next year's proposed rule.

Many of the changes to the DRG classifications are the result of specific issues brought to our attention by interested parties. We encourage individuals with concerns about DRG classifications to bring those concerns to our attention in a timely manner so they can be carefully considered for possible inclusion in the next proposed rule and if included, may be subjected to public review and comment. Therefore, similar to the timetable for interested parties to submit non-MedPAR data for consideration in the DRG recalibration process, concerns about DRG classification issues should be brought to our attention no later than early December in order to be considered and possibly included in the next annual proposed rule updating the IPPS.

The changes we are proposing to the DRG classification system for FY 2006 for the FY 2006 GROUPER, version 23.0 and to the methodology used to recalibrate the DRG weights are set forth below. Unless otherwise noted in this proposed rule, our DRG analysis is based on data from the December 2004 update of the FY 2004 MedPAR file, which contains hospital bills received through December 31, 2004 for discharges in FY 2004.

2. Pre-MDC: Intestinal Transplantation

In the FY 2005 IPPS final rule (69 FR 48976), we moved intestinal transplantation cases that were assigned to ICD-9-CM procedure code 46.97 (Transplant of intestine) out of DRG 148 (Major Small and Large Bowel Procedures with CC) and DRG 149 (Major Small and Large Bowel Procedures Without CC) and into DRG 480 (Liver Transplant). We also changed the title for DRG 480 to “Liver Transplant and/or Intestinal Transplant.” We moved these cases out of DRGs 148 and 149 because our analysis demonstrated that the average charges for intestinal transplants are significantly higher than the average charges for other cases in these DRGs. We stated at that time that we would continue to monitor these cases.

Based on our review of the FY 2004 MedPAR data, we found 959 cases assigned to DRG 480 with overall average charges of approximately $165,622. There were only three cases involving an intestinal transplant alone and one case in which both an intestinal transplant and a liver transplant were performed. The average charges for the intestinal transplant cases ($138,922) were comparable to the average charges for the liver transplant cases ($165,314), while the remaining combination of an intestinal transplant and a liver transplant case had much higher charges ($539,841), and would be paid as an outlier case. Therefore, we are not proposing any DRG modification for intestinal transplantation cases at this time.

We note that an institution that performs intestinal transplantation, in correspondence to us written following the publication of the FY 2005 IPPS final rule, agreed with our decision to move cases assigned to code 46.97 to DRG 480.

3. MDC 1 (Diseases and Disorders of the Nervous System)

a. Strokes

In 1996, the Food and Drug Administration (FDA) approved the use of tissue plasminogen activator (tPA), one type of thrombolytic agent that dissolves blood clots. In 1998, the ICD-9-CM Coordination and Maintenance Committee created code 99.10 (Injection or infusion of thrombolytic agent) in order to be able to uniquely identify the administration of thrombolytic agents. Studies have shown that tPA can be effective in reducing the amount of damage the brain sustains during an ischemic stroke, which is caused by blood clots that block blood flow to the brain. The use of tPA is approved for patients who have blood clots in the brain, but not for patients who have a bleeding or hemorrhagic stroke. Thrombolytic therapy has been shown to be most effective when used within the first 3 hours after the onset of a stroke, and it is contraindicated in hemorrhagic stroke. The presence or absence of code 99.10 does not currently influence DRG assignment. Since code 99.10 became effective, we have been monitoring the DRGs and cases in which this code can be found, particularly with respect to cardiac and stroke DRGs.

Last year, we met with representatives from several hospital stroke centers who recommended modification of the existing stroke DRGs 14 (Intracranial Hemorrhage or Cerebral Infarction) and 15 (Nonspecific CVA and Precerebral Occlusion Without Infarction) by using the administration of tPA as a proxy to identify patients who have severe strokes. The representatives stated that using tPA as a proxy for the more severely ill stroke patient would recognize the higher charges these cases generate because of their higher hospital resource utilization.

The stroke representatives made two suggestions concerning DRGs 14 and 15. First, they proposed modifying DRG 14 by renaming it “Ischemic Stroke Treatment with a Reperfusion Agent,” and including only those cases containing code 99.10. The remainder of stroke cases where the patient was not treated with a reperfusion agent would be included in DRG 15, which would be renamed “Hemorrhagic Stroke or Ischemic Stroke without a Reperfusion Agent.” Hemorrhagic stroke cases now found in DRG 14 that are not treated with a reperfusion agent would migrate to DRG 15.

The second suggestion was to leave DRGs 14 and 15 as they currently exist, and create a new DRG, with a recommended title “Ischemic Stroke Treatment with a Reperfusion Agent.” This suggested DRG would only include strokes caused by clots, not by hemorrhages, and would include the administration of tPA, identified by procedure code 99.10.

We have examined the MedPAR data for the cases in DRGs 14 and 15, and have divided the cases based on the presence of a principal diagnosis of hemorrhage or occlusive ischemia, and the presence of procedure code 99.10. The following table displays the results:

The above table shows that the average standardized charges for cases treated with a reperfusion agent are more than $16,000 and $10,000 higher than all other cases in DRGs 14 and 15, respectively. While these data suggest that patients treated with a reperfusion agent are more expensive than all other stroke patients, this conclusion is based on a small number of cases. At this time, we are not proposing a change to the stroke DRGs because of this concern. However, we believe it is possible that more patients are being treated with a reperfusion agent than indicated by our data because the presence of code 99.10 does not affect DRG assignment and may be underreported.

We invite public comment on the changes to DRGs 14 and 15 suggested by the hospital representatives. In addition, we are interested in public comment on the number of patients currently being treated with a reperfusion agent as well as the potential costs of these patients relative to others with strokes that are also included in DRGs 14 and 15.

b. Unruptured Cerebral Aneurysms

In the FY 2004 IPPS final rule (68 FR 45353), we created DRG 528 (Intracranial Vascular Procedures With a Principal Diagnosis of Hemorrhage) in MDC 1. We received a comment at that time that suggested we create another DRG for intracranial vascular procedures for unruptured cerebral aneurysms. For the FY 2004 IPPS final rule (68 FR 45353) and the FY 2005 IPPS final rule (69 FR 48957), we evaluated the data for cases in the MedPAR file involving unruptured cerebral aneurysms assigned to DRG 1 (Craniotomy Age 17 With CC) and DRG 2 (Craniotomy Age 17 Without CC) and concluded that the average charges were consistent with those for other cases found in DRGs 1 and 2. Therefore, we did not propose a change to the DRG assignment for unruptured cerebral aneurysms.

We have reviewed the latest data for unruptured cerebral aneurysms cases. In our analysis of the FY 2004 MedPAR data, we found 1,136 unruptured cerebral aneurysm cases assigned to DRG 1 and 964 unruptured cerebral aneurysm cases assigned to DRG 2. Although the average charges for the unruptured cerebral aneurysm cases in DRG 1 ($53,455) and DRG 2 ($34,028) were slightly higher than the average charges for all cases in DRG 1 ($51,466) and DRG 2 ($30,346), we do not believe these differences are significant enough to warrant a change in these two DRGs at this time. Therefore, we are not proposing a change in the structure of these DRGs relating to unruptured cerebral aneurysm cases for FY 2006.

4. MDC 5 (Diseases and Disorders of the Circulatory System)

a. Automatic Implantable Cardioverter/Defibrillator

As part of our annual review of DRGs, for FY 2006, we performed a review of cases in the FY 2004 MedPAR file involving the implantation of a defibrillator in the following DRGs:

DRG 515 (Cardiac Defibrillator Implant Without Cardiac Catheterization).

DRG 535 (Cardiac Defibrillator Implant With Cardiac Catheterization With Acute Myocardial Infarction, Heart Failure, or Shock).

DRG 536 (Cardiac Defibrillator Implant With Cardiac Catheterization Without Acute Myocardial Infarction, Heart Failure, or Shock).

While conducting our review, we noted that there had been considerable comments from hospital coders on code 37.26 (Cardiac electrophysiologic stimulation and recording studies (EPS)), which is included in these DRGs. These comments from hospital coders were directed at both CMS and the American Hospital Association. The procedure codes for these three DRGs describe the procedures that are considered to be a cardiac catheterization. Code 37.26 is classified as a cardiac catheterization within these DRGs. Therefore, the submission of code 37.26 affects the DRG assignment for defibrillator cases and leads to the assignment of DRGs 535 or 536. When a cardiac catheterization is performed, the case is assigned to DRGs 535 or 536, depending on whether or not the patient also had an acute myocardial infarction, heart failure, or shock. The following chart shows the number of cases in each DRG, along with their average length of stay and average charges, found in the data:

We have received a number of questions from hospital coders regarding the correct use of code 37.26. There is considerable confusion about whether or not code 37.26 should be reported when the procedure is performed as part of the defibrillator implantation. Currently, the ICD-9-CM instructs the coder not to report code 37.26 when a defibrillator is inserted. There is an inclusion term under the defibrillator code 37.94 (Implantation or replacement of automatic cardioverter/defibrillator, total system [AICD]) which states that EPS is included in code 37.94. We discussed modifying this instruction at the October 7-8, 2004 meeting of the ICD-9-CM Coordination and Maintenance Committee. We received a number of comments opposing a modification to the use of code 37.26 to also allow it to be reported with an AICD insertion. A report of this meeting can be found on the Web site: http://www.cms.hhs.gov/paymentsystem/icd9.

We performed an analysis of cases within DRGs 535 and 536 with cardiac catheterization and with and without code 37.26 and with code 37.26 only reported without cardiac catheterization and found the following:

The data show that when code 37.26 is the only procedure reported from the list of cardiac catheterizations, the average charges and the average length of stay are considerably lower. For example, the average standardized charges for a defibrillator implant with only an EPS are $85,390.88 in DRG 536, while the average standardized charges for DRG 536 with a cardiac catheterization, but not an EPS, are $110,493.86. The average standardized charges for all cases in DRG 536 are $94,453.62. The data show similar findings for DRG 535, with lower lengths of stay and average charges when the only code reported from the cardiac catheterization list is an EPS. When we also consider that there may be some coding problems in the use of code 37.26, we believe it is appropriate to propose a modification to these DRGs.

Data reflected in the chart above show that the average standardized charges for DRG 515 were $83,659.76. These average charges are closer to those in DRG 536 with code 37.26 and without any other cardiac catheterization code reported. While the cases in DRG 535 with code 37.26 and without a cardiac catheterization have higher average charges than the average charges for cases in DRG 515, these cases have much lower average charges than the average charges for overall cases in DRG 535. For these reasons, we are proposing to remove code 37.26 from the list of cardiac catheterizations for DRGs 535 and 536. If a defibrillator is implanted and an EPS is performed with no other type of cardiac catheterization, the case would be assigned to DRG 515.

CMS issued a National Coverage Determination for implantable cardioverter defibrillators, effective January 27, 2005, that expands coverage and requires, in certain cases, that patient data be reported when the defibrillator is implanted for the clinical indication of primary prevention of sudden cardiac death. The submission of data on patients receiving an implantable cardioverter defibrillator for primary prevention to a data collection system is needed for the determination that the implantable cardioverter defibrillator is reasonable and necessary and for quality improvement. These data will be made available in some form to providers and practitioners to inform their decisions, monitor performance quality, and benchmark and identify best practices. We made a temporary registry available for use when the policy became effective and used the Quality Net Exchange for data submission because Medicare-participating hospitals already use the Exchange to report data.

We intend to transition from the temporary registry using the Quality Net Exchange to a more sophisticated follow-on registry that will have the ability to collect longitudinal data. Some providers have suggested that CMS increase reimbursement for implantable cardioverter defibrillators to compensate the provider for reporting data. ICD data reporting includes elements of patient demographics, clinical characteristics and indications, medications, provider information, and complications. Since these data elements are commonly found in patient medical records, it is CMS' expectation that these data are readily available to the individuals abstracting and reporting data. Therefore, we believe that increased reimbursement is not needed at this time.

b. Coronary Artery Stents

In the FY 2005 IPPS final rule (69 FR 48971 through 48974), we addressed two comments from industry representatives about the DRG assignments for coronary artery stents. These commenters had expressed concern about whether the reimbursement for stents is adequate, especially for insertion of multiple stents. They also expressed concern about whether the current DRG structure represents the most clinically coherent classification of stent cases.

The current DRG structure incorporates stent cases into the following two pairs of DRGs, depending on whether bare metal or drug-eluting stents are used and whether acute myocardial infarction (AMI) is present:

  • DRG 516 (Percutaneous Cardiovascular Procedures with AMI).
  • DRG 517 (Percutaneous Cardiovascular Procedures with Nondrug-Eluting Stent without AMI).
  • DRG 526 (Percutaneous Cardiovascular Procedures with Drug-Eluting Stent with AMI).
  • DRG 527 (Percutaneous Cardiovascular Procedures with Drug-Eluting Stent without AMI).

The commenters presented two recommendations for refinement and restructuring of the current coronary stent DRGs. One of the recommendations involved restructuring these DRGs to create two additional stent DRGs that are closely patterned after the existing pairs, and would reflect insertion of multiple stents with and without AMI. The commenters recommended incorporating either stenting code 36.06 (Insertion of nondrug-eluting coronary artery stent(s)) or code 36.07 (Insertion of drug-eluting coronary artery stent(s)) when they are reported along with code 36.05 (Multiple vessel percutaneous transluminal coronary angioplasty [PTCA] or coronary atherectomy performed during the same operation, with or without mention of thrombolytic agent). The commenter's first concern was that hospitals may be steering patients toward coronary artery bypass graft surgery in place of stenting in order to avoid significant financial losses due to what it considered the inadequate reimbursement for inserting multiple stents.

In our response to comments in the FY 2005 IPPS final rule, we indicated that it was premature to act on this recommendation because the current coding structure for coronary artery stents cannot distinguish cases in which multiple stents are inserted from those in which only a single stent is inserted. Current codes are able to identify performance of PTCA in more than one vessel by use of code 36.05. However, while this code indicates that PTCA was performed in more than one vessel, its use does not reflect the exact number of procedures performed or the exact number of vessels treated. Similarly, when codes 36.06 and 36.07 are used, they document the insertion of at least one stent. However, these stenting codes do not identify how many stents were inserted in a procedure, nor distinguish insertion of a single stent from insertion of multiple stents. Even the use of one of the stenting codes in conjunction with multiple-PTCA code 36.05 does not distinguish insertion of a single stent from multiple stents. The use of code 36.05 in conjunction with code 36.06 or code 36.07 indicates only performance of PTCA in more than one vessel, along with insertion of at least one stent. The precise numbers of PTCA-treated vessels, the number of vessels into which stents were inserted, and the total number of stents inserted in all treated vessels cannot be determined. Therefore, the capabilities of the current coding structure do not permit the distinction between single and multiple vessel stenting that would be required under the recommended restructuring of the coronary stent DRGs.

We agree that the DRG classification of cases involving coronary stents must be clinically coherent and provide for adequate reimbursement, including those cases requiring multiple stents. For this reason, we created four new ICD-9-CM codes identifying multiple stent insertion (codes 00.45, 00.46, 00.47, and 00.48) and four new codes identifying multiple vessel treatment (codes 00.40, 00.41, 00.42, and 00.43) at the October 7, 2004 ICD-9-CM Coordination and Maintenance Committee Meeting. These eight new codes can be found in Table 6B of this proposed rule. We have worked closely with the coronary stent industry and the clinical community to identify the most logical code structure to identify new codes for both multiple vessel and multiple stent use. Effective October 1, 2005, code 36.05 will be deleted and the eight new codes will be used in its place. Coders are encouraged to use as many codes as necessary to describe each case, using one code to describe the angioplasty or atherectomy, and one code each for the number of vessels treated and the number of stents inserted. Coders are encouraged to record codes accurately, as these data will potentially be the basis for future DRG restructuring. While we agree that use of multiple vessel and stent codes will provide useful information in the future on hospital costs associated with percutaneous coronary procedures, we believe it remains premature to proceed with a restructuring of the current coronary stent DRGs on the basis of the number of vessels treated or the number of stents inserted, or both, in the absence of data reflecting use of this new coding structure.

The commenter's second recommendation was that we distinguish “complex” from “noncomplex” cases in the stent DRGs by expanding the higher weighted DRGs (516 and 526) to include conditions other than AMI. The commenter recommended recognizing certain comorbid and complicating conditions, including hypertensive renal failure, congestive heart failure, diabetes, arteriosclerotic cardiovascular disease, cerebrovascular disease, and certain procedures such as multiple vessel angioplasty or atherectomy (as evidenced by the presence of procedure code 36.05), as indicators of complex cases for this purpose. Specifically, the commenters recommended replacing the current structure with the following four DRGs:

  • Recommended restructured DRG 516 (Complex percutaneous cardiovascular procedures with non-drug-eluting stents).
  • Recommended restructured DRG 517 (Noncomplex percutaneous cardiovascular procedures with non-drug-eluting stents).
  • Recommended restructured DRG 526 (Complex percutaneous cardiovascular procedures with drug-eluting stents).
  • Recommended restructured DRG 527 (Noncomplex percutaneous cardiovascular procedures with drug-eluting stents).

The commenter argued that this structure would provide an improvement in both clinical and resource coherence over the current structure that classifies cases according to the type of stent inserted and the presence or absence of AMI alone, without considering other complicating conditions. The commenter also presented an analysis, based on previous MedPAR data, that evaluated charges and lengths of stay for cases with expected high resource use and reclassified cases into its recommended new structure of paired “complex” and “noncomplex” DRGs. The commenter's analysis showed some evidence of clinical and resource coherence in the recommended DRG structure. However, we did not adopt the proposal in the FY 2005 IPPS final rule. First, the data presented by the commenter still represented preliminary experience under a relatively new DRG structure. Second, the analysis did not reveal significant gains in resource coherence compared to existing DRGs for stenting cases. Therefore, we were reluctant to adopt this approach because of comments and concern about whether the overall level of payment in the coronary stent DRGs was adequate. However, we indicated that this issue deserved further study and consideration, and that we would conduct an analysis of this recommendation and other approaches to restructuring these DRGs with updated data in the FY 2006 proposed rule.

This year, we have analyzed the MedPAR data to determine the impact of certain secondary diagnoses or complicating conditions on the four DRGs cited above. Specifically, we examined the data in DRGs 516, 517, 526, and 527, based on the presence of coronary stents (codes 36.06 and 36.07) and the following additional diagnoses:

  • Congestive heart failure (represented by codes 398.91 (Rheumatic heart failure (congestive)), 402.01 (Hypertensive heart disease, malignant, with heart failure), 402.11, (Hypertensive heart disease, benign, with heart failure), 402.91 (Hypertensive heart disease, unspecified, with heart failure), 404.01 (Hypertensive heart and renal disease, malignant, with heart failure), 404.03 (Hypertensive heart and renal disease, malignant, with heart failure and renal failure), 404.11 (Hypertensive heart and renal disease, benign, with heart failure), 404.13 (Hypertensive heart and renal disease, benign, with heart failure and renal failure), 404.91 (Hypertensive heart and renal disease, unspecified, with heart failure), 404.93 (Hypertensive heart and renal disease, unspecified, with heart failure and renal failure), 428.0 (Congestive heart failure, unspecified), and 428.1 (Left heart failure)).
  • Arteriosclerotic cardiovascular disease (represented by code 429.2 (Cardiovascular disease, unspecified)).
  • Cerebrovascular disease (represented by codes 430.0 (Subarachnoid hemorrhage), 431.0 (Intracerebral hemorrhage), 432.0 (Nontraumatic extradural hemorrhage), 432.1, Subdural hemorrhage, 432.9, (Unspecified intracranial hemorrhage), 433.01 (Occlusion and stenosis of basilar artery, with cerebral infarction), 433.11 (Occlusion and stenosis of carotid artery, with cerebral infarction), 433.21 (Occlusion and stenosis of vertebral artery, with cerebral infarction), 433.31 (Occlusion and stenosis of multiple and bilateral precerebral arteries, with cerebral infarction), 433.81 (Occlusion and stenosis of other specified precerebral artery, with cerebral infarction), 434.01 (Cerebral thrombosis with cerebral infarction), 434.11 (Cerebral embolism with cerebral infarction), 434.91 (Cerebral artery occlusion with cerebral infarction, unspecified), 436.0 (Acute, but ill-defined, cerebrovascular disease)).
  • Secondary diagnosis of acute myocardial infarction (represented by codes 410.01 (Acute myocardial infarction of anterolateral wall, initial episode of care), 410.11 (Acute myocardial infarction of other anterior wall, initial episode of care), 410.21 (Acute myocardial infarction of inferolateral wall, initial episode of care), 410.31 (Acute myocardial infarction of inferoposterior wall, initial episode of care), 410.41 (Acute myocardial infarction of other inferior wall, initial episode of care), 410.51 (Acute myocardial infarction of other lateral wall, initial episode of care), 410.61 (True posterior wall infarction, initial episode of care), 410.71 (Subendocardial infarction, initial episode of care), 410.81 (Acute myocardial infarction of other specified sites, initial episode of care), 410.91 (Acute myocardial infarction of unspecified site, initial episode of care)).
  • Renal failure (represented by codes 403.01 (Hypertensive renal disease, malignant, with renal failure), 403.11 (Hypertensive renal disease, benign, with renal failure), 403.91 (Hypertensive renal disease, unspecified, with renal failure), 585.0 (Chronic renal failure), V42.0 (Organ or tissue replaced by transplant, kidney), V45.1 (Renal dialysis status), V56.0 (Extracorporeal dialysis), V56.1 (Fitting and adjustment of extracorporeal dialysis catheter), V56.2 (Fitting and adjustment of peritoneal dialysis catheter)). Any renal failure with congestive heart failure will be captured in the 404.xx codes listed above.

We reviewed the cases in the four coronary stent DRGs and found that most of the additional or “complicated” cases did, in fact, have higher average charges in most instances. However, these results could potentially be duplicated for many DRGs, or sets of DRGs, within the PPS structure. That is, cases with selected complicating factors will tend to have higher average lengths of stay and average charges than cases without those complicating factors. Since cases with the selected complicating factors necessarily contain sicker patients, longer lengths of stay and higher average charges are to be expected. For example, cases in which patients with a cardiac condition also have renal failure are quite likely to consume higher resources than patients only with a cardiac condition. In addition, selectively recognizing the recommended secondary diagnoses or complicating conditions raises some issues related to the logic and structural integrity of the DRG system. Generally, we have taken into account the higher costs of cases with complications by maintaining a general list of comorbidities and complications (the CC) list), and, where appropriate, distinguishing pairs of DRGs by “with and without CCs.” (This system also specifies exclusions from each pair, to account for cases where a condition on the CC list is an expected and normal constituent of the diagnoses reflected in the paired DRGs.) In order to maintain the basic DRG body-system structure, we have not employed special lists of procedures and diagnoses from one MDC to make determinations about the structure of DRGs in another MDC. The recommended restructuring of the coronary stent DRGs is inconsistent with this principle and may create a new precedent of selecting specific comorbidities and complications to restructure DRGs. For example, the presence of code 403.11 (Hypertensive renal disease, malignant, with renal failure) may distinguish cases with higher average charges, but the same argument could be raised for many other procedures across other MDCs.

Rather than establishing such a precedent, we are proposing to restructure the coronary stent DRGs on the basis of the standard CC list to differentiate cases that require greater resources. We believe this list to be more inclusive of true comorbid or complicating conditions than selection of specific secondary diagnosis codes. Therefore, restructuring these DRGs on this basis would result in a logical arrangement of cases with regard to both clinical coherence and resource consumption. We have compared the existing CC list with the list of the codes recommended by the commenter as secondary diagnoses. All of the recommended codes already appear on the CC list except for codes 429.2, 432.9, V56.1, and V56.2. Code 429.2 represents a very vague diagnosis (arteriosclerotic cardiovascular disease (ASCVD)). Code 432.9 represents a nonspecific principal diagnosis that is rejected by the MCE when reported as the principal diagnosis. Codes V56.1 and V56.2 describe conditions relating to dialysis for renal failure. Therefore, we believe that our proposal to utilize the existing CC list would encompass most of the cases on the recommended list, as well as other cases with additional CCs requiring additional resources. We have examined the MedPAR data for the cases in the coronary stent DRGs, distinguishing cases that include CCs and those that do not. The following table displays the results:

The data show a clear differentiation in average charges between the cases in DRG 516 and 526 “with CC” and those “without CC.” Therefore, the data suggest that a “with and without CC” split in DRG 516 and 526 is warranted. At the same time, the data do not show such a clear differentiation, in either average charges or lengths of stay, among the cases in DRGs 517 and 527.

Therefore, we are proposing to delete DRGs 516 and 526, and to substitute four new DRGs in their place. These new DRGs would be patterned after existing DRGs 516 and 526, except that they would be split based on the presence or absence of a secondary diagnosis on the existing CC list. Specifically, we are proposing to create DRG 547 (Percutaneous Cardiovascular Procedure with AMI with CC), DRG 548 (Percutaneous Cardiovascular Procedure with AMI without CC), DRG 549 (Percutaneous Cardiovascular Procedure with Drug-Eluting Stent with AMI with CC), and DRG 550 (Percutaneous Cardiovascular Procedure with Drug-Eluting Stent with AMI without CC). As we noted above, the MedPAR data do not support restructuring DRGs 517 and 527 based on the presence or absence of a CC. Therefore, we are proposing to retain these two DRGs in their current forms. We believe this revised structure will result in a more inclusive and comprehensive array of cases within MDC 5 without selectively recognizing certain secondary diagnoses as “complex.”

While we are proposing some restructuring of the coronary stent DRGs for FY 2006, it is important to note that we will continue to monitor and analyze clinical and resource trends in this area. For example, we have found indications in the current data that treatment may be moving toward use of drug-eluting stents, and away from use of bare metal stents. Specifically, cases in DRGs 516 and 517, which utilize bare metal stents, comprise only 44.4 percent, or less than half, of the cases in the four coronary stent DRGs in the MedPAR data we analyzed. As use of drug-eluting stents becomes the standard of treatment, we may consider over time whether to dispense with the distinction between these stents and the older bare metal stent technology in the structure of the coronary stent DRGs. In addition, we will continue to consider whether the structure of these DRGs ought to reflect differences in the number of vessels treated or the number of stents inserted, or both. As we discussed above, a new coding structure capable of identifying multiple vessel treatment and the insertion of multiple stents will go into effect on October 1, 2005. It remains premature to restructure the coronary stent DRGs on the basis of the number of vessels treated or the number of stents inserted, or both, until data reflecting the use of these new codes become available. However, we will analyze those data when they become available in order to determine whether a restructuring based on multiple vessel treatment or insertion of multiple stents, or both, is warranted. Our proposal to restructure two of the current coronary stent DRGs into paired “with and without CC” DRGs for FY 2006 does not preclude proposals in subsequent years to restructure the coronary stent DRGs in one or both of these ways.

c. Insertion of Left Atrial Appendage Device

Atrial fibrillation is a common heart rhythm disorder that can lead to a cardiovascular blood clot formation leading to increased risk of stroke. According to product literature, nearly all strokes are from embolic clots arising in the left atrial appendage of the heart: an appendage for which there is no useful function. Standard therapy uses anticoagulation drugs. However, these drugs may be contraindicated in certain patients and may cause complications such as bleeding. The underlying concept behind the left atrial appendage device is to block off the left atrial appendage, so that the blood clots formed therein cannot travel to other sites in the vascular system. The device is implanted using a percutaneous catheter procedure under fluoroscopy through the femoral vein. Implantation is performed in a hospital catheterization laboratory using standard transseptal technique, with the patient generally under local anesthesia. The procedure takes approximately 1 hour, and most patients stay overnight in the hospital.

In the FY 2005 IPPS final rule (69 FR 48978, August 11, 2004), we discussed the DRG assignment of new ICD-9-CM procedure code 37.90 (Insertion of left atrial appendage device) for clinical trials, effective for discharges occurring on or after October 1, 2004, to DRG 518 (Percutaneous Cardiovascular Procedure without Coronary Artery Stent or Acute Myocardial Infarction)). In that final rule, we addressed the DRG assignment of procedure code 37.90 in response to a comment from a manufacturer who suggested that placement of the code in DRG 108 (Other Cardiothoracic Procedures) was more representative of the complexity of the procedure than placement in DRG 518. The manufacturer indicated that the suggested placement of procedure code 37.90 in DRG 108 was justified because another percutaneous procedure, described by ICD-9-CM procedure code 35.52 (Repair of atrial septal defect with prosthesis, closed technique), was assigned to DRG 108. As we indicated in the FY 2005 final rule (69 FR 48978), this comment prompted us to examine data in the FY 2003 MedPAR file for cases of code 35.52 assigned to DRG 108 and DRG 518 in comparison to all cases assigned to DRG 108. We found the following:

Therefore, we concluded that procedure code 35.52 showed a decided similarity to the cases found in DRG 518, not DRG 108. At that time, we determined that we would analyze the cases for both clinical coherence and charge data as part of the IPPS FY 2006 process of identifying the most appropriate DRG assignment for procedure code 35.52.

We have now examined data from the FY 2004 MedPAR file and found results for cases assigned to DRG 108 and DRG 518 that are similar to last year's findings as indicated in the chart below:

From this comparison, we found that when an atrial septal defect is percutaneously repaired, and procedure code 35.52 is the only code reported in DRG 108, there is a significant discrepancy in both the average charges and the average length of stay between the cases with procedure code 35.52 reported in DRG 108 and the total cases in DRG 108. The total cases in DRG 108 have average charges of $51,744 greater than the 872 cases in DRG 108 reporting procedure code 35.52 as the only procedure. The total cases in DRG 108 also have an average length of stay of 7.39 days greater than the average length of stay for cases in DRG 108 with procedure code 35.52 reported. In comparison, the total cases in DRG 518 have average charges of only $1,988 lower than the cases in DRG 108 with only procedure code 35.52 reported. In addition, the length of stay in total cases in DRG 518 is more closely related to cases in DRG 108 with only procedure code 35.52 reported.

Based on our analysis of these data, we are proposing to move procedure code 35.52 out of DRG 108 and place it in DRG 518. We believe that this proposal would result in a more coherent group of cases in DRG 518 that reflect all percutaneous procedures.

d. External Heart Assist System Implant

In the August 1, 2002, final rule (67 FR 49989), we attempted to clinically and financially align ventricular assist device (VAD) procedures by creating DRG 525 (Heart Assist System Implant). We also noted that cases in which a heart transplant also occurred during the same hospitalization episode would continue to be assigned to DRG 103 (Heart Transplant).

After further data review during the next 2 years, we decided to realign the DRGs containing VAD codes for FY 2005. In the August 11, 2004 final rule (69 FR 48927), we announced changes to DRG 103, DRG 104 (Cardiac Valve and Other Major Cardiothoracic Procedure with Cardiac Catheterization), DRG 105 (Cardiac Valve and Other Major Cardiothoracic Procedures Without Cardiac Catheterization), and DRG 525.

In summary, these changes included—

  • Moving code 37.66 (Insertion of implantable heart assist system) out of DRG 525 and into DRG 103.
  • Renaming DRG 525 as “Other Heart Assist System Implant.”
  • Moving code 37.62 (Insertion of non-implantable heart assist system) out of DRGs 104 and 105 and back into DRG 525.

DRG 525 currently consists of any principal diagnosis in MDC 5, plus the following surgical procedure codes:

  • 37.52, Implantation of total replacement heart system *.
  • 37.53, Replacement or repair of thoracic unit of total replacement heart system *.
  • 37.54, Replacement or repair of other implantable component of total replacement heart system *.
  • 37.62, Insertion of non-implantable heart assist system.
  • 37.63, Repair of heart assist system.
  • 37.65, Implant of external heart assist system.

* These codes represent noncovered services for Medicare beneficiaries. However, it is our longstanding practice to assign every code in the ICD-9-CM classification to a DRG. Therefore, they have been assigned to DRG 525.

Since that decision, we have been encouraged by a manufacturer to reevaluate DRG 525 for FY 2006. The manufacturer requested that we again review the data surrounding cases reporting code 37.65 and has suggested moving these cases into DRG 103. The manufacturer pointed out the following: Code 37.65 describes the implantation of an external heart assist system and is currently approved by the FDA as a bridge-to-recovery device. From the standpoint of clinical status, the patients in DRG 103 and receiving an external heart assist system are similar because their native hearts cannot support circulation, and absent a heart transplant, a mechanical pump is needed for patient survival. The surgical procedures for implantation of both an internal VAD and an external VAD are very similar. However, the external heart assist system (code 37.65) is a less expensive device than the implantable heart assist system (code 37.66). The manufacturer suggested that the payment differential between DRGs 103 and 525 is an incentive to choose the higher paying device, and asserted that only a subset of patients receiving an implantable heart assist system are best served by this device. The manufacturer also suggested that the initial use of the least expensive therapeutically appropriate device yields both the best clinical outcomes and the lowest total system costs.

We note that, under the DRG system, our intent is to create payments that are reflective of the average resources required to treat a particular case. Our goal is that physicians and hospitals should make treatment decisions based on the clinical needs of the patient and not financial incentives.

When we reviewed the FY 2004 MedPAR data, we were able to demonstrate the following comparisons:

The above table shows that the 37.8 percent of cases in DRG 525 that reported code 37.65 have average charges that are nearly $33,000 higher than the average charges for all cases in the DRG. However, the average charges for the subset of cases with code 37.65 in DRG 525 ($206,497) are more than $107,086 lower than the average charges for all cases in DRG 103 ($313,583). Furthermore, the average length of stay for the subset of patients in DRG 525 receiving an external heart assist system was 9.26 days compared to 37.5 days for the 633 cases in DRG 103.

We note that the analysis above presents the difference in average charges, not costs. Because hospitals' charges are higher than costs, the difference in hospital costs will be less than the figures shown here. Moving cases containing code 37.65 from DRG 525 to DRG 103 would have two consequences. The cases in DRG 103 reporting code 37.65 would be appreciably overreimbursed, which would be inconsistent with our goal of coherent reimbursement structure within the DRGs. In addition, the relative weight of DRG 103 would decrease by moving the less resource-intensive external heart procedures into the same DRG with the more expensive heart transplant cases. The net effect would be an underpayment for heart transplant cases. Alternatively, we also reconsidered our position on moving the insertion of an implantable heart assist system (code 37.66) back into DRG 525. However, as shown in the FY 2005 IPPS final rule (69 FR 48929), the resource costs associated with caring for a patient receiving an implantable heart assist system are far more similar to those cases receiving a heart transplant in DRG 103 than they are to cases in DRG 525. For these reasons, we are not proposing to make any changes to the structure of either DRG 103 or DRG 525 in this proposed rule.

e. Carotid Artery Stent

Stroke is the third leading cause of death in the United States and the leading cause of serious, long-term disability. Approximately 70 percent of all strokes occur in people age 65 and older. The carotid artery, located in the neck, is the principal artery supplying the head and neck with blood. Accumulation of plaque in the carotid artery can lead to stroke either by decreasing the blood flow to the brain or by having plaque break free and lodge in the brain or in other arteries to the head. The percutaneous transluminal angioplasty (PTA) procedure involves inflating a balloon-like device in the narrowed section of the carotid artery to reopen the vessel. A carotid stent is then deployed in the artery to prevent the vessel from closing or restenosing. A distal filter device (embolic protection device) may also be present, which is intended to prevent pieces of plaque from entering the bloodstream.

Effective July 1, 2001, Medicare covers PTA of the carotid artery concurrent with carotid stent placement when furnished in accordance with the FDA-approved protocols governing Category B Investigational Device Exemption (IDE) clinical trials. PTA of the carotid artery, when provided solely for the purpose of carotid artery dilation concurrent with carotid stent placement, is considered to be a reasonable and necessary service only when provided in the context of such clinical trials and, therefore, is considered a covered service for the purposes of these trials. Performance of PTA in the carotid artery when used to treat obstructive lesions outside of approved protocols governing Category B IDE clinical trials remains a noncovered service.

At the April 1, 2004 ICD-9-CM Coordination and Maintenance Committee meeting, we discussed creation of a new code or codes to identify carotid artery stenting, along with a concomitant percutaneous angioplasty or atherectomy (PTA) code for delivery of the stent(s). This subject was addressed in response to the need to identify carotid artery stenting for use in clinical trials in the upcoming fiscal year. Public comment confirmed the need for specific codes for this procedure. We established codes for carotid artery stenting procedures effective October 1, 2004, for patients who are enrolled in an FDA-approved clinical trial and are using on-label FDA approved stents and embolic protection devices.

New procedure codes 00.61 (Percutaneous angioplasty or atherectomy of precerebral (extracranial vessel(s)) and 00.63 (Percutaneous insertion of carotid artery stent(s)) were published in Table 6B, New Procedure Codes in the FY 2005 IPPS final rule (69 FR 49624).

Procedure code 00.61 was assigned to four MDCs and seven DRGs. The most likely scenario is that in which cases are assigned to MDC 1 (Diseases and Disorders of the Nervous System in DRGs 533 (Extracranial Procedures with CC) and 534 (Extracranial Procedures without CC). Cases may also be assigned to MDC 5 (Diseases and Disorders of the Circulatory System), MDC 21 (Injuries, Poisoning, and Toxic Effects of Drugs), and MDC 24 (Multiple Significant Trauma). Other less likely DRG assignments can be found in Table 6B in the Addendum to the FY 2005 IPPS final rule (69 FR 49624).

In the FY 2005 final rule, we indicated that we would continue to monitor DRGs 533 and 534 and procedure code 00.61 in combination with procedure code 00.63 in upcoming annual DRG reviews. For this proposed rule, we are using proxy codes to evaluate the costs and DRG assignments for carotid artery stenting because codes 00.61 and 00.63 were only approved for use beginning October 1, 2004, and because MedPAR data for this period are not yet available. We used procedure code 39.50 (Angioplasty or atherectomy of other noncoronary vessel(s)) in combination with procedure code 39.90 (Insertion of nondrug-eluting peripheral vessel stent(s)) in DRGs 533 and 534 as the proxy codes for coronary artery stenting. For this evaluation, we used principal diagnosis code 433.10 (Occlusion and stenosis of carotid artery, without mention of cerebral infarction) because this diagnosis most closely reflects the clinical trial criteria.

The following chart shows our findings:

The patients receiving a carotid stent (codes 39.50 and 39.90) represented 3.5 percent of all cases in DRG 534. On average, patients receiving a carotid stent had slightly shorter average lengths of stay than other patients in DRGs 533 and 534. While the average charges for patients receiving a carotid artery stent were higher than for other patients in DRG 534, in our view, the small number of cases and the magnitude of the difference in average charges are not sufficient to justify a change in the DRGs.

Because we have a paucity of data for the carotid stent device and its insertion, and no data utilizing procedure codes 00.61 and 00.63 in a clinical trial setting, we believe it is premature to revise the DRG structure at this time. We expect to revisit this analysis once data become available on the new codes for carotid artery stents.

f. Extracorporeal Membrane Oxygenation (ECMO)

Extracorporeal membrane oxygenation (ECMO) is a procedure to create a closed chest, heart-lung bypass system by insertion of vascular catheters. Patients receiving this procedure require mechanical ventilation. ECMO is performed for a small number of severely ill patients who are at high risk of dying without this procedure. Most often it is done for neonates with persistent pulmonary hypertension and respiratory failure for whom other treatments have failed, certain severely ill neonates receiving major cardiac procedures or diaphragmatic hernia repair, and certain older children and adults, most of whom are receiving major cardiac procedures.

We received several letters from institutions that perform ECMO. The commenters stated that, in the CMS GROUPER logic, this procedure has little or no impact on the DRG assignment in the newborn, pediatric, and adult population. According to these letters, patients receiving ECMO are highly resource intensive and should have a unique DRG that reflects the costs of these resources. The commenters recommended the creation of a new DRG for ECMO with a DRG weight equal to or greater than the DRG weight for tracheostomy.

ECMO is assigned to procedure code 39.65 (Extracorporeal membrane oxygenation). This code is classified as an O.R. procedure and is assigned to DRG 104 (Cardiac Valve and Other Major Cardiothoracic Procedure With Cardiac Catheterization) and DRG 105 (Cardiac Valve and Other Major Cardiothoracic Procedure Without Cardiac Catheterization). When ECMO is performed with other O.R. procedures, the case is assigned to the higher weighted DRG. For example, when ECMO and a tracheostomy are performed during the same admission, the case would be assigned to DRG 541 (Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth, and Neck Diagnoses With Major O.R.).

We note that the primary focus of updates to the Medicare DRG classification system is changes relating to the Medicare patient population, not the pediatric patient population. Because ECMO is primarily a pediatric procedure and rarely performed in an adult population, we have few cases in our data to use to evaluate resource costs. We are aware that other insurers sometimes use Medicare's rates to make payments. We advise private insurers to make appropriate modifications to our payment system when it is being used for children or other patients who are not generally found in the Medicare population.

To evaluate the appropriateness of payment under the current DRG assignment, we have reviewed the FY 2004 MedPAR data and found 78 ECMO cases in 13 DRGs. The following table illustrates the results of our findings:

The average charges for all ECMO cases were approximately $258,821, and the average length of stay was approximately 20.7 days. The average charges for the ECMO cases are closer to the average charges for DRG 541 ($273,656) than to the average charges of DRG 104 ($147,766) and DRG 105 ($131,700). Of the 78 ECMO cases, 14 cases are already assigned to DRG 541. We believe that the data indicate that DRG 541 would be a more appropriate DRG assignment for cases where ECMO is performed. We further note that under the All Payer DRG System used in New York State, cases involving ECMO are assigned to the tracheostomy DRG. Thus, the assignment of ECMO cases to the tracheostomy DRG for Medicare would be similar to how these cases are grouped in another DRG system. For these reasons, we are proposing to reassign ECMO cases reporting code 39.65 to DRG 541. We are also proposing to change the title of DRG 541 to: “ECMO or Tracheostomy With Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth and Neck Diagnoses With Major O.R.”

5. MDC 6 (Diseases and Disorders of the Digestive System): Artificial Anal Sphincter

In the FY 2003 IPPS final rule (67 FR 50242), we created two new codes for procedures involving an artificial anal sphincter, effective for discharges occurring on or after October 1, 2002: code 49.75 (Implantation or revision of artificial anal sphincter) is used to identify cases involving implantation or revision of an artificial anal sphincter and code 49.76 (Removal of artificial anal sphincter) is used to identify cases involving the removal of the device. In Table 6B of that final rule, we assigned both codes to one of four MDCs, based on principal diagnosis, and one of six DRGs within those MDCs: MDC 6 (Diseases and Disorders of the Digestive System), DRGs 157 and 158 (Anal and Stomal Procedures With and Without CC, respectively); MDC 9 (Diseases and Disorders of the Skin, Subcutaneous Tissue and Breast), DRG 267 (Perianal and Pilonidal Procedures); MDC 21 (Injuries, Poisonings, and Toxic Effects of Drugs), DRGs 442 and 443 (Other O.R. Procedures for Injuries With and without CC, respectively); and MDC 24 (Multiple Significant Trauma), DRG 486 (Other O.R. Procedures for Multiple Significant Trauma).

In the FY 2004 IPPS final rule (68 FR 45372), we discussed the assignment of these codes in response to a request we had received to consider reassignment of these two codes to different MDCs and DRGs. The requester believed that the average charges ($44,000) for these codes warranted reassignment. In the FY 2004 IPPS final rule, we stated that we did not have sufficient MedPAR data available on the reporting of codes 49.75 and 49.76 to make a determination on DRG reassignment of these codes. We agreed that, if warranted, we would give further consideration to the DRG assignments of these codes because it is our customary practice to review DRG assignment(s) for newly created codes to determine clinical coherence and similar resource consumption after we have had the opportunity to collect MedPAR data on utilization, average lengths of stay, average charges, and distribution throughout the system. In the FY 2005 IPPS final rule, we reviewed the FY 2003 MedPAR data for the presence of codes 49.75 and 49.76 and determined that these procedures were not a clinical match with the other procedures in DRGs 157 and 158. Therefore, for FY 2005, we moved procedure codes 49.75 and 49.76 out of DRGs 157 and 158 and into DRGs 146 and 147 (Rectal Resection With and Without CC, respectively). This change had the effect of doubling the payment for the cases with procedure codes 49.75 and 49.76 assigned to DRGs 146 and 147 based on increases in the relative weights. One commenter had suggested that we create a new DRG for “Complex Anal/Rectal Procedure with Implant.” However, we noted that the DRG structure is a system of averages and is based on groups of patients with similar characteristics. At that time, we indicated that we would continue to monitor procedure codes 49.75 and 49.76 and the DRGs to which they are assigned.

For this FY 2006 proposed rule, we reviewed the FY 2004 MedPAR data for the presence of codes 49.75 and 49.76. We found that these two procedures are still of low incidence. Among the six possible DRG assignments, we found a total of 18 cases reported with codes 49.75 and 49.76 for the implant, revision, or removal of the artificial anal sphincter. We found 13 of these cases in DRGs 146 and 147 (compared to 12,558 total cases in these DRGs), and the remaining 5 cases in DRGs 442 and 443 (compared to 19,701 total cases in these DRGs).

We believe the number of cases with codes 49.75 and 49.76 in these DRGs is too low to provide meaningful data of statistical significance. Therefore, we are not proposing any further changes to the DRGs for these procedures at this time. Neither are we proposing to change the structure of DRGs 146 or 147 at this time.

6. MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue)

a. Hip and Knee Replacements

Orthopedic surgeons representing the American Association of Orthopaedic Surgeons (AAOS) requested that we subdivide DRG 209 (Major Joint and Limb Reattachment Procedures of Lower Extremity) in MDC 8 by creating a new DRG for revision of lower joint procedures. The AAOS made a presentation at the October 7-8, 2004 meeting of the ICD-9-CM Coordination and Maintenance Committee meeting. A summary report of this meeting can be found at the CMS Web site: http://www.cms.hhs.gov/paymentsystems/icd9/. We also received written comments on this request.

The AAOS surgeons stated that cases involving patients who require a revision of a prior replacement of a knee or hip require significantly more resources than cases in which patients receive an initial joint replacement. They pointed out that total joint replacement is one of the most commonly performed and successful operations in orthopedic surgery. The surgeons mentioned that, in 2002, over 300,000 hip replacement and 350,000 knee replacement procedures were performed in the United States. They also pointed out that these procedures are a frequent reason for Medicare hospitalization. The surgeons stated that total joint replacements have been shown to be highly cost-effective procedures, resulting in dramatic improvements in quality of life for patients suffering from disabling arthritic conditions involving the hip or knee. In addition, they reported that the medical literature indicates success rates of greater than 90 percent for implant survivorship, reduction in pain, and improvement in function at a 10-year to 15-year followup. However, despite these excellent results with primary total joint replacement, factors related to implant longevity and evolving patient demographics have led to an increase in the volume of revision total joint procedures performed in the United States over the past decade.

Total hip replacement is an operation that is intended to reduce pain and restore function in the hip joint by replacing the arthritic hip joint with a prosthetic ball and socket joint. The prosthetic hip joint consists of a metal alloy femoral component with a modular femoral head made of either metal or ceramic (the “ball”) that articulates with a metal acetabular component with a modular liner made of either metal, ceramic, or high-density polyethylene (the “socket”).

The AAOS surgeons stated that in a normal knee, four ligaments help hold the bones in place so that the joint works properly. When a knee becomes arthritic, these ligaments can become scarred or damaged. During knee replacement surgery, some of these ligaments, as well as the joint surfaces, are substituted or replaced by the new artificial prostheses. Two types of fixation are used to hold the prostheses in place. Cemented designs use polymethyl methacrylate to hold the prostheses in place. Cementless designs rely on bone growing into the surface of the implant for fixation.

The surgeons stated that all hip and knee replacements have an articular bearing surface that is subject to wear (the acetabular bearing surface in the hip and the tibial bearing surface in the knee). Traditionally, these bearing surfaces have been made of metal-on-metal or metal-on-polyethylene, although newer materials (both metals and ceramics) have been used more recently. Earlier hip and knee implant designs had nonmodular bearing surfaces, but later designs included modular articular bearing surfaces to reduce inventory and potentially simplify revision surgery. Wear of the articular bearing surface occurs over time and has been found to be related to many factors, including the age and activity level of the patient. In some cases, wear of the articular bearing surface can produce significant debris particles that can cause peri-prosthetic bone resorption (also known and osteolysis) and mechanical loosening of the prosthesis. Wear of the bearing surface can also lead to instability or prosthetic dislocation, or both, and is a common cause of revision hip or knee replacement surgery.

Depending on the cause of failure of the hip replacement, the type of implants used in the previous surgery, the amount and quality of the patient's remaining bone stock, and factors related to the patient's overall health and anatomy, revision hip replacement surgery can be relatively straightforward or extremely complex. Revision hip replacement can involve replacing any part or all of the implant, including the femoral or acetabular components, and the bearing surface (the femoral head and acetabular liner), and may involve major reconstruction of the bones and soft tissues around the hip. All of these procedures differ significantly in their clinical indications, outcomes, and resource intensity.

The AAOS surgeons provided the following summary of the types of revision knee replacement procedures: Among revision knee replacement procedures, patients who underwent complete revision of all components had longer operative times, higher complication rates, longer lengths of stay, and significantly higher resource utilization, according to studies conducted by the AAOS. Revision of the isolated modular tibial insert component was the next most resource-intensive procedure, and primary total knee replacement was the least resource-intensive of all the procedures studied.

  • Isolated Modular Tibial Insert Exchange. Isolated removal and exchange of the modular tibial bearing surface involves replacing the modular polyethylene bearing surface without removing the femoral, tibial, or patellar components of the prosthetic joint. Common indications for this procedure include wear of the polyethylene bearing surface or instability (for example, looseness) of the prosthetic knee joint. Patient recovery times are much shorter with this procedure than with removal and exchange of either the tibial, femoral, or patellar components.
  • Revision of the Tibial Component. Revision of the tibial component involves removal and exchange of the entire tibial component, including both the metal base plate and the modular polyethylene bearing surface. Common indications for tibial component revision are wear of the modular bearing surface, aseptic loosening (often associated with osteolysis), or infection. Depending on the amount of associated bone loss and the integrity of the ligaments around the knee, tibial component revision may require the use of specialized implants with stems that extend into the tibial canal and/or the use of metal augments or bone graft to fill bony defects.
  • Revision of the Femoral Component. Revision of the femoral component involves removal and exchange of the metal implant that covers the end of the thigh-bone (the distal femur). Common indications for femoral component revision are aseptic loosening with or without associated osteolysis/bone loss, or infection. Similar to tibial revision, femoral component revision that is associated with extensive bone loss often involves the use of specialized implants with stems that extend into the femoral canal and/or the use of metal augments or bone graft to fill bony defects.
  • Revision of the Patellar Component. Complications related to the patella-femoral joint are one of the most common indications for revision knee replacement surgery. Early patellar implant designs had a metal backing covered by high-density polyethylene; these implants were associated with a high rate of failure due to fracture of the relatively thin polyethylene bearing surface. Other common reasons for isolated patellar component revision include poor tracking of the patella in the femoral groove leading to wear and breakage of the implant, fracture of the patella with or without loosening of the patellar implant, rupture of the quadriceps or patellar tendon, and infection.
  • Revision of All Components (Tibial, Femoral, and Patellar). The most common type of revision knee replacement procedure is a complete total knee revision. A complete revision of all implants is more common in knee replacements than hip replacements because the components of an artificial knee are not compatible across vendors or types of prostheses. Therefore, even if only one of the implants is loose or broken, a complete revision of all components is often required in order to ensure that the implants are compatible. Complete total knee revision often involves extensive surgical approaches, including osteotomizing (for example, cutting) the tibia bone in order to adequately expose the knee joint and gain access to the implants. These procedures often involve extensive bone loss, requiring reconstruction with specialized implants with long stems and metal augments or bone graft to fill bony defects. Depending on the status of the ligaments in the knee, complete total knee revision at times requires implantation of a highly constrained or “hinged” knee replacement in order to ensure stability of the knee joint.
  • Reimplantation from previous resection or cement spacer. In cases of deep infection of a prosthetic knee, removal of the implants with implantation of an antibiotic-impregnated cement spacer, followed by 6 weeks of intravenous antibiotics is often required in order to clear the infection. Revision knee replacement from an antibiotic impregnated cement spacer often involves complex bony reconstruction due to extensive bone loss that occurs as a result of the infection and removal of the often well-fixed implants. As noted above, the clinical outcomes following revision from a spacer are often poor due to limited functional capacity while the spacer is in place, prolonged periods of protected weight bearing (following reconstruction of extensive bony defects), and the possibility of chronic infection.

The surgeons stated that the current ICD-9-CM codes did not adequately capture the complex nature of revisions of hip and knee replacements. Currently, code 81.53 (Revision of hip replacement) captures all “partial” and “total” revision hip replacement procedures. Code 81.55 (Revision of knee replacement) captures all revision knee replacement procedures. These two codes currently capture a wide variety of procedures that differ in their clinical indications, resource intensity, and clinical outcomes.

An AAOS representative made a presentation at the October 7-8, 2004 ICD-9-CM Coordination and Maintenance Committee. Based on the comments received at the October 7-8, 2004 meeting and subsequent written comments, new ICD-9-CM procedure codes were developed to better capture the variety of ways that revision of hip and knee replacements can be performed: codes 00.70 through 00.73 and code 81.53 for revisions of hip replacements and codes 00.80 through 00.84 and code 81.55 for revisions of knee replacements. These new and revised procedure codes, which will be effective on October 1, 2005, can be found in Table 6B and Table 6F of this proposed rule. The commenters stated that claims data using these new and specific codes should provide improved data on these procedures for future DRG modifications.

However, the commenters requested that CMS consider DRG modifications based on current data using the existing revision codes. The commenters reported on a recently completed study comparing detailed hospital resource utilization and clinical characteristics in over 10,000 primary and revision hip and knee replacement procedures at 3 high volume institutions: The Massachusetts General Hospital, the Mayo Clinic, and the University of California at San Francisco. The purpose of this study was to evaluate differences in clinical outcomes and resource utilization among patients who underwent different types of primary and revision hip or knee replacement procedures. The study found significant differences in operative time, complication rates, hospital length of stay, discharge disposition, and resource utilization among patients who underwent different types of revision hip or knee replacement procedures.

Among revision hip replacement procedures, patients who underwent both femoral and acetabular component revision had longer operative times, higher complication rates, longer lengths of stay, significantly higher resource utilization, and were more likely to be discharged to a subacute care facility. Isolated femoral component revision was the next most resource-intensive procedure, followed by isolated acetabular revision. Primary hip replacement was the least resource intensive of all the procedures studied. Similarly, among revision knee replacement procedures, patients who underwent complete revision of all components had longer operative times, higher complication rates, longer lengths of stay, and significantly higher resource utilization. Revision of one component was the next most resource-intensive procedure. Primary total knee replacement was the least resource intensive of all the procedures studied.

In addition, the commenters indicated that the data showed that extensive bone loss around the implants and the presence of a peri-prosthetic fracture were the most significant predictors of higher resource utilization among all revision hip and knee replacement procedures, even when controlling for other significant patient and procedural characteristics.

For this proposed rule, we examined data in the FY 2004 MedPAR file on the current hip replacement procedures (codes 81.51, 81.52, 81.53) as well as the replacements and revisions of knee replacement procedures (codes 81.54 and 81.55) in DRG 209. We found that revisions were significantly more resource intensive than the original hip and knee replacements. We found average charges for revisions of hip and knee replacements were approximately $7,000 higher than average charges for the original joint replacements, as shown in the following charts. The average charges for revisions of hip replacements were 21 percent higher than the average charges for initial hip replacements. The average charges for revisions of knee replacements were 25 percent higher than for initial knee replacements.

We note that there were no cases in DRG 209 for reattachment of the foot, lower leg, or thigh (codes 84.29, 84.27, and 84.28).

To address the higher resource costs associated with hip and knee revisions relative to the initial joint replacement procedure, we are proposing to delete DRG 209, create a proposed new DRG 544 (Major Joint Replacement or Reattachment of Lower Extremity), and create a proposed new DRG 545 (Revision of Hip or Knee Replacement).

We are proposing to assign the following codes to the new proposed DRG 544:

  • 81.51, Total hip replacement.
  • 81.52, Partial hip replacement.
  • 81.54, Total knee replacement.
  • 81.56, Total ankle replacement.
  • 84.26, Foot reattachment.
  • 84.27, Lower leg/ankle reattach.
  • 84.28, Thigh reattachment.

We are proposing to assign the following codes to the proposed new DRG 545:

  • 00.70, Revision of hip replacement, both acetabular and femoral components.
  • 00.71, Revision of hip replacement, acetabular component.
  • 00.72, Revision of hip replacement, femoral component.
  • 00.73, Revision of hip replacement, acetabular liner and/or femoral head only.
  • 00.80, Revision of knee replacement, total (all components).
  • 00.81, Revision of knee replacement, tibial component.
  • 00.82, Revision of knee replacement, femoral component.
  • 00.83, Revision of knee replacement, patellar component.
  • 00.84, Revision of knee replacement, tibial insert (liner).
  • 81.53, Revision of hip replacement, not otherwise specified.
  • 81.55, Revision of knee replacement, not otherwise specified.

We agree with the commenters and the AAOS that the creation of a new DRG for revisions of hip and knee replacements should resolve payment issues for hospitals that perform the more difficult revisions of joint replacements. In addition, as stated earlier, we have worked with the orthopedic community to develop new procedure codes that better capture data on the types of revisions of hip and knee replacements. These new codes will be implemented on October 1, 2005. Once we receive claims data using these new codes, we will review data to determine if additional DRG modifications are needed. This effort may include assigning some of the revision codes, such as 00.83 and 00.84 to a separate DRG. As stated earlier, the AAOS has found that some of the procedures may not be as resource intensive. Therefore, the AAOS has requested that CMS closely examine data from the use of the new codes and consider future revisions.

b. Kyphoplasty

In the FY 2005 IPPS final rule (69 FR 48938), we discussed the creation of new codes for vertebroplasty (81.65) and kyphoplasty (81.66), which went into effect on October 1, 2004. Prior to October 1, 2004, both of these surgical procedures were assigned to code 78.49 (Other repair or plastic operation on bone). For FY 2005, we assigned these codes to DRGs 233 and 234 (Other Musculoskeletal System and Connective Tissue O.R. Procedure With and Without CC, respectively) in MDC 8 (Table 6B of the FY 2005 final rule). (In the FY 2005 IPPS final rule (69 FR 48938), we indicated that new codes 81.65 and 81.66 were assigned to DRGs 223 and 234. We made a typographical error when indicating that these codes were assigned to DRG 223. Codes 81.65 and 81.66 have been assigned to DRGs 233 and 234.) Last year, we received comments opposing the assignment of code 81.66 to DRGs 233 and 234. The commenters supported the creation of the codes for kyphoplasty and vertebroplasty but recommended that code 81.66 be assigned to DRGs 497 and 498 (Spinal Fusion Except Cervical With and Without CC, respectively). The commenters stated that kyphoplasty requires special inflatable bone tamps and bone cement and is a significantly more resource intensive procedure than vertebroplasty. The commenters further stated that, while kyphoplasty involves internal fixation of the spinal fracture and restoration of vertebral heights, vertebroplasty involves only fixation. The commenters indicated that hospital costs for kyphoplasty procedures are more similar to resources used in a spinal fusion.

We stated in the FY 2005 IPPS final rule that we did not have data in the MedPAR file on kyphoplasty and vertebroplasty. Prior to October 1, 2004, both procedures were assigned in code 78.49, which was assigned to DRGs 233 and 234 in MDC 8. We stated that we would continue to review this area as part of our annual review of MedPAR data. While we do not have separate data for kyphoplasty because code 81.66 was not established until October 1, 2004, for this proposed rule, we did examine data on code 78.49, which includes both kyphoplasty and vertebroplasty procedures reported in DRGs 233 and 234. The following chart illustrates our findings:

We do not believe these data findings support moving cases represented by code 78.49 out of DRGs 233 and 234. While we cannot distinguish cases that are kyphoplasty from cases that are vertebroplasty, cases represented by code 78.49 have lower charges than do other cases within DRGs 233 and 234. Therefore, we are not proposing to change the DRG assignment of code 81.66 to DRGs 233 and 234 at this time. However, once specific charge data are available, we will consider whether further changes are warranted.

c. Multiple Level Spinal Fusion

On October 1, 2003, the following ICD-9-CM codes were created to identify the number of levels of vertebra fused during a spinal fusion procedure:

  • 81.62, Fusion or refusion of 2-3 vertebrae.
  • 81.63, Fusion or refusion of 4-8 vertebrae.
  • 81.64, Fusion or refusion of 9 or more vertebrae.

Prior to the creation of these codes, we received a comment recommending the establishment of new DRGs that would be differentiated based on the number of vertebrae fused. In the FY 2005 IPPS final rule (69 FR 48936), we stated that we did not yet have any reported cases utilizing these multiple level spinal fusion codes. We stated that we would wait until sufficient data were available prior to making a final determination on whether to create separate DRGs based on the number of vertebrae fused. We also stated that spinal fusion surgery was an area undergoing rapid changes.

Effective October 1, 2004, we created a series of codes that describe a new type of spinal surgery, spinal disc replacement. Our medical advisors describe these procedures as a more conservative approach for back pain than the spinal fusion surgical procedure. These codes are as follows:

  • 84.60, Insertion of spinal disc prosthesis, not otherwise specified.
  • 84.61, Insertion of partial spinal disc prosthesis, cervical.
  • 84.62, Insertion of total spinal disc prosthesis, cervical.
  • 84.63, Insertion of spinal disc prosthesis, thoracic.
  • 84.64, Insertion of partial spinal disc prosthesis, lumbosacral.
  • 84.65, Insertion of total spinal disc prosthesis, lumbosacral.
  • 84.66, Revision or replacement of artificial spinal disc prosthesis, cervical.
  • 84.67, Revision or replacement of artificial spinal disc prosthesis, thoracic.
  • 84.68, Revision or replacement of artificial spinal disc prosthesis, lumbosacral.
  • 84.69, Revision or replacement of artificial spinal disc prosthesis, not otherwise specified.

We also created the following two codes effective October 1, 2004, for these new types of spinal surgery that are also a more conservative approach to back pain than is spinal fusion:

  • 81.65 Vertebroplasty.
  • 81.66 Kyphoplasty.

We do not yet have data in the MedPAR file on these new types of procedures. Therefore, we cannot yet determine what effect these new types of procedures will have on the frequency of spinal fusion procedures.

However, we do have data in the MedPAR file on multiple level spinal procedures for analysis for this year's proposed rule. We examined data in the FY 2004 MedPAR file on spinal fusion cases in the following DRGs:

  • DRG 496 (Combined Anterior/Posterior Spinal Fusion).
  • DRG 497 (Spinal Fusion Except Cervical With CC).
  • DRG 498 (Spinal Fusion Except Cervical Without CC).
  • DRG 519 (Cervical Spinal Fusion With CC).
  • DRG 520 (Cervical Spinal Fusion Without CC).

Multiple level spinal fusion is captured by code 81.63 (Fusion or refusion of 4-8 vertebrae) and code 81.64 (Fusion or refusion of 9 or more vertebrae). Code 81.62 includes the fusion of 2-3 vertebrae and is not considered a multiple level spinal fusion. Orthopedic surgeons stated at the October 7-8, 2004 ICD-9-CM Coordination and Maintenance Committee meeting that the most simple and common type of spinal fusion involves fusing either 2 or 3 vertebrae. These surgeons stated that there was not a significant difference in resource utilization for cases involving the fusion of 2 versus 3 vertebrae. For this reason, the orthopedic surgeons recommended that fusion of 2 and 3 vertebrae be grouped into one ICD-9-CM code.

We reviewed the Medicare charge data to determine whether the number of vertebrae fused or specific diagnoses have an effect on average length of stay and resource use for a patient. We found that, while fusing 4 or more levels of the spine results in a small increase in the average length of stay and a somewhat larger increase in average charges for spinal fusion patients, an even greater impact was made by the presence of a principal diagnosis of curvature of the spine or malignancy. The following list of diagnoses describes conditions that have a significant impact on resource use for spinal fusion patients:

  • 170.2, Malignant neoplasm of vertebral column, excluding sacrum and coccyx.
  • 198.5, Secondary malignant neoplasm of bone and bone marrow.
  • 732.0, Juvenile osteochondrosis of spine.
  • 733.13, Pathologic fracture of vertebrae.
  • 737.0, Adolescent postural kyphosis.
  • 737.10, Kyphosis (acquired) (postural).
  • 737.11, Kyphosis due to radiation.
  • 737.12, Kyphosis, postlaminectomy.
  • 737.19, Kyphosis (acquired), other.
  • 737.20, Lordosis (acquired) (postural).
  • 737.21, Lordosis, postlaminectomy
  • 737.22, Other postsurgical lordosis.
  • 737.29, Lordosis (acquired), other.
  • 737.30, Scoliosis [and kyphoscoliosis], idiopathic.
  • 737.31, Resolving infantile idiopathic scoliosis.
  • 737.32, Progressive infantile idiopathic scoliosis.
  • 737.33, Scoliosis due to radiation.
  • 737.34, Thoracogenic scoliosis.
  • 737.39, Other kyphoscoliosis and scoliosis.
  • 737.40, Curvature of spine, unspecified.
  • 737.41, Curvature of spine associated with other conditions, kyphosis.
  • 737.42, Curvature of spine associated with other conditions, lordosis.
  • 737.43, Curvature of spine associated with other conditions, scoliosis.
  • 737.8, Other curvatures of spine.
  • 737.9, Unspecified curvature of spine.
  • 754.2, Congenital scoliosis.
  • 756.51, Osteogenesis imperfecta.

The majority of fusion patients with these diagnoses were in DRGs 497 and 498. The chart below reflects our findings. We also include in the chart statistics for cases in DRGs 497 and 498 with spinal fusion of 4 or more vertebrae and cases with a principal diagnosis of curvature of the spine or bone malignancy.

Thus, these diagnoses result in a significant increase in resource use. While the fusing of 4 or more vertebrae resulted in average charges of $77,352, the impact of a principal diagnosis of curvature of the spine or bone malignancy was substantially greater with average charges of $95,315.

Based on this analysis, we are proposing to create a new DRG for noncervical spinal fusions with a principal diagnosis of curvature of the spine and malignancies. The proposed new DRG would be: proposed new DRG 546 (Spinal Fusions Except Cervical With Principal Diagnosis of Curvature of the Spine or Malignancy). Cases included in this proposed new DRG would include all noncervical spinal fusions previously assigned to DRGs 497 and 498 that have a principal diagnosis of curvature of the spine or malignancy and would include the following codes listed above: 170.2, 198.5, 732.0, 733.13, 737.0, 737.10, 737.11, 737.12, 737.19, 737.20, 737.21, 737.22, 737.29, 737.30, 737.31, 737.32, 737.33, 737.34, 737.39, 737.40, 737.41, 737.42, 737.43, 737.8, 737.9, 754.2, and 756.51. The proposed DRG 546 would not include cases currently assigned to DRGs 496, 519, or 520 that have a principal diagnosis of curvature of the spine or malignancy. The structure of DRGs 496, 519, and 520 would remain the same.

As part of our meeting with the AAOS on DRG 209 in February 2005 (discussed under section II.B.6.a. of this preamble), the AAOS offered to work with CMS to analyze clinical issues and make revisions to the spinal fusion DRGs (DRGs 496 through 498 and 519 and 520). At this time, we are limiting our proposed changes to the spinal fusion DRGs for FY 2006 to the creation of the proposed DRG 546 discussed above. However, we look forward to working with the AAOS to obtain its clinical recommendations concerning our proposed changes and potential additional modifications to the spinal fusion DRGs. We are also soliciting comments from the public on our proposed changes and how to incorporate new types of spinal procedures such as kyphoplasty and spinal disc prostheses into the spinal fusion DRGs.

7. MDC 18 (Infectious and Parasitic Diseases (Systemic or Unspecified Sites)): Severe Sepsis

As we did for FY 2005, we received a request to consider the creation of a separate DRG for the diagnosis of severe sepsis for FY 2006. Severe sepsis is described by ICD-9-CM code 995.92 (Systemic inflammatory response syndrome due to infection with organ dysfunction). Patients admitted with sepsis currently are assigned to DRG 416 (Septicemia Age 17) and DRG 417 (Septicemia Age 0-17) in MDC 18 (Infectious and Parasitic Diseases, Systemic or Unspecified Sites). The commenter requested that all cases in which severe sepsis is present on admission, as well as those cases in which it develops after admission (which are currently classified elsewhere), be included in this new DRG. We addressed this issue in the FY 2005 IPPS final rule (69 FR 48975). As indicated last year, we do not feel the current clinical definition of severe sepsis is specific enough to identify a meaningful cohort of patients in terms of clinical coherence and resource utilization to warrant a separate DRG. Sepsis is found across hundreds of medical and surgical DRGs, and the term “organ dysfunction” implicates numerous currently existing diagnosis codes. While we recognize that Medicare beneficiaries with severe sepsis are quite ill and require extensive hospital resources, we do not believe that they can be identified adequately to justify removing them from all of the other DRGs in which they appear. We are not proposing a new DRG for severe sepsis at this time.

8. MDC 20 (Alcohol/Drug Use and Alcohol/Drug Induced Organic Mental Disorders): Drug-Induced Dementia

In the FY 2005 IPPS final rule (69 FR 48939, August 11, 2004), we discussed a request that CMS modify DRGs 521 through 523 by removing the principal diagnosis code 292.82 (Drug-induced dementia) from these alcohol and drug abuse DRGs. These DRGs are as follows:

  • DRG 521 (Alcohol/Drug Abuse or Dependence With CC).
  • DRG 522 (Alcohol/Drug Abuse or Dependence With Rehabilitation Therapy Without CC).
  • DRG 523 (Alcohol/Drug Abuse or Dependence Without Rehabilitation Therapy Without CC).

The commenter indicated that a patient who has a drug-induced dementia should not be classified to an alcohol/drug DRG. However, the commenter did not propose a new DRG assignment for code 292.82. Our medical advisors evaluated the request and determined that the most appropriate DRG classification for a patient with drug-induced dementia was within MDC 20. The medical advisors indicated that because the dementia is drug induced, it is appropriately classified to DRGs 521 through 523 in MDC 20. Therefore, we did not propose a new DRG classification for the principal diagnosis code 292.82.

In the FY 2005 IPPS final rule, we addressed a comment from an organization representing hospital coders that disagreed with our decision to keep code 292.82 in DRGs 521 through 523. The commenter stated that DRGs 521 through 523 are described as alcohol/drug abuse and dependence DRGs, and that drug-induced dementia can be caused by an adverse effect of a prescribed medication or a poisoning. The commenter did not believe that assignment to DRGs 521 through 523 was appropriate if the drug-induced dementia is due to one of these events and the patient is not alcohol or drug dependent. The commenter recommended that admissions for drug-induced dementia be classified to DRGs 521 through 523 only if there is a secondary diagnosis indicating alcohol/drug abuse or dependence.

The commenter recommended that drug-induced dementia that is due to the adverse effect of a drug or poisoning be classified to the same DRGs as other types of dementia, such as DRG 429 (Organic Disturbances and Mental Retardation). The commenter believed that when drug-induced dementia is caused by a poisoning, either accidental or intentional, the appropriate poisoning code would be sequenced as the principal diagnosis and, therefore, these cases would likely already be assigned to DRGs 449 and 450 (Poisoning and Toxic Effects of Drugs, Age Greater than 17, With and Without CC, respectively) and DRG 451 (Poisoning and Toxic Effects of Drugs, Age 0-17). The commenter stated that these would be the appropriate DRG assignments for drug-induced dementia due to a poisoning. We received a similar comment from a hospital organization.

In the FY 2005 IPPS final rule, we acknowledged that the commenters raised additional issues surrounding the DRG assignment for code 292.82 that should be considered. The commenters provided alternatives for DRG assignment based on sequencing of the principal diagnosis and reporting of additional secondary diagnoses. We recognized that patients may develop drug-induced dementia from drugs that are prescribed, as well as from drugs that are not prescribed. However, because dementia develops as a result of use of a drug, we believed the current DRG assignment to DRGs 521 through 523 remained appropriate. Some commenters have agreed with the current DRG assignment of code 292.82 since the dementia was caused by use of a drug. We agree that if either accidental or intentional poisoning caused the drug-induced dementia, the appropriate poisoning code should be sequenced as the principal diagnosis. As one commenter stated, these cases would be assigned to DRGs 449 through 451. We encouraged hospitals to examine the coding for these types of cases to determine if there were any coding or sequencing errors. As suggested by the commenter, if code 292.82 were reported as a secondary diagnosis and not a principal diagnosis in cases of poisoning or adverse drug reactions, the number of cases on DRGs 521 through 523 would decline.

In the FY 2005 IPPS final rule, we agreed to analyze this area for FY 2006 and to look at the alternative DRG assignments suggested by the commenters. For this proposed rule, we examined data from the FY 2004 MedPAR file on cases in DRGs 521 through 523 with a principal diagnosis of code 292.82. We found that there were only 134 cases reported with the principal diagnosis code 292.82 in DRGs 521 through 523 without a diagnosis of drug and alcohol abuse. The average standardized charges for cases with a principal diagnosis of code 292.82 that did not have a secondary diagnosis of drug/alcohol abuse or dependence were $12,244.35, compared to the average standardized charges for all cases in DRG 521, which were $10,543.69. There were no cases in DRG 522 with a principal diagnosis of code 292.82. We found only 24 cases in DRG 523 with a principal diagnosis of code 292.82. Given the small number of cases in DRG 522 and 523, and the similarity in average standardized charges between those cases in DRG 521 with a principal diagnosis of code 292.82 and without a secondary diagnosis of drug/alcohol abuse or dependence to the overall average for all cases in the DRG, we do not believe the data suggest that a modification to DRGs 521 through 523 is warranted. Therefore, we are not proposing changes to the current structure of DRGs 521 through 523 for FY 2006.

9. Medicare Code Editor (MCE) Changes

(If you choose to comment on issues in this section, please include the caption “Medicare Code Editor” at the beginning of your comment.)

As explained under section II.B.1. of this preamble, the Medicare Code Editor (MCE) is a software program that detects and reports errors in the coding of Medicare claims data. Patient diagnoses, procedure(s), discharge status, and demographic information go into the Medicare claims processing systems and are subjected to a series of automated screens. The MCE screens are designed to identify cases that require further review before classification into a DRG.

a. Newborn Age Edit

In the past, we have discussed and received comments concerning revision of the pediatric portions of the Medicare IPPS DRG classification system, that is, MDC 15 (Newborns and Other Neonates With Conditions Originating in the Perinatal Period). Most recently, we addressed these comments in both the FY 2005 proposed rule (69 FR 28210) and the FY 2005 IPPS final rule (69 FR 48938). In those rules, we indicated that we would be responsive to specific requests for updating MDC 15 on a limited, case-by-case basis.

We have recently received a request through the Open Door Forum to revise the MCE “newborn age edit” by removing over 100 codes located in Chapter 15 of ICD-9-CM that are identified as “newborn” codes. This request was made because these codes usually cause an edit or denial to be triggered when they are used on children greater than 1 year of age. However, the underlying issue with these particular edits is that other payers have adopted the CMS Medicare Code Editor in a wholesale manner, instead of adapting it for use in their own patient populations.

We acknowledge that Medicare DRGs are sometimes used to classify other patient groups. However, CMS' primary focus of updates to the Medicare DRG classification system is on changes relating to the Medicare patient population, not the pediatric or neonatal patient populations.

There are practical considerations regarding the assumption of a larger role for the Medicare DRG in the pediatric or neonatal areas, given the difference between the Medicare population and that of newborns and children. There are also challenges surrounding the development of DRG classification systems and applications appropriate to children. We do not have the clinical expertise to make decisions about these patients, and must rely on outside clinicians for advice. In addition, because newborns and other children are generally not eligible for Medicare, we must rely on outside data to make decisions. We recognize that there are evolving alternative classification systems for children and encourage payers to use the CMS MCE as a template while making modifications appropriate for pediatric patients.

Therefore, we would encourage those non-Medicare systems needing a more comprehensive pediatric system of edits to update their systems by choosing from other existing systems or programs that are currently in use. Because of our reluctance to assume expertise in the pediatric arena, we are not proposing to make the commenter's suggested changes to the MCE “newborn age edit” for FY 2006.

b. Newborn Diagnoses Edit

Last year, in our changes to the MCE, we inadvertently added code 796.6 (Abnormal findings on neonatal screening) to both the MCE edit for “Maternity Diagnoses—age 12 through 55”, and the MCE edit for “Diagnoses Allowed for Females Only”. We are proposing to remove code 796.6 from these two edits and add it to the “Newborn Diagnoses” edit.

c. Diagnoses Allowed for “Males Only” Edit

We have received a request to remove two codes from the “Diagnoses Allowed for Males Only” edit, related to androgen insensitivity syndrome (AIS). AIS is a new term for testicular feminization. Code 257.8 (Other testicular dysfunction) is used to describe individuals who, despite having XY chromosomes, develop as females with normal female genitalia and mammary glands. Testicles are present in the same general area as the ovaries, but are undescended and are at risk for development of testicular cancer, so are generally surgically removed. These individuals have been raised as females, and would continue to be considered female, despite their XY chromosome makeup. Therefore, as AIS is coded to 257.8, and has posed a problem associated with the gender edit, we are proposing to remove this code from the “Males Only” edit in the MCE.

A similar clinical scenario can occur with certain disorders that cause a defective biosynthesis of testicular androgen. This disorder is included in code 257.2 (Other testicular hypofunction). Therefore, we also are proposing to remove code 257.2 from the “Male Only” gender edit in the MCE.

d. Tobacco Use Disorder Edit

We have become aware of the possible need to add code 305.1 (Tobacco use disorder) to the MCE in order to make admissions for tobacco use disorder a noncovered Medicare service when code 305.1 is reported as the principal diagnosis. On March 22, 2005, CMS published a final decision memorandum and related national coverage determination (NCD) on smoking cessation counseling services on its Web site: (http://www.cms.hhs.gov/coverage/). Among other things, this NCD provides that: “Inpatient hospital stays with the principal diagnosis of 305.1, Tobacco Use Disorder, are not reasonable and necessary for the effective delivery of tobacco cessation counseling services. Therefore, we will not cover tobacco cessation services if tobacco cessation is the primary reason for the patient's hospital stay.” Therefore, in order to maintain internal consistency with CMS programs and decisions, we are proposing to add code 305.1 to the MCE edit “Questionable Admission-Principal Diagnosis Only” in order to make tobacco use disorder a noncovered admission.

e. Noncovered Procedure Edit

Effective October 1, 2004, CMS adopted the use of code 00.61 (Percutaneous angioplasty or atherectomey of precerebral (extracranial) vessel(s) (PTA)) and code 00.63 (Percutaneous insertion of carotid artery stent(s). Both codes are to be recorded to indicate the insertion of a carotid artery stent or stents. At the time of the creation of the codes, the coverage indication for carotid artery stenting was only for patients in a clinical trial setting, and diagnostic code V70.7 (Examination of participation in a clinical trial) was required for payment of these cases. However, effective October 12, 2004, Medicare covers PTA of the carotid artery concurrent with the placement of an FDA-approved carotid stent for an FDA-approved indication when furnished in accordance with FDA-approved protocols governing post-approval studies. Therefore, as the coverage indication has changed, we are proposing to remove codes 00.61, 00.63, and V70.7 from the MCE noncovered procedure edit.

10. Surgical Hierarchies

(If you choose to comment on issues in this section, please include the caption “Surgical Hierarchy” at the beginning of your comment.)

Some inpatient stays entail multiple surgical procedures, each one of which, occurring by itself, could result in assignment of the case to a different DRG within the MDC to which the principal diagnosis is assigned. Therefore, it is necessary to have a decision rule within the GROUPER by which these cases are assigned to a single DRG. The surgical hierarchy, an ordering of surgical classes from most resource-intensive to least resource-intensive, performs that function. Application of this hierarchy ensures that cases involving multiple surgical procedures are assigned to the DRG associated with the most resource-intensive surgical class.

Because the relative resource intensity of surgical classes can shift as a function of DRG reclassification and recalibrations, we reviewed the surgical hierarchy of each MDC, as we have for previous reclassifications and recalibrations, to determine if the ordering of classes coincides with the intensity of resource utilization.

A surgical class can be composed of one or more DRGs. For example, in MDC 11, the surgical class “kidney transplant” consists of a single DRG (DRG 302) and the class “kidney, ureter and major bladder procedures” consists of three DRGs (DRGs 303, 304, and 305). Consequently, in many cases, the surgical hierarchy has an impact on more than one DRG. The methodology for determining the most resource-intensive surgical class involves weighting the average resources for each DRG by frequency to determine the weighted average resources for each surgical class. For example, assume surgical class A includes DRGs 1 and 2 and surgical class B includes DRGs 3, 4, and 5. Assume also that the average charge of DRG 1 is higher than that of DRG 3, but the average charges of DRGs 4 and 5 are higher than the average charge of DRG 2. To determine whether surgical class A should be higher or lower than surgical class B in the surgical hierarchy, we would weight the average charge of each DRG in the class by frequency (that is, by the number of cases in the DRG) to determine average resource consumption for the surgical class. The surgical classes would then be ordered from the class with the highest average resource utilization to that with the lowest, with the exception of “other O.R. procedures” as discussed below.

This methodology may occasionally result in assignment of a case involving multiple procedures to the lower-weighted DRG (in the highest, most resource-intensive surgical class) of the available alternatives. However, given that the logic underlying the surgical hierarchy provides that the GROUPER search for the procedure in the most resource-intensive surgical class, in cases involving multiple procedures, this result is sometimes unavoidable.

We note that, notwithstanding the foregoing discussion, there are a few instances when a surgical class with a lower average charge is ordered above a surgical class with a higher average charge. For example, the “other O.R. procedures” surgical class is uniformly ordered last in the surgical hierarchy of each MDC in which it occurs, regardless of the fact that the average charge for the DRG or DRGs in that surgical class may be higher than that for other surgical classes in the MDC. The “other O.R. procedures” class is a group of procedures that are only infrequently related to the diagnoses in the MDC, but are still occasionally performed on patients in the MDC with these diagnoses. Therefore, assignment to these surgical classes should only occur if no other surgical class more closely related to the diagnoses in the MDC is appropriate.

A second example occurs when the difference between the average charges for two surgical classes is very small. We have found that small differences generally do not warrant reordering of the hierarchy because, as a result of reassigning cases on the basis of the hierarchy change, the average charges are likely to shift such that the higher-ordered surgical class has a lower average charge than the class ordered below it.

Based on the preliminary recalibration of the DRGs, we are proposing to revise the surgical hierarchy for MDC 5 (Diseases and Disorders of the Circulatory System) and MDC 8 (Diseases and Disorders of the Musculoskeletal System and Connective Tissue) as follows:

In MDC 5, we are proposing to reorder—

  • DRG 116 (Other Permanent Cardiac Pacemaker Implant) above DRG 549 (Percutaneous Cardiovascular Procedure With Drug-Eluting Stent With AMI With CC).
  • DRG 549 above DRG 550 (Percutaneous Cardiovascular Procedure With Drug-Eluting Stent With AMI Without CC).
  • DRG 550 above DRG 547 (Percutaneous Cardiovascular Procedure With AMI With CC).
  • DRG 547 above DRG 548 (Percutaneous Cardiovascular Procedure With AMI Without CC).
  • DRG 548 above DRG 527 (Percutaneous Cardiovascular Procedure With Drug-Eluting Stent Without AMI).
  • DRG 527 above DRG 517 (Percutaneous Cardiovascular Procedure With Non-Drug Eluting Stent Without AMI).
  • DRG 517 above DRG 518 (Percutaneous Cardiovascular Procedure Without Coronary Artery Stent or AMI).
  • DRG 518 above DRGs 478 and 479 (Other Vascular Procedures With and Without CC, respectively).

In MDC 8, we are proposing to reorder—

  • DRG 496 (Combined Anterior/Posterior Spinal Fusion) above DRG 546 (Spinal Fusion Except Cervical With Principal Diagnosis of Curvature of the Spine or Malignancy).
  • DRG 546 above DRGs 497 and 498 (Spinal Fusion Except Cervical With and Without CC, respectively).
  • DRG 217 (Wound Debridement and Skin Graft Except Hand, For Musculoskeletal and Connective Tissue Disease) above DRG 545 (Revision of Hip or Knee Replacement).
  • DRG 545 above DRG 544 (Major Joint Replacement or Reattachment).
  • DRG 544 above DRGs 519 and 520 (Cervical Spinal Fusion With and Without CC, respectively).

11. Refinement of Complications and Comorbidities (CC) List

(If you choose to comment on issues in this section, please include the caption “CC List” at the beginning of your comment.)

a. Background

As indicated earlier in this preamble, under the IPPS DRG classification system, we have developed a standard list of diagnoses that are considered complications or comorbidities (CCs). Historically, we developed this list using physician panels that classified each diagnosis code based on whether the diagnosis, when present as a secondary condition, would be considered a substantial complication or comorbidity. A substantial complication or comorbidity was defined as a condition that, because of its presence with a specific principal diagnosis, would cause an increase in the length of stay by at least 1 day in at least 75 percent of the patients.

b. Comprehensive Review of the CC List

In previous years, we have made changes to the standard list of CCs, either by adding new CCs or deleting CCs already on the list, but we have never conducted a comprehensive review of the list. There are currently 3,285 diagnosis codes on the CC list. There are 121-paired DRGs that are split on the presence or absence of a CC.

We have reviewed these paired DRGs and found that the majority of cases that are assigned to DRGs that have a CC split fall into the DRG with CC. While this fact is not new, we have found that a much higher proportion of cases are being grouped to the DRG with a CC than had occurred in the past. In our review of the DRGs included in Table 7b of the September 1, 1987 Federal Register rule (52 FR 33125), we found the following percentages of cases assigned a CC in those DRGs that had a CC split (DRG Definitions Manual, GROUPER Version 5.0 (1986 data)):

  • Cases with CC: 61.9 percent.
  • Cases without CC: 38.1 percent.

When we compared the above DRG 1986 data to the DRG 2004 data that were included in the DRGs Definitions Manual, GROUPER Version 22.0, we found the following:

  • Cases with CC: 79.9 percent.
  • Cases without CC: 20.1 percent.

(We used DRGs Definitions Manual, GROUPER Version 5.0, for this analysis because prior versions of the DRGs Definitions Manual used age as a surrogate for a CC and the split was “CC and/or age greater than 69”.)

The vast majority of patients being treated in inpatient settings have a CC as currently defined, and we believe that it is possible that the CC distinction has lost much of its ability to differentiate the resource needs of patients. The original definition used to develop the CC list (the presence of a CC would be expected to extend the length of stay of at least 75 percent of the patients who had the CC by at least one day) was used beginning in 1981 and has been part of the IPPS since its inception in 1983. There has been no substantive review of the CC list since its original development. In reviewing this issue, our clinical experts found several diseases that appear to be obvious candidates to be on the CC list, but currently are not:

Conversely, our medical experts believe the following conditions are examples of common conditions that are on the CC list, but are not likely to lead to higher treatment costs when present as a secondary diagnosis:

We note that the above conditions are examples only of why we believe the CC list needs a comprehensive review. In addition to this review, we note that these conditions may be treated differently under several DRG systems currently in use. For instance, ICD-9-CM code 414.12 (Dissection of coronary artery) is listed as a “Major CC” under the All Patient (AP) DRGs, GROUPER Version 21.0 and an “Extreme” CC under the All Patient Refined (APR) DRGs, GROUPER Version 20.0, but is not listed as a CC at all in GROUPER Version 22.0 of the DRGs Definitions Manual used by Medicare. Similarly, ICD-9-CM code 424.0 (Mitral valve disorder) is a CC under GROUPER Version 22.0 of the DRGs Definitions Manual for Medicare's DRG system, a minor CC under the GROUPER Version 20.0 of the APR-DRGs, and not a CC at all under GROUPER Version 21.0 of the AP-DRGs.

Given the long period of time that has elapsed since the original CC list was developed, the incremental nature of changes to it, and changes in the way inpatient care is delivered, we are planning a comprehensive and systematic review of the CC list for the IPPS rule for FY 2007. As part of this process, we plan to consider revising the standard for determining when a condition is a CC. For instance, we may use an alternative to classifying a condition as a CC based on how it affects the length of stay of a case. Similar to other aspects of the DRG system, we may consider the effect of a specific secondary diagnosis on the charges or costs of a case to evaluate whether to include the condition on the CC list. Using a statistical algorithm, we may classify each diagnosis based on its effect on hospital charges (or costs) relative to other cases when present as a secondary diagnosis to obtain better information on when a particular condition is likely to increase hospital costs. For example, Code 293.84 (Anxiety disorder in conditions classified elsewhere), which is currently listed as a CC, might be removed from the CC list if analysis of the data do not support the fact that it represents a significant increase in resource utilization, and a code such as 359.4 (Toxic myopathy), which is currently not listed as a CC, could be added to the CC list if the data support it. In addition to using hospital charge data as a basis for a review, we would expect to supplement the process with review by our medical experts. Further, we may also consider doing a comparison of the Medicare DRG CC list with other DRG systems such as the AP-DRGs and the APR-DRGs to determine how the same secondary diagnoses are treated under these systems.

By performing a comprehensive review of the CC list, we expect to revise the DRG classification system to better reflect resource utilization and remove conditions from the CC list that only have a marginal impact on a hospital's costs. We believe that a comprehensive review of the CC list would be consistent with MedPAC's recommendation that we improve the DRG system to better recognize severity. We will provide more detail about how we expect to undertake this analysis in the future, and any changes to the CC list will only be adopted after a notice and comment rulemaking that fully explains the methodology we plan to use in conducting this review. We encourage comment at this time regarding possible ways that more meaningful indicators of clinical severity and their implications for resource use can be incorporated into our comprehensive review and possible restructuring of the CC list.

c. CC Exclusions List for FY 2006

In the September 1, 1987 final notice (52 FR 33143) concerning changes to the DRG classification system, we modified the GROUPER logic so that certain diagnoses included on the standard list of CCs would not be considered valid CCs in combination with a particular principal diagnosis. We created the CC Exclusions List for the following reasons: (1) to preclude coding of CCs for closely related conditions; (2) to preclude duplicative or inconsistent coding from being treated as CCs; and (3) to ensure that cases are appropriately classified between the complicated and uncomplicated DRGs in a pair. As we indicated above, we developed this list of diagnoses, using physician panels, to include those diagnoses that, when present as a secondary condition, would be considered a substantial complication or comorbidity. In previous years, we have made changes to the list of CCs, either by adding new CCs or deleting CCs already on the list. At this time, we are not proposing to delete any of the diagnosis codes on the CC list for FY 2006.

In the May 19, 1987 proposed notice (52 FR 18877) and the September 1, 1987 final notice (52 FR 33154), we explained that the excluded secondary diagnoses were established using the following five principles:

  • Chronic and acute manifestations of the same condition should not be considered CCs for one another.
  • Specific and nonspecific (that is, not otherwise specified (NOS)) diagnosis codes for the same condition should not be considered CCs for one another.
  • Codes for the same condition that cannot coexist, such as partial/total, unilateral/bilateral, obstructed/unobstructed, and benign/malignant, should not be considered CCs for one another.
  • Codes for the same condition in anatomically proximal sites should not be considered CCs for one another.
  • Closely related conditions should not be considered CCs for one another.

The creation of the CC Exclusions List was a major project involving hundreds of codes. We have continued to review the remaining CCs to identify additional exclusions and to remove diagnoses from the master list that have been shown not to meet the definition of a CC. [1]

We are proposing a limited revision of the CC Exclusions List to take into account the proposed changes that will be made in the ICD-9-CM diagnosis coding system effective October 1, 2004. (See section II.B.13. of this preamble for a discussion of ICD-9-CM changes.) We are proposing these changes in accordance with the principles established when we created the CC Exclusions List in 1987.

Tables 6G and 6H in the Addendum to this proposed rule contain the revisions to the CC Exclusions List that would be effective for discharges occurring on or after October 1, 2005. Each table shows the principal diagnoses with changes to the excluded CCs. Each of these principal diagnoses is shown with an asterisk, and the additions or deletions to the CC Exclusions List are provided in an indented column immediately following the affected principal diagnosis.

CCs that are added to the list are in Table 6G—Additions to the CC Exclusions List. Beginning with discharges on or after October 1, 2005, the indented diagnoses would not be recognized by the GROUPER as valid CCs for the asterisked principal diagnosis.

CCs that are deleted from the list are in Table 6H—Deletions from the CC Exclusions List. Beginning with discharges on or after October 1, 2005, the indented diagnoses would be recognized by the GROUPER as valid CCs for the asterisked principal diagnosis.

Copies of the original CC Exclusions List applicable to FY 1988 can be obtained from the National Technical Information Service (NTIS) of the Department of Commerce. It is available in hard copy for $152.50 plus shipping and handling. A request for the FY 1988 CC Exclusions List (which should include the identification accession number (PB) 88-133970) should be made to the following address: National Technical Information Service, United States Department of Commerce, 5285 Port Royal Road, Springfield, VA 22161; or by calling (800) 553-6847.

Users should be aware of the fact that all revisions to the CC Exclusions List (FYs 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996, 1997, 1998, 1999, 2001, 2002, 2003, 2004, and 2005) and those in Tables 6G and 6H of this proposed rule for FY 2006 must be incorporated into the list purchased from NTIS in order to obtain the CC Exclusions List applicable for discharges occurring on or after October 1, 2005. (Note: There was no CC Exclusions List in FY 2000 because we did not make changes to the ICD-9-CM codes for FY 2000.)

Alternatively, the complete documentation of the GROUPER logic, including the current CC Exclusions List, is available from 3M/Health Information Systems (HIS), which, under contract with CMS, is responsible for updating and maintaining the GROUPER program. The current DRG Definitions Manual, Version 22.0, is available for $225.00, which includes $15.00 for shipping and handling. Version 23.0 of this manual, which will include the final FY 2006 DRG changes, will be available for $225.00. These manuals may be obtained by writing 3M/HIS at the following address: 100 Barnes Road, Wallingford, CT 06492; or by calling (203) 949-0303. Please specify the revision or revisions requested.

12. Review of Procedure Codes in DRGs 468, 476, and 477

(If you choose to comment on issues in this section, please include the caption “DRGs 468, 476, and 477” at the beginning of your comment.)

Each year, we review cases assigned to DRG 468 (Extensive O.R. Procedure Unrelated to Principal Diagnosis), DRG 476 (Prostatic O.R. Procedure Unrelated to Principal Diagnosis), and DRG 477 (Nonextensive O.R. Procedure Unrelated to Principal Diagnosis) to determine whether it would be appropriate to change the procedures assigned among these DRGs.

DRGs 468, 476, and 477 are reserved for those cases in which none of the O.R. procedures performed are related to the principal diagnosis. These DRGs are intended to capture atypical cases, that is, those cases not occurring with sufficient frequency to represent a distinct, recognizable clinical group. DRG 476 is assigned to those discharges in which one or more of the following prostatic procedures are performed and are unrelated to the principal diagnosis:

  • 60.0, Incision of prostate.
  • 60.12, Open biopsy of prostate.
  • 60.15, Biopsy of periprostatic tissue.[?USGPO Galley End:?][?USGPO Galley End:?]
  • 60.18, Other diagnostic procedures on prostate and periprostatic tissue.
  • 60.21, Transurethral prostatectomy.
  • 60.29, Other transurethral prostatectomy.
  • 60.61, Local excision of lesion of prostate.
  • 60.69, Prostatectomy, not elsewhere classified.
  • 60.81, Incision of periprostatic tissue.
  • 60.82, Excision of periprostatic tissue.
  • 60.93, Repair of prostate.
  • 60.94, Control of (postoperative) hemorrhage of prostate.
  • 60.95, Transurethral balloon dilation of the prostatic urethra.
  • 60.96, Transurethral destruction of prostate tissue by microwave thermotherapy.
  • 60.97, Other transurethral destruction of prostate tissue by other thermotherapy.
  • 60.99, Other operations on prostate.

All remaining O.R. procedures are assigned to DRGs 468 and 477, with DRG 477 assigned to those discharges in which the only procedures performed are nonextensive procedures that are unrelated to the principal diagnosis. [2]

a. Moving Procedure Codes From DRG 468 or DRG 477 to MDCs

We annually conduct a review of procedures producing assignment to DRG 468 or DRG 477 on the basis of volume, by procedure, to see if it would be appropriate to move procedure codes out of these DRGs into one of the surgical DRGs for the MDC into which the principal diagnosis falls. The data are arrayed two ways for comparison purposes. We look at a frequency count of each major operative procedure code. We also compare procedures across MDCs by volume of procedure codes within each MDC.

We identify those procedures occurring in conjunction with certain principal diagnoses with sufficient frequency to justify adding them to one of the surgical DRGs for the MDC in which the diagnosis falls. Based on this year's review, we did not identify any procedures in DRGs 468 or 477 that should be removed to one of the surgical DRGs. Therefore, in this proposed rule, we are not proposing any changes for FY 2006.

b. Reassignment of Procedures Among DRGs 468, 476, and 477

We also annually review the list of ICD-9-CM procedures that, when in combination with their principal diagnosis code, result in assignment to DRGs 468, 476, and 477, to ascertain if any of those procedures should be reassigned from one of these three DRGs to another of the three DRGs based on average charges and the length of stay. We look at the data for trends such as shifts in treatment practice or reporting practice that would make the resulting DRG assignment illogical. If we find these shifts, we would propose to move cases to keep the DRGs clinically similar or to provide payment for the cases in a similar manner. Generally, we move only those procedures for which we have an adequate number of discharges to analyze the data.

It has come to our attention that procedure code 26.12 (Open biopsy of salivary gland or duct) is assigned to DRG 468 (Extensive O.R. Procedure Unrelated to Principal Diagnosis). We believe this to be an error, as code 26.31 (Partial sialoadenectomy), which is a more extensive procedure than code 26.12, is assigned to DRG 477. Therefore, we are proposing to correct this error by moving code 26.12 out of DRG 468 and reassigning it to DRG 477.

We are not proposing to move any procedure codes from DRG 476 to DRGs 468 or 477, or from DRG 477 to DRGs 468 or 476.

c. Adding Diagnosis or Procedure Codes to MDCs

Based on our review this year, we are not proposing to add any diagnosis codes to MDCs.

13. Changes to the ICD-9-CM Coding System

As described in section II.B.1. of this preamble, the ICD-9-CM is a coding system used for the reporting of diagnoses and procedures performed on a patient. In September 1985, the ICD-9-CM Coordination and Maintenance Committee was formed. This is a Federal interdepartmental committee, co-chaired by the National Center for Health Statistics (NCHS) and CMS, charged with maintaining and updating the ICD-9-CM system. The Committee is jointly responsible for approving coding changes, and developing errata, addenda, and other modifications to the ICD-9-CM to reflect newly developed procedures and technologies and newly identified diseases. The Committee is also responsible for promoting the use of Federal and non-Federal educational programs and other communication techniques with a view toward standardizing coding applications and upgrading the quality of the classification system.

The Official Version of the ICD-9-CM contains the list of valid diagnosis and procedure codes. (The Official Version of the ICD-9-CM is available from the Government Printing Office on CD-ROM for $25.00 by calling (202) 512-1800.) The Official Version of the ICD-9-CM is no longer available in printed manual form from the Federal Government; it is only available on CD-ROM. Users who need a paper version are referred to one of the many products available from publishing houses.

The NCHS has lead responsibility for the ICD-9-CM diagnosis codes included in the Tabular List and Alphabetic Index for Diseases, while CMS has lead responsibility for the ICD-9-CM procedure codes included in the Tabular List and Alphabetic Index for Procedures.

The Committee encourages participation in the above process by health-related organizations. In this regard, the Committee holds public meetings for discussion of educational issues and proposed coding changes. These meetings provide an opportunity for representatives of recognized organizations in the coding field, such as the American Health Information Management Association (AHIMA), the American Hospital Association (AHA), and various physician specialty groups, as well as individual physicians, medical record administrators, health information management professionals, and other members of the public, to contribute ideas on coding matters. After considering the opinions expressed at the public meetings and in writing, the Committee formulates recommendations, which then must be approved by the agencies.

The Committee presented proposals for coding changes for implementation in FY 2006 at a public meeting held on October 7-8, 2004, and finalized the coding changes after consideration of comments received at the meetings and in writing by January 12, 2005. Those coding changes are announced in Tables 6A through 6F of the Addendum to this proposed rule. The Committee held its 2005 meeting on March 31-April l, 2005. Proposed new codes for which there was a consensus of public support and for which complete tabular and indexing charges can be made by May 2005 will be included in the October 1, 2005 update to ICD-9-CM. These additional codes will be included in Tables 6A through 6F of the final rule.

Copies of the minutes of the procedure codes discussions at the Committee's October 7-8, 2004 meeting can be obtained from the CMS Web site: http://www.cms.hhs.gov/paymentsystems/icd9/. The minutes of the diagnoses codes discussions at the October 7-8, 2004 meeting are found at: http://www.cdc.gov/nchs/icd9.htm. Paper copies of these minutes are no longer available and the mailing list has been discontinued. These Web sites also provide detailed information about the Committee, including information on requesting a new code, attending a Committee meeting, and timeline requirements and meeting dates.

We encourage commenters to address suggestions on coding issues involving diagnosis codes to: Donna Pickett, Co-Chairperson, ICD-9-CM Coordination and Maintenance Committee, NCHS, Room 2402, 3311 Toledo Road, Hyattsville, MD 20782. Comments may be sent by e-mail to: dfp4@cdc.gov.

Questions and comments concerning the procedure codes should be addressed to: Patricia E. Brooks, Co-Chairperson, ICD-9-CM Coordination and Maintenance Committee, CMS, Center for Medicare Management, Hospital and Ambulatory Policy Group, Division of Acute Care, C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244-1850. Comments may be sent by e-mail to: Patricia.Brooks1@cms.hhs.gov.

The ICD-9-CM code changes that have been approved will become effective October 1, 2005. The new ICD-9-CM codes are listed, along with their DRG classifications, in Tables 6A and 6B (New Diagnosis Codes and New Procedure Codes, respectively) in the Addendum to this proposed rule. As we stated above, the code numbers and their titles were presented for public comment at the ICD-9-CM Coordination and Maintenance Committee meetings. Both oral and written comments were considered before the codes were approved. In this proposed rule, we are only soliciting comments on the proposed classification of these new codes.

For codes that have been replaced by new or expanded codes, the corresponding new or expanded diagnosis codes are included in Table 6A. New procedure codes are shown in Table 6B. Diagnosis codes that have been replaced by expanded codes or other codes or have been deleted are in Table 6C (Invalid Diagnosis Codes). These invalid diagnosis codes will not be recognized by the GROUPER beginning with discharges occurring on or after October 1, 2005. Table 6D contains invalid procedure codes. These invalid procedure codes will not be recognized by the GROUPER beginning with discharges occurring on or after October 1, 2005. Revisions to diagnosis code titles are in Table 6E (Revised Diagnosis Code Titles), which also includes the DRG assignments for these revised codes. Table 6F includes revised procedure code titles for FY 2006.

In the September 7, 2001 final rule implementing the IPPS new technology add-on payments (66 FR 46906), we indicated we would attempt to include proposals for procedure codes that would describe new technology discussed and approved at the April meeting as part of the code revisions effective the following October. As stated previously, ICD-9-CM codes discussed at the March 31-April 1, 2005 Committee meeting that receive consensus and that can be finalized by May 2005 will be included in Tables 6A through 6F of the final rule.

Section 503(a) of Pub. L. 108-173 included a requirement for updating ICD-9-CM codes twice a year instead of a single update on October 1 of each year. This requirement was included as part of the amendments to the Act relating to recognition of new technology under the IPPS. Section 503(a) amended section 1886(d)(5)(K) of the Act by adding a clause (vii) which states that the “Secretary shall provide for the addition of new diagnosis and procedure codes in April 1 of each year, but the addition of such codes shall not require the Secretary to adjust the payment (or diagnosis-related group classification) * * * until the fiscal year that begins after such date.” This requirement improves the recognition of new technologies under the IPPS system by providing information on these new technologies at an earlier date. Data will be available 6 months earlier than would be possible with updates occurring only once a year on October 1.

While section 503(a) states that the addition of new diagnosis and procedure codes on April 1 of each year shall not require the Secretary to adjust the payment, or DRG classification under section 1886(d) of the Act until the fiscal year that begins after such date, we have to update the DRG software and other systems in order to recognize and accept the new codes. We also publicize the code changes and the need for a mid-year systems update by providers to capture the new codes. Hospitals also have to obtain the new code books and encoder updates, and make other system changes in order to capture and report the new codes.

The ICD-9-CM Coordination and Maintenance Committee holds its meetings in the Spring and Fall, usually in April and September, in order to update the codes and the applicable payment and reporting systems by October 1 of each year. Items are placed on the agenda for the ICD-9-CM Coordination and Maintenance Committee meeting if the request is received at least 2 months prior to the meeting. This requirement allows time for staff to review and research the coding issues and prepare material for discussion at the meeting. It also allows time for the topic to be publicized in meeting announcements in the Federal Register as well as on the CMS Web site. The public decides whether or not to attend the meeting based on the topics listed on the agenda. Final decisions on code title revisions are currently made by March 1 so that these titles can be included in the IPPS proposed rule. A complete addendum describing details of all changes to ICD-9-CM, both tabular and index, are publicized on CMS and NCHS Web pages in May of each year. Publishers of coding books and software use this information to modify their products that are used by health care providers. This 5-month time period has proved to be necessary for hospitals and other providers to update their systems.

A discussion of this timeline and the need for changes are included in the December 4-5, 2003 ICD-9-CM Coordination and Maintenance Committee minutes. The public agreed that there was a need to hold the fall meetings earlier, in September or October, in order to meet the new implementation dates. The public provided comment that additional time would be needed to update hospital systems and obtain new code books and coding software. There was considerable concern expressed about the impact this new April update would have on providers.

In the FY 2005 IPPS final rule, we implemented section 503(a) by developing a mechanism for approving, in time for the April update, diagnoses and procedure code revisions needed to describe new technologies and medical services for purposes of the new technology add-on payment process. We also established the following process for making these determinations. Topics considered during the Fall ICD-9-CM Coordination and Maintenance Committee meeting are considered for an April 1 update if a strong and convincing case is made by the requester at the Committee's public meeting. The request must identify the reason why a new code is needed in April for purposes of the new technology process. The participants at the meeting and those reviewing the Committee meeting summary report are provided the opportunity to comment on this expedited request. All other topics are considered for the October 1 update. Participants at the Committee meeting are encouraged to comment on all such requests. There were no requests for an expedited April l, 2005 implementation of an ICD-9-CM code at the October 7-8, 2004 Committee meeting. Therefore, there were no new ICD-9-CM codes implemented on April 1, 2005.

We believe that this process captures the intent of section 503(a). This requirement was included in the provision revising the standards and process for recognizing new technology under the IPPS. In addition, the need for approval of new codes outside the existing cycle (October 1) arises most frequently and most acutely where the new codes will capture new technologies that are (or will be) under consideration for new technology add-on payments. Thus, we believe this provision was intended to expedite data collection through the assignment of new ICD-9-CM codes for new technologies seeking higher payments.

Current addendum and code title information is published on the CMS Web page at: http://www.cms.hhs.gov/paymentsystems/icd9. Summary tables showing new, revised, and deleted code titles are also posted on the following CMS Web page: http://www.cms.hhs.gov/medlearn/icd9code.asp. Information on ICD-9-CM diagnosis codes, along with the Official ICD-9-CM Coding Guidelines, can be found on the Wep page at: http://www.cdc.gov/nchs/icd9.htm. Information on new, revised, and deleted ICD-9-CM codes is also provided to the AHA for publication in the Coding Clinic for ICD-9-CM. AHA also distributes information to publishers and software vendors.

CMS also sends copies of all ICD-9-CM coding changes to its contractors for use in updating their systems and providing education to providers.

These same means of disseminating information on new, revised, and deleted ICD-9-CM codes will be used to notify providers, publishers, software vendors, contractors, and others of any changes to the ICD-9-CM codes that are implemented in April. Currently, code titles are also published in the IPPS proposed and final rules. The code titles are adopted as part of the ICD-9-CM Coordination and Maintenance Committee process. The code titles are not subject to comment in the proposed or final rules. We will continue to publish the October code updates in this manner within the IPPS proposed and final rules. For codes that are implemented in April, we will assign the new procedure code to the same DRG in which its predecessor code was assigned so there will be no DRG impact as far as DRG assignment. This mapping was specified by Pub. L. 108-173. Any midyear coding updates will be available through the websites indicated above and through the Coding Clinic for ICD-9-CM. Publishers and software vendors currently obtain code changes through these sources in order to update their code books and software systems. We will strive to have the April 1 updates available through these websites 5 months prior to implementation (that is, early November of the previous year), as is the case for the October 1 updates. Codebook publishers are evaluating how they will provide any code updates to their subscribers. Some publishers may decide to publish mid-year book updates. Others may decide to sell an addendum that lists the changes to the October 1 code book. Coding personnel should contact publishers to determine how they will update their books. CMS and its contractors will also consider developing provider education articles concerning this change to the effective date of certain ICD-9-CM codes.

14. Other Issues: Acute Intermittent Porphyria

Acute intermittent porphyria is a rare metabolic disorder. The condition is described by code 277.1 (Disorders of porphyrin metabolism). Code 277.1 is assigned to DRG 299 (Inborn Errors of Metabolism) under MDC 10 (Endocrine, Nutritional, and Metabolic Diseases and Disorders).

In the FY 2005 final rule (69 FR 48981), we discussed the DRG assignment of acute intermittent porphyria. This discussion was a result of correspondence that we received during the comment period for the FY 2005 proposed rule in which the commenter suggested that Medicare hospitalization payments do not accurately reflect the cost of treatment. At that time, we indicated that we would take this comment into consideration when we analyzed the MedPAR data for this proposed rule for FY 2006.

Our review of the most recent MedPAR data shows a total of 1,370 cases overall in DRG 299, of which 471 had a principal diagnosis coded as 277.1. The average length of stay for all cases in DRG 299 was 5.17 days, while the average length of stay for porphyria cases with code 277.1 was 6.0 days. The average charges for all cases in DRG 299 were $15,891, while the average changes for porphyria cases with code 277.1 were $21,920. Based on our analysis of these data, we do not believe that there is a sufficient difference between the average charges and average length of stay for these cases to justify a change to the DRG assignment for treating this condition.

C. Proposed Recalibration of DRG Weights

(If you choose to comment on issues in this section, please include the caption “DRG Weights” at the beginning of your comment.)

We are proposing to use the same basic methodology for the FY 2006 recalibration as we did for FY 2005 (FY 2005 IPPS final rule (69 FR 48981)). That is, we have recalibrated the DRG weights based on charge data for Medicare discharges using the most current charge information available (the FY 2004 MedPAR file).

The MedPAR file is based on fully coded diagnostic and procedure data for all Medicare inpatient hospital bills. The FY 2004 MedPAR data used in this final rule include discharges occurring between October 1, 2003 and September 30, 2004, based on bills received by CMS through December 31, 2004, from all hospitals subject to the IPPS and short-term acute care hospitals in Maryland (which are under a waiver from the IPPS under section 1814(b)(3) of the Act). The FY 2004 MedPAR file includes data for approximately 11,910,025 Medicare discharges. Discharges for Medicare beneficiaries enrolled in a Medicare+Choice managed care plan are excluded from this analysis. The data excludes CAHs, including hospitals that subsequently became CAHs after the period from which the data were taken.

The proposed methodology used to calculate the DRG relative weights from the FY 2004 MedPAR file is as follows:

  • To the extent possible, all the claims were regrouped using the DRG classification revisions discussed in section II.B. of this preamble.
  • The transplant cases that were used to establish the relative weight for heart and heart-lung, liver, and lung transplants (DRGs 103, 480, and 495) were limited to those Medicare-approved transplant centers that have cases in the FY 2004 MedPAR file. (Medicare coverage for heart, heart-lung, liver, and lung transplants is limited to those facilities that have received approval from CMS as transplant centers.)
  • Organ acquisition costs for kidney, heart, heart-lung, liver, lung, pancreas, and intestinal (or multivisceral organs) transplants continue to be paid on a reasonable cost basis. Because these acquisition costs are paid separately from the prospective payment rate, it is necessary to subtract the acquisition charges from the total charges on each transplant bill that showed acquisition charges before computing the average charge for the DRG and before eliminating statistical outliers.
  • Charges were standardized to remove the effects of differences in area wage levels, indirect medical education and disproportionate share payments, and, for hospitals in Alaska and Hawaii, the applicable cost-of-living adjustment.
  • The average standardized charge per DRG was calculated by summing the standardized charges for all cases in the DRG and dividing that amount by the number of cases classified in the DRG. A transfer case is counted as a fraction of a case based on the ratio of its transfer payment under the per diem payment methodology to the full DRG payment for nontransfer cases. That is, a transfer case receiving payment under the transfer methodology equal to half of what the case would receive as a nontransfer would be counted as 0.5 of a total case.
  • Statistical outliers were eliminated by removing all cases that are beyond 3.0 standard deviations from the mean of the log distribution of both the charges per case and the charges per day for each DRG.
  • The average charge for each DRG was then recomputed (excluding the statistical outliers) and divided by the national average standardized charge per case to determine the relative weight.

The proposed new weights are normalized by an adjustment factor of 1.47263 so that the average case weight after recalibration is equal to the average case weight before recalibration. This proposed adjustment is intended to ensure that recalibration by itself neither increases nor decreases total payments under the IPPS.

When we recalibrated the DRG weights for previous years, we set a threshold of 10 cases as the minimum number of cases required to compute a reasonable weight. We used that same case threshold in recalibrating the proposed DRG weights for FY 2006. Using the FY 2004 MedPAR data set, there are 41 DRGs that contain fewer than 10 cases. We are proposing to compute the weights for these low-volume DRGs by adjusting the FY 2005 weights of these DRGs by the percentage change in the average weight of the cases in the other DRGs.

Section 1886(d)(4)(C)(iii) of the Act requires that, beginning with FY 1991, reclassification and recalibration changes be made in a manner that assures that the aggregate payments are neither greater than nor less than the aggregate payments that would have been made without the changes. Although normalization is intended to achieve this effect, equating the average case weight after recalibration to the average case weight before recalibration does not necessarily achieve budget neutrality with respect to aggregate payments to hospitals because payments to hospitals are affected by factors other than average case weight. Therefore, as we have done in past years and as discussed in section II.A.4.a. of the Addendum to this proposed rule, we are making a budget neutrality adjustment to ensure that the requirement of section 1886(d)(4)(C)(iii) of the Act is met.

D. Proposed LTC-DRG Reclassifications and Relative Weights for LTCHs for FY 2006

(If you choose to comment on issues in this section, please include the caption “LTC-DRGs” at the beginning of your comment.)

1. Background

In the June 6, 2003 LTCH PPS final rule (68 FR 34122), we changed the LTCH PPS annual payment rate update cycle to be effective July 1 through June 30 instead of October 1 through September 30. In addition, because the patient classification system utilized under the LTCH PPS is based directly on the DRGs used under the IPPS for acute care hospitals, in that same final rule, we explained that the annual update of the long-term care diagnosis-related group (LTC-DRG) classifications and relative weights will continue to remain linked to the annual reclassification and recalibration of the CMS-DRGs used under the IPPS. In that same final rule, we specified that we will continue to update the LTC-DRG classifications and relative weights to be effective for discharges occurring on or after October 1 through September 30 each year. Furthermore, we stated that we will publish the annual update of the LTC-DRGs in the proposed and final rules for the IPPS.

In the past, the annual update to the IPPS DRGs has been based on the annual revisions to the ICD-9-CM codes and was effective each October 1. As discussed in the FY 2005 IPPS final rule (69 FR 48954 through 48957) and in the February 3, 2005 LTCH PPS proposed rule (70 FR 5729 through 5733), with the implementation of section 503 (a) of Pub. L. 108-173, there is the possibility that one feature of the GROUPER software program may be updated twice during a Federal fiscal year (October 1 and April 1) as required by the statute for the IPPS. Specifically, ICD-9-CM diagnosis and procedure codes for new medical technology may be created and added to existing DRGs in the middle of the Federal fiscal year on April 1. This policy change will have no effect, however, on the LTC-DRG relative weights which will continue to be updated only once a year (October 1), nor will there be any impact on Medicare payments under the LTCH PPS. The use of the ICD-9-CM code set is also compliant with the current requirements of the Transactions and Code Sets Standards regulations at 45 CFR Parts 160 and 162, promulgated in accordance with the Health Insurance Portability and Accountability Act of 1996 (HIPAA), Pub. L. 104-191.

In the health care industry, historically annual changes to the ICD-9-CM codes were effective for discharges occurring on or after October 1 each year. Thus, the manual and electronic versions of the GROUPER software, which are based on the ICD-9-CM codes, were also revised annually and effective for discharges occurring on or after October 1 each year. As noted above, the patient classification system used under the LTCH PPS (LTC-DRGs) is based on the patient classification system used under the IPPS (CMS-DRGs), which historically had been updated annually and effective for discharges occurring on or after October 1 through September 30 each year. As mentioned above, the ICD-9-CM coding update process has been revised, as discussed in greater detail in the FY 2005 IPPS final rule (69 FR 48954 through 48957). Specifically, section 503(a) of Pub. L. 108-173 includes a requirement for updating ICD-9-CM codes as often as twice a year instead of the current process of annual updates on October 1 of each year. This requirement is included as part of the amendments to the Act relating to recognition of new medical technology under the IPPS. Section 503(a) of Pub L. 108-173 amended section 1886(d)(5)(K) of the Act by adding a new clause (vii) which states that “the Secretary shall provide for the addition of new diagnosis and procedure codes in [sic] April 1 of each year, but the addition of such codes shall not require the Secretary to adjust the payment (or diagnosis-related group classification) * * * until the fiscal year that begins after such date.” This requirement will improve the recognition of new technologies under the IPPS by accounting for those ICD-9-CM codes in the MedPAR claims data at an earlier date. Despite the fact that aspects of the GROUPER software may be updated to recognize any new technology ICD-9-CM codes, as discussed in the February 3, 2005 LTCH PPS proposed rule (70 FR 5730 through 5733), there will be no impact on either LTC-DRG assignments or payments under the LTCH PPS at that time. That is, changes to the LTC-DRGs (such as the creation or deletion of LTC-DRGs) and the relative weights will continue to be updated in the manner and timing (October 1) as they are now.

As noted above and as described in the February 3, 2005 LTCH PPS proposed rule (70 FR 5730), updates to the GROUPER for both the IPPS and the LTCH PPS (with respect to relative weights and the creation or deletion of DRGs) are made in the annual IPPS proposed and final rules and are effective each October 1. We explained in the FY 2005 IPPS final rule (69 FR 48955 and 48956), that since we do not publish a midyear IPPS rule, April 1 code updates discussed above will not be published in a midyear IPPS rule. Rather, we will assign any new diagnostic or procedure codes to the same DRG in which its predecessor code was assigned, so that there will be no impact on the DRG assignments. Any proposed coding updates will be available through the websites indicated in the same rule and provided above in section II.B. of this preamble and through the Coding Clinic for ICD-9-CM. Publishers and software vendors currently obtain code changes through these sources in order to update their code books and software system. If new codes are implemented on April 1, revised code books and software systems, including the GROUPER software program, will be necessary because we must use current ICD-9-CM codes. Therefore, for purposes of the LTCH PPS, since each ICD-9-CM code must be included in the GROUPER algorithm to classify each case into a LTC-DRG, the GROUPER software program used under the LTCH PPS would need to be revised to accommodate any new codes.

As we discussed in the FY 2005 IPPS final rule (69 FR 48956), in implementing section 503(a) of Pub. L. 108-173, there will only be an April 1 update if new technology codes are requested and approved. It should be noted that any new codes created for April 1 implementation will be limited to those diagnosis and procedure code revisions primarily needed to describe new technologies and medical services. However, we reiterate that the process of discussing updates to the ICD-9-CM has been an open process through the ICD-9-CM CM Committee since 1995. Requestors will be given the opportunity to present the merits of their proposed new code and make a clear and convincing case for the need to update ICD-9-CM codes for purposes of the IPPS new technology add-on payment process through an April 1 update.

In addition, in the FY 2005 IPPS final rule (69 FR 48956), we stated that at the October 2004 ICD-9-CM Coordination and Maintenance Committee meeting, no new codes were proposed for an April 1, 2005 implementation, and the next update to the ICD-9-CM coding system would not occur until October 1, 2005 (FY 2006). Presently, as there were no coding changes suggested for an April 1, 2005 update, the ICD-9-CM coding set implemented on October 1, 2004 will continue through September 30, 2005 (FY 2005). The proposed update to the ICD-9-CM coding system for FY 2006 is discussed above in section II.B. of this preamble.

In this proposed rule, we are proposing revisions to the LTC-DRG classifications and relative weights and, to the extent that they are finalized, we will publish them in the corresponding IPPS final rule, to be effective October 1, 2005 through September 30, 2006 (FY 2006), using the latest available data. The proposed LTC-DRGs and relative weights for FY 2006 in this proposed rule are based on the proposed IPPS DRGs (GROUPER Version 23.0) discussed in section II. of this proposed rule.

2. Proposed Changes in the LTC-DRG Classifications

a. Background

Section 123 of Pub. L. 106-113 specifically requires that the PPS for LTCHs be a per discharge system with a DRG-based patient classification system reflecting the differences in patient resources and costs in LTCHs while maintaining budget neutrality. Section 307(b)(1) of Pub. L. 106-554 modified the requirements of section 123 of Pub. L. 106-113 by specifically requiring that the Secretary examine “the feasibility and the impact of basing payment under such a system [the LTCH PPS] on the use of existing (or refined) hospital diagnosis-related groups (DRGs) that have been modified to account for different resource use of long-term care hospital patients as well as the use of the most recently available hospital discharge data.”

In accordance with section 307(b)(1) of Pub. L. 106-554 and § 412.515 of our existing regulations, the LTCH PPS uses information from LTCH patient records to classify patient cases into distinct LTC-DRGs based on clinical characteristics and expected resource needs. The LTC-DRGs used as the patient classification component of the LTCH PPS correspond to the DRGs under the IPPS for acute care hospitals. Thus, in this proposed rule, we are proposing to use the IPPS GROUPER Version 23.0 for FY 2006 to process LTCH PPS claims for LTCH occurring from October 1, 2005 through September 30, 2006. The proposed changes to the CMS DRG classification system used under the IPPS for FY 2006 (GROUPER Version 23.0) are discussed in section II.B. of the preamble to this proposed rule.

Under the LTCH PPS, we determine relative weights for each of the CMS DRGs to account for the difference in resource use by patients exhibiting the case complexity and multiple medical problems characteristic of LTCH patients. In a departure from the IPPS, as we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 55985), which implemented the LTCH PPS, and the FY 2004 IPPS final rule (68 FR 45374), we use low-volume quintiles in determining the LTC-DRG weights for LTC-DRGs with less than 25 LTCH cases, because LTCHs do not typically treat the full range of diagnoses as do acute care hospitals. Specifically, we group those low-volume LTC-DRGs (LTC-DRGs with fewer than 25 cases) into 5 quintiles based on average charge per discharge. (A listing of the composition of low-volume quintiles for the FY 2005 LTC-DRGs (based on FY 2003 MedPAR data) appears in section II.D.3. of the FY 2005 IPPS final rule (69 FR 48985 through 48989).) We also adjust for cases in which the stay at the LTCH is less than or equal to five-sixths of the geometric average length of stay; that is, short-stay outlier cases (§ 412.529), as discussed below in section II.D.4. of this preamble.

b. Patient Classifications into DRGs

Generally, under the LTCH PPS, Medicare payment is made at a predetermined specific rate for each discharge; that is, payment varies by the LTC-DRG to which a beneficiary's stay is assigned. Similar to case classification for acute care hospitals under the IPPS (see section II.B. of this preamble), cases are classified into LTC-DRGs for payment under the LTCH PPS based on the principal diagnosis, up to eight additional diagnoses, and up to six procedures performed during the stay, as well as age, sex, and discharge status of the patient. The diagnosis and procedure information is reported by the hospital using codes from the ICD-9-CM.

As discussed in section II.B. of this preamble, the CMS DRGs are organized into 25 major diagnostic categories (MDCs), most of which are based on a particular organ system of the body; the remainder involve multiple organ systems (such as MDC 22, Burns). Accordingly, the principal diagnosis determines MDC assignment. Within most MDCs, cases are then divided into surgical DRGs and medical DRGs. Some surgical and medical DRGs are further differentiated based on the presence or absence of CCs. (See section II.B. of this preamble for further discussion of surgical DRGs and medical DRGs.)

Because the assignment of a case to a particular LTC-DRG will help determine the amount that is paid for the case, it is important that the coding is accurate. As used under the IPPS, classifications and terminology used under the LTCH PPS are consistent with the ICD-9-CM and the Uniform Hospital Discharge Data Set (UHDDS), as recommended to the Secretary by the National Committee on Vital and Health Statistics (“Uniform Hospital Discharge Data: Minimum Data Set, National Center for Health Statistics, April 1980”) and as revised in 1984 by the Health Information Policy Council (HIPC) of the U.S. Department of Health and Human Services. We point out again that the ICD-9-CM coding terminology and the definitions of principal and other diagnoses of the UHDDS are consistent with the requirements of the Transactions and Code Sets Standards under HIPAA (45 CFR Parts 160 and 162).

The emphasis on the need for proper coding cannot be overstated. Inappropriate coding of cases can adversely affect the uniformity of cases in each LTC-DRG and produce inappropriate weighting factors at recalibration and result in inappropriate payments under the LTCH PPS. LTCHs are to follow the same coding guidelines used by the acute care hospitals to ensure accuracy and consistency in coding practices. There will be only one LTC-DRG assigned per long-term care hospitalization; it will be assigned at the discharge. Therefore, it is mandatory that the coders continue to report the same principal diagnosis on all claims and include all diagnostic codes that coexist at the time of admission, that are subsequently developed, or that affect the treatment received. Similarly, all procedures performed during that stay are to be reported on each claim.

Upon the discharge of the patient from a LTCH, the LTCH must assign appropriate diagnosis and procedure codes from the ICD-9-CM. Completed claim forms are to be submitted electronically to the LTCH's Medicare fiscal intermediary. Medicare fiscal intermediaries enter the clinical and demographic information into their claims processing systems and subject this information to a series of automated screening processes called the Medicare Code Editor (MCE). These screens are designed to identify cases that require further review before assignment into an LTC-DRG can be made.

After screening through the MCE, each LTCH claim will be classified into the appropriate LTC-DRG by the Medicare LTCH GROUPER. The LTCH GROUPER is specialized computer software based on the same GROUPER used under the IPPS. After the LTC-DRG is assigned, the Medicare fiscal intermediary determines the prospective payment by using the Medicare LTCH PPS PRICER program, which accounts for LTCH hospital-specific adjustments. As provided for under the IPPS, we provide an opportunity for the LTCH to review the LTC-DRG assignments made by the fiscal intermediary and to submit additional information within a specified timeframe (§ 412.513(c)).

The GROUPER is used both to classify past cases in order to measure relative hospital resource consumption to establish the LTC-DRG weights and to classify current cases for purposes of determining payment. The records for all Medicare hospital inpatient discharges are maintained in the MedPAR file. The data in this file are used to evaluate possible DRG classification changes and to recalibrate the DRG weights during our annual update (as discussed in section II. of this preamble). The LTC-DRG relative weights are based on data for the population of LTCH discharges, reflecting the fact that LTCH patients represent a different patient mix than patients in short-term acute care hospitals.

3. Development of the Proposed FY 2006 LTC-DRG Relative Weights

a. General Overview of Development of the LTC-DRG Relative Weights

As we stated in the August 30, 2002 LTCH PPS final rule (67 FR 55981), one of the primary goals for the implementation of the LTCH PPS is to pay each LTCH an appropriate amount for the efficient delivery of care to Medicare patients. The system must be able to account adequately for each LTCH's case-mix in order to ensure both fair distribution of Medicare payments and access to adequate care for those Medicare patients whose care is more costly. To accomplish these goals, we adjust the LTCH PPS standard Federal prospective payment system rate by the applicable LTC-DRG relative weight in determining payment to LTCHs for each case. Under the LTCH PPS, relative weights for each LTC-DRG are a primary element used to account for the variations in cost per discharge and resource utilization among the payment groups (§ 412.515). To ensure that Medicare patients classified to each LTC-DRG have access to an appropriate level of services and to encourage efficiency, we calculate a relative weight for each LTC-DRG that represents the resources needed by an average inpatient LTCH case in that LTC-DRG. For example, cases in an LTC-DRG with a relative weight of 2 will, on average, cost twice as much as cases in an LTC-DRG with a weight of 1.

b. Data

To calculate the proposed LTC-DRG relative weights for FY 2006 in this proposed rule, we obtained total Medicare allowable charges from FY 2004 Medicare hospital bill data from the December 2004 update of the MedPAR file, and we used the proposed Version 23.0 of the CMS GROUPER for IPPS (as discussed in section II.B. of this preamble) to classify cases. Consistent with the methodology under the IPPS, we are proposing to recalculate the FY 2006 LTC-DRG relative weights based on the best available data for this proposed rule.

As we discussed in the FY 2005 IPPS final rule (69 FR 48984), we have excluded the data from LTCHs that are all-inclusive rate providers and LTCHs that are reimbursed in accordance with demonstration projects authorized under section 402(a) of 90 (42 U.S.C. 1395b-1) or section 222(a) of 92 (42 U.S.C. 1395b-1). Therefore, in the development of the proposed FY 2006 LTC-DRG relative weights, we have excluded the data of the 19 all-inclusive rate providers and the 3 LTCHs that are paid in accordance with demonstration projects that had claims in the FY 2003 MedPAR file.

In the FY 2005 IPPS final rule (6 FR 48984), we discussed coding inaccuracies that were found in the claims data for a large chain of LTCHs in the FY 2002 MedPAR file, which were used to determine the LTC-DRG relative weights for FY 2004. As we discussed in the same final rule, after notifying the large chain of LTCHs whose claims contained the coding inaccuracies to request that they resubmit those claims with the correct diagnosis, from an analysis of LTCH claims data from the December 2003 update of the FY 2003 MedPAR file, it appeared that such claims data no longer contain coding errors. Therefore, it was not necessary to correct the FY 2003 MedPAR data for the development of the FY 2005 LTC-DRGs and relative weights established in the same final rule.

As stated above, in this proposed rule, we are proposing to use the December 2004 update of the FY 2004 MedPAR file for the determination of the proposed FY 2006 LTC-DRG relative weights as these are the best available data. Based on an analysis of LTCH claims data from the December 2004 update of the FY 2004 MedPAR file, it appears that such claims data do not contain coding inaccuracies found previously in LTCH claims data. Therefore, it was not necessary to correct the FY 2004 MedPAR data for the development of the proposed FY 2006 LTC-DRGs and relative weights presented in this proposed rule.

c. Hospital-Specific Relative Value Methodology

By nature, LTCHs often specialize in certain areas, such as ventilator-dependent patients and rehabilitation and wound care. Some case types (DRGs) may be treated, to a large extent, in hospitals that have, from a perspective of charges, relatively high (or low) charges. This nonarbitrary distribution of cases with relatively high (or low) charges in specific LTC-DRGs has the potential to inappropriately distort the measure of average charges. To account for the fact that cases may not be randomly distributed across LTCHs, we use a hospital-specific relative value method to calculate the LTC-DRG relative weights instead of the methodology used to determine the DRG relative weights under the IPPS described above in section II.C. of this preamble. We believe this method will remove this hospital-specific source of bias in measuring LTCH average charges. Specifically, we reduce the impact of the variation in charges across providers on any particular LTC-DRG relative weight by converting each LTCH's charge for a case to a relative value based on that LTCH's average charge.

Under the hospital-specific relative value method, we standardize charges for each LTCH by converting its charges for each case to hospital-specific relative charge values and then adjusting those values for the LTCH's case-mix. The adjustment for case-mix is needed to rescale the hospital-specific relative charge values (which, by definition, averages 1.0 for each LTCH). The average relative weight for a LTCH is its case-mix, so it is reasonable to scale each LTCH's average relative charge value by its case-mix. In this way, each LTCH's relative charge value is adjusted by its case-mix to an average that reflects the complexity of the cases it treats relative to the complexity of the cases treated by all other LTCHs (the average case-mix of all LTCHs).

In accordance with the methodology established under § 412.523, we standardize charges for each case by first dividing the adjusted charge for the case (adjusted for short-stay outliers under § 412.529 as described in section II.D.4. (step 3) of this preamble) by the average adjusted charge for all cases at the LTCH in which the case was treated. Short-stay outliers under § 412.529 are cases with a length of stay that is less than or equal to five-sixths the average length of stay of the LTC-DRG. The average adjusted charge reflects the average intensity of the health care services delivered by a particular LTCH and the average cost level of that LTCH. The resulting ratio is multiplied by that LTCH's case-mix index to determine the standardized charge for the case.

Multiplying by the LTCH's case-mix index accounts for the fact that the same relative charges are given greater weight in a LTCH with higher average costs than they would at a LTCH with low average costs which is needed to adjust each LTCH's relative charge value to reflect its case-mix relative to the average case-mix for all LTCHs. Because we standardize charges in this manner, we count charges for a Medicare patient at a LTCH with high average charges as less resource intensive than they would be at a LTCH with low average charges. For example, a $10,000 charge for a case in a LTCH with an average adjusted charge of $17,500 reflects a higher level of relative resource use than a $10,000 charge for a case in a LTCH with the same case-mix, but an average adjusted charge of $35,000. We believe that the adjusted charge of an individual case more accurately reflects actual resource use for an individual LTCH because the variation in charges due to systematic differences in the markup of charges among LTCHs is taken into account.

d. Proposed Low-Volume LTC-DRGs

In order to account for LTC-DRGs with low-volume (that is, with fewer than 25 LTCH cases), in accordance with the methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55984), we group those low-volume LTC-DRGs into one of five categories (quintiles) based on average charges, for the purposes of determining relative weights. For this proposed rule, using LTCH cases from the December 2004 update of the FY 2004 MedPAR file, we identified 172 LTC-DRGs that contained between 1 and 24 cases. This list of proposed LTC-DRGs was then divided into one of the 5 low-volume quintiles, each containing a minimum of 34 LTC-DRGs (172/5 = 34 with 2 LTC-DRGs as the remainder). For FY 2006, we are proposing to make an assignment to a specific low-volume quintile by sorting the low-volume proposed LTC-DRGs in ascending order by average charge. For this proposed rule, this results in an assignment to a specific low volume quintile of the sorted 172 low-volume proposed LTC-DRGs by ascending order by average charge. Because the number of LTC-DRGs with less than 25 LTCH cases is not evenly divisible by five, the average charge of the low-volume proposed LTC-DRG was used to determine which low- volume quintile received the additional proposed LTC-DRG. After sorting the 172 low-volume LTC-DRGs in ascending order, we are proposing that the first fifth of low-volume LTC-DRGs with the lowest average charge would be grouped into Quintile 1. The highest average charge cases would be grouped into Quintile 5. Since the average charge of the proposed 35th LTC-DRG in the sorted list is closer to the proposed 34th LTC-DRG's average charge (assigned to Quintile 1) than to the average charge of the proposed 36th LTC-DRG in the sorted list (to be assigned to Quintile 2), we are proposing to place it into Quintile 1. This process was repeated through the remaining low-volume proposed LTC-DRGs so that 2 proposed low-volume quintiles contain 35 proposed LTC-DRGs and 3 proposed low-volume quintiles contain 34 proposed LTC-DRGs.

In order to determine the proposed relative weights for the proposed LTC-DRGs with low volume for FY 2006, in accordance with the methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55984), we are proposing to use the proposed five low-volume quintiles described above. The composition of each of the proposed five low-volume quintiles shown in the chart below would be used in determining the proposed LTC-DRG relative weights for FY 2006. We would determine a proposed relative weight and (geometric) average length of stay for each of the proposed five low-volume quintiles using the formula that we apply to the regular proposed LTC-DRGs (25 or more cases), as described below in section II.D.4. of this preamble. We are proposing to assign the same relative weight and average length of stay to each of the proposed LTC-DRGs that make up that proposed low-volume quintile. We note that, as this system is dynamic, it is possible that the number and specific type of LTC-DRGs with a low volume of LTCH cases will vary in the future. We use the best available claims data in the MedPAR file to identify low-volume LTC-DRGs and to calculate the relative weights based on our methodology.

4. Steps for Determining the Proposed FY 2006 LTC-DRG Relative Weights

As we noted previously, the proposed FY 2006 LTC-DRG relative weights are determined in accordance with the methodology established in the August 1, 2003 IPPS final rule (68 FR 45367). In summary, LTCH cases must be grouped in the appropriate LTC-DRG, while taking into account the low-volume proposed LTC-DRGs as described above, before the proposed FY 2006 LTC-DRG relative weights can be determined. After grouping the cases in the appropriate proposed LTC-DRG, we are proposing to calculate the proposed relative weights for FY 2006 in this proposed rule by first removing statistical outliers and cases with a length of stay of 7 days or less, as discussed in greater detail below. Next, we are proposing to adjust the number of cases in each proposed LTC-DRG for the effect of short-stay outlier cases under § 412.529, as also discussed in greater detail below. The short-stay adjusted discharges and corresponding charges are used to calculate “relative adjusted weights” in each proposed LTC-DRG using the hospital-specific relative value method described above.

Below we discuss in detail the steps for calculating the proposed FY 2006 LTC-DRG relative weights.

Step 1—Remove statistical outliers.

The first step in the calculation of the proposed FY 2006 LTC-DRG relative weights is to remove statistical outlier cases. We define statistical outliers as cases that are outside of 3.0 standard deviations from the mean of the log distribution of both charges per case and the charges per day for each LTC-DRG. These statistical outliers are removed prior to calculating the proposed relative weights. We believe that they may represent aberrations in the data that distort the measure of average resource use. Including those LTCH cases in the calculation of the proposed relative weights could result in an inaccurate proposed relative weight that does not truly reflect relative resource use among the proposed LTC-DRGs.

Step 2—Remove cases with a length of stay of 7 days or less.

The proposed FY 2006 LTC-DRG relative weights reflect the average of resources used on representative cases of a specific type. Generally, cases with a length of stay 7 days or less do not belong in a LTCH because these stays do not fully receive or benefit from treatment that is typical in a LTCH stay, and full resources are often not used in the earlier stages of admission to a LTCH. If we were to include stays of 7 days or less in the computation of the proposed FY 2006 LTC-DRG relative weights, the value of many proposed relative weights would decrease and, therefore, payments would decrease to a level that may no longer be appropriate.

We do not believe that it would be appropriate to compromise the integrity of the payment determination for those LTCH cases that actually benefit from and receive a full course of treatment at a LTCH, in order to include data from these very short-stays. Thus, in determining the proposed FY 2006 LTC-DRG relative weights, we remove LTCH cases with a length of stay of 7 days or less.

Step 3—Adjust charges for the effects of short-stay outliers.

After removing cases with a length of stay of 7 days or less, we are left with cases that have a length of stay of greater than or equal to 8 days. The next step in the calculation of the proposed FY 2006 LTC-DRG relative weights is to adjust each LTCH's charges per discharge for those remaining cases for the effects of short-stay outliers as defined in § 412.529(a). (However, we note that even if a case was removed in Step 2 (that is, cases with a length of stay of 7 days or less), it was paid as a short-stay outlier if its length of stay was less than or equal to five-sixths of the average length of stay of the LTC-DRG, in accordance with § 412.529.)

We make this adjustment by counting a short-stay outlier as a fraction of a discharge based on the ratio of the length of stay of the case to the average length of stay for the proposed LTC-DRG for nonshort-stay outlier cases. This has the effect of proportionately reducing the impact of the lower charges for the short-stay outlier cases in calculating the average charge for the proposed LTC-DRG. This process produces the same result as if the actual charges per discharge of a short-stay outlier case were adjusted to what they would have been had the patient's length of stay been equal to the average length of stay of the proposed LTC-DRG.

As we explained in the FY 2005 IPPS final rule (69 FR 48991), counting short- stay outlier cases as full discharges with no adjustment in determining the proposed LTC-DRG relative weights would lower the proposed LTC-DRG relative weight for affected proposed LTC-DRGs because the relatively lower charges of the short-stay outlier cases would bring down the average charge for all cases within a proposed LTC-DRG. This would result in an “underpayment” to nonshort-stay outlier cases and an “overpayment” to short-stay outlier cases. Therefore, in this proposed rule, we adjust for short-stay outlier cases under § 412.529 in this manner because it results in more appropriate payments for all LTCH cases.

Step 4—Calculate the Proposed FY 2006 LTC-DRG relative weights on an iterative basis.

The process of calculating the proposed LTC-DRG relative weights using the hospital specific relative value methodology is iterative. First, for each LTCH case, we calculate a hospital-specific relative charge value by dividing the short-stay outlier adjusted charge per discharge (see step 3) of the LTCH case (after removing the statistical outliers (see step 1)) and LTCH cases with a length of stay of 7 days or less (see step 2) by the average charge per discharge for the LTCH in which the case occurred. The resulting ratio is then multiplied by the LTCH's case-mix index to produce an adjusted hospital-specific relative charge value for the case. An initial case-mix index value of 1.0 is used for each LTCH.

For each proposed LTC-DRG, the proposed FY 2006 LTC-DRG relative weight is calculated by dividing the average of the adjusted hospital-specific relative charge values (from above) for the proposed LTC-DRG by the overall average hospital-specific relative charge value across all cases for all LTCHs. Using these recalculated proposed LTC-DRG relative weights, each proposed LTCH's average relative weight for all of its cases (case-mix) is calculated by dividing the sum of all the proposed LTCH's LTC-DRG relative weights by its total number of cases. The LTCHs' hospital-specific relative charge values above are multiplied by these hospital specific case-mix indexes. These hospital-specific case-mix adjusted relative charge values are then used to calculate a new set of proposed LTC-DRG relative weights across all LTCHs. In this proposed rule, this iterative process is continued until there is convergence between the weights produced at adjacent steps, for example, when the maximum difference is less than 0.0001.

Step 5-Adjust the proposed FY 2006 LTC-DRG relative weights to account for nonmonotonically increasing relative weights.

As explained in section II.B. of this preamble, the proposed FY 2006 CMS DRGs, which the proposed FY 2006 LTC-DRGs are based, contain “pairs” that are differentiated based on the presence or absence of CCs. The proposed LTC-DRGs with CCs are defined by certain secondary diagnoses not related to or inherently a part of the disease process identified by the principal diagnosis, but the presence of additional diagnoses does not automatically generate a CC. As we discussed in the FY 2005 IPPS final rule (69 FR 48991), the value of monotonically increasing relative weights rises as the resource use increases (for example, from uncomplicated to more complicated). The presence of CCs in a proposed LTC-DRG means that cases classified into a “without CC” proposed LTC-DRG are expected to have lower resource use (and lower costs). In other words, resource use (and costs) are expected to decrease across “with CC”/“without CC” pairs of proposed LTC-DRGs.

For a case to be assigned to a proposed LTC-DRG with CCs, more coded information is called for (that is, at least one relevant secondary diagnosis), than for a case to be assigned to a proposed LTC-DRG “without CCs” (which is based on only one principal diagnosis and no relevant secondary diagnoses). Currently, the LTCH claims data include both accurately coded cases without complications and cases that have complications (and cost more), but were not coded completely. Both types of cases are grouped to a proposed LTC-DRG “without CCs” because only one principal diagnosis was coded. Since the LTCH PPS was only implemented for cost reporting periods beginning on or after October 1, 2002 (FY 2003) and LTCHs were previously paid under cost-based reimbursement, which is not based on patient diagnoses, coding by LTCHs for these cases may not have been as detailed as possible.

Thus, in developing the FY 2003 LTC-DRG relative weights for the LTCH PPS based on FY 2001 claims data, as we discussed in the August 30, 2002 LTCH PPS final rule (67 FR 55990), we found on occasion that the data suggested that cases classified to the LTC-DRG “with CCs” of a “with CC”/“without CC” pair had a lower average charge than the corresponding LTC-DRG “without CCs.” Similarly, as discussed in the FY 2005 IPPS final rule (69 FR 48991 through 48992), based on FY 2003 claims data, we also found on occasion that the data suggested that cases classified to the LTC-DRG “with CCs” of a “with CC”/“without CC” pair have a lower average charge than the corresponding LTC-DRG “without CCs” for the FY 2005 LTC-DRG relative weights.

We believe this anomaly may be due to coding that may not have fully reflected all comorbidities that were present. Specifically, LTCHs may have failed to code relevant secondary diagnoses, which resulted in cases that actually had CCs being classified into a “without CC” LTC-DRG. It would not be appropriate to pay a lower amount for the “with CC” LTC-DRG because, in general, cases classified into a “with CC” LTC-DRG are expected to have higher resource use (and higher cost) as discussed above. Therefore, previously when we determined the LTC-DRG relative weights in accordance with the methodology established in the August 30, 2002 LTCH PPS final rule (67 FR 55990), we grouped both the cases “with CCs” and “without CCs” together for the purpose of calculating the LTC-DRG relative weights for FYs 2003 through 2005. As we stated in that same final rule, we will continue to employ this methodology to account for nonmonotonically increasing relative weights until we have adequate data to calculate appropriate separate weights for these anomalous LTC-DRG pairs. We expect that, as was the case when we first implemented the IPPS, this problem will be self-correcting, as LTCHs submit more completely coded data in the future.

There are three types of “with CC” and “without CC” pairs that could be nonmonotonic; that is, where the “without CC” proposed LTC-DRG would have a higher average charge than the “with CC” proposed LTC-DRG. For this proposed rule, using the LTCH cases in the December 2004 update of the FY 2004 MedPAR file (the best available data at this time), we identified one of the three types of nonmonotonic LTC-DRG pairs.

The first category of nonmonotonically increasing proposed relative weights for FY 2006 proposed LTC-DRG pairs “with and without CCs” contains zero pairs of proposed LTC-DRGs in which both the proposed LTC-DRG “with CCs” and the proposed LTC-DRG “without CCs” had 25 or more LTCH cases and, therefore, did not fall into one of the 5 low-volume quintiles. For those nonmonotonic proposed LTC-DRG pairs, we would combine the LTCH cases and compute a new proposed relative weight based on the case-weighted average of the combined LTCH cases of the proposed LTC-DRGs. The case-weighted average charge is determined by dividing the total charges for all LTCH cases by the total number of LTCH cases for the combined proposed LTC-DRG. This new proposed relative weight would then be assigned to both of the proposed LTC-DRGs in the pair. In this proposed rule, for FY 2006, there are no proposed LTC-DRGs that fall into this category.

The second category of nonmonotonically increasing relative weights for proposed LTC-DRG pairs “with and without CCs” consists of one pair of proposed LTC-DRGs that has fewer than 25 cases, and each proposed LTC-DRG would be grouped to different proposed low-volume quintiles in which the “without CC” proposed LTC-DRG is in a higher-weighted proposed low-volume quintile than the “with CC” proposed LTC-DRG. For those pairs, we would combine the LTCH cases and determine the case-weighted average charge for all LTCH cases. The case-weighted average charge is determined by dividing the total charges for all LTCH cases by the total number of LTCH cases for the combined proposed LTC-DRG. Based on the case-weighted average LTCH charge, we determine within which low-volume quintile the “combined LTC-DRG” is grouped. Both proposed LTC-DRGs in the pair are then grouped into the same proposed low-volume quintile, and thus have the same proposed relative weight. In this proposed rule, for FY 2006, proposed LTC-DRGs 531 and 532 fall into this category.

The third category of nonmonotonically increasing relative weights for proposed LTC-DRG pairs “with and without CCs” consists of zero pairs of proposed LTC-DRGs where one of the proposed LTC-DRGs has fewer than 25 LTCH cases and is grouped to a proposed low-volume quintile and the other proposed LTC-DRG has 25 or more LTCH cases and has its own proposed LTC-DRG relative weight, and the proposed LTC-DRG “without CCs” has the higher proposed relative weight. We remove the proposed low-volume LTC-DRG from the proposed low-volume quintile and combine it with the other proposed LTC-DRG for the computation of a new proposed relative weight for each of these proposed LTC-DRGs. This new proposed relative weight is assigned to both proposed LTC-DRGs, so they each have the same proposed relative weight. In this proposed rule, for FY 2006, there are no proposed LTC-DRGs that fall into this category.

Step 6-Determine a proposed FY 2006 LTC-DRG relative weight for proposed LTC-DRGs with no LTCH cases.

As we stated above, we determine the proposed relative weight for each proposed LTC-DRG using charges reported in the December 2004 update of the FY 2004 MedPAR file. Of the 526 proposed LTC-DRGs for FY 2006, we identified 194 proposed LTC-DRGs for which there were no LTCH cases in the database. That is, based on data from the FY 2004 MedPAR file used in this proposed rule, no patients who would have been classified to those LTC-DRGs were treated in LTCHs during FY 2004 and, therefore, no charge data were reported for those proposed LTC-DRGs. Thus, in the process of determining the proposed LTC-DRG relative weights, we are unable to determine weights for these 194 proposed LTC-DRGs using the methodology described in steps 1 through 5 above. However, because patients with a number of the diagnoses under these proposed LTC-DRGs may be treated at LTCHs beginning in FY 2006, we assign proposed relative weights to each of the 194 “no volume” proposed LTC-DRGs based on clinical similarity and relative costliness to one of the remaining 332 (156—194 = 332) proposed LTC-DRGs for which we are able to determine proposed relative weights, based on FY 2004 claims data.

As there are currently no LTCH cases in these “no volume” proposed LTC-DRGs, we determine proposed relative weights for the 194 proposed LTC-DRGs with no LTCH cases in the FY 2004 MedPAR file used in this proposed rule by grouping them to the appropriate proposed low-volume quintile. This methodology is consistent with our methodology used in determining proposed relative weights to account for the proposed low-volume LTC-DRGs described above.

Our methodology for determining proposed relative weights for the proposed “no volume” LTC-DRGs is as follows: We crosswalk the proposed no volume LTC-DRGs by matching them to other similar proposed LTC-DRGs for which there were LTCH cases in the FY 2004 MedPAR file based on clinical similarity and intensity of use of resources as determined by care provided during the period of time surrounding surgery, surgical approach (if applicable), length of time of surgical procedure, post-operative care, and length of stay. We assign the proposed relative weight for the applicable proposed low-volume quintile to the proposed no volume LTC-DRG if the proposed LTC-DRG to which it is crosswalked is grouped to one of the proposed low-volume quintiles. If the proposed LTC-DRG to which the proposed no volume LTC-DRG is crosswalked is not one of the proposed LTC-DRGs to be grouped to one of the proposed low-volume quintiles, we compare the proposed relative weight of the proposed LTC-DRG to which the proposed no volume LTC-DRG is crosswalked to the proposed relative weights of each of the five quintiles and we assign the proposed no volume LTC-DRG the proposed relative weight of the proposed low-volume quintile with the closest weight. For this proposed rule, a list of the proposed no volume FY 2006 LTC-DRGs and the proposed FY 2006 LTC-DRG to which it is crosswalked in order to determine the appropriate proposed low-volume quintile for the assignment of a relative weight for FY 2006 is shown in the chart below.

To illustrate this methodology for determining the proposed relative weights for the 194 proposed LTC-DRGs with no LTCH cases, we are providing the following examples, which refer to the proposed no volume LTC-DRGs crosswalk information for FY 2006 provided in the chart above.

Example 1:

There were no cases in the FY 2004 MedPAR file used for this proposed rule for proposed LTC-DRG 163 (Hernia Procedures Age 0-17). Since the procedure is similar in resource use and the length and complexity of the procedures and the length of stay are similar, we determined that proposed LTC-DRG 178 (Uncomplicated Peptic Ulcer Without CC), which is assigned to proposed low-volume Quintile 3 for the purpose of determining the proposed FY 2006 relative weights, would display similar clinical and resource use. Therefore, we assign the same proposed relative weight of proposed LTC-DRG 178 of 0.7586 (proposed Quintile 3) for FY 2006 (Table 11 in the Addendum to this proposed rule) to proposed LTC-DRG 163.

Example 2:

There were no LTCH cases in the FY 2004 MedPAR file used in this proposed rule for proposed LTC-DRG 91 (Simple Pneumonia and Pleurisy Age 0-17). Since the severity of illness in patients with bronchitis and asthma is similar in patients regardless of age, we determined that proposed LTC-DRG 90 (Simple Pneumonia and Pleurisy Age 17 Without CC) would display similar clinical and resource use characteristics and have a similar length of stay to proposed LTC-DRG 91. There were over 25 cases in proposed LTC-DRG 90. Therefore, it would not be assigned to a low-volume quintile for the purpose of determining the proposed LTC-DRG relative weights. However, under our established methodology, proposed LTC-DRG 91, with no LTCH cases, would need to be grouped to a proposed low-volume quintile. We determined that the proposed low-volume quintile with the closest weight to proposed LTC-DRG 90 (0.5004) (refer to Table 11 in the Addendum to this proposed rule) would be proposed low-volume Quintile 1 (0. 4502) (refer to Table 11 in the Addendum to this proposed rule). Therefore, we assign proposed LTC-DRG 91 a proposed relative weight of 0.4502 for FY 2006.

Furthermore, we are proposing LTC-DRG relative weights of 0.0000 for heart, kidney, liver, lung, pancreas, and simultaneous pancreas/kidney transplants (LTC-DRGs 103, 302, 480, 495, 512, and 513, respectively) for FY 2006 because Medicare will only cover these procedures if they are performed at a hospital that has been certified for the specific procedures by Medicare and presently no LTCH has been so certified.

Based on our research, we found that most LTCHs only perform minor surgeries, such as minor small and large bowel procedures, to the extent any surgeries are performed at all. Given the extensive criteria that must be met to become certified as a transplant center for Medicare, we believe it is unlikely that any LTCHs would become certified as a transplant center. In fact, in the nearly 20 years since the implementation of the IPPS, there has never been a LTCH that even expressed an interest in becoming a transplant center.

However, if in the future a LTCH applies for certification as a Medicare-approved transplant center, we believe that the application and approval procedure would allow sufficient time for us to determine appropriate weights for the LTC-DRGs affected. At the present time, we would only include these six transplant LTC-DRGs in the GROUPER program for administrative purposes. Because we use the same GROUPER program for LTCHs as is used under the IPPS, removing these LTC-DRGs would be administratively burdensome.

Again, we note that as this system is dynamic, it is entirely possible that the number of proposed LTC-DRGs with a zero volume of LTCH cases based on the system will vary in the future. We used the best most recent available claims data in the MedPAR file to identify zero volume LTC-DRGs and to determine the proposed relative weights in this proposed rule.

Table 11 in the Addendum to this proposed rule lists the proposed LTC-DRGs and their respective proposed relative weights, geometric mean length of stay, and five-sixths of the geometric mean length of stay (to assist in the determination of short-stay outlier payments under § 412.529) for FY 2006.

E. Proposed Add-On Payments for New Services and Technologies

(If you choose to comment on issues in this section, please include the caption “New Technology Applications” at the beginning of your comment.)

1. Background

Sections 1886(d)(5)(K) and (L) of the Act establish a process of identifying and ensuring adequate payment for new medical services and technologies under the IPPS. Section 1886(d)(5)(K)(vi) of the Act specifies that a medical service or technology will be considered new if it meets criteria established by the Secretary after notice and opportunity for public comment. Section 1886(d)(5)(K)(ii)(I) of the Act specifies that the process must apply to a new medical service or technology if, “based on the estimated costs incurred with respect to discharges involving such service or technology, the DRG prospective payment rate otherwise applicable to such discharges under this subsection is inadequate.”

The regulations implementing this provision establish three criteria for new medical services and techniques to receive an additional payment. First, § 412.87(b)(2) defines when a specific medical service or technology will be considered new for purposes of new medical service or technology add-on payments. The statutory provision contemplated the special payment treatment for new medical services or technologies until such time as data are available to reflect the cost of the technology in the DRG weights through recalibration. There is a lag of 2 to 3 years from the point a new medical service or technology is first introduced on the market and when data reflecting the use of the medical service or technology are used to calculate the DRG weights. For example, data from discharges occurring during FY 2004 are used to calculate the proposed FY 2006 DRG weights in this proposed rule. Section 412.87(b)(2) provides that a “medical service or technology may be considered new within 2 or 3 years after the point at which data begin to become available reflecting the ICD-9-CM code assigned to the new medical service or technology (depending on when a new code is assigned and data on the new medical service or technology become available for DRG recalibration). After CMS has recalibrated the DRGs, based on available data, to reflect the costs of an otherwise new medical service or technology, the medical service or technology will no longer be considered ‘new’ under the criterion for this section.”

The 2-year to 3-year period during which a technology or medical service can be considered new would ordinarily begin with FDA approval, unless there was some documented delay in bringing the product onto the market after that approval (for instance, component production or drug production had been postponed until FDA approval due to shelf life concerns or manufacturing issues). After the DRGs have been recalibrated to reflect the costs of an otherwise new medical service or technology, the special add-on payment for new medical services or technology ceases (§ 412.87(b)(2)). For example, an approved new technology that received FDA approval in October 2004 and entered the market at that time may be eligible to receive add-on payments as a new technology until FY 2007 (discharges occurring before October 1, 2006), when data reflecting the costs of the technology would be used to recalibrate the DRG weights. Because the FY 2007 DRG weights will be calculated using FY 2005 MedPAR data, the costs of such a new technology would likely be reflected in the FY 2007 DRG weights.

Section 412.87(b)(3) further provides that, to receive special payment treatment, new medical services or technologies must be inadequately paid otherwise under the DRG system. To assess whether technologies would be inadequately paid under the DRGs, we establish thresholds to evaluate applicants for new technology add-on payments. In the FY 2004 IPPS final rule (68 FR 45385), we established the threshold at the geometric mean standardized charge for all cases in the DRG plus 75 percent of 1 standard deviation above the geometric mean standardized charge (based on the logarithmic values of the charges and transformed back to charges) for all cases in the DRG to which the new medical service or technology is assigned (or the case-weighted average of all relevant DRGs, if the new medical service or technology occurs in many different DRGs). Table 10 in the Addendum to the FY 2004 IPPS final rule (68 FR 45648) listed the qualifying threshold by DRG, based on the discharge data that we used to calculate the FY 2004 DRG weights.

However, section 503(b)(1) of Pub. L. 108-173 amended section 1886(d)(5)(K)(ii)(I) of the Act to provide for “applying a threshold* * *that is the lesser of 75 percent of the standardized amount (increased to reflect the difference between cost and charges) or 75 percent of 1 standard deviation for the diagnosis-related group involved.” The provisions of section 503(b)(1) apply to classification for fiscal years beginning with FY 2005. We updated Table 10 from the October 6, 2003 Federal Register correction document, which contains the thresholds that we used to evaluate applications for new service or technology add-on payments for FY 2005, using the section 503(b)(1) measures stated above, and posted these new thresholds on our Web site at: http://www.cms.hhs.gov/providers/hipps/newtech.asp. In the FY 2005 IPPS final rule (in Table 10 of the Addendum), we included the final thresholds that are being used to evaluate applicants for new technology add-on payments for FY 2006. (Refer to section IV.D. of the preamble to the FY 2005 IPPS final rule (69 FR 49084) for a discussion of a revision of the regulations to incorporate the change made by section 503(b)(1) of Pub. L. 108-173.)

Section 412.87(b)(1) of our existing regulations provides that a new technology is an appropriate candidate for an additional payment when it represents an advance in medical technology that substantially improves, relative to technologies previously available, the diagnosis or treatment of Medicare beneficiaries. For example, a new technology represents a substantial clinical improvement when it reduces mortality, decreases the number of hospitalizations or physician visits or reduces recovery time compared to the technologies previously available. (See the September 7, 2001 final rule (66 FR 46902) for a complete discussion of this criterion.)

The new medical service or technology add-on payment policy provides additional payments for cases with high costs involving eligible new medical services or technologies while preserving some of the incentives under the average-based payment system. The payment mechanism is based on the cost to hospitals for the new medical service or technology. Under § 412.88, Medicare pays a marginal cost factor of 50 percent for the costs of a new medical service or technology in excess of the full DRG payment. If the actual costs of a new medical service or technology case exceed the DRG payment by more than the 50-percent marginal cost factor of the new medical service or technology, Medicare payment is limited to the DRG payment plus 50 percent of the estimated costs of the new technology.

The report language accompanying section 533 of Pub. L. 106-554 indicated Congressional intent that the Secretary implement the new mechanism on a budget neutral basis (H.R. Conf. Rep. No. 106-1033, 106th Cong., 2nd Sess. at 897 (2000)). Section 1886(d)(4)(C)(iii) of the Act requires that the adjustments to annual DRG classifications and relative weights must be made in a manner that ensures that aggregate payments to hospitals are not affected. Therefore, in the past, we accounted for projected payments under the new medical service and technology provision during the upcoming fiscal year at the same time we estimated the payment effect of changes to the DRG classifications and recalibration. The impact of additional payments under this provision was then included in the budget neutrality factor, which was applied to the standardized amounts and the hospital-specific amounts.

Section 503(d)(2) of Pub. L. 108-173 amended section 1886(d)(5)(K)(ii)(III) of the Act to provide that there shall be no reduction or adjustment in aggregate payments under the IPPS due to add-on payments for new medical services and technologies. Therefore, add-on payments for new medical services or technologies for FY 2005 and later years will not be budget neutral.

Applicants for add-on payments for new medical services or technologies for FY 2007 must submit a formal request, including a full description of the clinical applications of the medical service or technology and the results of any clinical evaluations demonstrating that the new medical service or technology represents a substantial clinical improvement, along with a significant sample of data to demonstrate the medical service or technology meets the high-cost threshold, no later than October 15, 2005. Applicants must submit a complete database no later than December 30, 2005. Complete application information, along with final deadlines for submitting a full application, will be available after publication of the FY 2006 final rule at our Web site: http://www.cms.hhs.gov/providers/hipps/default.asp. To allow interested parties to identify the new medical services or technologies under review before the publication of the proposed rule for FY 2007, the website will also list the tracking forms completed by each applicant.

2. Public Input Before Publication of This Notice of Proposed Rulemaking on Add-On Payments

Section 503(b)(2) of Pub. L. 108-173 amended section 1886(d)(5)(K) of the Act by adding a clause (viii) to provide for a mechanism for public input before publication of a notice of proposed rulemaking regarding whether a medical service or technology represents a substantial improvement or advancement. The revised process for evaluating new medical service and technology applications requires the Secretary to—

  • Provide, before publication of a proposed rule, for public input regarding whether a new service or technology represents an advance in medical technology that substantially improves the diagnosis or treatment of Medicare beneficiaries.
  • Make public and periodically update a list of the services and technologies for which an application for add-on payments is pending.
  • Accept comments, recommendations, and data from the public regarding whether a service or technology represents a substantial improvement.
  • Provide, before publication of a proposed rule, for a meeting at which organizations representing hospitals, physicians, manufacturers, and any other interested party may present comments, recommendations, and data regarding whether a new service or technology represents a substantial clinical improvement to the clinical staff of CMS.

In order to provide an opportunity for public input regarding add-on payments for new medical services and technologies for FY 2006 before publication of this proposed rule, we published a notice in the Federal Register on December 30, 2004 (69 FR 78466) and held a town hall meeting at the CMS Headquarters Office in Baltimore, MD, on February 23, 2005. In the announcement notice for the meeting, we stated that the opinions and alternatives provided during the meeting would assist us in our evaluations of applications by allowing public discussions of the substantial clinical improvement criteria for each of the FY 2006 new medical service and technology add-on payment applications before the publication of this FY 2006 IPPS proposed rule.

Approximately 45 participants registered and attended in person, while additional participants listened over an open telephone line. The participants focused on presenting data on the substantial clinical improvement aspect of their products, as well as the need for additional payments to ensure access to Medicare beneficiaries. In addition, we received written comments regarding the substantial clinical improvement criterion for the applicants. We have considered these comments in our evaluation of each new application for FY 2006 in this proposed rule. We have summarized these comments or, if applicable, indicated that no comments were received, at the end of the discussion of the individual applications.

Section 503(c) of Pub. L. 108-173 amended section 1886(d)(5)(K) of the Act by adding a new clause (ix) requiring that, before establishing any add-on payment for a new medical service or technology, the Secretary shall seek to identify one or more DRGs associated with the new technology, based on similar clinical or anatomical characteristics and the costs of the technology and assign the new technology into a DRG where the average costs of care most closely approximate the costs of care using the new technology. No add-on payment shall be made with respect to such a new technology.

At the time an application for new technology add-on payments is submitted, the DRGs associated with the new technology are identified. We only determine that a new technology add-on payment is appropriate when the reimbursement under these DRGs is not adequate for this new technology. The criterion for this determination is the cost threshold, which we discuss below. We discuss the assignments of several new technologies within the DRG payment system in section II.B. of this proposed rule.

In this proposed rule, we evaluate whether new technology add-on payments will continue in FY 2006 for the three technologies that currently receive such payments. In addition, we present our evaluations of eight applications for add-on payments in FY 2006. The eight applications for FY 2006 include two applications for products that were denied new technology add-on payments for FY 2005.

3. FY 2006 Status of Technology Approved for FY 2005 Add-On Payments

a. INFUSE TM (Bone Morphogenetic Proteins (BMPs) for Spinal Fusions)

INFUSE TM was approved by FDA for use on July 2, 2002, and became available on the market immediately thereafter. In the FY 2004 IPPS final rule (68 FR 45388), we approved INFUSE TM for add-on payments under § 412.88, effective for FY 2004. This approval was on the basis of using INFUSE TM for single-level, lumbar spinal fusion, consistent with the FDA's approval and the data presented to us by the applicant. Therefore, we limited the add-on payment to cases using this technology for anterior lumbar fusions in DRGs 497 (Spinal Fusion Except Cervical With CC) and 498 (Spinal Fusion Except Cervical Without CC). Cases involving INFUSE TM that are eligible for the new technology add-on payment are identified by assignment to DRGs 497 and 498 as a lumbar spinal fusion, with the combination of ICD-9-CM procedure codes 84.51 (Insertion of interbody spinal fusion device) and 84.52 (Insertion of recombinant bone morphogenetic protein).

The FDA approved INFUSE TM for use on July 2, 2002. For FY 2005, INFUSE TM was still within the 2-year to 3-year period during which a technology can be considered new under the regulations. Therefore, in the FY 2005 IPPS final rule (69 FR 49007 through 49009), we continued add-on payments for FY 2005 for cases receiving INFUSE TM for spinal fusions in DRGs 497 (Spinal Fusion Except Cervical With CC) and 498 (Spinal Fusion Except Cervical Without CC).

As we discussed in the September 7, 2001 final rule (66 FR 46915), an approval of a new technology for special payment should extend to all technologies that are substantially similar. Otherwise, our payment policy would bestow an advantage to the first applicant to receive approval for a particular new technology. In last year's final rule (69 FR 49008), we discussed another product, called OP-1 Putty, manufactured by Stryker Biotech, that promotes natural bone growth by using a closely related bone morphogenetic protein called rhBMP-7. (INFUSE TM is rhBMP-2.) We also stated in last year's final rule that we had determined that the costs associated with the OP-1 Putty are similar to those associated with INFUSE TM. Because the OP-1 Putty became available on the market in May 2004 (when it received FDA approval for spinal fusions) for similar spinal fusion procedures and because this product also eliminates the need for the autograft bone surgery, we extended new technology add-on payments to this technology as well for FY 2005.

As noted above, the period for which technologies are eligible to receive new technology add-on payments is 2 to 3 years after the product becomes available on the market and data reflecting the cost of the technology are reflected in the DRG weights. The FDA approved INFUSE TM bone graft on July 2, 2002. Therefore, data reflecting the cost of the technology are now reflected in the DRG weights. In addition, by the end of FY 2005, the add-on payment will have been made for 2 years. Therefore, we are proposing to discontinue new technology add-on payment for INFUSE TM for FY 2006. Because we apply the same policies in making new technology payment for OP-1 Putty as we do for INFUSE TM, we are proposing to discontinue new technology add-on payment for OP-1 Putty as well for FY 2006.

b. InSync® Defibrillator System (Cardiac Resynchronization Therapy With Defibrillation (CRT-D))

Cardiac Resynchronization Therapy (CRT), also known as bi-ventricular pacing, is a therapy for chronic heart failure. A CRT implantable system provides electrical stimulation to the right atrium, right ventricle, and left ventricle to coordinate or resynchronize ventricular contractions and improve cardiac output.

In the FY 2005 IPPS final rule (69 FR 49016), we determined that cardiac resynchronization therapy with defibrillator (CRT-D) was eligible for add-on payments in FY 2005. Cases involving CRT-D that are eligible for new technology add-on payments are identified by either one of the following two ICD-9-CM procedure codes: 00.51 (Implantation of Cardiac Resynchronization Defibrillator, Total System (CRT-D)) or 00.54 (Implantation or Replacement of Pulse Generator Device Only (CRT-D)). InSync® Defibrillation System received FDA approval on June 26, 2002. However, another manufacturer, Guidant, received FDA approval for its CRT-D device on May 2, 2002. As we discussed in the September 7, 2001 final rule (66 FR 46915), an approval of a new technology for special payment should extend to all technologies that are substantially similar. Otherwise, our payment policy would bestow an advantage to the first applicant to receive approval for a particular new technology. We also noted that we would extend new technology add-on payments for the entire FY 2005 even though the 2-3 year period of newness ended in May 2005 for CRT-D since predictability is an important aspect of the prospective payment methodology and, therefore, we believe it is appropriate to apply a consistent payment methodology for new technologies throughout the fiscal year (69 FR 49016).

As noted in the FY 2005 IPPS final rule (69 FR 49014), because CRT-Ds were available upon the initial FDA approval in May 2002, we considered the technology to be new from this date. As a result, for FY 2006, the CRT-D will be beyond the 2-3 year period during which a technology can be considered new. Therefore, we are proposing to discontinue add-on payments for the CRT-D for FY 2006.

c. Kinetra® Implantable Neurostimulator for Deep Brain Stimulation

Medtronic, Inc. submitted an application for approval of the Kinetra® implantable neurostimulator device for new technology add-on payments for FY 2005. The Kinetra® device was approved by the FDA on December 16, 2003. The Kinetra® implantable neurostimulator is designed to deliver electrical stimulation to the subthalamic nucleus (STN) or internal globus pallidus (GPi) in order to ameliorate symptoms caused by abnormal neurotransmitter levels that lead to abnormal cell-to-cell electrical impulses in Parkinson's Disease and essential tremor. Before the development of Kinetra®, treating bilateral symptoms of patients with these disorders required the implantation of two neurostimulators (in the form of a product called Soletra TM, also manufactured by Medtronic): one for the right side of the brain (to control symptoms on the left side of the body), the other for the left side of the brain (to control symptoms on the right side of the body). Additional procedures were required to create pockets in the chest cavity to place the two generators required to run the individual leads. The Kinetra® neurostimulator generator, implanted in the pectoral area, is designed to eliminate the need for two devices by accommodating two leads that are placed in both the left and right sides of the brain to deliver the necessary impulses. The manufacturer argued that the development of a single neurostimulator that treats bilateral symptoms provides a less invasive treatment option for patients, and simpler implantation, follow up, and programming procedures for physicians.

In December 2003, the FDA approved the device. Therefore, for FY 2006, Kinetra® qualifies under the newness criterion because FDA approval was within the statutory timeframe of 2 to 3 years and its costs are not yet reflected in the DRG weights. Because there were no data available to evaluate costs associated with Kinetra®, in the FY 2005 IPPS final rule, we conducted the cost analysis using Soletra TM, the predecessor technology used to treat this condition, as a proxy for Kinetra®. The preexisting technology provided the closest means to track cases that have actually used similar technology and served to identify the need and use of the new device. The manufacturer informed us that the cost of the Kinetra® device is twice the price of a single Soletra TM device. Because most patients would receive two Soletra TM devices if the Kinetra® device is not implanted, we believed data regarding the cost of Soletra TM would give a good measure of the actual costs that would be incurred. Medtronic submitted data for 104 cases that involved the Soletra TM device (26 cases in DRG 1 (Craniotomy Age 17 With CC), and 78 cases in DRG 2 (Craniotomy Age 17 Without CC)). These cases were identified from the FY 2002 MedPAR file using procedure codes 02.93 (Implantation, intracranial neurostimulator) and 86.09 (Other incision of skin and subcutaneous tissue). In the analysis presented by the applicant, the mean standardized charges for cases involving Soletra TM in DRGs 1 and 2 were $69,018 and $44,779, respectively. The mean standardized charge for these Soletra TM cases according to Medtronic's data was $50,839.

Last year, we used the same procedure codes to identify 187 cases involving the Soletra TM device in DRGs 1 and 2 in the FY 2003 MedPAR file. Similar to the Medtronic data, 53 of the cases were found in DRG 1, and 134 cases were found in DRG 2. The average standardized charges for these cases in DRGs 1 and 2 were $51,163 and $44,874, respectively. Therefore, the case-weighted average standardized charge for cases that included implantation of the Soletra TM device was $46,656. The new cost thresholds established under the revised criteria in Pub. L. 108-173 for DRGs 1 and 2 are $43,245 and $30,129, respectively. Accordingly, the case-weighted threshold to qualify for new technology add-on payment using the data we identified was determined to be $33,846. Under this analysis, Kinetra® met the cost threshold.

We note that an ICD-9-CM code was approved for dual array pulse generator devices, effective October 1, 2004, for IPPS tracking purposes. The new ICD-9-CM code that will be assigned to this device is 86.95 (Insertion or replacement of dual array neurostimulator pulse generator), which includes dual array and dual channel generators for intracranial, spinal, and peripheral neurostimulators. The code will not separately identify cases with the Kinetra® device and will only be used to distinguish single versus dual channel-pulse generator devices. Because the code only became effective on October 1, 2004, we do not have any specific data regarding the costs of cases involving dual array pulse generator devices.

The manufacturer claimed that Kinetra® provides a range of substantial improvements beyond previously available technology. These include a reduced rate of device-related complications and hospitalizations or physician visits and less surgical trauma because only one generator implantation procedure is required. Kinetra® has a reed switch disabling function that physicians can use to prevent inadvertent shutoff of the device, as occurs when accidentally tripped by electromagnetic inference (caused by common products such as metal detectors and garage door openers). Kinetra® also provides significant patient control, allowing patients to monitor whether the device is on or off, to monitor battery life, and to fine-tune the stimulation therapy within clinician-programmed parameters. While Kinetra® provides the ability for patients to better control their symptoms and reduce the complications associated with the existing technology, it does not eliminate the necessity for two surgeries. Because the patients who receive the device are often frail, the implantation generally occurs in two phases: the brain leads are implanted in one surgery, and the generator is implanted in another surgery, typically on another day. However, implanting Kinetra® does reduce the number of potential surgeries compared to its predecessor (which requires two surgeries to implant the two single-lead arrays to the brain and an additional surgery for implantation of the second generator). Therefore, the Kinetra® device reduces the number of surgeries from 3 to 2.

Last year, we solicited comments on (1) the issue of whether the device is sufficiently different from the previously used technology to qualify as a substantially improved treatment for the same patient symptoms; (2) the cost of the device; and (3) the approval of the device for add-on payment, given the uncertainty over the frequency with which the patients receiving the device have the generator implanted in a second hospital stay, and the frequency with which this implantation occurs in an outpatient setting. In the response, we received sufficient evidence to demonstrate that Kinetra® does represent a substantial clinical improvement over the previous Soletra TM device. Specifically, the increased patient control, reduced surgery, fewer complications, and elimination of environmental interference significantly improve patient outcomes. Therefore, we approved Kinetra® for new technology add-on payments for FY 2005.

Cases receiving Kinetra® for Parkinson's disease or essential tremor on or after October 1, 2004, are eligible to receive an add-on payment of up to $8,285, or half the cost of the device, which is approximately $16,570. These cases are identified by the presence of procedure codes 02.93 (Implantation or replacement of intracranial neurostimulator leads) and 86.95 (Insertion or replacement of dual array neurostimulator pulse generator). If a claim has only the procedure code identifying the implantation of the intracranial leads, or if the claim identifies only insertion of the generator, no add-on payment will be made.

This technology received FDA approval on December 16, 2003, and remains within the 2 to 3 year period during which it can be considered new. Therefore, we are proposing to continue add-on payments for Kinetra® Inplantable Neurostimulator for deep brain stimulation for FY 2006.

4. FY 2006 Applications for New Technology Add-On

a. INFUSE TM Bone Graft (Bone Morphogenetic Proteins (BMPs) for Tibia Fractures)

Bone Morphogenetic Proteins (BMPs) have been shown to have the capacity to induce new bone formation and, therefore, to enhance the healing of fractures. Using recombinant techniques, some BMPs (also referred to as rhBMPs) can be produced in large quantities. This innovation has cleared the way for the potential use of BMPs in a variety of clinical applications such as in delayed union and nonunion of fractured bones and spinal fusions. One such product, rhBMP-2, is developed as an alternative to bone graft with spinal fusions.

Medtronic Sofamor Danek (Medtronic) resubmitted an application (previously submitted for consideration for FY 2005) for a new technology add-on payment in FY 2006 for the use of INFUSE TM Bone Graft in open tibia fractures. In cases of open tibia fractures, INFUSE TM is applied using an absorbable collagen sponge, which is then applied to the fractured bone to promote new bone formation and improved healing. The manufacturer contends that patient access to this technology is restricted due to the increased costs of treating these cases with INFUSE TM. The FDA approved use of INFUSE TM for open tibia fractures on April 30, 2004.

Medtronic's first application for a new technology add-on payment for INFUSE TM Bone Graft in open tibia fractures was denied. As we discussed in the FY 2005 IPPS final rule (69 FR 49010), the FY 2005 application for INFUSE TM for open tibia fractures was denied because a similar product, OP-1, was approved in 2001 for the treatment of nonunion of tibia fractures.

Comment: In comments presented at the February 2005 new technology town hall meeting, Medtronic contended that there was no opportunity for public comment on our decision regarding OP-1 Putty: “the public had no opportunity to comment on whether the follow-on products were ‘substantially similar' to the primary technologies under consideration. The absence of such provisions led to unpredictability and confusion about the new-technology add-on program.”

Response: In the FY 2005 IPPS final rule, we noted that a commenter brought the existence of the Stryker Biotech OP-1 product to our attention during the comment period on the IPPS proposed rule for FY 2005. The commenter noted OP-1's clinical similarity to INFUSE TM and contended that the products should be treated the same with respect to new technology payments when the product is used for tibia fractures. At that time, we determined that, despite the differences in indications under the respective FDA approvals, the two products were in use for many of the same kinds of cases. Specifically, clinical studies on the safety of OP-1 included patients with complicated fractures of the tibia, and those cases were similar to the cases described in the clinical trials for INFUSE TM for open tibia fractures. In addition, cases involving the use of OP-1 for long bone union and open tibia fractures are assigned to the same DRGs (DRGs 218 and 219 (Lower Extremity Procedures With and Without CC, respectively)) as cases involving INFUSE TM. Therefore, we denied new technology add-on payments for INFUSE TM for open tibia fractures for FY 2005 on the grounds that the technology involving the use of bone morphogenetic proteins to treat severe long bone fractures (including open tibia fractures) and recalcitrant long bone fractures had been in use for more than 3 years.

We note that Medtronic had ample opportunity, prior to the issuance of the FY 2005 IPPS final rule, to bring to our attention the fact that there was a similar product on the market that was being used in long bone fractures. We based our decision for FY 2005 on the record that was placed at our disposal by the applicant and by commenters during the comment period. Nevertheless, we have considered the issues raised by these two products again in the course of evaluating Medtronic's new application for approval of INFUSE TM for new technology add-on payments in FY 2006.

As part of its FY 2006 application, Medtronic advanced several arguments designed to demonstrate that OP-1 and INFUSE TM are substantially different. The application cites data from several studies as evidence of the clinical superiority of INFUSE TM over OP-1. Medtronic presented studies at the February 2005 new technology town hall meeting to provide evidence that INFUSE TM is superior to OP-1 in the time it takes for critical-sized defects to heal and in radiographic assessment, mechanical testing of the repaired bone, and histology of the union for trial subjects receiving INFUSE TM compared with OP-1. (Study subjects were canines whose ulnas had 2.5 cm each of bone removed and then equal amounts of OP-1 and INFUSE TM were put into the front legs in a head to head trial.) Medtronic has also argued that these studies demonstrate that OP-1 has been shown to be less effective than using the patient's own bone or the current standard of care (nail fixation with soft tissue medical management). Medtronic argued that the INFUSE TM product is not only superior to OP-1 for patients with open tibia fractures, but also that it is superior to any other treatment for these serious injuries.

Medtronic also pointed out that the FDA approved OP-1 for Humanitarian Device Exemption (HDE) status, whereas INFUSE TM received a Pre-Market Approval (PMA). To receive HDE approval, a product only needs to meet a safety standard, while standards of both safety and efficacy have to be met for a PMA approval. Medtronic argued that, because the only point the manufacturer of OP-1 was able to prove was that it did not harm those individuals that received it, the efficacy of OP-1 not only has not been demonstrated for the general population, but also more specifically, it has not been proven in the Medicare population. Medtronic presented arguments that INFUSE TM is a superior product to OP-1 because the INFUSE TM product has demonstrated safety and efficacy, while the OP-1 product has merely demonstrated that it is safe to use in humans. Medtronic pointed to the labeled indications and package inserts provided with the two products, stating that only INFUSE TM provides a substantial clinical improvement to patients receiving a BMP product.

We do not believe that the different types of FDA approvals for the two products are relevant to distinguish between the two products in determining whether either product should be considered for new technology add-on payments under the IPPS. Manufacturers seek different types of FDA approval for many different reasons, including timing, the availability of adequate studies, the availability of resources to pursue research studies, and the size of the patient population that may be affected. The FDA has stated that the HDE approval process was established to address cases involving devices used in the treatment or diagnosis of diseases affecting fewer than 4,000 individuals in the United States per year: “A device manufacturer's research and development costs could exceed its market returns for diseases or conditions affecting small patient populations. FDA, therefore, developed and published [the regulation establishing the HDE process] to provide an incentive for the development of devices for use in the treatment or diagnosis of diseases affecting these populations.” (http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfHDE/HDEInformation.cfm). The fact that two products received different types of approval does not demonstrate either that they are substantially different for purposes of new technology add-on payments, or that one is new and the other is not. Nor do the different types of FDA approval imply that one product could meet our substantial clinical improvement criterion and the other could not. Neither type of FDA approval requires that products establish substantial clinical improvement, as is required for approval of new technology add-on payments. Theoretically, a product that receives an FDA HDE approval could subsequently meet our substantial clinical improvement criterion, while a product that receives an FDA PMA approval could fail to do so. We base our substantial clinical improvement determinations on the evidence presented in the course of the application process, and not on the type of FDA approval.

For purposes of determining whether the use of rhBMPs for open tibia fracture represents a new technology, the crucial consideration is whether the costs of this technology are represented in the weights of the relevant DRGs. Cases that involve treatment of non-healed and acute tibia fractures fall into the same DRGs. We have identified 10,047 cases involving the use of rhBMPs in the FY 2004 MedPAR data file. This use includes the approved indications for INFUSE TM in spinal fusions (6,712 cases) and tibia DRGs (77 cases). However, we note that an additional 3,258 cases involving the off-label use of rhBMPs were found in 47 DRGs in the FY 2004 MedPAR data. We also note that, in our analysis of the FY 2003 MedPAR data, an additional 890 cases of off-label use (identified by the presence of ICD-9-CM code 84.52) were found in 36 DRGs. Therefore, we note that the use of rhBMPs, made by Medtronic or otherwise, has penetrated the cost data that were used to set the FY 2005 and FY 2006 DRG weights. Whether or not it is possible to differentiate between patient populations that would be eligible to receive the OP-1 Implant for nonunions or the INFUSE TM bone graft for open tibia fractures, the patient populations both fall into the same DRGs. In addition, we have determined that the costs associated with the two products are comparable (69 FR 49009). Therefore, because BMP products have been used in treating both types of fractures included in the same DRGs since 2001, we continue to believe that the hospital charge data used in developing the relative weights reflect the costs of these products.

Comment: In our Federal Register announcement of the February 23, 2005 new technology town hall meeting, held on February 23, 2005, we solicited comments on the issue of when products should be considered substantially similar. As a result, Medtronic recommended several criteria for determining whether two or more products are substantially similar and requested that we apply these criteria in determining whether OP-1 and INFUSE TM are similar for new technology add-on payment purposes. The three criteria recommended by Medtronic are:

  • The technologies or services in question use the same, or a similar, mechanism of action to achieve the therapeutic outcome.
  • The technologies or services are indicated for use in the same population for the same condition.
  • The technologies or services achieve the same level of substantial improvement.

Medtronic has also argued that, according to its proposed criteria, OP-1 would fail on two of the three proposed tests for substantial similarity:

  • According to Medtronic, the OP-1 implant “arguably” uses the same or a similar mechanism of action to achieve the therapeutic outcome.
  • OP-1 and INFUSE TM are indicated for use in different population and different conditions. According to Medtronic, INFUSE TM Bone Graft has an indication for acute, open tibia fractures only, used within 14 days, and is to be used with an intramedullary (IM) nail as part of the primary procedure. There is no limitation on the number of patients that can receive the technology. OP-1 Implant is indicated only for recalcitrant long-bone non-unions that have failed to heal. The HDE approval also specifies that use of OP-1 is limited to secondary procedures (as would be expected with nonunions). The number of patients able to receive the device is limited to 4,000 patients per year and with oversight from an Institutional Review Board.
  • Medtronic argues the products do not achieve the same level of substantial improvement (as discussed above).

Response: We agree with Medtronic that the first proposed criterion has some relevance in determining whether products are substantially similar. In evaluating the application for new technology add-on payments last year, we made the determination that, while these products are not identical chemically, the products do use the same mechanism of action to achieve the therapeutic outcome. However, we do not agree that the other two criteria recommended by Medtronic are relevant considerations for this purpose. As we have discussed above, we believe that whether cases involving different products are assigned to the same DRGs is a more relevant consideration than whether the products have the same specific indications. In addition, as we have already stated, we continue to believe that the hospital charge data used in developing the relative weights of the relevant DRGs reflect the costs of these products. Furthermore, we do not necessarily agree that considerations about the degrees of clinical improvements offered by different products should enter into decisions about whether products are new. We have always based our decisions about new technology add-on payments on a logical sequence of determinations, moving from the newness criterion to the cost criterion and finally to the substantial clinical improvement criterion. Specifically, we do not make determinations about substantial improvement unless a product has already been determined to be new and to meet the cost criterion. Therefore, we are reluctant to import substantial clinical improvement considerations into the logical prior decision about whether technologies are new. Furthermore, while we may sometimes need to make separate determinations about whether similar products meet the substantial clinical improvement criterion, we do not believe that it would be appropriate to make determinations about whether one product or another is clinically superior. However, we welcome comments while we continue to consider these issues.

Comment: Medtronic suggested revisions to the application process that are designed to assist in identifying substantially similar products and provide the public with opportunity for comment on specific instances in which substantial similarity is an issue. The suggested proposed revisions are:

  • After receipt of all new applications for a fiscal year, CMS should publish a Federal Register notice specifically asking manufacturers to identify if they wish to receive consideration for products that may be substantially similar to applications received. Such notice would probably occur in January. Responses would be required by a date certain in advance of the new technology town hall meeting, and would include justification of how the products meet the “substantial similarity” criteria.
  • The new technology town hall meeting should include a discussion of products identified by manufacturers as “substantially similar” to other approved products or pending applications.
  • CMS should publish initial findings about “substantial similarity” in the proposed hospital inpatient rule, with opportunity for public comment.
  • CMS should publish ultimate findings in the inpatient final rule.

Alternatively, Medtronic suggested that, if a manufacturer identifies a product that may be substantially similar to a technology with an approved add-on payment, the manufacturer may choose to submit an application under the normal deadlines for the add-on payment program.

Response: We appreciate Medtronic's suggestions for evaluating similar technologies for new technology add-on payment. We have stated on several occasions that we wish to avoid creating situations in which similar products receive different treatment because only one manufacturer has submitted an application for new technology add-on payments. As we discussed in the September 7, 2001 Federal Register (66 FR 46915), an approval of a new technology for special payment should extend to all technologies that are substantially similar. Otherwise, our payment policy would bestow an advantage to the first applicant to receive approval for a particular new technology.

In addition, we note that commenters on the FY 2005 proposed rule placed a great deal of emphasis on the fact that many manufacturers developing new technologies are not aware of the existence of the add-on payment provision or lack the resources to apply for add-on payment. Therefore, commenters on that proposed rule argued that the regulations we have established are already too stringent and cumbersome, especially for small manufacturers to access the new technology add-on payment process. The proposal by Medtronic would place further burden on these small manufacturers, both to know that an application has been made for a similar product and to make representations on a product that may or may not be on the market. Therefore, we are reluctant to adopt a process that places the formal burden on a competitor to seek equal treatment. However, we welcome comments while we continue to consider these issues.

We note that Medtronic submitted data on 236 cases using INFUSE TM for open tibia fractures in the FY 2003 MedPAR data file, as identified by procedure code 79.36 (Reduction, fracture, open, internal fixation, tibia and fibula) and diagnosis codes of either 823.30 (Fracture of tibia alone, shaft, open) or 823.32 (Fracture of fibula and tibia, shaft, open). Medtronic also noted that the patients in clinical trials with malunion fractures (diagnosis code 733.81) or nonunion fractures (diagnosis code 733.82) would also be likely candidates to receive INFUSE TM. Based on the data submitted by the applicant, INFUSE TM would be used primarily in two different DRGs: 218 and 219 (Lower Extremity and Humerus Procedures Except Hip, Foot, Femur Age 17, With and Without CC, respectively). The analysis performed by the applicant resulted in a case-weighted cost threshold of $24,461 for these DRGs. The average case-weighted standardized charge for cases using INFUSE TM in these DRGs would be $39,537. Therefore, the applicant maintains that INFUSE TM for open tibia fractures meets the cost criterion.

However, because the costs of INFUSE TM and OP-1 are already reflected in the relevant DRGs, these products cannot be considered new. Therefore, we are proposing to deny new technology add-on payments for INFUSE TM bone graft for open tibia fractures for FY 2006.

b. Aquadex TM System 100 Fluid Removal System (System 100)

CHF Solutions, Inc. resubmitted an application (previously submitted for consideration for FY 2005) for the approval of the System 100 for new technology add-on payments for FY 2006. The System 100 is designed to remove excess fluid (primarily excess water) from patients suffering from severe fluid overload through the process of ultrafiltration. Fluid retention, sometimes to an extreme degree, is a common problem for patients with chronic congestive heart failure. This technology removes excess fluid without causing hemodynamic instability. It also avoids the inherent nephrotoxicity and tachyphylaxis associated with aggressive diuretic therapy, the mainstay of current therapy for fluid overload in congestive heart failure.

The System 100 consists of: (1) An S-100 console; (2) a UF 500 blood circuit; (3) an extended length catheter (ELC); and (4) a catheter extension tubing. The System 100 is designed to monitor the extracorporeal blood circuit and to alert the user to abnormal conditions. Vascular access is established via the peripheral venous system, and up to 4 liters of excess fluid can be removed in an 8-hour period.

On June 3, 2002, FDA approved the System 100 for use with peripheral venous access. On November 20, 2003, FDA approved the System 100 for expanded use with central venous access and catheter extension use for infusion or withdrawal circuit line with other commercially applicable venous catheters. According to the applicant, although the FDA first approved System 100 in June 2002, it was not used by hospitals until August 2002 because of the substantial amount of time necessary to market and sell the device to hospitals. The applicant presented data and evidence demonstrating that the System 100 was not marketed until August 2002.

We note the applicant submitted an application for FY 2005 and was denied new technology add-on payments. Our review indicated that the applicant did not present sufficient objective clinical evidence to determine that the System 100 meets the substantial clinical improvement criterion (such as a large prospective, randomized clinical trial) even though it is indicated for use in patients with congestive heart failure, a common condition in the Medicare population. However, for FY 2006, we are proposing to deny System 100 new technology add-on payments on the basis of our determination that it is no longer new. Technology is no longer considered new 2 to 3 years after data reflecting its costs begin to become available. Because data on the costs of the System 100 first became available in 2002, the costs are currently reflected in the DRG weights and the device is no longer new.

The applicant also submitted information for the cost and substantial clinical improvement criteria. As stated last year, it is important to note at the outset of the cost analysis that the console is reusable and is, therefore, a capital cost. Only the circuits and catheters are components that represent operating expenses. Section 1886(d)(5)(K)(i) of the Act requires that the Secretary establish a mechanism to recognize the costs of new medical services or technologies under the payment system established under subsection (d) of section 1886, which establishes the system for paying for the operating costs of inpatient hospital services. The system of payment for capital costs is established under section 1886(g) of the Act, which makes no mention of any add-on payments for a new medical service or technology. Therefore, it is not appropriate to include capital costs in the add-on payments for a new medical service or technology and these costs should also not be considered in evaluating whether a technology meets the cost criterion. The applicant has applied for add-on payments for only the circuits and catheter, which represent the operating expenses of the device. However, as stated in the FY 2005 IPPS final rule, we believe that the catheters cannot be considered new technology for this device. As a result, we considered only the UF 500 disposable blood circuit as relevant to the evaluation of the cost criterion.

The applicant submitted data from the FY 2003 MedPAR file in support of its application for new technology add-on payments for FY 2006. The applicant used a combination of diagnosis codes to determine which cases could potentially use the System 100. The applicant found 28,155 cases with the following combination of ICD-9-CM diagnosis codes: 428.0 through 428.9 (Heart Failure), 402.91 (Unspecified with Heart Failure), or 402.11 (Hypertensive Heart Disease with Heart Failure), in combination with 276.6 (Fluid Overload) and 782.3 (Edema). The 28,155 cases were found among 148 DRGs with 50.1 percent of cases mapped across DRGs 88, 89, 127, 277 and 316. The applicant eliminated those DRGs with less than 150 cases, which resulted in a total of 22,620 cases that could potentially use the System 100. The case-weighted average standardized charge across all DRGs was $13,619.32. The case-weighted threshold across all DRGs was $16,125.42. Although the case-weighted threshold is greater than the case-weighted standardized charge, it is necessary to include the standardized charge for the circuits used in each case. In order to establish the charge per circuit, the applicant submitted data regarding 76 actual cases that used the System 100. Based on these 76 cases, the standardized charge per circuit was $2,591. The applicant also stated that an average of two circuits are used per case. Therefore, adding $5,182 for the charge of the two circuits to the case-weighted average standardized charge of $13,619.32 results in a total case-weighted standardized charge of $18,801.32. This amount is greater than the case-weighted threshold of $16,125.42.

The applicant contended that the System 100 represents a substantial clinical improvement for the following reasons: It removes excess fluid without the use of diuretics; it does not lead to electrolyte imbalance, hemodynamic instability or worsening renal function; it can restore diuretic responsiveness; it does not adversely affect the renin-angiotensin system; it reduces length of hospital stay for the treatment of congestive heart failure, and it requires only peripheral venous access. The applicant also noted that there are some clinical trials that have demonstrated the clinical safety and effectiveness as well as cost effectiveness of the System 100 in treating patients with fluid overload.

However, as stated above, we are proposing to deny new technology add-on payments for the System 100 because it does not meet the newness criterion.

We received no public comments regarding this application for add-on payments.

c. CHARITE TM Artificial Disc (CHARITE TM)

DePuy Spine TM submitted an application for new technology add-on payments for the CHARITE TM Artificial Disc for FY 2006. This device is a prosthetic intervertebral disc. DePuy Spine TM stated that the CHARITE TM Artificial Disc is the first artificial disc approved for use in the United States. It is a 3-piece articulating medical device consisting of a sliding core that is placed between two metal endplates. The sliding core is made from a medical grade plastic and the endplates are made from medical grade cobalt chromium alloy. The endplates support the core and have small teeth that are secured to the vertebrae above and below the disc space. The sliding core fits in between the endplates.

On October 26, 2004, the FDA approved the CHARITE TM Artificial Disc for single level spinal arthroplasty in skeletally mature patients with degenerative disc disease (DDD) between L4 and S1. The FDA further stated that DDD is defined as discogenic back pain with degeneration of the disc confirmed by patient history and radiographic studies. These DDD patients should have no more than 3 mm of spondylolisthesis at an involved level. Patients receiving the CHARITE TM Artificial Disc should have failed at least 6 months of conservative treatment prior to implantation of the CHARITE TM Artificial Disc. Because the device is within the statutory timeframe of 2 to 3 years and data is not yet reflected within the DRGs, we consider the CHARITE TM Artificial Disc to meet the newness criterion.

We note that an ICD-9-CM code was effective October 1, 2004, for IPPS tracking purposes. The code assigned to the CHARITE TM was 84.65 (Insertion of total spinal disc prosthesis, lumbosacral).

For analysis of the cost criterion, the applicant submitted two sets of data: one that used actual cases and one that used FY 2003 MedPAR cases. The applicant expects that cases using the CHARITE TM will map to DRGs 499 and 500. The applicant submitted 68 actual cases from 35 hospitals that used the CHARITE TM. Of these 68 cases, only 3 were Medicare patients; the remaining cases were privately insured patients or patients for whom the payer was unknown. Using data from the 68 actual cases, the average standardized charge was $40,722. The applicant maintained that this figure is well in excess of the thresholds for DRGs 499 and 500 (regardless of a case weighted threshold) of $24,828 and $17,299 respectively. Based on this analysis, the applicant maintained that the CHARITÉTM meets the cost criterion because the average standardized charge exceeds the charge thresholds for DRGs 499 and 500.

In addition, as stated above, the applicant submitted cases from the FY 2003 MedPAR file. The applicant searched the MedPAR file for ICD-9-CM procedure codes 81.06, 81.07, and 81.08 in combination with diagnosis codes 722.10, 722.2, 722.5, 722.52, 722.6, 722.7, 722.73 and 756.12, to identify a patient population that could be eligible for the CHARITE TM Artificial Disc and found a total of 12,680 cases. However, these cases are from the FY 2003 MedPAR file and precede the effective date of ICD-9-CM code 84.65 that is currently used to track the device. Of these 12,680 cases, 55.5 percent were reported in DRG 497, and 44.5 percent were reported in DRG 498. The applicant stated that cases using the CHARITE TM device group to the DRGs for back and neck procedures that exclude spinal fusions (DRGs 499 and 500). However, the applicant argues that the CHARITE TM could be a substitute for spinal fusion procedures found in DRGs 497 and 498 and, therefore, used cases from these DRGs to evaluate whether the CHARITE TM meets the cost criterion and to argue that procedures using the technology should be grouped to the spinal fusion DRGs. The average standardized charge per case was $50,098 for DRG 497 and $41,290 for DRG 498. Using revenue codes 272 and 278 from the MedPAR file, the applicant then subtracted the charges for surgical and medical supplies used in connection with spinal fusion procedures, which resulted in a standardized charge of all other charges of $24,333 for DRG 497 and $22,183 for DRG 498. Based on the actual cases above, the applicant then estimated the average standardized charge for surgical and medical supplies per case for the CHARITE TM was $20,033. The applicant estimated that charges have grown by 15 percent from FY 2003 to FY 2005 and, therefore, deflated the average standardized charge for surgical and medical supplies of the CHARITE TM by 15 percent to $17,420. The applicant then added the average standardized charge for surgical and medical supplies of the CHARITE TM to the standardized charge of all other charges for DRG 497 and 498 and also inflated the charges by 15 percent in order to update the data to FY 2005 charge levels. This amounted to a case-weighted average standardized charge of $46,256. Although the analysis was completed with DRGs 497 and 498, it is necessary to compare the average standardized charge to the thresholds of DRGs 499 and 500 because the GROUPER maps these cases to DRGs 499 and 500. As a result, the case-weighted threshold was $21,480. Similar to the analysis above, the applicant stated that the case-weighted average standardized charge is greater than the case-weighted threshold and, as a result, the applicant maintained that the CHARITE TM meets the cost criterion.

The applicant also contended that the CHARITE TM represents a substantial clinical improvement over existing technology. Use of the CHARITE TM may eliminate the need for spinal fusion and the use of autogenous bone, and the applicant stated that, based on the Investigational Device Exemption (IDE) study, “A Prospective Randomized Multicenter Comparison of Artificial Disc vs. Fusion for Single Level Lumbar Degenerative Disc Disease” (Blumenthal, S, et al, National American Spine Society 2004 Abstract) that patients who received the CHARITE TM Artificial Disc were discharged from the hospital after an average of 3.7 days compared to 4.2 days in the fusion group. Furthermore, the applicant stated that patients who received the CHARITE TM Artificial Disc had a statistically greater improvement in Oswetry Disability Index scores and Visual Analog Scale Pain scores compared to the fusion group at 6 weeks and 3, 6 and 12 months. The study also showed greater improvement from baseline compared to the fusion group on the Physical Component Score at 3, 6, and 23 months. In addition, the applicant states that patients receiving the CHARITE TM Artificial Disc returned to normal activities in half the time, compared to patients who underwent fusion, and at the 2 year follow up, 15 percent of patients who underwent a fusion were dissatisfied with the postoperative improvements compared to 2 percent who received the CHARITE TM Artificial Disc. Also, patients who received the CHARITE TM Artificial Disc returned to work on average of 12.3 weeks after surgery compared to 16.3 weeks after circumferential fusion and 14.4 weeks with Bagby and Kuslich cages. The applicant finally stated that the motion preserving technology of the CHARITE TM Artificial Disc may reduce the risk of increase of degenerative disc disease (DDD). The applicant explained that degeneration of adjacent discs due to increased stress has been strongly associated with spinal fusion utilizing instrumentation. In a followup of 100 patients (minimum 10 years) who received the CHARITE TM Artificial Disc, the incidence of adjacent level DDD was 2 percent.

We are continuing to review the information on whether the CHARITE TM Artificial Disc would appear to represent a substantial clinical improvement over existing technology for certain patient populations. Based on the studies submitted to the FDA and CMS, we remain concerned that the information presented may not definitively substantiate whether the CHARITE TM Artificial Disc is a substantial clinical improvement over spinal fusion. In addition, we are concerned that the cited IDE study enrolled no patients over 60 years of age, which excludes much of the Medicare population, and we are concerned that the device is contraindicated in patients with “significant osteoporosis,” which is quite common in the Medicare population. We invite comment on both of these points and on the more general question of whether the device satisfies the substantial clinical improvement criterion.

Despite the issues mentioned above, we are still considering whether it is appropriate to approve new technology add-on payment status for the CHARITE TM Artificial Disc for FY 2006. If approved for add-on payments, the device would be reimbursed up to half of the costs for the device. Because the manufacturer has stated that the cost for the CHARITE TM Artificial Disc would be $11,500, the maximum add-on payment for the device would be $5,750. In the final rule, we will make a final determination on whether the CHARITE TM Artificial Disc should receive new technology add-on payments for FY 2006 based on public comments and our continuing analyses.

We finally note that the applicant requested a DRG reassignment for cases of the CHARITE TM Artificial Disc from DRGs 499 (Back and Neck Procedures Except Spinal Fusion With CC) and 500 (Back and Neck Procedures Except Spinal Fusion Without CC) to DRGs 497 (Spinal Fusion Except Cervical With CC) and 498 (Spinal Fusion Except Cervical Without CC). The applicant argued that the costs associated with an artificial disc surgery are similar to spinal fusion and inclusion in DRGs 497 and 498 would obviate the need to make a new technology add-on payment. On October 1, 2004, we created new codes for the insertion of spinal disc prostheses (codes 84.60 through 84.69). In the FY 2005 IPPS proposed rule and the final rule, we described the new DRG assignments for these new codes in Table 6B of the Addendum to the rules. We received a number of comments recommending that we change the DRG assignments from DRGs 499 and 500 in MDC 8 to the DRGs for spinal fusion (DRGs 497 and 498). In the FY 2005 IPPS final rule (69 FR 48938), we indicated that DRGs 497 and 498 are limited to spinal fusion procedures. Because the surgery involving the CHARITE TM is not a spinal fusion, we decided not to include this procedure in these DRGs. However, we will continue to analyze this issue and are interested in public comments on both the new technology application for the CHARITE TM and the DRG assignment for spinal disc prostheses.

We received no public comments regarding this application for new technology add-on payments.

d. Endovascular Graft Repair of the Thoracic Aorta

Endovascular stent-grafting of the descending thoracic aorta (TA) provides a less invasive alternative to the traditional open surgical approach required for the management of descending thoracic aortic aneurysms. W.L. Gore Associates, Inc. submitted an application for consideration of its Endovascular Graft Repair of the Thoracic Aorta (GORE TAG) for new technology add-on payments for FY 2006. The GORE TAG device is a tubular stent-graft mounted on a catheter-based delivery system, and it replaces the synthetic graft normally sutured in place during open surgery. The device is identified using ICD-9-CM procedure code 39.79 (Other endovascular repair (of aneurysm) of other vessels). The applicant has requested a unique ICD-9-CM procedure code.

At this point the time of the initial application, the FDA hads not yet approved this technology for general use. Subsequently, however, we were notified that FDA approval was granted on March 23, 2005. Although we discuss some of the data submitted with the application for new technology add-on payments below, we are unable to include a detailed analysis of cost data and substantial clinical improvement data in this proposed rule because FDA approval occurred too late for us to conduct a complete analysis.

The applicant submitted cost threshold information for the GORE TAG device. According to the manufacturer, cases using the GORE TAG device would fall into DRGs 110 and 111 (Major Cardiovascular Procedures With and Without CC, respectively). The applicant identified 185 cases in the FY 2003 MedPAR using procedure code 39.79 (Other endovascular repair (of aneurysm) of other vessels) and primary diagnosis codes 441.2 (Thoracic aneurysm, without mention of rupture), 441.1 (Thoracic aneurysm, ruptured), or 441.01 (Dissection of aorta, thoracic). The case-weighted standardized charge for 177 of these cases was $60,905. According to the manufacturer, the case-weighted cost threshold for these DRGs is $49,817. Based on this analysis, the manufacturer maintained that the technology meets our cost threshold.

The manufacturer argued that the GORE TAG represents a substantial clinical improvement over existing technology, primarily by avoiding the traditional open aneurysm repair procedure with its associated high morbidity and mortality. The applicant argued that a descending thoracic aorta aneurysm is a potentially life threatening condition that currently requires a major operative procedure for its treatment. The mortality and complication rates associated with this surgery are very high, and the surgery is frequently performed under urgent or emergent conditions. The applicant noted that such complications can increase the length of the hospital stay and can include neurological damage, paralysis, renal failure, pulmonary emboli, hemorrhage, and sepsis. The average time for patients undergoing surgical repair to return to normal activity is 3 to 4 months, but can be significantly longer.

In comparison, the applicant argued that endovascular stent-grafting done with the GORE TAG thoracic endoprosthesis is minimally invasive. The manufacturer noted that patients treated with the endovascular technique experience far less aneurysm-related mortality and morbidity, compared to those patients that receive the open procedure resulting in reduced overall length-of-stay, less intensive care unit days and less operative complications.

We received the following public comments, in accordance with section 503(b)(2) of Pub. L. 108-173, regarding this application for add-on payments.

Comment: Several commenters expressed support for approval of new technology add-on payments for the GORE TAG device. These commenters noted that the data presented to the FDA advisory panel for consideration for FDA approval of the device clearly demonstrate the safety and efficacy of the GORE TAG device. They also noted that nearly 200 patients have been treated with the endografts, with a highly significant difference in both postoperative mortality and a reduction in the incidence of spinal cord ischemic complications, with some commenters noting the trial results, which showed a reduction in the rate of paraplegia from 14 percent to 3 percent, compared to open surgery. The commenters also stressed the rigorous nature of the open surgery, which requires a left lateral thoracotomy, resulting in significant morbidity. The commenters further argued that, since many of the patients with degenerative aneurysm of the thoracic aorta are elderly or present with significant comorbidities, or both, it is “a common circumstance in clinical practice to deny repair to such patients because of the magnitude of the conventional open surgery.” Other commenters stated that the 5-year mortality in all patients diagnosed with thoracic aortic aneurysm is as high as 80 percent in some groups of patients. Therefore, the commenters argued, the GORE TAG device for thoracic aortic aneurysm satisfies the criteria for substantial clinical improvement.

Response: We appreciate the commenters' input on this criterion. We will consider these comments regarding the substantial clinical improvement criterion in the final rule if we determine that the technology meets the other two criteria.

Comment: A representative of another device manufacturer stated at the town hall meeting that the manufacturer has a similar product awaiting FDA approval.

Response: As we discussed in the September 7, 2001 Federal Register (66 FR 46915), an approval of a new technology for special payment should extend to all technologies that are substantially similar. Otherwise, our payment policy would bestow an advantage to the first applicant to receive approval for a particular new technology. In this case, we will determine whether the GORE TAG device qualifies for new technology add-on payments in the FY 2006 final rule. In the event that this technology satisfies all the criteria, we would extend new technology payments to any substantially similar technology that also receives FDA approval prior to publication of the FY 2006 final rule. We welcome comments regarding this technology in light of its recent FDA approval, particularly with regard to the cost threshold and the substantial clinical improvement criteria.

e. Restore® Rechargeable Implantable Neurostimulator

Medtronic Neurological submitted an application for new technology add-on payments for its Restore® Rechargeable Implantable Neurostimulator. The Restore® Rechargeable Implantable Neurostimulator is designed to deliver electrical stimulation to the spinal cord for treatment of chronic, intractable pain.

Neurostimulation is designed to deliver electrical stimulation to the spinal cord to block the sensation of pain. The current technology standard for neurostimulators utilizes internal sealed batteries as the power source to generate the electrical current. These internal batteries have finite lives, and require replacement when their power has been completely discharged. According to the manufacturer, the Restore® Rechargeable Implantable Neurostimulator “represents the next generation of neurostimulator technology, allowing the physician to set the voltage parameters in such a way that fully meets the patient's requirements to achieve adequate pain relief without fear of premature depletion of the battery.” The applicant stated that the expected life of the Restore® rechargeable battery is 9 years, compared to an average life of 3 years for conventional neurostimulator batteries. The applicant stated that this represents a significant clinical improvement because patients can use any power settings that are necessary to achieve pain relief with less concern for battery depletion and subsequent battery replacement.

This device has not yet received approval for use by the FDA; however, another manufacturer has received approval for a similar device. (Advanced Bionics' Precision® Rechargeable Neurostimulator was approved by the FDA on April 27, 2004.)

Medtronic Neurological also provided data to determine whether the Restore® Rechargeable Implantable Neurostimulator meets the cost criterion. Medtronic Neurological stated that the cases involving use of the device would primarily fall into DRGs 499, 500, 531 and 532, which have a case-weighted threshold of $24,090. The manufacturer stated that the anticipated average standardized charge per case involving the Restore® technology is $59,265. This manufacturer derived this estimate by identifying cases in the FY 2003 MedPAR that reported procedure code 03.93 (Insertion or replacement of spinal neurostimulators). The manufacturer then added the total cost of the Restore® Rechargeable Implantable Neurostimulator to the average standardized charges for those cases. Of the applicable charges for the Restore® Rechargeable Implantable Neurostimulator, only the components that the applicant identified as new would be eligible for new technology add-on payments. Medtronic Neurological submitted information that distinguished the old and new components of the device and submitted data indicating that the neurostimulator itself is $17,995 and the patient recharger, antenna, and belt are $3,140. Thus, the total cost for new components would be $21,135, with a maximum add-on amount of $10,568 if the product were to be approved for new technology payments.

We note that we reviewed a technology for add-on payments for FY 2003 called Renew [TM] Radio Frequency Spinal Cord Stimulation (SCS) Therapy, made by Advanced Neuromodulation Systems (ANS). In the FY 2003 final rule, we discussed and subsequently denied an application for new technology add-on payment for Renew [TM] SCS because “Renew [TM] SCS was introduced in July 1999 as a device for the treatment of chronic intractable pain of the trunk and limbs.” (67 FR 50019) We also noted, “[t]his system only requires one surgical placement and does not require additional surgeries to replace batteries as do other internal SCS systems.”

The applicant also stated in its application for Restore® that cases where it is used will be identified by ICD-9-CM procedure code 03.93 (Insertion or replacement of spinal neurostimulators). As we discussed in the FY 2003 final rule (67 FR 50019), the Renew [TM] SCS is identified by the same ICD-9-CM procedure code. The applicant has also applied for a new ICD-9-CM code for rechargeable neurostimulator pulse generator (We refer readers to Tables 6A through 6H in the Addendum to this proposed rule for information regarding ICD-9-CM codes.) Because both technologies are similar, we asked Medtronic to provide information that would demonstrate how the products were substantially different. The applicant noted that the Renew [TM] SCS, while programmable and rechargeable, is not a good option for those patients who have high energy requirements because of chronic intractable pain that will result in more battery wear and subsequent surgery to replace the device. Both systems rely on rechargeable batteries, and in the case of Renew [TM] SCS the energy is transmitted through the skin from a radiofrequency source for the purpose of recharging. The manufacturer of the Restore® device contends that it is superior to the Renew [TM] device because Renew [TM] requires an external component that uses a skin adhesive that is uncomfortable and inconvenient (causes skin irritation, is affected by moisture that will come from bathing, sweating, swimming, etc.), leading to patient noncompliance.

Because FDA approval has not yet been received for this device, we are making no decision concerning the Restore® application at this time. We will make a formal determination if FDA approval occurs in sufficient time for full consideration in the final FY 2006 rule. However, we have reservations about whether this technology is new for purposes of the new technology add-on payments because of its similarity to other products that are also used to treat the same conditions. Although we recognize the benefits of a more easily rechargeable neurostimulator system, we believe that the Restore® device may not be sufficiently different from predecessor devices to meet the newness criterion for the new technology add-on payment. As we discussed above, similar products have been on the market since 1999. Therefore, these technologies are already represented in the DRG weights and are not considered new for the purposes of the new technology add-on payment provision. We welcome comments on this issue, specifically regarding how the Restore® device may or may not be significantly different from previous devices. We also seek comments on whether the product meets the cost and significant improvement criteria.

We received no public comments regarding this application for add-on payments.

f. Safe-Cross® Radio Frequency Total Occlusion Crossing System (Safe-Cross®) Back to Top

Intraluminal Therapeutics submitted an application for the Safe Cross® Radio Frequency (RF) Total Occlusion Crossing System. This device performs the function of a guidewire during percutaneous transluminal angioplasty of chronic total occlusions of peripheral and coronary arteries. Using fiberoptic guidance and radiofrequency ablation, it is able to cross lesions where a standard guidewire is unsuccessful. On November 21, 2003, the FDA approved the Safe Cross® for use in iliac and superficial femoral arteries. The device was approved by the FDA for all native peripheral arteries except carotids in August 2004. In January 2004, the FDA approved the Safe Cross® for coronary arteries as well. Because the device is within the statutory timeframe of 2 to 3 years for all approved uses and data regarding the cost of this device are not yet reflected within the DRG weights, we consider the Safe Cross® to meet the newness criterion.

We note that the applicant submitted an application for a distinctive ICD-9-CM code. The applicant noted in its application that the device is currently coded with ICD-9-CM procedure codes 36.09 (Other removal of coronary artery obstruction) and 39.50 (Angioplasty or atherectomy of other noncoronary vessels).

As we stated in last year's final rule, section 1886(d)(5)(K)(i) of the Act requires that the Secretary establish a mechanism to recognize the costs of new medical services or technologies under the payment system established under subsection (d) of section 1886, which establishes the system for paying for the operating costs of inpatient hospital services. The system of payment for capital costs is established under section 1886(g) of the Act, which makes no mention of any add-on payments for a new medical service or technology. Therefore, it is not appropriate to include capital costs in the add-on payments for a new medical service or technology, and these costs should not be considered in evaluating whether a technology meets the cost criterion. As a result, we consider only the Safe Cross® crossing wire, ground pad, and accessories to be operating equipment that is relevant to the evaluation of the cost criterion.

The applicant submitted the following two analyses on the cost criterion. The first analysis contained 27 actual cases from two hospitals. Of these 27 cases, 25.1 percent of the cases were reported in DRGs 24 (Seizure and Headache Age 17 With CC), 107 (Coronary Bypass With Cardiac Catheterization), 125 (Circulatory Disorders Except AMI, With Cardiac Catheterization and Without Complex Diagnosis), 518 (Percutaneous Cardiovascular Procedure Without Coronary Artery Stent or AMI), and 526 (Percutaneous Cardiovascular Procedure With Drug-Eluting Stent With AMI); and 74.9 percent were reported in DRG 527 (Percutaneous Cardiovascular Procedure With Drug-Eluting Stent Without AMI). This resulted in a case-weighted threshold of $35,956 and a case-weighted average standardized charge of $40,319. Because the case-weighted average standardized charge is greater than the case-weighted threshold, the applicant maintained that the Safe Cross® meets the cost criterion.

The applicant also submitted cases from the FY 2003 MedPAR. The applicant found a total of 1,274,535 cases that could be eligible for the Safe Cross® using diagnosis codes 411 through 411.89 (Other acute and subacute forms of ischemic heart disease) or 414 through 414.19 (Other forms of chronic ischemic heart disease) in combination with any of the following procedure codes: 36.01 (Single vessel percutaneous transluminal coronary angioplasty (PTCA) or coronary atherectomy without mention of thrombolytic agent), 36.02 (Single vessel PTCA or coronary atherectomy with mention of thrombolytic agent), 36.05 (Multiple vessel PTCA or coronary atherectomy performed during the same operation with or without mention of thrombolytic agent), 36.06 (Insertion of nondrug-eluting coronary artery stent(s)), 36.07 (Insertion of drug-eluting coronary artery stent(s)) and 36.09 (Other removal of coronary artery obstruction). A total of 59.40 percent of these cases fell into DRG 517 (Percutaneous Cardiovascular Procedure With Nondrug-Eluting Stent Without AMI), 16.4 percent of cases into DRG 516 (Percutaneous Cardiovascular Procedure With AMI), and 16.2 percent of cases into DRG 527, while the rest of the cases fell into the remaining DRGs 124, 518 and 526. The average case-weighted standardized charge per case was $40,318. This amount included an extra $6,000 for the charges related to the Safe Cross®. The case-weighed threshold across the DRGs mentioned above was $35,955. Similar to the analysis above, because the case-weighted average standardized charge is greater than the case-weighted threshold, the applicant maintained that the Safe Cross® meets the cost criterion.

The applicant maintained that the device meets the substantial clinical improvement criterion. The applicant explained that many traditional guidewires fail to cross a total arterial occlusion due to difficulty in navigating the vessel and to the fibrotic nature of the obstructing plaque. By using fiberoptic guidance and radiofrequency ablation, the Safe Cross® succeeds where standard guidewires fail. The applicant further maintained that in clinical trials where traditional guidewires failed, the Safe Cross® succeeded in 54 percent of cases of coronary artery chronic total occlusions (CTOs), and in 76 percent of cases of peripheral artery CTOs.

However, we note that we use similar standards to evaluate substantial clinical improvement in the IPPS and OPPS. The IPPS regulations provide that technology may be approved for add-on payments when it “represents an advance in medical technology that substantially improves, relative to technologies previously available, the diagnosis or treatment of Medicare beneficiaries” (66 FR 46912). Under the OPPS, the standard for approval of new devices is “a substantial improvement in medical benefits for Medicare beneficiaries compared to the benefits obtained by devices in previously established (that is, existing or previously existing) categories or other available treatments” (67 FR 66782). Furthermore, the OPPS and IPPS employ identical language (for IPPS, see 66 FR 46914, and for OPPS, see 67 FR 66782) to explain and elaborate on the kinds of considerations that are taken into account in determining whether a new technology represents substantial improvement. In both systems, we employ the following kinds of considerations in evaluating particular requests for special payment for new technology:

  • The device offers a treatment option for a patient population unresponsive to, or ineligible for, currently available treatments.
  • The device offers the ability to diagnose a medical condition in a patient population where that medical condition is currently undetectable or offers the ability to diagnose a medical condition earlier in a patient population than allowed by currently available methods. There must also be evidence that use of the device to make a diagnosis affects the management of the patient.
  • Use of the device significantly improves clinical outcomes for a patient population as compared to currently available treatments. Some examples of outcomes that are frequently evaluated in studies of medical devices are the following:

—Reduced mortality rate with use of the device.

—Reduced rate of device-related complications.

—Decreased rate of subsequent diagnostic or therapeutic interventions (for example, due to reduced rate of recurrence of the disease process).

—Decreased number of future hospitalizations or physician visits.

—More rapid beneficial resolution of the disease process treatment because of the use of the device.

—Decreased pain, bleeding, or other quantifiable symptom.

—Reduced recovery time.

In a letter to the applicant dated October 25, 2004, we denied approval of the Safe Cross® for pass-through payments for the OPPS on the basis that the technology did not meet the substantial clinical improvement criterion. In particular, we found that studies failed to show long-term or intermediate-term results, and the device had a relatively low rate of successfully opening occlusions. Since that initial determination, the applicant has requested reconsideration for pass-through payments under the IPPS. However, on the basis of the original findings under the OPPS, we do not now believe that the technology can qualify for new technology add-on payments under the IPPS. Therefore, we are proposing to deny new technology add-on payment for FY 2006 for Safe Cross® on the grounds that it does not appear to be a substantial clinical improvement over existing technologies. We welcome further information on whether this device meets the substantial clinical improvement criterion, and we will consider any further information prior to making our final determination in the final rule.

We received no public comments regarding this application for add-on payments.

g. Trident® Ceramic Acetabular System

Stryker Orthopaedics submitted an application for new technology add-on payments for the Trident® Ceramic Acetabular System. This system is used to replace the “ball and socket” joint of a hip when a total hip replacement is performed for patients suffering from arthritis or related conditions. The applicant stated that, unlike conventional hip replacement systems, the Trident® system utilizes alumina ceramic-on-ceramic bearing surfaces rather than metal-on-plastic or metal-on-metal. Alumina ceramic is the hardest material next to diamond. The Trident® System is a patented design that captures the ceramic insert in a titanium sleeve. This design increases the strength of the ceramic insert by 50 percent over other designs. The manufacturer stated that the alumina ceramic bearing of the device is a substantial clinical improvement because it is extremely hard and scratch resistant, has a low coefficient of friction and excellent wear resistance, has improved lubrication over metal or polyethylene, has no potential for metal ion release, and has less alumina particle debris. The manufacturer also stated that fewer hip revisions are needed when this product is used (2.7 percent of ceramic versus 7.5 percent for polyethylene). Stryker stated that the ceramic implant also causes less osteolysis (or bone loss from particulate debris). Due to these improvements over traditional hip implants, the manufacturer stated the Trident® Ceramic Acetabular System has demonstrated significantly lower wear versus the conventional plastic/metal system in the laboratory; therefore, it is anticipated that these improved wear characteristics will extend the life of the implant.

The Trident® Ceramic Acetabular System received FDA approval in February 3, 2003. However, this product was not available on the market until April 2003. The period that technologies are eligible to receive new technology add-on payment is no less than 2 years but not more than 3 years from the point the product comes on the market. At this point, we begin to collect charges reflecting the cost of the device in the MedPAR data. Because the device became available on the market in April 2003, charges reflecting the cost of the device may have been included in the data used to calculate the DRG weights in FY 2005 and the proposed DRG weights for FY 2006. Therefore, the technology may no longer be considered new for the purposes of new technology add-on payments. For this reason, we are proposing to deny add-on payments for the Trident® Ceramic Acetabular System for FY 2006.

Although we are proposing not to approve this application because the Trident® Ceramic Acetabular System does not meet the newness criterion, we note that the applicant submitted information on the cost and substantial clinical improvement criteria.

The applicant submitted cost threshold information for the Trident® Ceramic Acetabular System, stating that cases using the system would be included in DRG 209 (Major Joint and Limb Reattachment Procedures of Lower Extremity). The manufacturer indicated that there is not an ICD-9-CM code specific to ceramic hip arthroplasty, but it is currently reported using code 81.51 (Total hip replacement). Of the applicable charges for the Trident® Ceramic Acetabular System, only the components that the applicant identified as new would be eligible for new technology add-on payments. The estimated cost of the new portions of the device, according to the information provided in the application, is $6,009. The charge threshold for DRG 209 is $34,195. The data submitted by Stryker Orthopaedics showed an average standardized charge, assuming a 28 percent implant markup, of $34,230.

Regarding the issue of substantial clinical improvement, we recognize that the Trident® Ceramic Acetabular System represents an incremental advance in prosthetic hip technology. However, we also recognize that there are a number of other new prostheses available that utilize a variety of bearing surface materials that also offer increased longevity and decreased wear. For this reason, we do not believe that the Trident® system has demonstrated itself to be a clearly superior new technology.

We received the following public comments, in accordance with section 503(b)(2) of Pub. L. 108-173, regarding this application for add-on payments.

Comment: One commenter noted that clinical outcomes for the Trident® Ceramic Acetabular System are not a significant clinical improvement over similar devices on the market. A member of the orthopedic community noted at the new technology town hall meeting that this system is not the only new product that promises significantly improved results because of enhancements to materials and design. This commenter suggested that it may be inappropriate to recognize only one of these new hip replacement products for new technology add-on payments.

Response: We appreciate the commenter's input on this criterion. We will consider these comments regarding the substantial clinical improvement criterion. However, based on the observations provided at the town hall meeting, we are considering alternative methods of recognizing technological improvements in this area other than approving only one of these new technologies for add-on payments. For example, as discussed in section II.B.6.a. of the preamble to this proposed rule, we are proposing to split DRG 209 to create a new DRG for revisions of hip and knee replacements. We would leave all other replacements and attachment procedures in a separate, new DRG. We also stated that we will be reviewing these DRGs based on new procedure codes that will provide more detailed data on the specific nature of the revision procedures performed. In addition, we are creating new procedure codes that will identify the type of bearing surface of a hip replacement. As we obtain data from these new codes, we will consider additional DRG revisions to better capture the various types of joint procedures. We may consider a future restructuring of the joint replacement and revision DRGs that would better capture the higher costs of products that offer greater durability, extended life, and improved outcomes. In doing so, of course, we may need to create additional, more precise ICD-9-CM codes. We welcome comments on this issue, and generally on whether the Trident® Ceramic Acetabular System meets the criteria to qualify for new technology add-on payments.

h. Wingspan TM Stent System with Gateway TM PTA Balloon Catheter

Boston Scientific submitted an application for the Wingspan TM Stent System with Gateway TM PTA Balloon Catheter for new technology add-on payments. The device is designed for the treatment of patients with intracranial atherosclerotic disease who suffer from recurrent stroke despite medical management. The device consists of the following: a self-expanding nitinol stent, a multilumen over the wire delivery catheter, and a Gateway PTA Balloon Catheter. The device is used to treat stenoses that occur in the intracranial vessels. Prior to stent placement, the Gateway PTA Balloon is inflated to dilate the target lesion, and then the stent is deployed across the lesion to restore and maintain luminal patency. Effective October 1, 2004, two new ICD-9-CM procedure codes were created to code intracranial angioplasty and intracranial stenting procedures: procedure codes 00.62 (Percutaneous angioplasty or atherectomy of intracranial vessels) and 00.65 (Percutaneous insertion of intracranial vascular stents).

On January 9, 2004, the FDA designated the Wingspan TM as a Humanitarian Use Designation (HUD). The manufacturer has also applied for Humanitarian Device Exemption (HDE) status and expects approval from the FDA in July 2005. It is important to note that currently CMS has a noncoverage policy for percutaneous transluminal angioplasty to treat lesions of intracranial vessels. The applicant is working closely with CMS to review this decision upon FDA approval. Because the device is neither FDA-approved nor Medicare-covered, we do not believe it is appropriate to present our full analysis on whether the technology meets the individual criteria for the new technology add-on payment. However, we note that the applicant did submit the following information below on the cost criterion and substantial clinical improvement criterion.

The manufacturer submitted data from MedPAR and non-MedPAR databases. The non-MedPAR data was from the 2003 patient discharge data from California's Office of Statewide Health Planning and Development database for hospitals in California and from the 2003 patient data from Florida's Agency for Health Care Administration for hospitals in Florida. The applicant identified cases that had a diagnosis code of 437.0 (Cerebral atherosclerosis), 437.1 (Other generalized ischemic cerebrovascular disease) or 437.9 (Unspecified) or any diagnosis code that begins with the prefix of 434 (Occlusion of cerebral arteries) in combination with procedure code 39.50 (Angioplasty or atherectomy of noncoronary vessel) or procedure code 39.90 (Insertion of nondrug-eluting, noncoronary artery stents). The applicant used procedure codes 39.50 and 39.90 because procedure codes 00.62 and 00.65 were not available until FY 2005. The applicant found cases in DRG 5 (Extracranial Vascular Procedures) (which previously existed under the Medicare IPPS DRG system prior to a DRG split) and in DRGs 533 (Extracranial Procedure with CC) and 534 (Extracranial Procedure Without CC). Even though DRG 5 was split into DRGs 533 and 534 in FY 2003, some hospitals continued to use DRG 5 for non-Medicare cases. The applicant found 22 cases that had an intracranial PTA with a stent. The average (nonstandardized) charge per case was $78,363.

The applicant also submitted data from the FY 2002 and FY 2003 MedPAR files. Using the latest data from the FY 2003 MedPAR and the same combination of diagnosis and procedure codes mentioned above to identify cases of intracranial PTA with stenting, the applicant found 116 cases in DRG 533 and 20 cases in DRG 534. The case-weighted average standardized charge per case was $51,173. The average case-weighted threshold was $25,394. Based on this analysis, the applicant maintained that the technology meets the cost criteria since the average case-weighted standardized charge per case is greater than the average case-weighted threshold.

The applicant also maintained that the technology meets the substantial clinical improvement criterion. Currently, there is no available surgical or medical treatment for recurrent stroke that occurs despite optimal medical management. The Wingspan TM is the first commercially available PTA/stent system designed specifically for the intracranial vasculature. However, because the Wingspan TM does not have FDA approval or Medicare coverage, as stated above, we are proposing to deny add-on payment for this new technology.

We received no public comments regarding this application for add-on payments.

III. Proposed Changes to the Hospital Wage Index Back to Top

A. Background

Section 1886(d)(3)(E) of the Act requires that, as part of the methodology for determining prospective payments to hospitals, the Secretary must adjust the standardized amounts “for area differences in hospital wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level.” In accordance with the broad discretion conferred under the Act, we currently define hospital labor market areas based on the definitions of statistical areas established by the Office of Management and Budget (OMB). A discussion of the proposed FY 2006 hospital wage index based on the statistical areas, including OMB's revised definitions of Metropolitan Areas, appears under section III.B. of this preamble.

Beginning October 1, 1993, section 1886(d)(3)(E) of the Act requires that we update the wage index annually. Furthermore, this section provides that the Secretary base the update on a survey of wages and wage-related costs of short-term, acute care hospitals. The survey should measure the earnings and paid hours of employment by occupational category, and must exclude the wages and wage-related costs incurred in furnishing skilled nursing services. This provision also requires us to make any updates or adjustments to the wage index in a manner that ensures that aggregate payments to hospitals are not affected by the change in the wage index. The proposed adjustment for FY 2006 is discussed in section II.B. of the Addendum to this proposed rule.

As discussed below in section III.G. of this preamble, we also take into account the geographic reclassification of hospitals in accordance with sections 1886(d)(8)(B) and 1886(d)(10) of the Act when calculating the wage index. Under section 1886(d)(8)(D) of the Act, the Secretary is required to adjust the standardized amounts so as to ensure that aggregate payments under the IPPS after implementation of the provisions of sections 1886(d)(8)(B) and (C) and 1886(d)(10) of the Act are equal to the aggregate prospective payments that would have been made absent these provisions. The proposed budget neutrality adjustment for FY 2006 is discussed in section II.B. of the Addendum to this proposed rule.

Section 1886(d)(3)(E) of the Act also provides for the collection of data every 3 years on the occupational mix of employees for short-term, acute care hospitals participating in the Medicare program, in order to construct an occupational mix adjustment to the wage index. A discussion of the proposed occupational mix adjustment that we are proposing to apply beginning October 1, 2005 (the proposed FY 2006 wage index) appears under section III.C. of this preamble.

B. Core-Based Statistical Areas Used for the Proposed Hospital Wage Index

(If you choose to comment on issues in this section, please include the caption “CBSAs” at the beginning of your comment.)

The wage index is calculated and assigned to hospitals on the basis of the labor market area in which the hospital is located. In accordance with the broad discretion under section 1886(d)(3)(E) of the Act, beginning with FY 2005, we define hospital labor market areas based on the Core-Based Statistical Areas (CBSAs) established by OMB and announced in December 2003 (69 FR 49027). OMB defines a CBSA, beginning in 2003, as “a geographic entity associated with at least one core of 10,000 or more population, plus adjacent territory that has a high degree of social and economic integration with the core as measured by commuting ties.” The standards designate and define two categories of CBSAs: Metropolitan Statistical Areas (MSAs) and Micropolitan Statistical Areas (65 FR 82235).

According to OMB, MSAs are based on urbanized areas of 50,000 or more population, and Micropolitan Statistical Areas (referred to in this discussion as Micropolitan Areas) are based on urban clusters with a population of at least 10,000 but less than 50,000. Counties that do not fall within CBSAs are deemed “Outside CBSAs.” In the past, OMB defined MSAs around areas with a minimum core population of 50,000, and smaller areas were “Outside MSAs.”

The general concept of the CBSAs is that of an area containing a recognized population nucleus and adjacent communities that have a high degree of integration with that nucleus. The purpose of the standards is to provide nationally consistent definitions for collecting, tabulating, and publishing Federal statistics for a set of geographic areas. CBSAs include adjacent counties that have a minimum of 25 percent commuting to the central counties of the area. (This is an increase over the minimum commuting threshold of 15 percent for outlying counties applied in the previous MSA definition.)

The new CBSAs established by OMB comprised MSAs and the new Micropolitan Areas based on Census 2000 data. (A copy of the announcement may be obtained at the following Internet address: http://www.whitehouse.gov/omb/bulletins/fy04/b04-03.html.)The definitions recognize 49 new MSAs and 565 new Micropolitan Areas, and extensively revised the composition of many of the existing MSAs.

The new area designations resulted in a higher wage index for some areas and lower wage index for others. Further, some hospitals that were previously classified as urban are now in rural areas. Given the significant payment impacts upon some hospitals because of these changes, we provided a transition period to the new labor market areas in the FY 2005 IPPS final rule (69 FR 49027 through 49034). As part of that transition, we allowed urban hospitals that became rural under the new definitions to maintain their assignment to the Metropolitan Statistical Area (MSA) where they were previously located for the 3-year period of FY 2005, FY 2006, and FY 2007. Specifically, these hospitals were assigned the wage index of the urban area to which they previously belonged. (For purposes of wage index computation, the wage data of these hospitals remained assigned to the statewide rural area in which they are located.) The hospitals receiving this transition will not be considered urban hospitals; rather they will maintain their status as rural hospitals. Thus, the hospital would not be eligible, for example, for a large urban add-on payment under the capital PPS. In other words, it is the wage index, but not the urban or rural status, of these hospitals that is being affected by this transition. The higher wage indices that these hospitals are receiving are also being taken into consideration in determining whether they qualify for the out-commuting adjustment discussed in section III.I. of this preamble and the amount of any adjustment.

FY 2006 will be the second year of this transition period. We will continue to assign the wage index for the urban area in which the hospital was previously located through FY 2007. In order to ensure this provision remains budget neutral, we will continue to adjust the standardized amount by a transition budget neutrality factor to account for these hospitals. Doing so is consistent with the requirement of section 1886(d)(3)(E) of the Act that any “adjustments or updates [to the adjustment for different area wage levels] * * * shall be made in a manner that assures that aggregate payments * * * are not greater or less than those that would have been made in the year without such adjustment.”

Beginning in FY 2008, these hospitals will receive their statewide rural wage index, although they will be eligible to apply for reclassification by the MGCRB, both during this transition period as well as in subsequent years.

In addition, in the FY 2005 IPPS final rule (69 FR 49032 through 49033), we provided a 1-year transition blend for hospitals that, due solely to the changes in the labor market definitions, experienced a decrease in their FY 2005 wage index compared to the wage index they would have received using the labor market areas included in calculating their FY 2004 wage index. Hospitals that experienced a decrease in their wage index as a result of adoption of the new labor market area changes received a wage index based on 50 percent of the CBSA labor market area definitions and 50 percent of the wage index that the provider would have received under the FY 2004 MSA boundaries (in both cases using the FY 2001 wage data). This blend applied to any provider experiencing a decrease due to the new definitions, including providers who were reclassifying under MGCRB requirements, section 1886(d)(8)(B) of the Act, or section 508 of Pub. L. 108-173. In the FY 2005 IPPS final rule (69 FR 49027 through 49033), we described the determination of this blend in detail. We noted that this blend would not prevent a decrease in wage index due to any reason other than adoption of CBSAs, nor did it apply to hospitals that benefited from a higher wage index due to the new labor market definitions.

Consistent with the FY 2005 IPPS final rule, we are proposing that hospitals receive 100 percent of their wage index based upon the new CBSA configurations beginning in FY 2006. Specifically, we will determine for each hospital a new wage index employing wage index data from FY 2002 hospital cost reports and using the CBSA labor market definitions.

C. Proposed Occupational Mix Adjustment to FY 2006 Index

(If you choose to comment on issues in this section, please include the caption “Occupational Mix Adjustment” at the beginning of your comment.)

As stated earlier, section 1886(d)(3)(E) of the Act provides for the collection of data every 3 years on the occupational mix of employees for each short-term, acute care hospital participating in the Medicare program, in order to construct an occupational mix adjustment to the wage index, for application beginning October 1, 2004 (the FY 2005 wage index). The purpose of the occupational mix adjustment is to control for the effect of hospitals' employment choices on the wage index. For example, hospitals may choose to employ different combinations of registered nurses, licensed practical nurses, nursing aides, and medical assistants for the purpose of providing nursing care to their patients. The varying labor costs associated with these choices reflect hospital management decisions rather than geographic differences in the costs of labor.

1. Development of Data for the Proposed Occupational Mix Adjustment

In the FY 2005 IPPS final rule (69 FR 49034), we discussed in detail the data we used to calculate the occupational mix adjustment to the FY 2005 wage index. For the FY 2006 wage index, we are proposing to use the same CMS Wage Index Occupational Mix Survey and Bureau of Labor Statistics (BLS) data that we used for the FY 2005 wage index, with two exceptions. The CMS survey requires hospitals to report the number of total paid hours for directly hired and contract employees in occupations that provide the following services: nursing, physical therapy, occupational therapy, respiratory therapy, medical and clinical laboratory, dietary, and pharmacy. These services each include several standard occupational classifications (SOCs), as defined by the BLS' Occupational Employment Statistics (OES) survey. For the proposed FY 2006 wage index, we used revised survey data for 20 hospitals that took advantage of the opportunity we afforded hospitals to submit changes to their occupational mix data during the FY 2006 wage index data collection process (see discussion of wage data corrections process under section III.J. of this preamble). We also excluded survey data for hospitals that became designated as CAHs since the original survey data were collected and hospitals for which there are no corresponding cost report data for the proposed FY 2006 wage index. The proposed FY 2006 wage index includes occupational mix data from 3,563 out of 3,765 hospitals (94.6 percent response rate). The results of the occupational mix survey are included in the chart below:

2. Calculation of the Proposed FY 2006 Occupational Mix Adjustment Factor and the Proposed FY 2006 Occupational Mix Adjusted Wage Index

For the proposed FY 2006 wage index, we are proposing to use the same methodology that we used to calculate the occupational mix adjustment to the FY 2005 wage index (69 FR 49042). We are proposing to use the following steps for calculating the proposed FY 2006 occupational mix adjustment factor and the occupational mix adjusted wage index:

Step 1—For each hospital, the percentage of the general service category attributable to an SOC is determined by dividing the SOC hours by the general service category's total hours. Repeat this calculation for each of the 19 SOCs.

Step 2—For each hospital, the weighted average hourly rate for an SOC is determined by multiplying the percentage of the general service category (from Step 1) by the national average hourly rate for that SOC from the 2001 BLS OES survey, which was used in calculating the occupational mix adjustment for the FY 2005 wage index. The 2001 OES survey is BLS' latest available hospital-specific survey. (See Chart 4 in the FY 2005 IPPS final rule, 69 FR 49038.) Repeat this calculation for each of the 19 SOCs.

Step 3—For each hospital, the hospital's adjusted average hourly rate for a general service category is computed by summing the weighted hourly rate for each SOC within the general category. Repeat this calculation for each of the 7 general service categories.

Step 4—For each hospital, the occupational mix adjustment factor for a general service category is calculated by dividing the national adjusted average hourly rate for the category by the hospital's adjusted average hourly rate for the category. (The national adjusted average hourly rate is computed in the same manner as Steps 1 through 3, using instead, the total SOC and general service category hours for all hospitals in the occupational mix survey database.) Repeat this calculation for each of the 7 general service categories. If the hospital's adjusted rate is less than the national adjusted rate (indicating the hospital employs a less costly mix of employees within the category), the occupational mix adjustment factor will be greater than 1.0000. If the hospital's adjusted rate is greater than the national adjusted rate, the occupational mix adjustment factor will be less than 1.0000.

Step 5—For each hospital, the occupational mix adjusted salaries and wage-related costs for a general service category is calculated by multiplying the hospital's total salaries and wage-related costs (from Step 5 of the unadjusted wage index calculation in section F) by the percentage of the hospital's total workers attributable to the general service category and by the general service category's occupational mix adjustment factor (from Step 4 above). Repeat this calculation for each of the 7 general service categories. The remaining portion of the hospital's total salaries and wage-related costs that is attributable to all other employees of the hospital is not adjusted for occupational mix.

Step 6—For each hospital, the total occupational mix adjusted salaries and wage-related costs for a hospital are calculated by summing the occupational mix adjusted salaries and wage-related costs for the 7 general service categories (from Step 5) and the unadjusted portion of the hospital's salaries and wage-related costs for all other employees. To compute a hospital's occupational mix adjusted average hourly wage, divide the hospital's total occupational mix adjusted salaries and wage-related costs by the hospital's total hours (from Step 4 of the unadjusted wage index calculation in Section F).

Step 7—To compute the occupational mix adjusted average hourly wage for an urban or rural area, sum the total occupational mix adjusted salaries and wage-related costs for all hospitals in the area, then sum the total hours for all hospitals in the area. Next, divide the area's occupational mix adjusted salaries and wage-related costs by the area's hours.

Step 8—To compute the national occupational mix adjusted average hourly wage, sum the total occupational mix adjusted salaries and wage-related costs for all hospitals in the nation, then sum the total hours for all hospitals in the nation. Next, divide the national occupational mix adjusted salaries and wage-related costs by the national hours. The proposed national occupational mix adjusted average hourly wage for FY 2006 is $27.9988.

Step 9—To compute the occupational mix adjusted wage index, divide each area's occupational mix adjusted average hourly wage (Step 7) by the national occupational mix adjusted average hourly wage (Step 8).

Step 10—To compute the Puerto Rico specific occupational mix adjusted wage index, follow the Steps 1 through 9 above. The proposed Puerto Rico occupational mix adjusted average hourly wage for FY 2006 is $12.9875.

An example of the occupational mix adjustment was included in the FY 2005 IPPS final rule (69 FR 49043).

For the FY 2005 final wage index, we used the unadjusted wage data for hospitals that did not submit occupational mix survey data. For calculation purposes, this equates to applying the national SOC mix to the wage data for these hospitals, because hospitals having the same mix as the Nation would have an occupational mix adjustment factor equaling 1.0000. In the FY 2005 IPPS final rule (69 FF 49035), we noted that we would revisit this matter with subsequent collections of the occupational mix data. Because we are using essentially the same survey data for the proposed FY 2006 occupational mix adjustment that we used for FY 2005, with the only exceptions as stated in section III.C.1. of this preamble, we are proposing to treat the wage data for hospitals that did not respond to the survey in this same manner for the proposed FY 2006 wage index.

In implementing an occupational mix adjusted wage index based on the above calculation, the proposed wage index values for 14 rural areas (29.8 percent) and 206 urban areas (53.5 percent) would decrease as a result of the adjustment. Six (6) rural areas (12.8 percent) and 111 urban areas (28.8 percent) would experience a decrease of 1 percent or greater in their wage index values. The largest negative impact for a rural area would be 1.9 percent and for an urban area, 4.3 percent. Meanwhile, 33 rural areas (70.2 percent) and 179 urban areas (46.5 percent) would experience an increase in their wage index values. Although these results show that rural hospitals would gain the most from an occupational mix adjustment to the wage index, their gains may not be as great as might have been expected. Further, it might not have been anticipated that almost one-third of rural hospitals would actually fare worse under the adjustment. Overall, a fully implemented occupational mix adjusted wage index would have a redistributive effect on Medicare payments to hospitals.

In the FY 2005 IPPS, we indicated that, for future data collections, we would revise the occupational mix survey to allow hospitals to provide both salaries and hours data for each of the employment categories that are included on the survey. We also indicated that we would assess whether future occupational mix surveys should be based on the calendar year or if the data should be collected on a fiscal year basis as part of the Medicare cost report. (One logistical problem is that cost report data are collected yearly, but occupational mix survey data are collected only every 3 years.) We are currently reviewing options for revising the occupational mix survey and improving the data collection process. We will publish any changes we make to the occupational mix survey in a Federal Register notice.

In our continuing efforts to meet the information needs of the public, we are providing three additional public use files for the proposed occupational mix adjusted wage index: (1) A file including each hospital's unadjusted and adjusted average hourly wage (FY 2006 Proposed Rule Occupational Mix Adjusted and Unadjusted Average Hourly Wage by Provider); (2) a file including each CBSA's adjusted and unadjusted average hourly wage (FY 2006 Proposed Rule Occupational Mix Adjusted and Unadjusted Average Hourly Wage and Pre-Reclassified Wage Index by CBSA); and (3) a file including each hospital's occupational mix adjustment factors by occupational category (Provider Occupational Mix Adjustment Factors for Each Occupational Category). These additional files are being released concurrently with the publication of this proposed rule and are posted on the Internet, at http://www.cms.hhs.gov/providers/hipps/ippswage.asp. We will also post these files with future applications of the occupational mix adjustment.

D. Worksheet S-3 Wage Data for the Proposed FY 2006 Wage Index Update

(If you choose to comment on issues in this section, please include the caption “Wage Data” at the beginning of your comment.)

The proposed FY 2006 wage index values (effective for hospital discharges occurring on or after October 1, 2005 and before October 1, 2006) in section VI. of the Addendum to this proposed rule are based on the data collected from the Medicare cost reports submitted by hospitals for cost reporting periods beginning in FY 2002 (the FY 2005 wage index was based on FY 2001 wage data).

The proposed FY 2006 wage index includes the following categories of data associated with costs paid under the IPPS (as well as outpatient costs):

  • Salaries and hours from short-term, acute care hospitals (including paid lunch hours and hours associated with military leave and jury duty).
  • Home office costs and hours.
  • Certain contract labor costs and hours (which includes direct patient care, certain top management, pharmacy, laboratory, and nonteaching physician Part A services).
  • Wage-related costs, including pensions and other deferred compensation costs.

The September 1, 1994 Federal Register (59 FR 45356) included a list of core wage-related costs that are included in the wage index, and discussed criteria for including other wage-related costs. In that discussion, we instructed hospitals to use generally accepted accounting principles (GAAPs) in developing wage-related costs for the wage index for cost reporting periods beginning on or after October 1, 1994. We discussed our rationale that “the application of GAAPs for purposes of compiling data on wage-related costs used to construct the wage index will more accurately reflect relative labor costs, because certain wage-related costs (such as pension costs), as recorded under GAAPs, tend to be more static from year to year.”

Since publication of the September 1, 1994 rule, we have periodically received inquiries for more specific guidance on developing wage-related costs for the wage index. In response, we have provided clarifications in the IPPS rules (for example, health insurance costs (66 FR 39859)) and in the cost report instructions (Provider Reimbursement Manual (PRM), Part II, Section 3605.2). Due to recent questions and concerns we received regarding inconsistent reporting and overreporting of pension and other deferred compensation plan costs, as a result of an ongoing Office of Inspector General review, we are clarifying in this proposed rule that hospitals must comply with the PRM, Part I, sections 2140. 2141, and 2142 and related Medicare program instructions for developing pension and other deferred compensation plan costs as wage-related costs for the wage index. The Medicare instructions for pension costs and other deferred compensation costs combine GAAPs, Medicare payment principles, and other Federal labor requirements. We believe that the Medicare instructions allow for consistent reporting among hospitals and for the development of reasonable deferred compensation plan costs for purposes of the wage index.

Beginning with the FY 2007 wage index, hospitals and fiscal intermediaries must ensure that pension, post-retirement health benefits, and other deferred compensation plan costs for the wage index are developed according to the above terms.

Consistent with the wage index methodology for FY 2005, the proposed wage index for FY 2006 also excludes the direct and overhead salaries and hours for services not subject to IPPS payment, such as SNF services, home health services, costs related to GME (teaching physicians and residents) and certified registered nurse anesthetists (CRNAs), and other subprovider components that are not paid under the IPPS. The proposed FY 2006 wage index also excludes the salaries, hours, and wage-related costs of hospital-based rural health clinics (RHCs), and Federally qualified health centers (FQHCs) because Medicare pays for these costs outside of the IPPS (68 FR 45395). In addition, salaries, hours and wage-related costs of CAHs are excluded from the wage index, for the reasons explained in the FY 2004 IPPS final rule (68 FR 45397).

Data collected for the IPPS wage index are also currently used to calculate wage indices applicable to other providers, such as SNFs, home health agencies, and hospices. In addition, they are used for prospective payments to rehabilitation, psychiatric, and long-term care hospitals, and for hospital outpatient services.

In the August 11, 2004 final rule, we stated that a commenter had asked CMS to designate provider-based clinics as IPPS-excluded areas in order to remove the costs from the wage index (69 FR 49049). The commenter noted that provider-based clinics are like physician private offices, which are excluded from the wage index calculation, and that services provided in the provider-based clinics are paid for not through the IPPS, but rather under the hospital outpatient PPS. In response to the comment, we stated that we were not prepared to grant the commenter's request without first studying the issue, and that we would explore the matter of salaries related to provider-based clinics in a future rule.

Regulations at 42 CFR 413.65 describe the criteria and procedures for determining whether a facility or organization is provider-based. Historically, under the Medicare program, some providers, referred to as “main providers,” have functioned as single entities while owning and operating multiple provider-based departments, locations, and facilities that are treated as part of the main provider for Medicare purposes. Section 413.65(a)(2) defines various types of provider-based facilities, including “department of a provider.” A “department of a provider” means a facility or organization that is either created by, or acquired by, a main provider for the purposes of furnishing health care services of the same type as those furnished by the main provider under the name, ownership, and financial and administrative control of the main provider * * * a department of a provider may not itself be qualified to participate in Medicare as a provider under § 489.2 * * * the term ‘department of a provider' does not include an RHC or * * * an FQHC.” Thus, if a facility offers services that are similar to those provided in a freestanding physician's office, and the facility meets the criteria to become provider-based under § 413.65, the facility would be considered a “department of a provider.” More specifically, the facility would be part of the main provider's outpatient department, since the facility offers health care services of the same type as those furnished by the main provider, and because a physician's office would not be subject to a provider agreement or receive a Medicare provider number under § 489.2. (We note that a provider-based RHC or FQHC may, by itself, be qualified to participate in Medicare as a provider under § 489.2 and, thus, would be classified not as a “department of a provider” but as a “provider-based entity,” as defined at § 413.65(a)(2)). This provider-based facility, or provider-based clinic, as the commenter referred to it, would be reported on the main provider's Medicare cost report as an outpatient service cost center, on Worksheet A, line 60. With the exception of RHC and FQHC salaries that have been excluded from the wage index beginning with FY 2004 (68 FR 45395, August 1, 2003), the salaries attributable to employees working in these outpatient service cost centers, including emergency departments, are included in the main provider's total salaries on Worksheet S-3, Part II, line 1, and accordingly, are included in the wage index calculation. We have historically included the salaries and wages of hospital employees working in the outpatient departments in the calculation of the hospital wage index since these employees often work in both the IPPS and in the outpatient areas of the hospital. Consistent with this longstanding treatment of outpatient salary costs in the wage index calculation, we believe it is appropriate to continue to include the salaries and wages of employees working in outpatient departments, including provider-based clinics, in the wage index calculation.

E. Verification of Worksheet S-3 Wage Data

(If you choose to comment on issues in this section, please include the caption “Wage Data” at the beginning of your comment.)

The wage data for the proposed FY 2006 wage index were obtained from Worksheet S-3, Parts II and III of the FY 2002 Medicare cost reports. Instructions for completing the Worksheet S-3, Parts II and III are in the Provider Reimbursement Manual, Part I, sections 3605.2 and 3605.3. The data file used to construct the proposed wage index includes FY 2002 data submitted to us as of February 23, 2005. As in past years, we performed an intensive review of the wage data, mostly through the use of edits designed to identify aberrant data.

We asked our fiscal intermediaries to revise or verify data elements that resulted in specific edit failures. Some unresolved data elements are included in the calculation of the proposed FY 2006 wage index, pending their resolution before calculation of the final FY 2006 index. We instructed the fiscal intermediaries to complete their data verification of questionable data elements and to transmit any changes to the wage data no later than April 15, 2005. We believe all unresolved data elements will be resolved by the date the final rule is issued. The revised data will be reflected in the final rule.

Also, as part of our editing process, we removed the data for 438 hospitals from our database: 402 hospitals became CAHs by the time we published the February public use file, and 28 hospitals were low Medicare utilization hospitals or failed edits that could not be corrected because the hospitals terminated the program or changed ownership. In addition, we removed the wage data for 8 hospitals with incomplete or inaccurate data resulting in zero or negative, or otherwise aberrant, average hourly wages. We have notified the fiscal intermediaries of these hospitals and will continue to work with the fiscal intermediaries to correct these data until we finalize our database to compute the final wage index. The data for these hospitals will be included in the final wage index if we receive corrected data that passes our edits. As a result, the proposed FY 2006 wage index is calculated based on FY 2002 wage data from 3,765 hospitals.

In constructing the proposed FY 2006 wage index, we include the wage data for facilities that were IPPS hospitals in FY 2002, even for those facilities that have since terminated their participation in the program as hospitals, as long as those data do not fail any of our edits for reasonableness. We believe that including the wage data for these hospitals is, in general, appropriate to reflect the economic conditions in the various labor market areas during the relevant past period. However, we exclude the wage data for CAHs (as discussed in 68 FR 45397). The proposed wage index in this proposed rule excludes hospitals that are designated as CAHs by February 1, 2005, the date of the latest available Medicare CAH listing at the time we released the proposed wage index public use file on February 25, 2005.

F. Computation of the Proposed FY 2006 Unadjusted Wage Index

(If you choose to comment on issues in this section, please include the caption “Wage Index” at the beginning of your comment.)

The method used to compute the proposed FY 2006 wage index without an occupational mix adjustment follows:

Step 1—As noted above, we based the proposed FY 2006 wage index on wage data reported on the FY 2002 Medicare cost reports. We gathered data from each of the non-Federal, short-term, acute care hospitals for which data were reported on the Worksheet S-3, Parts II and III of the Medicare cost report for the hospital's cost reporting period beginning on or after October 1, 2001 and before October 1, 2002. In addition, we included data from some hospitals that had cost reporting periods beginning before October 2001 and reported a cost reporting period covering all of FY 2002. These data were included because no other data from these hospitals would be available for the cost reporting period described above, and because particular labor market areas might be affected due to the omission of these hospitals. However, we generally describe these wage data as FY 2002 data. We note that, if a hospital had more than one cost reporting period beginning during FY 2002 (for example, a hospital had two short cost reporting periods beginning on or after October 1, 2001 and before October 1, 2002), we included wage data from only one of the cost reporting periods, the longer, in the wage index calculation. If there was more than one cost reporting period and the periods were equal in length, we included the wage data from the later period in the wage index calculation.

Step 2—Salaries—The method used to compute a hospital's average hourly wage excludes certain costs that are not paid under the IPPS. In calculating a hospital's average salaries plus wage-related costs, we subtracted from Line 1 (total salaries) the GME and CRNA costs reported on Lines 2, 4.01, 6, and 6.01, the Part B salaries reported on Lines 3, 5 and 5.01, home office salaries reported on Line 7, and excluded salaries reported on Lines 8 and 8.01 (that is, direct salaries attributable to SNF services, home health services, and other subprovider components not subject to the IPPS). We also subtracted from Line 1 the salaries for which no hours were reported. To determine total salaries plus wage-related costs, we added to the net hospital salaries the costs of contract labor for direct patient care, certain top management, pharmacy, laboratory, and nonteaching physician Part A services (Lines 9 and 10), home office salaries and wage-related costs reported by the hospital on Lines 11 and 12, and nonexcluded area wage-related costs (Lines 13, 14, and 18).

We note that contract labor and home office salaries for which no corresponding hours are reported were not included. In addition, wage-related costs for nonteaching physician Part A employees (Line 18) are excluded if no corresponding salaries are reported for those employees on Line 4.

Step 3—Hours—With the exception of wage-related costs, for which there are no associated hours, we computed total hours using the same methods as described for salaries in Step 2.

Step 4—For each hospital reporting both total overhead salaries and total overhead hours greater than zero, we then allocated overhead costs to areas of the hospital excluded from the wage index calculation. First, we determined the ratio of excluded area hours (sum of Lines 8 and 8.01 of Worksheet S-3, Part II) to revised total hours (Line 1 minus the sum of Part II, Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, and Part III, Line 13 of Worksheet S-3). We then computed the amounts of overhead salaries and hours to be allocated to excluded areas by multiplying the above ratio by the total overhead salaries and hours reported on Line 13 of Worksheet S-3, Part III. Next, we computed the amounts of overhead wage-related costs to be allocated to excluded areas using three steps: (1) We determined the ratio of overhead hours (Part III, Line 13) to revised hours (Line 1 minus the sum of Lines 2, 3, 4.01, 5, 5.01, 6, 6.01, 7, 8, and 8.01); (2) we computed overhead wage-related costs by multiplying the overhead hours ratio by wage-related costs reported on Part II, Lines 13, 14, and 18; and (3) we multiplied the computed overhead wage-related costs by the above excluded area hours ratio. Finally, we subtracted the computed overhead salaries, wage-related costs, and hours associated with excluded areas from the total salaries (plus wage-related costs) and hours derived in Steps 2 and 3.

Step 5—For each hospital, we adjusted the total salaries plus wage-related costs to a common period to determine total adjusted salaries plus wage-related costs. To make the wage adjustment, we estimated the percentage change in the employment cost index (ECI) for compensation for each 30-day increment from October 14, 2001 through April 15, 2003 for private industry hospital workers from the Bureau of Labor Statistics'Compensation and Working Conditions. We use the ECI because it reflects the price increase associated with total compensation (salaries plus fringes) rather than just the increase in salaries. In addition, the ECI includes managers as well as other hospital workers. This methodology to compute the monthly update factors uses actual quarterly ECI data and assures that the update factors match the actual quarterly and annual percent changes. The factors used to adjust the hospital's data were based on the midpoint of the cost reporting period, as indicated below.

For example, the midpoint of a cost reporting period beginning January 1, 2002 and ending December 31, 2002 is June 30, 2002. An adjustment factor of 1.03083 would be applied to the wages of a hospital with such a cost reporting period. In addition, for the data for any cost reporting period that began in FY 2002 and covered a period of less than 360 days or more than 370 days, we annualized the data to reflect a 1-year cost report. Dividing the data by the number of days in the cost report and then multiplying the results by 365 accomplishes annualization.

Step 6—Each hospital was assigned to its appropriate urban or rural labor market area before any reclassifications under section 1886(d)(8)(B), section 1886(d)(8)(E), or section 1886(d)(10) of the Act. Within each urban or rural labor market area, we added the total adjusted salaries plus wage-related costs obtained in Step 5 for all hospitals in that area to determine the total adjusted salaries plus wage-related costs for the labor market area.

Step 7—We divided the total adjusted salaries plus wage-related costs obtained under both methods in Step 6 by the sum of the corresponding total hours (from Step 4) for all hospitals in each labor market area to determine an average hourly wage for the area.

Step 8—We added the total adjusted salaries plus wage-related costs obtained in Step 5 for all hospitals in the nation and then divided the sum by the national sum of total hours from Step 4 to arrive at a national average hourly wage. Using the data as described above, the proposed national average hourly wage is $27.9730.

Step 9—For each urban or rural labor market area, we calculated the hospital wage index value by dividing the area average hourly wage obtained in Step 7 by the national average hourly wage computed in Step 8.

Step 10—Following the process set forth above, we developed a separate Puerto Rico-specific wage index for purposes of adjusting the Puerto Rico standardized amounts. (The national Puerto Rico standardized amount is adjusted by a wage index calculated for all Puerto Rico labor market areas based on the national average hourly wage as described above.) We added the total adjusted salaries plus wage-related costs (as calculated in Step 5) for all hospitals in Puerto Rico and divided the sum by the total hours for Puerto Rico (as calculated in Step 4) to arrive at an overall proposed average hourly wage of $12.9957 for Puerto Rico. For each labor market area in Puerto Rico, we calculated the Puerto Rico-specific wage index value by dividing the area average hourly wage (as calculated in Step 7) by the overall Puerto Rico average hourly wage.

Step 11—Section 4410 of Pub. L. 105-33 provides that, for discharges on or after October 1, 1997, the area wage index applicable to any hospital that is located in an urban area of a State may not be less than the area wage index applicable to hospitals located in rural areas in that State. Furthermore, this wage index floor is to be implemented in such a manner as to ensure that aggregate IPPS payments are not greater or less than those that would have been made in the year if this section did not apply. For FY 2006, this change affects 147 hospitals in 52 urban areas. The areas affected by this provision are identified by a footnote in Table 4A in the Addendum of this proposed rule.

G. Computation of the Proposed FY 2006 Blended Wage Index

(If you choose to comment on issues in this section, please include the caption “Blended Wage Index” at the beginning of your comments.)

For the final FY 2005 wage index, we used a blend of the occupational mix adjusted wage index and the unadjusted wage index. Specifically, we adjusted 10 percent of the FY 2005 wage index adjustment factor by a factor reflecting occupational mix. Given that 2003-2004 was the first time for the administration of the occupational mix survey, hospitals had a short timeframe for collecting their occupational mix survey data and documentation, the wage data were not in all cases from a 1-year period, and there was no baseline data for purposes of developing a desk review program, we found it prudent not to adjust the entire wage index factor by the occupational mix. However, we did find the data sufficiently reliable for applying an adjustment to 10 percent of the wage index. We found the data reliable because hospitals were given an opportunity to review their survey data and submit changes in the Spring of 2004, hospitals were already familiar with the BLS OES survey categories, hospitals were required to be able to provide documentation that could be used by fiscal intermediaries to verify survey data, and the results of our survey were consistent with the findings of the 2001 BLS OES survey, especially for nursing and physical therapy categories. In addition, we noted that we were moving cautiously with implementing the occupational mix adjustment in recognition of changing trends in hiring nurses, the largest group in the survey. We noted that some States had recently established floors on the minimum level of registered nurse staffing in hospitals in order to maintain licensure. In addition, in some rural areas, we believed that hospitals might be accounting for shortages of physicians by hiring more registered nurses. (A complete discussion of the FY 2005 wage index adjustment factor can be found in section III.G. of the FY 2005 IPPS final rule (69 FR 49052)).

In the FY 2005 final rule, we noted that while the statute required us to collect occupational mix data every 3 years, the statute does not specify how the occupational mix adjustment is to be constructed or applied. We are clarifying in this proposed rule that the October 1, 2004 deadline for implementing an occupational mix adjustment is not codified in section 1886(d)(3)(E) of the Act, which requires only a collection and measurement of occupational mix data, but rather stems from the effective date provisions in section 304(c) of the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000, Pub. L. 106-554 (BIPA). Although we believe that applying the occupational mix to 10 percent of the wage index factor fully implements the occupational mix adjustment, we also interpret BIPA as requiring only that we begin applying an adjustment by October 1, 2004. BIPA required the Secretary to complete, “by not later than September 30, 2003, for application beginning October 1, 2004,” both the collection of occupational mix data and the measurement of such data. (BIPA, section 304(c)(3).) Thus, even if adjusting 10 percent of the wage index for occupational mix were not (as we believe it to be) considered to be full implementation of the BIPA effective date, we certainly began our application of the adjustment as of October 1, 2004.

In addition, section 1886(d)(3)(E) of the Act provides broad authority for us to establish the factor we use to adjust hospital costs to take into account area differences in wage levels. The statute is clear that the wage index factor is to be “established by the Secretary.” The occupational mix is only one part of this wage index factor, which, for the most part, is calculated on the basis of average hourly wage data submitted by all hospitals in the United States. In exercising the Secretary's broad discretion to establish the factor that adjusts for geographic wage differences, in FY 2005 we adjusted 10 percent of such factor to account for occupational mix.

Indeed, we have often used percentage figures or blended amounts in exercising the Secretary's authority to establish the factor that adjusts for wage differences. For example, in the FY 2005 final rule, we implemented new mapping boundaries for assigning hospitals to the geographic labor market areas used for calculating the wage index. For hospitals that were harmed by the new geographic boundaries, we used a blended rate based on 50 percent of the wage index that would apply using the new geographic boundaries effective for FY 2005 and 50 percent of the wage index that would apply using the old geographic boundaries that were effective during FY 2004 (69 FR 49033). Similarly, beginning with FY 2000, we began phasing out costs related to GME and CRNAs from the wage index (64 FR 41505). Thus, for example, the FY 2001 wage index was based on a blend of 60 percent of an average hourly wage including these costs, and 40 percent of an average hourly wage excluding these costs (65 FR 47071).

For FY 2006, we are again proposing to adjust 10 percent of the wage index factor for occupational mix. In computing the occupational mix adjustment for the proposed FY 2006 wage index, we used the occupational mix survey data that we collected for the FY 2005 wage index, replacing the survey data for 20 hospitals that submitted revised data, and excluding the survey data for hospitals with no corresponding Worksheet S-3 wage data for FY 2006 wage index. While we considered adjusting 100 percent of the wage index by the occupational mix, we did not believe it was appropriate to use first-year survey data to make such a large adjustment. As hospitals gain additional experience with the occupational mix survey, and as we develop more information upon which to audit the data we receive, we expect to increase the portion of the wage index that is adjusted.

We also acknowledge the District Court opinion in Bellevue Hospital Center v. Leavitt, No. 04-8639 (S.D.N.Y, March 2005) finding that the statute requires full implementation of the occupational mix adjustment beginning October 1, 2004, and granting summary judgment to plaintiffs on the matter. At the time this proposed rule was written, an appeal had not yet been heard in the Circuit Court. Thus, because it was not yet clear whether the decision would be appealed, we determined that, for FY 2006, we would continue to propose the policy we believe to be most prudent in light of the survey data being used to adjust the wage index.

With 10 percent of the proposed FY 2006 wage index adjusted for occupational mix, the wage index values for 13 rural areas (27.7 percent) and 204 urban areas (53.0 percent) would decrease as a result of the adjustment. These decreases would be minimal; the largest negative impact for a rural area would be 0.19 percent and for an urban area, 0.42 percent. Conversely, 34 rural areas (72.3 percent) and 181 urban areas (47.0 percent) would benefit from this adjustment, with 1 urban area increasing 2.1 percent and 1 rural area increasing 0.39 percent. As there are no significant differences between the FY 2005 and the FY 2006 occupational mix survey data and results, we believe it is appropriate to again apply the occupational mix to 10 percent of the proposed FY 2006 wage index. (See Appendix A to this proposed rule for further analysis of the impact of the occupational mix adjustment on the proposed FY 2006 wage index.)

The wage index values in Tables 4A, 4B, 4C, and 4F and the average hourly wages in Tables 2, 3A, and 3B in the Addendum to this proposed rule include the occupational mix adjustment.

H. Proposed Revisions to the Wage Index Based on Hospital Redesignation

(If you choose to comment on issues in this section, please include the caption “Hospital Redesignations and Reclassifications” at the beginning of your comment.)

1. General

Under section 1886(d)(10) of the Act, the Medicare Geographic Classification Review Board (MGCRB) considers applications by hospitals for geographic reclassification for purposes of payment under the IPPS. Hospitals must apply to the MGCRB to reclassify by September 1 of the year preceding the year during which reclassification is sought. Generally, hospitals must be proximate to the labor market area to which they are seeking reclassification and must demonstrate characteristics similar to hospitals located in that area. The MGCRB issues its decisions by the end of February for reclassifications that become effective for the following fiscal year (beginning October 1). The regulations applicable to reclassifications by the MGCRB are located in §§ 412.230 through 412.280.

Section 1886(d)(10)(D)(v) of the Act provides that, beginning with FY 2001, a MGCRB decision on a hospital reclassification for purposes of the wage index is effective for 3 fiscal years, unless the hospital elects to terminate the reclassification. Section 1886(d)(10)(D)(vi) of the Act provides that the MGCRB must use the 3 most recent years' average hourly wage data in evaluating a hospital's reclassification application for FY 2003 and any succeeding fiscal year.

Section 304(b) of Pub. L. 106-554 provides that the Secretary must establish a mechanism under which a statewide entity may apply to have all of the geographic areas in the State treated as a single geographic area for purposes of computing and applying a single wage index, for reclassifications beginning in FY 2003. The implementing regulations for this provision are located at § 412.235.

Section 1886(d)(8)(B) of the Act requires the Secretary to treat a hospital located in a rural county adjacent to one or more urban areas as being located in the MSA to which the greatest number of workers in the county commute if: the rural county would otherwise be considered part of an urban area under the standards for designating MSAs if the commuting rates used in determining outlying counties were determined on the basis of the aggregate number of resident workers who commute to (and, if applicable under the standards, from) the central county or counties of all contiguous MSAs. In light of the new CBSA definitions and the Census 2000 data that we implemented for FY 2005 (69 FR 49027), we undertook to identify those counties meeting these criteria. The eligible counties are identified below under section III.H.5. of this preamble.

2. Effects of Reclassification

Section 1886(d)(8)(C) of the Act provides that the application of the wage index to redesignated hospitals is dependent on the hypothetical impact that the wage data from these hospitals would have on the wage index value for the area to which they have been redesignated. These requirements for determining the wage index values for redesignated hospitals is applicable both to the hospitals located in rural counties deemed urban under section 1886(d)(8)(B) of the Act and hospitals that were reclassified as a result of the MGCRB decisions under section 1886(d)(10) of the Act. Therefore, as provided in section 1886(d)(8)(C) of the Act, [3] the wage index values were determined by considering the following:

  • If including the wage data for the redesignated hospitals would reduce the wage index value for the area to which the hospitals are redesignated by 1 percentage point or less, the area wage index value determined exclusive of the wage data for the redesignated hospitals applies to the redesignated hospitals.
  • If including the wage data for the redesignated hospitals reduces the wage index value for the area to which the hospitals are redesignated by more than 1 percentage point, the area wage index determined inclusive of the wage data for the redesignated hospitals (the combined wage index value) applies to the redesignated hospitals.
  • If including the wage data for the redesignated hospitals increases the wage index value for the urban area to which the hospitals are redesignated, both the area and the redesignated hospitals receive the combined wage index value. Otherwise, the hospitals located in the urban area receive a wage index excluding the wage data of hospitals redesignated into the area.
  • The wage data for a reclassified urban hospital is included in both the wage index calculation of the area to which the hospital is reclassified (subject to the rules described above) and the wage index calculation of the urban area where the hospital is physically located.
  • Rural areas whose wage index values would be reduced by excluding the wage data for hospitals that have been redesignated to another area continue to have their wage index values calculated as if no redesignation had occurred (otherwise, redesignated rural hospitals are excluded from the calculation of the rural wage index).
  • The wage index value for a redesignated rural hospital cannot be reduced below the wage index value for the rural areas of the State in which the hospital is located.

3. Proposed Application of Hold Harmless Protection for Certain Urban Hospitals Redesignated as Rural

Section 401(a) of Pub. L. 106-113 (the Balanced Budget Refinement Act of 1999) amended section 1886(d)(8) of the Act by adding paragraph (E). Section 401(a) created a mechanism that permits an urban hospital to apply to the Secretary to be treated, for purposes of subsection (d), as being located in the rural area of the State in which the hospital is located. A hospital that is granted redesignation under section 1886(d)(8)(E) of the Act, as added by section 401 of Pub. L. 106-113 is, therefore, treated as a rural hospital for all purposes of payment under the Medicare IPPS, including the standardized amount, wage index, and disproportionate share calculations as of the effective date of the redesignation. Under current policy, as a result of an approved redesignation of an urban hospital as a rural hospital, the wage index data are excluded from the wage index calculation for the area where the urban hospital is geographically located and included in the rural hospital wage index calculation.

Last year, we became aware of an instance where the approved redesignation of an urban hospital as rural under section 1886(d)(8)(E) of the Act resulted in the hospital's data having an adverse impact on the rural wage index. We received a public comment noting that specific “hold harmless” provisions apply to reclassifications that occur under section 1886(d)(8)(B) and section 1886(d)(10) of the Act. That is, if a hospital is granted geographic reclassification under section 1886(d)(8)(B) or section 1886(d)(10) of the Act, there are certain rules that apply when the inclusion of the hospital's data results in a reduction of the reclassification area's wage index, and these rules are slightly different for urban areas versus rural areas. These rules are more fully described in the FY 2005 IPPS final rule (69 FR 49053). Generally stated, these rules prevent a rural area from being adversely affected as a result of reclassification. That is, if excluding the reclassifying hospitals' wage data would decrease the wage index of the rural area, the reclassifying hospitals are included in the rural area's wage index. Otherwise, the reclassifying hospitals are excluded. For hospitals reclassifying out of urban areas, the rules provide that the wage data for the reclassified urban hospital is included in the wage index calculation of the urban area where the hospital is physically located.

The commenter recommended that we revise our regulations and apply similar hold harmless provisions and treat hospitals redesignated under 1886(d)(8)(E) of the Act in the same manner as reclassifications under section 1886(d)(8)(B) and section 1886(d)(10) of the Act. In our continued effort to promote consistency, equity and to simplify our rules with respect to how we construct the wage indexes of rural and urban areas, we are persuaded that there is a need to modify our policy when hospital redesignations occur under section 1886(d)(8)(E) of the Act. Therefore, for the FY 2006 wage index, we are proposing to apply the hold harmless rule that currently applies when rural hospitals are reclassifying out of the rural area (from rural to urban) to situations where hospitals are reclassifying into the rural area (from urban to rural under section 1886(d)(8)(E) of the Act). Thus, the rule would be that the wage data of the urban hospital reclassifying into the rural area is included in the rural area's wage index, if including the urban hospital's data increases the wage index of the rural area. Otherwise, the wage data is excluded. Similarly, we are proposing to apply to these cases the rule that currently applies when urban hospitals reclassify under the MGCRB process. Thus, the wage data for an urban hospital reclassifying under section 1886(d)(8)(E) of the Act is always included in the wage index of the urban area where the hospital is located, and can also be included in the wage index of the rural area to which it is reclassifying (if doing so increases the rural area's wage index). We believe this proposal provides uniformity in the way geographic areas are treated under all types of reclassifications. In addition, our proposal promotes predictability by alleviating fluctuations in the wage indexes due to a section 401 redesignation.

We are including in the Addendum to this proposed rule Table 9C, which shows hospitals redesignated under section 1886(d)(8)(E) of the Act.

4. FY 2006 MGCRB Reclassifications

At the time this proposed rule was constructed, the MGCRB had completed its review of FY 2006 reclassification requests. There were 295 hospitals approved for wage index reclassifications by the MGCRB for FY 2006. Because MGCRB wage index reclassifications are effective for 3 years, hospitals reclassified during FY 2004 or FY 2005 are eligible to continue to be reclassified based on prior reclassifications to current MSAs during FY 2006. There were 395 hospitals reclassified for wage index for FY 2005, and 94 hospitals reclassified for wage index in FY 2004. Some of the hospitals that reclassified in FY 2004 and FY 2005 have elected not to continue their reclassifications in FY 2006 because, under the new labor market area definitions, they are now physically located in the areas to which they previously reclassified. Of all of the hospitals approved for reclassification for FY 2004, FY 2005, and FY 2006, 672 hospitals will be in a reclassification status for FY 2006.

Prior to FY 2004, hospitals had been able to apply to be reclassified for purposes of either the wage index or the standardized amount. Section 401 of Pub. L. 108-173 established that all hospitals will be paid on the basis of the large urban standardized amount, beginning with FY 2004. Consequently, all hospitals are paid on the basis of the same standardized amount, which made such reclassifications moot. Although there could still be some benefit in terms of payments for some hospitals under the DSH payment adjustment for operating IPPS, section 402 of Pub. L. 108-173 equalized DSH payment adjustments for rural and urban hospitals, with the exception that the rural DSH adjustment is capped at 12 percent (except that RRCs have no cap). (A detailed discussion of this application appears in section IV.I. of the preamble of the FY 2005 IPPS final rule (69 FR 49085.)

5. Proposed FY 2006 Redesignations Under Section 1886(d)(8)(B) of the Act

Beginning October 1, 1988, section 1886(d)(8)(B) of the Act required us to treat a hospital located in a rural county adjacent to one or more urban areas as being located in the MSA if certain criteria were met. Prior to FY 2005, the rule was that a rural county adjacent to one or more urban areas would be treated as being located in the MSA to which the greatest number of workers in the county commute, if the rural county would otherwise be considered part of an urban area under the standards published in the Federal Register on January 3, 1980 (45 FR 956) for designating MSAs (and NECMAs), and if the commuting rates used in determining outlying counties (or, for New England, similar recognized areas) were determined on the basis of the aggregate number of resident workers who commute to (and, if applicable under the standards, from) the central county or counties of all contiguous MSAs (or NECMAs). Hospitals that met the criteria using the January 3, 1980 version of these OMB standards were deemed urban for purposes of the standardized amounts and for purposes of assigning the wage data index.

On June 6, 2003, OMB announced the new CBSAs based on Census 2000 data. For FY 2005, we used OMB's 2000 CBSA standards and the Census 2000 data to identify counties qualifying for redesignation under section 1886(d)(8)(B) for the purpose of assigning the wage index to the urban area. We presented this listing, effective for discharges occurring on or after October 1, 2004 (FY 2005), in Chart 6 of the FY 2005 final rule (69 FR 49057). However, Chart 6 in the FY 2005 final rule contained a printing error in which we misidentified rural counties that qualified for redesignation under section 1886(d)(8)(B) of the Act. The list of rural counties qualifying to be urban in that Chart 6 incorrectly included Monroe, PA and Walworth, WI. This error was made only in the chart and not in the application of the rules; that is, we correctly applied the rules to the correct rural counties qualifying to be urban for FY 2005.

In addition, we discovered that, in the FY 2005 IPPS final rule, we had erroneously printed the names of the entire Metropolitan Statistical Areas rather than the Metropolitan Division names. Because we recognized Metropolitan Divisions as MSAs in the FY 2005 IPPS final rule (69 FR 49029), we should have printed the division names for the following counties: Henry, FL; Starke, IN; Henderson, TX; Fannin, TX; and Island, WA.

The chart below contains the corrected listing of the rural counties designated as urban under section 1886(d)(8)(B) of the Act that we are proposing to use for FY 2006. We are proposing that, for discharges occurring on or after October 1, 2005, hospitals located in the first column of this chart will be redesignated for purposes of using the wage index of the urban area listed in the second column.

BILLING CODE 4120-01-P

BILLING CODE 4120-01-C

As in the past, hospitals redesignated under section 1886(d)(8)(B) of the Act are also eligible to be reclassified to a different area by the MGCRB. Affected hospitals are permitted to compare the reclassified wage index for the labor market area in Table 4C in the Addendum of this proposed rule into which they have been reclassified by the MGCRB to the wage index for the area to which they are redesignated under section 1886(d)(8)(B) of the Act. Hospitals may withdraw from an MGCRB reclassification within 45 days of the publication of this proposed rule.

6. Reclassifications Under Section 508 of Pub. L. 108-173

Under section 508 of Pub. L. 108-173, a qualifying hospital could appeal the wage index classification otherwise applicable to the hospital and apply for reclassification to another area of the State in which the hospital is located (or, at the discretion of the Secretary, to an area within a contiguous State). We implemented this process through notices published in the Federal Register on January 6, 2004 (69 FR 661) and February 13, 2004 (69 FR 7340). Such reclassifications are applicable to discharges occurring during the 3-year period beginning April 1, 2004 and ending March 31, 2007. Under section 508(b), reclassifications under this process do not affect the wage index computation for any area or for any other hospital and cannot be effected in a budget neutral manner.

We show the reclassifications effective under the one-time appeal process in Table 9B in the Addendum to this proposed rule.

I. Proposed FY 2006 Wage Index Adjustment Based on Commuting Patterns of Hospital Employees

(If you choose to comment on issues in this section, please include the caption “Out-Migration Adjustment” at the beginning of your comment.)

In accordance with the broad discretion under section 1886(d)(13) of the Act, as added by section 505 of Pub. L. 108-173, beginning with FY 2005, we established a process to make adjustments to the hospital wage index based on commuting patterns of hospital employees. The process, outlined in the FY 2005 IPPS final rule (69 FR 49061), provides for an increase in the wage index for hospitals located in certain counties that have a relatively high percentage of hospital employees who reside in the county but work in a different county (or counties) with a higher wage index. Such adjustments to the wage index are effective for 3 years, unless a hospital requests to waive the application of the adjustment. A county will not lose its status as a qualifying county due to wage index changes during the 3-year period, and counties will receive the same wage index increase for those 3 years. However, a county that qualifies in any given year may no longer qualify after the 3-year period, or it may qualify but receive a different adjustment to the wage index level. Hospitals that receive this adjustment to their wage index are not eligible for reclassification under section 1886(d)(8) or section 1886(d)(10) of the Act. Adjustments under this provision are not subject to the IPPS budget neutrality requirements at section 1886(d)(3)(E) or section 1886(d)(8)(D) of the Act.

Hospitals located in counties that qualify for the wage index adjustment are to receive an increase in the wage index that is equal to the average of the differences between the wage indexes of the labor market area(s) with higher wage indexes and the wage index of the resident county, weighted by the overall percentage of hospital workers residing in the qualifying county who are employed in any labor market area with a higher wage index. We have employed the prereclassified wage indexes in making these calculations.

We are proposing that hospitals located in the qualifying counties identified in Table 4J in the Addendum to this proposed rule that have not already reclassified through section 1886(d)(10) of the Act, redesignated through section 1886(d)(8) of the Act, received a section 508 reclassification, or requested to waive the application of the out-migration adjustment would receive the wage index adjustment listed in the table for FY 2006. We used the same formula described in the FY 2005 final rule (69 FR 49064) to calculate the out-migration adjustment. This proposed adjustment was calculated as follows:

Step 1. Subtract the wage index for the qualifying county from the wage index for the higher wage area(s).

Step 2. Divide the number of hospital employees residing in the qualifying county who are employed in such higher wage index area by the total number of hospital employees residing in the qualifying county who are employed in any higher wage index area. Multiply this result by the result obtaining in Step 1.

Step 3. Sum the products resulting from Step 2 (if the qualifying county has workers commuting to more than one higher wage area).

Step 4. Multiply the result from Step 3 by the percentage of hospital employees who are residing in the qualifying county and who are employed in any higher wage index area.

The proposed adjustments calculated for qualifying hospitals are listed in Table 4J in the Addendum to this proposed rule. These proposed adjustments would be effective for each county for a period of 3 fiscal years. Hospitals that received the adjustment in FY 2005 will be eligible to retain that same adjustment for FY 2006 and FY 2007. For hospitals in newly qualified counties, adjustments to the wage index would be effective for 3 years, beginning with discharges occurring on or after October 1, 2005.

As previously noted, hospitals receiving the wage index adjustment under section 1886(d)(13)(F) of the Act are not eligible for reclassification under section 1886(d)(10) of the Act or reclassifications under section 508 of Pub. L. 108-173. Hospitals that wish to waive the application of this wage index adjustment must notify CMS within 45 days of the publication of this proposed rule. Waiver notification should be sent to the following address: Centers for Medicare and Medicaid Services, Center for Medicare Management, Attention: Wage Index Adjustment Waivers, Division of Acute Care, Room C4-08-06, 7500 Security Boulevard, Baltimore, MD 21244-1850. We will assume that hospitals that have been redesignated under section 1886(d)(8) of the Act or reclassified under section 886(d)(10) of the Act or under section 508 of Pub. L. 108-173 would prefer to keep their redesignation/reclassification unless they explicitly notify CMS that they would like to receive the out-migration adjustment instead. In addition, hospitals that wish to retain their redesignation/reclassification (instead of receiving the out-migration adjustment) for FY 2006 do not need to submit a formal request to CMS, and will automatically retain their redesignation/reclassification status for FY 2006. However, consistent with § 412.273, hospitals that have been reclassified by the MGCRB are permitted to withdraw their applications within 45 days of the publication of this proposed rule. Hospitals that have been reclassified by the MGCRB (including reclassifications under section 508 of Pub. L. 108-173) may terminate an existing 3-year reclassification within 45 days of the publication of this proposed rule in order to receive the wage index adjustment under this provision. Hospitals that are eligible to receive the wage index adjustment and that withdraw their application for reclassification will then automatically receive the wage index adjustment listed in Table 4J in the Addendum to this proposed rule. The request for withdrawal of an application for reclassification or termination of an existing 3-year reclassification that would be effective in FY 2006 must be received by the MGCRB within 45 days of the publication of this proposed rule. Hospitals should carefully review the wage index adjustment that they would receive under this provision (as listed in Table 2 in the Addendum to this proposed rule) in comparison to the wage index adjustment that they would receive under the MGCRB reclassification (Table 9 in the Addendum to this proposed rule).

J. Process for Requests for Wage Index Data Corrections

(If you choose to comment on issues in this section, please include the caption “Wage Index Data Corrections” at the beginning of your comment.)

In the FY 2005 IPPS final rule (68 FR 27194), we revised the process and timetable for application for development of the wage index, beginning with the FY 2005 wage index. The preliminary and unaudited Worksheet S-3 wage data and occupational mix survey files were made available on October 8, 2004 through the Internet on the CMS Web site at: http://cms.hhs.gov/providers/hipps/ippswage.asp. In a memorandum dated October 6, 2004, we instructed all Medicare fiscal intermediaries to inform the IPPS hospitals they service of the availability of the wage index data files and the process and timeframe for requesting revisions (including the specific deadlines listed below). We also instructed the fiscal intermediaries to advise hospitals that these data are also made available directly through their representative hospital organizations.

If a hospital wished to request a change to its data as shown in the October 8, 2004 wage and occupational mix data files, the hospital was to submit corrections along with complete, detailed supporting documentation to its fiscal intermediary by November 29, 2004. Hospitals were notified of this deadline and of all other possible deadlines and requirements, including the requirement to review and verify their data as posted on the preliminary wage index data file on the Internet, through the October 6, 2004 memorandum referenced above.

In the October 6, 2004 memorandum, we also specified that a hospital could only request revisions to the occupational mix data for the reporting period that the hospital used in its original FY 2005 wage index occupational mix survey. That is, a hospital that submitted occupational mix data for the 12-month reporting period could not switch to submitting data for the 4-week reporting period and vice versa. Further, a hospital could not submit an occupational mix survey for the periods beginning before January 1, 2003, or after January 11, 2004. In addition, a hospital that did not submit an occupational mix survey for the FY 2005 wage index was not permitted to submit a survey for the FY 2006 wage index.

The fiscal intermediaries notified the hospitals by mid-February 2005 of any changes to the wage index data as a result of the desk reviews and the resolution of the hospitals' late November 2004 change requests. The fiscal intermediaries also submitted the revised data to CMS by mid-February 2005. CMS published the proposed wage index public use files that included hospitals' revised wage data on February 25, 2005. In a memorandum also dated February 25, 2005, we instructed fiscal intermediaries to notify all hospitals regarding the availability of the proposed wage index public use files and the criteria and process for requesting corrections and revisions to the wage index data. Hospitals had until March 14, 2005 to submit requests to the fiscal intermediaries for reconsideration of adjustments made by the fiscal intermediaries as a result of the desk review, and to correct errors due to CMS's or the fiscal intermediary's mishandling of the wage index data. Hospitals were also required to submit sufficient documentation to support their requests.

After reviewing requested changes submitted by hospitals, fiscal intermediaries are to submit any additional revisions resulting from the hospitals' reconsideration requests by April 15, 2005. The deadline for a hospital to request CMS intervention in cases where the hospital disagrees with the fiscal intermediary's policy interpretations is April 22, 2005.

Hospitals should also examine Table 2 in the Addendum to this proposed rule. Table 2 contains each hospital's adjusted average hourly wage used to construct the wage index values for the past 3 years, including the FY 2002 data used to construct the FY 2006 wage index. We note that the hospital average hourly wages shown in Table 2 only reflect changes made to a hospital's data and transmitted to CMS by February 23, 2005.

We will release a final wage index data public use file in early May 2005 to hospital associations and the public on the Internet at http://www.cms.hhs.gov/providers/hipps/ ippswage.asp. The May 2005 public use file will be made available solely for the limited purpose of identifying any potential errors made by CMS or the fiscal intermediary in the entry of the final wage data that result from the correction process described above (revisions submitted to CMS by the fiscal intermediaries by April 15, 2005). If, after reviewing the May 2005 final file, a hospital believes that its wage data were incorrect due to a fiscal intermediary or CMS error in the entry or tabulation of the final wage data, it should send a letter to both its fiscal intermediary and CMS that outlines why the hospital believes an error exists and provide all supporting information, including relevant dates (for example, when it first became aware of the error). CMS and the fiscal intermediaries must receive these requests no later than June 10, 2005. Requests mailed to CMS should be sent to:

Centers for Medicare Medicaid Services, Center for Medicare Management, Attention: Wage Index Team, Division of Acute Care,C4-08-06,7500 Security Boulevard,Baltimore, MD 21244-1850.

Each request also must be sent to the fiscal intermediary. The fiscal intermediary will review requests upon receipt and contact CMS immediately to discuss its findings.

At this point in the process, that is, after the release of the May 2005 wage index data file, changes to the hospital wage data will only be made in those very limited situations involving an error by the fiscal intermediary or CMS that the hospital could not have known about before its review of the final wage index data file. Specifically, neither the intermediary nor CMS will approve the following types of requests:

  • Requests for wage data corrections that were submitted too late to be included in the data transmitted to CMS by fiscal intermediaries on or before April 15, 2005.
  • Requests for correction of errors that were not, but could have been, identified during the hospital's review of the February 25, 2005 wage index data file.
  • Requests to revisit factual determinations or policy interpretations made by the fiscal intermediary or CMS during the wage index data correction process.

Verified corrections to the wage index received timely by CMS and the fiscal intermediaries (that is, by June 10, 2005) will be incorporated into the final wage index to be published by August 1, 2005, and to be effective October 1, 2005.

We created the processes described above to resolve all substantive wage index data correction disputes before we finalize the wage and occupational mix data for the FY 2006 payment rates. Accordingly, hospitals that do not meet the procedural deadlines set forth above will not be afforded a later opportunity to submit wage index data corrections or to dispute the fiscal intermediary's decision with respect to requested changes. Specifically, our policy is that hospitals that do not meet the procedural deadlines set forth above will not be permitted to challenge later, before the Provider Reimbursement Review Board, the failure of CMS to make a requested data revision (See W. A. Foote Memorial Hospital v. Shalala, No. 99-CV-75202-DT (E.D. Mich. 2001), also Palisades General Hospital v. Thompson, No. 99-1230 (D.D.C. 2003)).

Again, we believe the wage index data correction process described above provides hospitals with sufficient opportunity to bring errors in their wage index data to the fiscal intermediaries' attention. Moreover, because hospitals will have access to the final wage index data by early May 2005, they have the opportunity to detect any data entry or tabulation errors made by the fiscal intermediary or CMS before the development and publication of the final FY 2006 wage index by August 1, 2005, and the implementation of the FY 2006 wage index on October 1, 2005. If hospitals avail themselves of the opportunities afforded to provide and make corrections to the wage data, the wage index implemented on October 1 should be accurate. Nevertheless, in the event that errors are identified by hospitals and brought to our attention after June 10, 2005, we retain the right to make midyear changes to the wage index under very limited circumstances.

Specifically, in accordance with § 412.64(k)(1) of our existing regulations, we make midyear corrections to the wage index for an area only if a hospital can show that: (1) The fiscal intermediary or CMS made an error in tabulating its data; and (2) the requesting hospital could not have known about the error or did not have an opportunity to correct the error, before the beginning of the fiscal year. For purposes of this provision, “before the beginning of the fiscal year” means by the June deadline for making corrections to the wage data for the following fiscal year's wage index. This provision is not available to a hospital seeking to revise another hospital's data that may be affecting the requesting hospital's wage index for the labor market area. As indicated earlier, since CMS makes the wage data available to a hospital on the CMS website prior to publishing both the proposed and final IPPS rules, and the fiscal intermediaries notify hospitals directly of any wage data changes after completing their desk reviews, we do not expect that midyear corrections would be necessary. However, under our current policy, if the correction of a data error changes the wage index value for an area, the revised wage index value will be effective prospectively from the date the correction is made.

We are proposing to revise § 412.64(k)(2) to specify that a change to the wage index can be made retroactive to the beginning of the Federal fiscal year only when: (1) The fiscal intermediary or CMS made an error in tabulating data used for the wage index calculation; (2) the hospital knew about the error and requested that the fiscal intermediary and CMS correct the error using the established process and within the established schedule for requesting corrections to the wage data, before the beginning of the fiscal year for the applicable IPPS update (that is, by the June 10, 2005 deadline for the FY 2006 wage index); and (3) CMS agreed that the fiscal intermediary or CMS made an error in tabulating the hospital's wage data and the wage index should be corrected. We are proposing this change because there may be instances in which a hospital identifies an error in its wage data and submits a correction request using all appropriate procedures and by the June deadline, CMS agrees that the fiscal intermediary or CMS caused the error in the hospital's wage data and that the wage index must be corrected, but CMS fails to publish or implement the corrected wage index value by the beginning of the Federal fiscal year. We believe that the above proposed revision to § 412.64(k)(2) is appropriate and fair. We also believe that unlike a generalized retroactive policy, the situations where this will occur will be minimal, thus minimizing the administrative burden associated with such retroactive corrections. In those circumstances where a hospital requests a correction to its wage data before CMS calculates the final wage index (that is, by the June deadline), and CMS acknowledges that the error in the hospital's wage data caused by CMS's or the fiscal intermediary's mishandling of the data, we believe that the hospital should not be penalized by our delay in publishing or implementing the correction. As with our current policy, this provision would not be available to a hospital seeking to revise another hospital's data. In addition, the provision could not be used to correct prior years' wage data; it could only be used for the current Federal fiscal year. In other situations, we continue to believe that it is appropriate to make prospective corrections to the wage index in those circumstances where a hospital could not have known about or did not have the opportunity to correct the fiscal intermediary's or CMS's error before the beginning of the fiscal year (that is, by the June deadline).

We are proposing to make this change to § 412.64(k)(2) effective on October 1, 2005, that is, beginning with the FY 2006 wage index. We note that, as with prospective changes to the wage index, the proposed retroactive correction would be made irrespective of whether the change increases or decreases a hospital's payment rate. In addition, we note that the policy of retroactive adjustment would still apply in those instances where a judicial decision reverses a CMS denial of a hospital's wage data revision request.

In addition, we are proposing to correct the FY 2005 wage index retroactively (that is, from October 1, 2004) on a one-time only basis for a limited circumstance using the authority provided under section 903(a)(1) of Pub. L. 108-173. This provision authorizes the Secretary to make retroactive changes to items and services if failure to apply such changes would be contrary to the public interest. However, as indicated, our current regulations at § 412.64(k)(1) allow only for a prospective correction to the hospitals' area wage index values. We are proposing to correct the FY 2005 wage index retroactively in the limited circumstance where a hospital meets all of the following criteria: (1) The fiscal intermediary or CMS made an error in tabulating a hospital's FY 2005 wage index data; (2) the hospital informed the fiscal intermediary or CMS, or both, about the error, following the established schedule and process for requesting corrections to its FY 2005 wage index data; and (3) CMS agreed before October 1 that the fiscal intermediary or CMS made an error in tabulating the hospital's wage data and the wage index should be corrected by the beginning of the Federal fiscal year (that is, by October 1, 2004), but CMS was unable to publish the correction by the beginning of the fiscal year.

On December 30, 2004, we published in the Federal Register a correction notice to the FY 2005 IPPS final rule that included the corrected wage data for four hospitals that meet all of the three above stated criteria (69 FR 78526). These corrections were effective January 1, 2005. As noted, our current regulations allow only for a prospective correction to the hospitals' area wage index values. However, we believe that, in the limited circumstance mentioned above, a retroactive correction to the FY 2005 wage index is appropriate and meets the condition of section 903(a)(1) of Pub. L. 108-173 that “failure to apply the change retroactively would be contrary to the public interest.”

IV. Proposed Rebasing and Revision of the Hospital Market Baskets Back to Top

(If you choose to comment on issues in this section, please include the caption “Hospital Market Basket” at the beginning of your comment.)

A. Background

Effective for cost reporting periods beginning on or after July 1, 1979, we developed and adopted a hospital input price index (that is, the hospital market basket for operating costs). Although “market basket” technically describes the mix of goods and services used to produce hospital care, this term is also commonly used to denote the input price index (that is, cost category weights and price proxies combined) derived from that market basket. Accordingly, the term “market basket” as used in this document refers to the hospital input price index.

The 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 IPPS hospital index from FY 1997 to FY 2002). “Revising” means changing data sources, or price proxies, used in the input price index.

The percentage change in the market basket reflects the average change in the price of goods and services hospitals purchase in order to furnish inpatient care. We first used the market basket to adjust hospital cost limits by an amount that reflected the average increase in the prices of the goods and services used to provide hospital inpatient care. This approach linked the increase in the cost limits to the efficient utilization of resources.

Since the inception of the IPPS, the projected change in the hospital market basket has been the integral component of the update factor by which the prospective payment rates are updated every year. An explanation of the hospital market basket used to develop the prospective payment rates was published in the Federal Register on September 1, 1983 (48 FR 39764). We also refer the reader to the August 1, 2002 Federal Register (67 FR 50032) in which we discussed the previous rebasing of the hospital input price index.

The hospital market basket is a fixed weight, Laspeyres-type price index that is constructed in three steps. First, a base period is selected (in this proposed rule, FY 2002) and total base period expenditures are estimated for a set of mutually exclusive and exhaustive spending categories based upon type of expenditure. Then the proportion of total operating costs that each category represents is determined. These proportions are called cost or expenditure weights. Second, each expenditure category is matched to an appropriate price or wage variable, referred to as a price proxy. In nearly every instance, these price proxies are price levels derived from publicly available statistical series that are published on a consistent schedule, preferably at least on a quarterly basis.

Finally, the expenditure weight for each cost category is multiplied by the level of its respective price proxy. The sum of these products (that is, the expenditure weights multiplied by their price levels) for all cost categories yields the composite index level of the market basket in a given period. Repeating this step for other periods produces a series of market basket levels over time. Dividing an index level for a given period by an index level for an earlier period produces a rate of growth in the input price index over that time period.

The market basket is described as a fixed-weight index because it describes the change in price over time of the same mix of goods and services purchased to provide hospital services in a base period. The effects on total expenditures resulting from changes in the quantity or mix of goods and services (intensity) purchased subsequent to the base period are not measured. For example, shifting a traditionally inpatient type of care to an outpatient setting might affect the volume of inpatient goods and services purchased by the hospital, but would not be factored into the price change measured by a fixed weight hospital market basket. In this manner, the market basket measures only the pure price change. Only when the index is rebased using a more recent base period would the quantity and intensity effects be captured in the cost weights. Therefore, we rebase the market basket periodically so the cost weights reflect changes in the mix of goods and services that hospitals purchase (hospital inputs) to furnish inpatient care between base periods. We last rebased the hospital market basket cost weights effective for FY 2003 (67 FR 50032, August 1, 2002), with FY 1997 data used as the base period for the construction of the market basket cost weights.

B. Rebasing and Revising the Hospital Market Basket

1. Development of Cost Categories and Weights

a. Medicare Cost Reports

The major source of expenditure data for developing the proposed rebased and revised hospital market basket cost weights is the FY 2002 Medicare cost reports. These cost reports are from IPPS hospitals only. They do not reflect data from hospitals excluded from the IPPS or CAHs. The IPPS cost reports yield seven major expenditure or cost categories: wages and salaries, employee benefits, contract labor, pharmaceuticals, professional liability insurance (malpractice), blood and blood products, and a residual “all other.”

b. Other Data Sources

In addition to the Medicare cost reports, other sources of data used in developing the market basket weights are the Benchmark Input-Output Tables (I-Os) created by the Bureau of Economic Analysis, U.S. Department of Commerce, and the Business Expenses Survey developed by the Bureau of the Census, U.S. Department of Commerce, from its Economic Census.

New data for these Census sources are scheduled for publication every 5 years, but often take up to 7 years after the reference year. Only an Annual I-O is produced each year, but the Annual I-O contains less industry detail than does the Benchmark I-O. When we rebased the market basket using FY 1997 data in the FY 2003 IPPS final rule, the 1997 Benchmark I-O was not yet available. Therefore, we did not incorporate data from that source into the FY 1997-based market basket (67 FR 50033). However, we did use a secondary source, the 1997 Annual Input-Output tables. The third source of data, the 1997 Business Expenditure Survey (now known as the Business Expenses Survey) was used to develop weights for the utilities and telephone services categories.

The 1997 Benchmark I-O data are a much more comprehensive and complete set of data than the 1997 Annual I-O estimates. The 1997 Annual I-O is an update of the 1992 I-O tables, while the 1997 Benchmark I-O is an entirely new set of numbers derived from the 1997 Economic Census. The 2002 Benchmark Input-Output tables are not yet available. Therefore, we are proposing to use the 1997 Benchmark I-O data in the proposed FY 2002-based market basket, to be effective for FY 2006. Instead of using the less detailed, less accurate Annual I-O data, we aged the 1997 Benchmark I-O data forward to FY 2002. The methodology we used to age the data involves applying the annual price changes from the price proxies to the appropriate cost categories. We repeat this practice for each year.

The “all other” cost category is further divided into other hospital expenditure category shares using the 1997 Benchmark Input-Output tables. Therefore, the “all other” cost category expenditure shares are proportional to their relationship to “all other” totals in the I-O tables. For instance, if the cost for telephone services were to represent 10 percent of the sum of the “all other” I-O (see below) hospital expenditures, then telephone services would represent 10 percent of the market basket's “all other” cost category.

2. PPS—Selection of Price Proxies

After computing the FY 2002 cost weights for the proposed rebased hospital market basket, it is necessary to select appropriate wage and price proxies to reflect the rate-of-price change for each expenditure category. With the exception of the Professional Liability proxy, all the indicators are based on Bureau of Labor Statistics (BLS) data and are grouped into one of the following BLS categories:

  • Producer Price Indexes—Producer Price Indexes (PPIs) measure price changes for goods sold in other than retail markets. PPIs are preferable price proxies for goods that hospitals purchase as inputs in producing their outputs because the PPIs would better reflect the prices 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 the wholesaler. The PPIs that we use measure price change at the final stage of production.
  • Consumer Price Indexes—Consumer Price Indexes (CPIs) measure change in the prices of final goods and services bought by the typical consumer. Because they may not represent the price faced by a producer, we used CPIs only if an appropriate PPI was not available, or if the expenditures were more similar to those of retail consumers in general rather than purchases at the wholesale level. For example, the CPI for food purchased away from home is used as a proxy for contracted food services.
  • Employment Cost Indexes—Employment Cost Indexes (ECIs) measure the rate of change in employee wage rates and employer costs for employee benefits per hour worked. These indexes are fixed-weight indexes and strictly measure the change in wage rates and employee benefits per hour. Appropriately, they are not affected by shifts in employment mix.

We evaluated the price proxies using the criteria of reliability, timeliness, availability, and relevance. Reliability indicates that the index is based on valid statistical methods and has low sampling variability. Timeliness implies that the proxy is published regularly, at least once a quarter. Availability means that the proxy is publicly available. Finally, relevance means that the proxy is applicable and representative of the cost category weight to which it is applied. The CPIs, PPIs, and ECIs selected meet these criteria.

Chart 2 sets forth the complete proposed market basket including cost categories, weights, and price proxies. For comparison purposes, the corresponding FY 1997-based market basket is listed as well. A summary outlining the choice of the various proxies follows the chart.

BILLING CODE 4120-01-P

BILLING CODE 4120-01-C

BILLING CODE 4120-01-C

a. Wages and Salaries

For measuring the price growth of wages in the proposed FY 2002-based market basket, we are proposing to use the ECI for wages and salaries for civilian hospital workers as the proxy for wages in the hospital market basket. This same proxy was used for the 1997-based market basket.

b. Employee Benefits

The proposed FY 2002-based hospital market basket uses the ECI for employee benefits for civilian hospital workers. This is the same proxy that was used in the FY 1997-based market basket.

c. Nonmedical Professional Fees

The ECI for compensation for professional and technical workers in private industry is applied to this category because it includes occupations such as management and consulting, legal, accounting and engineering services. The same proxy was used in the FY 1997-based market basket.

d. Fuel, Oil, and Gasoline

The percentage change in the price of gas fuels as measured by the PPI (Commodity Code #0552) is applied to this component. The same proxy was used in the FY 1997-based market basket.

e. Electricity

The percentage change in the price of commercial electric power as measured by the PPI (Commodity Code #0542) is applied to this component. The same proxy was used in the FY 1997-based market basket.

f. Water and Sewerage

The percentage change in the price of water and sewerage maintenance as measured by the CPI for all urban consumers (CPI Code #CUUR0000SEHG01) is applied to this component. The same proxy was used in the FY 1997-based market basket.

g. Professional Liability Insurance

The proposed FY 2002-based index uses the percentage change in the hospital professional liability insurance (PLI) premiums as estimated by the CMS Hospital Professional Liability Index, which we use as a proxy in the Medicare Economic Index (68 FR 63244), for the proxy of this category. Similar to the Physicians Professional Liability Index, we attempt to collect commercial insurance premiums for a fixed level of coverage, holding nonprice factors constant (such as a change in the level of coverage). In the FY 1997-based market basket, the same price proxy was used.

We continue to research options for improving our proxy for professional liability insurance. This research includes exploring various options for expanding our current survey, including the identification of another entity that would be willing to work with us to collect more complete and comprehensive data. We are also exploring other options such as third party or industry data that might assist us in creating a more precise measure of PLI premiums. At this time, we have not yet identified a preferred option. Therefore, we are not proposing to make any changes to the proxy in this proposed rule.

h. Pharmaceuticals

The percentage change in the price of prescription drugs as measured by the PPI (PPI Code #PPI283D#RX) is used as a proxy for this category. This is a special index produced by BLS and is the same proxy used in the 1997-based index.

i. Food: Direct Purchases

The percentage change in the price of processed foods and feeds as measured by the PPI (Commodity Code #02) is applied to this component. The same proxy was used in the FY 1997-based market basket.

j. Food: Contract Services

The percentage change in the price of food purchased away from home as measured by the CPI for all urban consumers (CPI Code #CUUR0000SEFV) is applied to this component. The same proxy was used in the FY 1997-based market basket.

k. Chemicals

The percentage change in the price of industrial chemical products as measured by the PPI (Commodity Code #061) is applied to this component. While the chemicals hospitals purchase include industrial as well as other types of chemicals, the industrial chemicals component constitutes the largest proportion by far. Thus, we believe that Commodity Code #061 is the appropriate proxy. The same proxy was used in the FY 1997-based market basket.

l. Medical Instruments

The percentage change in the price of medical and surgical instruments as measured by the PPI (Commodity Code #1562) is applied to this component. The same proxy was used in the FY 1997-based market basket.

m. Photographic Supplies

The percentage change in the price of photographic supplies as measured by the PPI (Commodity Code #1542) is applied to this component. The same proxy was used in the FY 1997-based market basket.

n. Rubber and Plastics

The percentage change in the price of rubber and plastic products as measured by the PPI (Commodity Code #07) is applied to this component. The same proxy was used in the FY 1997-based market basket.

o. Paper Products

The percentage change in the price of converted paper and paperboard products as measured by the PPI (Commodity Code #0915) is used. The same proxy was used in the FY 1997-based market basket.

p. Apparel

The percentage change in the price of apparel as measured by the PPI (Commodity Code #381) is applied to this component. The same proxy was used in the FY 1997-based market basket.

q. Machinery and Equipment

The percentage change in the price of machinery and equipment as measured by the PPI (Commodity Code #11) is applied to this component. The same proxy was used in the FY 1997-based market basket.

r. Miscellaneous Products

The percentage change in the price of all finished goods less food and energy as measured by the PPI (Commodity Code #SOP3500) is applied to this component. Using this index removes the double-counting of food and energy prices, which are already captured elsewhere in the market basket. The same proxy was used in the FY 1997-based index. The weight for this cost category is higher than in the FY 1997-based index because the weight for blood and blood products (1.082) is added to it. In the FY 1997-based market basket, we included a separate cost category for blood and blood products, using the BLS PPI (Commodity Code #063711) for blood and derivatives as a price proxy. A review of recent trends in the PPI for blood and derivatives suggests that its movements may not be consistent with the trends in blood costs faced by hospitals. While this proxy did not match exactly with the product hospitals are buying, its trend over time appears to be reflective of the historical price changes of blood purchased by hospitals. However, an apparent divergence over recent periods led us to reevaluate whether the PPI for blood and derivatives was an appropriate measure of the changing price of blood. We ran test market baskets classifying blood in three separate cost categories: blood and blood products, contained within chemicals as was done for the FY 1992-based index, and within miscellaneous products. These categories use as proxies the following PPIs: The PPI for blood and blood products, the PPI for chemicals, and the PPI for finished goods less food and energy, respectively. Of these three proxies, the PPI for finished goods less food and energy moved most like the recent blood cost and price trends. In addition, the impact on the overall market basket by using different proxies for blood was negligible, mostly due to the relatively small weight for blood in the market basket. Therefore, we chose the PPI for finished goods less food and energy for the blood proxy because we believe it will best be able to proxy price changes (not quantities or required tests) associated with blood purchased by hospitals. We will continue to evaluate this proxy for its appropriateness and will explore the development of alternative price indexes to proxy the price changes associated with this cost.

s. Telephone

The percentage change in the price of telephone services as measured by the CPI for all urban consumers (CPI Code # CUUR0000SEED) is applied to this component. The same proxy was used in the FY 1997-based market basket.

t. Postage

The percentage change in the price of postage as measured by the CPI for all urban consumers (CPI Code # CUUR0000SEEC01) is applied to this component. The same proxy was used in the FY 1997-based market basket.

u. All Other Services: Labor Intensive

The percentage change in the ECI for compensation paid to service workers employed in private industry is applied to this component. The same proxy was used in the FY 1997-based market basket.

v. All Other Services: Nonlabor Intensive

The percentage change in the all-items component of the CPI for all urban consumers (CPI Code # CUUR0000SA0) is applied to this component. The same proxy was used in the FY 1997-based market basket.

For further discussion of the rationales for choosing many of the specific price proxies, we refer the reader to the August 1, 2002 final rule (67 FR 50037).

3. Labor-Related Share

(If you choose to comment on issues in this section, please include the caption “Labor-Related Share” at the beginning of your comment.)

Under section 1886(d)(3)(E) of the Act, the Secretary estimates from time to time the proportion of payments that are labor-related. “The Secretary shall adjust the proportion (as estimated by the Secretary from time to time) of hospitals' costs which are attributable to wages and wage-related costs of the DRG prospective payment rates. * * *” We refer to the proportion of hospitals' costs that are attributable to wages and wage-related costs as the “labor-related share.”

The labor-related share is used to determine the proportion of the national PPS base payment rate to which the area wage index is applied. We are proposing to continue to use our current methodology of defining the labor-related share as the national average proportion of operating costs that are related to, influenced by, or vary with the local labor markets. We believe that the operating cost categories that are related to, influenced by, or vary with the local labor markets are wages and salaries, fringe benefits, professional fees, contract labor, and labor intensive services. Therefore, we are proposing to calculate the labor-related share by adding the relative weights for these operating cost categories. After we reviewed all cost categories in the proposed IPPS market basket using this definition of labor-related, we removed postage costs from the proposed FY 2002-based labor-related share because we no longer believe these costs are likely to vary with the local labor market. Using the cost category weights that we determined in section IV.B. of this preamble, we calculated a labor-related share of 69.731 percent, using the FY 2002-based PPS market basket. Accordingly, we are proposing to implement a labor-related share of 69.7 percent for discharges occurring on or after October 1, 2005. We note that section 403 of Pub. L. 108-173 amended sections 1886(d)(3)(E) and 1886(d)(9)(C)(iv) of the Act to provide that the Secretary must employ 62 percent as the labor-related share unless this employment “would result in lower payments than would otherwise be made.”

We also are proposing an update to the labor-related share for Puerto Rico. Consistent with our methodology for determining the national labor-related share, we are proposing to add the Puerto Rico-specific relative weights for wages and salaries, fringe benefits, and contract labor. Because there are no Puerto Rico-specific relative weights for professional fees and labor intensive services, we are proposing to use the national weights. Alternatively, we could apply the national labor-related share to the Puerto Rico-specific rate. We note that we are still reviewing our data and have not yet calculated the updated Puerto Rico-specific labor-related share percentage. Therefore, the labor-related and nonlabor-related portions of the Puerto Rico-specific standardized amount listed in Table 1C of the Addendum to this proposed rule reflect the current (FY 2005) labor-related share for Puerto Rico of 71.3 percent. Once we have calculated the updated labor-related share for Puerto Rico, we will post it on the CMS website at http://www.cms.hhs.gov/providers/hipps. In addition, if we adopt this proposal, we would publish the updated Puerto Rico labor-related share in the IPPS final rule. We welcome comments on our proposal to update the labor-related share for Puerto Rico.

Unlike the 1997 Annual I-O which was based on Standard Industrial Codes (SIC), the 1997 Benchmark I-O is categorized using the North American Industrial Classification System (NAICS). This change required us to classify all cost categories under NAICS, including a reevaluation of labor-related costs on the NAICS definitions. Chart 4 compares the FY 1992-based labor-related share, the current measure, with the FY 2002-based labor-related share. When we rebased the market basket to reflect FY 1997 data, we did not change the labor-related share (67 FR 50041). Therefore, the FY 1992-based labor-related share is the current measure.

Although we are proposing to continue to calculate the labor-related share by adding the relative weights of the labor-related operating cost categories, we continue to evaluate alternative methodologies. In the May 9, 2002 Federal Register (67 FR 31447), we discussed our research on the methodology for the labor-related share. This research involved analyzing the compensation share (the sum of wages and salaries and benefits) separately for urban and rural hospitals, using regression analysis to determine the proportion of costs influenced by the area wage index, and exploring alternative methodologies to determine whether all or only a portion of professional fees and nonlabor intensive services should be considered labor-related.

Our original analysis, which appeared in the May 9, 2002 Federal Register (67 FR 31447) and which focused mainly on edited FY 1997 hospital data, found that the compensation share of costs for hospitals in rural areas was higher on average than the compensation share for hospitals in urban areas. We also researched whether only a proportion of the costs in professional fees and labor-intensive services should be considered labor-related, not the entire cost categories. However, there was not enough information available to make this determination.

Our finding that the average compensation share of costs for rural hospitals was higher than the average compensation for urban hospitals was validated consistently through our regression analysis. Regression analysis is a statistical technique that determines the relationship between a dependent variable and one or more independent variables. We tried several regression specifications in an effort to determine the proportion of costs that are influenced by the area wage index. Furthermore, MedPAC raised the possibility that regression may be an alternative to the current market basket methodology. Our initial regression specification (in log form) was Medicare operating cost per Medicare discharge as the dependent variable and the independent variables being the area wage index, the case-mix index, the ratio of residents per bed (as proxy for IME status), and a dummy variable that equals one if the hospital is located in a metropolitan area with a population of 1 million or more. (A dummy variable represents the presence or absence of a particular characteristic.) This regression produced a coefficient for all hospitals for the area wage index of 0.638 (which is equivalent to the labor share and can be interpreted as an elasticity because of the log specification) with an adjusted R-squared of 64.3. (Adjusted R-squared is a measure of how well the regression model fits the data.) While, on the surface, this appeared to be a reasonable result, this same specification for urban hospitals had a coefficient of 0.532 (adjusted R-squared = 53.2) and a coefficient of 0.709 (adjusted R-squared = 36.4) for rural hospitals. This highlighted some apparent problems with the specification because the overall regression results appear to be masking underlying problems. It did not seem reasonable that urban hospitals would have a labor share below their actual compensation share or that the discrepancy between urban and rural hospitals would be this large. When we standardized the Medicare operating cost per Medicare discharge for case mix, the fit, as measured by adjusted R-squared, fell dramatically and the urban/rural discrepancy became even larger.

Based on this initial result, we tried two modifications to the FY 1997 regressions to correct for the underlying problems. First, we edited the data differently to determine if a few reports were causing the inconsistent results. We found when we tightened the edits, the wage index coefficient was lower and the fit was worse. When we loosened the edits, we found higher wage index coefficients and still a worse fit. Second, we added additional variables to the regression equation to attempt to explain some of the variation that was not being captured. We found the best fit occurred when the following variables were added: The occupancy rate, the number of hospital beds, a dummy variable that equals one if the hospital is privately owned and zero otherwise, a dummy variable that equals one if the hospital is government-controlled and zero otherwise, the Medicare length-of-stay, the number of FTEs per bed, and the age of fixed assets. The result of this specification was a wage index coefficient of 0.620 (adjusted R-squared = 68.7), with the regression on rural hospitals having a coefficient of 0.772 (adjusted R-squared = 45.0) and the regression on urban hospitals having a coefficient of 0.474 (adjusted R-squared = 60.9). Neither of these alternatives seemed to help the underlying difficulties with the regression analysis.

Subsequent to the work described above, we have undertaken the research necessary to reevaluate the current assumptions used in determining the labor-related share. We ran regressions applying the previous specifications to more recent data (FY 2001 and FY 2002), and, as described below, we ran regressions using alternative specifications. Once again we encourage comments on this research and any information that is available to help determine the most appropriate measure.

The first step in our regression analysis to determine the proportion of hospitals' costs that varied with labor-related costs was to edit the data, which had significant outliers in some of the variables we used in the regressions. We originally began with an edit that excluded the top and bottom 5 percent of reports based on average Medicare cost per discharge and number of discharges. We also used edits to exclude reports that did not meet basic criteria for use, such as having costs greater than zero for total, operating, and capital for the overall facility and just the Medicare proportion. We also required that the hospital occupancy rate, length-of-stay, number of beds, FTEs, and overall and Medicare discharges be greater than zero. Finally, we excluded reports with occupancy rates greater than one.

Our regression specification (in log form) was Medicare operating cost per Medicare discharge as the dependent variable (the same dependent variable we used in the regression analysis described in the May 9, 2002 Federal Register) with the independent variables being the compensation per FTE, the ratio of interns and residents per bed (as proxy for IME status), the occupancy rate, the number of hospital beds, a dummy variable that equals one if the hospital is privately owned and is zero otherwise, a dummy variable that equals one if the hospital is government-controlled and is zero otherwise, the Medicare length-of-stay, the number of FTEs per bed, the age of fixed assets, and a dummy variable that equals one if the hospital is located in a metropolitan area with a population of 1 million or more. This is a similar model to the one described in the May 9, 2002 Federal Register (67 FR 31447) as having the best fit, with two notable exceptions. First, the area wage index is replaced by compensation per FTE, where compensation is the sum of hospital wages and salaries, contract labor costs, and benefits. The area wage index is a payment variable computed by averaging wages across all hospitals within each MSA, whereas compensation per FTE differs from one hospital to the next. Second, the case-mix index is no longer included as a regressor because it is correlated with other independent variables in the regression. In other words, the other independent variables are capturing part of the effect of the case-mix index. We made these two specification changes in an attempt to only use cost variables to explain the variation in Medicare operating costs per discharge. We believe this is appropriate in order to compare to the results we are getting from the market basket methodology, which is based solely on cost data. As we will show below, the use of payment variables on the right-hand side of the equation appears to be producing less reasonable results when cost data are used.

The revised specification for FY 2002 produced a coefficient for all hospitals for compensation per FTE of 0.673 (which is roughly equivalent to the labor share and can be interpreted as an elasticity because of the log specification) with an adjusted R-squared of 63.7. The coefficient result for FY 2001 is 64.5, with an adjusted R-squared of 65.2. (For comparison, a separate regression for FY 2002 with the log area wage index and log case-mix index included in the set of regressors displays a log area wage index coefficient of 75.6 (adjusted R-squared = 67.7).) For FY 2001, the coefficient for the log area wage index is 72.3 (adjusted R-squared = 67.9). On the surface, these seem to be reasonable results. However, a closer look reveals some problems. In FY 2001, the coefficient for urban hospitals was 59.6 (adjusted R-squared = 57.3), and the coefficient for rural hospitals was 61.3 (adjusted R-squared = 50.6). On the other hand, in FY 2002, the coefficient for urban hospitals increased to 69.2 (adjusted R-squared = 55.9), and the coefficient for rural hospitals decreased to 58.2 (adjusted R squared = 46.0). The results for FY 2001 seem reasonable, but not when compared with the results for FY 2002. Furthermore, for FY 2002 the compensation share of costs for hospitals in rural areas was higher on average than the compensation share for hospitals in urban areas. Rural areas had an average compensation share of 63.3 percent, while urban areas had a share of 60.5 percent. This compares to a share of 61.2 percent for all hospitals.

Due to these problems, we do not believe the regression analysis is producing sound enough evidence at this point for us to make the decision to change from the current method for calculating the labor-related share. We continue to analyze these data and work on alternative specifications, including working with MedPAC, who in the past have done similar analysis in their studies of payment adequacy. Comments on this approach would be welcomed, given the difficulties we have encountered.

We also continue to look into ways to refine our market basket approach to more accurately account for the proportion of costs influenced by the local labor market. Specifically, we are looking at the professional fees and labor-intensive cost categories to determine if only a proportion of the costs in these categories should be considered labor-related, not the entire cost category. Professional fees include management and consulting fees, legal services, accounting services, and engineering services. Labor-intensive services are mostly building services, but also include other maintenance and repair services.

We conducted preliminary research into whether the various types of professional fees are more or less likely to be purchased in local labor markets. Through contact with a handful of hospitals in only two States, we asked for the percentages of their advertising, legal, and management and consulting services that they purchased in either local, regional, or national labor markets. The results were quite consistent across all of the hospitals, indicating most advertising and legal services are purchased in local or regional markets and nearly all management and consulting services are purchased in national labor markets. This suggested we may be appropriately reflecting advertising and legal services in the labor-related share, but we plan to investigate further whether management and consulting services are appropriately reflected. We do not believe that this limited effort produced enough evidence for us to change our methodology. However, we do plan to expand our efforts in this area to ensure we appropriately determine the labor-related share. We are soliciting data or studies that would be helpful in this analysis. We are unsure if we will be able to finish this analysis in time for inclusion in the FY 2006 IPPS final rule.

As mentioned previously, we are proposing to continue to calculate the labor-related share by adding the relative weights of the operating cost categories that are related to, influenced by, or vary with the local labor markets. These categories include wages and salaries, fringe benefits, professional fees, contract labor and labor-intensive services. Since we no longer believe that postage costs meet our definition of labor-related, we are excluding them from the labor-related share. Using this methodology, we calculated a labor-related share of 69.731. Therefore, we are proposing a labor-related share of 69.731.

C. Separate Market Basket for Hospitals and Hospital Units Excluded from the IPPS

(If you choose to comment on issues in this section, please include the caption “Excluded Hospital Market Basket” at the beginning of your comment.)

1. Hospitals Paid Based on Their Reasonable Costs

On August 7, 2001, we published a final rule in the Federal Register (66 FR 41316) establishing the PPS for IRFs, effective for cost reporting periods beginning on or after January 1, 2002. On August 30, 2002, we published a final rule in the Federal Register (67 FR 55954) establishing the PPS for LTCHs, effective for cost reporting periods beginning on or after October 1, 2002. On November 15, 2004, we published a final rule in the Federal Register (69 FR 66922) establishing the PPS for the IPFs, effective for cost reporting periods beginning on or after January 1, 2005.

Prior to being paid under a PPS, IRFs, LTCHs, and IPFs were reimbursed solely under the reasonable cost-based system under § 413.40 of the regulations, which impose rate-of-increase limits. Children's and cancer hospitals and religious nonmedical health care institutions (RNHCIs) are still reimbursed solely under the reasonable cost-based system, subject to the rate-of-increase limits. Under these limits, an annual target amount (expressed in terms of the inpatient operating cost per discharge) is set for each hospital based on the hospital's own historical cost experience trended forward by the applicable rate-of-increase percentages. To the extent a LTCH or IPF receives a blend of reasonable cost-based payment and the Federal prospective payment rate amount, the reasonable cost portion of the payment is also subject to the applicable rate-of-increase percentage. Section 1886(b)(3)(B)(ii) of the Act sets the percentage increase of the limits, which in certain years was based upon the market basket percentage increase. Beginning in FY 2003 and subsequent years, the applicable rate-of-increase is the market basket percentage increase. The market basket currently (and historically) used is the excluded hospital operating market basket, representing the cost structure of rehabilitation, long-term care, psychiatric, children's, and cancer hospitals (FY 2003 final rule, 67 FR 50042).

Because IRFs, LTCHs, and some IPFs are now paid under a PPS, we are considering developing a separate market basket for these hospitals that contains both operating and capital costs. We would publish any proposal to use a revised separate market basket for each of these types of hospitals when we propose the nest update of their respective PPS rates. Children's and cancer hospitals are two of the remaining three types of hospitals excluded from the IPPS that are still being paid based solely on their reasonable costs, subject to target amounts. (RNHCIs, the third type of IPPS-excluded entity still subject to target amounts, are reimbursed under § 403.752(a) of the regulations.) Because there are a small number of children's and cancer hospitals and RNHCIs, which receive in total less than 1 percent of all Medicare payments to hospitals and because these hospitals provide limited Medicare cost report data, we are not proposing to create a separate market basket specifically for these hospitals. Under the broad authority in sections 1886(b)(3)(A) and (B), 1886(b)(3)(E), and 1871 of the Act, we are proposing to use the proposed FY 2002 IPPS operating market basket percentage increase to update the target amounts for children's and cancer hospitals reimbursed under sections 1886(b)(3)(A) and (b)(3)(E) of the Act and the market basket for RNHCIs under § 403.752(a) of the regulations. This proposal reflects our belief that it is best to use an index that most closely represents the cost structure of children's and cancer hospitals and RNHCIs. The FY 2002 cost weights for wages and salaries, professional liability, and “all other” for children's and cancer hospitals are noticeably closer to those in the IPPS operating market basket than those in the excluded hospital market basket, which is based on the cost structure of IRFs, LTCHs, IPFs, and children's and cancer hospitals and RNHCIs. Therefore, we believe it is more appropriate to use the IPPS operating market basket for children's and cancer hospitals and RNHCIs. However, when we compare the weights for LTCHs and IPFs to the weights for IPPS hospitals, we did not find them comparable. Therefore, we do not believe it is appropriate to use the IPPS market basket for LTCHs and IPFs.

For similar reasons, we are considering at some other date proposing a separate market basket to update the adjusted Federal payment amount for IRFs, LTCHs, and IPFs. We expect that these changes would be proposed in separate proposed rules for each of these three hospital types. We envision that these changes should apply to the adjusted Federal payment rate, and not the portion of the payment that is based on a facility-specific (or reasonable cost) payment to the extent such a hospital or unit is paid under a blend methodology. In other words, to the extent any of these hospitals are paid under a blend methodology whereby a percentage of the payment is based on reasonable cost principles, we would not propose to make changes to the existing methodology for developing the market basket for the reasonable cost portion of the payment because this portion of the payment is being phased out, if it is not already a nonexistent feature of the PPSs for IRFs, LTCHs, and IPFs. We do not believe that it makes sense to propose to create an entirely new methodology for creating the market basket index which updates the “reasonable cost” portion of a blend methodology since the “reasonable cost portion” will last at most for just 1 or 3 additional years (1 year for LTCHs paid under a blend methodology since LTCHs only have 1 year remaining in their transition, and 3 years for IPFs since IPFs paid under a blend methodology only have 3 years remaining under a blend methodology). However, the same cannot be said for the adjusted Federal payment amount. In the case of the IRF PPS, all IRFs are paid at 100 percent of the adjusted Federal payment amount and will continue to be paid based on 100 percent of this amount for perpetuity. In the LTCH PPS, most LTCHs (98 percent) are already paid at 100 percent of the adjusted Federal payment amount. In the case of the few LTCHs that are paid under a blend methodology for cost reporting periods beginning on or after October 1, 2006, payment will be based entirely on the adjusted Federal prospective payment rate. In the case of IPFs, new IPFs (as defined in § 412.426(c)) will be paid at 100 percent of the adjusted Federal prospective payment rate (the Federal per diem payment amount), while all others will continue to transition to 100 percent of the Federal per diem payment amount. In any event, even those transitioning will be at 100 percent of the adjusted Federal prospective payment rate in 3 years.

Chart 5 compares the updates for the FY 2002-based IPPS operating market basket, our proposed index used to update the target amounts for children's and cancer hospitals, and RNHCIs, with a FY 2002-based excluded hospital market basket that is based on the current methodology (that is, based on the cost structure of IRFs, LTCHs, IPFs, and children's and cancer hospitals). Although the percent change in the IPPS operating market basket is typically lower than the percent change in the FY 2002-based excluded hospital market basket (see charts), we believe it is important to propose using the market basket that most closely reflects the cost structure of children's and cancer hospitals. We invite comments on our proposal to use the proposed FY 2002 IPPS operating market basket to update the target amounts for children's and cancer hospitals reimbursed under sections 1886(b)(3)(A) and (b)(3)(E) of the Act and the market basket for RNHCIs under § 403.752(a) of the regulations.

Chart 5 shows the historical and forecasted updates under both the proposed FY 2002-based IPPS operating market basket and the proposed FY 2002-based excluded hospital market basket. The forecasts are based on Global Insight, Inc. 4th quarter, 2004 forecast with historical data through the 3rd quarter of 2004. Global Insight, Inc. is a nationally recognized economic and financial forecasting firm that contracts with CMS to forecast the components of the market baskets.

2. Excluded Hospitals Paid Under a Blend Methodology

As we discuss in greater detail in Appendix B to this proposed rule, in the past, hospitals and hospital units excluded from the IPPS have been paid based on their reasonable costs, subject to TEFRA limits. However, some of these categories of excluded hospitals and hospital units are now paid under their own PPSs. Specifically, some LTCHs and most IPFs are or will be transitioning from reasonable cost-based payments (subject to the TEFRA limits) to prospective payments under their respective PPSs. Under the respective transition period methodologies for the LTCH PPS and the IPF PPS, which are described below, payment is based, in part, on a decreasing percentage of the reasonable cost-based payment amount, which is subject to the TEFRA limits and an increasing percentage of the Federal prospective payment rate. For those LTCHs and IPFs whose PPS payment is comprised in part of a reasonable cost-based payment will have those reasonable cost-based payment amounts limited by the hospital's TEFRA ceiling.

Effective for cost reporting periods beginning on or after October 1, 2002, LTCHs are paid under the LTCH PPS, which was implemented with a 5-year transition period, transitioning existing LTCHs to a payment based on the fully Federal prospective payment rate (August 30, 2002; 67 FR 55954). However, a LTCH may elect to be paid at 100 percent of the Federal prospective rate at the start of any of its cost reporting periods during the 5-year transition period. A “new” LTCH, as defined in § 412.23(e)(4), are paid based on 100 percent of the standard Federal rate. Effective for cost reporting periods beginning on or after January 1, 2005, IPFs are paid under the IPF PPS under which they receive payment based on a prospectively determined Federal per diem rate that is based on the sum of the average routine operating, ancillary, and capital costs for each patient day of psychiatric care in an IPF, adjusted for budget neutrality. During a 3-year transition period, existing IPFs are paid based on a blend of the reasonable cost-based payments and the Federal prospective per diem base rate. For cost reporting periods beginning on or after January 1, 2008, existing IPFs are to be paid based on 100 percent of the Federal per diem rate. A “new” IPF, as defined in § 412.426(c), are paid based on 100 percent of the Federal per diem payment amount. Any LTCHs or IPFs that receive a PPS payment that includes a reasonable cost-based payment during its respective transition period will have that portion of its payment subject to the TEFRA limits.

Under the broad authority of section 1886(b)(3)(A) and (b)(3)(B) of the Act, for LTCHs and IPFs that are transitioning to the fully Federal prospective payment rate, we are proposing to use the rebased FY 2002 based-excluded hospital market basket to update the reasonable cost-based portion of their payments. The proposed market basket update is described in detail below. We do not believe the IPPS operating market basket should be used for the proposed update to the reasonable cost-based portion of the payments to LTCHs or IPFs because this market basket does not reflect the cost structure of LTCHs and IPFs.

3. Development of Cost Categories and Weights for the Proposed FY 2002-Based Excluded Hospital Market Basket

a. Medicare Cost Reports

The major source of expenditure data for developing the proposed rebased and revised excluded hospital market basket cost weights is the FY 2002 Medicare cost reports. We choose FY 2002 as the base year because we believe this is the most recent, relatively complete year (with a 90-percent reporting rate) of Medicare cost report data. These cost reports are from rehabilitation, psychiatric, long-term care, children's, cancer, and religious nonmedical excluded hospitals. They do not reflect data from IPPS hospitals or CAHs. These are the same hospitals included in the FY 1997-based excluded hospital market basket, except for religious nonmedical hospitals. Due to insufficient Medicare cost report data for these excluded hospitals, their cost reports yield only four major expenditure or cost categories: Wages and salaries, pharmaceuticals, professional liability insurance (malpractice), and a residual “all other.”

Since the cost weights for the FY 2002-based excluded hospital market basket are based on facility costs, we are proposing to use those cost reports for IRFs, LTCHs, and children's, cancer, and RNHCIs whose Medicare average length of stay is within 15 percent (that is, 15 percent higher or lower) of the total facility average length of stay for the hospital. We are proposing to use a less stringent edit for Medicare length of stay for IPFs, requiring the average length of stay to be within 30 or 50 percent (depending on the total facility average length of stay) of the total facility length of stay. This allows us to increase our sample size by over 150 reports and produce a cost weight more consistent with the overall facility. The edit we applied to IPFs when developing the FY 1997-based excluded hospital market basket was based on the best available data at the time.

We believe that limiting our sample to hospitals with a Medicare average length of stay within a comparable range of the total facility average length of stay provides a more accurate reflection of the structure of costs for Medicare treatments. Our method results in including in our data set hospitals with a share of Medicare patient days relative to total patient days that was approximately three times greater than for those hospitals excluded from our sample. Our goal is to measure cost shares that are reflective of case-mix and practice patterns associated with providing services to Medicare beneficiaries.

Cost weights for benefits, contract labor and blood and blood products were derived using the proposed FY 2002-based IPPS market basket. This is necessary because these data are poorly reported in the cost reports for non-IPPS hospitals. For example, the ratio of the benefit cost weight to the wages and salaries cost weight was applied to the proposed excluded hospital wages and salaries cost weight to derive a benefit cost weight for the proposed excluded hospital market basket.

b. Other Data Sources

In addition to the Medicare cost reports, the other source of data used in developing the excluded hospital market basket weights is the Benchmark Input-Output Tables (I-Os) created by the Bureau of Economic Analysis, U.S. Department of Commerce.

New data for this source are scheduled for publication every 5 years, but often take up to 7 years after the reference year. Only an Annual I-O is produced each year, but the Annual I-O contains less industry detail than does the Benchmark I-O. When we rebased the excluded hospital market basket using FY 1997 data in the FY 2003 IPPS final rule, the 1997 Benchmark I-O was not yet available. Therefore, we did not incorporate data from that source into the FY 1997-based excluded hospital market basket (67 FR 50033). However, we did use a secondary source the 1997 Annual Input-Output tables. The third source of data, the 1997 Business Expenditure Survey (now known as the Business Expenses Survey), was used to develop weights for the utilities and telephone services categories.

The 1997 Benchmark I-O data are a much more comprehensive and complete set of data than the 1997 Annual I-O estimates. The 1997 Annual I-O is an update of the 1992 I-O tables, while the 1997 Benchmark I-O is an entirely new set of numbers derived from the 1997 Economic Census. The 2002 Benchmark Input-Output tables are not yet available. Therefore, we are proposing to use the 1997 Benchmark I-O data in the proposed FY 2002-based excluded hospital market basket, to be effective for FY 2006. Instead of using the less detailed, less accurate Annual I-O data, we aged the 1997 Benchmark I-O data forward to FY 2002. The methodology we used to age the data involves applying the annual price changes from the price proxies to the appropriate cost categories. We repeat this practice for each year.

The “all other” cost category is further divided into other hospital expenditure category shares using the 1997 Benchmark Input-Output tables. Therefore, the “all other” cost category expenditure shares are proportional to their relationship to “all other” totals in the I-O tables. For instance, if the cost for telephone services were to represent 10 percent of the sum of the “all other” I-O (see below) hospital expenditures, then telephone services would represent 10 percent of the market basket's “all other” cost category. The remaining detailed cost categories under the residual “all other” cost category were derived using the 1997 Benchmark Input-Output Tables aged to FY 2002 using relative price changes.

4. Proposed 2002-Based Excluded Hospital Market Basket—Selection of Price Proxies

After computing the FY 2002 cost weights for the proposed rebased excluded hospital market basket, it is necessary to select appropriate wage and price proxies to reflect the rate-of-price change for each expenditure category. With the exception of the Professional Liability proxy, all the indicators are based on Bureau of Labor Statistics (BLS) data and are grouped into one of the following BLS categories:

  • Producer Price Indexes—Producer Price Indexes (PPIs) measure price changes for goods sold in other than retail markets. PPIs are preferable price proxies for goods that hospitals purchase as inputs in producing their outputs because the PPIs would better reflect the prices 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 the wholesaler. The PPIs that we use measure price change at the final stage of production.
  • Consumer Price Indexes—Consumer Price Indexes (CPIs) measure change in the prices of final goods and services bought by the typical consumer. Because they may not represent the price faced by a producer, we used CPIs only if an appropriate PPI was not available, or if the expenditures were more similar to those of retail consumers in general rather than purchases at the wholesale level. For example, the CPI for food purchased away from home is used as a proxy for contracted food services.
  • Employment Cost Indexes—Employment Cost Indexes (ECIs) measure the rate of change in employee wage rates and employer costs for employee benefits per hour worked. These indexes are fixed-weight indexes and strictly measure the change in wage rates and employee benefits per hour. Appropriately, they are not affected by shifts in employment mix.

We evaluated the price proxies using the criteria of reliability, timeliness, availability, and relevance. Reliability indicates that the index is based on valid statistical methods and has low sampling variability. Timeliness implies that the proxy is published regularly, at least once a quarter. Availability means that the proxy is publicly available. Finally, relevance means that the proxy is applicable and representative of the cost category weight to which it is applied. The CPIs, PPIs, and ECIs selected meet these criteria and, therefore, we believe they continue to be the best measure of price changes for the cost categories to which they are applied.

Chart 7 sets forth the complete proposed FY 2002-based excluded hospital market basket including cost categories, weights, and price proxies. For comparison purposes, the corresponding FY 1997-based excluded hospital market basket is listed as well. A summary outlining the choice of the various proxies follows the charts.

BILLING CODE 4120-01-P

BILLING CODE 4120-01-C

a. Wages and Salaries

For measuring the price growth of wages in the proposed FY 2002-based excluded hospital market basket, we are proposing to use the ECI for wages and salaries for civilian hospital workers as the proxy for wages. This same proxy was used for the FY 1997-based excluded hospital market basket.

b. Employee Benefits

The proposed FY 2002-based excluded hospital market basket uses the ECI for employee benefits for civilian hospital workers. This is the same proxy that was used in the FY 1997-based excluded hospital market basket.

c. Nonmedical Professional Fees

The ECI for compensation for professional and technical workers in private industry is applied to this category because it includes occupations such as management and consulting, legal, accounting and engineering services. The same proxy was used in the FY 1997-based excluded hospital market basket.

d. Fuel, Oil, and Gasoline

The percentage change in the price of gas fuels as measured by the PPI (Commodity Code #0552) is applied to this component. The same proxy was used in the FY 1997-based excluded hospital market basket.

e. Electricity

The percentage change in the price of commercial electric power as measured by the PPI (Commodity Code #0542) is applied to this component. The same proxy was used in the FY 1997-based excluded hospital market basket.

f. Water and Sewerage

The percentage change in the price of water and sewerage maintenance as measured by the CPI for all urban consumers (CPI Code # CUUR0000SEHG01) is applied to this component. The same proxy was used in the FY 1997-based excluded hospital market basket.

g. Professional Liability Insurance

The proposed FY 2002-based excluded hospital market basket uses the percentage change in the hospital professional liability insurance (PLI) premiums as estimated by the CMS Hospital Professional Liability Index for the proxy of this category. Similar to the Physicians Professional Liability Index, we attempt to collect commercial insurance premiums for a fixed level of coverage, holding nonprice factors constant (such as a change in the level of coverage). In the FY 1997-based excluded hospital market basket, the same price proxy was used.

We continue to research options for improving our proxy for professional liability insurance. This research includes exploring various options for expanding our current survey, including the identification of another entity that would be willing to work with us to collect more complete and comprehensive data. We are also exploring other options such as third party or industry data that might assist us in creating a more precise measure of PLI premiums. At this time, we have not yet identified a preferred option. Therefore, we are not proposing to make any changes to the proxy in this proposed rule.

h. Pharmaceuticals

The percentage change in the price of prescription drugs as measured by the PPI (PPI Code #PPI283D#RX) is used as a proxy for this category. This is a special index produced by BLS and is the same proxy used in the FY 1997-based excluded hospital market basket.

i. Food: Direct Purchases

The percentage change in the price of processed foods and feeds as measured by the PPI (Commodity Code #02) is applied to this component. The same proxy was used in the FY 1997-based excluded hospital market basket.

j. Food: Contract Services

The percentage change in the price of food purchased away from home as measured by the CPI for all urban consumers (CPI Code # CUUR0000SEFV) is applied to this component. The same proxy was used in the FY 1997-based excluded hospital market basket.

k. Chemicals

The percentage change in the price of industrial chemical products as measured by the PPI (Commodity Code #061) is applied to this component. While the chemicals hospitals purchase include industrial as well as other types of chemicals, the industrial chemicals component constitutes the largest proportion by far. Thus, we believe that Commodity Code #061 is the appropriate proxy. The same proxy was used in the FY 1997-based excluded hospital market basket.

l. Medical Instruments

The percentage change in the price of medical and surgical instruments as measured by the PPI (Commodity Code #1562) is applied to this component. The same proxy was used in the FY 1997-based excluded hospital market basket.

m. Photographic Supplies

The percentage change in the price of photographic supplies as measured by the PPI (Commodity Code #1542) is applied to this component. The same proxy was used in the FY 1997-based excluded hospital market basket.

n. Rubber and Plastics

The percentage change in the price of rubber and plastic products as measured by the PPI (Commodity Code #07) is applied to this component. The same proxy was used in the FY 1997-based excluded hospital market basket.

o. Paper Products

The percentage change in the price of converted paper and paperboard products as measured by the PPI (Commodity Code #0915) is used. The same proxy was used in the FY 1997-based excluded hospital market basket.

p. Apparel

The percentage change in the price of apparel as measured by the PPI (Commodity Code #381) is applied to this component. The same proxy was used in the FY 1997-based excluded hospital market basket.

q. Machinery and Equipment

The percentage change in the price of machinery and equipment as measured by the PPI (Commodity Code #11) is applied to this component. The same proxy was used in the FY 1997-based excluded hospital market basket.

r. Miscellaneous Products

The percentage change in the price of all finished goods less food and energy as measured by the PPI (Commodity Code #SOP3500) is applied to this component. Using this index removes the double-counting of food and energy prices, which are already captured elsewhere in the market basket. The same proxy was used in the FY 1997-based excluded hospital market basket. The weight for this cost category is higher than in the FY 1997-based index because it also includes blood and blood products. In the FY 1997-based excluded hospital market basket, we included a separate cost category for blood and blood products, using the BLS PPI (Commodity Code #063711) for blood and derivatives as a price proxy. A review of recent trends in the PPI for blood and derivatives suggests that its movements may not be consistent with the trends in blood costs faced by hospitals. While this proxy did not match exactly with the product hospitals are buying, its trend over time appears to be reflective of the historical price changes of blood purchased by hospitals. However, an apparent divergence over recent periods led us to reevaluate whether the PPI for blood and derivatives was an appropriate measure of the changing price of blood. We ran test market baskets classifying blood in three separate cost categories: blood and blood products, contained within chemicals as was done for the FY 1992-based index, and within miscellaneous products. These categories use as proxies the following PPIs: the PPI for blood and blood products, the PPI for chemicals, and the PPI for finished goods less food and energy, respectively. Of these three proxies, the PPI for finished goods less food and energy moved most like the recent blood cost and price trends. In addition, the impact on the overall market basket by using different proxies for blood was negligible, mostly due to the relatively small weight for blood in the market basket. Therefore, we chose the PPI for finished goods less food and energy for the blood proxy because we believe it will best be able to proxy price changes (not quantities or required tests) associated with blood purchased by hospitals. We will continue to evaluate this proxy for its appropriateness and will explore the development of alternative price indexes to proxy the price changes associated with this cost.

s. Telephone

The percentage change in the price of telephone services as measured by the CPI for all urban consumers (CPI Code #CUUR0000SEED) is applied to this component. The same proxy was used in the FY 1997-based excluded hospital market basket.

t. Postage

The percentage change in the price of postage as measured by the CPI for all urban consumers (CPI Code #CUUR0000SEEC01) is applied to this component. The same proxy was used in the FY 1997-based excluded hospital market basket.

u. All Other Services: Labor Intensive

The percentage change in the ECI for compensation paid to service workers employed in private industry is applied to this component. The same proxy was used in the FY 1997-based excluded hospital market basket.

v. All Other Services: Nonlabor Intensive

The percentage change in the all-items component of the CPI for all urban consumers (CPI Code #CUUR0000SA0) is applied to this component. The same proxy was used in the FY 1997-based excluded hospital market basket.

For further discussion of the rationale for choosing many of the specific price proxies, we refer the reader to the August 1, 2002 final rule (67 FR 50037).

D. Frequency of Updates of Weights in IPPS Hospital Market Basket

Section 404 of Pub. L. 108-173 (MMA) requires CMS to report in this proposed rule the research that has been done to determine a new frequency for rebasing the hospital market basket. Specifically, section 404 states:

“(a) More frequent updates in weights. After revising the weights used in the hospital market basket under section 1886(b)(3)(B)(iii) of the Social Security Act (42 U.S.C. 1395ww(b)(3)(B)(iii)) to reflect the most current data available, the Secretary shall establish a frequency for revising such weights, including the labor share, in such market basket to reflect the most current data available more frequently than once every 5 years; and

“(b) Incorporation of explanation in rulemaking. The Secretary shall include in the publication of the final rule for payment for inpatient hospitals services under section 1886(d) of the Social Security Act (42 U.S.C. 1395ww(d)) for fiscal year 2006, an explanation of the reasons for, and options considered, in determining the frequency established under subsection (a).”

This section of the proposed rule discusses the research we have done to fulfill this requirement, and proposes a rebasing frequency that makes optimal use of available data.

Our past practice has been to monitor the appropriateness of the market basket on a consistent basis in order to rebase and revise the index when necessary. The decision to rebase and revise the index has been driven in large part by the availability of the data necessary to produce a complete index. In the past, we have supplemented the Medicare cost report data that are available on an annual basis with Bureau of the Census hospital expense data that are typically available only every 5 years (usually in years ending in 2 and 7). Because of this, we have generally rebased the index every 5 years. However, prior to the requirement associated with section 404 of Pub. L. 108-173, there was no legislative requirement regarding the timing of rebasing the hospital market basket nor was there a hard rule that we used in determining this frequency. ProPAC, one of MedPAC's predecessor organizations, did a report to the Secretary on April 1, 1985, that supported periodic rebasing at least every 5 years.

The most recent rebasing of the hospital market basket was just 3 years ago, for the FY 2003 update. Since its inception with the hospital PPS in FY 1984, the hospital market basket has been rebased several times (FY 1987 update, FY 1991 update, FY 1997 update, FY 1998 update, and FY 2003 update). One of the reasons we believe it appropriate to rebase the index on a periodic basis is that rebasing (as opposed to revising, as explained in section IV.A. of this preamble) tends to have only a minor impact on the actual percentage increase applied to the PPS update. There are two major reasons for this: (1) The cost category weights tend to be relatively stable over shorter term periods (3 to 5 years); and (2) the update is based on a forecast, which means the individual price series tend not to grow as differently as they have in some historical periods.

We focused our research in two major areas. First, we reviewed the frequency and availability of the data needed to produce the market basket. Second, we analyzed the impact on the market basket of determining the market basket weights under various frequencies. We did this by developing market baskets that had base years for every year between 1997 and 2002, and then analyzed how different the market basket percent changes were over various periods. We used the results from these areas of research to assist in our determination of a new rebasing frequency. Based on this analysis, we are proposing to rebase the hospital market basket every 4 years. This would mean the next rebasing would occur for the FY 2010 update.

As we have described in numerous Federal Register documents over the past few decades, the hospital market basket weights are the compilation of data from more than one data source. When we are discussing rebasing the weights in the hospital market basket, there are two major data sources: (1) The Medicare cost reports; and (2) expense surveys from the Bureau of the Census (the Economic Census is used to develop data for the Bureau of Economic Analysis' input-output series). We will explore the future availability of each of these data sources.

Each Medicare-participating hospital submits a Medicare cost report to CMS on an annual basis. It takes roughly 2 years before “nearly complete” Medicare cost report data are available. For example, approximately 90 percent of FY 2002 Medicare cost report data were available in October 2004 (only 50 percent of FY 2003 data was available), although only 20 percent of these reports were settled. We choose FY 2002 as the base year because we believe this is the most recent, relatively complete year (with a 90 percent reporting rate) of Medicare cost report data. In developing the hospital market basket weights, we have used the Medicare cost reports to determine the weights for six major cost categories (wages, benefits, contract labor, pharmaceuticals, professional liability, and blood). In FY 2002, these six categories accounted for 68.5 percent of the hospital market basket. Therefore, it is possible to develop a new set of market basket weights for these categories on an annual basis, but with a substantial lag (for the FY 2006 update, we consider the latest year of historical data to be FY 2002).

The second source of data is the U.S. Department of Commerce, Bureau of Economic Analysis' Benchmark Input-Output (I-O) table. These data are published every 5 years with a more significant lag than the Medicare cost reports. For example, the 1997 Benchmark I-O tables were not published until the beginning of 2003. We have sometimes used data from a third data source, the Bureau of the Census' Business Expenses Survey (BES), which is also published every 5 years. The BES data are used as an input into the I-O data, and thus are published a few months prior to the release of the I-O. However, the BES contains only a fraction of the detail contained in the I-O.

Chart 9 below takes into consideration the expected availability of these major data sources and summarizes how they could be incorporated into the development of future market basket weights.

It would be necessary to age the I-O or BES data to the year for which cost report data are available using the price changes between those periods. While not a preferred method in developing the market basket weights, we have done this in the past when rebasing the index. We are proposing to age the 1997 Benchmark I-O data for this proposed rule.

As the table clearly indicates, the most optimal rebasing frequency from a data availability standpoint is every 5 years. That is, if we were to next rebase for the FY 2011 update, we could use the 2002 Benchmark I-O data that would recently be available. In order to match the Medicare cost report data that would be available at that time (FY 2007 data), we would have to age the I-O data to FY 2007. However, this would be aging the data only 5 years, whereas if the rebasing frequency was determined to be every 4 years, we would have to age 1997 I-O data to FY 2006. While aging data over 5 years is problematic (there can be significant utilization and intensity changes over that length period, as opposed to only a year or two), it would be significantly worse to age data over an 8-year or 9-year period. If we were on a 5-year rebasing frequency, for the FY 2016 update, we would use cost report data for FY 2012 and the newly available 2007 I-O data. Again, the I-O data would have to be aged only 5 years to match the cost report data.

We can look at the implications of determining a rebasing frequency of every 3 or 4 years. Considering a frequency of 3 years first, we would next rebase for the FY 2009 update using FY 2005 Medicare cost report data and 1997 I-O data (the same data currently being used in the proposed FY 2002-based market basket). This is problematic because the 1997 I-O data would need to be aged 8 years to match the cost report data. The next two rebasings would be for the FY 2012 update (using FY 2008 cost report data and 2002 I-O data) and FY 2015 (using FY 2011 cost report data and 2002 I-O data). This means that while we are making optimal use of the Medicare cost report data, we would be forced to use the same I-O data in consecutive rebasings and would have to age that data as much as 9 years to use the same year as the cost report data.

For a rebasing frequency of every 4 years, our next rebasing would be for the FY 2010 update using FY 2006 Medicare cost report data and 1997 I-O data. This is also problematic because the 1997 I-O data would need to be aged 9 years to match the cost report data. The next two rebasings would be for the FY 2014 update (using FY 2010 cost report data and 2002 I-O data) and FY 2018 (using FY 2014 cost report data and 2007 I-O data). Again, this frequency would make optimal use of the Medicare cost report data but would require aging of the I-O data between 7 and 9 years in order to match the cost report data.

It is clear from this analysis that neither the 3-year nor 4-year rebasing frequencies makes as good use of all the data as rebasing every 5 years. In addition, when comparing the 3-year and 4-year rebasing frequencies, no one method stands out as being significantly improved over another. Thus, this analysis does not lead us to draw any definitive conclusions as to a rebasing frequency more appropriate than every 5 years.

Our second area of research in determining a new rebasing frequency was to analyze the impact on the market basket of determining the market basket weights under various frequencies. We did this by using the current historical data that are available (both Medicare cost report and I-O) to develop market baskets with base year weights for each year between FY 1997 and FY 2002. We then analyzed how differently the market baskets moved over various historical periods.

Approaching the analysis this way allowed us to develop six hypothetical market baskets with different base years (FY 1997, FY 1998, FY 1999, FY 2000, FY 2001, and FY 2002). As we have done when developing the official market baskets, we used Medicare cost report data where available. Thus, cost report data were used to determine the weights for wages and salaries, benefits, contract labor, pharmaceuticals, blood and blood products, and all other costs. We used the 1997 Benchmark I-O data to fill out the remainder of the market basket weights (note that this produces a different index for FY 1997 than the official FY 1997-based hospital market basket that used the Annual 1997 I-O data), aging the data to the appropriate year to match the cost report data. This means the FY 2002-based index used in this analysis matches the FY 2002-based market basket we are proposing in this rule. Chart 10 shows the weights from these hypothetical market baskets:

Note that the weights remain relatively stable between periods. It is for this reason that we believe defining the market basket as a Laspeyres-type, fixed-weight index is appropriate. Because the weights in the market basket are generally for aggregated costs (for example, wages and salaries for all employees), there is not much volatility in the weights between periods, especially over shorter time spans. As the results of this analysis will show, it is for this reason that rebasing the market basket more frequently than every 5 years is expected to have little impact on the overall percent change in the hospital market basket.

Using these hypothetical market baskets, we can produce market basket percent changes over historical periods to determine what is the impact of using various base periods. In our analysis, we consider the hypothetical FY 1997-based index to be the benchmark measure and the other indexes to indicate the impact of rebasing over various frequencies. The hypothetical FY 2000-based index would reflect the impact of rebasing every 3 years, the hypothetical FY 2001-based index would reflect the impact of rebasing every 4 years, and the hypothetical FY 2002-based index would reflect the impact of rebasing every 5 years. Chart 11 shows the results of these comparisons.

It is clear from this comparison that there is little difference between the indexes, and, for some FYs, there would be no difference in the market basket update factor if we had rebased the market basket more frequently. In particular, there is no difference in the hypothetical indexes based between FY 2000 and FY 2002. This suggests that setting the rebasing frequency to 3, 4, or 5 years will have little or no impact on the resulting market basket. As we found when analyzing data availability, this portion of our research does not suggest that rebasing the market basket more frequently than every 5 years results in an improved market basket or that there is any noticeable difference between rebasing every 3 or 4 years.

Market basket rebasing is a 1-year to 2-year long process that includes data processing, analytical work, methodology reevaluation, and regulatory process. After developing a rebased and revised market basket, there are extensive internal review processes that a rule must undergo, both in proposed and final form. Once the proposed rule has been published, there is a 60-day comment period set aside for the public to respond to the proposed rule. After comments are received, we then need adequate time to research and reply to all comments submitted. The last part of the regulatory process is the 60-day requirement—the final rule must be published 60 days before the provisions of the rule can become effective.

We would like to rebase all of our indexes (PPS operating, PPS capital, excluded hospital with capital, SNFs, HHAs, and Medicare Economic Index) on a regular schedule. Therefore, if we were to choose a 3-year rebasing schedule, we would have to rebase more than one index at a time. This may potentially limit the amount of time we could devote to the market basket rebasing process. In addition, we recognize that, in the future, we may be required to develop additional market baskets that would require frequent rebasing.

Given the number of market baskets we are responsible for rebasing and revising, the regulatory process for each, and the availability of source data, we believe that while it is not necessary, rebasing and revising the hospital market baskets every 4 years is the most appropriate frequency to meet the legislative requirement.

E. Capital Input Price Index Section

The Capital Input Price Index (CIPI) was originally described in the September 1, 1992 Federal Register (57 FR 40016). There have been subsequent discussions of the CIPI presented in the May 26, 1993 (58 FR 30448), September 1, 1993 (58 FR 46490), May 27, 1994 (59 FR 27876), September 1, 1994 (59 FR 45517), June 2, 1995 (60 FR 29229), September 1, 1995 (60 FR 45815), May 31, 1996 (61 FR 27466), and August 30, 1996 (61 FR 46196) issues of the Federal Register. The August 1, 2002 (67 FR 50032) rule discussed the most recent revision and rebasing of the CIPI to a FY 1997 base year, which reflects the capital cost structure facing hospitals in that year.

We are proposing to revise and rebase the CIPI to a FY 2002 base year to reflect the more recent structure of capital costs in hospitals. Unlike the PPS operating market basket, we do not have FY 2002 Medicare cost report data available for the development of the capital cost weights, due to a change in the FY 2002 cost reporting requirements. Rather, we used hospital capital expenditure data for the capital cost categories of depreciation, interest, and other capital expenses for FY 2001 and aged these data to a FY 2002 base year using the relevant vintage-weighted price proxies. As with the FY 1997-based index, we have developed two sets of weights in order to calculate the proposed FY 2002-based CIPI. The first set of proposed weights identifies the proportion of hospital capital expenditures attributable to each expenditure category, while the second set of proposed weights is a set of relative vintage weights for depreciation and interest. The set of vintage weights is used to identify the proportion of capital expenditures within a cost category that is attributable to each year over the useful life of the capital assets in that category. A more thorough discussion of vintage weights is provided later in this section.

Both sets of proposed weights are developed using the best data sources available. In reviewing source data, we determined that the Medicare cost reports provided accurate data for all capital expenditure cost categories. We are proposing to use the FY 2001 Medicare cost reports for PPS hospitals, aged to FY 2002, excluding expenses from hospital-based subproviders, to determine weights for all three cost categories: depreciation, interest, and other capital expenses. We compared the weights determined from the Medicare cost reports to the 2002 Bureau of the Census' Business Expenses Survey and found the weights to be similar to those developed from the Medicare cost reports.

Lease expenses are not broken out as a separate cost category in the CIPI, but are distributed among the cost categories of depreciation, interest, and other, reflecting the assumption that the underlying cost structure of leases is similar to capital costs in general. As was done in previous rebasings of the CIPI, we assumed 10 percent of lease expenses are overhead and assigned them to the other capital expenses cost category as overhead. The remaining lease expenses were distributed to the three cost categories based on the proportion of depreciation, interest, and other capital expenses to total capital costs excluding lease expenses.

Depreciation contains two subcategories: building and fixed equipment and movable equipment. The split between building and fixed equipment and movable equipment was determined using the Medicare cost reports. This methodology was also used to compute the FY 1997-based index.

Total interest expense cost category is split between government/nonprofit and profit interest. The FY 1997-based CIPI allocated 85 percent of the total interest cost weight to government/nonprofit interest, proxied by average yield on domestic municipal bonds, and 15 percent to for-profit interest, proxied by average yield on Moody's Aaa bonds (67 FR 50044). The methodology used to derive this split is explained in the June 2, 1995 issue of the Federal Register (60 FR 29233). We are proposing to derive the split using the relative FY 2001 Medicare cost report data on interest expenses for government/nonprofit and profit hospitals. Based on these data, we are proposing a 75/25 split between government/nonprofit and profit interest. We believe it is important that this split reflects the latest relative cost structure of interest expenses. The proposed split of 75/25 had little (less than 0.1 percent in any given year) or no effect on the annual capital market basket percent change in both the historical and forecasted periods.

Chart 12 presents a comparison of the proposed FY 2002-based CIPI capital cost weights and the FY 1997-based CIPI capital cost weights.

Because capital is acquired and paid for over time, capital expenses in any given year are determined by both past and present purchases of physical and financial capital. The vintage-weighted CIPI is intended to capture the long-term consumption of capital, using vintage weights for depreciation (physical capital) and interest (financial capital). These vintage weights reflect the proportion of capital purchases attributable to each year of the expected life of building and fixed equipment, movable equipment, and interest. We used the vintage weights to compute vintage-weighted price changes associated with depreciation and interest expense.

Vintage weights are an integral part of the CIPI. Capital costs are inherently complicated and are determined by complex capital purchasing decisions, over time, based on such factors as interest rates and debt financing. In addition, capital is depreciated over time instead of being consumed in the same period it is purchased. The CIPI accurately reflects the annual price changes associated with capital costs, and is a useful simplification of the actual capital investment process. By accounting for the vintage nature of capital, we are able to provide an accurate, stable annual measure of price changes. Annual nonvintage price changes for capital are unstable due to the volatility of interest rate changes and, therefore, do not reflect the actual annual price changes for Medicare capital-related costs. CMS' CIPI reflects the underlying stability of the capital acquisition process and provides hospitals with the ability to plan for changes in capital payments.

To calculate the vintage weights for depreciation and interest expenses, we needed a time series of capital purchases for building and fixed equipment and movable equipment. We found no single source that provides the best time series of capital purchases by hospitals for all of the above components of capital purchases. The early Medicare cost reports did not have sufficient capital data to meet this need. While the AHA Panel Survey provided a consistent database back to 1963, it did not provide annual capital purchases. The AHA Panel Survey provided a time series of depreciation expenses through 1997 which could be used to infer capital purchases over time. From 1998 to 2001, hospital depreciation expenses were calculated by multiplying the AHA Annual Survey total hospital expenses by the ratio of depreciation to total hospital expenses from the Medicare cost reports. Beginning in 2001, the AHA Annual Survey began collecting depreciation expenses. We hope to be able to use these data in future rebasings.

In order to estimate capital purchases from AHA data on depreciation expenses, the expected life for each cost category (building and fixed equipment, movable equipment, and interest) is needed to calculate vintage weights. We used FY 2001 Medicare cost reports to determine the expected life of building and fixed equipment and movable equipment. The expected life of any piece of equipment can be determined by dividing the value of the asset (excluding fully depreciated assets) by its current year depreciation amount. This calculation yields the estimated useful life of an asset if depreciation were to continue at current year levels, assuming straight-line depreciation. From the FY 2001 cost reports, the expected life of building and fixed equipment was determined to be 23 years, and the expected life of movable equipment was determined to be 11 years. The FY 1997-based CIPI showed the same expected life for the two categories of depreciation.

Although we are proposing to use this methodology for deriving the useful life of an asset, we intend to conduct a further review of the methodology between the publication of this proposed rule and the final rule. We plan to review alternate data sources, if available, and analyze in more detail the hospital's capital cost structure reported in the Medicare cost reports.

We are proposing to use the building and fixed equipment and movable equipment weights derived from FY 2001 Medicare cost reports to separate the depreciation expenses into annual amounts of building and fixed equipment depreciation and movable equipment depreciation. Year-end asset costs for building and fixed equipment and movable equipment were determined by multiplying the annual depreciation amounts by the expected life calculations from the FY 2001 Medicare cost reports. We then calculated a time series back to 1963 of annual capital purchases by subtracting the previous year asset costs from the current year asset costs. From this capital purchase time series, we were able to calculate the vintage weights for building and fixed equipment and movable equipment. Each of these sets of vintage weights is explained in detail below.

For building and fixed equipment vintage weights, the real annual capital purchase amounts for building and fixed equipment derived from the AHA Panel Survey were used. The real annual purchase amount was used 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, the Boeckh Institutional Construction Index. Because building and fixed equipment have an expected life of 23 years, the vintage weights for building and fixed equipment are deemed to represent the average purchase pattern of building and fixed equipment over 23-year periods. With real building and fixed equipment purchase estimates available back to 1963, we averaged sixteen 23-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 23-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 23-year period. This calculation is done for each year in the 23-year period, and for each of the sixteen 23-year periods. We are proposing to use the average of each year across the sixteen 23-year periods to determine the 2002 average building and fixed equipment vintage weights for the FY 2002-based CIPI.

For movable equipment vintage weights, the real annual capital purchase amounts for movable equipment derived from the AHA Panel Survey 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 amount by the movable equipment price proxy, the PPI for Machinery and Equipment. 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 back to 1963, twenty-eight 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 twenty-eight 11-year periods. We are proposing to use the average of each year across the twenty-eight 11-year periods to determine the average movable equipment vintage weights for the FY 2002-based CIPI.

For interest vintage weights, the nominal annual capital purchase amounts for total equipment (building and fixed, and movable) derived from the AHA Panel and Annual Surveys were used. Nominal annual purchase amounts were used to capture the value of the debt instrument. Because we have determined that hospital debt instruments have an expected life of 23 years, the vintage weights for interest are deemed to represent the average purchase pattern of total equipment over 23-year periods. With nominal total equipment purchase estimates available back to 1963, sixteen 23-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 23-year period are calculated by dividing the nominal total capital purchase amount for any given year by the total amount of purchases in the 23-year period. This calculation is done for each year in the 23-year period and for each of the sixteen 23-year periods. We are proposing to use the average of each year across the sixteen 23-year periods to determine the average interest vintage weights for the FY 2002-based CIPI. The vintage weights for the FY 1997 CIPI and the proposed FY 2002 CIPI are presented in Chart 13.

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. Our proposed price proxies for the FY 2002-based CIPI are the same as those used in the FY 1997-based CIPI. We still believe these are the most appropriate proxies for hospital capital costs that meet our selection criteria of relevance, timeliness, availability, and reliability. We ran the proposed FY 2002-based index using the Moody's Aaa bonds average yield and then using the Moody's Baa bonds average yield as proxy for the for-profit interest cost category. There was no difference in the two sets of index percent changes either historically or forecasted. The rationale for selecting these price proxies is explained more fully in the August 30, 1996 final rule (61 FR 46196). The proposed proxies are presented in Chart 14.

Global Insight, Inc. forecasts a 0.7 percent increase in the FY 2002-based CIPI for 2006, as shown in Chart 15. This is the result of a 1.3 percent increase in projected depreciation prices (building and fixed equipment, and movable equipment) and a 2.7 percent increase in other capital expense prices, partially offset by a 2.3 percent decrease in vintage-weighted interest rates in FY 2006, as indicated in Chart 15. Accordingly, we are proposing a 0.7 percent increase in the CIPI.

Rebasing the CIPI from FY 1997 to FY 2002 decreased the percent change in the FY 2006 forecast by 0.1 percentage point, from 0.8 to 0.7, as shown in Chart 12. The difference is caused mostly by changes in the relationships between the cost category weights within depreciation and interest. The fixed depreciation cost weight relative to the movable depreciation cost weight and the nonprofit/government interest cost weight relative to the for-profit interest cost weight are both less in the FY 2002-based CIPI. The changes in these relationships have a small effect on the FY 2002-based CIPI percent changes. However, when added together, they are responsible for a negative one-tenth percentage point difference between the FY 2002-based CIPI and the FY 1997-based CIPI.

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

A. Postacute Care Transfer Payment Policy (§ 412.4)

(If you choose to comment on issues in this section, please include the caption “Postacute Care Transfers” at the beginning of your comment.)

1. Background

Existing regulations at § 412.4(a) define discharges under the IPPS as situations in which a patient is formally released from an acute care hospital or dies in the hospital. Section 412.4(b) defines transfers from one acute care hospital to another, and § 412.4(c) defines transfers to certain postacute care providers. Our policy provides that, in transfer situations, full payment is made to the final discharging hospital and each transferring hospital is paid a per diem rate for each day of the stay, not to exceed the full DRG payment that would have been made if the patient had been discharged without being transferred.

The per diem rate paid to a transferring hospital is calculated by dividing the full DRG payment by the geometric mean length of stay for the DRG. Based on an analysis that showed that the first day of hospitalization is the most expensive (60 FR 45804), our policy provides for payment that is double the per diem amount for the first day (§ 412.4(f)(1)). Transfer cases are also eligible for outlier payments. The outlier threshold for transfer cases is equal to the fixed-loss outlier threshold for nontransfer cases, divided by the geometric mean length of stay for the DRG, multiplied by the length of stay for the case, plus one day. The purpose of the IPPS transfer payment policy is to avoid providing an incentive for a hospital to transfer patients to another hospital early in the patients' stay in order to minimize costs while still receiving the full DRG payment. The transfer policy adjusts the payments to approximate the reduced costs of transfer cases.

2. Changes to DRGs Subject to the Postacute Care Transfer Policy (§§ 412.4(c) and (d))

Section 1886(d)(5)(J) of the Act provides that, effective for discharges on or after October 1, 1998, a “qualified discharge” from one of 10 DRGs selected by the Secretary to a postacute care provider would be treated as a transfer case. This section required the Secretary to define and pay as transfers all cases assigned to one of 10 DRGs selected by the Secretary, if the individuals are discharged to one of the following postacute care settings:

  • A hospital or hospital unit that is not a subsection 1886(d) hospital. (Section 1886(d)(1)(B) of the Act identifies the hospitals and hospital units that are excluded from the term “subsection (d) hospital” as psychiatric hospitals and units, rehabilitation hospitals and units, children's hospitals, long-term care hospitals, and cancer hospitals.)
  • A SNF (as defined at section 1819(a) of the Act).
  • Home health services provided by a home health agency, if the services relate to the condition or diagnosis for which the individual received inpatient hospital services, and if the home health services are provided within an appropriate period (as determined by the Secretary).

In the July 31, 1998 IPPS final rule (63 FR 40975 through 40976), we specified that a patient discharged to home would be considered transferred to postacute care if the patient received home health services within 3 days after the date of discharge. In addition, in the July 31, 1998 final rule, we did not include patients transferred to a swing-bed for skilled nursing care in the definition of postacute care transfer cases (63 FR 40977).

Section 1886(d)(5)(J) of the Act directed the Secretary to select 10 DRGs based upon a high volume of discharges to postacute care and a disproportionate use of postacute care services. As discussed in the July 31, 1998 final rule, these 10 DRGs were selected in 1998 based on the MedPAR data from FY 1996. Using that information, we identified and selected the first 20 DRGs that had the largest proportion of discharges to postacute care (and at least 14,000 such transfer cases). In order to select 10 DRGs from the 20 DRGs on our list, we considered the volume and percentage of discharges to postacute care that occurred before the mean length of stay and whether the discharges occurring early in the stay were more likely to receive postacute care. We identified 10 DRGs to be subject to the postacute care transfer rule starting in FY 1999.

Section 1886(d)(5)(J)(iv) of the Act authorizes the Secretary to expand the postacute care transfer policy for FY 2001 or subsequent fiscal years to additional DRGs based on a high volume of discharges to postacute care facilities and a disproportionate use of postacute care services. In the FY 2004 IPPS final rule (68 FR 45412), we expanded the postacute care transfer policy to include additional DRGs. We established the following criteria that a DRG must meet, for both of the 2 most recent years for which data are available, in order to be included under the postacute care transfer policy:

  • At least 14,000 postacute care transfer cases;
  • At least 10 percent of its postacute care transfers occurring before the geometric mean length of stay;
  • A geometric mean length of stay of at least 3 days; and
  • If a DRG is not already included in the policy, a decline in its geometric mean length of stay during the most recent 5-year period of at least 7 percent.

In the FY 2004 IPPS final rule, we identified 21 new DRGs that met these criteria. We also determined that one DRG from the original group of 10 DRGs (DRG 263) no longer met the volume criterion of 14,000 transfer cases. Therefore, we removed DRGs 263 and 264 (DRG 264 is paired with DRG 263) from the policy and expanded the postacute care transfer policy to include payments for transfer cases in the new 21 DRGs, effective October 1, 2003. As a result, a total of 29 DRGs were subject to the postacute care transfer policy in FY 2004. In the FY 2004 IPPS final rule, we indicated that we would review and update this list periodically to assess whether additional DRGs should be added or existing DRGs should be removed (68 FR 45413).

For FY 2005, we analyzed the available data from the FY 2003 MedPAR file. For the 2 most recent years of available data (FY 2002 and FY 2003), we found that no additional DRGs qualified under the four criteria set forth in the IPPS final rule for FY 2004. We also analyzed the DRGs included under the policy for FY 2004 to determine if they still met the criteria to remain under the policy. In addition, we analyzed the special circumstances arising from a change to one of the DRGs included under the policy in FY 2004.

In the FY 2005 IPPS final rule (69 FR 48942), we deleted DRG 483 (Tracheostomy With Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth, and Neck Diagnosis) and established the following new DRGs as replacements: DRG 541 (Tracheostomy With Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth and Neck Diagnoses With Major O.R. Procedure) and DRG 542 (Tracheostomy with Mechanical Ventilation 96+ Hours or Principal Diagnosis Except Face, Mouth and Neck Diagnoses Without Major O.R. Procedure). Cases in the existing DRG 483 were assigned to the new DRGs 541 and 542 based on the presence or absence of a major O.R. procedure, in addition to the tracheostomy code that was previously required for assignment to DRG 483. Specifically, if the patient's case involves a major O.R. procedure (a procedure whose code is included on the list that is assigned to DRG 468 (Extensive O.R. Procedure Unrelated to Principal Diagnosis), except for tracheostomy codes 31.21 and 31.29), the case is assigned to the DRG 541. If the patient does not have an additional major O.R. procedure (that is, if there is only a tracheostomy code assigned to the case), the case is assigned to DRG 542.

Based on data analysis, we determined that neither DRG 541 nor DRG 542 would have enough cases to meet the existing threshold of 14,000 transfer cases for inclusion in the postacute care transfer policy. Nevertheless, we believed the cases that would be incorporated into these two DRGs remained appropriate candidates for application of the postacute care transfer policy and that the subdivision of DRG 483 should not change the original application of the postacute care transfer policy to the cases once included in that DRG. Therefore, for FY 2005, we proposed alternate criteria to be applied in cases where DRGs do not satisfy the existing criteria, for discharges occurring on or after October 1, 2004 (69 FR 28273 and 28374). The proposed new criteria were designed to address situations such as those posed by the split of DRG 483, where there remain substantial grounds for inclusion of cases within the postacute care transfer policy, although one or more of the original criteria may no longer apply. Under the proposed alternate criteria, DRGs 430, 541, and 542 would have qualified for inclusion in the postacute care transfer policy.

In the response to comments on our FY 2005 proposal, we decided not to adopt the proposed alternate criteria for including DRGs under the postacute care transfer policy in the FY 2005 IPPS final rule. Instead we adopted the policy of simply grandfathering, for a period of 2 years, any cases that were previously included within a DRG that has split, when the split DRG qualified for inclusion in the postacute care transfer policy for both of the previous 2 years. Under this policy, the cases that were previously assigned to DRG 483 and that now fall into DRGs 541 and 542 continue to be subject to the policy. Therefore, effective for discharges on or after October 1, 2004, 30 DRGs, including new DRGs 541 and 542, are subject to the postacute care transfer policy. We indicated that we would monitor the frequency with which these cases are transferred to postacute care settings and the percentage of these cases that are short-stay transfer cases. Because we did not adopt the proposed alternate criteria for DRG inclusion in the postacute care transfer policy, DRG 430 (Psychoses) did not meet the criteria for inclusion and has not been subject to the postacute care transfer policy for FY 2005. We also invited comments on how to treat the cases formerly included in a split DRG after the grandfathering period.

We note that some commenters also suggested that, in place of the proposed alternate criteria, we should adopt a policy of permanently applying the postacute care transfer policy to a DRG once it has initially qualified for inclusion in the policy. These commenters noted that removing DRGs from the postacute care transfer policy makes the payment system less stable and results in inconsistent incentives over time. They also argued that “a drop in the number of transfers to postacute care settings is to be expected after the transfer policy is applied to a DRG, but the frequency of transfers may well rise again if the DRG is removed from the policy.” We indicated that we would consider adopting this general policy once we had evaluated the experience with the specific cases that are subject to the grandfathering policy for FY 2005 and FY 2006.

In the May 18, 2004 proposed rule, we also called attention to the data concerning DRG 263, which was subject to the postacute care transfer policy until FY 2004. We removed DRG 263 from the postacute care transfer policy for FY 2004 because it did not have the minimum number of cases (14,000) transferred to postacute care (13,588 transfer cases in FY 2002, with more than 50 percent of transfer cases being short-stay transfers). The FY 2003 MedPAR data show that there were 15,602 transfer cases in the DRG in FY 2003, of which 46 percent were short-stay transfers. Because we removed the DRG from the postacute care transfer policy in FY 2004, it must meet all criteria to be included under the policy in subsequent fiscal years. Because the geometric mean length of stay for DRG 263 showed only a 6-percent decrease since 1999, DRG 263 did not qualify to be added to the policy for FY 2005 under the existing criteria that were included in last year's rule. DRG 263 would have qualified under the volume threshold and percent of short-stay transfer cases under the proposed new alternate criteria contained in the FY 2005 proposed rule. However, it still would not have met the proposed required decline in length of stay to qualify to be added to the policy for FY 2005. We indicated that we would continue to monitor the experience with DRG 263, especially in light of the comment that recommended a general policy of grandfathering cases that qualify under the criteria for inclusion in the postacute care transfer policy.

The table below displays the 30 DRGs that are included in the postacute care transfer policy, effective for discharges occurring on or after October 1, 2004.

For this year's proposed rule, we have conducted an extensive analysis of the FY 2003 and FY 2004 MedPAR data to monitor the effects of the postacute care transfer policy. We have also conducted an overall assessment of the postacute care transfer policy since its inception in FY 1999. Specifically, we have examined the relationship between rates of postacute care utilization and the geometric mean length of stay and the relationship between a high volume and a high proportion of postacute care transfers within a DRG in light of experience under the current policy. Specifically, we examined whether a decline in the geometric mean length of stay is associated with an increase in the volume and proportion of total cases in a DRG that are discharges to postacute care. We analyzed these data as part of determining whether to retain the criteria that a DRG must have a decline in the geometric mean length of stay of at least 7 percent in the previous 5-year period to be included under the postacute care transfer policy.

Our current criteria for inclusion in the postacute care transfer policy include a requirement that, if a DRG is not already included in the policy, there must be a decline of at least 7 percent in the DRG's geometric mean length of stay during the most recent 5-year period. It has come to our attention that not all DRGs that experience an increase in postacute care utilization also experience a decrease in geometric mean length of stay. In fact, some DRGs with increases in postacute care utilization during the past several years have also experienced an increase in the geometric mean length of stay. The table below lists a number of DRGs that experienced increases in postacute care utilization and increases in the geometric mean length of stay from FY 2002 through FY 2004:

Our current criteria also include a requirement that a DRG have at least 14,000 total postacute care transfer cases in order to be included in the policy. We have examined the data on the numbers of transfers and the percentage of postacute care transfer cases across DRGs. Among the 30 DRGs currently included within the postacute care transfer policy, the percentage of postacute care transfer cases ranges from a low of 15 percent to a high of 76 percent. Among DRGs that are not currently included within the policy, many have a relatively high percentage of postacute care transfer cases in proportion to the total volume of cases for the DRG or a relatively high volume of discharges to postacute care facilities, or both. For this reason, we reviewed the data for all DRGs before proposing a change to the postacute care transfer payment policy. As part of this review, we found that:

  • Of 550 DRGs, 26 have been deactivated and 17 have no cases in the FY 2004 MedPAR files. We are not proposing any changes for these DRGs because application of the postacute care transfer policy to them would have no effect.
  • Of the remaining 507 DRGs, 220 have geometric mean lengths of stay that are less than 3.0 days. Because the transfer payment policy provides 2 times the per diem rate for the first day of care (due to the large proportion of charges incurred on the first day of a patient's treatment), including these DRGs in the transfer policy would be relatively meaningless as they would all receive a full DRG payment. For this reason, we are not proposing any changes to the postacute care transfer policy for these DRGs.
  • Of the remaining 287 DRGs, 64 have fewer than 100 short-stay transfer cases. In addition, 39 of these 64 DRGs have fewer than 50 short-stay transfer cases. Consistent with the statutory guidance, we are not proposing any change to how we apply the postacute care transfer payment policy to these DRGs because we believe that these DRGs do not have a high volume of discharges to postacute care facilities or involve a disproportionate use of postacute care services.

Once we eliminated the DRGs cited above from consideration for the postacute care transfer policy, we examined the characteristics of the remaining 223 DRGs. We found that these DRGs had three common characteristics:

  • The DRG had at least 2,000 total postacute care transfer cases.
  • At least 20 percent of all cases in the DRG were discharged to postacute care settings.
  • 10 percent of all discharges to postacute care were prior to the geometric mean length of stay for the DRG.

Consistent with the statutory guidance giving the Secretary the authority to make a DRG subject to the postacute care transfer policy based on a high volume of discharges to postacute care facilities and a disproportionate use of postacute care services, we believe these DRGs have characteristics that make them appropriate for inclusion in the postacute care transfer policy.

As a result of our analysis, we believe that it is appropriate to consider major revisions to the criteria for including a DRG within the postacute care transfer policy. First, our analysis calls into question the requirement that a DRG experience a decline in the geometric mean length of stay over the most recent 5-year period. Our findings that some DRGs with increases in postacute care utilization during the past several years have also experienced increases in geometric mean length of stay indicate that this criterion is no longer effective to identify those DRGs that should be subject to the postacute care transfer policy. In addition, our findings about the number of DRGs with relatively high volumes (at least 2,000 cases) and relatively high proportions (at least 20 percent) of postacute care utilization suggest that we should revise the requirement that a DRG have at least 14,000 total postacute care transfer cases to be included within the postacute care transfer policy.

Our analysis does confirm that it is appropriate to maintain the requirement that a DRG must have a geometric mean length of stay of at least 3.0 days in order to be included within the postacute care transfer policy. We believe that this policy should be retained because, under the transfer payment methodology, hospitals receive the entire payment for cases in these DRGs in the first 2 days of the stay. Lowering the limit below 3.0 days would, therefore, have no effect on payment for DRGs with geometric mean lengths-of-stay in this range. For the reasons discussed in the May 19, 2003 proposed rule (68 FR 27199) and because it is a common characteristic of DRGs with a large number of cases discharged to postacute care, we also continue to believe that it is appropriate to retain the criterion that at least 10 percent of all cases that are transferred to postacure care should be short-stay cases where the patient is transferred before the geometric mean length of stay for the DRG. We also continue to believe that both DRGs in a CC/non-CC pair should be subject to the postacute care transfer policy if one of the DRGs meets the criteria for inclusion. By including both DRGs in a CC/non-CC pair, our policy will preclude an incentive for hospitals to code cases in ways designed to avoid triggering the application of the policy, for example, by excluding codes that would identify a complicating or comorbid condition in order to assign a case to a non-CC DRG that is not subject to the policy.

Therefore, we are considering substantial revisions to the four criteria that are currently used to determine whether a DRG qualifies for inclusion in the postacute care transfer policy. The current criteria provide that, in order to be included within the policy, a DRG must have, for both of the 2 most recent years for which data are available:

  • At least 14,000 total postacute care transfer cases;
  • At least 10 percent of its postacute care transfers occurring before the geometric mean length of stay;
  • A geometric mean length of stay of at least 3 days;
  • If a DRG is not already included in the policy, a decline in its geometric mean length of stay during the most recent 5-year period of at least 7 percent; and
  • If the DRG is one of a paired set of DRGs based on the presence or absence of a comorbidity or complication, both paired DRGs are included if either one meets the first three criteria above.

As a result of our analysis, we considered two options for revising the current criteria. Option 1 is to include all DRGs within the postacute care transfer policy. This option has the advantage of providing consistent treatment of all DRGs. However, as we discussed above, our analysis tends to indicate that, at a minimum, it may be appropriate to maintain the requirement that a DRG must have a geometric mean length of stay of at least 3.0 days because, under the transfer payment methodology, hospitals receive the entire payment for these DRGs in the first 2 days of the stay. Lowering the limit below 3.0 days, would therefore have little or no effect on payment for DRGs with geometric mean lengths of stay in this range.

Option 2 that we considered is to expand the application of the postacute care transfer policy by applying the policy to any DRG that meets the following criteria:

  • The DRG has at least 2,000 postacute care transfer cases;
  • At least 20 percent of the cases in the DRG are discharged to postacute care;
  • Out of the cases discharged to postacute care, at least 10 percent occur before the geometric mean length of stay for the DRG;.
  • The DRG has a geometric mean length of stay of at least 3.0 days;
  • If the DRG is one of a paired set of DRGs based on the presence or absence of a comorbidity or complication, both paired DRGs are included if either one meets the first three criteria above.

Option 2 would expand the application of the postacute care transfer policy to 223 DRGs that have both a relatively high volume and a relatively high proportion of postacute care utilization. The proposed change would also avoid applying the postacute care transfer policy to DRGs with only a small number or proportion of cases transferred to postacute care. The table below shows the DRGs that would be included in the postacute care transfer policy under this option:

We believe that the analysis that we have conducted suggest that substantial revisions to the criteria for including a DRG within the postacute care transfer policy are warranted. In this proposed rule, we are formally proposing Option 2 as presented above. However, we invite comments on both of these options and on the analysis that we have presented.

The impact section in Appendix A of this proposed rule discusses our findings on the effects of adopting Option 2. The proposed DRG relative weights included in Tables 5 and 7 of the Addendum to this proposed rule also include the effect of changing the postacute care transfer policy as described in Option 2 above. We note that if we adopt either option discussed above, or a variation based on comments submitted, we would follow procedures similar to those that are currently followed for treating cases identified as transfers in the DRG recalibration process. That is, as described in the discussion of DRG recalibration in section II.C. of the preamble to this proposed rule, additional transfer cases would be counted as a fraction of a case based on the ratio of a hospital's transfer payment under the per diem payment methodology to the full DRG payment for nontransfer cases.

Section 1886(d)(5)(J)(i) of the Act recognizes that, in some cases, a substantial portion of the cost of care is incurred in the early days of the inpatient stay. Similar to the policy for transfers between two acute care hospitals, transferring hospitals receive twice the per diem rate for the first day of treatment and the per diem rate for each following day of the stay before the transfer, up to the full DRG payment, for cases discharged to postacute care. However, three of the DRGs subject to the postacute care transfer policy exhibit an even higher share of costs very early in the hospital stay in postacute care transfer situations. For these DRGs, hospitals receive 50 percent of the full DRG payment plus the single per diem (rather than double the per diem) for the first day of the stay and 50 percent of the per diem for the remaining days of the stay, up to the full DRG payment.

In previous years, we determined that DRGs 209 and 211 met this cost threshold and qualified to receive this special payment methodology. Because DRG 210 is paired with DRG 211, we include payment for cases in that DRG for the same reason we include paired DRGs in the postacute care transfer policy (to eliminate any incentive to code incorrectly in order to receive higher payment for those cases). The FY 2004 MedPAR data show that DRGs 209 and 211 continue to have charges on the first day of the stay that are higher than 50 percent of the average charges in the DRGs. In addition, several of the DRGs that may be added to the postacute care transfer policy under the options that we are considering may also meet the 50 percent threshold in their average charges. We have identified those additional DRGs that are subject to the special payment methodology in Tables 5 and 7 of the Addendum to this proposed rule.

B. Reporting of Hospital Quality Data for Annual Hospital Payment Update (§ 412.64(d)(2))

(If you choose to comment on issues in this section, please include the caption “Hospital Quality Data” at the beginning of your document.)

1. Background

Section 1886(b)(3)(B)(vii) of the Act, as added by section 501(b) of Pub. L. 108-173 revised the mechanism used to update the standardized amount of payment for inpatient hospital operating costs. Specifically, the statute provides for a reduction of 0.4 percentage points to the update percentage increase (also known as the market basket update) for each of FYs 2005 through 2007 for any “subsection (d) hospital” that does not submit data on a set of 10 quality indicators established by the Secretary as of November 1, 2003. The statute also provides that any reduction will apply only to the fiscal year involved, and will not be taken into account in computing the applicable percentage increase for a subsequent fiscal year. This measure establishes an incentive for IPPS hospitals to submit data on the quality measures established by the Secretary.

We initially implemented section 1886(b)(3)(B)(vii) of the Act in the FY 2005 IPPS final rule (August 11, 2004, 69 FR 49078) in continuity with the Department's Hospital Quality Initiative as described at the CMS Web site: http://www.cms.hhs.gov/quality/hospitals. At a press conference on December 12, 2002, the Secretary of the Department of Health and Human Services (HHS) announced a series of steps that HHS and its collaborators were taking to promote public reporting of hospital quality information. These collaborators include the American Hospital Association, the Federation of American Hospitals, the Association of American Medical Colleges, the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), the National Quality Forum, the American Medical Association, the Consumer-Purchaser Disclosure Project, the American Association of Retired Persons, the American Federation of Labor-Congress of Industrial Organizations, the Agency for Healthcare Research and Quality, as well as CMS, Quality Improvement Organizations (QIOs), and others.

In July 2003, CMS began the National Voluntary Hospital Reporting Initiative (NVHRI), now known as the Hospital Quality Alliance (HQA): Improving Care through Information. Data from this initiative have been used to populate a professional Web site providing data to healthcare professionals. This website will be followed by the development of a consumer Web site in an easy-to-use format. The consumer Web site is intended to be an important tool for individuals to use in making decisions about health care options. This information will assist beneficiaries by providing comparison information for consumers who need to select a hospital. It will also serve as a way to encourage accountability of hospitals for the care they provide to patients.

The 10 measures that were employed in this voluntary initiative as of November 1, 2003, are:

  • Heart Attack (Acute Myocardial Infarction)

Was aspirin given to the patient upon arrival to the hospital?

Was aspirin prescribed when the patient was discharged?

Was a beta-blocker given to the patient upon arrival to the hospital?

Was a beta-blocker prescribed when the patient was discharged?

Was an ACE inhibitor given for the patient with heart failure?

  • Heart failure

Did the patient get an assessment of his or her heart function?

Was an ACE inhibitor given to the patient?

  • Pneumonia

Was an antibiotic given to the patient in a timely way?

Had a patient received a pneumococcal vaccination?

Was the patient's oxygen level assessed?

These measures have been endorsed by the National Quality Forum (NQF) and are a subset of the same measures currently collected for the JCAHO by its accredited hospitals. The Secretary adopted collection of data on these 10 quality measures in order to: (1) provide useful and valid information about hospital quality to the public; (2) provide hospitals with a sense of predictability about public reporting expectations; (3) begin to standardize data and data collection mechanisms; and (4) foster hospital quality improvement. Many hospitals are currently participating in the National Voluntary Hospital Reporting Initiative (NVHRI), and are submitting data to the QIO Clinical Warehouse for that purpose.

Over the next several years, hospitals are encouraged to take steps toward the adoption of electronic medical records (EMRs) that will allow for reporting of clinical quality data from the electronic record directly to a CMS data repository. CMS intends to begin working toward creating measures specifications and a system or mechanism, or both, that will accept the data directly without requiring the transfer of the raw data into an XML file as currently exists. The Department is presently working cooperatively with other Federal agencies in the development of Federal health architecture data standards. CMS encourages hospitals that are developing systems to conform them to both industry standards and the Federal health architecture data standards, and to ensure that they would capture the data necessary for quality measures. Ideally, such systems will also provide point-of-care decision support that enables high levels of performance on the measures. Hospitals using EMRs to produce data on quality measures will be held to the same performance expectations as hospitals not using EMRs. We are exploring requirements for the submission of electronically produced data and other options to encourage the submission of such data, and invite comments on this issue.

2. Requirements for Hospital Reporting of Quality Data

The procedures for participating in the Reporting Hospital Quality Data for the Annual Payment Update (RHQDAPU) program created in accordance with section 501(b) of Pub. L. 108-173 can be found on the QualityNet Exchange at the Web site: http://www.qnetexchange.org in the “Reporting Hospital Quality Data for Annual Payment Update Reference Checklist”. This checklist also contains all of the forms to be completed by hospitals participating in the program. In order to participate in the hospital reporting initiative, hospitals must follow these steps:

  • The hospital must identify a QualityNet Exchange Administrator who follows the registration process and submits the information through the QIO. This must be done regardless of whether the hospital uses a vendor for transmission of data.
  • All participants must first register with the QualityNet Exchange, regardless of the method used for data submission. If a hospital is currently participating in the voluntary reporting initiative, re-registration on QualityNet Exchange is unnecessary. However, the hospital must complete the Reporting Hospital Quality Data for Annual Payment Update Notice of Participation form. All hospitals must send this form to their QIOs.
  • The hospital must collect data for all 10 measures and submit the data to the QIO Clinical Warehouse either using the CMS Abstraction Reporting Tool (CART), the JCAHO Oryx Core Measures Performance Measurement System (PMS), or another third-party vendor that has met the measurement specification requirements for data transmission to QualityNet Exchange. The QIO Clinical Warehouse will submit the data to CMS on behalf of the hospitals. The submission will be done through QualityNet Exchange, which is a secure site that voluntarily meets or exceeds all current Health Insurance Portability and Accountability Act (HIPAA) requirements, while maintaining QIO confidentiality as required under the relevant regulations and statutes. The information in the Clinical Warehouse is considered QIO data and, therefore, is subject to the stringent QIO confidentiality regulations in 42 CFR Part 480.

For the first year of the program, FY 2005, hospitals were required to begin the submission of data by July 1, 2004, under the provisions of section 1886(b)(3)(B)(vii)(II) of the Act, as added by section 501(b) of Pub. L. 108-173. Because section 501(b) of Pub. L. 108-173 granted a 30-day grace period for submission of data for purposes of the FY 2005 update, hospitals were given until August 1, 2004, for completed submissions to be successfully accepted into the QIO Clinical Warehouse. Hospitals were required to submit data for the first calendar quarter of 2004. We received data from over 98 percent of the eligible hospitals.

For FY 2006, we are proposing that hospitals must continuously submit the required 10 measures each quarter according to the schedule found on the Web site at http://www.qnetexchange.org. New facilities must submit the data using the same schedule, as dictated by the quarter they begin discharging patients. We will expect that all hospitals will have submitted data to the QIO Clinical Warehouse for discharges through the fourth quarter of calendar year 2004 (October to December 2004). Hospitals have 41/2months from the end of the fourth quarter until the closing of the warehouse (from December 31, 2004, until May 15, 2005) to make sure there are no errors in the submitted data. The warehouse is closed at that time in order to draw the validation sample and to begin preparing the public file for Hospital Compare public reporting. Data from fourth quarter 2004 discharges (October through December 2004) will be the last quarter of data with a submission deadline (May 15, 2005) that precedes our deadline for certifying the hospitals eligible to receive the full update for FY 2006. As we required for FY 2005, the data for each quarter must be submitted on time and pass all of the edits and consistency checks required in the clinical warehouse. Hospitals that do not treat a condition or have very few discharges will not be penalized and will receive the full annual payment update if they submit all the data they do possess.

New hospitals should begin collecting and reporting data immediately and complete the registration requirements for the RHQDAPU. New hospitals will be held to the same standard as established facilities when determining the expected number of discharges for the calendar quarters covered for each fiscal year. The annual payment updates would be based on the successful submission of data to CMS via the QIO Clinical Warehouse by the established deadlines.

For FY 2005, hospitals could withdraw from RHQDAPU at any time up to August 1, 2004. Hospitals withdrawing from the program did not receive the full market basket update and, instead, received a reduction of 0.4 percentage points in their update. By law, a hospital's actions each year will not affect its update in a subsequent year. Therefore, a hospital must meet the requirements for RHQDAPU each year the program is in effect. Failure of a hospital to receive the full update in one year does not affect its update in a succeeding year.

For the first year, FY 2005, there were no chart-audit validation criteria in place. Based upon our experience from the FY 2005 submissions, and upon our requirement for reliable and valid data, we are proposing to place the following additional requirements on hospitals for the data for the FY 2006 payment update. These requirements, as well as additional information on validation requirements, will be placed on QualityNet Exchange.

  • The hospital must have passed our validation requirement of a minimum of 80 percent reliability, based upon our chart-audit validation process, for the third quarter data of calendar year 2004 in order to receive the full market basket update in FY 2006. These data were due to the clinical warehouse by February 15, 2005. We will use appropriate confidence intervals to determine if a hospital has achieved an 80-percent reliability. The use of confidence intervals will allow us to establish an appropriate range below the 80-percent reliability threshold that will demonstrate a sufficient level of validity to allow the data to still be considered valid. We will estimate the percent reliability based upon a review of five charts and then calculate the upper 95 percent confidence limit for that estimate. If this upper limit is above the required 80 percent, the hospital data will be considered validated. We are proposing to use the design specific estimate of the variance for the confidence interval calculation, which, in this case, is a single stage cluster sample, with unequal cluster sizes. (For reference, see Cochran, William G. (1977) Sampling Techniques, John Wiley Sons, New York, chapter 3, section 3.12.)

We will use a two-step process to determine if a hospital is submitting valid data. At the first step, we will calculate the percent agreement for all of the variables submitted in all of the charts, whether or not they are related to the 10 measures. If a hospital falls below the 80 percent cutoff, we will then restrict the comparison to those variables associated with the 10 measures required under section 501(b) of Pub. L. 108-173. We will recalculate the percent agreement and the estimated 95 percent confidence interval and again compare to the 80 percent cutoff point. If a hospital passes under this restricted set of variables, the hospital will be considered to be submitting valid data for purposes of this proposed rule.

Under the standard appeal process, all hospitals are given the detailed results of the Clinical Data Abstraction Center (CDAC) reabstraction along with their estimated percent reliability and the upper bound of the 95 percent confidence interval. If a hospital disagrees with any of the abstraction results from the CDAC, the hospital has 10 days to appeal these results to their QIO. The QIO will review the appeal with the hospital and, if the QIO review agrees with the hospitals original abstraction, the QIO will forward the appeal to the CDAC for a final determination. If the QIO does not agree with the hospital's appeal, then the original results stand. When the CDAC has made its final determination, the new results will be provided to the hospital through the usual processes and the validation described previously will be repeated. This process is described in detail at the following Web site: http://www.qnetexchange.org. Hospitals that fail to receive the required 80-percent reliability after the standard appeals process may ask that CMS accept the fourth quarter of calendar year 2004 validation results as a final attempt to present evidence of reliability. However, in order to process the fourth quarter data in time to meet our internal deadlines, these hospitals will need to submit the charts requested for reabstraction as soon as possible, but no later than August 1, 2005, in order for us to guarantee consideration of this information. Hospitals that make the early submission of these data and pass the 80-percent reliability minimum level will satisfy this requirement. In reviewing the data for these hospitals, we plan to combine the 5 cases from the third quarter and the 5 cases from the fourth quarter into a single sample to determine whether the 80 percent reliability level is met. This gives us the greatest accuracy when estimating the reliability level. The confidence interval approach accounts for the variation in coding among the 5 charts pulled each quarter and for the entire year around the overall hospital mean score (on all individual data elements compared). The closer each case's reliability score is to the hospital mean score, the tighter the confidence interval established for that hospital. A hospital may code each chart equally inaccurately, achieve a tight confidence interval, and fail to pass even though its overall score is just below the passing threshold (75 percent, for example). A hospital with more variation among charts will achieve a broader confidence interval, which may allow it to pass even though some charts score very low and others very high. As we gain experience with this system, we will adjust it as appropriate over time as we build our sample of validated cases and learn more about hospital performance against the thresholds we establish.

We believe we have adopted the most suitable statistical tests for the hospital data we are trying to validate, but we invite public comments on this and any other approaches hospitals choose to comment on. We are particularly interested in comments from hospitals on the initial starting points for the passing threshold, the confidence interval established, and the sampling approach. Because we will be receiving data each quarter from hospitals, our information on the sampling methodology will improve with each quarter's submissions. We will analyze this information to determine if any changes in our methodology are required. We will make any necessary revisions to the sampling methodology and the statistical approach through manual issuances and other guidance to hospitals.

  • The hospital must have two consecutive quarters of publishable data. The information collected by CMS through this rule will be displayed for public viewing on the Internet. Prior to this display, hospitals are permitted to preview their information as we have it recorded. In our previous experience, a number of hospitals requested that this information not be displayed due to errors in the submitted data that were not of the sort that could be detected by the normal edit and consistency checks. We acquiesced to these requests in the public interest and because of our own desire to present correct data. However, we still believe that the hospital bears the responsibility of submitting correct data that can serve as valid and reliable information. Therefore, in order to receive the full market basket update for IPPS, we are proposing to establish a requirement for two consecutive quarters of publishable data. We published the first quarter of calendar year 2004 data in November 2004. The first two quarters of calendar year 2004 data were published in March 2005. Our plans are to publish the first three quarters of calendar year 2004 in August 2005. For the FY 2006 update, we will expect that all hospitals receiving the full market basket update for FY 2006 to have published data for all of the required 10 measures for both the March and August 2005 publications. Allowances would be made for hospitals that do not treat a particular condition and for new hospitals that have not had the opportunity to provide the required data.

C. Sole Community Hospitals (SCHs) and Medicare Dependent Hospitals (MDHs) (§§ 412.73, 412.75, 412.77, 412.92 and 412.108)

(If you choose to comment on issues in this section, please include the caption “Sole Community Hospitals and Medicare Dependent Hospitals” at the beginning of your comments.)

1. Background

Under the IPPS, special payment protections are provided to a sole community hospital (SCH). Section 1886(d)(5)(D)(iii) of the Act defines an SCH as a hospital that, by reason of factors such as isolated location, weather conditions, travel conditions, absence of other like hospitals (as determined by the Secretary), or historical designation by the Secretary as an essential access community hospital, is the sole source of inpatient hospital services reasonably available to Medicare beneficiaries. The regulations that set forth the criteria that a hospital must meet to be classified as an SCH are located in § 412.92 of the regulations. Although SCHs and MDHs are paid under a special payment methodology, they are hospitals that are paid under section 1886(d) of the Act. Like all IPPS hospitals paid under section 1886(d) of the Act, SCHs and MDHs are paid for their discharges based on the DRG weights calculated under section 1886(d)(4) of the Act.

Effective with hospital cost reporting periods beginning on or after October 1, 2000, section 1886(d)(5)(D)(i) of the Act (as amended by section 6003(e) of 101) and section 1886(b)(3)(I) of the Act (as added by section 405 of Pub. L. 106-113 and further amended by section 213 of Pub. L. 106-554), provide that SCHs are paid based on whichever of the following rates yields the greatest aggregate payment to the hospital for the cost reporting period:

  • The Federal rate applicable to the hospital;
  • The updated hospital-specific rate based on FY 1982 costs per discharge;
  • The updated hospital-specific rate based on FY 1987 costs per discharge; or
  • The updated hospital-specific rate based on FY 1996 costs per discharge.

For purposes of payment to SCHs for which the FY 1996 hospital-specific rate yields the greatest aggregate payment, payments for discharges during FYs 2001, 2002, and 2003 were based on a blend of the FY 1996 hospital-specific rate and the greater of the Federal rate or the updated FY 1982 or FY 1987 hospital-specific rate. For discharges during FY 2004 and subsequent fiscal years, payments based on the FY 1996 hospital-specific rate are 100 percent of the updated FY 1996 hospital-specific rate.

For each cost reporting period, the fiscal intermediary determines which of the payment options will yield the highest rate of payment. Payments are automatically made at the highest rate using the best data available at the time the fiscal intermediary makes the determination. However, it may not be possible for the fiscal intermediary to determine in advance precisely which of the rates will yield the highest payment by year's end. In many instances, it is not possible to forecast the outlier payments, the amount of the DSH adjustment, or the IME adjustment, all of which are applicable only to payments based on the Federal rate. The fiscal intermediary makes a final adjustment at the close of the cost reporting period to determine precisely which of the payment rates would yield the highest payment to the hospital.

If a hospital disagrees with the fiscal intermediary's determination regarding the final amount of program payment to which it is entitled, it has the right to appeal the fiscal intermediary's decision in accordance with the procedures set forth in subpart R of part 400, which concern provider payment determinations and appeals.

Under section 1886(d)(5)(G) of the Act, Medicare dependent hospitals (MDHs) are paid based on the Federal national rate or, if higher, the Federal national rate plus 50 percent of the difference between the Federal national rate and the updated hospital-specific rate based on FY 1982 or FY 1987 costs per discharge, whichever is higher. MDHs do not have the option to use their FY 1996 hospital-specific rate. The regulations that set forth the criteria that a hospital must meet to be classified as an MDH are located in § 412.108.

2. Budget Neutrality Adjustment to Hospital Payments Based on Hospital-Specific Rate

Under section 1886(d)(4)(C)(i) of the Act, beginning in FY 1988 and for each fiscal year thereafter, the Secretary is required to adjust the DRG classifications and weighting factors established under sections 1886(d)(4)(A) and (d)(4)(B) of the Act to reflect changes in treatment patterns, technology, and other factors that may change the use of hospital resources. For discharges beginning in FY 1991, section 1886(d)(4)(C)(iii) of the Act requires the Secretary to ensure that adjustments to DRG classifications and weighting factors result in aggregate DRG payments that are budget neutral (not greater or less than the aggregate payments without the adjustments). In addition, section 1886(d)(3)(E) of the Act requires the Secretary to update the hospital wage index annually in a manner that does not affect aggregate payments to hospitals under section 1886(d) of the Act.

As discussed in the May 9, 1990 IPPS proposed rule (55 FR 19466), we normalize the proposed recalibrated DRG weights by an adjustment factor so that the average case weight after recalibration is equal to the average case weight prior to recalibration. While this adjustment is intended to ensure that recalibration does not affect total payments to hospitals under section 1886(d) of the Act, our analysis has indicated that the normalization adjustment does not achieve budget neutrality with respect to aggregate payments to hospitals under section 1886(d) of the Act. In order to comply with the requirement of section 1886(d)(4)(C)(iii) of the Act that the DRG reclassification changes and recalibration of the relative weights be budget neutral and the requirement of section 1886(d)(3)(E) of the Act that the updated wage index be implemented in a budget neutral manner, we compare the estimated aggregate payments using the current year's relative weights and wage index factors to aggregate payments using the prior year's weights and factors. Based on this comparison, we compute a budget neutrality adjustment factor. This budget neutrality adjustment factor is then applied to the standardized per discharge payment amount. Beginning in FY 1994, in applying the current year's budget neutrality adjustment factor to both the standard Federal rate and hospital-specific rates, we do not remove the prior years' budget neutrality adjustment factors because estimated aggregate payments after the changes in the DRG relative weights and wage index factors must equal estimated aggregate payments prior to the changes. If we removed the prior year adjustment, we would not satisfy this condition. (58 FR 30269)

We are bound by the Act to ensure that aggregate payments to hospitals under section 1886(d) of the Act are projected to neither increase nor decrease as a result of the annual updates to the DRG classifications and weighting factors and for the updated wage indices. However, we have broad authority under the statute to determine the method for implementing budget neutrality. We have maintained since 1991 that the budget neutrality adjustment is applied, as described above, to all hospitals paid under section 1886(d) of the Act, including those that are paid based on a hospital-specific rate. Thus, the budget neutrality factor applies to payments to SCHs and MDHs.

Hospitals that are paid under section 1886(d) of the Act based on a hospital-specific rate are subject to the DRG reclassification and recalibration factor component of the budget neutrality adjustment because, as IPPS hospitals, they are paid based on DRGs. As described above, changes in DRG relative weights from one year to the next affect aggregate SCH and MDH payments, which in turn affect total Medicare payments to hospitals under section 1886(d) of the Act. Because SCHs and MDHs are paid under section 1886(d) of the Act, we believe their DRG payments should be factored into the DRG reclassification and recalibration factor component of the budget neutrality adjustment to ensure that recalibration does not affect total payments to hospitals under section 1886(d) of the Act. Therefore, we continue to believe it is appropriate to apply the DRG reclassification and recalibration factor component of the budget neutrality adjustment to SCHs and MDHs. Furthermore, consistent with the requirement of section 1886(d)(4)(C)(iii) of the Act that DRG reclassification changes and recalibration of relative weights be budget neutral, we continue to believe it is appropriate to apply this adjustment without removing the previous year's adjustment factor.

In the May 9, 1990 proposed rule (55 FR 19466), we discussed the rationale behind our decision to apply the wage index portion of the budget neutrality adjustment factors to hospitals that are paid under section 1886(d) of the Act based on a hospital-specific rate. We described how, even though the wage index is only applicable to those hospitals that are paid based on the Federal rate, the changes in wage index can cause changes in the payment basis for some SCHs, and MDHs. That is, depending on the size of the increase in their wage index values, some hospitals that had been paid based on the hospital-specific rate could now be paid based on the Federal rate when the wage index-adjusted Federal rate exceeds the hospital-specific rate. In some instances, hospitals that had previously been paid based on the Federal rate may be paid based on the hospital-specific rate if the Federal rate is adjusted by a lower wage index and the hospital-specific rate now exceeds the Federal rate. These shifts in the payment basis affect aggregate program payments and, therefore, are taken into account in the budget neutrality adjustment. In addition, we maintained that because we apply the adjustment to all hospitals paid based on the Federal rate under section 1886(d) of the Act, it would be fair to apply it to hospitals that are paid under section 1886(d) of the Act based on hospital-specific rates. We believed that if we did not apply the budget neutrality factor to hospitals paid based on their hospital-specific rate, hospitals that are paid on the Federal rate would be subject to larger reductions to make up for not adjusting payments to hospitals that are paid based on hospital-specific rates.

Concerns have been raised that hospitals under section 1886(d) of the Act whose reimbursement is based on a hospital-specific rate should not be subject to the wage index component of the budget neutrality adjustment. Hospital-specific rates reflect the effects of hospitals' area wage levels and, therefore, are not adjusted by an area wage index. Accordingly, the concern is that a budget neutrality factor for changes in the wage index should not be applied to hospitals that are paid based on a hospital-specific rate. In addition, it has been suggested that the budget neutrality adjustment that CMS applies to hospitals paid on a hospital-specific rate should be similar to the budget neutrality adjustment made to hospitals in Puerto Rico. Hospitals in Puerto Rico that are paid under the IPPS are paid based on a blend of the national prospective payment rate and the Puerto Rico-specific prospective payment rate (42 CFR 412.212). Beginning in FY 1991, the Puerto Rico-specific standardized amount became subject to a budget neutrality adjustment. This budget neutrality adjustment included both the DRG reclassification and recalibration factor component and the wage index component. However, beginning in FY 1998, the Puerto Rico-specific rate has been subject only to the DRG reclassification and recalibration factor component of the budget neutrality adjustment (62 FR 46038) and not to the wage index component of the budget neutrality adjustment. In other words, beginning in FY 1998, the budget neutrality adjustment for the Puerto Rico-specific rate reflects only the DRG reclassification and recalibration factor component. This adjustment is computed, as described above, for all hospitals paid under section 1886(d) of the Act, without removing the previous year's budget neutrality adjustment.

We have considered the concern that it is inappropriate to apply a budget neutrality factor that includes a component for changes in the wage index to a hospital with a payment rate that is not adjusted by a wage index adjustment. In cases in which a hospital's payments are ultimately based on a hospital-specific rate, that portion of the payment is not adjusted by a wage index. We believe that our current policy is valid, for the reasons indicated above and in previous rulemaking documents, but we recognize that there are also valid grounds to review the regulations and consider other approaches. Accordingly, we are revisiting this policy. After further consideration of these issues, we are proposing to remove the wage index component from the budget neutrality adjustment applied to the hospital-specific rate for hospitals paid under section 1886(d) of the Act. The DRG reclassification and recalibration factor component of the budget neutrality adjustment would still apply to these hospitals, as payments to SCHs and MDHs are based on DRGs and affect total Medicare payments to hospitals under section 1886(d) of the Act. In applying this budget neutrality adjustment factor, which would include only the DRG reclassification and recalibration factor component, to the hospital-specific rate, we would not remove the prior years' budget neutrality adjustment factors. This would satisfy the statutory requirement that estimated aggregate payments after the changes in the DRG relative weights equal estimated aggregate payments prior to the changes. We are proposing that the wage index portion of the budget neutrality adjustment would not be applied to hospital-specific amounts, as these amounts are not adjusted by an area wage index. While this may result in a slightly higher budget neutrality adjustment applied to all other IPPS hospitals, because these hospitals actually are paid based on the revised wage indices and are affected by wage index changes, we believe this is appropriate. In addition, we note that in FY 1990 when this policy was first discussed, we did not calculate a budget neutrality factor that reflected only the DRG changes. Because we now calculate such a budget neutrality factor for Puerto Rico hospitals, it would not be administratively burdensome to apply the same budget neutrality factor to SCHs and MDHs.

We are proposing to add a new paragraph (f) to § 412.73, a new paragraph (i) to § 412.75, and a new paragraph (j) to § 412.77 relating to the computation of the hospital-specific rate to clarify our longstanding policy that CMS makes an adjustment to the hospital-specific rate to ensure that changes to the DRG reclassifications and recalibrations of the DRG relative weights are made in a manner so that aggregate payments to hospitals under section 1886(d) of the Act are not affected, and that this adjustment is made without removing the budget neutrality adjustment for the prior year. These provisions are cross-referenced in § 412.92 for SCHs and § 412.108 for MDHs for purposes of computing the hospital-specific rates for these hospitals. This proposed regulatory text will reflect the proposed changes to the way CMS applies the budget neutrality adjustment to hospitals paid under section 1886(d) of the Act based on the hospital-specific rate. Specifically, it would indicate that the budget neutrality adjustment made to hospitals paid under section 1886(d) of the Act based on the hospital-specific rate will only account for the DRG reclassification and recallibration factor component. The budget neutrality adjustment would no longer include the wage index factor component.

3. Technical Change

In the September 4, 1990 IPPS final rule (55 FR 36056), we made changes to the regulations at § 412.92 to incorporate the provisions of section 6003(e) of 101. Section 6003(e) of 101 provided for a permanent payment methodology for SCHs that recognized distortions in operating costs in years subsequent to the implementation of the IPPS and provided for opportunity for payment based on a new base year. As a result of this legislation, we deleted from the regulations a special provision that we had included under § 412.92(g) that provided for a payment adjustment to compensate SCHs reasonably for the increased operating costs resulting from the addition of new services or facilities.

We have discovered that, in making the changes to § 412.92 in the September 4, 1990 final rule to remove paragraph (g), we inadvertently failed to make a conforming change to paragraph (d)(3) that references the provisions of paragraph (g) relating to a payment adjustment for significant increases in a SCH's operating costs. In this proposed rule, we are proposing to make this technical correction by revising paragraph (d)(3).

D. Rural Referral Centers (§ 412.96)

(If you choose to comment on issues in this section, please include the caption “Rural Referral Centers” at the beginning of your document.)

Under the authority of section 1886(d)(5)(C)(i) of the Act, the regulations at § 412.96 set forth the criteria that a hospital must meet in order to qualify under the IPPS as a rural referral center. For discharges occurring before October 1, 1994, rural referral centers received the benefit of payment based on the other urban standardized amount rather than the rural standardized amount. Although the other urban and rural standardized amounts are the same for discharges occurring on or after October 1, 1994, rural referral centers continue to receive special treatment under both the DSH payment adjustment and the criteria for geographic reclassification.

Section 402 of Pub. L. 108-173 raised the DSH adjustment for other rural hospitals with less than 500 beds and rural referral centers. Other rural hospitals with less than 500 beds are subject to a 12-percent cap on DSH payments. Rural referral centers are not subject to the 12.0 percent cap on DSH payments that is applicable to other rural hospitals (with the exception of rural hospitals with 500 or more beds). Rural referral centers are not subject to the proximity criteria when applying for geographic reclassification, and they do not have to meet the requirement that a hospital's average hourly wage must exceed 106 percent of the average hourly wage of the labor market area where the hospital is located.

Section 4202(b) of Pub. L. 105-33 states, in part, “[a]ny hospital classified as a rural referral center by the Secretary * * * for fiscal year 1991 shall be classified as such a rural referral center for fiscal year 1998 and each subsequent year.” In the August 29, 1997 final rule with comment period (62 FR 45999), we also reinstated rural referral center status for all hospitals that lost the status due to triennial review or MGCRB reclassification, but not to hospitals that lost rural referral center status because they were now urban for all purposes because of the OMB designation of their geographic area as urban. However, subsequently, in the August 1, 2000 final rule (65 FR 47089), we indicated that we were revisiting that decision. Specifically, we stated that we would permit hospitals that previously qualified as a rural referral center and lost their status due to OMB redesignation of the county in which they are located from rural to urban to be reinstated as a rural referral center. Otherwise, a hospital seeking rural referral center status must satisfy the applicable criteria. For FYs 1984 through 2004, we used the definitions of “urban” and “rural” in § 412.63. For FY 2005 and subsequent years, the revised definitions of “urban” and “rural” in § 412.64 apply.

One of the criteria under which a hospital may qualify as a rural referral center is to have 275 or more beds available for use (§ 412.96(b)(1)(ii)). A rural hospital that does not meet the bed size requirement can qualify as a rural referral center if the hospital meets two mandatory prerequisites (a minimum case-mix index and a minimum number of discharges) and at least one of three optional criteria (relating to specialty composition of medical staff, source of inpatients, or referral volume) (§ 412.96(c)(1) through (c)(5)). (See also the September 30, 1988 Federal Register (53 FR 38513)). With respect to the two mandatory prerequisites, a hospital may be classified as a rural referral center if—

  • The hospital's case-mix index is at least equal to the lower of the median case-mix index for urban hospitals in its census region, excluding hospitals with approved teaching programs, or the median case-mix index for all urban hospitals nationally; and
  • The hospital's number of discharges is at least 5,000 per year, or, if fewer, the median number of discharges for urban hospitals in the census region in which the hospital is located. (The number of discharges criterion for an osteopathic hospital is at least 3,000 discharges per year, as specified in section 1886(d)(5)(C)(i) of the Act.)

1. Case-Mix Index

Section 412.96(c)(1) provides that CMS will establish updated national and regional case-mix index values in each year's annual notice of prospective payment rates for purposes of determining rural referral center status. The methodology we use to determine the proposed national and regional case-mix index values is set forth in regulations at § 412.96(c)(1)(ii). The proposed national median case-mix index value for FY 2006 includes all urban hospitals nationwide, and the proposed regional values for FY 2006 are the median values of urban hospitals within each census region, excluding those hospitals with approved teaching programs (that is, those hospitals receiving indirect medical education payments as provided in § 412.105). These proposed values are based on discharges occurring during FY 2004 (October 1, 2003 through September 30, 2004) and include bills posted to CMS' records through December 2004.

We are proposing that, in addition to meeting other criteria, if they are to qualify for initial rural referral center status for cost reporting periods beginning on or after October 1, 2005, rural hospitals with fewer than 275 beds must have a case-mix index value for FY 2004 that is at least—

  • 1.3659; or
  • The median case-mix index value (not transfer-adjusted) for urban hospitals (excluding hospitals with approved teaching programs as identified in § 412.105) calculated by CMS for the census region in which the hospital is located.

The proposed median case-mix index values by region are set forth in the following table:

The preceding numbers will be revised in the final rule to the extent required to reflect the updated FY 2004 MedPAR file, which will contain data from additional bills through March 31, 2005.

Hospitals seeking to qualify as rural referral centers or those wishing to know how their case-mix index value compares to the criteria should obtain hospital-specific case-mix index values (not transfer-adjusted) from their fiscal intermediaries. Data are available on the Provider Statistical and Reimbursement (PSR) System. In keeping with our policy on discharges, these case-mix index values are computed based on all Medicare patient discharges subject to DRG-based payment.

2. Discharges

Section 412.96(c)(2)(i) provides that CMS will set forth the national and regional numbers of discharges in each year's annual notice of prospective payment rates for purposes of determining rural referral center status. As specified in section 1886(d)(5)(C)(ii) of the Act, the national standard is set at 5,000 discharges. We are proposing to update the regional standards based on discharges for urban hospitals' cost reporting periods that began during FY 2002 (that is, October 1, 2001 through September 30, 2002), which is the latest available cost report data we have at this time.

Therefore, we are proposing that, in addition to meeting other criteria, a hospital, if it is to qualify for initial rural referral center status for cost reporting periods beginning on or after October 1, 2005, must have as the number of discharges for its cost reporting period that began during FY 2002 a figure that is at least—

  • 5,000 (3,000 for an osteopathic hospital); or
  • The median number of discharges for urban hospitals in the census region in which the hospital is located, as indicated in the following table:

These numbers will be revised in the final rule based on the latest available cost report data.

We reiterate that if an osteopathic hospital is to qualify for rural referral center status for cost reporting periods beginning on or after October 1, 2005, the hospital would be required to have at least 3,000 discharges for its cost reporting period that began during FY 2002.

3. Technical Change

In the FY 1998 IPPS final rule (62 FR 46028), we removed paragraph (f) from § 412.96. Paragraph (f) was removed when the requirement for triennial reviews of rural referral centers was terminated (62 FR 45998 through 45600, 46028 through 46029). However, we inadvertently failed to address all of the related cross-references to paragraph (f) in the entire § 412.96. Therefore, we are proposing to revise § 412.96 to remove paragraphs (h)(4) and (i)(4), consistent with the removal of paragraph (f).

E. Payment Adjustment for Low-Volume Hospitals (§ 412.101)

(If you choose to comment on issues in this section, please include the caption “Low-Volume Hospital Payment Adjustment” at the beginning of your comment.)

Section 1886(d)(12) of the Act, as added by section 406 of Pub. L. 108-173, provides for a payment adjustment to account for the higher costs per discharge of low-volume hospitals under the IPPS. Section 1886(d)(12)(C)(i) of the Act defines a low-volume hospital as a “subsection (d) hospital * * * that the Secretary determines is located more than 25 road miles from another subsection (d) hospital and that has less than 800 discharges during the fiscal year.” Section 1886(d)(12)(C)(ii) of the Act further stipulates that the term “discharge” refers to total discharges, and not merely to Medicare discharges. Specifically, the term refers to the “inpatient acute care discharge of an individual regardless of whether the individual is entitled to benefits under part A.” Finally, the provision requires the Secretary to determine an applicable percentage increase for these low-volume hospitals based on the “empirical relationship” between “the standardized cost-per-case for such hospitals and the total number of discharges of these hospitals and the amount of the additional incremental costs (if any) that are associated with such number of discharges.” The statute thus mandates the Secretary to develop an empirically justifiable adjustment based on the relationship between costs and discharges for these low-volume hospitals. The statute also limits the adjustment to no more than 25 percent.

According to the analysis conducted for the FY 2005 IPPS final rule (69 FR 49099 through 49102), a 25 percent low-volume adjustment to all qualifying hospitals with less than 200 discharges was found to be most consistent with the statutory requirement to provide relief to low-volume hospitals where there is empirical evidence that higher incremental costs are associated with low numbers of total discharges. However, we acknowledged that the empirical evidence did not provide robust support for that conclusion and indicated that we would reexamine the empirical evidence for the FY 2006 IPPS final rule with the intention of modifying or even eliminating the adjustment if the empirical evidence indicates that it is appropriate to do so.

In the FY 2005 IPPS final rule (69 FR 49102), we indicated that our analysis showed that there are fewer than 100 hospitals with less than 200 total discharges. At that time, we were unable to determine how many of these hospitals also meet the requirement that a low-volume hospital be more than 25 road miles from the nearest IPPS hospital in order to qualify for the adjustment. Our data systems currently indicate that 10 hospitals are receiving the low-volume adjustment.

As indicated in the FY 2005 IPPS final rule, we have now conducted a more detailed multivariate analysis on the empirical basis for a low-volume adjustment for FY 2006. In order to further evaluate the need for a proposed change in the development of the low-volume adjustment, we replicated much of the analysis conducted for the FY 2005 IPPS final rule, using updated data. We again empirically modeled the relationship between hospital costs-per-case and total discharges in several ways. We used both regression analysis and straight-line statistics to examine this relationship.

We conducted three different regression analyses. For all of the analyses, we simulated the FY 2005 cost environment by inflating FY 2002 and FY 2003 hospital cost report data to FY 2005 using the full hospital market basket updates. We note that, at the time of this analysis, we only had cost report data from FY 2003 for approximately 57 percent of the IPPS hospitals. Therefore, we have placed a greater weight on the results from the simulated FY 2002 cost data, which are significantly more complete. We again simulated the FY 2005 payment environment because payments have undergone several changes between FY 2002 and FY 2003 and FY 2005, making the results of the earlier data less relevant. Furthermore, many of these policy changes may already have helped increase payments to low-volume hospitals. We were unable to simulate the FY 2006 environment because payment factors for FY 2006 were not available at the time of our analysis.

In the first regression analysis, we used a dummy variable approach to model the relationship between standardized costs and total discharges. Using FY 2002 cost data, we found some evidence for a low-volume payment adjustment for hospitals with up to 199 discharges, consistent with our current policy. Using FY 2003 cost data, the empirical evidence only supported an adjustment for hospitals with up to 99 total discharges.

We also used a descriptive analysis approach to understand empirically the relationship between costs and total discharges. We grouped all hospitals by their total discharges and compared the mean Medicare per discharge payment to Medicare per discharge cost ratios. Hospitals with less than 800 total discharges were split into 24 cohorts based on increments of 25 discharges. When using the FY 2002 cost report data, the mean payment-to-cost ratios were below one (implying that Medicare per discharge costs exceeded Medicare per discharge payments) for all cohorts of hospitals with less than 200 discharges, after which the ratio was consistently above one. When using the FY 2003 cost report data, the mean payment-to-cost ratios were below one for all but two cohorts up to those with less than 175 total discharges, after which the ratio was consistently above one. No obvious increasing trend in the ratios, from which it would be possible to infer a formula to generate adjustments for hospitals based upon the number of discharges, was evident. Because more than 70 percent of hospitals with less than 200 discharges had ratios below 0.80, this analysis supports applying the highest payment adjustment to all providers with less than 200 discharges that are eligible for the low-volume adjustment.

The second regression analysis modeled the Medicare per discharge cost to Medicare per discharge payment ratio as a function of total discharges. The cost-to-payment ratio model more explicitly accounts for the relative values of per discharge costs and per discharge payments. These models provided some evidence for a statistically significant negative relationship between the cost-to-payment ratio and total discharges. However, that result was limited to FY 2002 data. FY 2003 data displayed no significant relationship between the cost-to-payment ratio and total discharges.

The third regression analysis employed per discharge costs minus per discharge payments as the dependent variable and total discharges as an explanatory variable. The results of this analysis were similar to the other regression analyses: some evidence was provided for an adjustment with the FY 2002 data, but not with the FY 2003 data, simulated for FY 2005. In fact, the FY 2003 data results suggest (with a positive intercept and positive coefficient on total discharges) that payments are greater than costs for all hospitals, including the low-volume hospitals.

Based upon these multivariate analyses using the FY 2002 cost report data, a case can be made that hospitals with fewer than 200 total discharges have per discharge costs that are statistically significantly higher relative to their Medicare per discharge payments in comparison to hospitals with 200 or more total discharges. Therefore, we are proposing to extend the existing low-volume adjustment for FY 2006. That is, a low-volume adjustment would again be provided for qualifying hospitals with less than 200 discharges. As noted above, the descriptive data do not reveal any pattern that could provide a formula for calculating an adjustment in relation to the number of discharges. However, the descriptive analysis of the data does indicate that, for a large majority of the hospitals with less than 200 discharges, the maximum adjustment of 25 percent would be appropriate because, for example, the payment-to-cost ratios for more than 70 percent of these hospitals are 0.80 or less. The maximum adjustment of 25 percent would still leave most of these hospitals with payment-to-cost ratios below 1.00. Because a large majority of hospitals with less than 200 discharges have payment-to-cost ratios below 1.00, we are proposing to again provide hospitals with less than 200 total discharges in the most recent submitted cost report an adjustment of 25 percent on each Medicare discharge. This policy is consistent with the existing language in § 412.101(a) and (b).

However, the initial analysis of the FY 2003 data does not seem to provide strong empirical evidence for a relationship between Medicare per discharge costs and total discharges. Therefore, we will reevaluate the appropriateness of the low-volume adjustment in the FY 2007 proposed rule.

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

(If you choose to comment on issues in this section, please include the caption “IME Adjustment” at the beginning of your comment.)

1. Background

Section 1886(d)(5)(B) of the Act provides that prospective payment hospitals that have residents in an approved graduate medical education (GME) program receive an additional payment to reflect the higher indirect costs of teaching hospitals relative to nonteaching hospitals. The regulations regarding the calculation of this additional payment, known as the indirect medical education (IME) adjustment, are located at § 412.105. The IME adjustment to the DRG payment is based in part on the applicable IME adjustment factor. The IME adjustment factor is calculated using a hospital's ratio of residents to beds, which is represented as r, and a formula multiplier, which is represented as c, in the following equation: c × [{1 + r} [.405] − 1]. The formula is traditionally described in terms of a certain percentage increase in payment for every 10-percent increase in the resident-to-bed ratio.

2. IME Adjustment for TEFRA Hospitals Converting to IPPS Hospitals

The Balanced Budget Act of 1997 (Pub. L. 105-33) established a limit on the number of allopathic and osteopathic residents that a hospital may include in its full-time equivalent (FTE) count for direct GME and IME payment purposes. Under section 1886(h)(4)(F) of the Act, a hospital's unweighted FTE count of residents may not exceed the hospital's unweighted FTE count for its most recent cost reporting period ending on or before December 31, 1996. Under section 1886(d)(5)(B)(v) of the Act, the limit on the FTE resident count for IME purposes is effective for discharges occurring on or after October 1, 1997. A similar limit is effective for direct GME purposes for cost reporting periods beginning on or after October 1, 1997.

When these provisions were enacted, hospitals reported their weighted FTE resident count for direct GME and their unweighted FTE resident count for IME on the Medicare cost report. The cost report was subsequently modified to require reporting of unweighted FTE resident counts for both direct GME and IME. However, for cost reporting periods ending on or before December 31, 1996 (the cost report on which the FTE limit is based), hospitals were not required to report unweighted FTE resident counts for direct GME purposes. Therefore, a separate data collection effort was required to obtain the unweighted FTE resident counts. The fiscal intermediaries worked with hospitals to determine the unweighted FTE resident counts for direct GME for cost reporting periods ending on or before December 31, 1996, for purposes of implementing the FTE cap.

During this process, the fiscal intermediaries did not determine IME FTE resident counts for hospitals that were excluded from the IPPS (that is, psychiatric hospitals, LTCHs, rehabilitation hospitals, children's hospitals, and cancer hospitals) because these hospitals were not paid under the IPPS and, therefore, did not receive any IME payment adjustments. Only the FTE resident data related to direct GME payments were relevant for these excluded hospitals and, therefore, only those data were collected. However, it has come to our attention that some hospitals that were excluded from the IPPS during the cost reporting period ending on or before December 31, 1996 (that is, the cost reporting period during which the hospital's FTE resident limit was established under section 1886(h)(4)(F) of the Act for purposes of direct GME payments) have either failed to continue to qualify for exclusion from the IPPS or deliberately changed their operations in a way to become subject to the IPPS and, as a result, have subsequently become subject to the IME payment adjustment provisions of the IPPS. For example, a provider that was a rehabilitation hospital during its cost reporting period ending on December 31, 1996, but no longer meets the regulatory criteria to qualify as a rehabilitation hospital would become subject to the IPPS and be able to receive IME payments. However, because no IME FTE resident count for the cost reporting period ending on or before December 31, 1996, was determined, such a hospital does not have an unweighted FTE resident limit for IME.

To address this situation, we are proposing to incorporate in the regulations (proposed § 412.105(f)(1)(xiii)) CMS' existing policy in such situations which provides for the establishment of an IME FTE cap for a hospital that was excluded from the IPPS during its base year and that subsequently became subject to the IPPS. We are clarifying and proposing to adopt into regulations our existing policy that, in such a situation, the fiscal intermediary would determine an IME FTE cap for the hospital, applicable beginning with the hospital's payments under the IPPS, based on the FTE count of residents during the cost reporting period(s) used to determine the hospital's direct GME FTE cap in accordance with existing § 412.105(f) of the regulations. The new IPPS hospital's IME FTE cap would be subject to the same rules and adjustments as any IPPS hospital's IME FTE cap in accordance with § 412.105(f) of the regulations.

While calculation of the IME FTE cap for a TEFRA hospital that converts to an IPPS hospital may require that fiscal intermediaries obtain information from cost reporting periods that are closed, allowing a fiscal intermediary to obtain this information should not be understood as allowing a fiscal intermediary to reopen closed cost reports that are beyond the normal reopening period in order to carry out the provisions of this proposed regulation.

Finally, there may be situations where the data necessary to carry out this policy are not available. For example, under this proposal, if a children's hospital converts to an IPPS hospital on July 1, 2007, the fiscal intermediary may need to determine the count of FTE residents for IME purposes training at the hospital during the most recent cost reporting period ending on or before December 31, 1996, in order to establish an IME FTE cap for the hospital, effective for discharges occurring on or after October 1, 2007. However, the count of FTE residents for IME purposes from the cost reporting period ending on or before December 31, 1996, may no longer be available, as the minimum time that hospitals are required to retain records is 5 years from the date the hospital submits the cost report. We believe this problem may not occur with sufficient frequency to warrant specific regulatory action. We are specifically soliciting comments as to whether and how hospitals believe this is a problem that needs to be addressed.

In some cases, a hospital that was previously excluded from the IPPS may become subject to the IPPS as a result of a merger between two or more hospitals where the surviving hospital is subject to the IPPS (and not creating an IPPS hospital with an excluded unit). In such cases, CMS policy is that the FTE resident cap for the surviving hospital should reflect the combined FTE resident caps for the hospitals that merged. If two or more hospitals merge after the conclusion of each hospital's base year for purposes of calculating resident FTE caps, the surviving hospital's FTE resident cap is an aggregation of the FTE resident cap for each hospital participating in the merger. When a merger involves an IPPS-excluded hospital, the base year IME FTE count for the IPPS-excluded hospital has not been determined. We are clarifying and proposing to codify in regulations our existing policy that, in such cases, the fiscal intermediary would determine an IME FTE cap for the IPPS-excluded hospital for purposes of determining the merged hospital's IME FTE cap in accordance with § 412.105(f) of the regulations. Once this cap is determined, the aggregate IME FTE cap of the surviving entity may be calculated in accordance with existing CMS policy for mergers.

We note that we would compute an IME cap for an IPPS-excluded hospital only in cases of a merger between an IPPS-excluded hospital and an acute care IPPS hospital, where the entire surviving entity is subject to the IPPS. No such IME FTE cap would be computed for an IPPS-excluded hospital in instances where an IPPS-excluded hospital and an acute care IPPS hospital agree to form a Medicare GME affiliated group for purposes of aggregating FTE resident caps. In cases where an IPPS-excluded hospital enters into a Medicare GME affiliation agreement with other IPPS hospitals, the IPPS-excluded hospital can contribute only its direct GME FTE cap to the aggregate FTE cap for the group. This is because, as long as a hospital remains excluded from the IPPS, that hospital will not have an FTE resident cap established for purposes of IME. Under no circumstances may an IPPS-excluded hospital be considered to contribute any FTE residents to a Medicare GME affiliation group for purposes of the aggregate IME FTE resident cap. IPPS-excluded hospitals do not currently, and would not under this proposed policy, have an IME FTE resident cap.

3. Section 1886(d)(8)(E)Teaching Hospitals That Withdraw Rural Reclassification

In section V.I. of this preamble, we discuss situations in which an urban hospital may become rural under a reclassification request under section 1886(d)(8)(E) of the Act. Under section 1886(d)(8)(E) of the Act, an urban hospital may file an application to be treated as being located in a rural area. Becoming rural under this provision affects only payments under section 1886(d) of the Act. If the hospital is a teaching hospital, the hospital could not receive adjustments to its direct GME FTE cap because payments for direct GME are made under section 1886(h) of the Act and the section 1886(d)(8)(E) reclassifications affect only the payments that are made under section 1886(d) of the Act. Therefore, an urban hospital that reclassifies as rural under this provision may receive the 130-percent adjustment to its IME FTE resident cap. In addition, its IME FTE cap may be adjusted for any new programs (similar to a hospital that is actually located in an area designated as rural) under section 1886(d)(5)(B)(v) of the Act, as amended by section 407 of Pub. L. 106-113 (BBRA).

An urban hospital treated as rural under section 1886(d)(8)(E) of the Act may subsequently withdraw its election and return to its urban status under the regulations at § 412.103. We are proposing that, effective with discharges occurring on or after October 1, 2005, hospitals that rescind their section 1886(d)(8)(E) reclassifications and return to being urban would not be eligible for permanent increases in their IME caps. Rather, any adjustments the hospitals received to their IME caps due to their rural status would be forfeited upon returning to urban status. Although we read the relevant IME FTE cap provisions in section 1886(d)(5)(B) of the Act as effecting a permanent increase to the FTE cap, we believe we have the statutory authority under section 1886(d)(5)(I) of the Act to make necessary adjustments to these caps that we believe are appropriate. Section 1886(d)(5)(I)(i) of the Act grants the Secretary authority to provide by regulation for “such other exceptions and adjustments to such payment amounts under this subsection as the Secretary deems appropriate.” We believe it is appropriate that a section 1886(d)(8)(E) hospital forfeit the adjustments it received solely due to its reclassification to rural status when it returns to being urban. Otherwise, urban hospitals might reclassify to rural areas under section 1886(d)(8)(E) of the Act for a short period of time solely as a means of receiving an increase to their IME FTE caps. These hospitals could reclassify for as little as one year, simply in order to receive a permanent increase to their IME FTE caps. Because section 1886(d)(8)(E) hospitals have control over when they switch in and out of rural status, we believe any other policy would be subject to gaming and inappropriate usage of the section 1886(d)(8)(E) authority. In contrast, hospitals that become urban due to the OMB-revised labor area designations have no control in the matter, and therefore would not be subject to the same type of manipulation of payment rates we believe would exist with the section 1886(d)(8)(E) hospitals.

(We note that the above proposed policy would have no effect on rural track resident training programs. Section 1886(h)(4)(H)(iv) of the Act, which governs direct GME, provides that an urban hospital may receive adjustments to its FTE caps for establishing “separately accredited approved medical residency training programs (or rural tracks) in an [sic] rural area.” The provisions governing IME state that “Rules similar to the rules of subsection (h)(4)(H) shall apply for purposes of” determining FTE resident caps (section 1886(d)(5)(B)(viii) of the Act). Since the requirement that the hospital be located in a rural area is found in the provisions governing direct GME (section 1886(h) of the Act), not the provision governing IME, and since hospitals cannot reclassify as rural for purposes of section 1886(h) of the Act, we believe that, as provided in section 1886(h) of the Act, the hospital with which the urban hospital establishes the rural track must be physically located in an area designated as rural. We do not believe we would be properly incorporating the rules of section 1886(h) of the Act or creating a rule similar to that used in section 1886(h) of the Act if we were to allow counting of such reclassified hospitals.)

For the reasons stated above, we are proposing to amend the regulations at § 412.105 by adding a new paragraph (f)(1)(xiv) to provide that a hospital that rescinds its section 1886(d)(8)(E) reclassification will forfeit any adjustments to its IME FTE cap it received due to its rural status. Thus, for example, a hospital that reclassified as rural under section 1886(d)(8)(e) of the Act with an IME FTE cap of 10 would have received a 130 percent adjustment to its IME cap (that is, 10 FTEs × 1.3). Furthermore, if this hospital, while reclassified as rural, started a new 3-year residency program with 2 residents in each program year, its FTE cap would have been increased by an additional 6 FTEs to 19 FTEs (that is, 13 FTEs + 6 FTEs). However, once this hospital rescinds its reclassification under section 1886(d)(8)(E) of the Act to become urban again, its IME FTE cap would return to 10 FTEs (its original pre-reclassification IME FTE cap).

G. Payment to Disproportionate Share Hospitals (DSHs) (§ 412.106)

(If you choose to comment on issues in this section, please include the caption “DSH Adjustment Data” at the beginning of your comment.)

1. Background

Section 1886(d)(5)(F) of the Act provides for additional payments to subsection (d) hospitals that serve a disproportionate share of low-income patients. The Act specifies two methods for a hospital to qualify for the Medicare disproportionate share hospital (DSH) adjustment. Under the first method, hospitals that are located in an urban area and have 100 or more beds may receive a DSH payment adjustment if the hospital can demonstrate that, during its cost reporting period, more than 30 percent of its net inpatient care revenues are derived from State and local government payments for care furnished to indigent patients. These hospitals are commonly known as “Pickle hospitals.” The second method, which is also the most commonly used method for a hospital to qualify, is based on a complex statutory formula under which payment adjustments are based on the level of the hospital's DSH patient percentage, which is the sum of two fractions: the “Medicare fraction” and the “Medicaid fraction.” The Medicare fraction is computed by dividing the number of patient days that are furnished to patients who were entitled to both Medicare Part A and Supplemental Security Income (SSI) benefits by the total number of patient days furnished to patients entitled to benefits under Medicare Part A. The Medicaid fraction is computed by dividing the number of patient days furnished to patients who, for those days, were eligible for Medicaid but were not entitled to benefits under Medicare Part A by the number of total hospital patient days in the same period.

[Graphic not available; view image of printed page]

2. Implementation of Section 951 of Pub. L. 108-173 (MMA)

Section 951 of Pub. L. 108-173 requires the Secretary to arrange to furnish the data necessary for hospitals to compute the number of patient days used in calculating the disproportionate patient percentages. The provision is not specific as to whether it applies to the patient day data used to determine the Medicare fraction or the Medicaid fraction. We are interpreting section 951 to require the Secretary to arrange to furnish to hospitals the data necessary to calculate both the Medicare and Medicaid fractions. With respect to both the Medicare and Medicaid fractions, we also are interpreting section 951 to require CMS to arrange to furnish the personally identifiable information that would enable a hospital to compare and verify its records, in the case of the Medicare fraction, against the CMS' records, and in the case of the Medicaid fraction, against the State Medicaid agency's records. Currently, as explained in more detail below, CMS provides the Medicare SSI days to certain hospitals that request these data. Hospitals are currently required under the regulation at § 412.106(b)(4)(iii) to provide the data adequate to prove eligibility for the Medicaid, non-Medicare days.

As indicated above, the numerator of the Medicare fraction includes the number of patient days furnished by the hospital to patients who were entitled to both Medicare Part A and SSI benefits. This number is divided by the hospital's total number of patient days furnished to patients entitled to benefits under Medicare Part A. In order to determine the numerator of this fraction for each hospital, CMS obtains a data file from the Social Security Administration (SSA). CMS matches personally identifiable information from the SSI file against its Medicare Part A entitlement information for the fiscal year to determine the number of Medicare SSI days for each hospital during each fiscal year. These data are maintained in the MedPAR Limited Data Set (LDS) as described in more detail below and discussed in a notice published on August 18, 2000 in the Federal Register (65 FR 50548). The number of patient days furnished by the hospital to Medicare beneficiaries entitled to SSI is divided by the hospital's total number of Medicare days (the denominator of the Medicare fraction). CMS determines this number from Medicare claims data; hospitals also have this information in their records. The Medicare fraction for each hospital is posted on the CMS Web site (http://www.cms.hhs.gov) under the SSI/Medicare Part A Disproportionate Share Percentage File. Under current regulations at § 412.106(b)(3), a hospital may request to have its Medicare fraction recomputed based on the hospital's cost reporting period if that year differs from the Federal fiscal year. This request may be made only once per cost reporting period, and the hospital must accept the resulting DSH percentage for that year, whether or not it is a more favorable number than the DSH percentage based on the Federal fiscal year.

In accordance with section 951 of Pub. L. 108-173, we are proposing to change the process that we use to make Medicare data used in the DSH calculation available to hospitals. Currently, as stated above, CMS calculates the Medicare fraction for each section 1886(d) hospital using data from the MedPAR LDS (as established in a notice published in the August 18, 2000 Federal Register (65 FR 50548)). The MedPAR LDS contains a summary of all services furnished to a Medicare beneficiary, from the time of admission through discharge, for a stay in an inpatient hospital or skilled nursing facility, or both; SSI eligibility information; and enrollment data on Medicare beneficiaries. The MedPAR LDS is protected by the Privacy Act of 1974 (5 U.S.C. 552a) and the Privacy Rule of the Health Insurance Portability and Accountability Act of 1996 (Pub. L. 104-191). The Privacy Act allows us to disclose information without an individual's consent if the information is to be used for a purpose that is compatible with the purpose(s) for which the information was collected. Any such compatible use of data is known as a “routine use.” In order to obtain this privacy-protected data, the hospital must qualify under the routine use that was described in the August 18, 2000 Federal Register. Currently, a hospital qualifies under the routine use if it has an appeal properly pending before the Provider Reimbursement Review Board (PRRB) or before an intermediary on the issue of whether it is entitled to DSH payments, or the amount of such payments. Once determined eligible to receive the data under the routine use, the hospital is then required to sign a data use agreement with CMS to ensure that the data are appropriately used and protected, and pay the requisite fee.

Beginning with cost reporting periods that include December 8, 2004 (within one year of the date of enactment of Pub. L. 108-173), we are proposing to furnish MedPAR LDS data for a hospital's patients eligible for both SSI and Medicare at the hospital's request, regardless of whether there is a properly pending appeal relating to DSH payments. We are proposing to make the information available for either the Federal fiscal year or, if the hospital's fiscal year differs from the Federal fiscal year, for the months included in the two Federal fiscal years that encompass the hospital's cost reporting period. Under our proposal, the hospital could use these data to calculate and verify its Medicare fraction, and to decide whether it prefers to have the fraction determined on the basis of its fiscal year rather than a Federal fiscal year. The data set made available to hospitals would be the same data set CMS uses to calculate the Medicare fractions for the Federal fiscal year.

Because we interpret section 951 to require the Secretary to arrange to furnish these data, we do not believe that it will continue to be appropriate to charge hospitals to access the data. These proposed changes would require CMS to modify the current routine use for the MedPAR LDS to reflect changes in the data provided and the circumstances under which they are made available to hospitals. In a future Federal Register document, we will publish the details of any necessary modifications to the current routine use to implement section 951 of Pub. L. 108-173. We welcome comments on all aspects of these proposed changes.

The numerator of the Medicaid fraction includes hospital inpatient days that are furnished to patients who, for those days, were eligible for Medicaid but were not entitled to benefits under Medicare Part A. Under the regulation at § 412.106(b)(4)(iii), hospitals are responsible for proving Medicaid eligibility for each Medicaid patient day and verifying with the State that patients were eligible for Medicaid on the claimed days. The number of Medicaid, non-Medicare days is divided by the hospital's total number of inpatient days in the same period. Total inpatient days are reported on the Medicare cost report. (This number is also available in the hospital's own records.)

Much of the data used to calculate the Medicaid fraction of the DSH patient percentage are available to hospitals from their own records or from the States. We recognize that Medicaid State plans are only permitted to use and disclose information concerning applicants and recipients for “purposes directly connected with the administration of the [State] plan” under section 1902(a)(7) of the Act. Regulations at 42 CFR 431.302 define these purposes to include establishing eligibility (§ 431.302(a)) and determining the amount of medical assistance (§ 431.302(b)). Thus, State plans are permitted under the currently applicable statutory and regulatory provisions governing the disclosure of individually identifiable data on Medicaid applicants and recipients to provide hospitals the data needed to meet their obligation under § 412.106(b)(4)(iii) in the context of either an “eligibility inquiry” with the State plan or in order to assist the hospital, and thus the State plan, in determining the amount of medical assistance.

In the process of developing a plan for implementing section 951 with respect to the data necessary to calculate the Medicaid fraction, we asked our regional offices to report on the availability of this information to hospitals and on any problems that hospitals face in obtaining the information that they need. The information we received suggested that, in the vast majority of cases, there are established procedures for hospitals or their authorized representatives to obtain the information needed for hospitals to meet their obligation under § 412.106(b)(4)(iii) and to calculate their Medicaid fraction. There is no uniform national method for hospitals to verify Medicaid eligibility for a specific patient on a specific day. For instance, some States, such as Arizona, have secure online systems that providers may use to check eligibility information. However, in most States, providers send a list of patients to the State Medicaid office for verification. Other States, such as Hawaii, employ a third party private company to maintain the Medicaid database and run eligibility matches for providers. The information that providers submit to State plans (or third party contractors) differs among States as well. Most States require the patient's name, date of birth, gender, social security number, Medicaid identification, and admission and discharge dates. States or the third parties may respond with either “Yes/No” or with more detailed Medicaid enrollment and eligibility information such as whether or not the patient is a dual-eligible, whether the patient is enrolled in a fee-for-service or HMO plan, and under which State assistance category the individual qualified for Medicaid. [4]

We note that we have been made aware of at least one instance in which a State is concerned about providing hospitals with the requisite eligibility data. We understand that the basis for the State's objections is section 1902(a)(7) of the Act. The State is concerned that section 1902(a)(7) of the Act prohibits the State from providing eligibility data for any purpose other than a purpose related to State plan administration. However, as described above, we believe that States are permitted to verify Medicaid eligibility for hospitals as a purpose directly related to State plan administration under § 431.302.

In addition, we believe it is reasonable to continue to place the burden of furnishing the data adequate to prove eligibility for each Medicaid patient day claimed for DSH percentage calculation purposes on hospitals because, since they have provided inpatient care to these patients for which they billed the relevant payors, including the State Medicaid plan, they will necessarily already be in possession of much of this information. We continue to believe hospitals are best situated to provide and verify Medicaid eligibility information. Although we believe the mechanisms are currently in place to enable hospitals to obtain the data necessary to calculate their Medicaid fraction of the DSH patient percentage, there is currently no mandatory requirement imposed upon State Medicaid agencies to verify eligibility for hospitals. At this point, we believe there is no need to modify the Medicaid State plan regulations to require that State plans verify Medicaid eligibility for hospitals. However, should we find that States are not voluntarily providing or verifying Medicaid eligibility information for hospitals, we will consider amending the State plan regulations to add a requirement that State plans provide certain eligibility information to hospitals.

H. Geographic Reclassifications (§§ 412.103 and 412.230)

(If you choose to comment on issues in this section, please include the caption “Geographic Reclassifications” at the beginning of your comment.)

1. Background

With the creation of the MGCRB, beginning in FY 1991, under section 1886(d)(10) of the Act, hospitals could request reclassification from one geographic location to another for the purpose of using the other area's standardized amount for inpatient operating costs or the wage index value, or both (September 6, 1990 interim final rule with comment period (55 FR 36754), June 4, 1991 final rule with comment period (56 FR 25458), and June 4, 1992 proposed rule (57 FR 23631)). As a result of legislative changes under section 402(b) of Pub. L. 108-7, Pub. L. 108-89, and section 401 of Pub. L. 108-173, the standardized amount reclassification criterion for large urban and other areas is no longer necessary or appropriate and has been removed from our reclassification policy (69 FR 49103). We implemented this provision in the FY 2005 IPPS final rule (69 FR 49103). As a result, hospitals can request reclassification for the purposes of the wage index only and not the standardized amount. Implementing regulations in Subpart L of Part 412 (§§ 412.230 et seq.) set forth criteria and conditions for reclassifications for purposes of the wage index from rural to urban, rural to rural, or from an urban area to another urban area, with special rules for SCHs and rural referral centers.

Under section 1886(d)(8)(E) of the Act, an urban hospital may file an application to be treated as being located in a rural area if certain conditions are met. The regulations implementing this provision are located under § 412.103.

Effective with reclassifications for FY 2003, section 1886(d)(10)(D)(vi)(II) of the Act provides that the MGCRB must use the average of the 3 years of hourly wage data from the most recently published data for the hospital when evaluating a hospital's request for reclassification. The regulations at § 412.230(d)(2)(ii) stipulate that the wage data are taken from the CMS hospital wage survey used to construct the wage index in effect for prospective payment purposes. To evaluate applications for wage index reclassifications for FY 2006, the MGCRB used the 3-year average hourly wages published in Table 2 of the August 11, 2004 IPPS final rule (69 FR 49295). These average hourly wages are taken from data used to calculate the wage indexes for FY 2003, FY 2004, and FY 2005, based on cost reporting periods beginning during FY 1999, FY 2000, and FY 2001, respectively.

2. Multicampus Hospitals (§ 412.230)

As discussed in section III.B. of this preamble, on June 6, 2003, the OMB announced the new CBSAs, comprised of Metropolitan Statistical Areas (MSAs) and Micropolitan Statistical Areas, based on Census 2000 data. Effective October 1, 2004, for the IPPS, we implemented new labor market areas based on the CBSA definitions of MSAs. In some cases, the new CBSAs resulted in previously existing MSAs being divided into two or more separate labor market areas. In the FY 2005 IPPS final rule (69 FR 48916), we acknowledged that the implementation of the new MSAs would have a considerable impact on hospitals. Therefore, we made every effort to implement transitional provisions that would mitigate the negative effects of the new labor market areas on hospitals that request reclassification to another area for purposes of the wage index and on all hospitals.

Subsequent to the publication of the FY 2005 IPPS final rule, we became aware of a situation in which, as a result of the new labor market areas, a multicampus hospital previously located in a single MSA is now located in more than one CBSA. Under our current policy, a multicampus hospital with campuses located in the same labor market area receives a single wage index. However, if the campuses are located in more than one labor market area, payment for each discharge is determined using the wage index value for the MSA (or metropolitan division, where applicable) in which the campus of the hospital is located. In addition, the current provision set forth in section 2779F of the Medicare State Operations Manual provides that, in the case of a merger of hospitals, if the merged facilities operate as a single institution, the institution must submit a single cost report, which necessitates a single provider identification number. This provision does not differentiate between merged facilities in a single wage index area or in multiple wage index areas. As a result, the wage index data for the merged facility is reported for the entire entity on a single cost report.

The current criteria for a hospital being reclassified to another wage area by the MGCRB do not address the circumstances under which a single campus of a multicampus hospital may seek reclassification. That is, a hospital must provide data from the CMS hospital wage survey for the average hourly wage comparison that is used to support a request for reclassification. However, because a multicampus hospital is required to report data for the entire entity on a single cost report, there is no wage survey data for the individual hospital campus that can be used in a reclassification application. In an effort to remedy this situation, for FY 2007 and subsequent year reclassifications, we are proposing to allow a campus of a multicampus hospital system that wishes to seek geographic reclassification to another labor market area to report campus-specific wage data using a supplemental Form S-3 (CMS' manual version of Worksheet S-3) for purposes of the wage data comparison. These data would then constitute the appropriate wage data under § 412.232(d)(2) for purposes of comparing the hospital's wages to the wages of hospitals in the area to which it seeks reclassification as well as the area in which it is located. Before the data could be used in a reclassification application, the hospital's fiscal intermediary would have to review the allocation of the entire hospital's wage data among the individual campuses.

For FY 2006 reclassification applications, we are proposing to allow a campus of a multicampus hospital system to use the average hourly wage data submitted for the entire multicampus hospital system as its appropriate wage data under § 412.232(d)(2). We are establishing this special rule for FY 2006 reclassifications because the deadline for submitting an application to the MGCRB was September 1, 2004, and there no longer is an opportunity to provide a Supplemental Form S-3 that allocates the wage data by individual hospital campus. This special rule will be applied only to an individual campus of a multicampus hospital system that made an application for reclassification for FY 2006 and that otherwise meets all of the reclassification criteria. We do not believe that the special rule is necessary for reclassifications for FY 2007 because the deadline for making those applications has not yet passed and a hospital seeking reclassification will be able to provide the Supplemental Form S-3 that allocates the wage data by individual hospital campus. We are proposing to apply these new criteria to geographic reclassification applications that were received by September 1, 2004, and that will take effect for FY 2006.

We are proposing to revise the regulations at § 412.230(d)(2) by redesignating paragraph (d)(2)(iii) as paragraph (d)(2)(v) and adding new paragraph (d)(2))(iii) and (d)(2)(iv) to incorporate the proposed new criteria for multicampus hospitals.

3. Urban Group Hospital Reclassifications

In FY 2005 IPPS final rule (69 FR 49104), we set forth, under § 412.234(a)(3)(ii), revised criteria for urban hospitals to be reclassified as a group. After the publication of the final rule, we became aware that portions of our policy discussion with respect to the implementing decision were inadvertently omitted. This policy was corrected in the October 7, 2004, correction to the final rule (69 FR 60248). The correction specified that “hospitals located in counties that are in the same Combined Statistical Area (under the MSA definitions announced by the OMB on June 6, 2003); or in the same Consolidated Metropolitan Statistical Area (CMSA) (under the standards published by the OMB on March 30, 1990) as the urban area to which they seek redesignation qualify as meeting the proximity requirement for reclassification to the urban area to which they seek redesignation.”

In making the determination to revise our urban group reclassification policy, we took into consideration the magnitude of the changes that would have resulted from our adoption of the new labor market areas. The resulting policy was intended to preserve the reclassification opportunities for urban county groups; in other words, an eligible urban county group would have to meet either the CSA or CMSA criteria, but not both to be eligible for consideration.

As a result of adopting the new labor market area definitions, we reexamined the appropriateness of the FY 2005 changes with emphasis on determining whether including “* * * or in the same Consolidated Metropolitan Statistical Area (CMSA) (under the standards published by the OMB on March 30, 1990)” as a qualifying criterion, is necessary or consistent with our plans to fully implement the new labor area market definitions.

Based on our experiences now that the new labor market areas are in effect and since we revised the urban county group regulations, we no longer think it is necessary to retain use of a 1990-based standard as a criterion for determining whether an urban county group is eligible for reclassification. We believe it is reasonable to use the area definitions that are based on the most recent statistics; in other words, the CSA standard. Therefore, we are proposing to delete § 412.234(a)(3)(ii) to remove reference to the CMSA eligibility criterion. Beginning with FY 2006, we are proposing to require that hospitals must be located in counties that are in the same Combined Statistical Area (under the MSA definitions announced by the OMB on June 6, 2003) as the urban area to which they seek redesignation to qualify as meeting the proximity requirement for reclassification to the urban area to which they seek redesignation. We believe that this proposed change would improve the overall consistency of our policies by using a single labor market area definition for all aspects of the wage index and reclassification.

4. Clarification of Goldsmith Modification Criterion for Urban Hospitals Seeking Reclassification as Rural

Under section 1886(d)(8)(E) of the Act, certain urban hospitals may file an application for reclassification as rural if the hospital meets certain criteria. One of these criteria is that the hospital is located in a rural census tract of a CBSA, as determined under the most recent version of the Goldsmith Modification as determined by the Office of Rural Health Policy. This provision is implemented in our regulations at § 412.103(a)(1).

The original Goldsmith Modification was developed using data from the 1980 census. In order to more accurately reflect current demographic and geographic characteristics of the Nation, the Office of Rural Health Policy, in partnership with the Department of Agriculture's Economic Research Service and the University of Washington, has developed the Rural-Urban Commuting Area codes (RUCAs) (69 FR 47518 through 47529, August 5, 2004). Rather than being limited to large area metropolitan counties (LAMCs), RUCAs use urbanization, population density, and daily commuting data to categorize every census tract in the country. RUCAs are the updated version of the Goldsmith Modification and are used to identify rural census tracts in all metropolitan counties.

We are proposing to update the Medicare regulations at § 412.103(a)(1) to incorporate this change in the identification of rural census tracts. We are also proposing to update the website and the agency location at which the RUCA codes are accessible.

5. Cross-Reference Changes

In the FY 2005 IPPS final rule, in conjunction with changes made by various sections of Pub. L. 108-173 and changes in the OMB standards for defining labor market areas, we established a new § 412.64 governing rules for establishing Federal rates for inpatient operating costs for FY 2005 and subsequent years. In this new section, we included definitions of “urban” and “rural” for the purpose of determining the geographic location or classification of hospitals under the IPPS. These definitions were previous located in § 412.63(b), applicable to FYs 1985 through 2004, and in § 412.62(f), applicable to FY 1984. References to the definitions under § 412.62(f) and § 412.63(b), appear throughout 42 CFR Chapter IV. However, when we finalized the provisions of § 412.64, we inadvertently omitted updating some of these cross-references to reflect the change in the location of the two definitions for FYs 2005 and subsequent years. We are proposing to change the cross-references to the definitions of “urban” and “rural” to reflect their current locations in Subpart D of Part 412, as applicable.

I. Payment for Direct Graduate Medical Education (§ 413.79)

(If you choose to comment on issues in this section, please include the caption “Graduate Medical Education” at the beginning of your comment.)

1. Background

Section 1886(h) of the Act, as added by section 9202 of the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985 (99) and implemented in regulations at existing §§ 413.75 through 413.83, establishes a methodology for determining payments to hospitals for the costs of approved graduate medical education (GME) programs. Section 1886(h)(2) of the Act, as added by COBRA, sets forth a payment methodology for the determination of a hospital-specific, base-period per resident amount (PRA) that is calculated by dividing a hospital's allowable costs of GME for a base period by its number of residents in the base period. The base period is, for most hospitals, the hospital's cost reporting period beginning in FY 1984 (that is, the period of beginning between October 1, 1983, through September 30, 1984). Medicare direct GME payments are calculated by multiplying the PRA times the weighted number of full-time equivalent (FTE) residents working in all areas of the hospital (and nonhospital sites, when applicable), and the hospital's Medicare share of total inpatient days. In addition, as specified in section 1886(h)(2)(D)(ii) of the Act, for cost reporting periods beginning on or after October 1, 1993, through September 30, 1995, each hospital-specific PRA for the previous cost reporting period is not updated for inflation for any FTE residents who are not either a primary care or an obstetrics and gynecology resident. As a result, hospitals that train primary care and obstetrics and gynecology residents, as well as nonprimary care residents in FY 1994 or FY 1995, have two separate PRAs: One for primary care and obstetrics and gynecology residents and one for nonprimary care residents.

Pub. L. 106-113 amended section 1886(h)(2) of the Act to establish a methodology for the use of a national average PRA in computing direct GME payments for cost reporting periods beginning on or after October 1, 2000, and on or before September 30, 2005. Pub. L. 106-113 established a “floor” for hospital-specific PRAs equal to 70 percent of the locality-adjusted national average PRA. In addition, the BBRA established a “ceiling” that limited the annual adjustment to a hospital-specific PRA if the PRA exceeded 140 percent of the locality-adjusted national average PRA. Section 511 of the BIPA (Pub. L. 106-554) increased the floor established by the BBRA to equal 85 percent of the locality-adjusted national average PRA. Existing regulations at § 413.77(d)(2)(iii) specify that, for purposes of calculating direct GME payments, each hospital-specific PRA is compared to the floor and the ceiling to determine whether a hospital-specific PRA should be revised.

Section 1886(h)(4)(F) of the Act established limits on the number of allopathic and osteopathic residents that hospitals may count for purposes of calculating direct GME payments. For most hospitals, the limits were the number of allopathic and osteopathic FTE residents training in the hospital's most recent cost reporting period ending on or before December 31, 1996.

2. Direct GME Initial Residency Period (IRP) § 413.79(a)(10)

a. Background

As we have generally described above, the amount of direct GME payment to a hospital is based in part on the number of FTE residents the hospital is allowed to count for direct GME purposes during a year. The number of FTE residents, and thus the amount of direct GME payment to a hospital, is directly affected by CMS policy on how “initial residency periods” are determined for residents. Section 1886(h)(4)(C)(ii) of the Act, implemented at § 413.79(b)(1), provides that while a resident is in the “initial residency period” (IRP), the resident is weighted at 1.00. Section 1886(h)(4)(C)(iii) of the Act, implemented at § 413.79(b)(2), requires that if a resident is not in the resident's IRP, the resident is weighted at .50 FTE resident.

Section 1886(h)(5)(F) of the Act defines “initial residency period” as the “period of board eligibility,” and, subject to specific exceptions, limits the initial residency period to an “aggregate period of formal training” of no more than 5 years for any individual. Section 1886(h)(5)(G) of the Act generally defines “period of board eligibility” for a resident as “the minimum number of years of formal training necessary to satisfy the requirements for initial board eligibility in the particular specialty for which the resident is training.” Existing § 413.79(a) of the regulations generally defines “initial residency period” as the “minimum number of years required for board eligibility.” Existing § 413.79(a)(5) provides that “time spent in residency programs that do not lead to certification in a specialty or subspecialty, but that otherwise meet the definition of approved programs * * * is counted toward the initial residency period limitation.” Section 1886(h)(5)(F) of the Act further provides that “the initial residency period shall be determined, with respect to a resident, as of the time the resident enters the residency training program.”

The IRP is determined as of the time the resident enters the “initial” or first residency training program and is based on the period of board eligibility associated with that medical specialty. Thus, these provisions limit the amount of FTE resident time that may be counted for a resident who, after entering a training program in one specialty, switches to a program in a specialty with a longer period of board eligibility or completes training in one specialty training program and then continues training in a subspecialty (for example, cardiology and gastroenterology are subspecialties of internal medicine).

b. Direct GME Initial Residency Period Limitation: Simultaneous Match

We understand that there are numerous programs, including anesthesiology, dermatology, psychiatry, and radiology, that require a year of generalized clinical training to be used as a prerequisite for the subsequent training in the particular specialty. For example, in order to become board eligible in anesthesiology, a resident must first complete a generalized training year and then complete 3 years of training in anesthesiology. This first year of generalized residency training is commonly known as the “clinical base year.” Often, the clinical base year requirement is fulfilled by completing either a preliminary year in internal medicine (although the preliminary year can also be in other specialties such as general surgery or family practice), or a transitional year program (which is not associated with any particular medical specialty).

In many cases, during the final year of medical school, medical students apply for training in specialty residency training programs. Typically, a medical student who wants to train to become a specialist is “matched” to both the clinical base year program and the specialty residency training program at the same time. For example, the medical student who wants to become an anesthesiologist will apply and “match” simultaneously for a clinical base year in an internal medicine program for year 1 and for an anesthesiology training program beginning in year 2.

Prior to October 1, 2004, CMS' policy was that the IRP is determined for a resident based on the program in which he or she participates in the resident's first year of training, without regard to the specialty in which the resident ultimately seeks board certification. Therefore, for example, a resident who chooses to fulfill the clinical base year requirement for an anesthesiology program with a preliminary year in an internal medicine program will be “labeled” with the IRP associated with internal medicine, that is, 3 years (3 years of training are required to become board eligible in internal medicine), even though the resident may seek board certification in anesthesiology, which requires a minimum of 4 years of training to become board eligible. As a result, this resident would have an IRP of 3 years and, therefore, be weighted at 0.5 FTE in his or her fourth year of anesthesiology training for purposes of direct GME payment.

Effective with cost reporting periods beginning on or after October 1, 2004, to address programs that require a clinical base year, we revised our policy in the FY 2005 IPPS final rule (69 FR 49170 through 49174) concerning the IRP. Specifically, under the revised policy, if a hospital can document that a particular resident matches simultaneously for a first year of training in a clinical base year in one medical specialty, and for additional year(s) of training in a different specialty program, the resident's IRP will be based on the period of board eligibility associated with the specialty program in which the resident matches for the subsequent year(s) of training and not on the period of board eligibility associated with the clinical base year program. This change in policy is codified at § 413.79(a)(10) of the regulations.

This policy applies regardless of whether the resident completes the first year of training in a separately accredited transitional year program or in a preliminary (or first) year in another residency training program such as internal medicine.

In addition, because programs that require a clinical base year are nonprimary care specialties, we specified in § 413.79(a)(10) that the nonprimary care PRA would apply for the entire duration of the initial residency period. By treating the first year as part of a nonprimary care specialty program, the hospital will be paid at the lower nonprimary care PRA rather than the higher primary care PRA, even if the residents are training in a primary care program during the clinical base year.

In the FY 2005 IPPS final rule (69 FR 49170 and 49171), we also defined “residency match” to mean, for purposes of direct GME, a national process by which applicants to approved medical residency programs are paired with programs on the basis of preferences expressed by both the applicants and the program directors.

These policy changes, which were effective October 1, 2004, are only applicable to residents that simultaneously match in both a clinical base year program and a longer specialty residency program. We have become aware of situations where residents, upon completion of medical school, only match for a program beginning in the second residency year in an advanced specialty training program but fail to match for a clinical base year of training. Residents that match into an advanced program but fail to match into a clinical base year program may independently pursue unfilled residency positions in preliminary year programs after the match process is complete. However, because these residents do not “simultaneously match” into both a preliminary year and an advanced program, currently their IRP cannot be determined based on the period of board eligibility associated with the advanced program, as specified in § 413.79(a)(10). Rather, the IRP for such residents would continue to be determined based on the specialty associated with the preliminary year program. For example, a student in the final year of medical school may match into a radiology program that begins in the second residency year, but not match with any clinical base year program. Under our current policy, if subsequent to conclusion of the match process, this resident secured a preliminary year position in an internal medicine program, the resident would not have met the requirements at § 413.79(a)(10) for a simultaneous match and the IRP for this resident would be based on the length of time required to complete an internal medicine program (3 years) rather than the length of the radiology program (4 years).

The intent of the “simultaneous match” provision of § 413.79(a)(10) is to identify in a verifiable manner the specialty associated with the program in which the resident will initially train and seek board certification. It is also the intent of § 413.79(a)(10) that a resident's IRP would not change if the resident, after initially entering a training program in one specialty, changes programs to train in another medical specialty. The “simultaneous match” provisions of § 413.79(a)(10) allow CMS to both identify the specialty associated with the program in which the resident is ultimately expected to train and seek board certification and prevent inappropriate revision of the IRP in cases where a resident changes specialties subsequent to beginning residency training. However, we note that when a medical student in his or her final year of medical school matches into an advanced program (for example, anesthesiology) for the second program year, but fails to match in a clinical base year, and obtains a preliminary year position outside the match process, we can still identify the specialty associated with the program in which the resident is ultimately expected to train and seek board certification and prevent inappropriate changes to the IRP if the resident changes specialties subsequent to beginning residency training.

Therefore, we are proposing to revise § 413.79(a)(10) to state that, when a hospital can document that a resident matched in an advanced residency training program beginning in the second residency year prior to commencement of any residency training, the resident's IRP will be determined based on the period of board eligibility for the specialty associated with the advanced program, without regard to the fact that the resident had not matched for a clinical base year training program.

We note that this proposed policy change would not result in a policy to determine the IRP for all residents who must complete a clinical base year during the second residency training year based on the specialty associated with that second residency training year. That is, we are not proposing that, for any resident whose first year of training is completed in a program that provides a general clinical base year as required by the ACGME for certain specialties, an IRP should be assigned in the second year based on the specialty the resident enters in the second year of training. As we stated in the FY 2005 IPPS final rule (69 FR 49172), a “second year” policy would not allow CMS to distinguish between those residents who, in their second year of training, match in a specialty program prior to their first year of training, those residents who participated in a clinical base year in a specialty and then continued training in that specialty, and those residents who simply switched specialties in their second year. Rather, we are proposing that, if a hospital can document that a particular resident had matched in an advanced specialty program that requires completion of a clinical base year prior to the resident's first year of training, the IRP would not be determined based on the period of board eligibility for the specialty associated with the clinical base year program, for purposes of direct GME payment. Rather, under those circumstances, the IRP would be determined based upon the period of board eligibility associated with the specialty program in which the resident has matched and is expected to begin training in the second program year.

3. New Teaching Hospitals' Participation in Medicare GME Affiliated Groups (§ 413.79(e)(1))

In the August 29, 1997 final rule (62 FR 46005 through 46006) and the May 12, 1998 final rule (63 FR 26331 through 23336), we established rules for applying the FTE resident limit (or “FTE cap”) for calculating Medicare direct GME and IME payments to hospitals. We added regulations, currently at § 413.79(e), to provide for an adjustment to the FTE cap for certain hospitals that begin training residents in new medical residency training programs. For purposes of this provision, a new program is one that receives initial accreditation or begins training residents on or after January 1, 1995. Although we refer only to the direct GME provision throughout the remainder of this discussion, a similar cap adjustment is made under § 412.105(f) for IME purposes. Therefore, this proposal applies to both IME and direct GME.

A new teaching hospital is one that had no allopathic or osteopathic residents in its most recent cost reporting period ending on or before December 31, 1996. Under § 413.79(e)(1), if a new teaching hospital establishes one or more new medical residency training programs, the hospital's unweighted FTE caps for both direct GME and IME will be based on the product of the highest number of FTE residents in any program year in the third year of the hospital's first new program and the number of years in which residents are expected to complete the program(s), based on the minimum number of years of training that are accredited for the type of program(s).

The regulations at § 413.79(e)(1)(iv) specify that hospitals in urban areas that qualify for an FTE cap adjustment for residents in newly approved programs under § 413.79(e)(1) are not permitted to be part of a Medicare GME affiliated group for purposes of establishing an aggregate FTE cap. (A Medicare GME affiliated group is defined in the regulations at § 413.75(b).) We established this policy because of our concern that hospitals with existing medical residency training programs could otherwise, with the cooperation of new teaching hospitals, circumvent the statutory FTE resident caps by establishing new medical residency programs in the new teaching hospitals solely for the purpose of affiliating with the new teaching hospitals to receive an upward adjustment to their FTE cap under an affiliation agreement. This would effectively allow existing teaching hospitals to achieve an increase in their FTE resident caps beyond the number allowed by their statutory caps.

In contrast, hospitals in rural areas that qualify for an adjustment under § 413.79(e)(1)(v) are allowed to enter into a Medicare GME affiliation. Although we recognize that rural hospitals would not be immune from the kind of “gaming” arrangement described above, we allow new rural teaching hospitals that begin training residents in new programs, and thereby increase their FTE cap, to affiliate because we understand that rural hospitals may not have a sufficient volume of patient care utilization at the rural hospital site to be able to support a training program that meets accreditation standards. Securing sufficient patient volumes to meet accreditation requirements may necessitate rotations of the residents to another hospital. Accordingly, the regulations allow new teaching hospitals in rural areas to enter into Medicare GME affiliation agreements. However, an affiliation is only permitted if the rural hospital provides training for at least one-third of the FTE residents participating in all of the joint programs of the affiliated hospitals because, as we stated in the May 12, 1998 Federal Register (63 FR 26333), we believe that requiring at least one-third of the training to take place in the rural area allows operation of programs that focus on, but are not exclusively limited to, training in rural areas.

Through comment and feedback from industry trade groups and hospitals, we understand that, while these rules were meant to prevent gaming on the part of existing teaching hospitals, they could also preclude affiliations that clearly are designed to facilitate additional training at the new teaching hospital.

For example, Hospital A had no allopathic or osteopathic residents in its most recent cost reporting period ending on or before December 31, 1996. As such, Hospital A's caps for direct GME and IME are both zero. Hospital A and Hospital B enter into a Medicare GME affiliation for the academic year beginning on July 1, 2003, and ending on June 30, 2004. On July 1, 2003, Hospital A begins training residents from an existing family medicine program located at Hospital B. This rotation will result in 5 FTE residents training at Hospital A. Through the affiliation agreement, Hospital A receives a positive adjustment of 5 FTE's for both its direct GME and IME caps. Hospital B receives a corresponding negative adjustment of 5 FTEs under the affiliation agreement. Hospital A's Board of Directors is interested in starting a new residency program in Internal Medicine that would begin training residents at Hospital A on July 1, 2005. If Hospital A establishes the new program, under existing Medicare regulations, Hospital A will have its direct GME and IME caps (which were both previously established at zero) permanently adjusted to reflect the additional residents training in the newly approved program in accordance with § 413.79(e)(1). However, under existing regulations, Hospital A may no longer enter into an affiliation with Hospital B after it receives the adjustment to its FTE caps under § 413.79(e)(1).

We are proposing to revise § 413.79(e)(1)(iv) so that new urban teaching hospitals that qualify for an adjustment under § 413.79(e)(1) may enter into a Medicare GME affiliation agreement under certain circumstances. Specifically, a new urban teaching hospital that qualifies for an adjustment to its FTE caps for a newly approved program may enter into a Medicare GME affiliation agreement, but only if the resulting adjustments to its direct GME and IME caps are “positive adjustments.” “Positive adjustment” means, for the purpose of this policy, that there is an increase in the new teaching hospital's caps as a result of the affiliation agreement. At no time would the caps of a hospital located in an urban area that qualifies for adjustment to its FTE caps for a new program under § 413.79(e)(1), be allowed to decrease as a result of a Medicare GME affiliation agreement. We believe this proposed policy change would allow new urban teaching hospitals flexibility to start new teaching programs without jeopardizing their ability to count additional FTE residents training at the hospital under an affiliation agreement.

We remain concerned that hospitals with existing medical residency training programs could cooperate with a new teaching hospital to circumvent the statutory FTE caps by establishing new programs at the new teaching hospital, and, through a Medicare GME affiliation agreement, moving most or all of the new residency program to its own hospital, thereby receiving an upward adjustment to its FTE caps. For this reason, we are proposing to revise § 413.79(e)(1)(iv) of the regulations to provide that a hospital that qualifies for an adjustment to its caps under § 413.79(e)(1) would not be permitted to enter into an affiliation agreement that would produce a negative adjustment to its FTE resident cap.

Continuing the example shown above, under the proposed change in policy, Hospital A and Hospital B would be able to continue the Medicare GME affiliation agreement under which Hospital A trained residents from Hospital B's family practice program because Hospital A would receive an increase in its direct GME or IME caps under an affiliation after qualifying for a new program adjustment under § 413.79(e)(1). However, Hospital B would not be able to receive an increase in its caps as a result of a Medicare GME affiliation agreement with Hospital A.

Thus, we are proposing the above policy change to provide some flexibility to hospitals that are currently prohibited from entering into a Medicare GME affiliation agreement, while continuing to protect the statutory FTE resident caps from being undermined by gaming. We solicit comments on the proposed change.

4. GME FTE Cap Adjustment for Rural Hospitals (§ 413.79(c) and (k))

As stated earlier under section V.I.1. of this preamble, Medicare makes both direct and indirect GME payments to hospitals for the training of residents. Direct GME payments are made in accordance with section 1886(h) of the Act, based generally on the hospital-specific PRA, the number of FTE residents a hospital trains, and the hospital's percentage of Medicare inpatient utilization. Indirect GME payments (referred to as IME) are made in accordance with section 1886(d)(5)(B) of the Act as an adjustment to DRG payment and are based generally on the ratio of the hospital's FTE residents to the number of hospital beds. It is well-established that the calculation of both direct GME and IME payments is affected by the number of FTE residents a hospital is allowed to count; generally, the greater the number of FTE residents a hospital counts, the greater the amount of Medicare direct GME and IME payments the hospital will receive.

Effective October 1, 1997, Congress instituted caps on the number of allopathic and osteopathic residents a hospital is allowed to count for direct GME and IME purposes at sections 1886(h)(4)(F) (direct GME) and 1886(d)(5)(B)(v) (IME) of the Act. These caps were instituted in an attempt to end the implicit incentive for hospitals to increase the number of FTE residents. Dental and podiatric residents were not included in these statutorily mandated caps.

Congress provided certain exceptions for rural hospitals when establishing the 1996 caps “with the intent of encouraging physician training and practice in rural areas” (65 FR 47032). For example, the statute states at section 1886(h)(4)(H)(i) that, in promulgating rules regarding application of the FTE caps to training programs established after January 1, 1995, “the Secretary shall give special consideration to facilities that meet the needs of underserved rural areas.” Accordingly, in implementing this provision, we provided in the regulations under § 413.86(g)(6)(i)(C) (now § 413.79(e)(1)(iii)) that “except for rural hospitals, the cap will not be adjusted for new programs established more than 3 years after the first program begins training residents. In other words, only hospitals located in rural areas (that is, areas that are not designated as an MSA), receive adjustments to their unweighted FTE caps to reflect residents in new medical residency training programs past the third year after the first residency program began training in that hospital (62 FR 46006).

Section 413.79(e)(1) specifies the new program adjustment as the “product of the highest number of residents in any program year during the third year of the * * * program's existence * * * and the number of years in which residents are expected to complete the program based on the minimum accredited length for the type of program.” The regulation applies only to new programs (as defined under § 413.79(1)) established by rural hospitals, not for expansion of previously existing programs. For example, if a rural hospital has an unweighted FTE cap for direct GME of 100 and begins training residents in a new 3-year residency program that has 10 residents in each of its first 3 program years (for a total of 30 residents in the entire program in the program's third year), the hospital's direct GME FTE cap of 100 would be permanently adjusted at the conclusion of the third program year by 30, and the hospital's new FTE cap would be 130. A similar adjustment would be made to the hospital's FTE cap for IME in accordance with the regulations at § 412.105(f)(1)(iv)(A). However, the rural hospital would not be able to receive adjustments to its FTE cap for any expansion of a preexisting program.

In 1999, Congress passed an additional provision under section 407 of Pub. L. 106-113 (BBRA) to promote physician training in rural areas. Section 407 of the Pub. L. 106-113 amended the FTE caps provision at sections 1886(h)(4)(F) and 1886(d)(5)(B)(v) of the Act to provide that “effective for cost reporting periods beginning on or after April 1, 2000, [a rural hospital's FTE cap] is 130 percent of the unweighted FTE count * * * for those residents for the most recent cost reporting period ending on or before December 31, 1996.” In other words, the otherwise applicable FTE caps for rural hospitals were multiplied by 1.3 to encourage rural hospitals to expand preexisting residency programs. (As described above, even prior to the BBRA change, rural hospitals were able to receive FTE cap adjustments for new programs.) For example, a hospital that was rural as of April 1, 2000, and had a direct GME cap of 100 FTEs would receive a permanent cap adjustment of 30 FTEs (100 FTEs × 1.3 = 130 FTEs) and effective for cost reporting periods beginning on or after April 1, 2000, its FTE for direct GME would be 130. (A similar adjustment would be made to the FTE cap for IME for discharges occurring on or after April 1, 2000.)

We recently received questions regarding the application of the 130-percent FTE cap adjustment and the new program adjustment for rural hospitals in instances in which a rural teaching hospital is later redesignated as an urban hospital or reclassifies back to being an urban hospital after having been classified as rural. We are aware of two circumstances when a rural hospital may subsequently be reclassified as urban. The first circumstance involves labor market area changes, and the second involves urban hospitals, after having been reclassified as rural through section 1886(d)(8)(E) of the Act, that elect to be considered urban again. In both situations, if the hospital in question was a teaching hospital, its FTE caps would have been subject to the 130 percent and new program FTE cap adjustments while it was designated or classified as rural. The issue is whether the adjusted caps would continue to apply after the hospital becomes urban or returns to being treated as urban. Below we first address hospitals that lost their status as urban hospitals due to new labor market areas. We then address hospitals that rescinded their section 1886(d)(8)(E) reclassifications. (We note that reclassification by the MGCRB under section 1886(d)(10) of the Act, as well as reclassifications under section 1886(d)(8)(B) of the Act, are effective only for purposes of the wage index and would not affect the hospital's IME or direct GME payments).

a. Formerly Rural Hospitals That Became Urban Due to the New CBSA Labor Market Areas

In the FY 2005 IPPS final rule, we adopted the new CBSA-based labor market areas announced by OMB on June 6, 2003, and these areas became effective October 1, 2004. As a result of these new labor market areas, a number of hospitals that previously were located outside of an MSA and therefore considered rural are now located in a CBSA that is designated as urban and considered urban.

We believe that previously rural hospitals that received adjustments due to establishing new medical training programs should not now be required to forego such adjustments simply because they have now been redesignated as urban. Such hospitals added and received accreditation for new medical training programs under the assumption that such programs would effect a permanent increase in their FTE caps. Indeed, we believe it would be nonsensical to view the fact that these hospitals are now urban as causing them to lose the adjustments that stemmed directly from the permissible and encouraged establishment of new medical training programs. Such hospitals cannot reach back into the past and alter whether they added the new programs or not. Nor would it be reasonable to prohibit them from counting FTE residents training in new programs that they worked to accredit. (We note that the hospitals would not be required to close the programs. Rather, if they were not permitted to retain the adjustments to their FTE caps they received as a result of having established new programs, they would no longer be permitted to count FTE residents that exceeded their original, preadjustment FTE caps for purposes of direct GME and IME payments. The effect might be that the hospital would have to close the program(s) as a result of decreased Medicare funding, but the hospital would be free to continue to operate the programs(s).)

For these reasons, we believe the best reading of our regulation at § 413.79(e)(3), which states that if a hospital “is located in a rural area,” it may adjust its FTE cap to reflect residents training in new programs, is that hospitals were permitted to receive a permanent adjustment to their FTE caps if, at the time of adding a new program, the hospitals were rural. A hospital's subsequent designation as urban or rural due to labor market area changes becomes irrelevant, because the central question is whether the hospital is rural at the time it adds the new programs. Therefore, we are clarifying in this proposed rule our policy that hospitals that became urban in FY 2005 due to the new labor market areas would nevertheless be permitted to retain the adjustments they received for new programs as long as they were rural at the time they received them. (Once such hospitals receive a designation as “urban,” they may no longer seek FTE cap adjustments relating to new training programs; they may only retain the adjustments they received for the new programs they added when they were rural.)

Similarly, we believe that rural hospitals that received the statutorily mandated 130 percent adjustment to their FTE caps would be disadvantaged if we were to rescind this adjustment due to new urban designation. Such hospitals expanded their already existing training programs under the assumption that these expansions would cause a permanent increase in their FTE caps. Many of these hospitals expanded their programs only once the BBRA became effective (in 2000). Thus, they have had only a few years to expand their programs and receive the cap adjustment mandated by statute. For these reasons, we believe it is permissible to read sections 1886(h)(4)(F)(i) and 1886(d)(5)(B)(v) of the Act as permitting a permanent adjustment to the FTE caps at the time a rural hospital adds residents to its already existing program(s). The language states that the total number of FTE residents with respect to a “hospital's approved medical residency training program in the fields of allopathic medicine and osteopathic medicine may not exceed the number (or, 130 percent of such number in the case of a hospital located in a rural area) of such full-time equivalent residents for the hospital's most recent cost reporting period ending on or before December 31, 1996.” As with the addition of new programs, we interpret the language “130 percent of such number in the case of a hospital located in a rural area,” as meaning only that the hospital was required to be rural at the time it received the 30-percent increase. Once the hospital received such increase, the increase became a permanent increase in the FTE cap and should not be rescinded based on subsequent designation as an urban hospital.

We believe our interpretations are consistent with legislative intent. Congress provided for these FTE cap adjustments for rural hospitals with the intent of encouraging physician training and practice in rural areas. If rural hospitals had believed that new CBSAs would cause them to lose the adjustments, they would not have had the incentives Congress wished to increase the number of FTE residents training in their programs. These hospitals might have feared losing the adjustments as a result of new labor market areas, and therefore not carried out Congress' intent to expand their already existing residency training programs or add new residency training programs.

To provide an example of the how the above statutory interpretations would be applied, a hospital located in a rural area prior to October 1, 2004, with an unweighted direct GME FTE cap of 100 would have received a 30-percent increase in its FTE cap so that its adjusted cap was 130 FTEs. The rural hospital also could have received an adjustment for any new medical residency program. If this hospital, while rural, started a new 3-year residency program with 10 residents in each program year, its FTE cap would have been increased by an additional 30 FTEs to 160 FTEs (that is, (100 FTEs × 1.3) + 30 FTEs = 160 FTEs). Under our reading of the statute, if this hospital is now located in an urban area due to the new CBSAs, it would retain this cap of 160 FTEs.

We also believe that the statute should be interpreted as permitting urban hospitals with rural track training programs to retain the adjustment they received for such programs at § 413.79(k), even if the “rural” tracks as of October 1, 2004, are now located in urban areas due to the new OMB labor market areas. As explained in the FY 2001 IPPS final rule (66 FR 47033), we provided that an urban hospital that establishes a separately accredited medical residency training program in a rural area (that is, a rural track) may receive an adjustment to reflect the number of residents in that program (existing § 413.79(k)). Section 1886(h)(4)(H)(iv) of the Act states: “In the case of a hospital that is not located in a rural area but establishes separately accredited approved medical residency training programs (or rural tracks) in an (sic) rural area or has an accredited training program with an integrated rural track, the Secretary shall adjust the limitation under subparagraph (F) in an appropriate manner insofar as it applies to such programs in such rural areas in order to encourage the training of physicians in rural areas.”

Again, we believe that the reading that best carries out Congressional intent is one that allows the adjustment for rural tracks to remain permanent as long as the rural track training programs continue, even if the once-rural tracks are now urban due to new labor market area boundaries. Congress clearly intended to encourage the training of physicians in the rural tracks identified by the statute. However, if the FTE cap adjustments were merely temporary, and hospitals could not rely on retaining the adjustments relating to the rural training programs in which they invested, then Congress' wishes to encourage rural training programs might not have been realized. Hospitals would always need to speculate as to whether the FTE cap adjustments relating to the rural track programs they established would be lost each time new labor market areas were adopted (which normally occurs once every 10 years). Thus, we believe the statutory language should be interpreted as allowing an urban hospital to retain its FTE cap adjustment for rural track programs as long as the tracks were actually located in rural areas at the time the urban hospital received its adjustment. However, if the urban hospital wants to receive a cap adjustment for a new rural track residency program, the rural track must involve rural hospitals that are located in rural areas based on the most recent OMB labor market designations as specified in the FY 2005 IPPS final rule. We are proposing to add a new paragraph (k)(7) to § 413.79 to incorporate this proposal.

b. Section 1886(d)(8)(E)Hospitals

As stated above, a second situation exists where a hospital that is treated as rural returns to being urban under section 1886(d)(8)(E) of the Act (§ 412.103 of the regulations). Under this provision, an urban hospital may file an application to be treated as being located in a rural area. A hospital's reclassification as located in a rural area under this provision affects only payments under section 1886(d) of the Act. Accordingly, a hospital that is treated as rural under this provision can receive the FTE cap adjustments that any other rural hospital receives, but only to the FTE cap that applies for purposes of IME payments, which are made under section 1886(d) of the Act. The hospital could not receive adjustments to its direct GME FTE cap because payments for direct GME are made under section 1886(h) of the Act and the section 1886(d)(8)(E) reclassifications affect only the payments that are made under that section 1886(d) of the Act. Therefore, a hospital that reclassifies as rural under section 1886(d)(8)(E) of the Act may receive the 130-percent adjustment to its IME FTE cap and its IME FTE cap may be adjusted for any new programs, similar to hospitals that are actually located in a rural location. A hospital treated as rural under section 1886(d)(8)(E) of the Act may subsequently withdraw its election and return to its urban status under the regulations at § 412.103. We are proposing that, effective with discharges occurring on or after October 1, 2005, a different policy should apply for hospitals that reclassify under section 1886(d)(8)(E) of the Act than the policy that applies to rural hospitals redesignated as urban due to changes in labor market areas, as discussed in section IV.F.3 of this preamble.

5. Technical Changes: Cross References

  • In the FY 2005 IPPS final rule (69 FR 49234), we redesignated the contents of § 413.86 as §§ 413.75 through 413.83. We also updated cross-references to § 413.86 that were located in various sections under 42 CFR Parts 400 through 499. We inadvertently did not capture all of the needed cross-reference changes. In this proposed rule, we are proposing to correct the additional cross-references in 42 CFR Parts 405, 412, 413, 415, 419, and 422 that were not made in the August 11, 2004 final rule.
  • When we redesignated § 413.86 as §§ 413.75 through 413.83 in the FY 2005 IPPS final rule, we also made a corresponding redesignation of § 413.80 as § 413.89. We are proposing to correct cross-references to § 413.80 in 42 CFR Parts 412, 413, 417, and 419 to reflect the redesignation of this section as § 413.89.

J. Provider-Based Status of Facilities and Organizations Under Medicare

(If you choose to comment on issues in this section, please include the caption “Provider-Based Entities” at the beginning of your comment.)

1. Background

Since the beginning of the Medicare program, some providers, which we refer to as “main providers,” have functioned as a single entity while owning and operating multiple provider-based departments, locations, and facilities that were treated as part of the main provider for Medicare purposes. Having clear criteria for provider-based status is important because this designation can result in additional Medicare payments for services furnished at the provider-based facility, and may also increase the coinsurance liability of Medicare beneficiaries for those services.

To set forth Medicare policies with regard to the provider-based status of facilities and organizations, we have published a number of Federal Register documents as follows:

  • In a proposed rule published in the Federal Register on September 8, 1998 (63 FR 47552), we proposed specific and comprehensive criteria for determining whether a facility or organization is provider-based. In the preamble to the proposed rule, we explained why we believed meeting each criterion would be necessary to a finding that a facility or organization qualifies for provider-based status. After considering public comments on the September 8, 1998 proposed rule and making appropriate revisions, on April 7, 2000 (65 FR 18504), we published a final rule setting forth the provider-based regulations at 42 CFR 413.65.
  • Before the regulations that were issued on April 7, 2000 could be implemented, Congress enacted the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA), Pub. L. 106-544. Section 404 of BIPA delayed implementation of the April 7, 2000 provider-based rules with respect to many providers, and mandated changes in the criteria at § 413.65 for determining provider-based status.
  • In order to conform our regulations to the requirements of section 404 of BIPA and to codify certain clarifications of provider-based policy that had previously been posted on the CMS Web site, we published another proposed rule on August 24, 2001 (66 FR 44672). After considering public comments on the August 24, 2001 proposed rule and making appropriate revisions, we published a final rule on November 30, 2001 setting forth the provider-based regulations (66 FR 59909).
  • On May 9, 2002, we proposed further significant revisions to the provider-based regulations at § 413.65 (67 FR 31480). After considering public comments on the May 9, 2002 proposed rule and making appropriate revisions, on August 1, 2002, we published a final rule specifying the criteria that must be met to qualify for provider-based status (67 FR 50078). These regulations remain in effect and continue to be codified at § 413.65.

Following is a discussion of the major provisions of the provider-based regulations: Section 413.65(a) of the regulations describes the scope of that section and provides definitions of key terms used in the regulations. Paragraph (b) describes the procedure for making provider-based determinations, and paragraph (c) imposes requirements for reporting material changes in relationships between main providers and provider-based facilities or organizations. In paragraph (d), we specify the requirements that are applicable to all facilities or organizations seeking provider-based status, and in paragraph (e), we describe the additional requirements applicable to off-campus facilities or organizations (generally, those located more than 250 yards from the provider's main buildings). Paragraphs (f) through (o) set forth policies regarding joint ventures, obligations of provider-based facilities, facilities operated under management contracts or providing all services under arrangements, procedures in connection with certain provider-based determinations, and specific types of facilities such as Indian Health Service (IHS) and Tribal facilities and Federally qualified health centers (FQHCs).

2. Limits on the Scope of the Provider-Based Regulations—Facilities for Which Provider-Based Determinations Will Not Be Made

In § 413.65(a) (1)(ii), we list specific types of facilities and organizations for which determinations of provider-based status will not be made. We previously concluded that provider-based determinations should not be made for these facilities because the outcome of the determination (that is, whether a facility, unit, or department is found to be freestanding or provider-based) would not affect the methodology used to make Medicare or Medicaid payment, the scope of benefits available to a Medicare beneficiary in or at the facility, or the deductible or coinsurance liability of a Medicare beneficiary in or at the facility.

We have now concluded that, under the principle stated above, rural health clinics affiliated with hospitals having 50 or more beds should be added to the list of facilities for which provider-based status determinations are not made. Therefore, we are proposing to revise § 413.65(a)(1)(ii) to add rural health clinics with hospitals having 50 or more beds to the listing of the types of facilities for which a provider-based status determination will not be made. We believe this proposed revision to § 413.65(a)(1)(ii) is appropriate because all rural health clinics affiliated with hospitals having 50 or more beds are paid on the same basis as rural health clinics not affiliated with any hospital, and the scope of Medicare Part B benefits and beneficiary liability for Medicare Part B deductible and coinsurance amounts would be the same, regardless of whether the rural health clinic was found to be provider-based or freestanding.

In setting forth this proposal, we recognize that rural health clinics affiliated with hospitals report their costs using the hospital's cost report rather than by filing a separate rural health clinic cost report, and that whether or not a rural health clinic is hospital-affiliated will affect the selection of a fiscal intermediary for the clinic. However, we do not believe these administrative differences provide a sufficient reason to make provider-based determinations for such rural health clinics.

3. Location Requirement for Off-Campus Facilities: Application to Certain Neonatal Intensive Care Units

As we stated in the preamble to May 9, 2002 proposed rule for changes in the provider-based rules (67 FR 31485), we recognize that provider-based status is not limited to on-campus facilities or organizations and that facilities or organizations located off the main provider campus may also be sufficiently integrated with the main provider to justify a provider-based designation. However, the off-campus location of the facilities or organizations may make such integration harder to achieve, and such integration should not simply be presumed to exist. Therefore, to ensure that off-campus facilities or organizations seeking provider-based status are appropriately integrated, we have adopted certain requirements regarding the location of off-campus facilities or organizations. These requirements are set forth in § 413.65(e)(3). Section 413.65(e)(3) specifies that a facility or organization not located on the main campus of the potential main provider can qualify for provider-based status only if it is located within a 35-mile radius of the campus of the hospital or CAH that is the potential main provider, or meets any one of the following requirements.

  • The facility or organization is owned and operated by a hospital or CAH that has a disproportionate share adjustment (as determined under § 412.106) greater than 11.75 percent or is described in § 412.106(c)(2) of the regulations which implement section 1886(e)(5)(F)(i)(II) of the Act and is—

—Owned or operated by a unit of State or local government;

—A public or nonprofit corporation that is formally granted governmental powers by a unit of State or local government; or

—A private hospital that has a contract with a State or local government that includes the operation of clinics located off the main campus of the hospital to assure access in a well-defined service area to health care services for low-income individuals who are not entitled to benefits under Medicare (or medical assistance under a Medicaid State plan). (§ 413.65(e)(3)(i))

  • The facility or organization demonstrates a high level of integration with the main provider by showing that it meets all of the other provider-based criteria and demonstrates that it serves the same patient population as the main provider, by submitting records showing that, during the 12-month period immediately preceding the first day of the month in which the application for provider-based status is filed with CMS, and for each subsequent 12-month period—

—At least 75 percent of the patients served by the facility or organization reside in the same zip code areas as at least 75 percent of the patients served by the main provider (§ 413.65(e)(3)(ii)(A)); or

—At least 75 percent of the patients served by the facility or organization who required the type of care furnished by the main provider received that care from that provider (for example, at least 75 percent of the patients of a rural health clinic seeking provider-based status received inpatient hospital services from the hospital that is the main provider (§ 413.65(e)(3)(ii)(B)).

Section 413.65(e)(3)(ii)(C) of the regulations allows new facilities or organizations to qualify as provider-based entities. Under this section, if a facility or organization is unable to meet the criteria in § 413.65(e)(3)(ii)(A) or (e)(3)(ii)(B) because it was not in operation during all of the 12-month period before the start of the period for which provider-based status is sought, the facility or organization may nevertheless meet the location requirement of paragraph (e)(3) of § 413.65 if it is located in a zip code area included among those that, during all of the 12-month period before the start of the period for which provider-based status is sought, accounted for at least 75 percent of the patients served by the main provider.

CMS has been advised that, in some cases, the location requirements in current regulations may inadvertently impede the delivery of intensive care services to newborn infants in areas where there is no nearby children's hospital with a neonatal intensive care unit (NICU). According to those who expressed this concern, hospitals participating in the Medicare program as children's hospitals establish off-site neonatal intensive care units (NICUs) which they operate and staff but which are located in space leased from other hospitals. The hospitals in which the offsite NICUs are housed typically are short-term, acute care hospitals located in rural areas. According to comments that CMS has received, the nearest children's hospital in a rural area is usually located a considerable distance from individual rural communities, which prevents infants in these rural communities from having ready access to the specialized care offered by NICUs.

We have received a suggestion that this configuration (that of a hospital participating in the Medicare program as a hospital whose inpatients are predominantly individuals under 18 years of age under section 1886(d)(1)(B)(iii) of the Act, establishing an offsite NICU which it operates and staffs but which is located in space leased from another hospital) can be very helpful in making neonatal intensive care more quickly available in areas where community hospitals are located. In addition, this configuration can offer relief to families who otherwise would be required to travel long distances to obtain this care for their infants. However, offsite NICUs would not be able to qualify for provider-based status under the location criteria in our current regulations if they are located more than 35 miles from the children's hospital that would be the main provider, are not owned and operated by a hospital meeting the requirements of § 413.65(e)(3)(i), and cannot meet either of the “75 percent tests” for service to the same patient population as the potential main provider that are specified in existing § 413.65(e)(3)(ii)(A) and § 413.65(e)(3)(ii)(B).

We understand the concern that requiring a patient to be transported to an NICU located on the campus of a distant children's hospital could create an unacceptable medical risk to the life of a newborn at a most critical time. To help us better understand this issue and determine what action, if any, CMS should take on it, we are soliciting specific public comment on the following question:

  • Is the problem as described above actually occurring and, if so, in what locations? We are particularly interested in learning which areas of which States are experiencing such a problem, and in receiving specific information, such as the rates of transfer of newborns from community hospitals to children's hospital on-campus NICUs relative to adult or non-neonatal pediatric transfers for intensive care services, which describe the problem objectively. Such objective information will be much more useful than expressions of opinion or anecdotes.

We also wish to ask those who believe such a problem is currently occurring to comment on which of the following approaches would be most effective in resolving it. The proposed approaches on which we are soliciting specific comments are:

A change in the Medicare provider-based regulations to create an exception to the location requirements for NICUs located in community hospitals that are more than 35 miles from the children's hospital that is the potential main provider. The exception might take the form of a more generous mileage allowance (such as being within 50 miles of the potential main provider) or could require other criteria to be met. However, the exception would be available only if there is no other NICU within 35 miles of the community hospital.

A change in the national Medicaid regulations to allow off-campus NICUs that meet other provider-based requirements under § 413.65 to qualify as provider-based for purposes of payment under Medicaid, even though those facilities would not qualify as provider-based under Medicare. (We note that under 42 CFR 440.10(a)(3)(iii), services are considered to be “inpatient hospital services” under the Medicaid program only if they are furnished in an institution that meets the requirements for participation in Medicare as a hospital. Because of the age of the patients they serve, NICUs typically have no Medicare utilization but a substantial proportion of their patients may be Medicaid patients.)

A change in individual State's Medicaid plans that would provide enhanced financial incentives for community hospitals to establish NICUs, possibly in collaboration with children's hospitals.

The establishment of children's hospitals that meet the requirements for being hospitals-within-hospitals under 42 CFR 412.22(e). (We note that this option, unlike the three above, would not require any revision of Medicare or Medicaid regulations or individual State Medicaid plans).

We also welcome suggestions for specific options other than those listed above.

4. Technical and Clarifying Changes to § 413.65

a. Definitions. In paragraph (a)(2) of § 413.65, we state that the term “Provider-based entity” means a provider of health care services, or an RHC as defined in § 405.2401(b), that is either created by, or acquired by, a main provider for the purpose of furnishing health care services of a different type from those of the main provider under the name, ownership and administrative and financial control of the main provider, in accordance with the provisions of § 413.65. In recognition of the fact that provider-based entities, unlike departments of a provider, offer a type of services different from those of the main provider and participate separately in Medicare, we are proposing to revise this requirement by deleting the word “name” from this definition. This change would simplify compliance with the provider-based criteria since entities that do not now operate under the potential main provider's name will not be obligated to change their names in order to be treated as provider-based.

b. Provider-based determinations. In paragraph (b)(3)(ii) of § 413.65, we state that, in the case of a facility not located on the campus of the potential main provider, the provider seeking a determination would be required to submit an attestation stating that the facility meets the criteria in paragraphs (d) and (e) of § 413.65, and if the facility is operated as a joint venture or under a management contract, the requirements of paragraph (f) or paragraph (h) of § 413.65, as applicable. However, paragraph (f), which sets forth rules regarding provider-based status for joint ventures, states clearly that a facility or organization operated as a joint venture may qualify for provider-based status only if it is located on the main campus of the potential main provider. To avoid any misunderstanding regarding the content of attestations for off-campus facilities, we are proposing to revise paragraph (b)(3)(ii) by removing the reference to compliance with requirements in paragraph (f) for joint ventures. We also are proposing to add a sentence to paragraph (b)(3)(i), regarding attestations for on-campus facilities, to state that if the facility is operated as a joint venture, the attestation by the potential main provider regarding that facility would also have to include a statement that the provider will comply with the requirements of paragraph (f) of § 413.65.

c. Additional requirements applicable to off-campus facilities or organizations—Operation under the ownership and control of the main provider. In paragraph (e)(1)(i), regarding 100 percent ownership by the main provider of the business enterprise that constitutes the facility or organization seeking provider-bases status, we are proposing to add the word “main” before the word “provider”, to clarify that the main provider must own and control the facility or organization seeking provider-based status. We are also proposing, for purposes of clarifying the requirements in paragraph (e)(1), to add the word “main” before the word “provider” in paragraphs (e)(1)(ii) and (e)(1)(iii).

d. Additional requirements applicable to off-campus facilities or organizations—Location. We are proposing several clarifying changes to this paragraph, as follows:

Currently, the opening sentence of § 413.65(e)(3) states that a facility or organization for which provider-based status is sought must be located within a 35-mile radius of the campus of the hospital or CAH that is the potential main provider, except when the requirements in paragraph (e)(3)(i), (e)(3)(ii), or (e)(3)(iii) of that section are met. However, the regulation text that follows does not contain a paragraph designation as paragraph (e)(3)(iii). We are proposing to correct this error by redesignating existing paragraph (e)(3)(ii)(C) as paragraph (e)(3)(iv). We are also proposing to revise this sentence to state that the facility or organization must meet the requirements in paragraph (e)(3)(i), (e)(3)(ii), (e)(3)(iii), (e)(3)(iv) or, in the case of an RHC, paragraph (e)(3)(v) of § 413.65 and the requirements in paragraph (e)(3)(vi) of § 413.65.

We are proposing to revise the opening sentence of § 413.65(e)(3) to reflect the changes in the coding of this paragraph as described above.

We are also proposing to redesignate paragraph (v) of § 413.65(e)(3) as paragraph (e)(3)(vi) and correct a drafting error by adding the word “that” before “has fewer than 50 beds”. This proposed addition is a grammatical change that is intended only to clarify the size of the hospital with which a rural health clinic must have a provider-based relationship in order to qualify under the special location requirement in that paragraph.

e. Paragraph (g)—Obligations of hospital outpatient departments and hospital-based entities. We are proposing to revise the first sentence of paragraph (g)(7), regarding beneficiary notices of coinsurance liability, to clarify that notice must be given only if the service is one for which the beneficiary will incur a coinsurance liability for both an outpatient visit to the hospital and the physician service. This should help to make it clear that notice is not required for visits that do not result in additional coinsurance liability. In addition, we are proposing to reorganize the subsequent paragraphs of that section for clarity.

K. Rural Community Hospital Demonstration Program

(If you choose to comment on issues in this section, please include the caption “Rural Community Hospital Demonstration Program” at the beginning of your comments.)

In accordance with the requirements of section 410A(a) of Pub. L. 108-173, the Secretary has established a 5-year demonstration (beginning with selected hospitals' first cost reporting period beginning on or after October 1, 2004) to test the feasibility and advisability of establishing “rural community hospitals” for Medicare payment purposes for covered inpatient hospital services furnished to Medicare beneficiaries. A rural community hospital, as defined in section 410A(f)(1), is a hospital that—

  • Is located in a rural area (as defined in section 1886(d)(2)(D) of the Act) or treated as being so located under section 1886(d)(8)(E) of the Act;
  • Has fewer than 51 beds (excluding beds in a distinct part psychiatric or rehabilitation unit) as reported in its most recent cost report;
  • Provides 24-hour emergency care services; and
  • Is not designated or eligible for designation as a CAH.

As we indicated in the FY 2005 IPPS final rule (69 FR 49078), in accordance with sections 410A(a)(2) and (4) of Pub. L. 108-173 and using 2002 data from the U.S. Census Bureau, we identified 10 States with the lowest population density from which to select hospitals: Alaska, Idaho, Montana, Nebraska, Nevada, New Mexico, North Dakota, South Dakota, Utah, and Wyoming. (Source: U.S. Census Bureau Statistical Abstract of the United States: 2003) Thirteen rural community hospitals located within these States are participating in the demonstration.

Under the demonstration, participating hospitals are paid the reasonable costs of providing covered inpatient hospital services (other than services furnished by a psychiatric or rehabilitation unit of a hospital that is a distinct part), applicable for discharges occurring in the first cost reporting period beginning on or after the October 1, 2004 implementation date of the demonstration program. Payment will be the lesser amount of reasonable cost or a target amount in subsequent cost reporting periods. The target amount in the second cost reporting period is defined as the reasonable costs of providing covered inpatient hospital services in the first cost reporting period, increased by the inpatient prospective payment update factor (as defined in section 1886(b)(3)(B) of the Act) for that particular cost reporting period. The target amount in subsequent cost reporting periods is defined as the preceding cost reporting period's target amount, increased by the inpatient prospective payment update factor (as defined in section 1886(b)(3)(B) of the Act) for that particular cost reporting period.

Covered inpatient hospital services means inpatient hospital services (defined in section 1861(b) of the Act) and includes extended care services furnished under an agreement under section 1883 of the Act.

Section 410A of Pub. L. 108-173 requires that “in conducting the demonstration program under this section, the Secretary shall ensure that the aggregate payments made by the Secretary do not exceed the amount which the Secretary would have paid if the demonstration program under this section was not implemented.” Generally, when CMS implements a demonstration on a budget neutral basis, the demonstration is budget neutral in its own terms; in other words, aggregate payments to the participating providers do not exceed the amount that would be paid to those same providers in the absence of the demonstration. This form of budget neutrality is viable when, by changing payments or aligning incentives to improve overall efficiency, or both, a demonstration may reduce the use of some services or eliminate the need for others, resulting in reduced expenditures for the demonstration participants. These reduced expenditures offset increased payments elsewhere under the demonstration, thus ensuring that the demonstration as a whole is budget neutral or yields savings. However, the small scale of this demonstration, in conjunction with the payment methodology, makes it extremely unlikely that this demonstration could be viable under the usual form of budget neutrality. Specifically, cost-based payments to 13 small rural hospitals are likely to increase Medicare outlays without producing any offsetting reduction in Medicare expenditures elsewhere. Therefore, a rural community hospital's participation in this demonstration is unlikely to yield benefits to the participant if budget neutrality were to be implemented by reducing other payments for these providers.

In order to achieve budget neutrality for this demonstration, we are proposing to adjust national inpatient PPS rates by an amount sufficient to account for the added costs of this demonstration. In other words, we apply budget neutrality across the payment system as a whole rather than merely across the participants of this demonstration. As we discussed in the FY 2005 IPPS final rule (69 FR 49183), we believe that the language of the statutory budget neutrality requirements permits the agency to implement the budget neutrality provision in this manner. For FY 2006, using the most recent cost report data (that is, data for FY 2003), adjusted for increased estimated cost for the 13 participating hospitals, we are proposing that the estimated adjusted amount would be $12,706,334. This adjusted amount reflects the estimated difference between cost and IPPS payment based on data from hospitals' cost reports. We discuss the proposed payment rate adjustment that would be required to ensure the budget neutrality of the demonstration in section II.A.4. of the Addendum to this proposed rule.

The data collection instrument for the demonstration has been approved by OMB under the title “Medicare Waiver Demonstration Application,” under OMB approval number 0938-0880, with a current expiration date of July 30, 2006.

L. Definition of a Hospital in Connection With Specialty Hospitals Back to Top

(If you choose to comment on issues in this section, please include the caption “Specialty Hospitals” at the beginning of your comment.)

Section 1861(e) of the Act provides a definition for a “hospital” for purposes of participating in the Medicare program. In order to be a Medicare-participating hospital, an institution must, among other things, be primarily engaged in furnishing services to inpatients. This requirement is incorporated in our regulations on conditions of participation for hospitals at 42 CFR 482.1. An institution that applies for a Medicare provider agreement as a hospital but is unable to meet this requirement will have its application denied in accordance with our authority at 42 CFR 489.12. In addition, institutions that have a Medicare hospital provider agreement but are no longer primarily engaging in furnishing services to inpatients are subject to having their provider agreements terminated pursuant to 42 CFR 489.53. Although compliance with this requirement is not problematic for most hospitals, the issue of whether an institution is primarily engaged in providing care to inpatients has recently come to our attention in two arisen two contexts. First, an institution has applied to be certified as an “emergency hospital,” yet the institution has 29 outpatient beds for emergency patients, including observation and post-anesthesia care, and only 2 inpatient beds. Emergency treatment by nature does not usually involve overnight stays. Second, the issue has also arisen in the area of “specialty hospitals.” (For purposes of this discussion, “specialty hospitals” are those hospitals specifically defined as such in section 507 of Pub. L. 108-173 (MMA), that is, those hospitals that are primarily or exclusively engaged in the care and treatment of:

(i) Patients with a cardiac condition; (ii) patients with an orthopedic condition; or (iii) patients receiving a surgical procedure.)

“Specialty hospitals” are of interest partly because of section 507 of Pub. L. 108-173, which amended the hospital ownership exception to the physician self-referral prohibition statute, section 1877 of the Act. Prior to the enactment of Pub. L. 108-173, the “whole hospital” exception contained in section 1877(d)(3) of the Act allowed a physician to refer Medicare patients to a hospital in which the physician (or an immediate family member of the physician) had an ownership or investment interest, if the physician was authorized to perform services at the hospital and the ownership or investment interest was in the entire hospital and not a subdivision of the hospital. Section 507 of Pub. L. 108-173 added an additional criterion to the whole hospital exception, specifying that for the 18-month period beginning on December 8, 2003 and ending on June 8, 2005, physician ownership and investment interests in “specialty hospitals” would not qualify for the whole hospital exception. The term “specialty hospital” does not include any hospital determined by the Secretary to be in operation or “under development” as of November 18, 2003.

In our advisory opinions that we issue as to whether a requesting entity is subject to the 18-month moratorium described above, we inform the requesting entity that, among other things, it must meet the definition of a hospital that is contained in section 1861(e) of the Act. It has come to our attention that some institutions entities that describe themselves as surgical or orthopedic specialty hospitals may be primarily primarily engaged in furnishing services to outpatients, and thus would might not meet the definition of a hospital as contained in section 1861(e) of the Act. Therefore, although an institution entity may satisfy the “under development” criteria for purposes of being excepted from the moratorium on physician-owner referrals to specialty hospitals, if we were to determine such entity is not primarily engaged in inpatient care at the time it seeks certification to participate in the Medicare program, its application for a provider agreement as a hospital would will be denied and it would not be eligible for the whole hospital exception to the prohibition on physician self-referrals. Further, if we were to determine that a specialty hospital that is operating under an existing Medicare provider agreement but is not, or is no longer, primarily engaged in treating inpatients, the hospital is subject to having its provider agreement terminated; in this event, it could no longer take advantage of and lose the protection of the whole hospital exception.

VI. PPS for Capital-Related Costs Back to Top

(If you choose to comment on issues in this section, please include the caption “Capital-Related Costs” at the beginning of your comment.)

In this proposed rule, we are not proposing any changes in the policies governing the determination of the payment rates for capital-related costs for short-term acute care hospitals under the IPPS. However, for the readers' benefit, we are providing a summary of the statutory basis for the PPS for hospital capital-related costs and the methodology used to determine capital-related payments to hospitals. A discussion of the proposed rates and factors for FY 2006 (determined under our established methodology) can be found in section III. of the Addendum of this proposed rule.

Section 1886(g) of the Act requires the Secretary to pay for the capital-related costs of inpatient acute hospital services “in accordance with a PPS established by the Secretary.” Under the statute, the Secretary has broad authority in establishing and implementing the PPS for hospital inpatient capital-related costs. We initially implemented the PPS for capital-related costs in the August 30, 1991 IPPS final rule (56 FR 43358), in which we established a 10-year transition period to change the payment methodology for Medicare hospital inpatient capital-related costs from a reasonable cost-based methodology to a prospective methodology (based fully on the Federal rate).

Federal fiscal year (FY) 2001 was the last year of the 10-year transition period established to phase in the PPS for hospital inpatient capital-related costs. For cost reporting periods beginning in FY 2002, capital PPS payments are based solely on the Federal rate for most acute care hospitals (other than certain new hospitals and hospitals receiving certain exception payments). The basic methodology for determining capital prospective payments using the Federal rate is set forth in § 412.312. For the purpose of calculating payments for each discharge, the standard Federal rate is adjusted as follows:

(Standard Federal Rate) × (DRG Weight) × (Geographic Adjustment Factor (GAF)) × (Large Urban Add-on, if applicable) × (COLA Adjustment for hospitals located in Alaska and Hawaii) × (1 + Capital DSH Adjustment Factor + Capital IME Adjustment Factor, if applicable)

Hospitals also may receive outlier payments for those cases that qualify under the thresholds established for each fiscal year as specified in § 412.312(c) of the regulations.

The regulations at § 412.348(f) provide that a hospital may request an additional payment if the hospital incurs unanticipated capital expenditures in excess of $5 million due to extraordinary circumstances beyond the hospital's control. This policy was originally established for hospitals during the 10-year transition period, but as we discussed in the August 1, 2002 IPPS final rule (67 FR 50102), we revised the regulations at § 412.312 to specify that payments for extraordinary circumstances are also made for cost reporting periods after the transition period (that is, cost reporting periods beginning on or after October 1, 2001). Additional information on the exceptions payment for extraordinary circumstances in § 412.348(f) can be found in the FY 2005 IPPS final rule (69 FR 49185 through 49186).

During the transition period, under §§ 412.348(b) through (e), eligible hospitals could receive regular exception payments. These exception payments guaranteed a hospital a minimum payment percentage of its Medicare allowable capital-related costs depending on the class of hospital (§ 412.348(c)), but were available only during the 10-year transition period. After the end of the transition period, eligible hospitals can no longer receive this exception payment. However, even after the transition period, eligible hospitals receive additional payments under the special exceptions provisions at § 412.348(g), which guarantees all eligible hospitals a minimum payment of 70 percent of its Medicare allowable capital-related costs provided that special exceptions payments do not exceed 10 percent of total capital IPPS payments. Special exceptions payments may be made only for the 10 years from the cost reporting year in which the hospital completes its qualifying project, and the hospital must have completed the project no later than the hospital's cost reporting period beginning before October 1, 2001. Thus, an eligible hospital may receive special exceptions payments for up to 10 years beyond the end of the capital PPS transition period. Hospitals eligible for special exceptions payments were required to submit documentation to the intermediary indicating the completion date of their project. (For more detailed information regarding the special exceptions policy under § 412.348(g), refer to the August 1, 2001 IPPS final rule (66 FR 39911 through 39914) and the August 1, 2002 IPPS final rule (67 FR 50102).)

Under the PPS for capital-related costs, § 412.300(b) of the regulations defines a new hospital as a hospital that has operated (under current or previous ownership) for less than 2 years. (For more detailed information see the August 30, 1991 final rule (56 FR 43418).) During the 10-year transition period, a new hospital was exempt from the capital PPS for its first 2 years of operation and was paid 85 percent of its reasonable costs during that period. Originally, this provision was effective only through the transition period and, therefore, ended with cost reporting periods beginning in FY 2002. Because we believe that special protection to new hospitals is also appropriate even after the transition period, as discussed in the August 1, 2002 IPPS final rule (67 FR 50101), we revised the regulations at § 412.304(c)(2) to provide that, for cost reporting periods beginning on or after October 1, 2002, a new hospital (defined under § 412.300(b)) is paid 85 percent of its allowable Medicare inpatient hospital capital-related costs through its first 2 years of operation, unless the new hospital elects to receive fully-prospective payment based on 100 percent of the Federal rate. (Refer to the August 1, 2001 IPPS final rule (66 FR 39910) for a detailed discussion of the statutory basis for the system, the development and evolution of the system, the methodology used to determine capital-related payments to hospitals both during and after the transition period, and the policy for providing exception payments.)

Section 412.374 provides for the use of a blended payment amount for prospective payments for capital-related costs to hospitals located in Puerto Rico. Accordingly, under the capital PPS, we compute a separate payment rate specific to Puerto Rico hospitals using the same methodology used to compute the national Federal rate for capital-related costs. In general, hospitals located in Puerto Rico are paid a blend of the applicable capital PPS Puerto Rico rate and the applicable capital PPS Federal rate.

Prior to FY 1998, hospitals in Puerto Rico were paid a blended capital PPS rate that consisted of 75 percent of the applicable capital PPS Puerto Rico specific rate and 25 percent of the applicable capital PPS Federal rate. However, effective October 1, 1997 (FY 1998), in conjunction with the change to the operating PPS blend percentage for Puerto Rico hospitals required by section 4406 of Pub. L. 105-33, we revised the methodology for computing capital PPS payments to hospitals in Puerto Rico to be based on a blend of 50 percent of the Puerto Rico rate and 50 percent of the Federal rate. Similarly, effective beginning in FY 2005, in conjunction with the change in operating PPS payments to hospitals in Puerto Rico for FY 2005 required by section 504 of Pub. L. 108-173, we again revised the methodology for computing capital PPS payments to hospitals in Puerto Rico to be based on a blend of 25 percent of the Puerto Rico rate and 75 percent of the Federal rate for discharges occurring on or after October 1, 2004.

VII. Proposed Changes for Hospitals and Hospital Units Excluded From the IPPS Back to Top

(If you choose to comment on issues in this section, please include the caption “Excluded Hospitals and Units” at the beginning of your comment.)

A. Payments to Existing Hospitals and Hospital Units (§§ 413.40(c), (d), and (f))

1. Payments to Existing Excluded Hospitals and Hospital Units

Section 1886(b)(3)(H) of the Act (as amended by section 4414 of Pub. L. 105-33) established caps on the target amounts for cost reporting periods beginning on or after October 1, 1997 through September 30, 2002, for certain existing hospitals and hospital units excluded from the IPPS. Section 413.40(c)(4)(iii) of the implementing regulations states that “In the case of a psychiatric hospital or unit, rehabilitation hospital or unit, or long-term care hospital, the target amount is the lower of amounts specified in paragraph (c)(4)(iii)(A) or (c)(4)(iii)(B) of this section.” Accordingly, in general, for hospitals and units within these three classes of providers for the applicable 5-year period, the target amount is the lower of either: the hospital-specific target amount (§ 413.40(c)(4)(iii)(A)) or the 75th percentile cap (§ 413.40(c)(4)(iii)(B)). (We note that, in the case of LTCHs, for cost reporting periods beginning during FY 2001, the hospital-specific target amount is the net allowable cost in a base period increased by the applicable update factors multiplied by 1.25.)

Questions have been raised as to whether § 413.40(c)(4)(iii) (specifically paragraph (c)(4)(iii)(A)) continues to apply beyond FY 2002. In order to clarify the policy for periods after FY 2002, we note that § 413.40(c)(4)(iii) applies only to cost reporting periods beginning on or after October 1, 1997 through September 30, 2002, for psychiatric hospitals and units, rehabilitation hospitals and units, and LTCHs. We discussed this applicable time period in the May 12, 1998 Federal Register (63 FR 26344) when we discussed implementing the caps. Specifically, we clarified our regulations to indicate that the target amount for FYs 1998 through 2002 is equal to the lower of the hospital-specific target amount or the 75th percentile of target amounts for hospitals in the same class for cost reporting periods ending during FY 1996, increased by the applicable market basket percentage for the subject period. We did not intend for the provisions of § 413.40(c)(4)(iii) to apply beyond FY 2002, as we specifically included an ending date; that is, we stated that the target amount calculation provisions were for FYs 1998 through 2002. More recently, in the FY 2003 IPPS final rule (67 FR 50103), we clarified again how the target amount for FY 2003 was to be determined by stating that: “* * * for cost reporting periods beginning in FY 2003, the hospital or unit should use its previous year's target amount, updated by the appropriate rate-of-increase percentage.” Thus, the time-limited provision of § 413.40(c)(4)(iii) is neither a new policy nor a change in policy.

For cost reporting periods beginning on or after October 1, 2002, to the extent one of the above-mentioned excluded hospitals or units has all or a portion of its payment determined under reasonable cost principles, the target amounts for the reasonable cost-based portion of the payment are determined in accordance with section 1886(b)(3)(A)(ii) of the Act and the regulations at § 413.40(c)(4)(ii). Section 413.40(c)(4)(ii) states, “Subject to the provisions of [§ 413.40] paragraph (c)(4)(iii) of this section, for subsequent cost reporting periods, the target amount equals the hospital's target amount for the previous cost reporting period increased by the update factor for the subject cost reporting period unless the provisions of [§ 413.40] paragraph (c)(5)(ii) of this section apply.” Thus, since § 413.40(c)(4)(ii) indicates that the provisions of that paragraph are subject to the provisions of § 413.40(c)(4)(iii), which are applicable only for cost reporting periods beginning on or after October 1, 1997 through September 30, 2002, the target amount for FY 2003 is determined by updating the target amount for FY 2002 (the target amount from the previous period) by the applicable update factor. Accordingly, we are proposing to make a change to the language in § 413.40(c)(4)(iii) to clarify that the provisions of this paragraph relating to the caps on target amounts are for a specific period of time only, that is, cost reporting periods beginning on or after October 1, 1997, and before October 1, 2002.

The inpatient operating costs of children's hospitals and cancer hospitals that are excluded from the IPPS are subject to the rate-of-increase limits established under the authority of section 1886(b) of the Act and implemented in the regulations at § 413.40. Under these limits, an annual target amount (expressed in terms of the inpatient operating cost per discharge) is set for each hospital, based on the hospital's own historical cost experience, trended forward by the applicable percentage increase. This target amount is applied as a ceiling on the allowable costs per discharge for the hospital's cost reporting period. (We note that, in accordance with § 403.752(a) of the regulations, RNHCIs are also subject to the rate-of-increase limits established under § 413.40 of the regulations.)

2. Updated Caps for New Excluded Hospitals and Units

Section 1886(b)(7) of the Act established the method for determining the payment amount for new rehabilitation hospitals and units, psychiatric hospitals and units, and LTCHs that first received payment as a hospital or unit excluded from the IPPS on or after October 1, 1997. However, effective for cost reporting periods beginning on or after October 1, 2002, this payment amount (or “new provider cap”) no longer applies to any new rehabilitation hospital or unit because they now are paid 100 percent of the Federal prospective rate under the IRF PPS.

In addition, LTCHs that meet the definition of a new LTCH under § 412.23(e)(4) are also paid 100 percent of the fully Federal prospective payment rate under the LTCH PPS. In contrast, those “new” LTCHs that meet the criteria under § 413.40(f)(2)(ii) (that is, that were not paid as an excluded hospital prior to October 1, 1997), but were paid as a LTCH before October 1, 2002, may be paid under the LTCH PPS transition methodology with the reasonable cost portion of the payment subject to § 413.40(f)(2)(ii). Finally, LTCHs that existed prior to October 1, 1997, may also be paid under the LTCH PPS transition methodology with the reasonable cost portion of the payment subject to § 413.40(c)(4)(ii). (The last LTCHs that were subject to the payment amount limitation for “new” LTCHs were new LTCHs that had their first cost reporting period beginning on September 30, 2002. In that case, the payment amount limitation remained applicable for the next 2 years—September 30, 2002 through September 29, 2003, and September 30, 2003 through September 29, 2004. This is because, under existing regulations at § 413.40(f)(2)(ii), a “new hospital” would be subject to the same payment (target amount) in its second cost reporting period that was applicable to the LTCH in its first cost reporting period. Accordingly, for these hospitals, the updated payment amount limitation that we published in the FY 2003 IPPS final rule (67 FR 50103) applied through September 29, 2004. Consequently, there is no longer a need to publish updated payment amounts for new (§ 413.40(f)(2)(ii)) LTCHs. A discussion of how the payment limitations were calculated can be found in the August 29, 1997 final rule with comment period (62 FR 46019); the May 12, 1998 final rule (63 FR 26344); the July 31, 1998 final rule (63 FR 41000); and the July 30, 1999 final rule (64 FR 41529).

A freestanding inpatient rehabilitation hospital, an inpatient rehabilitation unit of an acute care hospital, and an inpatient rehabilitation unit of a CAH are referred to as IRFs. Effective for cost reporting periods beginning on or after October 1, 2002, this payment limitation is also no longer applicable to new rehabilitation hospitals and units because they are paid 100 percent of the Federal prospective rate under the IRF PPS. Therefore, it is also no longer necessary to update the payment limitation for new rehabilitation hospitals or units.

For psychiatric hospitals and units, under the IPF PPS, there is a 3-year transition period during which existing IPFs will receive a blended payment of the Federal per diem payment amount and the payment amount that IPFs would receive under the reasonable cost-based payment (TEFRA) methodology. However, new IPFs (those facilities that under present or previous ownership (or both) have their first cost reporting period as an IPF begin on or after January 1, 2005, are paid the fully Federal per diem payment amount rather than a blended payment amount. (See section VII.A.5. of the preamble of this proposed rule for further discussion of the IPF PPS.) Thus, the payment limitations under the TEFRA payment system are not applicable for new IPFs that meet the definition in § 412.426(c).

However, “new” IPFs that meet the criteria under § 413.40(f)(2)(ii) (that is, that were not paid as an excluded hospital prior to October 1, 1997), but were paid as an IPF before January 1, 2005, are paid under the IPF PPS transition methodology with the reasonable cost portion of the payment determined according to § 413.40(f)(2)(ii), that is, subject to the payment amount limitation. The last “new” IPFs that were subject to the payment amount limitation were IPFs that had their first cost reporting period beginning on December 31, 2004. For these hospitals, the payment amount limitation that was published in the FY 2005 IPPS final rule (69 FR 49189) for cost reporting periods beginning on or after October 1, 2004, and before January 1, 2005, remains applicable for the IPF's first two cost reporting periods. IPFs with a first cost reporting period beginning on or after January 1, 2005, are paid 100 percent of the Federal rate and are not subject to the payment amount limitation. Therefore, since the last IPFs eligible for a blended payment have a cost reporting period beginning on December 31, 2004, the payment limitation published for FY 2005 remains applicable for these IPFs, and publication of the updated payment amount limitation is no longer needed. We note that IPFs that existed prior to October 1, 1997, may also be paid under the IPF transition methodology with the reasonable cost portion of the payment subject to § 413.40(c)(4)(ii).

The payment limitations for new hospitals under TEFRA do not apply to new LTCHs, IRFs, or IPFs, that is, these hospitals with their first cost reporting period beginning on or after the date that the particular class of hospitals implemented their respective PPS. Therefore, for the reasons noted above, we are proposing to discontinue publishing Tables 4G and 4H (Pre-Reclassified Wage Index for Urban and Rural Areas, respectively) in the annual proposed and final IPPS rules.

3. Implementation of a PPS for IRFs

Section 1886(j) of the Act, as added by section 4421(a) of Pub. L. 105-33, provided for the phase-in of a case-mix adjusted PPS for inpatient hospital services furnished by a rehabilitation hospital or a rehabilitation hospital unit (referred to in the statute as rehabilitation facilities) for cost reporting periods beginning on or after October 1, 2000, and before October 1, 2002, with payments based entirely on the adjusted Federal prospective payment for cost reporting periods beginning on or after October 1, 2002. Section 1886(j) of the Act was amended by section 125 of Pub. L. 106-113 to require the Secretary to use a discharge as the payment unit under the PPS for inpatient hospital services furnished by rehabilitation facilities and to establish classes of patient discharges by functional-related groups. Section 305 of Pub. L. 106-554 further amended section 1886(j) of the Act to allow rehabilitation facilities, subject to the blend methodology, to elect to be paid the full Federal prospective payment rather than the transitional period payments specified in the Act.

On August 7, 2001, we issued a final rule in the Federal Register (66 FR 41316) establishing the PPS for inpatient rehabilitation facilities, effective for cost reporting periods beginning on or after January 1, 2002. There was a transition period for cost reporting periods beginning on or after January 1, 2002 and ending before October 1, 2002. For cost reporting periods beginning on or after October 1, 2002, payments are based entirely on the Federal prospective payment rate determined under the IRF PPS.

4. Implementation of a PPS for LTCHs

In accordance with the requirements of section 123 of Pub. L. 106-113, as modified by section 307(b) of Pub. L. 106-554, we established a per discharge, DRG-based PPS for LTCHs as described in section 1886(d)(1)(B)(iv) of the Act for cost reporting periods beginning on or after October 1, 2002, in a final rule issued on August 30, 2002 (67 FR 55954). The LTCH PPS uses information from LTCH hospital patient records to classify patients into distinct LTC-DRGs based on clinical characteristics and expected resource needs. Separate payments are calculated for each LTC-DRG with additional adjustments applied.

We published in the Federal Register on May 7, 2004, a final rule (69 FR 25673) that updated the payment rates for the upcoming rate year LTCH PPS and made policy changes effective as of July 1, 2004. The 5-year transition period to the fully Federal prospective rate will end with cost reporting periods beginning on or after October 1, 2005 and before October 1, 2006. For cost reporting periods beginning on or after October 1, 2006, payment is based entirely on the adjusted Federal prospective payment rate. However, existing hospitals can elect payment under 100 percent of the adjusted Federal prospective payment rate. Moreover, LTCHs as defined in § 412.23(e)(4) are paid under 100 percent of the adjusted Federal prospective payment rate.

5. Implementation of a PPS for IPFs

In accordance with section 124 of the BBRA and section 405(g)(2) of Pub. L. 108-173, we established a PPS for inpatient hospital services furnished in psychiatric hospitals and psychiatric units of acute care hospitals and CAHs (inpatient psychiatric facilities (IPFs)). On November 15, 2004, we issued in the Federal Register a final rule (69 FR 66922) that established the IPF PPS, effective for IPF cost reporting periods beginning on or after January 1, 2005. Under the final rule, we compute a Federal per diem base rate to be paid to all IPFs for inpatient psychiatric services based on the sum of the average routine operating, ancillary, and capital costs for each patient day of psychiatric care in an IPF, adjusted for budget neutrality. The Federal per diem base rate is adjusted to reflect certain patient characteristics, including age, specified DRGs, selected high-cost comorbidities, and day of the stay, and certain facility characteristics, including a wage index adjustment, rural location, indirect teaching costs, the presence of a full-service emergency department, and cost-of-living adjustments for IPFs located in Alaska and Hawaii. We have established a 3-year transition period during which IPFs will be paid based on a blend of reasonable cost-based payment and IPF PPS payments. For cost reporting periods beginning on or after January 1, 2008, IPFs will be paid 100 percent of the Federal per diem payment amount.

B. Critical Access Hospitals (CAHs)

(If you choose to comment on issues in this section, please include the caption “Critical Access Hospitals” at the beginning of your comment.)

1. Background

Section 1820 of the Act provides for the establishment of Medicare Rural Hospital Flexibility P